(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
2,978,928,849 Ordinary Shares (excluding ordinary shares in the form of ADS that are reserved for issuance upon the exercise of share awards) as of December 31, 2020.
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨ No x
If this report is an annual
or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. Yes ¨
No x
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x No ¨
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company
that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use
the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section
13(a) of the Exchange Act.
¨
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If
“Other” has been checked in response to the previous question, indicate by check mark which financial statement
item the registrant has elected to follow. ¨ Item 17 ¨ Item
18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check
mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes
¨ No ¨
In this annual report, unless otherwise indicated or the context otherwise requires, references to:
Our reporting and functional currency is U.S. dollar. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. This annual report contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at the rate of RMB6.5250 to US$1.00, the exchange rate as set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System in effect as of December 31, 2020.
This annual report contains forward-looking statements that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about us and our industry. In some cases, these forward-looking statements can be identified by words or phrases such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “going forward,” “intend,” “ought to,” “plan,” “project,” “potential,” “seek,” “may,” “might,” “can,” “could,” “will,” “would,” “shall,” “should,” “is likely to” and the negative form of these words and other similar expressions. The forward-looking statements included in this annual report relate to, among others:
These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations could later be found to be incorrect. Our actual results could be materially different from our expectations. You should thoroughly read this annual report and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.
This annual report contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. Our industry might not grow at the rate projected by market data, or at all. Failure of our industry to grow at the projected rate may have a material adverse effect on our business and the market price of our ADSs. Furthermore, if any one or more of the assumptions underlying the market data is later found to be incorrect, actual results could differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following selected consolidated statements of operations data for the years ended December 31, 2018, 2019 and 2020, and selected consolidated balance sheet data as of December 31, 2018, 2019 and 2020, have been derived from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statements of operations data for the years ended December 31, 2016 and 2017, and consolidated balance sheet data as of December 31, 2016 and 2017 are derived from our consolidated financial statements not included in this annual report, which have been restated due to the divestment of the discontinued operations in 2019. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this selected financial data section together with our consolidated financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.
Selected Consolidated Financial Data
|
|
For the year ended December 31,
|
|
|
|
2016
(Note)
|
|
|
2017
(Note)
|
|
|
2018
(Note)
|
|
|
2019
(Note)
|
|
|
2020
(Note)
|
|
|
|
(US$ in thousands, except share and share related data)
|
|
Selected consolidated statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,738
|
|
|
|
1,482
|
|
Total revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,738
|
|
|
|
1,482
|
|
Cost of revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(257
|
)
|
|
|
(155
|
)
|
Gross (loss)/profit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,481
|
|
|
|
1,327
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
(1,513
|
)
|
|
|
(1,440
|
)
|
|
|
(1,809
|
)
|
|
|
(1,025
|
)
|
|
|
(2,124
|
)
|
Impairment of intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(835
|
)
|
Total operating expenses
|
|
|
(1,513
|
)
|
|
|
(1,440
|
)
|
|
|
(1,809
|
)
|
|
|
(1,025
|
)
|
|
|
(2,959
|
)
|
(Loss)/income from operations
|
|
|
(1,513
|
)
|
|
|
(1,440
|
)
|
|
|
(1,809
|
)
|
|
|
456
|
|
|
|
(1,632
|
)
|
Interest income, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
Other income, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
|
|
(28
|
)
|
(Loss)/income before provision
for income taxes
|
|
|
(1,513
|
)
|
|
|
(1,440
|
)
|
|
|
(1,809
|
)
|
|
|
483
|
|
|
|
(1,651
|
)
|
Provision for income tax benefits
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(Loss)/Income from continuing operations
|
|
|
(1,513
|
)
|
|
|
(1,440
|
)
|
|
|
(1,809
|
)
|
|
|
483
|
|
|
|
(1,651
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(23,780
|
)
|
|
|
(160,459
|
)
|
|
|
(121,431
|
)
|
|
|
(1,708
|
)
|
|
|
-
|
|
Net loss
|
|
|
(25,293
|
)
|
|
|
(161,899
|
)
|
|
|
(123,240
|
)
|
|
|
(1,225
|
)
|
|
|
(1,651
|
)
|
Net loss attributable to holders of ordinary shares
|
|
|
(25,293
|
)
|
|
|
(161,899
|
)
|
|
|
(123,240
|
)
|
|
|
(1,225
|
)
|
|
|
(1,651
|
)
|
Note: Due to the divestment of our B2B business in July 2019, the results of operations from the B2B business is reclassified as discontinued operations and the consolidated statements of operations for the year ended December 31, 2016, 2017 and 2018 have been restated to reflect such reclassification.
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2017(1)
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
(in US$ thousands)
|
|
Selected consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
13,428
|
|
|
|
12,087
|
|
|
|
4,619
|
|
|
|
2,134
|
|
|
|
2,471
|
|
Total assets
|
|
|
274,045
|
|
|
|
134,173
|
|
|
|
5,025
|
|
|
|
8,871
|
|
|
|
10,961
|
|
Total current liabilities
|
|
|
15,227
|
|
|
|
20,837
|
|
|
|
20,289
|
|
|
|
837
|
|
|
|
708
|
|
Total liabilities
|
|
|
25,648
|
|
|
|
30,623
|
|
|
|
27,211
|
|
|
|
837
|
|
|
|
708
|
|
Total shareholders’ equity/(deficit)
|
|
|
248,397
|
|
|
|
103,550
|
|
|
|
(22,186
|
)
|
|
|
8,035
|
|
|
|
10,253
|
|
Total liabilities and shareholders’ equity
|
|
|
274,045
|
|
|
|
134,173
|
|
|
|
5,025
|
|
|
|
8,871
|
|
|
|
10,961
|
|
(1)
|
We reclassified one transaction occurred in 2017 from online direct sales to online platform services, thus assets and liabilities in relation to this transaction were netted off according to the terms in the online platform services contract. Such adjustment had no impact on our net liabilities.
|
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Summary of Risk Factors
Risks Relating to Our Business and Industry
|
•
|
We have a limited operating history of blockchain-based digital asset infrastructure solutions services and our business model is subject to uncertainties, which makes it difficult to evaluate our business.
|
|
•
|
We have a history of losses, have spent substantial amounts in operating expenses and could require additional funding in the future.
|
|
•
|
We may need to recognize significant impairment losses in connection with past and future acquisitions, which may have a material and adverse effect on our results of operations.
|
|
•
|
We have a limited customer base. If we lose any of our customer, or if the volume of business with such customers decline, our revenues may be significantly affected.
|
|
•
|
Blockchain technology and digital assets are subject to a number of inherent risks that may impact our ability to provide the services we are developing and adversely affect an investment in us.
|
|
•
|
The growth of the blockchain industry in general, as well as the blockchain networks, is subject to a high degree of uncertainty.
|
|
•
|
As we acquire, dispose of or restructure our businesses, product lines, and technologies, we may encounter unforeseen costs and difficulties that could impair our financial performance.
|
|
•
|
Domestic and international regulatory regimes governing blockchain technologies, digital assets, distribution and utilization of digital assets is uncertain, and new regulations or policies may materially adversely affect the development and the value of certain digital assets.
|
|
•
|
Blockchain technologies are subject to unfavorable regulatory action in one or more jurisdictions.
|
Risks Related to Our Corporate Structure and Dependence on our Contractual Arrangements with our Affiliates
|
•
|
If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in internet business, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
|
|
•
|
Substantial uncertainties exist with respect to the PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.
|
|
•
|
We rely on contractual arrangements with Our VIEs in China and their respective shareholders for our operations, which might not be as effective as direct ownership in providing operational control.
|
|
•
|
Any failure by Our VIEs or their shareholders to perform their obligations under our contractual arrangements with them could have an adverse effect on our business.
|
|
•
|
Contractual arrangements with Our VIEs might result in adverse tax consequences to us.
|
Risks Relating to Doing Business in China
|
•
|
We could be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet businesses and companies.
|
|
•
|
Uncertainties with respect to the PRC legal system could have an adverse effect on us.
|
|
•
|
Regulation and censorship of information distribution over the internet in China could adversely affect our business, and we could be liable for information displayed on, retrieved from or linked to our website.
|
|
•
|
Governmental control of currency conversion could affect the value of your investment.
|
|
•
|
Fluctuations in exchange rates of the Renminbi could affect our reported results of operations.
|
|
•
|
Our operations could be adversely affected by changes in China’s political, economic and social conditions.
|
|
•
|
Under the PRC enterprise income tax law, we could be classified as a “resident enterprise” of China. Such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.
|
|
•
|
A failure by our shareholders or beneficial owners who are PRC citizens or residents in China to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws, which could adversely affect our business and financial condition.
|
|
•
|
Certain audit reports included in this annual report are prepared by auditors who are
not inspected by the Public Company Accounting Oversight Board, and consequently you are deprived of the benefits of such inspection.
|
Risks Relating to Our ADSs
|
•
|
The trading price of our ADSs could be volatile, which would result in substantial losses to investors.
|
|
•
|
If we fail to maintain Nasdaq minimum market value of publicly held shares, minimum bid requirements or minimum stockholder equity standard, our ADSs could be delisted.
|
|
•
|
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.
|
|
•
|
As a foreign private issuer, we are permitted to, and we plan to, rely on exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. This might afford less protection to holders of our ordinary shares and ADSs.
|
|
•
|
Anti-takeover provisions in our charter documents could discourage a third-party from acquiring us, which could limit our shareholders’ opportunities to sell their shares at a premium.
|
Risks Relating to Our Business and Industry
We have a limited operating
history of blockchain-based digital asset infrastructure solutions services and our business model is subject to uncertainties,
which makes it difficult to evaluate our business.
We disposed of our
business of providing integrated B2B services to food service suppliers and customers in July 2019. We started to provide blockchain-based
digital asset infrastructure solutions services in May 2019. The limited history of our current operations makes it difficult for
you to evaluate our business, financial performance and prospects, and our historical growth rate might not be indicative of our
future performance. We cannot assure you that our current digital asset infrastructure solutions business will grow as rapidly
as we expect or achieve the critical mass needed for long-term success. We design and develop digital asset transaction platforms
based on blockchain technologies for customers to facilitate asset trading, asset digitalization and cross-border payments and
provide supplemental services for such platforms, such as customized software development services, maintenance services and compliance
support services, which is still a new business model, and we face consistent challenges to innovate our business and service model
to serve our customers. Given the limited history of our business model and the fast and iterative developments in the blockchain
technology sector, it is difficult to predict if we can achieve our expected business growth in the future, and the market might
evolve in ways that are difficult to anticipate. You should consider our prospects in light of the risks and uncertainties that
companies in a rapidly evolving market might encounter. These risks and difficulties include, but are not limited to:
|
•
|
a new and relatively unproven business model;
|
|
•
|
our ability to anticipate and adapt to a developing
market and industry;
|
|
•
|
market acceptance of our platform-based products
and services;
|
|
•
|
high expenditures associated with our technology
upgrading, brand promotion and marketing activities;
|
|
•
|
our ability to attract sufficient customers
and business partners in the blockchain and digital asset industry and generate sufficient cash flow;
|
|
•
|
difficulties in managing rapid growth in personnel
and operations; and
|
|
•
|
our ability to compete in the market.
|
We cannot be certain
that our business strategy will be successful or that we will successfully address these risks. Failure to address any of the risks
described above could have an adverse effect on our business, financial condition and results of operations.
We have a history of losses,
have spent substantial amounts in operating expenses and could require additional funding in the future.
We have incurred net losses
since our inception. We incurred operating loss of US$121.4 million and US$1.7 million in 2018 and 2019, respectively, from our B2B business
which was disposed of in July 2019 and treated as discontinued operations. We incurred net loss of US$1.8 million, net profit of US$0.5 million
and net loss of US$1.7 million in connection with our current digital asset infrastructure solutions business for the year ended December
31, 2018, 2019 and 2020.
We historically spent,
and expect to continue to spend, significant amounts in operating expenses in developing our business. We received net proceeds
of US$37.3 million from our initial public offering on April 8, 2015 and the underwriters’ exercise of the over-allotment
option, after deducting underwriting discounts and commissions and offering expenses payable by us. Additionally, we received
US$15.0 million in a private placement transaction with Mr. Maodong Xu in September 2015. In May 2017, we received a loan of RMB35.0
million (US$5.4 million) from one of our principal shareholders. In April 2018, we received additional loans of RMB70.0 million
(US$10.7million) from Ms. Xiaoxia Zhu and Ms. Huimin Wang. In May 2020, we received US$0.3 million upon the first closing of a
private placement with Universal Hunter (BVI) Limited and, pursuant to the share purchase agreement with Universal Hunter (BVI)
Limited, we received additional US$0.7 million in 2021. We believe that our current cash and cash equivalents and anticipated cash
flow from operations will be sufficient to meet our anticipated cash needs in the next twelve months. However, we may require
additional cash due to changing business conditions or other future developments, including any investments we may decide to pursue.
If these resources are insufficient to satisfy our cash requirements, we may seek to obtain a credit facility or sell additional
equity or debt securities. The sale of additional equity securities could result in dilution of our existing shareholders. The
incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants
that would restrict our operations. We cannot be certain that additional funding will be available to us on acceptable terms,
or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us when needed, we may
have to significantly delay, scale back or discontinue a certain portion of our operations. Any of these events could significantly
harm our business, financial condition and prospects.
We may need to recognize significant
impairment losses in connection with past and future acquisitions, which may have a material and adverse effect on our results
of operations.
We acquired Mercurity
Limited (previously known as Unicorn Investment Limited), in May 2019 to establish our blockchain-based infrastructure solutions
digital asset business. In March 2020, we acquired NBpay Investment Limited, or NBpay, to further strengthen our capabilities in
the blockchain-enabled payment solutions. We may acquire other companies that are complementary to our business in the future.
We record goodwill
if the purchase price paid in an acquisition exceeds the amount assigned to the fair value of the assets acquired and liabilities
assumed, and we have intangible assets without determinable useful lives obtained from the acquisition of Mercurity Limited. We
are required to test goodwill and intangible assets without determinable useful lives for impairment annually, or more frequently
if events or changes in circumstances indicate that it might be impaired in accordance with ASC 350, “Intangibles –
Goodwill and Other.” As of December 31, 2020, the carrying amount of goodwill amounted to approximately US$8.11 million and
the intangible assets amounted to approximately US$0.38 million after the annual impairment test in 2020. We did not recognize
any impairment loss in relation to these assets. If the carrying amount of goodwill or intangible assets without determinable useful
lives in connection with past or future acquisitions is determined to be further impaired, we will be required to recognize additional
impairment losses and our results of operations will be adversely and materially affected. We have made our impairment test as
of December 31, 2020 and determined that impairment is not required, and fair market value of intangible assets exceed its book
value.
We have a limited customer
base. If we lose any of our customer, or if the volume of business with such customers declines, our revenues may be significantly
affected.
As of the date of
this annual report, we have service agreements with one customer for our current blockchain-based digital asset infrastructure
solutions business, Beijing Xichi trading Co., LTD. Due to our
very limited customer base, any of the following events may cause a material decline in our revenue and have a material adverse
effect on our results of operations:
|
•
|
reductions, delays or cessation of purchases
from the existing customers;
|
|
•
|
loss of the existing customer and our inability
to find new customers that can generate the same volume of business; and
|
|
•
|
the existing customer’s failure to make
timely payment for our services.
|
We cannot assure
you that our relationships with these major customers will continue to develop or these significant customers will continue to
generate significant revenue for us in the future.
Blockchain technology and digital
assets are subject to a number of inherent risks that may impact our ability to provide the services we are developing and adversely
affect an investment in us.
Blockchain technology
and digital assets are subject to a number of inherent risks, including reliability risks, security risks, regulatory risks, and
risks associated with human error, that may impact our ability to provide the services we are developing. For example, a blockchain-based
platform’s functionality depends on the internet, and a significant disruption in internet connectivity could disrupt a platform’s
operations until the disruption is resolved; such disruption may have an adverse effect on the value of the digital assets traded
on a platform. In addition, a hacking or service attack on a platform may cause temporary delays in block creation on the blockchain
and in the transfer of digital assets recorded on the chain. Any disruptions, attacks or other security breaches, or the perception
that our blockchain technology is unreliable for any reason, may have a material adverse effect on the value of the digital assets,
investment in the digital assets and the operations and success of our business operations and financial results.
In addition, digital
assets based on blockchain technology can only be transferred with the private key associated with a platform’s address in
which the digital assets are held. To the extent a private key is lost, destroyed, or otherwise compromised and no backup of the
private key is accessible, we will be unable to transfer the digital assets held in a platform’s addresses associated with
that private key. Consequently, the digital assets associated with such address will effectively be lost, which would adversely
affect an investment in digital assets.
We and our customers
may be subject to the risks encountered by the digital asset exchanges we partner with, including a malicious hacking, sale of
a digital asset exchange, loss of the digital assets by the exchange, and other risks. Many digital asset exchanges do not provide
insurance and may lack the resources to protect against hacking and theft. If a material amount of our digital assets or the digital
assets of our customers are held by exchanges, we and our customers may be materially and adversely affected if an exchange suffers
a cyberattack or incurs financial problems.
Furthermore, the recording
of digital asset transactions is not, from an administrative perspective, reversible without the consent and active participation
of the recipient of the transaction or, in theory, control or consent of a majority of the processing power on a certain blockchain
platform. Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer of
digital assets or a theft of such digital assets generally will not be reversible. We, our customers and our partners may not be
capable of seeking compensation for any such transfer or theft. It is possible that, through computer or human error, or through
theft or criminal action, digital assets could be transferred in incorrect amounts or to unauthorized third parties. To the extent
that we, our customers or our partners are unable to seek a corrective transaction with such third party or are incapable of identifying
the third party that has received the digital assets through error or theft, we, our customers or our partners will be unable to
revert or otherwise recover incorrectly transferred digital assets. To the extent that we, our customers and our partners are unable
to seek redress for such error or theft, such loss could adversely affect our reputation and our business.
The growth of the blockchain
industry in general, as well as the blockchain networks, is subject to a high degree of uncertainty.
The factors affecting
the further development of the blockchain and digital asset industry include uncertainties regarding:
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worldwide growth in the adoption and use of
digital assets, and other blockchain technologies;
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government and quasi-government regulations
of digital assets and other blockchain assets and their use, or restrictions on or regulation of access to and operation of blockchain
networks or similar systems;
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the maintenance and development of the open-source
software protocol of the blockchain networks;
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changes in consumer demographics and public
tastes and preferences;
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the availability and popularity of other forms
or methods of buying and selling goods and services, or trading assets including new means of using traditional currencies or existing
networks;
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general economic conditions and the regulatory
environment relating to digital assets; and
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the popularity or acceptance of blockchain-enabled
transaction services.
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Blockchain networks
are based on software protocols that govern peer-to-peer interactions between computers connected to these networks. The suitability
of the networks for our business, depends upon a variety of factors, including, but not limited to:
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the effectiveness of the informal groups of
developers contributing to the protocols that underlie the networks;
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the effectiveness of the network validators
(sometimes called “miners”) and the network’s consensus mechanisms to effectively secure the networks against
confirmation of invalid transactions;
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disputes among the developers or validators
of the networks;
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changes in the consensus or validation schemes
that underlie the networks, including, without limitation, shifts between so-called “proof of work” and “proof
of stake” schemes;
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the failure of cybersecurity controls or security
breaches of the networks;
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the existence of other competing and operational
versions of the networks, including, without limitation, so-called “forked” networks;
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the existence of undiscovered technical flaws
in the networks;
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the development of new or existing hardware,
software tools, or mechanisms that could negatively impact the functionality of the systems;
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the price of blockchain-based digital assets
associated with the networks;
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intellectual property rights-based claims
or other claims against the networks’ participants; and
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the maturity of the computer software programming
languages used in connection with the networks.
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The digital assets
industry as a whole has been characterized by rapid changes and innovations and are continually evolving. Although blockchain networks
and blockchain-based digital assets have experienced significant growth in recent years, the slowing or stopping of the development,
general acceptance and adoption and usage of these networks and assets may materially adversely affect our business plans and results
of operations.
As we acquire, dispose of or
restructure our businesses, product lines, and technologies, we may encounter unforeseen costs and difficulties that could impair
our financial performance.
We launched our Mercury
Plan in April 2020, which focuses on acquisitions of global digital asset service providers in the sectors of payments, digitalization
and transaction. Under the “Mercury Plan,” we actively explore acquisition prospects that would complement our existing
services, augment our market coverage and distribution ability, or enhance our capabilities. As a result, we may seek to make acquisitions
of companies, products, or technologies, or we may reduce or dispose of certain product lines or technologies that no longer fit
our business strategies. For regulatory or other reasons, we may not be successful in our attempts to acquire or dispose of businesses,
products, or technologies, resulting in significant financial costs, reduced or lost opportunities, and diversion of management’s
attention. Managing an acquired business, disposing of product technologies, or reducing personnel entails numerous operational
and financial risks, including, among other things:
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difficulties in assimilating acquired operations
and new personnel or separating existing business or product groups;
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diversion of management’s attention
away from other business concerns;
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amortization of acquired intangible assets;
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adverse customer reaction to our decision
to cease support for a product; and
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potential loss of key employees or customers
of acquired or disposed operations.
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There can be no assurance
that we will be able to achieve and manage successfully any such integration of potential acquisitions, disposition of product
lines or technologies, or reduction in personnel or that our management, personnel, or systems will be adequate to support continued
operations. Any such inabilities or inadequacies could have a material adverse effect on our business, operating results, or financial
condition.
Domestic and international
regulatory regimes governing blockchain technologies, digital assets, distribution and utilization of digital assets is uncertain,
and new regulations or policies may materially adversely affect the development and the value of certain digital assets.
Blockchain and distributed
ledger platforms are recent technological innovations, and the regulatory schemes to which digital assets may be subject have not
been fully explored or developed. Regulation of digital assets varies from country to country as well as within countries. In some
cases, existing laws have been interpreted to apply to blockchain-based technologies and digital assets, and in other cases, jurisdictions
have adopted laws, regulations or directives that specifically affect digital assets, and some jurisdictions have not taken any
regulatory stance on digital assets and or have explicitly declined to apply regulation. Accordingly, there is no clear regulatory
framework applicable to blockchain platforms or digital asset products, and laws that do apply at times may overlap or change.
Regulation in these areas is likely to rapidly evolve as government agencies take regulatory actions to monitor companies and their
activities with respect to these areas.
China has promulgated
laws and restrictions against illegal activities conducted through blockchain technologies. The blockchain-based technologies may
be used in illegal ways and Chinese government may regulate, control or ban the blockchain-based activities. In addition, if China
prohibits or restricts blockchain-based technologies and digital assets in laws and regulations it will promulgate in the future,
we may be subject to legal and other liabilities, which may have a material adverse effect on our business. We cannot assure you
that the blockchain-based technologies and digital assets will not be used in illegal activities by third parties and not be prohibited
or restricted in China in the future.
The further development
and acceptance of blockchain platforms, which represent a new and rapidly changing industry, are subject to a variety of factors
that are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain platforms and blockchain
assets would have a material adverse effect on our business plans and could have a material adverse effect on us.
Blockchain technologies are
subject to unfavorable regulatory action in one or more jurisdictions.
Blockchain technologies
and digital assets have been the subject of scrutiny by various regulatory bodies around the world. We could be impacted by one
or more regulatory inquiries or actions, including but not limited to restrictions on the use of blockchain technology, which could
impede or limit the development of our anticipated blockchain-based digital asset infrastructure solutions and adversely affect
our results of operations.
Any harm to our Mercurity brand
or reputation may materially and adversely affect our business and results of operations.
We believe that the
recognition and reputation of our Mercurity brand among is critical to our business and competitiveness. Many factors, some of
which are beyond our control, are important to maintaining and enhancing our brand. These factors include our ability to:
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enhance the quality and safety of our blockchain-based
digital asset infrastructure solutions for our customers;
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maintain or improve customers’ satisfaction
with our platform products and related services;
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increase brand awareness through marketing
and brand promotion activities; and
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preserve our reputation and goodwill in the
event of any negative publicity on our platform products, internet security, data privacy, price, or other issues affecting us
or the blockchain technology sector.
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A public perception
that we do not provide reliable digital asset infrastructure solutions or satisfactory services, even if factually incorrect or
based on isolated incidents, could damage our reputation, diminish the value of our brand, undermine the trust and credibility
we have established and have a negative impact on our ability to attract new customers or retain our current customers. If we are
unable to maintain our reputation, enhance our brand recognition or increase positive awareness of our website, products and services,
it may be difficult to maintain and grow our customer base, and our business and growth prospects may be materially and adversely
affected.
If we are unable to offer products
or services that attract new customers and new purchases from existing customers, our business, financial condition and results
of operations may be materially and adversely affected.
The blockchain and
digital asset industry is characterized by constant changes, including rapid technological evolution, continual shifts in customer
demands, frequent introductions of new products and solutions and constant emergence of new industry standards and practices. Thus,
our ability to maintain current customers and attract new customers will depend, in part, on our ability to respond to these changes
in a cost-effective and timely manner. We need to anticipate the emergence of new technologies and assess their market acceptance.
However, research and development activities are inherently uncertain, and we might encounter practical difficulties in commercializing
our research and development results, which could result in excessive research and development expenses or delays. Given the fast
pace with which blockchain technologies have been and will continue to be developed, we may not be able to timely upgrade our technologies
in an efficient and cost-effective manner, or at all.
We also need to invest
significant resources in selling and marketing efforts. We take targeted business development approaches to reach out to our potential
customers and provide them with our company profile through various means, such as emails and social network media. We also attended
offline marketing activities to promote our presence and brand recognition in the blockchain and digital asset industry. To continue
to reach potential customers and grow our current business, we must identify and devote more of our marketing expenditures to new
and evolving marketing channels, which may include mobile and virtual channels. The opportunities in and sophistication of newer
marketing channels generally are relatively undeveloped and unproven, making it difficult to assess returns on investment associated
with such channels, and there can be no assurance that we will be able to continue to appropriately manage and fine-tune our marketing
efforts in response to these and other trends in the industry. Any failure to do so could have a material adverse effect on our
business, reputation, results of operations and financial condition.
We face intense competition
in blockchain industry.
As we transition to
our blockchain-enabled digital asset infrastructure solutions business, we will continue to face intense competition globally.
New blockchain-based technologies are constantly evolving, and our competitors may introduce new platforms and solutions that are
superior to ours. In addition, our competitors may be able to adapt more quickly to new technologies or may be able to devote greater
resources to the development, marketing and sale of their products than we can. We may never establish and maintain a competitive
position in the hybrid financing and logistics management businesses.
Some of our current
or future competitors have or may have longer operating histories, stronger research and development capabilities, greater brand
recognition, larger customer bases or greater financial, technical or marketing resources than we do. Smaller companies or new
entrants may be acquired by, receive investment from or enter into strategic relationships with well-established and well-financed
companies or investors which would help enhance their competitive positions. We cannot assure you that we will be able to compete
successfully against current or future competitors, and competitive pressures may have a material and adverse effect on our business,
financial condition and results of operations.
If we fail to adopt new technologies
or adapt our digital asset platforms and systems to changing customer requirements or emerging industry standards, our business
may be materially and adversely affected.
To remain competitive,
we must be able to develop new products or enhance the capabilities related to blockchain technology that is being developed by
us to keep pace with our industry’s rapidly changing technology and customer requirements. However, the industry for blockchain
technology is characterized by rapid technological changes, new product introductions, enhancements, and evolving industry standards.
Our business prospects depend on our ability to develop new products and applications for our technology in new markets that develop
as a result of technological and scientific advances, while improving performance and cost-effectiveness. New technologies, techniques
or products could emerge that might offer better combinations of price and performance than the blockchain technology solutions
that are being developed by us. It is important that we anticipate changes in technology and market demand. If we do not successfully
innovate and introduce new technology into our anticipated technology solutions or effectively manage the transitions of our technology
to new product and service offerings, our business, financial condition and results of operations could be adversely affected.
The successful operation of
our business depends upon the performance and reliability of the internet and mobile telecommunications infrastructures in China.
Our business depends
on the performance and reliability of the internet and mobile telecommunications infrastructures in China. Almost all access to
the internet is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision
of the Ministry of Industry and Information Technology of China. In addition, the national networks in China are connected to the
internet through state-owned international gateways, which are the only channels through which a domestic user can connect to the
internet outside of China. We might not have access to alternative networks in the event of disruptions, failures or other problems
with China’s internet infrastructure. In addition, the internet infrastructure in China might not support the demands associated
with continued growth in internet usage.
The failure of telecommunications
network operators to provide us with the requisite bandwidth could also interfere with the speed and availability of our online
platforms. We have no control over the costs of the services provided by the national telecommunications operators. If the prices
that we pay for telecommunications and internet services rise significantly, or if the telecommunication network in China is disrupted
or failed, our gross margins could be adversely affected. Technical limitations on internet use could also be developed or implemented.
For example, restrictions could be implemented on personal internet use in the workplace in general or access to our website in
particular. This could lead to a reduction of customers’ activities or a loss of customers altogether, which in turn could
have an adverse effect on our financial position and results of operations. In addition, if internet access fees or other charges
to internet users increase, our user traffic might decrease, which in turn could significantly decrease our revenues.
The proper functioning of our
platform is essential to our business. Any failure to maintain the satisfactory performance of our platforms and systems could
materially and adversely affect our business and reputation.
The satisfactory performance,
reliability and availability of the blockchain-based digital asset platform designed and developed by us are critical to our ability
to attract and retain customers and provide quality customer service. Any system interruptions caused by telecommunications failures,
computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our platforms
or reduced transaction processing performance could reduce the attractiveness of product and service offerings. Our servers may
also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to system interruptions,
website slowdown or unavailability, delays or errors in transaction processing, loss of data or the inability to accept and fulfill
customer orders. Security breaches, computer viruses and hacking attacks have become more prevalent in our industry. We have experienced
in the past, and may experience in the future, such attacks and unexpected interruptions. We can provide no assurance that our
current security mechanisms will be sufficient to protect our IT systems from any third-party intrusions, viruses or hacker attacks,
information or data theft or other similar activities. Any such future occurrences could reduce customer satisfaction, damage our
reputation and result in a material decrease in our revenue.
Additionally, we must
continue to upgrade and improve our blockchain-based digital asset platform to meet evolving demand of our customers, and failure
to do so could impede our growth. However, we cannot assure you that we will be successful in executing these technology upgrades
and improvement strategies. In particular, our systems may experience interruptions during upgrades, and the new technologies or
infrastructures may not be fully integrated with the existing systems on a timely basis, or at all. If our existing or future technology
platform does not function properly, it could cause system disruptions and slow response times, affecting data transmission, which
in turn could materially and adversely affect our business, financial condition and results of operations.
If we are unable to conduct
our marketing activities cost-effectively, our results of operations and financial condition may be materially and adversely affected.
We historically incurred
a great amount of expenses on a variety of different marketing and brand promotion efforts to enhance our brand recognition and
increase sales of our services and products for our previous B2B business. We have very limited operating history of our current
business and may need to make significant investments in sales and marketing to promote our brand recognition. Our brand promotion
and marketing activities may not be well received by customers and may not result in the levels of sales that we anticipate. Marketing
of blockchain-based solutions services to customers is evolving. This further requires us to enhance our marketing approaches and
experiment with new marketing methods to keep pace with customer preferences. Failure to refine our existing marketing approaches
or to introduce new marketing approaches in a cost-effective manner could reduce our market share, cause our revenues to decline
and negatively impact our profitability.
Failure to protect confidential
information of our customers and network against security breaches could damage our reputation and brand and substantially harm
our business and results of operations.
A significant challenge
to the blockchain and digital asset industry is the secure storage of confidential information and its secure transmission over
public networks. A significant amount of transaction data is stored on the platform designed and developed by us. In addition,
some digital asset transactions are settled through third-party online payment services. Maintaining complete security for the
storage and transmission of confidential information on our technology platform, such as customer names, personal information and
billing addresses, is essential to maintaining customer confidence.
We have adopted security
policies and measures, including encryption technology, to protect our proprietary data and customer information. However, advances
in technology, the expertise of hackers, new discoveries in the field of cryptography or other events or developments could result
in a compromise or breach of the technology that we use to protect confidential information. We may not be able to prevent third
parties, especially hackers or other individuals or entities engaging in similar activities, from illegally obtaining such confidential
or private information stored on the platforms developed and maintained by us. Such individuals or entities obtaining our customers’
confidential or private information may further engage in various other illegal activities using such information. Any negative
publicity on our platforms’ safety or privacy protection mechanisms and policies, and any claims asserted against us or fines
imposed upon us as a result of actual or perceived failures, could have a material and adverse effect on our public image and reputation.
If we give third parties greater access to our blockchain-based platform in the future as part of our business operation, it may
become more challenging for us to ensure the security of our systems.
Practices regarding
the collection, use, storage, transmission and security of personal information by companies operating over the internet and mobile
platforms have recently come under increased public scrutiny. As blockchain and digital asset industry continues to evolve, we
believe that increased regulation by the PRC government of data privacy on the internet is likely. We may become subject to new
laws and regulations applying to the solicitation, collection, processing or use of personal or customer information that could
affect how we store, process and share data with our customers. We generally comply with industry standards and are subject to
the terms of our own privacy policies. Compliance with any additional laws could be expensive and may place restrictions on the
conduct of our business and the manner in which we interact with our customers. Any failure to comply with applicable regulations
could also result in regulatory enforcement actions against us.
If our senior management is
unable to work together effectively or efficiently or if we lose their services, our business may be severely disrupted.
Our success heavily
depends upon the continued services of our management. In particular, we rely on the expertise and experience of Ms. Hua Zhou,
our chairperson and chief executive officer, and our other executive officers. If our senior management cannot work together effectively
or efficiently, our business may be severely disrupted. If one or more of our senior management were unable or unwilling to continue
in their present positions, we might not be able to replace them easily or at all, and our business, financial condition and results
of operations may be materially and adversely affected. If any of our senior management joins a competitor or forms a competing
business, we may lose customers, know-how and key professionals and staff members. Our senior management has entered into employment
agreements and confidentiality and non-competition agreements with us. However, if any dispute arises between our officers and
us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce
them at all.
Substantial future sales of
our shares in the public market, or the perception that these sales could occur, could cause our share price to decline.
Additional sales of
our shares in the public market, or the perception that these sales could occur, could cause the market price of our shares to
decline. As of March 31, 2021, we had 3,472,895,329 ordinary shares issued and outstanding (excluding 127,963,800 ordinary shares
in the form of ADSs that are reserved for issuance upon the exercise of share awards). If part or all of these shares are sold
in the public market or if any other existing shareholders sell a substantial amount of their shares, the prevailing market price
for our shares could be adversely affected. Such sales also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate.
We have limited insurance coverage
and could incur losses resulting from liability claims or business interruptions.
As the insurance industry
in China is still developing, insurance companies in China currently offer limited business insurance products. We do not have
any product liability insurance or business interruption insurance. As we continue to expand our business, we could be increasingly
exposed to various liability claims related to our products and services. Any liability claims, business disruption, or natural
disaster could result in substantial costs and the diversion of resources, which would have an adverse effect on our business and
results of operations.
We might not be able to adequately
protect our intellectual property rights.
We believe our domain
names, trademarks, technology know-how and other intellectual properties are important to our business and our future prospects.
We have been investing resources to develop our own intellectual properties and we take prudent steps to protect our intellectual
properties and know-how. But we cannot assure you such steps would be sufficient to prevent the infringement of our intellectual
properties. If we fail to adequately protect our intellectual property rights, including our rights in know-how or our trademark,
it could have an adverse effect on our operations.
The validity, enforceability
and scope of protection available under intellectual property laws with respect to the internet industry in China are uncertain
and still evolving. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient and
ineffective. Accordingly, protection of intellectual property rights in China might not be as effective as in the United States
or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we
might need to resort to litigation to enforce or defend our intellectual property rights or to determine the enforceability, scope
and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation,
if any, could result in substantial costs and the diversion of resources and management’s attention.
Companies in the internet
and technology industries are frequently involved in litigation based on allegations of infringement of intellectual property rights,
unfair competition and other violations of third parties’ rights. From time to time, we could face allegations of trademark,
copyright, patent and other intellectual property rights infringement of third parties. Such allegations of intellectual property
rights infringements could come from our competitors and there could also be allegations that we are involved in unfair trade practices.
We may face intellectual property
infringement claims or other related disputes, which could be time-consuming, costly to defend or settle and result in the loss
of significant rights.
We may be subject
to infringement claims from time to time or otherwise become aware of potentially relevant patents or other intellectual property
rights held by other parties that may cover some of our technologies, products and services. The blockchain and digital asset industry
is characterized by companies that hold large numbers of patents and other intellectual property rights and that vigorously pursue,
protect and enforce these rights. Patent litigation has increased in recent years owing to increased assertions made by intellectual
property licensing entities and increasing competition and overlap of product functionality in our markets. Additionally, we may
in the future to enter into licensing agreements with third parties for the use of their proprietary technologies, primarily software
development tools, in developing our platform products. As with any business relationship, we may face disputes and lawsuits related
to those intellectual property licensing agreements. As our operations grow, the likelihood of us becoming involved in intellectual
property related lawsuits and disputes to protect or defend our intellectual property rights and the use of third-party intellectual
property rights may increase.
In addition, it is
extremely difficult for us to monitor all of the patent applications that have been filed in the PRC or in other countries or regions
and whether, if such pending patents are granted, such patents would have a material and adverse effect on our business if our
product and service offering were to infringe upon them.
Other third parties
may file claims against us or our customers alleging that our products, processes, or technologies infringe third-party intellectual
property rights. Regardless of their merits or resolutions, such claims could be costly to defend or settle and could divert the
efforts and attention of our management and technical personnel. We do not know whether we could prevail in any such proceeding
given the complex technical issues and inherent uncertainties involved in intellectual property litigations. Any unfavorable results
we may receive in such proceedings could have a material adverse effect on our business, financial condition and results of operations.
We depend on regulatory approvals
and licenses to operate in our existing markets and to gain access to new markets.
The internet and telecommunication
industries in China are highly regulated by the PRC government and numerous regulatory authorities of the central PRC government
are empowered to issue and implement regulations governing various aspects of the internet industries including foreign ownership
of and licensing and permit requirements pertaining to companies in the internet industries.
The relevant laws
and regulations are relatively new or evolving, and their interpretation and enforcement involve significant uncertainty. As a
result, in certain circumstances, it could be difficult to determine what actions or omissions could be deemed to be in violation
of applicable laws and regulations. Our VIEs may be required to obtain and maintain the applicable Internet Information Service
license, or ICP license, for value-added internet services if they operate any website in China and engage in providing commercial
internet information services through such websites. Furthermore, Our VIEs could be required to obtain additional licenses. If
Our VIEs fail to obtain or maintain any of the required licenses or approvals, their continued business operations could subject
them to various penalties, such as confiscation of illegal net sales, fines and the discontinuation or restriction of its operations.
Any such disruption in the business operations of Our VIEs will materially and adversely affect our business, financial condition
and results of operations.
Any unauthorized
use of indicia of corporate power or authority would have a material adverse effect on our business.
In China, a company
chop, or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each
legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security
Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes.
The chops of our PRC subsidiary, our VIE and its subsidiaries are generally held securely by personnel designated or approved by
us in accordance with our internal control procedures. To the extent those chops are not kept safe, are stolen or are used by unauthorized
persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and
those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual
who lacked the requisite power and authority to do so.
We are subject to changing
laws and regulations regarding regulatory matters, corporate governance and public disclosure that have increased both our costs
and the risk of non-compliance.
We are subject to
rules and regulations by various governing bodies, including, among others, the U.S. Securities and Exchange Commission, which
is charged with the protection of investors and the oversight of companies whose securities are publicly traded, and the various
regulatory authorities in China and the Cayman Islands, and subject to new and evolving regulatory measures under applicable law.
Our efforts to comply with new and changing laws and regulations have resulted in and are likely to continue to result in, increased
general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance
activities.
Moreover, because
these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time
as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional
costs necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these
regulations and any subsequent changes, we may be subject to penalty and our business may be harmed.
If we fail to maintain an effective
system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and
investor confidence and the market price of our ADSs may be adversely impacted.
The SEC, as required
by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring most public companies to include
a management report on such company’s internal control over financial reporting in its annual report, which contains management’s
assessment of the effectiveness of the company’s internal control over financial reporting. In addition, when a company meets the
SEC’s criteria, an independent registered public accounting firm must report on the effectiveness of the company’s internal
control over financial reporting.
Our management has concluded
that our internal control over financial reporting as of December 31, 2020 was effective. However, if we fail to maintain effective internal
controls over financial reporting in the future, our management and our independent registered public accounting firm may not be able
to conclude that we have effective internal controls over financial reporting at a reasonable assurance level. This could result in a
loss of investor confidence in the reliability of our financial conditions which in turn could negatively impact the trading price of
our ADSs and result in lawsuits being filed against us by our shareholders or otherwise harm our reputation. Furthermore, we have incurred
and anticipate that we will continue to incur considerable costs and use significant management time and other resources in an effort
to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
Certain audit reports included
in this annual report are prepared by auditors who are not inspected by the Public Company Accounting Oversight Board, and consequently
you are deprived of the benefits of such inspection.
Our independent registered
public accounting firm that issues the audit report included in our annual report filed with the U.S. Securities and Exchange Commission,
or the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company
Accounting Oversight Board, or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB
to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the
PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities,
our auditors are not currently inspected by the PCAOB. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting
continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with
significant operations in China. The joint statement reflects a heightened interest in this issue that U.S. regulators have focused
on in recent years. However, it remains unclear whether the SEC and PCAOB will take any further actions to address the issue.
Inspections of other
firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality
control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB
inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures.
As a result, investors may be deprived of the benefits of PCAOB inspections.
The inability of the
PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s
audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections.
Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.
The audit committee takes such a situation into consideration and adds additional risk mitigation controls to carry out its responsibilities
in overseeing financial reporting. Examples of some of those controls are: i) encouraging the auditors to meet and report to the
audit committee without management presence to discuss any issues that may be raised during audits, ii) requesting information
from the auditor regarding audit risk assessment and audit plan and procedure, and iii) increasing the effectiveness of internal
controls on financial reporting through its supervision over the management team.
As part of a continued
regulatory focus in the United States on access to audit and other information currently protected by national law, in
particular China’s, in December 2020, the U.S. enacted the Holding Foreign Companies Accountable Act, or the HFCA Act, which
includes requirements for the SEC to identify issuers whose audit reports are prepared by auditors that the PCAOB is unable to
inspect or investigate because of restrictions imposed by non-U.S. authorities in the auditor’s local jurisdiction. The HFCA
Act also requires public companies on this SEC list to certify that they are not owned or controlled by a foreign government and
make certain additional disclosures on foreign ownership and control of such issuers in their SEC filings. On March 24, 2021, the
SEC announced the adoption of interim final amendments to implement the foregoing certification and disclosure requirements and
that it is seeking public comment on the requirements. Furthermore, the HFCA Act amends the Sarbanes-Oxley Act of 2002 to require
the SEC to prohibit securities of any U.S. listed companies from being traded on any of the U.S. national securities exchanges,
such as the NYSE and Nasdaq Stock Market, or in the U.S. “over-the-counter” markets, if the auditor of the U.S. listed
companies’ financial statements is not subject to PCAOB inspections for three consecutive “non-inspection” years
after the law becomes effective. The SEC has not yet identified a list of issuers whose auditors are not subject to PCAOB inspections.
Enactment of the HFCA Act and other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty
for affected issuers, including us, and the market price of the ADSs could be adversely affected. There can be no assurance that
we will not be identified by the SEC as an issuer whose audit report is prepared by auditors that the PCAOB is unable to inspect
or investigate. There can be no assurance that, once we have a “non-inspection” year, we will be able to take remedial
measures in a timely manner, and as a result, and there can be no assurance that we will always be able to maintain the listing
of our ADSs on a national stock exchange in the U.S., such as the NYSE or the Nasdaq Stock Market, or that you will always be allowed
to trade our shares or ADSs. In the worst case, our ADSs could be delisted if we were unable to cure the situation to meet the
PCAOB inspection requirement in time.
The
COVID-19 outbreak could significantly disrupt our operations and adversely affect our results of operations.
Since December 2019,
the severity of the outbreak of COVID-19 resulted in travel restrictions, quarantine and social distancing measures imposed by
the local governments across the globe and materially affected general commercial activities globally. The COVID-19 outbreak made
it difficult to carry out our marketing activities to promote our products and services to potential customers and gave rise to
sudden significant changes in regional and global economic conditions that could interfere with purchases of products or services.
We currently are unable to predict the duration and severity of the spread of the COVID-19, and responses thereto, and the impact
on our business, results of operations, financial condition, cash flows and liquidity, as these depend on rapidly evolving developments,
which are highly uncertain and will be a function of factors beyond our control, such as the continued spread or recurrence of
contagion, the implementation of effective preventative and containment measures, the development of effective medical solutions,
financial and other market reactions to the foregoing, and reactions and responses of communities and societies.
Any similar future
outbreak of a contagious disease, other adverse public health developments in China and around the world, or the measures taken
by the governments of China or other countries in response to a future outbreak of a contagious disease may restrict economic activities
in affected regions, resulting in reduced business volume, temporary closure of our facilities and offices or otherwise disrupt
our business operations and adversely affect our results of operations.
We face risks related to natural
disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
Our business could
be materially and adversely affected by natural disasters or the outbreak of avian influenza, severe acute respiratory syndrome,
or SARS, influenza A (H1N1), Ebola or another epidemic. Any such occurrences could cause severe disruption to our daily operations,
including our fulfillment infrastructure and our customer service center, and may even require a temporary closure of our facilities.
Earthquakes or other similar disasters affecting cities where we have major operations in China could materially and adversely
affect our operations due to loss of personnel and damages to property, including our inventory and our technology systems. Our
operation could also be severely disrupted if our suppliers, customers or business partners were affected by health epidemics or
other natural disasters.
Risks Relating to Our Corporate Structure and Dependence
on our Contractual Arrangements with Our Affiliates
If the PRC government finds
that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions
on foreign investment in internet business, or if these regulations or the interpretation of existing regulations change in the
future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
Current PRC laws and
regulations place certain restrictions on foreign ownership of companies that engage in internet businesses. After the divestment
of our previous wholly-owned PRC subsidiary and VIE that are associated with the operations of our B2B services in July 2019, we
currently conduct our operations in China principally through contractual arrangements between our wholly-owned PRC subsidiary,
Lianji Future, and our consolidated affiliated entities in China, Lianji and Mercurity Beijing, or Our VIEs, and their respective
shareholders. Our contractual arrangements with Our VIEs and their respective shareholders enable us to exercise effective control
over them and hence treat them as our consolidated affiliated entities and consolidate their results. For a detailed discussion
of these contractual arrangements, see “Item 4. Information on the Company—A. History and Development of the Company.”
In the opinion of
our PRC counsel, Beijing Dacheng Law Offices, LLP (Shanghai), our current ownership structure, the ownership structure of Our WFOE
and Our VIEs, and the contractual arrangements between Our WFOE, Our VIEs, and their respective shareholders are in compliance
with existing PRC laws, rules, and regulations. There are, however, substantial uncertainties regarding the interpretation and
application of current or future PRC laws and regulations. Thus, we cannot assure you, however, that we will be able to enforce
these contracts. Although we believe we are in compliance with current PRC regulations, we cannot assure you that the PRC government
would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with
existing policies or with requirements or policies that might be adopted in the future. PRC laws and regulations governing the
validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting
these laws and regulations. If the PRC government determines that we are not in compliance with applicable laws and regulations,
it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to
collect revenues, restrict or prohibit us to finance our business and operations in China, shut down our servers or block our website,
require us to restructure our operations, impose additional conditions or requirements with which we might not be able to comply,
levy fines, confiscate our income or the income of our PRC subsidiary or affiliated PRC entities, or take other regulatory or enforcement
actions against us that could be harmful to our business. The imposition of any of these penalties would result in an adverse effect
on our ability to conduct our business.
Substantial uncertainties exist
with respect to the PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate
governance and business operations.
Foreign Investment
Law of the PRC was promulgated in March 2019 and took effect in January 2020, which replaced the trio of existing laws regulating
foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture
Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations.
The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in
line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign
and domestic investments.
Among other things,
the Foreign Investment Law expands the definition of foreign investment and introduces the principle for determining whether a
company is considered a foreign-invested enterprise, or an FIE. The Foreign Investment Law specifically provides that an FIE refers
to an enterprise all or part of whose capital is invested by foreign investor(s) and duly registered and established within China
in accordance with PRC law. “Foreign investment” in the Foreign Investment Law refers to investment activities directly
or indirectly conducted by one or more natural persons, business entities, or otherwise organizations of a foreign country, or
the Foreign Investor, within China, with the investment activities including the following situations: (i) a Foreign Investor,
individually or collectively with other investors, establishes an FIE within China; (ii) a Foreign Investor acquires stock shares,
equity shares, interests in assets, or other similar rights to and interests in an enterprise within China; (iii) a Foreign Investor,
individually or collectively with other investors, invests in a new project within China; and (iv) foreign investments in other
forms as provided by law, administrative regulations, or by the State Council.
Once an entity is
determined to be an FIE, it shall be subject to the foreign investment restrictions or prohibitions set forth in a “negative
list,” which was separately issued by the National Development and Reform Commission and the Ministry of Commerce. If the
underlying business of the FIE falls within the negative list, the relevant market entry clearance, prior approval from the government
authorities as mandated by the existing foreign investment legal regime would be required for establishment of the FIE.
Currently, the Foreign
Investment Law divides foreign investments into direct investments and indirect investments, but there are no further provisions
in indirect investments. Whether China will implement penetration supervision, to which level it will penetrate, whether it will
use “control” as the judgement standard, whether it will be limited to the areas in the negative list and other issues
such as the way to supervise, all remain uncertain. Considering the possibility that any future law, administrative regulations
or provisions of the State Council may subject foreign companies with contractual arrangements with a PRC entity to the supervision
of the Foreign Investment Law, It is unclear whether Our VIEs would be determined to be FIEs. The Foreign Investment Law provides
that China may establish a foreign investment security review system to conduct security reviews on foreign investment that affect
or may affect national security. Therefore, it is also unclear whether the market entry clearance shall be completed by companies
with existing VIE structures like us and whether the security reviews shall be conducted on us. If such clearance or review is
required, we will face uncertainties as to whether it can be timely obtained, or at all.
In addition, the Foreign
Investment Law stipulates a five-year transition period, during which enterprises could retain original organization form. It remains
uncertain as to whether the requirement of the five-year transition mean that FIEs need to modify existing contracts and other
documents within five years and go through the relevant approval, filing and industrial and commercial registration procedures
and as to the consequence of the failure to go through such approval and filing procedures. Failure to take timely and appropriate
measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current
corporate structure and business operations.
We rely on contractual arrangements
with Our VIEs in China and their respective shareholders for our operations, which might not be as effective as direct ownership
in providing operational control.
Since PRC laws restrict foreign
equity ownership in companies engaged in certain internet businesses in China, we rely on contractual arrangements with our consolidated
affiliated entity, in which we do not hold shares, and its shareholder to operate our business in China. If we held the shares of Our
VIEs, we would be able to exercise our rights as a shareholder to effect changes in their respective board of directors, which in turn
could effectuate changes at the management level, subject to any applicable fiduciary obligations. However, under the current contractual
arrangements, we rely on Our VIEs and their shareholders’ performance of their contractual obligations to exercise effective control.
Our contractual arrangements are generally effective for the complete period Our VIEs exists. In general, neither Our VIEs nor their respective
shareholders could terminate the contracts prior to the expiration date. However, the shareholders of Our VIEs might not act in the best
interests of our company or might not perform its obligations under these contracts. Such risks exist throughout the period in which we
intend to operate our business through the contractual arrangements with our consolidated affiliated entity. We can replace the shareholder
of Our VIEs at any time pursuant to our contractual arrangements with it and its shareholders. However, if any dispute relating to these
contracts remains unresolved, we will have to enforce our rights under these contracts through the operation of PRC law and courts and
therefore will be subject to uncertainties in the PRC legal system. See “—Any failure by Our VIEs or their shareholders to
perform their obligations under our contractual arrangements with them could have an adverse effect on our business.” Therefore,
these contractual arrangements might not be as effective as the direct holding of shares.
Any failure by Our VIEs or
their shareholders to perform their obligations under our contractual arrangements with them could have an adverse effect on our
business.
Our VIEs and their
shareholders could fail to take certain actions required for our business or follow our instructions despite their contractual
obligations to do so. If they fail to perform their obligations under their respective agreements with us, we might have to rely
on legal remedies under PRC law, including seeking specific performance or injunctive relief, which might not be effective.
All of these contractual
arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these
contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures.
The legal environment in the PRC is not as developed as in certain other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements, which could make it difficult
to exert effective control over our consolidated affiliated entity, and our ability to conduct our business could be adversely
affected. Additionally, under PRC law, rulings by arbitrators are final. Parties cannot appeal the arbitration results in courts.
If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may enforce
the arbitration awards only in PRC courts through arbitration award recognition proceedings, which could require additional expenses
and delay.
Contractual arrangements with
Our VIEs might result in adverse tax consequences to us.
Under applicable PRC
tax laws and regulations, arrangements and transactions among related parties could be subject to audit or scrutiny by the PRC
tax authorities within ten years after the taxable year when the arrangements or transactions are conducted. We could face adverse
tax consequences if the PRC tax authorities were to determine that the contractual arrangements between Our WFOE, Our VIEs and
their respective shareholders were not entered into on an arms-length basis and therefore constituted unfavorable transfer pricing
arrangements. Unfavorable transfer pricing arrangements could, among other things, result in an upward adjustment on taxation.
In addition, the PRC tax authorities could impose late payment fees and other penalties on our consolidated affiliated entity for
the adjusted but unpaid taxes. Our results of operations could be adversely affected if our consolidated affiliated entity’s
tax liabilities increase significantly or if it is required to pay late payment fees or other penalties.
The shareholders of Our VIEs
may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
The shareholders of
Our VIEs include Mr. Kaiming Hu, Mr. Longming Wu, a director of our company, and Ms. Hong Zhou. Mr. Hu and Mr. Wu are also beneficial
owners of our company. Conflicts of interest may arise from them in their roles as directors and beneficial owners of our company
and as shareholders of Our VIEs. These shareholders may breach, or cause Our VIEs to breach, or refuse to renew, the existing contractual
arrangements we have with them and Our VIEs, which would have a material and adverse effect on our ability to effectively control
Our VIEs and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with Our VIEs
to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements
to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in
the best interests of our company or such conflicts will be resolved in our favor.
Currently, we do not
have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could
exercise our purchase option under the option agreements with these shareholders to request them to transfer all of their equity
interests in Our VIEs to a PRC entity or individual designated by us, to the extent permitted by PRC laws. For the shareholders
who are also our directors, we rely on them to abide by the laws of the Cayman Islands and China, which provide that directors
owe a fiduciary duty to the company that requires them to act in good faith and in what they believe to be the best interests of
the company and not to use their position for personal gain. There is currently no specific and clear guidance under PRC laws that
addresses any conflict between PRC laws and laws of Cayman Islands in respect of any conflict relating to corporate governance.
The shareholders of Our VIEs have executed powers of attorney to appoint our WFOE to vote on their behalf and exercise voting rights
as shareholders of Our VIEs. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of Our
VIEs, we would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to our operations. There
is also substantial uncertainty as to the outcome of any such legal proceedings.
We rely principally on dividends
and other distributions on equity paid by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we might
have. Any limitation on the ability of our PRC and Hong Kong subsidiaries to pay dividends to us could have an adverse effect on
our ability to conduct our business.
We are a holding company,
and we rely principally on dividends and other distributions on equity paid by Our WFOE, and our wholly-owned Hong Kong subsidiary,
Ucon Capital (HK) Limited, or Ucon HK, which is the direct holding company of Our WFOE, for our cash and financing requirements,
including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we might incur.
If Our WFOE or Ucon HK, as the case may be, incurs debt on their own behalf in the future, the instruments governing the debt could
restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities could require us
to adjust our taxable income under the contractual arrangements Our WFOE currently has in place with our consolidated affiliated
entities in a manner that would adversely affect its ability to pay dividends and other distributions to us.
Under PRC laws and
regulations, Our WFOE, as a wholly foreign-owned enterprise in China, can pay dividends only out of its accumulated profits as
determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise such as
Our WFOE is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory
reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. At its discretion, it may allocate
a portion of its after-tax profits based on PRC accounting standards to other funds. These statutory reserve funds and other funds
are not distributable as cash dividends. As of December 31, 2020, the paid-in registered capital of Our WFOE was nil. Our WFOE
obtained the business license on April 3, 2019. According to its articles of association, our WFOE’s registered capital is
US$1.5 million. The registered capital will be paid one-time within 20 years from the date of issuance of the business license.
Under the subscription system of the registered capital in PRC Company Law, we only need to contribute capital before that date.
Since our obligations have not expired yet, the current unpaid capital contribution is not an act of non-performance of the investment
obligations, and it will not affect the shareholders’ rights such as dividend rights and equity transfer rights. According
to the Minutes of the National Court Work Conference for Civil and Commercial Trials promulgated by the Supreme People’s
Court in November 2019, the shareholder’s capital contribution dates expire expeditiously in the following situations: (i)
where the company is subject to execution in a case in which the people’s court has taken all execution measures but there
is no property available for execution and the company meets the conditions for bankruptcy but fails to apply for bankruptcy; or
(ii) the period for capital contribution by the shareholders is extended by resolutions made by company’s shareholders’
(general) meeting or by other means after the incurrence of the company’s debts. In both cases, we have the risk of contributing
the capital to our WFOE before expected date. Any limitation on the ability of Our WFOE or Ucon HK to pay dividends or make other
distributions to us could adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our
business, pay dividends, or otherwise fund and conduct our business.
We could lose the ability to
use and enjoy assets held by Our VIEs that are important to the operation of our business if such entities go bankrupt or become
subject to dissolution or liquidation proceedings.
As part of our contractual
arrangements with Our VIEs, such entities hold certain assets that are important to the operation of our business. If Our VIEs
go bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we might not be able to
continue some or all of our business activities, which could adversely affect our business, financial condition and results of
operations. If Our VIEs undergo voluntary or involuntary liquidation proceedings, the unrelated third-party creditors could claim
rights to some or all of these assets, thereby hindering our ability to operate our business, which could adversely affect our
business, financial condition and results of operations.
Risks Relating to Doing Business in China
We could be adversely affected
by the complexity, uncertainties and changes in PRC regulation of internet businesses and companies.
The PRC government
extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining
to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their
interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it could be difficult to
determine what actions or omissions could be deemed to be in violation of applicable laws and regulations. Issues, risks and uncertainties
relating to PRC regulation of internet businesses include, but are not limited to, the following:
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new laws and regulations could be promulgated
that will regulate internet activities. If these new laws and regulations are promulgated, additional licenses could be required
for our operations. If our operations do not comply with these new regulations after they become effective, or if we fail to obtain
any licenses required under these new laws and regulations, we could be subject to penalties; and
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we operate in the blockchain and digital asset
industry that is characterized by constant changes, including rapid technological evolution, continual shifts in customer demands,
frequent introductions of new technologies and new industry standards and practices, which could result in new laws and regulations.
Currently, the laws and regulations relating to blockchain technologies are not established and detailed enough in China and other
jurisdictions. As a result, we are subject to legal and regulatory uncertainties.
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The interpretation
and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet
industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses
and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits
or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain any new licenses
required under any new laws or regulations. There are also risks that we could be found to violate the existing or future laws
and regulations given the uncertainty and complexity of China’s regulation of internet businesses.
Uncertainties with respect
to the PRC legal system could have an adverse effect on us.
The PRC legal system
is a civil law system based on written statutes. Unlike the common law system, prior court decisions in a civil law system may
be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced
the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively
new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always
consistent, and enforcement of these laws, regulations and rules involves uncertainties, which could limit the available legal
protections.
In addition, the PRC
administrative and court authorities have significant discretion in interpreting and implementing or enforcing statutory rules
and contractual terms, and it could be more difficult to predict the outcome of administrative and court proceedings and the level
of legal protection we could enjoy in the PRC than under some more developed legal systems. These uncertainties could affect our
judgment on the relevance of legal requirements and our decisions on the measures and actions to be taken to fully comply therewith,
and could affect our ability to enforce our contractual or tort rights. Such uncertainties could therefore increase our operating
costs and expenses as well as adversely affect our business and results of operations.
Furthermore, the PRC
legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at
all and could have a retroactive effect. As a result, we might not be aware of our violation of any of these policies and rules
until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property
(including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment in
China could adversely affect our business and impede our ability to continue our operations.
You may experience difficulties
in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named
in the prospectus based on foreign laws.
We are an exempted
company incorporated under the laws of the Cayman Islands. A substantial portion of our assets are located in China. In addition,
many of our senior executive officers and directors reside within China for a significant portion of the time and some of them
are PRC nationals. As a result, it may be difficult for you to effect service of process upon us or those persons inside China.
It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions
of the U.S. federal securities laws against us and our officers and directors. In addition, there is uncertainty as to whether
the courts of the Cayman Islands or the PRC would (i) recognize or enforce judgments of U.S. courts against us or our directors
or officers that are predicated upon the civil liability provisions of the securities laws of the United States or any state in
the United States, or (ii) entertain original actions brought in the Cayman Islands against us or our directors or officers that
are predicated upon the federal securities laws of the United States or the securities laws of any state in the United States.
The recognition and
enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign
judgments in accordance with the requirements of the PRC Civil Procedures Law and other applicable laws, regulations and interpretations
based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions.
China does not have any treaties or other forms of written arrangement with the United States that provide for the reciprocal recognition
and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a
foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC
laws or national sovereignty, security or the public interest. As a result, it is uncertain whether and on what basis a PRC court
would enforce a judgment rendered by a court in the United States.
Regulation and censorship of
information distribution over the internet in China could adversely affect our business, and we could be liable for information
displayed on, retrieved from or linked to our website.
China has enacted
laws and regulations governing internet access and the distribution of products, services, news, information and other content
through the internet. In the past, the PRC government has prohibited the distribution of information through the internet that
it deems to be in violation of PRC laws and regulations. If any of our internet content was deemed by the PRC government to violate
any content restrictions, we would not be able to continue to display such content and could become subject to penalties, including
confiscation of income, fines, suspension of business and revocation of required licenses, which could adversely affect our business,
financial condition and results of operations. We could also be subject to potential liability for any unlawful actions of users
of our website or for content we distribute that is deemed inappropriate. It could be difficult to determine the type of content
that could result in liability to us, and if we are found to be liable, we could be prevented from operating our website in China.
Governmental control of currency
conversion could affect the value of your investment.
The PRC government
imposes controls on the convertibility between the Renminbi and foreign currencies despite the significant reduction over the years
by the PRC government of control over routine foreign exchange transactions under current accounts. Substantially all of our revenues
are denominated in Renminbi. Under our current holding company corporate structure, our income is primarily derived from dividend
payments from our PRC subsidiary. Shortages in the availability of foreign currency or other restrictions could restrict the ability
of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their
foreign currency- denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items,
including profit distributions, interest payments and expenditures from trade related transactions, can be made in foreign currencies
without prior approval from SAFE by complying with certain procedural requirements. However, approval from SAFE or its local branch
is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the
repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access to foreign
currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient
foreign currency to satisfy our currency demands, we might not be able to pay dividends in foreign currencies to our shareholders,
including holders of our ADSs.
Fluctuations in exchange rates
of the Renminbi could affect our reported results of operations.
Substantially all
of our revenues and expenses are denominated in RMB. The value of the RMB against the U.S. dollar and other currencies is affected
by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things.
Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict
how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
As we rely on dividends
and other fees paid to us by our subsidiary and affiliated consolidated entities in China, any significant revaluation of the Renminbi
could adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on,
our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars we received from our initial public offering into
Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi
amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose
of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar
against the Renminbi would have a negative effect on the U.S. dollar amount available to us. In addition, since our functional
and reporting currency is the U.S. dollar while the functional currency of our subsidiary and consolidated affiliated entities
in China is Renminbi, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would have a positive
or negative effect on our reported financial results, which might not reflect any underlying change in our business, financial
condition or results of operations.
Our operations could be adversely
affected by changes in China’s political, economic and social conditions.
Substantially all
of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects
could be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic
growth in China as a whole. In addition, the increased global focus on social, ethical and environmental issues may lead to China’s
adoption of more stringent standards in these areas, which may adversely impact the operations of China-based companies including
us.
The Chinese economy
differs from the economies of most developed countries in many respects, including the level of government involvement, level of
development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented
measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets,
and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China
is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development
by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through
allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential
treatment to particular industries or companies.
While the Chinese
economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various
sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation
of resources. Some of these measures might benefit the overall Chinese economy but could have a negative effect on us. For example,
our financial condition and results of operations could be adversely affected by government control over capital investments or
changes in tax regulations. In the past the PRC government has implemented certain measures, including interest rate increases,
to control the pace of economic growth. These measures could cause decreased economic activity in China, which could adversely
affect our business and operating results. Any significant increase in China’s inflation rate could increase our costs and
have an adverse effect on our operating margins. In addition, any sudden changes to China’s political system or the occurrence
of widespread social unrest could have negative effects on our business and results of operations.
Under the PRC enterprise income
tax law, we could be classified as a “resident enterprise” of China. Such classification could result in unfavorable
tax consequences to us and our non-PRC shareholders.
Under the PRC Enterprise
Income Tax Law and its implementation rules, or the Enterprise Income Tax Rules, an enterprise established outside of the PRC with
“de facto management bodies” within the PRC is considered a resident enterprise and is subject to PRC enterprise income
tax at the rate of 25% on its global income. The Enterprise Income Tax Rules define the term “de facto management bodies”
as “establishments that carry out substantial and overall management and control over the manufacturing and business operations,
personnel, accounting, properties, etc. of an enterprise.” The only detailed guidance currently available regarding the definition
of “de facto management body” as well as the determination of the tax residence of offshore incorporated enterprises
whose primary controlling shareholder is a PRC company or a PRC corporate group, and such enterprises’ tax administrations
are set forth in two notices, the Notice On Issues Relating to Determination of Chinese-Controlled Offshore Enterprise as PRC Resident
Enterprises by applying the “De Facto Management Body,” or Circular 82, and the Administrative Measures of Enterprise
Income of Chinese Controlled Offshore Incorporated Resident Enterprise (Trial), or Circular 45, issued by the PRC State Administration
of Taxation, or the Circulars. The Circulars provide that a foreign enterprise controlled by a PRC enterprise or a PRC enterprise
group would be classified as a “resident enterprise” with its “de facto management body” located within
China if all of the following requirements are satisfied: (i) the enterprise’s day-to-day operations management is primarily
exercised in China, (ii) decisions relating to the enterprise’s financial and human resource matters are made or subject
to approval by organizations or personnel in China, (iii) the enterprise’s primary assets, accounting books and records,
company seals, board and shareholders’ meeting minutes are located or maintained in China, and (iv) 50% or more of voting
board members or senior executives of the enterprise habitually reside in China. If all of these criteria are met, the relevant
offshore enterprise controlled by PRC enterprises or PRC enterprise groups would be deemed to have its “de facto management
body” in China and therefore be deemed a PRC resident enterprise. The Circulars made a clarification in the areas of resident
status determination, post-determination administration, as well as the exercise of competent tax authorities’ procedures.
The Circulars also specify that when provided with a copy of PRC tax resident determination certificate from a resident Chinese
controlled offshore incorporated enterprise, a payer of PRC-sourced dividends, interest, royalties, etc. should not withhold 10%
income tax on such payments to such Chinese controlled offshore incorporated enterprise. Although the Circulars apply only to offshore
enterprises controlled by PRC enterprises and not those controlled by PRC individuals such as us, the determination criteria and
administration clarification made in the Circulars reflect the PRC State Administration of Taxation’s general position on
how the “de facto management body” test should be applied in determining the tax residency status of offshore enterprises
and how the administration measures should be implemented. There is no assurance that the PRC State Administration of Taxation
will not apply the same or similar criteria as stated in the Circulars to determine whether the “de facto management body”
of an offshore incorporated enterprise controlled by PRC individuals (like us) is located within the PRC in the future. If the
PRC authorities were to determine that we should be treated as a PRC resident enterprise for the purpose of PRC enterprise income
tax, a 25% enterprise income tax on our global income could significantly increase our tax burden and adversely affect our financial
condition and results of operations.
Pursuant to the Enterprise
Income Tax Law and the Enterprise Income Tax Rules, dividends generated after January 1, 2008 and payable by a foreign-invested
enterprise in China to its foreign enterprise investors will be subject to a 10% withholding tax, unless any such foreign investor’s
jurisdiction of incorporation has a tax treaty with China that provides for a reduced withholding arrangement. We are a Cayman
Islands holding company and substantially all of our income comes from dividends from our PRC subsidiary through our Hong Kong
holding company. To the extent these dividends are subject to withholding tax, the amount of funds available to us to meet our
cash requirements, including the payment of dividends to our shareholders and ADS holders, will be reduced.
The Enterprise Income
Tax Rules provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC, or (ii) if gains are realized
from transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are treated as PRC-sourced
income. It is not clear how “domicile” might be interpreted under the Enterprise Income Tax Law, and it could be interpreted
as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered to be a PRC resident enterprise for
tax purposes, any dividends we pay to our overseas corporate shareholders or ADS holders as well as gains realized by such shareholders
or ADS holders from the transfer of our shares or ADSs could be regarded as PRC-sourced income and as a result subject to PRC withholding
tax at a rate of up to 10%, subject to the provisions of any applicable tax treaty. If dividends we pay to our overseas individual
shareholders or ADS holders, or gains realized by such holders from the transfer of our shares or ADSs, are treated as China-sourced
income, the withholding rate would be 20%, subject to the provisions of any applicable tax treaty.
If we are required
under the Enterprise Income Tax Law to withhold PRC income tax on any dividends paid to our non-PRC shareholders and ADS holders
or if gains from dispositions of our shares or ADSs are subject to PRC tax, your investment in our ADSs or ordinary shares could
be adversely affected.
Furthermore, the State
Administration of Taxation promulgated the Announcement of the State Administration of Taxation on Issues concerning the Beneficial
Owners in Tax Treaties in April 2018, or Circular 9, which provides guidance for determining whether a resident of a contracting
state is the “beneficial owner” of an item of income under China’s tax treaties and tax arrangements. According
to Circular 9, there exist many factors to exclude a resident of a contracting state from being treated as a beneficial owner,
including but not limited to the following situations: (i) such resident of a contracting state is obliged to pay more than 50%
of the income to the resident(s) of a third state (region) within 12 months of receipt of the income; and (ii) the business activities
undertaken by such resident do not constitute substantive business activities. We cannot assure you that any dividends distributed
by us to our non-PRC shareholders and ADS holders whose jurisdiction of incorporation has a tax treaty with China providing for
the avoidance of double taxation will be entitled to the benefits under the relevant withholding arrangement.
A failure by our shareholders
or beneficial owners who are PRC citizens or residents in China to comply with certain PRC foreign exchange regulations could restrict
our ability to distribute profits, restrict our overseas and cross-border investment activities or subject us to liability under
PRC laws, which could adversely affect our business and financial condition.
The State Administration
of Foreign Exchange, or SAFE, issued the Circular Relating to Foreign Exchange Administration of Offshore Investment, Financing
and Return Investment by Domestic Residents Utilizing Special Purpose Vehicles, or SAFE Circular 37, that was promulgated and become
effective on July 14, 2014. It requires a PRC natural person or a PRC company, or a PRC Resident, to file a “Registration
Form of Overseas Investments Contributed by PRC Resident” and register with the local SAFE branch before it contributes assets
or equity interests in an overseas special purpose vehicle, or SPV, that is directly established and controlled by PRC Resident
for the purpose of conducting investment or financing. Following the initial registration, the PRC resident is also required to
register with the local SAFE branch timely for any major change in respect of SPV, including, among other things, any major change
of SPV’s PRC Resident shareholder, name of the SPV, term of operation or any increase or reduction of the SPV’s registered
capital, share transfer or swap, and merger or division. Failure to comply with the registration procedures of Circular 37 could
result in the penalties including the imposition of restrictions on the ability of SPV’s PRC subsidiaries to dividends to
its overseas parent company.
It remains unclear
how this regulation and any future related legislation will be interpreted, amended and implemented by the relevant PRC government
authorities. As of December 31, 2020, to the best of our knowledge, most of our PRC Resident shareholders with offshore investments
had not registered their offshore investments with SAFE according to the predecessor regulation of Circular 37, namely the Notice
on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments
via Overseas Special Purpose Vehicles, or SAFE Circular 75, which was replaced by the SAFE Circular 37 but still effective when
the relevant PRC shareholders made their investments. If PRC government determined that our PRC Resident shareholders are required
to make the registration regarding their offshore investment under Circular 37, both they and us may be subject to fines by PRC
government.
We are committed to
complying, and to ensuring that our shareholders and beneficial owners who are PRC citizens or residents comply with SAFE Circular
37 requirements. The rest of our PRC citizen or resident beneficial owners are also applying for registrations under SAFE Circular
37 with the relevant local counterpart of SAFE. However, we might not be fully informed of the identities of all our beneficial
owners who are PRC citizens or residents, and we cannot compel our beneficial owners to comply with SAFE Circular 37 requirements.
As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC citizens or residents have complied
with, or will in the future make or obtain the necessary any applicable registrations or approvals as required by, SAFE Circular
37 or other related regulations. Failure by such shareholders or beneficial owners to comply with SAFE Circular 37, or failure
by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict
our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends
or affect our ownership structure, which could adversely affect our business and prospects. Failure by us to amend the foreign
exchange registrations in compliance with SAFE Circular 37 could subject us to fines or legal sanctions restrict our overseas or
cross-border ownership structure, which could adversely affect our business and prospects. See “—We rely principally
on dividends and other distributions on equity paid by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements
we might have. Any limitation on the ability of our PRC and Hong Kong subsidiaries to pay dividends to us could have an adverse
effect on our ability to conduct our business.”
A failure to comply with PRC
regulations regarding the registration of shares and share options held by our employees who are PRC citizens could subject such
employees or us to fines and legal or administrative sanctions.
Pursuant to the Implementation
Rules of the Administrative Measures on Individual Foreign Exchange, or the Individual Foreign Exchange Rules, promulgated by SAFE
on January 5, 2007 and amended on May 2016, a relevant guidance issued by SAFE in March 2007 and Notices on Issues concerning the
Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company,
or the Stock Option Rules, on February 15, 2012 that replaces the guidance issued in March 2007, PRC citizens who are granted shares
or share options by an overseas-listed company according to its employee share option or share incentive plan are required, through
the PRC subsidiary of such overseas-listed company or other qualified PRC agents selected by such PRC subsidiary, to register with
SAFE and complete certain other procedures related to the share option or other share incentive plan. In addition, the PRC agent
is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock
incentive plan, the PRC agent or the overseas entrusted institution or other material changes. For participants who had already
participated in an employee share option or share incentive plan before the date of the guidance, the guidance requires their PRC
employers or PRC agents to complete the relevant formalities within three months of the date of the guidance. We and our PRC citizen
employees who have been granted share options, or PRC option holders, are subject to these rules. If we or our PRC option holders
fail to comply with these rules, we or our PRC option holders could be subject to fines and legal or administrative sanctions.
The heightened scrutiny over
acquisition transactions by the PRC tax authorities may have a negative impact on our business operations, our acquisition or restructuring
strategy or the value of your investment in us.
The State Administration
of Taxation has issued several rules and notices to tighten the scrutiny over acquisition transactions in recent years, including
the Notice on Certain Corporate Income Tax Matters Related to Indirect Transfer of Properties by Non-PRC Resident Enterprises issued
in February 2015, or SAT Circular 7. Pursuant to SAT Circular 7, except for a few circumstances falling into the scope of the safe
harbor provided by SAT Circular 7, such as open market trading of stocks in public companies listed overseas, if a non-PRC resident
enterprise indirectly transfers PRC taxable properties (i.e. properties of an establishment or a place in the PRC, real estate
properties in the PRC or equity investments in a PRC tax resident enterprise) by disposing of equity interest or other similar
rights in an overseas holding company, without a reasonable commercial purpose and resulting in the avoidance of PRC enterprise
income tax, such indirect transfer should be deemed as a direct transfer of PRC taxable properties and gains derived from such
indirect transfer may be subject to the PRC withholding tax at a rate of up to 10%. SAT Circular 7 sets out several factors to
be taken into consideration by tax authorities in determining whether an indirect transfer has a reasonable commercial purpose,
such as whether the main value of equity interest in an overseas holding company is derived directly or indirectly from PRC taxable
properties. An indirect transfer satisfying all the following criteria will be deemed to lack reasonable commercial purpose and
be taxable under PRC law without considering other factors set out by SAT Circular 7: (i) 75% or more of the equity value of the
intermediary enterprise being transferred is derived directly or indirectly from the PRC taxable properties; (ii) at any time during
the one-year period before the indirect transfer, 90% or more of the asset value of the intermediary enterprise (excluding cash)
is comprised directly or indirectly of investments in the PRC, or 90% or more of its income is derived directly or indirectly from
the PRC; (iii) the functions performed and risks assumed by the intermediary enterprise and any of its subsidiaries that directly
or indirectly hold the PRC taxable properties are limited and are insufficient to prove their economic substance; and (iv) the
foreign tax payable on the gain derived from the indirect transfer of the PRC taxable properties is lower than the potential PRC
income tax on the direct transfer of such assets. Further, SAT Circular 7 embodies a voluntary reporting regime, and both the foreign
transferor and the transferee, and the PRC tax resident enterprise whose equity interests are being transferred may voluntarily
report the transfer by submitting the documents required in SAT Circular 7.
Although SAT Circular
7 provides clarity in many important areas, such as reasonable commercial purpose, there are still uncertainties on the tax reporting
and payment obligations with respect to future private equity financing transactions, share exchange or other transactions involving
the transfer of shares in non-PRC resident companies. Our company and other non-resident enterprises in our group may be subject
to filing obligations or being taxed if our company and other non-resident enterprises in our group are transferors in such transactions,
and may be subject to withholding obligations if our company and other non-resident enterprises in our group are transferees in
such transactions. For the transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries
may be requested to assist in the filing under the rules and notices. As a result, we may be required to expend valuable resources
to comply with these rules and notices or to request the relevant transferors from whom we purchase taxable assets to comply, or
to establish that our company and other non-resident enterprises in our group should not be taxed under these rules and notices,
which may have a material adverse effect on our financial condition and results of operations.
We cannot assure you
that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing obligations on
us or require us to provide assistance for the investigation of PRC tax authorities with respect thereto. We acquired Join Me Group
(HK) Investment Company Limited, or JMU HK, in June 2015 and divested our B2C business in September 2015, and we may pursue acquisitions
in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise
Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of these transactions under SAT Circular 7,
our income tax expenses associated with such potential acquisitions will be increased, which may have an adverse effect on our
financial condition and results of operations.
PRC laws and regulations establish
complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to
pursue growth through acquisitions in China.
PRC laws and regulations,
such as the 2006 M&A Rules, the Anti-Monopoly Law promulgated by the PRC National People’s Congress in 2007 and the Notice
on the Establishment of the Security Review System in Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated
by the State Council, or the Security Review Rule, establish procedures and requirements that could make some acquisitions of Chinese
companies by foreign investors and companies more time-consuming and complex, including requirements in some instances that various
governmental authorities be notified in advance of any change-of-control transaction in which a foreign investor takes control
of a PRC domestic enterprise. For example, on February 3, 2011, the State Council promulgated the Security Review Rule, which provides,
among other things, that merger and acquisition transactions by foreign investors of PRC enterprises in sensitive sectors or industries,
such as internet information service industry, which our operations fall within, could be subject to security review. Consequently,
any such transaction could be blocked due to their effect on the national defense security, national economic stability, basic
social life order, or capacity of indigenous research and development of key technologies. On August 25, 2011, the Ministry of
Commerce promulgated the Regulations on Implementing the Security Review System in Mergers and Acquisition of Domestic Enterprises
by Foreign Investors, which, among other things, set forth detailed provisions on how the security review of relevant transactions
would be conducted, and provide for that foreign investors could not for any reason evade the security review process through entrustment,
phased-in investment, leasing, loans and control agreement, and overseas transactions. We could expand our business in part by
acquiring complementary businesses. Complying with the requirements of the relevant PRC laws and regulations to complete such transactions
could be time-consuming, and any required approval processes could delay or inhibit our ability to complete such transactions,
which could affect our ability to expand our business or maintain our market share.
Increases in labor costs in
the PRC may adversely affect our business and results of operations.
The economy of China
has been experiencing increases in inflation and labor costs in recent years. As a result, the average wages in the PRC are expected
to continue to grow. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including
pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated
government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made
adequate payments of the requisite statutory employee benefits, and those employers who fail to make adequate payments could be
subject to late payment fees, fines and/or other penalties. If the relevant PRC authorities determine that we should make supplemental
social insurance and housing fund contributions and that we are subject to fines and legal sanctions, our business, financial condition
and results of operations could be adversely affected. We expect that our labor costs, including wages and employee benefits, would
continue to increase. Unless we are able to pass on these increased labor costs to our customers by increasing the prices of our
products and services, our financial condition and results of operations could be adversely affected.
It may be difficult for overseas
regulators to conduct investigations or collect evidence within China.
Shareholder claims
or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality
in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory
investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation
mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration,
such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual
and practical cooperation mechanisms. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became
effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities
within the territory of the PRC. While detailed interpretations of or implementation rules under Article 177 are yet to be promulgated,
the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China
may further increase difficulties you may face in protecting your interests.
We may be subject to strict
regulations from PRC government for our operation of new Decentralized Finance (DeFi) platform.
Under the current
PRC legal system, the PRC laws and regulations applicable to the DeFi platforms is still unclear. Initial Coin Offerings (ICOs)
and technical support for ICOs may be deemed as illegal token sales, illegal issuance of securities, illegal fund-raising, financial
fraud, a pyramid scheme or other serious illegal activities. Other related behaviors may be punishable by a shutdown, regardless
of whether the server or platform is set up China.
Recently, the PRC
government is promulgating a series of blockchain-related legislations and laws to promote blockchain economy. However, as a result
of public aversion to token economy and the caliber of advocating coin free blockchain, there remains uncertainty with respect
to the compliance issues of token market in the future. As a result, we may be subject to the strict regulation for our operation
of Defi platform in China.
In addition, according
to the Civil Code of China, if there is a loophole in the smart contract due to intentional or gross negligence in the process
of writing and deploying the smart contract, resulting in the loss of users, we will bear certain liability to compensate the users.
Moreover, as the project
party of DeFi platform, we are bound by the tort liability section of the Civil Code of China. We may bear the unreal joint and
several liability to the users of DeFi platform and obtain the right of subrogation to claim against the hackers. In the project
service terms of the DeFi smart contract, if there is an agreement that the project party should undertake the necessary security
obligations for the project platform, smart contract and other infrastructure, then in the event of user losses caused by the bug
of the DeFi smart contract, the DeFi user may pursue our liability for breach of contract according to the service terms.
The loan and synthetic
asset businesses not yet launched by the platform are similar to the risks of similar businesses of offline financial platform.
The risks mentioned above will not be repeated here.
Risks Relating to Our ADSs
The trading price of our ADSs
could be volatile, which would result in substantial losses to investors.
The trading price
of our ADSs could be volatile and could fluctuate widely in response to factors relating to our business as well as external factors
beyond our control. Factors such as variations in our financial results, announcements of new business initiatives by us or by
our competitors, recruitment or departure of key personnel, changes in the estimates of our financial results or changes in the
recommendations of any securities analysts electing to follow our securities or the securities of our competitors could cause the
market price for our ADSs to change substantially. At the same time, securities markets could from time to time experience significant
price and volume fluctuations that are not related to the operating performance of particular companies, as they did for example
in late 2008 and early 2009. These market fluctuations could also have an adverse effect on the market price of our ordinary shares.
The performance and
fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities
in the United States could affect the volatility in the price of and trading volumes for our ADSs. In recent years, a number of
PRC companies have listed their securities, or are in the process of preparing for listing their securities, on U.S. stock markets.
Some of these companies have experienced significant volatility, including significant price declines in connection with their
initial public offerings. The trading performances of these PRC companies’ securities at the time of or after their offerings
could affect the overall investor sentiment towards PRC companies listed in the United States and consequently could affect the
trading performance of our ADSs. These broad market and industry factors could significantly affect the market price and volatility
of our ADSs, regardless of our actual operating performance. Any of these factors could result in large and sudden changes in the
trading volume and price for our ADSs.
If we fail to maintain Nasdaq
minimum market value of publicly held shares, minimum bid requirements or minimum stockholder equity standard, our ADSs could be
delisted.
According to the Nasdaq
listing standards, if the market value of publicly held shares falls below US$1 million for 30 consecutive business days, such
company’s securities may be subject to delisting from Nasdaq Capital Market, unless such failure is cured within the grace
period the company is eligible to, from the date on which Nasdaq notifies to the listed company of such failure. Prior to the transfer
of the listing of our ADSs from the Nasdaq Global Market to the Nasdaq Capital Market in January 2020, we received letters from
Nasdaq advising us that the market value of our publicly held shares no longer met the continued listing requirement of the Nasdaq
Global Market. We cannot assure you that we will not fail to meet the continued listing requirement of the Nasdaq Capital Market
in the future. In the event that we are not in compliance with such requirement and fail to regain compliance, we may delist our
ADSs.
Furthermore, according
to the Nasdaq listing standards, if the trading price of a listed company’s listed securities falls below US$1.00 per share
for a period of 10 consecutive business days, such company’s securities may be subject to delisting unless such failure is
cured within the grace period the company is eligible to, from the date on which Nasdaq notifies to the listed company of such
failure. On January 4, 2019 and March 2, 2020, respectively, we received two letters from Nasdaq advising us that our ADS had been
trading at a price that would subject our ADSs to delisting if we fail to regain compliance with the Nasdaq minimum bid price requirements.
We were granted a grace period of 180 calendar days, expiring on August 31, 2020, in which to regain compliance. We have regained
compliance since June 5, 2020 as the closing bid price of our ADSs was at least US$1.00 for a minimum of ten consecutive business
days during this 180-day period.
In addition, according
to the Nasdaq listing standards, if the stockholders’ equity falls below US$2.5 million, such company’s securities
may be subject to delisting from Nasdaq Capital Market, unless such failure is cured within the grace period the company is eligible
to, from the date on which Nasdaq notifies to the listed company of such failure. Prior to the transfer of the listing of our ADSs
from the Nasdaq Global Market to the Nasdaq Capital Market in January 2020, we received a letter from Nasdaq advising us that our
stockholders’ equity no longer met the continued listing requirement of the Nasdaq Global Market. We cannot assure you that
we will not fail to meet the continued listing requirement of the Nasdaq Capital Market in the future. In the event that we are
not in compliance with such requirement and fail to regain compliance, we may delist our ADSs.
We have regained
compliance with the minimum bid requirement as of the date of this annual report. However, there can be no assurance that we will
meet the requirements for continued listing.
We are a foreign private issuer
within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic
public companies.
Because we qualify
as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations
in the United States that are applicable to U.S. domestic issuers, including:
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the rules under the Exchange Act requiring
the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;
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the sections of the Exchange Act regulating
the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;
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the sections of the Exchange Act requiring
insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades
made in a short period of time; and
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the selective disclosure rules by issuers
of material nonpublic information under Regulation FD.
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We are required to
file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, press releases relating to financial
results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with
or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic
issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you
investing in a U.S. domestic issuer.
As a foreign private issuer,
we are permitted to, and we plan to, rely on exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers,
including the requirement that a majority of an issuer’s directors consist of independent directors. This might afford less
protection to holders of our ordinary shares and ADSs.
Section 5605(b)(1)
of the Nasdaq Listing Rules requires listed companies to have, among other things, a majority of its board members to be independent,
and Section 5605(d) and 5605(e) require listed companies to have independent director oversight of executive compensation and nomination
of directors. As a foreign private issuer, however, we are permitted to, and we plan to follow home country practice in lieu of
the above requirements. The corporate governance practice in our home country, the Cayman Islands, does not require a majority
of our board to consist of independent directors or the implementation of a nominating and corporate governance committee. We have
informed Nasdaq that we will follow home country practice in place of all of the requirements of Rule 5600 other than those rules
which we are required to follow pursuant to the provisions of Rule 5615(a)(3).
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Rule 5605(b), pursuant to which (i) a majority
of the board of directors must be comprised of Independent Directors, and (ii) the Independent Directors must have regularly scheduled
meetings at which only Independent Directors are present.
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Rule 5605(c) (other than those parts as to
which the home country exemption is not applicable), pursuant to which each company must have, and certify that it has and will
continue to have, an audit committee of at least three members, each of whom must meet criteria set forth in Rule 5605(c)(2)(A).
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Rule 5605(d), pursuant to which each company
must (i) certify that it has adopted a formal written compensation committee charter and that the compensation committee will review
and reassess the adequacy of the formal written charter on an annual basis, and (ii) have a compensation committee of at least
two members, each of whom must be an Independent Director.
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Rule 5605(e), pursuant to which director nominees
must be selected, or recommended for the Board’s selection, either by Independent Directors constituting a majority of the
Board’s Independent Directors in a vote in which only Independent Directors participate, or a nominations committee comprised
solely of Independent Directors.
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Rule 5610, pursuant to which each company
shall adopt a code of conduct applicable to all directors, officers and employees.
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Rule 5620(a), pursuant to which each company
listing common stock or voting preferred stock, or their equivalents, shall hold an annual meeting of shareholders no later than
one year after the end of the issuer’s fiscal year-end.
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Rule 5620(b), pursuant to which each company
shall solicit proxies and provide proxy statements for all meetings of shareholders and shall provide copies of such proxy solicitation
to Nasdaq.
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Rule 5620(c), pursuant to which each company
that is not a limited partnership shall provide for a quorum as specified in its by-laws for any meeting of the holders of common
stock; provided, however, that in no case shall such quorum be less than 331/3% of the outstanding shares of the company’s
common voting stock.
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Rule 5630, pursuant to which each company
that is not a limited partnership shall conduct an appropriate review and oversight of all related party transactions for potential
conflict of interest situations on an ongoing basis by the company’s audit committee or another independent body of the board
of directors.
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Rule 5635(a), pursuant to which shareholder
approval is required in certain circumstances prior to an issuance of securities in connection with the acquisition of the stock
or assets of another company.
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Rule 5635(b), pursuant to which shareholder
approval is required prior to the issuance of securities when the issuance or potential issuance will result in a change of control
of the company.
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Rule 5635(c), pursuant to which shareholder
approval is required prior to the issuance of securities when a stock option or purchase plan is to be established or materially
amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers,
directors, employees, or consultants, subject to certain exceptions.
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Rule 5635(d), pursuant to which shareholder
approval is required prior to the issuance of securities in connection with a transaction other than a public offering involving:
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the sale, issuance or potential
issuance by the company of common stock (or securities convertible into or exercisable for common stock) at a price less than the
greater of book or market value which together with sales by officers, directors or Substantial Shareholders of the company equals
20% or more of common stock or 20% or more of the voting power outstanding before the issuance; or
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the sale, issuance or potential
issuance by the company of common stock (or securities convertible into or exercisable common stock) equal to 20% or more of the
common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value
of the stock.
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Anti-takeover provisions in
our charter documents could discourage a third-party from acquiring us, which could limit our shareholders’ opportunities
to sell their shares at a premium.
Our fourth amended
and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control
of us, modify our structure or cause us to engage in change-of-control transactions. For example, our board of directors will have
the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix the designations,
powers, preferences and relative, participating, optional and other rights, if any, and the qualifications, limitations and restrictions
thereof, if any, including, without limitation, the number of shares constituting each such class or series, dividend rights, conversion
rights, redemption privileges, voting powers, full or limited or no voting powers, and liquidation preferences, any or all of which
could be greater than the rights associated with our ordinary shares. Preferred shares could thus be issued quickly with terms
calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if our board of directors
issues preferred shares, the market price of our ordinary shares could fall and the voting and other rights of the holders of our
ordinary shares could be adversely affected. These provisions could have the effect of depriving our shareholders of an opportunity
to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of
us in a tender offer or similar transaction.
You might not receive certain
distributions we make on our ordinary shares or other deposited securities if the depositary decides not to make such distributions
to you.
The depositary of
our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares
or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the
number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is not lawful or
reasonably practicable to make a distribution available to any holders of ADSs. For example, the depositary could determine that
it is not practicable to distribute certain property through the mail, or that the value of certain distributions could be less
than the cost of mailing them. In these cases, the depositary could decide not to distribute such property and you will not receive
such distribution.
We are a Cayman Islands company
and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law,
you could have less protection of your shareholder rights than you would under U.S. law.
Our corporate affairs
are governed by our fourth amended and restated memorandum and articles of association, the Cayman Islands Companies Act (As Revised),
as amended, and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions
by noncontrolling shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large
extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively
limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority
on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman
Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United
States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly
less protection to investors. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted
bodies of corporate law than the Cayman Islands.
There is uncertainty
with regard to Cayman Islands law related to whether a judgment obtained from the U.S. courts under civil liability provisions
of U.S. securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination
is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as
our company. As the courts of the Cayman Islands have yet to rule on making such a determination in relation to judgments obtained
from U.S. courts under civil liability provisions of U.S. securities laws, it is uncertain whether such judgments would be enforceable
in the Cayman Islands. Maples and Calder (Hong Kong) LLP has advised us that although there is no statutory enforcement in the
Cayman Islands of judgments obtained in the federal or state courts of the United States, a judgment obtained in such jurisdiction
will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of
the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided
such judgment:
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is given by a foreign court of competent jurisdiction;
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imposes on the judgment debtor a liability
to pay a liquidated sum for which the judgment has been given;
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is final and conclusive;
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is not in respect of taxes, a fine or a penalty;
and
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was not obtained in a manner and is not of
a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.
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You should also read “Item
10. Additional Information—B. Memorandum and Articles of Association—Differences in Corporate Law” for some of the differences
between the corporate and securities laws in the Cayman Islands and the United States.
Your ability to protect your
rights as shareholders through the U.S. federal courts could be limited because we are incorporated under Cayman Islands law.
Cayman Islands companies
might not have the standing to initiate a derivative action in a federal court of the United States. As a result, your ability
to protect your interests if you are harmed in a manner that would otherwise enable you to sue in a United States federal court
could be limited to direct shareholder lawsuits.
You will have limited ability
to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, because we are
incorporated in the Cayman Islands, because we conduct a majority of our operations in China and because a majority of our directors
and officers reside outside the United States.
We are incorporated
in the Cayman Islands and conduct our operations exclusively in China. All of our assets are located outside the United States.
A majority of our officers and directors reside outside the United States and a substantial portion of the assets of those persons
are located outside of the United States. As a result, it could be difficult or impossible for you to bring an action against us
or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed
under the applicable securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the
Cayman Islands and of China could render you unable to enforce a judgment against our assets or the assets of our directors and
officers. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce
judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the
United States or any state, and it is uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions
brought in the Cayman Islands or China against us or such persons predicated upon the securities laws of the United States or any
state.
Shareholders of Cayman
Islands exempted companies such as ourselves have no general rights under Cayman Islands law to inspect corporate records and accounts
or to obtain copies of lists of shareholders of these companies (apart from our memorandum and articles of association and the
register of mortgages and charges). Our directors have discretion under Cayman Islands law to determine whether or not, and under
what conditions, our corporate records could be inspected by our shareholders, but are not obliged to make them available to our
shareholders. This could make it more difficult for you to obtain the information needed to establish any facts necessary for a
shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of all
of the above, public shareholders might have more difficulty in protecting their interests in the face of actions taken by management,
members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company.
The voting rights of holders
of ADSs are limited in several significant ways by the terms of the deposit agreement.
Holders of our ADSs
will only be able to exercise their voting rights with respect to the underlying ordinary shares in accordance with the provisions
of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt
of voting instructions from a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to
vote the underlying ordinary shares in accordance with these instructions. You will not be able to directly exercise your right
to vote with respect to the underlying ordinary shares unless you cancel your ADSs and withdraw the underlying ordinary shares
and follow the requisite steps to be recognized as a holder of ordinary shares entitled to vote such shares. Under our fourth amended
and restated memorandum and articles of association and Cayman Islands law, the minimum notice period required for convening a
general meeting is 10 clear days. When a general meeting is convened, you might not receive sufficient notice of a shareholders’
meeting to permit you to withdraw the underlying ordinary shares represented by your ADs to allow you to cast your vote directly
with respect to any specific matter at the meeting. In addition, the depositary might not be able to send voting instructions to
you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend
voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure
that you can instruct the depositary to vote the shares representing your ADSs. Furthermore, the depositary will not be responsible
for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote.
As a result, you might not be able to exercise your right to vote and you could lack recourse if your ordinary shares are not voted
as you requested.
Except as described
in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to
the ordinary shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee
as their representative to exercise the voting rights attaching to the ordinary shares represented by the ADSs. You might not receive
voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through
brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. The deposit agreement provides
that if the depositary does not timely receive valid voting instructions from the ADS holders, then the depositary must, with certain
limited exceptions, give a discretionary proxy to a person designated by us to vote such shares. Furthermore, as a party to the
deposit agreement, you waive your right to trial by jury in any legal proceedings arising out of the deposit agreement or the ADRs
against us and/or the depositary.
You might not receive distributions
on our ordinary shares or any value for them if it is unlawful or impractical for us to make them available to you.
The depositary of
our ADSs has agreed to pay you the cash dividends or other distributions it or the custodian for our ADSs receives on our ordinary
shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion
to the number of our ordinary shares your ADSs represent. However, the depositary is not responsible if it is unlawful or impractical
to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of
ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed
pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to
any holders of ADSs, if any government approval or registration is required for such distribution. We have no obligation to take
any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This
means that you might not receive the distributions we make on our ordinary shares or any value for them if it is unlawful or impractical
for us to make them available to you. These restrictions could have an adverse effect on the value of your ADSs.
You might be subject to limitations
on the transfer of your ADSs.
Your ADSs are transferable
on the books of the depositary. However, the depositary could close its books at any time or from time to time when it deems expedient
in connection with the performance of its duties. The depositary could close its books from time to time for a number of reasons,
including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an
exact number of ADS holders on its books for a specified period. The depositary could also close its books in emergencies, and
on weekends and public holidays. The depositary could refuse to deliver, transfer or register transfers of our ADSs generally when
our books or the books of the depositary are closed, or at any time if we think or the depositary thinks it is necessary or advisable
to do so in connection with the performance of its duty under the deposit agreement, including due to any requirement of law or
any government or governmental body, or under any provision of the deposit agreement.
Compliance with rules and requirements
applicable to public companies could cause us to incur increased costs, which could negatively affect our results of operations.
As a public
company, we have incurred and will continue to incur significant legal, accounting and other expenses that we did not incur as a
private company, including costs associated with public company reporting requirements. We ceased to be an “emerging growth
company” on December 31, 2020, and are no longer eligible for reduced disclosure requirements and exemptions applicable to
emerging growth companies. We expect that our loss of emerging growth company status will require additional attention from
management and will result in increased costs to us, which could include higher legal fees, accounting fees and fees associated with
investor relations activities, among others. We have also incurred and will continue to incur costs associated with corporate
governance requirements, including requirements of the Sarbanes-Oxley Act, as well as rules implemented by the SEC and Nasdaq
Capital Market, has requirements in corporate governance practices of public companies. We expect these rules and regulations to
continue to increase our legal, accounting and financial compliance costs and to make certain corporate activities more
time-consuming and costly. Complying with these rules and requirements could be especially difficult and costly for us because we
might have difficulty locating sufficient personnel in China with experience and expertise relating to U.S. GAAP and U.S. public
company reporting requirements, and such personnel could command higher salaries relative to what similarly experienced personnel
would command in the United States. If we cannot employ sufficient personnel to ensure compliance with these rules and regulations,
we might need to rely more on outside legal, accounting and financial experts, which could be very costly. In addition, we will
incur additional costs associated with our public company reporting requirements. We are evaluating and monitoring developments with
respect to these rules, and we cannot predict or estimate the amount of additional costs we might incur or the timing of such
costs.
We could be a passive foreign investment
company, or PFIC, which could result in adverse U.S. federal income tax consequences to U.S. investors in our ADSs or ordinary shares.
Under the Internal Revenue
Code of 1986, as amended, or the Code, we will generally be a PFIC if, in any particular taxable year, either (a) 75% or more of our gross
income for such year consists of certain types of “passive” income (the “income test”) or (b) 50% or more of the
average quarterly value of our assets (as determined on the basis of fair market value) during such year produce or are held for the production
of passive income (the “asset test”). Passive income generally includes dividends, interest, royalties, rents, annuities,
net gains from the sale or exchange of passive assets (including property producing passive income) and net foreign currency gains. In
addition, for purposes of the income and asset tests, we will generally be treated as owning our proportionate share of the assets and
earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value)
of its stock. Although the law in this regard is not entirely clear, we intend to treat our VIEs as being owned by us for U.S. federal
income tax purposes because we control their management decisions and we are entitled to substantially all their economic benefits. As
a result, we consolidate our VIEs’ results of operations in our consolidated U.S. GAAP financial statements.
Based on our current operations,
income and assets and certain estimates and projections, we do not believe that we were a PFIC for our taxable year ended December 31,
2020, and we do not expect to be a PFIC for our taxable year ending December 31, 2021, or in the foreseeable future. The determination
as to whether we are a PFIC, however, is fact-intensive and depends on, among other factors, (i) the composition of our income and assets,
(ii) fluctuations in the market price of our ADSs and ordinary shares which may impact the value of our assets, including goodwill, for
purposes of the asset test and (iii) whether we are treated as owning our VIEs for U.S. federal income tax purposes (as discussed above).
Such determination must also be made on an annual basis applying principles and methodologies which are in some circumstances unclear.
As such, there can be no assurance that we will not be a PFIC for any taxable year. Our U.S. counsel expresses no opinion with respect
to our expectations regarding our PFIC status for any taxable year.
If we are a PFIC for any
taxable year during which a U.S. investor holds our ADSs or ordinary shares, we will continue to be treated as a PFIC with respect to
the U.S. investor for all succeeding taxable years during which the U.S. investor holds our ADSs or ordinary shares, even if we ceased
to meet the threshold requirements for PFIC status, unless certain exceptions apply. Such U.S. investor may incur adverse U.S. federal
income tax consequences with respect to distributions on our ADSs or ordinary shares and gains recognized on the sale or other disposition
of our ADSs or ordinary shares to the extent such distributions and gains are treated as an “excess distribution” under the
Code. Such U.S. investor may also be subject to burdensome reporting requirements. See “Item 10. Additional Information—E.
Taxation—Material United States Federal Income Tax Considerations—Passive Foreign Investment Company.”
ITEM 4. INFORMATION ON THE COMPANY
A. History
and Development of the Company
We started to operate
a group buying and B2C e-commerce platform in China through Beijing Wowo Tuan Information Technology Co., Ltd. in March 2010. In
order to facilitate investment in our company, we incorporated Wowo Limited in Cayman Islands as a holding company in July 2011.
In April 2015, Wowo
Limited completed the initial public offering and listed our ADSs on the Nasdaq Capital Market under the symbol “WOWO.”
We raised approximately US$37.3 million in net proceeds from our initial public offering after deducting underwriting commissions
and the offering expenses payable by us.
In June 2015, we acquired
Join Me Group (HK) Investment Company Limited to establish our food services industry B2B business. We issued 741,422,780 ordinary
shares and paid US$30.0 million as consideration for the acquisition.
In September 2015,
we divested our group buying and B2C e-commerce businesses to focus our efforts on our food services industry B2B business.
In September 2015,
we raised US$15.0 million in a private placement transaction with Mr. Maodong Xu.
In June 2016, we changed
the trading symbol for our ADSs listed on the Nasdaq Global Market to “JMU.” In December 2016, we also changed our
company name to JMU Limited.
In August 2016, TANSH
Global Food Group Co., Ltd, which was formerly known as Xiao Nan Guo Restaurants Holdings Limited, a Hong Kong Stock Exchange listed
company (Stock Code: 3666), through its wholly-owned subsidiary, acquired a 9.82% stake in our company via secondary transfers
for a total consideration of HK$368 million (approximately US$47.5 million).
In July 2018, we changed
the ratio of our ADSs to ordinary shares from one ADS representing 18 ordinary shares to one ADS representing 180 ordinary shares.
In May 2019, we acquired
Mercurity Limited (previously known as Unicorn Investment Limited) to establish our blockchain-based digital asset infrastructure
solutions business. We issued 632,660,858 new ordinary shares as consideration for the acquisition.
In July 2019, we divested
our B2B services to food-industry suppliers and customers by selling all the issued and outstanding shares of New Admiral Limited,
or New Admiral, our former wholly-owned subsidiary, to Marvel Billion Development Limited, or Marvel Billion, in exchange for US$1.0
million in cash. In addition, the buyer and the divested entities agreed to waive all the rights and claims with respect to the
liabilities owed by us to the divested entities.
In January 2020, we
transferred the listing of our ADSs from the Nasdaq Global Market to the Nasdaq Capital Market.
In February 2020,
we changed the trading symbol for our ADSs listed on the Nasdaq Capital Market to “MFH.”
In March 2020, we
acquired the entire ownership of NBpay Investment Limited, or NBpay, to further strengthen our capabilities in the blockchain-enabled
payment solutions. We issued 761,789,601 new ordinary shares to Mr. Kaiming Hu, our principal shareholder and the sole shareholder
of Kuali Yitong, as consideration for the acquisition.
In April 2020, we
changed our company name to “Mercurity Fintech Holding Inc.” to align the company name with our new blockchain-based
digital asset infrastructure solutions business.
In May 2020, we changed
the ratio of our ADSs to ordinary shares from one ADS representing 180 ordinary shares to one ADS representing 360 ordinary shares.
We currently conduct
our operations in China through contractual arrangements among (i) our wholly-owned PRC subsidiary, Lianji Future, and (ii) Mercurity
Beijing Technology Co., Ltd. and Beijing Lianji Technology Co., Ltd. and their respective shareholders.
Our principal executive
offices are located at Room 1112-2, Floor 11, No.15 Xinxi Road, Haidian District, Beijing 100086, People’s Republic of China.
Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland
House, Grand Cayman, KY1-1104, Cayman Islands.
SEC maintains an internet
site that contains reports, proxy and information statements, and other information regarding issuers that file electronically
with the SEC on www.sec.gov. You can also find information on our investor relationship website ir.mercurity.com.
The information on our website should not be deemed a part of this annual report.
B. Business
Overview
Our Principal Business
Prior to July 2019, we
provided integrated B2B services to food service suppliers and customers in China. In May 2019, we acquired Mercurity Limited and
its subsidiaries and variable interest entity to start developing digital asset transaction platform and solutions based on
blockchain technologies. On July 22, 2019, we divested our B2B services to food service suppliers and customers by selling all the
issued and outstanding shares of New Admiral Limited, or New Admiral, our former wholly-owned subsidiary operating the B2B business,
to Marvel Billion Development Limited, or Marvel Billion. After this divestment, we are no longer engaged in B2B services and our
current principal business is focused on providing digital asset infrastructure solutions services based on blockchain technologies.
We design and develop digital asset transaction platforms based on blockchain technologies for customers to facilitate asset
trading, asset digitalization and cross-border payments and provide supplemental services for such platforms, such as customized
software development services, maintenance services and compliance support services. We have also introduced a Defi platform at the
end of 2020, using our technology, to provide communities with the infrastructure to swap digital assets.
Asset Trading
We provide digital
asset trading infrastructure solutions based on internet and blockchain technologies to our customers. These services include,
among others, (i) comprehensive solutions in connection with digital asset transactions, (ii) platform-based products, such as
transaction facilitation system, trading system, account management system, operation management system and mobile applications,
and (iii) a variety of supplemental services, such as customized software development services, maintenance services and compliance
support services. We launched Version 2.0 of our asset trading platform in 2019 which has included enhancements to the functionality
of Version 1.0 as well as new offerings of services and products for our customer on this platform. We are currently developing
Version 3.0 of our asset trading platform.
Our target customers
for the asset trading platform are mainly traders, communities, and liquidity providers. In 2019, we generated substantially
all of our revenues from selling our asset trading platform and providing supplemental services to a customer who purchased this
platform.
Asset Digitalization
We have developed
an asset digitalization platform, which can provide blockchain-based digitalization solutions for traditional assets, such as fiat
currencies, bonds and precious metals. These solutions include, among others, (i) standard process of white label asset tokenization,
such onboarding, compliance certification, asset custody and token issuance and asset redemption by token holders, (ii) comprehensive
and customized solutions for asset tokenization, and (iii) blockchain-enabled smart contract management system, KYC and anti-money
laundering compliance management system, trust audit management system and other products that can be purchased and used separately,
as well as mobile applications. We launched Version 1.0 of our asset digitalization platform in 2019 to provide institutional customers
with customized services and products. We are currently developing Version 2.0 of our asset digitalization platform. The core offerings
of Version 2.0 will be SaaS platform products and API services.
Defi Platform
In November 2020,
we launched an open, decentralized finance (DeFi) platform that designed to solve retail traders’ global problems of low
liquidity and capital utilization, poor governance, token growth incentive deficiencies, and slow transaction speeds. The company’s
mission is to build a global, unified, and diverse decentralized finance (DeFi) ecosystem by connecting the world’s best
DEXs, centralized exchanges (CEXs), and DeFi communities across the globe. The revenue from this product was immaterial in 2020.
Our Customer
As of December 31, 2020,
we had two customers. We entered into two master software development agreements with a customer in May 2018 and July 2019, respectively.
The projected was completed in 2020. We entered into one agreement with a newly acquired customer in July 2020. Pursuant to the agreement,
we provide software design, development, testing, installation, configuration, integration and customized development services based on
blockchain technologies and provide related supplemental services to this customer from July 29, 2020 to July 29, 2021. The contract value
was approximately $210 thousand. The customer makes instalment payments of product development and service fees to us upon the occurrence
of each specified event set out in these agreements.
Previous Business
In July 2019, we divested
our B2B services to food-industry suppliers and customers by selling all the issued and outstanding shares of New Admiral, our
former wholly-owned subsidiary, to Marvel Billion in exchange for US$1.0 million in cash. Prior to such divestment, we operated
the following businesses from June 2016 to July 2019.
Online Direct Sales
In our discontinued
online direct sales business, we acquired products from suppliers and sold them directly to customers. We had been expanding our
offering in direct sales since the acquisition of our previous B2B business in June 2015. We focused on the sale of standard new
ingredients by conducting research and developments of new products and organizing the manufacture by factories to ensure the standardized
process of operation.
Online Marketplace
In our discontinued
online marketplace business, third-party sellers offered products to customers over our previous online marketplace. We acquired
the B2B online marketplace in June 2015 and had been bringing new products and services to the online marketplace since then. In
order to attract more third-party sellers, we did not charge commission on transactions on our previous online marketplace. We
provided transaction processing and billing services on all orders on our online marketplace. We required third-party sellers to
meet our standards of quality.
Marketing
We engage various
marketing channels to expand our business to more business partners and customers. We provide various incentives to our customers
to increase their spending and loyalty, and we send e-mails to our customers periodically with product recommendations or promotions.
To enhance our brand awareness, we also have engaged in brand promotion activities.
In
addition to the online marketing activities, we also utilize offline activities to attract more users and promote our brand recognition.
For example, we attended offline meetings, such as the Blockchain Technology Conference in Hainan, to enhance our brand awareness
and promote our presence in the industry.
Competition
The blockchain and digital
asset industry is intensely competitive and is densely populated by global competitors touting blockchain capabilities, including Uniswap,
Huobi, Bitbank, Wanxiang Blockchain, Bit One Group and Metaps Inc., among others. Our competitors may have entered the industry much
earlier than us. They may be better capitalized, may have more industry connections, and may be able to adapt more quickly to new technologies
or may be able to devote greater resources to the development, marketing and sale of their products than we can.
We
anticipate that the blockchain and digital asset market will continually evolve and will continue to experience rapid technological
change, evolving industry standards, shifting customer requirements, and frequent innovation. We must continually innovate to
remain competitive. We believe that the principal competitive factors in our industry are:
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brand
recognition and reputation;
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ecosystem
integration; and
|
We
believe that we are well-positioned to effectively compete on the basis of the factors listed above. However, some of our current
or future competitors have or may introduce new platforms and solutions that are superior to ours.
Seasonality
We
have not experienced seasoned fluctuations in our current principal business. Due to our limited operating history in our current
core business, the seasonal trends that we experienced are not necessarily indicative of the seasonal trends that we may experience
in the future.
Intellectual
Property
We
regard our trademarks, copyrights, domain names, know-how, proprietary technologies, and similar intellectual property as critical
to our success, and we rely on copyright and trademark law and confidentiality, invention assignment and non-compete agreements
with our employees and others to protect our proprietary rights. As of the date of this annual report, we have three trademark
applications relating to various aspects of our operations. As of the date of this annual report, we have registered three generic
top-level domain names. Our registered domain names include www.mercurity.com, www.mfhi.com and www.nbpay.com.
Regulation
This
section sets forth a summary of the most significant rules and regulations that affect our business activities in China.
Regulations
Relating to Foreign Investment
Industry
Catalogue Relating to Foreign Investment. Investment activities in the PRC by foreign investors are principally governed
by the Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, which was promulgated and is amended from time
to time by the Ministry of Commerce and the National Development and Reform Commission. Industries listed in the Catalogue are
divided into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalogue are generally deemed
as constituting a fourth “permitted” category. The current Special Administrative Measures (Negative List) for Admission
of Foreign Investment (Year 2019) was promulgated in June 2019 and Industry Guidelines on Encouraged Foreign Investment (Year
2019) was promulgated in June 2019.Establishment of wholly foreign-owned enterprises is generally allowed in encouraged and permitted
industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners
are required to hold the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level
government approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed
in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations.
Through
Our WFOE and Our VIEs, we are engaged in certain industries that are classified as “restricted” under the Catalogue.
We engage in the development of computer network technology, technical consultancy and technical services, which are in the permitted
category. Under PRC law, the establishment of a wholly foreign owned enterprise is subject to the approval of, or the requirement
for record filing with, the Ministry of Commerce or its local counterparts and the wholly foreign owned enterprise must register
with the competent industry and commerce bureau. We have duly obtained the approvals from the Ministry of Commerce or its local
counterparts for our interest in our wholly owned PRC subsidiaries and completed the registration of these PRC subsidiaries with
the competent industry and commerce bureau.
The
Ministry of Commerce issued the Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested
Enterprises, as amended in June 2018, which was replaced by Measures on Reporting of Foreign Investment Information promulgated
in December 2019. According to Measures on Reporting of Foreign Investment Information, foreign investors carrying out investment
activities in China directly shall submit investment information to the Ministry of Commerce or its local counterparts. Pursuant
to the Announcement [2016] No. 22 of the National Development and Reform Commission and the Ministry of Commerce dated October
8, 2016, the special entry administration measures for foreign investment apply to restricted and prohibited categories specified
in the Catalogue, and the encouraged categories are subject to certain requirements relating to equity ownership and senior management
under the special entry administration measures.
On
January 1, 2020, Foreign Investment Law of the People’s Republic of China became effective. For foreign-invested enterprises
established after the Foreign Investment Law, the organization form, institution and activity requirement shall be governed by
the PRC Company Law and PRC Partnership Law. The established foreign-invested enterprises have a five-year transition period.
During the transition period, the enterprises could retain the original organization form. Specific implementation measures will
be further formulated by the State Council.
On
August 5, 2020, The opinions of the general office of the State Council on further stabilizing foreign trade and foreign investment
came into effect. The rules put forward requirements on expanding the online channels of foreign trade and improving the convenience
of foreign business personnel to come to China, which is of great benefit to the field of foreign investment.
Foreign
Investment in Value-Added Telecommunications Businesses. The Regulations for Administration of Foreign-invested Telecommunications
Enterprises promulgated by the PRC State Council in December 2001 and subsequently amended in September 2008 and February 2016
set forth detailed requirements with respect to capitalization, investor qualifications and application procedures in connection
with the establishment of a foreign-invested telecommunications enterprise. These regulations prohibit a foreign entity from owning
more than 50% of the total equity interest in any value-added telecommunications service business in China and require the major
foreign investor in any value-added telecommunications service business in China have a good and profitable record and operating
experience in this industry.
Regulations
Relating to Blockchain Technology
Since
May 2019, we started to engage in blockchain-enabled digital asset infrastructure solutions business. China has promulgated laws
and restrictions against illegal activities conducted through blockchain technologies.
In
January 2019, the Cyberspace Administration of China promulgated the Administrative Regulation on Blockchain Information Services,
which regulates the information services provided to the public through internet sites, applications, etc. based on blockchain
technology or systems. It states that blockchain information services suppliers shall implement the responsibility for information
content security management, establish and improve management systems such as user registration, information review, emergency
response, and security protection, they shall also have the technical conditions suitable for their services, establish and disclose
management rules and platform conventions, sign service agreements with blockchain information services users, etc. This is the
first time China conducted compliance supervision on the blockchain.
The
PRC Cryptography Law, which entered into force on January 1, 2020, is the latest normative legal document that regulates the blockchain
industry. The term “cryptography” refers to products, technologies and services that use specific transformations
to carry out encryption protection or security authentication for information, etc. The use of blockchain technology to encrypt
and protect the information it collects is a “cryptography” under PRC law and shall be regulated by the PRC Cryptography
Law.
Under
criminal law, the illegal use of blockchain technology may involves four types of crimes: crime of refusing to perform network
security management obligations, crime of helping information network criminal activities, crime of violating citizens’
information and crime of endangering public safety. Among them, the crime of refusing to perform network security management obligations
may cause the mass dissemination of illegal information, the leakage of user information and leads to a serious consequence, the
loss of evidence in criminal cases in a serious circumstance and other serious circumstance. Refusing to make corrections after
being ordered by the regulatory authority to make corrective measures is subject to imprisonment of up to three years, detention
or control and a fine.
Regulations
Relating to E-Commerce
Prior
to July 22, 2019, our principal business was food-industry B2B services and we were subject to regulations relating to e-commerce.
China’s e-commerce industry is at a relatively early stage of development and there are few PRC laws or regulations specifically
regulating the e-commerce industry. In May 2010, the State Administration of Industry and Commerce adopted the Interim Measures
for the Administration of Online Commodities Trading and Relevant Services, which took effect in July 2010. Under these measures,
enterprises or other operators which engage in online commodities trading and other services and have been registered with the
State Administration of Industry and Commerce or its local branches must make the information stated in their business license
available to the public or provide a link to their business license on their website. Online distributors must adopt measures
to ensure safe online transactions, protect online shoppers’ rights and prevent the sale of counterfeit goods. Information
on products and transactions released by online distributors must be authentic, accurate, complete and sufficient.
In
January 2014, the State Administration of Industry and Commerce promulgated the Administrative Measures for Online Trading, which
terminated the above interim measures and became effective in March 2014. The Administrative Measures for Online Trading further
strengthen the protection of consumers and impose more stringent requirements and obligations on online business operators and
third-party online marketplace operators. For example, online business operators are required to issue invoices to consumers for
online products and services. Consumers are generally entitled to return products purchased from online business operators within
seven days upon receipt, without giving any reason. Online business operators and third-party online marketplace operators are
prohibited from collecting any information on consumers and business operators, or disclosing, selling or providing any such information
to any third-party, or sending commercial electronic messages to consumers, without their consent. Fictitious transactions, deletion
of adverse comments and technical attacks on competitors’ websites are prohibited as well. In addition, third-party online
marketplace operators are required to examine and verify the identifications of the online business operators and set up and keep
relevant records for at least two years. Moreover, any third-party online marketplace operator that simultaneously engages in
online trading for products and services should clearly distinguish itself from other online business operators on the marketplace
platform. We are subject to these measures as a result of our online direct sales and online marketplace.
In
addition, The PRC E-Commerce Law, which was issued on August 31, 2018 and came into effect on January 1, 2019, imposes further
obligations on the e-commerce business, such as protecting consumer rights and interests, protecting the environment, protecting
intellectual property rights, protecting cybersecurity and individual information, assuming responsibility for the quality of
products or services, and accepting the supervision by the government and the public.
On
April 30, 2019, the State Administration for Market Regulation published the Administrative Measures for Online Trading (Draft)
to implement the PRC E-Commerce Law and improve the system for standardizing online trading. This draft could be regarded as a
restatement and refinement of the PRC E-Commerce Law, which mainly stipulates the management of online transaction operators,
the delivery of transaction information and data, the norms of transaction behavior, the protection of consumer rights and the
market supervision department.
The
Law of the People’s Republic of China Against Unfair Competition, as amended in 2019, includes the use of networks to engage
in production and business activities in its scope of regulation, requiring operators not to use technical means to commit the
acts through influencing user’s choice or otherwise hinder and disrupt normal operation of the cyber products or services
provided legitimately by other business operators.
Regulations
Relating to Internet Content and Information Security
The
Administrative Measures on Internet Information Services specify that internet information services regarding news, publications,
education, medical and health care, pharmacy and medical appliances, among other things, are to be examined, approved and regulated
by the relevant authorities. Internet information providers are prohibited from providing services beyond those included in the
scope of their ICP licenses or filings. Furthermore, these measures clearly specify a list of prohibited content. Internet information
providers are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory to
others or that infringes the lawful rights and interests of others. Internet information providers that violate the prohibition
may face criminal charges or administrative sanctions by the PRC authorities. Internet information providers must monitor and
control the information posted on their websites. If any prohibited content is found, they must remove the offending content immediately,
keep a record of it and report to the relevant authorities.
Internet
information in China is also regulated and restricted from a national security standpoint. The National People’s Congress,
China’s national legislative body, has enacted the Decisions on Maintaining Internet Security, which may subject violators
to criminal punishment in China for any effort to: (i) gain improper entry into a computer or system of strategic importance;
(ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v)
infringe intellectual property rights. The Ministry of Public Security has promulgated measures that prohibit use of the internet
in ways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content.
In
July 2019, the Cyberspace Administration of China promulgated The Measures for Credit Information Management of Internet Untrustworthy
Subjects (draft) to credit construction in the field of internet information services and strengthen credit information management
of internet information service untrustworthy subjects. The draft lists four specific cases of serious untrustworthy activities
and stipulates the subject of the above-mentioned acts shall be included in the blacklist of serious untrustworthy of internet
information service. The validity period is three years, during which the subject will be restricted to engage in internet information
service. Relatively minor behaviors which committed several times but have not reached the blacklist determination criteria will
be included in the focus list.
In
January 2021, the state Internet Information Office issued the administrative measures for Internet information services (Revised
Draft for comments). China has set up a blacklist system for Internet information services. Organizations and individuals whose
licenses or records have been revoked by the competent authorities shall not re apply for relevant licenses or records within
three years; organizations and individuals whose accounts have been cancelled or websites have been shut down by the competent
authorities shall not re provide similar services for them within three years.
Regulations
Relating to Internet Privacy
In
recent years, PRC government authorities have enacted laws and regulations on internet use to protect personal information
from any unauthorized disclosure. The Administrative Measures on Internet Information Services prohibit ICP service operators
from insulting or slandering a third-party or infringing upon the lawful rights and interests of a third-party. Under the
Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT in 2011, an ICP
operator may not collect any user personal information or provide any such information to third parties without the consent
of a user. An ICP service operator must expressly inform the users of the method, content and purpose of the collection and
processing of such user personal information and may only collect such information necessary for the provision of its
services. An ICP service operator is also required to properly keep the user personal information, and in case of any leak or
likely leak of the user personal information, the ICP service operator must take immediate remedial measures and, in severe
circumstances, to make an immediate report to the telecommunications regulatory authority. In addition, pursuant to the
Decision on Strengthening the Protection of Online Information issued by the Standing Committee of the National
People’s Congress in December 2012 and the Order for the Protection of Telecommunication and Internet User Personal
Information issued by the MIIT in July 2013, any collection and use of user personal information must be subject to the
consent of the user, abide by the principles of legality, rationality and necessity and be within the specified purposes,
methods and scopes. An ICP service operator must also keep such information strictly confidential, and is further
prohibited from divulging, tampering or destroying of any such information, or selling or proving such information to other
parties. Any violation of the above decision or order may subject the ICP service operator to warnings, fines, confiscation
of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal liabilities.
Furthermore, in June 2016, the State Internet Information Office issued the Administrative Provisions on Mobile Internet
Applications Information Services, which became effective on August 1, 2016, to further strengthen the regulation of the
mobile application information services. Pursuant to these provisions, owners or operators of mobile internet applications
that provide information services are required to be responsible for information security management, establish and improve
the protective mechanism for user information, observe the principles of legality, rightfulness and necessity, and expressly
state the purpose, method and scope of, and obtain user consent to, the collection and use of users’ personal
information. In addition, the new Cyber Security Law, which became effective on June 1, 2017, also requires network operators
to strictly keep confidential users’ personal information that they have collected and to establish and improve user
information protective mechanism. We have required our users to consent to our collecting and using their personal
information, and established information security systems to protect user’s privacy.
On
May 24, 2019, the Cyberspace Administration of China promulgated the Cybersecurity Review Measures (Exposure Draft), which, together
with the Article 35 of the Cybersecurity Law, focuses on the cyber security review. It has clear and detailed provisions on the
review object, review scope and review process, and provides guidance for law enforcement agencies.
On
May 28, 2019, the Cyberspace Administration of China promulgated the Administrative Measures on Data Security, which further stipulates
the network security protection obligations that network operators should perform under the PRC Cybersecurity Law, clarifies the
standards for the collection, processing, using and security supervision of personal information and important data, and states
that network operators shall make a filing with the local cyberspace administration when they collect important data or sensitive
personal information for the purposes of business operations, any network operator that collects and uses personal information
through products such as websites and applications shall develop and disclose the rules for collection and use separately.
In
October 2019, the Information Security Technology - Personal Information Security Specification (Exposure Draft) was published
to seek comments from the general public. Although the draft is a national recommended standard but not legally enforceable, from
a practical point of view, existing internet companies have been inquired by the Cyberspace Administration of China for not conforming
to the draft’s spirit and have been ordered to make rectification. In January 2020, National Information Security Standardization
Technical Committee promulgated Information Security Technology - Basic Specification for the Collection of Personal Information
by Mobile Internet Application (App) (Exposure Draft). This draft clarifies the basic requirements that mobile Internet applications
should meet to collect personal information, which means that APP developers and operators who collect user’s personal information
shall comply with the requirement strictly.
In
December 2019, the Cyberspace Administration of China promulgated Provisions on the Ecological Governance of Network Information
Contents, which took effect on March 1, 2020. Its goal is to meet the requirement of a network comprehensive management system
and promote and create a good network ecology and network space. It specifies the obligations of network information content producers,
network information content service platforms and network information content service users regarding related ecological governance.
Regulations
Relating to Intellectual Property Rights
The
PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and
domain names.
Copyright.
Pursuant to the Copyright Law and its implementation rules, creators of protected works enjoy personal and property rights, including,
among others, the right of disseminating the works through information networks. Pursuant to the relevant PRC regulations, rules
and interpretations, internet service providers will be jointly liable with the infringer if they (a) participate in, assist in
or abet infringing activities committed by any other person through the internet, (b) are or should be aware of the infringing
activities committed by their website users through the internet, or (c) fail to remove infringing content or take other action
to eliminate infringing consequences after receiving a warning with evidence of such infringing activities from the copyright
holder. To comply with these laws and regulations, we have implemented internal procedures to monitor and review the content we
have licensed from content providers before they are released on our website and remove any infringing content promptly after
we receive notice of infringement from the legitimate rights holder.
Trademark.
The Trademark Law and its implementation rules protect registered trademarks. The PRC Trademark Office of State Administration
of Industry and Commerce is responsible for the registration and administration of trademarks throughout the PRC. The Trademark
Law has adopted a “first-to-file” principle with respect to trademark registration. As of December 31, 2020, we had
approximately one (1) trademark applications in China.
Domain
Name. Domain names are protected under the Administrative Measures on the Internet Domain Names promulgated by the MIIT
on November 1, 2017. The MIIT is the major regulatory body responsible for the administration of the PRC internet domain names,
under supervision of which the CNNIC is responsible for the daily administration of .cn domain names and Chinese domain names.
CNNIC adopts the “first to file” principle with respect to the registration of domain names. We have registered www.mercurity.com,
www.nbpay.com and www.mfhi.com.
On
November 27, 2017, the MITT issued the Notice of the Ministry of Industry and Information Technology on Regulating the Use of
Domain Names in Providing Internet-based Information Services. Pursuant to this notice, internet access service providers shall,
via the Record-filing System, regularly check the use of domain names by Internet-based information service providers, and shall,
in the case that a domain name does not exist or is expired or has no real identity information, cease the provision of access
services for the Internet-based information service provider concerned.
Regulations
Relating to Employment
The
Labor Contract Law and its implementation rules provide requirements concerning employment contracts between an employer and its
employees. If an employer fails to enter into a written employment contract with an employee within one year from the date on
which the employment relationship is established, the employer must rectify the situation by entering into a written employment
contract with the employee and pay the employee twice the employee’s salary for the period from the day following the lapse
of one month from the date of establishment of the employment relationship to the day prior to the execution of the written employment
contract. The Labor Contract Law and its implementation rules also require compensation to be paid upon certain terminations,
which significantly affects the cost of reducing workforce for employers. In addition, if an employer intends to enforce a non-compete
provision with an employee in an employment contract or non-competition agreement, it has to compensate the employee on a monthly
basis during the term of the restriction period after the termination or ending of the labor contract. Employers in most cases
are also required to provide a severance payment to their employees after their employment relationships are terminated.
Enterprises
in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social
insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury
insurance plan and a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts
equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local
government from time to time at locations where they operate their businesses or where they are located. According to the
Social Insurance Law, an employer that fails to make social insurance contributions may be ordered to pay the required
contributions within a stipulated deadline and be subject to a late fee. If the employer still fails to rectify the failure
to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three
times the amount overdue. According to the Regulations on Management of Housing Fund, an enterprise that fails to make
housing fund contributions may be ordered to rectify the noncompliance and pay the required contributions within a stipulated
deadline; otherwise, an application may be made to a local court for compulsory enforcement. We have not made adequate
contributions to employee benefit plans, as required by applicable PRC laws and regulations.
Regulations
Relating to Dividend Withholding Tax
Pursuant
to the Enterprise Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or
establishment in the PRC, or has set up an organization or establishment but the income derived has no actual connection with
such organization or establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant
to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation
and Tax Evasion on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong
enterprise is reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise.
Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses
of Tax Agreements, or Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order
to enjoy the reduced withholding tax: (i) it must directly own the required percentage of equity interests and voting rights in
the PRC resident enterprise; and (ii) it must have directly owned such percentage in the PRC resident enterprise throughout the
12 months prior to receiving the dividends. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments
under Tax Treaties (For Trial Implementation), which became effective in October 2009, require that non-resident enterprises must
obtain approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. There are also other conditions
for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. In November 2015, the Administrative
Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties became effective and repealed the Trial Implementation,
which was later replaced by the Administrative Measures on Non-resident Taxpayers Enjoying Treaty Benefits promulgated by State
Taxation Administration in October 2019. Pursuant to the new Measures, non-resident taxpayers claiming treaty benefits shall be
handled in accordance with the principles of “self-assessment, claiming benefits, retention of the relevant materials for
future inspection.” Non-resident taxpayers who satisfy the criteria for entitlement to tax treaty benefits may, at the time
of tax declaration or withholding declaration through a withholding agent, enjoy the tax treaty benefits, instead of being subject
to approvals, simultaneously gather and retain the relevant materials pursuant to the provisions of these measures for future
inspection and be subject to follow-up administration by the tax authorities.
Pursuant
to the Notice of the Ministry of Finance, the State Administration of Taxation, the National Development and Reform Commission,
and the Ministry of Commerce on the Applicable Scope of the Policy of Temporary Exemption of Withholding Taxes on the Direct Investment
Made by Overseas Investors with Distributed Profits, or Circular 102, which became effective in January 2018, where an overseas
investor uses profits distributed by a resident enterprise in China for direct investment in an encouraged investment project,
deferred tax payment policy shall apply if the stipulated criteria is satisfied, and withholding of income tax shall be waived
in the interim.
Regulations
Relating to Foreign Exchange
The
principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently
amended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions
and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE
by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities
is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment
of foreign currency-denominated loans.
In
August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of
the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular No. 142, regulating
the conversion by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the
converted RMB may be used. SAFE Circular No. 142 provides that the RMB capital converted from foreign currency registered
capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable
government authority and may not be used for equity investments within the PRC. SAFE also strengthened its oversight of the
flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use
of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may not in any case be used to
repay RMB loans if the proceeds of such loans have not been used. In March 2015, SAFE issued SAFE Circular No.19, which took
effect and replaced SAFE Circular No. 142 from June 1, 2015. Although SAFE Circular No.19 allows for the use of RMB converted
from the foreign currency-denominated capital for equity investments in the PRC, the restrictions continue to apply as to
foreign-invested enterprises’ use of the converted RMB for purposes beyond the business scope, for entrusted loans or
for inter-company RMB loans. The sixth article of SAFE Circular No.19 relating to the administration of the exchange
settlement and use of the capital in the foreign exchange account under other direct investments has been abolished by SAFE
Circular No.39 in 2019.
In
November 2012, SAFE promulgated the Circular on Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign
Direct Investment, and amended it in May 2015, which substantially amends and simplifies the current foreign exchange procedure.
Pursuant to this circular, the opening of various special purpose foreign exchange accounts (e.g. pre-establishment expenses account,
foreign exchange capital account, guarantee account), the reinvestment of lawful incomes derived by foreign investors in the PRC
(e.g. profit, proceeds of equity transfer, capital reduction, liquidation and early repatriation of investment), and purchase
and remittance of foreign exchange as a result of capital reduction, liquidation, early repatriation or share transfer in a foreign-invested
enterprise no longer require SAFE approval, and multiple capital accounts for the same entity may be opened in different provinces,
which was not possible before. The Appendix 1 and 2 have been abolished by SAFE Circular No.39 in 2019. In addition, SAFE promulgated
the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by
Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches
over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign
exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its
branches. The Appendix 3 and Article 11 in the Appendix 1 which stipulates that the foreign exchange bureaus shall implement annual
inspection on foreign investment enterprises pursuant to the relevant provisions of the State have been abolished by SAFE Circular
No.39 in 2019.
In
February 2015, SAFE promulgated the Circular on Further Simplifying and Improving the Policies Concerning Foreign Exchange Control
on Direct Investment, or SAFE Circular No. 13, which took effect on June 1, 2015. SAFE Circular No. 13 delegates the authority
to enforce the foreign exchange registration in connection with the inbound and outbound direct investment under relevant SAFE
rules to certain banks and therefore further simplifies the foreign exchange registration procedures for inbound and outbound
direct investment. SAFE Circular No.13 has been partially abolished by SAFE Circular No.39 in 2019.
C. Organizational
Structure
The
following diagram illustrates our corporate structure as of the date of this annual report.
(1)
|
Formerly known as Unicorn Investment Limited.
|
(2)
|
The sole shareholder of Mercurity Beijing is Mr. Kaiming Hu, formerly known as Beijing Kuali Yitong Technology Co., LTD.
|
(3)
|
The shareholders of Lianji are Ms. Hong Zhou and Mr. Longming Wu, holding 1.0% and 99.0% equity interests of Lianji, respectively.
|
Contractual
Arrangements with Lianji and Its Shareholders
Following
our acquisition of Mercurity Limited in May 2019, we gained effective control over and received substantially all the economic
benefits from Lianji through a series of contractual arrangements among our wholly-owned subsidiary Lianji Future, Lianji and
its shareholders.
Agreements
that Transfer Economic Benefits and Risks to Us
Exclusive
Business Operation Agreement. Lianji Future and Lianji have entered into an exclusive business operation agreement, pursuant
to which Lianji Future has the exclusive right to provide Lianji with technology development and application services. Without
Lianji Future’s written consent, Lianji shall not accept any technology development and application services covered by
this agreement from any third party. Lianji agrees to pay comprehensive service charges on an annual basis and up to the full
balance of Lianji’s total income after deduction of its costs and expenses. In addition, Lianji undertakes that without
Lianji Future’s prior written consent, Lianji shall not enter into any transactions that may have material effect on Lianji’s
assets, obligations, rights or business operations. Unless otherwise agreed by the parties, this agreement will remain effective
until Lianji Future ceases business operations.
Agreements
that Provide Us with Effective Control over Lianji
Powers
of Attorney. Each shareholder of Lianji has issued a power of attorney, irrevocably appointing Lianji Future, as such
shareholder’s attorney-in-fact to exercise all shareholder rights, including, but not limited to, the right to call
shareholders’ meeting, the right to vote on all matters of Lianji that require shareholder approval, and the right to
dispose of all or part of the shareholder’s equity interest in Lianji, on behalf of such shareholder. Other than the
foregoing circumstances, the power of attorney will remain in force until the termination of the business operation agreement
and during its effective term, shall not be amended or terminated without the consent of Lianji Future.
Exclusive
Option Agreement. Lianji Future, Lianji and each of Lianji’s shareholders have entered into an option agreement, pursuant
to which Lianji’s shareholder has irrevocably granted Lianji Future an exclusive option, to the extent permitted by PRC
law, to purchase, or have its designated person or persons to purchase, at its discretion all or part of the shareholder’s
equity interests in Lianji or all or part of Lianji’s assets. The purchase price shall be a nominal price unless where PRC
laws and regulations require valuation of the equity interests or the assets, or promulgates other restrictions on the purchase
price, or otherwise prohibits purchasing the equity interests or the assets at a nominal price. If the PRC laws and regulations
prohibit purchasing the equity interests or the assets at a nominal price, the purchase price shall be equal to the original investment
of the equity interests made by such shareholders or the book value of the assets. Where PRC laws and regulations require valuation
of the equity interests or the assets or promulgates other restrictions on the purchase price, the purchase price shall be the
minimum price permitted under PRC laws and regulations. However, if the minimum price permitted under PRC laws and regulations
exceed the original investment of the equity interests or the book value of the assets, Lianji shall reimburse Lianji Future the
exceeding amount after deducting all taxes and fees paid under PRC laws and regulations. The shareholders of Lianji undertake,
among other things, that without Lianji Future’s prior written consent, they shall not take any actions that may have material
effect on Lianji’s assets, businesses and liabilities, nor shall they appoint or replace any directors, supervisors and
officers of Lianji. These agreements have terms of ten years, which may be extended upon Lianji Future’s written confirmation
prior to the expiry.
Equity
Interest Pledge Agreement. Each shareholder of Lianji has entered into an equity interest pledge agreement with Lianji Future
and Lianji, pursuant to which, the shareholder has pledged all of his or her equity interest in Lianji to Lianji Future to guarantee
the performance by Lianji and its shareholders of their obligations under the master agreements, which include the business operation
agreement the power of attorney and the exclusive option agreement. Each shareholder of Lianji agrees that, during the term of
the equity interest pledge agreement, he or she will not dispose of the pledged equity interests or create or allow any encumbrance
on the pledged equity interests without the prior written consent of Lianji Future. The equity interest pledge agreement remain
effective until Lianji and its shareholders discharge all of their obligations under the master agreements.
Contractual
Arrangements with Mercurity Beijing and Its Shareholder
Following
our acquisition of NBpay in March 2020, we gained effective control over and received substantially all the economic benefits
from Mercurity Beijing through a series of contractual arrangements among our wholly-owned subsidiary Lianji Future, Mercurity
Beijing and its shareholder.
In
July 2020, Kuaili Yitong changed its name to Mercruity (Beijing) Technology Co, Ltd ( Mercurity Beiijing).
Agreements
that Transfer Economic Benefits and Risks to Us
Business
Operation Agreement. Lianji Future and Mercurity Beijing have entered into a business operation agreement, pursuant to which
Lianji Future has the exclusive right to provide Mercurity Beijing with technology development and application services. Without
Lianji Future’s written consent, Mercurity Beijing shall not accept any technology development and application services
covered by this agreement from any third party. Mercurity Beijing agrees to pay comprehensive service charges on an annual basis
and up to the full balance of Mercurity Beijing’s total income after deduction of its costs and expenses. In addition, Mercurity
Beijing undertakes that without Lianji Future’s prior written consent, Mercurity Beijing shall not enter into any transactions
that may have material effect on Mercurity Beijing’s assets, obligations, rights or business operations. Unless otherwise
agreed by the parties, this agreement will remain effective until Lianji Future ceases business operations.
Agreements
that Provide Us with Effective Control over Lianji
Powers
of Attorney. The shareholder of Mercurity Beijing has issued a power of attorney, irrevocably appointing Lianji Future, as
such shareholder’s attorney-in-fact to exercise all shareholder rights, including, but not limited to, the right to call
shareholders’ meeting, the right to vote on all matters of Mercurity Beijing that require shareholder approval, and the
right to dispose of all or part of the shareholder’s equity interest in Mercurity Beijing, on behalf of such shareholder.
Other than the foregoing circumstances, the power of attorney will remain in force until the termination of the business operation
agreement and during its effective term, shall not be amended or terminated without the consent of Lianji Future.
Option
Agreement. Lianji Future, Mercurity Beijing’s shareholder have entered into an option agreement, pursuant to which Mercurity
Beijing’s shareholder has irrevocably granted Lianji Future an exclusive option, to the extent permitted by PRC law, to
purchase, or have its designated person or persons to purchase, at its discretion all or part of the shareholder’s equity
interests in Mercurity Beijing. The purchase price shall be a nominal price unless where PRC laws and regulations require valuation
of the equity interests or the assets, or promulgates other restrictions on the purchase price, or otherwise prohibits purchasing
the equity interests or the assets at a nominal price. If the PRC laws and regulations prohibit purchasing the equity interests
or the assets at a nominal price, the purchase price shall be equal to the original investment of the equity interests made by
such shareholder or the book value of the assets. Where PRC laws and regulations require valuation of the equity interests or
the assets or promulgates other restrictions on the purchase price, the purchase price shall be the minimum price permitted under
PRC laws and regulations. However, if the minimum price permitted under PRC laws and regulations exceed the original investment
of the equity interests or the book value of the assets, Mercurity Beijing shall reimburse Lianji Future the exceeding amount
after deducting all taxes and fees paid under PRC laws and regulations. The shareholder of Mercurity Beijing undertakes, among
other things, that without Lianji Future’s prior written consent, it shall not take any actions that may have material effect
on Mercurity Beijing’s assets, businesses and liabilities, nor shall he appoint or replace any directors, supervisors and
officers of Kuali Yitong. These agreements have terms of ten years, which may be extended upon Lianji Future’s written confirmation
prior to the expiry.
Equity
Pledge Agreement. The shareholder of Mercurity Beijing has entered into an equity pledge agreement with Lianji Future pursuant
to which, the shareholder has pledged all of his equity interest in Mercurity Beijing to Lianji Future to guarantee the performance
by Mercurity Beijing and its shareholder of their obligations under the master agreements, which include the business operation
agreement the power of attorney and the exclusive option agreement. The shareholder of Mercurity Beijing agrees that, during the
term of the equity interest pledge agreement, he will not dispose of the pledged equity interests or create or allow any encumbrance
on the pledged equity interests without the prior written consent of Lianji Future. The equity interest pledge agreement remains
effective until Mercurity Beijing and its shareholder discharge all of their obligations under the master agreements.
We
have been advised by our PRC legal counsel, Beijing Dacheng Law Offices, LLP, that the ownership structure and the contractual
arrangements among Our WFOE, Our VIEs and their respective shareholders will not result in any violation of PRC laws or regulations
currently in effect. However, we have been further advised by our PRC legal counsel that there are substantial uncertainties regarding
the interpretation and application of current and future PRC laws, rules and regulations. Accordingly, there can be no assurance
that the PRC regulatory authorities will not take a view that is contrary to or otherwise different from the above opinion of
our PRC legal counsel. Our PRC legal counsel has further advised that if the PRC government authority finds that our corporate
structure, the contractual arrangements or the reorganization to establish our current corporate structure do not comply with
any applicable PRC laws, rules or regulations, the contractual arrangements will become invalid or unenforceable, and we could
be subject to severe penalties including being prohibited from continuing operations. See “Item 3. Key Information—D.
Risk Factors—Risks Related to Our Corporate Structure and Dependence on our Contractual Arrangements with our Affiliates—If
the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply
with PRC governmental restrictions on foreign investment in internet business, or if these regulations or the interpretation of
existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in
those operations” and “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—Uncertainties
with respect to the PRC legal system could have an adverse effect on us.”
D. Property,
Plants and Equipment
Our
executive offices are located at Room 1112-2, Floor 11, No.15 Xinxi Road, Haidian District, Beijing 100086, People’s Republic
of China and occupy a total of 108 square meters. The lease of our headquarter office has a term of one years.
ITEM
4A. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You
should read the following discussion and analysis of our financial condition and results of operations in conjunction with our
consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially
from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item
3. Key Information—D. Risk Factors” and elsewhere in this annual report on Form 20-F.
A. Operating
Results
Overview
Our
current principal business is to design and develop digital asset transaction platforms based on blockchain technologies for customers
to facilitate asset trading, asset digitalization and cross-border payments and provide supplemental services for such platforms,
such as customized software development services, maintenance services and compliance support services. We started this new business
since our acquisition of Mercurity Limited (previously known as Unicorn Investment Limited) in May 2019. We incurred net loss
of US$1.65 million for the year ended December 31, 2020.
We incurred loss from operations
of US$1.8 million for the year ended December 31, 2018 and had income from operations of US$0.5 million and loss of US$1.65 million for
the years ended December 31, 2019 and 2020, respectively. As we only acquired our current continuing operations in 2019, our loss from
operations for the year ended December 31, 2018 were primarily due to the general and administrative expenses incurred during those years.
Acquisition
of Mercurity Limited
In
May 2019, we acquired Mercurity Limited and its subsidiaries and variable interest entity to start developing digital asset transaction
platform products based on blockchain technologies and providing related services. Pursuant to the share purchase agreement among
our company, Mercurity Limited and Mr. Haohan Xu, who was the sole shareholder of Mercurity Limited prior to the completion of
this transaction, we acquired all the issued and outstanding shares of Mercurity Limited from Mr. Haohan Xu for the consideration
of 632,660,858 newly issued ordinary shares of our company. Upon the completion of this acquisition, Mercurity Limited and its
subsidiaries became our wholly-owned subsidiaries and we gained effective control over Lianji through the contractual arrangements
among Lianji Future, Lianji and its shareholders.
Acquisition
of NBpay
In
March 2020, we acquired the entire ownership of NBpay Investment Limited, or NBpay, to further strengthen our capabilities in
the blockchain-enabled payment solutions. Pursuant to the share purchase agreement among our company, NBpay Investment Limited
and Mr. Kaiming Hu, who was the sole shareholder of NBpay Investment Limited prior to the completion of this transaction, we acquired
all the issued and outstanding shares of NBpay Investment Limited from Mr. Kaiming Hu for the consideration of 761,789,601 newly
issued ordinary shares of our company. Upon the completion of this acquisition, NBpay Investment Limited and its subsidiaries
became our wholly-owned subsidiaries and we gained effective control over Mercurity Beijing through the contractual arrangements
among Lianji Future, Kuali Yiting and its shareholders.
Divestment
of B2B Business
On
July 22, 2019, we divested our B2B services to food service suppliers and customers by selling all the issued and outstanding
shares of New Admiral Limited, or New Admiral, our former wholly-owned subsidiary operating the B2B business, to Marvel Billion
Development Limited, or Marvel Billion, an entity associated with Ms. Xiaoxia Zhu, in exchange for US$1.0 million in cash. Marvel
Billion and the divested entities agreed to waive all the rights and claims with respect to the liabilities owed by us to the
divested entities. Upon the completion of this transaction, Marvel Billion assumed all the outstanding liabilities of the divested
entities.
The
above-mentioned divestment was a strategic shift of our business and has had a major effect on our results of operations. As a
result, assets and liabilities, revenues and expenses and cash flows related to the previous B2B business have been reclassified
as discontinued operations in accordance with U.S. GAAP in our consolidated financial statements for all the periods presented
in this annual report. Our consolidated statements of operations and the consolidated statements of cash flows for the year ended
December 31, 2018 are adjusted retrospectively to reflect the change. For more information of our discontinued operations, see
Note 5 to our consolidated financial statements included elsewhere in this annual report.
Key
Components of Results of Operations
Revenues
We
have been deriving revenues from providing digital asset infrastructure solutions based on blockchain technologies, cross-border
remittance and DeFi platform since our acquisition of Mercurity Limited in May 2019 and our acquisition of NBpay in March 2020.
We had two customers purchased our software design and development service. One of the two customers service agreement was completed
and was not renewed. We currently generate our revenues from software design, development and related, testing, installation,
configuration, integration and customized development services based on blockchain technologies and provide related supplemental
services to one customer whom we acquired in July 2020. We also generated revenues from cross-border remittance and Defi platform.
Our revenues were US$1.48 million for the year ended December 31, 2020.
Cost
of Revenues
Our
cost of revenues currently consists of payroll of technical personnel. Our cost of revenues was US$0.15 million for the year ended
December 31, 2020.
Operating
Expenses
Our
operating expenses consist of general and administrative expenses. Our total operating expenses were US$2.96 million for the year
ended December 31, 2020.
Our
general and administrative expenses consist primarily of (i) salaries and benefits for employees, which are the salaries and benefits
for our management, merchant service representatives and general administrative staff, (ii) office expenses, which consist primarily
of office rental, maintenance and utilities expenses, depreciation of office equipment and other office expenses, and (iii) professional
expenses, which consist primarily of legal expense and audit fees.
Interest
Income
Our
interest income consists primarily of the interest income from our cash and short-term deposits with banks and compensation received
for payments we made on behalf of the divested business. As of December 31, 2020, the shareholder of divested business has repaid
all outstanding balance including the interest.
Other
Income
Other
income consists primarily of the gain generated from our disposal of one cryptocurrency in exchange for another type of cryptocurrency
and refund of social security tax from Chinese government to help enterprise to reduce the Covid-19 impact.
Critical
Accounting Policies
The
preparation of our consolidated financial statements and related notes requires our management to make judgments, estimates and
assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent
assets and liabilities. We have based our estimates on historical experience and various other assumptions that we believe to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Our management has discussed the development, selection and
disclosure of these estimates with our board of directors. Actual results may differ from these estimates under different assumptions
or conditions. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions
about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have
been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the
consolidated financial statements.
We
believe that the following critical accounting policies are the most sensitive and require more significant estimates and assumptions
used in the preparation of our consolidated financial statements.
You
should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our consolidated
financial statements and other disclosures included in this annual report.
Revenue
Recognition
We
generate revenues primarily from fixed-price short-term contracts involving the design, development, creation, testing, installation,
configuration, integration and customization of fully operational software and from providing related services.
On
January 1, 2019, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), which supersedes the
revenue recognition requirements in ASC Topic 605, Revenue Recognition (“ASC 605”), using the modified retrospective
transition method applied to those contracts which were not completed as of January 1, 2019. Results for reporting periods beginning
after January 1, 2019 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported
in accordance with historic accounting under ASC 605. The impact of adopting the new revenue standard was not material to our
consolidated financial statements and there was no adjustment to beginning retained earnings on January 1, 2019.
Under
ASC 606, we recognize revenue when we satisfy a performance obligation when the customer obtains control of promised goods or
services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine
revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (i)
identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction
price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract;
and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts
when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services we transfer
to the customer.
Once
a contract is determined to be within the scope of ASC 606 at contract inception, we review the contract to determine which performance
obligations it must deliver and which of these performance obligations are distinct. We recognize revenue based on the amount
of the transaction price that is allocated to each performance obligation when that performance obligation is satisfied or as
it is satisfied.
For
software development services, we recognize revenue over time as our performance creates or enhances an asset that the customer
controls as the asset is created or enhanced. We generally recognize revenue using an input method with revenue amounts being
recognized proportionately as costs are incurred relative to the total expected costs to satisfy the performance obligation. We
believe that costs incurred as a portion of total estimated costs is an appropriate measure of progress towards satisfaction of
the performance obligation since this measure reasonably depicts the progress of the work effort.
The
services other than those associated with the software development services may be a service performance obligation, which is
distinct from performance obligation for software development. Our services are provided to customers for a fixed amount over
the contract service period and revenue is recognized on a straight-line basis over the term of the contract.
Intangible
Assets
Intangible assets with indefinite
useful life are not amortized and are tested for impairment annually or more frequently, if events or changes in circumstances indicate
that they might be impaired in accordance with ASC Subtopic 350-30, Intangibles-Goodwill and Other: General Intangibles Other than Goodwill
(“ASC 350-30”). Our intangible assets are cryptocurrencies which are measured at cost. We estimated the fair values of the
intangible assets and recognized 0.8 million impairment loss for the year ended December 31, 2020.
Impairment
of Goodwill
Goodwill
represents the cost of an acquired business in excess of the fair value of tangible and identifiable intangible net assets purchased.
We assign all the assets and liabilities of an acquired business, including goodwill, to reporting units.
Specifically,
goodwill impairment is determined using a two-step process. The first step compares the fair value of each reporting unit to its
carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered
to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the
second step compares the implied fair value of the affected reporting unit’s goodwill to the carrying value of that goodwill.
The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation
of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the
fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill.
An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating
fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow.
We
estimated the fair value of the goodwill with the assistance from an independent third-party appraiser and no impairment loss
was recognized for the year ended December 31, 2020. We are ultimately responsible for the determination of all amounts related
to the goodwill recorded in the financial statements.
Goodwill
is tested for impairment at least once annually or more frequently if we believe indications of impairment exist. Impairment is
tested using a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including
goodwill.
If
the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step
will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied
fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined
in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the
first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts
assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess
in the carrying value of goodwill over the implied fair value of goodwill. Estimating the fair value of reporting unit is performed
by the DCF method.
Since the divestiture of
the B2B business and B2B business in July 2019, we have one reporting unit, our blockchain-based digital asset infrastructure solutions
business. We measure goodwill at fair value on a non-recurring basis when it is annually evaluated or whenever events or changes in circumstances
indicate that carrying amount of a reporting unit exceeds its fair value. The fair value was determined using models with significant
unobservable input (Level 3 inputs) and the cash flow projections were based on past experience, actual results of operations and management
best estimates about future developments as well as certain market assumptions. We did not recognize any impairment loss for the year
ended December 31, 2020.
Income
Taxes
We
follow the liability method in accounting for income taxes in accordance with ASC topic 740 (“ASC 740”), Income Taxes.
Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting
and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences
are expected to reverse. We record a valuation allowance against deferred tax assets if, based on the weight of available evidence,
it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized.
We
apply the provision of ASC 740 to account for uncertainty in income taxes. ASC 740 clarifies the accounting for uncertainty in
income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the consolidated
financial statements.
We
have elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of income
tax expense in the consolidated statements of operations.
Share-based
Payments
Share-based
payment awards with employees are measured based on the grant date fair value of the equity instrument issued, and recognized
as compensation costs using the straight-line method over the requisite service period, which is generally the vesting period
of the options, with a corresponding impact reflected in additional paid-in capital. For share-based payment awards with market
conditions, such market conditions are included in the determination of the estimated grant-date fair value. In the second quarter
of 2017, we elected to early adopt ASU No. 2016-09, Compensation Stock Compensation (Topic 718): Improvement to Employee Share-based
Payment Accounting, to account for forfeitures as they occur. The cumulative-effect adjustment to accumulated deficits was
nil as a result of the adoption of ASU 2016-09.
A
change in any of the terms or conditions of share-based payment awards is accounted for as a modification of awards. The Company
measures the incremental compensation cost of a modification as the excess of the fair value of the modified awards over the fair
value of the original awards immediately before its terms are modified, based on the share price and other pertinent factors at
the modification date. For vested awards, the Company recognizes incremental compensation cost in the period the modification
occurred. For unvested awards, we recognize, over the remaining requisite service period, the sum of the incremental compensation
cost and the remaining unrecognized compensation cost for the original award on the modification date.
Since
our initial public offering in April 2015, the determination of the fair value of the ordinary shares has been based on the market
price of our ADSs traded on the Nasdaq Global Market.
In
determining the value of share options to employees, we have used the binomial option-pricing model, with assistance from the
independent third-party appraiser. Under this option pricing model, certain assumptions, including risk-free interest rate, the
contractual life of the options, the expected dividends on the underlying ordinary shares, the expected volatility of the price
of the underlying shares for the contractual life of the options, the post-vesting forfeiture rate and the expected exercise multiple
are required in order to determine the fair value of our options. Changes in these assumptions could significantly affect the
fair value of share options and hence the amount of compensation expense we recognize in our consolidated financial statements.
In
determining the value of ordinary shares to directors and executives, we have considered the fair value of the ordinary share
and the expected dividend paid-out ratio. Because we have no plan to pay dividend, the fair value of the share granted to directors
and executives is the fair value of the ordinary share.
The
key assumptions used in the valuation of the employee share options are summarized in the following table:
|
|
Modification
on September 1,
|
|
|
Grants
on
July 1,
|
|
|
Modification
on
June 20,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Risk-free
rate of return(1)
|
|
|
0.47%
- 0.88
|
%
|
|
|
1.46
|
%
|
|
|
1.25
|
%
|
Contractual
life of the options(2)
|
|
|
5.0
years
|
|
|
|
10.0
years
|
|
|
|
5.0
years
|
|
Volatility(3)
|
|
|
60.3%
- 65.1
|
%
|
|
|
54.8
|
%
|
|
|
41.0
|
%
|
Post-vesting
forfeiture rate(4)
|
|
|
nil
|
|
|
|
nil
|
|
|
|
nil
|
|
Post-vesting
forfeiture rate(5)
|
|
|
N/A
|
|
|
|
36.1
|
%
|
|
|
N/A
|
|
Exercise
multiple(6)
|
|
|
3x
/ 2x
|
|
|
|
3x
/ 2x
|
|
|
|
3x
/ 2x
|
|
|
(1)
|
The
risk-free rate of return is based on the yield curve of U.S. dollar China sovereign bonds
as of the valuation dates as extracted from Bloomberg.
|
|
(2)
|
The
contractual life of the options is based on the option grant letter.
|
|
(3)
|
The
volatility of the underlying ordinary shares during the life of the options was estimated
based on the historical stock price volatility of listed guideline companies over a period
comparable to the contractual life of the options.
|
|
(4)
|
We
estimate the dividend yield based on our expected dividend policy over the expected term
of the options.
|
|
(5)
|
The
post-vesting forfeiture rate applied to options granted to general staff was based on
our historical statistical data. 0% was applied to options granted to executive management
with expectation that the executive management will not quit from the company over the
contractual life of the options.
|
|
(6)
|
Exercise
multiple is the ratio of the fair value of a share over the exercise price at the time
which the option will be exercised, estimated based on a consideration of research study
regarding exercise pattern from historical statistical data. A multiple of three was
used for the executive management and a multiple of two was used for general staff.
|
Recent
Accounting Pronouncements
See
Note 2 to our consolidated financial statements included elsewhere in this annual report.
Results
of Operations
The
following table presents selected financial data from our consolidated statements of operations for the periods indicated. Because
we had a significant restructuring and a strategic shift in principal business during 2019, the historical operation of our B2B
food supply chain business was categorized as a discontinued operation. In addition, we only acquired our current continuing asset
transaction platform business in 2019. As a result, the period-to-period comparisons of our results of operations can only provide
very limited insight into the development of our operation and thus should not be relied upon as indicative of our future performance.
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties
|
|
|
-
|
|
|
|
1,738,000
|
|
|
|
1,481,589
|
|
Total revenues
|
|
|
-
|
|
|
|
1,738,000
|
|
|
|
1,481,589
|
|
Cost of revenues
|
|
|
-
|
|
|
|
(257,023
|
)
|
|
|
(154,266
|
)
|
Gross profit
|
|
|
-
|
|
|
|
1,480,977
|
|
|
|
1,327.323
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(1,808,776
|
)
|
|
|
(1,025,145
|
)
|
|
|
(2,123,784
|
)
|
Impairment Loss
|
|
|
|
|
|
|
|
|
|
|
(835,344
|
)
|
Total operating expenses
|
|
|
(1,808,776
|
)
|
|
|
(1,025,145
|
)
|
|
|
(2,959,129
|
)
|
(Loss)/income from operations
|
|
|
(1,808,776
|
)
|
|
|
455,832
|
|
|
|
(1,631,806
|
)
|
Interest income, net
|
|
|
29
|
|
|
|
279
|
|
|
|
8,181
|
|
Other income/(Expenses), net
|
|
|
-
|
|
|
|
26,859
|
|
|
|
(27,649
|
)
|
(Loss)/income before provision for income taxes
|
|
|
(1,808,747
|
)
|
|
|
482,970
|
|
|
|
(1,651,273
|
)
|
Income tax benefits
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(Loss)/Income from continuing operations
|
|
|
(1,808,747
|
)
|
|
|
482,970
|
|
|
|
(1,651,273
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(121,431,038
|
)
|
|
|
(1,708,270
|
)
|
|
|
-
|
|
Net loss
|
|
|
(123,239,785
|
)
|
|
|
(1,225,300
|
)
|
|
|
(1,651,273
|
)
|
Year
Ended December 31, 2020 Compared to Year Ended December 31, 2019
Revenues
Our
revenues for the year ended December 31, 2019 and 2020 were US$1.7 million and US$1.5 million from our blockchain-based digital
asset infrastructure solutions business respectively.
Cost
of revenues
Our
cost of revenues for the year ended December 31, 2019 and 2020 were US$0.30 million and US$0.2 million, which consisted of payroll
of technical personnel respectively
Operating
expenses
Our operating expenses excluding
intangible assets impairment, consisting of general and administrative expenses, increased by 100% from US$1.0 million for the year ended
December 31, 2019 to US$2.1 million for the year ended December 31, 2020. This change was primarily due to increase in employment cost.
In 2020, we recorded US$0.8 million intangible assets impairment because of the devaluation of one of the cryptocurrencies we held. There
was no intangible assets impairment in 2019.
Net
loss
Our
net loss was US$1.6 million for the year ended December 31, 2020 compared to US$1.2 million for the year ended December 31, 2019.
Year
Ended December 31, 2019 Compared to Year Ended December 31, 2018
Revenues
Our
revenues for the year ended December 31, 2019 were US$1.7 million from our blockchain-based digital asset infrastructure solutions
business. We did not record any revenue for the year ended December 31, 2018 as we did not acquire our current continuing business
until 2019.
Cost
of revenues
Our
cost of revenues for the year ended December 31, 2019 were US$0.3 million, which consisted of payroll of technical personnel.
We did not incur any cost of revenues for the year ended December 31, 2018 as we did not acquire our current continuing business
until 2019.
Operating
expenses
Our
operating expenses, consisting of general and administrative expenses, decreased by 43.3% from US$1.8 million for the year ended
December 31, 2018 to US$1.0 million for the year ended December 31, 2019. This change was primarily due to a decrease in fees
for professional services.
Net
loss
As
a result of the foregoing, our net loss decreased by 99.0% from US$123.2 million for the year ended December 31, 2018 to US$1.2
million for the year ended December 31, 2019.
B. Liquidity
and Capital Resources
We
had US$1,191, US$435,211 and US$174,783 in cash and cash equivalents as of December 31, 2018, 2019 and 2020, respectively.
We have incurred net losses
since our inception. Our net losses were US$123.2 million, US$1.2 million and US$1.6 million for the year ended December 31, 2018, 2019
and 2020, respectively, and our net cash used in operating activities were US$4.3 million, US$0.6 million and US$0.6 million in 2018,
2019 and 2020, respectively. In May 2020, we entered into a share purchase agreement regarding a private placement of US$1.0 million to
Universal Hunter (BVI) Limited. We have received US$300,000 upon the first closing of this private placement and, pursuant to the share
purchase agreement with Universal Hunter (BVI) Limited, we received additional US$700,000 in 2021. We believe that our current cash balance
and anticipated cash flows from operations will be sufficient to meet our anticipated capital needs in the next twelve months.
If
there is any change in business conditions or other future developments, including any investments we may decide to pursue, we
may also seek to sell additional equity securities or debt securities or borrow from lending institutions. Financing may be unavailable
in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible
debt securities, would dilute our earnings per share. The incurrence of debt would divert cash for working capital and capital
expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and
our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required,
our business operations and prospects may suffer.
In the future, we may rely
on dividends and other distributions on equity paid by our wholly-owned PRC subsidiary for our cash and financing requirements. There
are potential restrictions on the dividends and other distributions by our PRC subsidiary. For instance, if our wholly-owned PRC subsidiary
incurs debt on its own behalf in the future, the instruments governing the debt could restrict its ability to pay dividends or make other
distributions to us. The PRC tax authorities may require us to adjust our taxable income under the contractual arrangements that Our WFOE
currently has in place with Our VIEs in a way that could adversely affect the latter’s ability to pay dividends and other distributions
to us. In addition, under PRC laws and regulations, our wholly-owned PRC subsidiary, as a wholly foreign-owned enterprise in the PRC,
may only pay dividends out of its accumulated profits. Wholly foreign-owned enterprises such as our wholly-owned PRC subsidiary are required
to set aside at least 10% of their accumulated after-tax profits each year, if any, to fund a statutory reserve fund, until the aggregate
amount of such fund reaches 50% of their respective registered capital. At their discretion, wholly foreign-owned enterprises may allocate
a portion of their after-tax profits to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable
as cash dividends. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure and Dependence
on our Contractual Arrangements with our Affiliates—We rely principally on dividends and other distributions on equity paid by our
PRC and Hong Kong subsidiaries to fund any cash and financing requirements we might have. Any limitation on the ability of our PRC and
Hong Kong subsidiaries to pay dividends to us could have an adverse effect on our ability to conduct our business.” In addition,
our investment made as registered capital and additional paid-in capital of Our WFOE and Our VIEs are also subject to restrictions in
their distribution and transfer according to the laws and regulations in China. Owing to the above, Our WFOE and Our VIEs in China are
restricted in their ability to transfer their net assets to us in terms of cash dividends, loans or advances. As of December 31, 2020,
the restricted net assets of Lianji and Mercurity Beijing, which represents registered capital and additional paid-in capital, was US$1.5
million. Any limitation on the ability of Lianji Future or our Hong Kong subsidiary, Ucon HK, to pay dividends or make other distributions
to us could adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends,
or otherwise fund and conduct our business.
We are an offshore holding
company conducting our operations in China through Our WFOE and Our VIEs. The functional and reporting currency of our company is U.S.
dollars. The financial records of Our WFOE and Our VIEs located in the PRC are maintained in Renminbi. Fluctuation in the exchange rate
between the Renminbi and other foreign currency may affect our ability to inject capital in Our WFOE and Our VIEs. We could lend to Our
WFOE and Our VIEs, or we could make additional capital contributions to Our WFOE, or we could establish new PRC subsidiary and make capital
contributions to these new PRC subsidiary, or we could acquire offshore entities with business operations in China in an offshore transaction.
Most of these uses are subject to PRC regulations and approvals. For example, loans by us to Our WFOE to finance its activities cannot
exceed statutory limits and must be registered with the local counterpart of SAFE. If we decide to finance Our WFOE by means of capital
contributions, these capital contributions must be approved by the Ministry of Commerce or its local counterpart. Due to the restrictions
imposed on loans in foreign currencies extended to any PRC domestic companies, we are unlikely to lend money to Our VIEs and its subsidiaries
which are PRC domestic companies. The following table sets forth a summary of our cash flows for the periods indicated:
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
(in US$ thousands)
|
|
Net cash used in operating activities
|
|
|
(4,331
|
)
|
|
|
(645
|
)
|
|
|
(595
|
)
|
Net cash (used in)/ provided by investing activities
|
|
|
(13
|
)
|
|
|
588
|
|
|
|
(10
|
)
|
Net cash provided by financing activities
|
|
|
1,686
|
|
|
|
-
|
|
|
|
300
|
|
Effect of exchange rate changes
|
|
|
(1,897
|
)
|
|
|
135
|
|
|
|
45
|
|
Increase/(decrease) in cash and cash equivalents
|
|
|
(4,555
|
)
|
|
|
78
|
|
|
|
(260
|
)
|
Cash at the beginning of the period
|
|
|
4,912
|
|
|
|
357
|
|
|
|
435
|
|
Cash at the end of the period
|
|
|
357
|
|
|
|
435
|
|
|
|
175
|
|
Net
cash used in operating activities
Net
cash used in operating activities was US$0.6 million for the year ended December 31, 2020, reflecting a combination of net cash
used in continuing operations of US$0.6 million. The net cash used in continuing operations was primarily due to a decrease in
accounts receivable of US$0.8 million and an increase in prepaid expenses and other current assets of US$0.7 million, net loss
from continuing operations of US$0.5 million after excluding impairment and stock-based compensation those two non-cash items,
and an decrease in accrued expenses and other current liabilities and other non-current liabilities of US$0.2 million.
Net
cash used in operating activities was US$0.6 million for the year ended December 31, 2019, reflecting a combination of net cash
used in continuing operations of US$0.9 million and net cash provided by discontinued operations of US$0.3 million. The net cash
used in continuing operations was primarily due to an increase in accounts receivable of US$1.6 million and an decrease in prepaid
expenses and other current assets of US$0.2 million, which were partially offset by net income from continuing operations of US$0.5
million and an increase in accrued expenses and other current liabilities and other non-current liabilities of US$0.2 million.
Net
cash used in operating activities was US$4.3 million for the year ended December 31, 2018. We had a net loss of US$123.2 million.
The principal items accounting for the difference between our net loss and our net cash used in operating activities were an increase
in accrued expenses and other current liabilities of US$0.6 million and an increase in provision of doubtful other receivables
of US$0.2 million, partially offset by a decrease in other current liabilities of US$0.1 million. Net cash used in discontinued
operations in operating activities was US$3.1 million for the year ended December 31, 2018.
Net
cash (used in)/provided by investing activities
Net
cash used by investing activities was US$0.1 million for the year ended December 31, 2020, representing investing and disposal
of digital assets through accepting payment, making payment and exchange for legal currencies, as well as cash acquired from acquisition
of subsidiary and VIE
Net
cash provided by investing activities was US$0.6 million for the year ended December 31, 2019, representing proceeds from disposal
of subsidiaries, VIE and VIE’s subsidiaries, net of cash disposed, as well as cash acquired from acquisition of subsidiary
and VIE.
Net
cash used in investing activities was US$13.1 thousand for the year ended December 31, 2018, representing net cash used in our
discontinued operations.
Net
cash provided by financing activities
Net
cash provided by financing activities was US$0.3 million for the year ended December 31, 2020, representing net cash provided
by private placement.
Net
cash provided by financing activities was nil for the year ended December 31, 2019.
Net
cash provided by financing activities was US$1.7 million for the year ended December 31, 2018, representing net cash provided
by discontinued operations.
Capital
Expenditures
We
did not have capital expenditures for the year ended December 31, 2020.
We
did not have capital expenditures for the year ended December 31, 2019.
We
made capital expenditures of US$13.1 thousand for the year ended December 31, 2018, consisting of the purchase of property and equipment.
Inflation
Since
our inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics
of China, the year-over-year percent changes in the consumer price index for December 2018, 2019 and 2020 were increases of 1.9%,
4.5% and 2.5%, respectively. Although we have not been materially affected by inflation in the past, we have experienced and expect
to continue to experience upward pressure on our operating expenses.
Withholding
Tax Obligation
Pursuant
to PRC individual income tax laws, when a corporation purchases equity interest from individuals, the individuals are obligated
to pay individual income tax based on 20% of the capital gain from the transaction with the corporation as the withholding agent.
We have purchased equity interests of certain entities from individual sellers. There is a possibility that if individual sellers
fail to meet their income tax obligations, the tax authority may require us, as the withholding agent, to pay the taxes for the
sellers. Based on the information currently available, we are unable to make a reasonable estimate of the related liability due
to the uncertainty related to the outcome and amount of payment and relating penalty and interest.
C. Research
and Development
Please refer to “Item
4. Information on the Company—B. Business Overview—Intellectual Property.”
D. Trend
Information
Other
than as described elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events
that are reasonably likely to have a material adverse effect on our revenue, income from continuing operations, profitability,
liquidity or capital resources, or that would cause our reported financial information not necessarily to be indicative of future
operating results or financial condition.
E. Off-balance
Sheet Arrangements
Save
for the contingent withholding tax obligation disclosed above and commitments disclosed below, we do not currently have any outstanding
off-balance sheet arrangements or commitments. We have no plans to enter into transactions involving, or otherwise form relationships
with, unconsolidated entities or financial partnerships established for the purpose of facilitating off-balance sheet arrangements
or commitments.
F. Tabular
Disclosure of Contractual Obligations
The
following table sets forth our contractual obligations as of December 31, 2020:
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
1–3 years
|
|
3–5 years
|
|
|
More than 5 years
|
|
|
|
(in US$ thousands)
|
Operating Lease Commitments
|
|
|
11
|
|
|
|
11
|
|
|
-
|
|
-
|
|
|
|
-
|
|
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors
and Senior Management
The
following table sets forth certain information relating to our directors and executive officers as of the date of this annual
report
Directors
and Executive Officers
|
|
Age
|
|
Position/Title
|
Hua
Zhou
|
|
44
|
|
Chairperson
of the Board of Directors, Chief Executive Officer
|
Erez
Simha
|
|
57
|
|
Chief
Financial Officer
|
Longming
Wu
|
|
45
|
|
Director
|
Xiaoyu
Li
|
|
31
|
|
Director
|
Paul
L. Gillis
|
|
67
|
|
Independent
Director
|
Tony
C. Luh
|
|
56
|
|
Independent
Director
|
Samuel
Yuan-Ching Shen
|
|
56
|
|
Independent
Director
|
Haohan
Xu
|
|
25
|
|
Director
|
Cong
Huang
|
|
40
|
|
Independent
Director
|
Hao
Liu
|
|
35
|
|
Director
|
Ms.
Hua Zhou has served as our chairperson and chief executive officer since July 2019 and as our director since May 2018. Ms.
Zhou used to work at our company as a sales manager from 2011 to 2015. Ms. Zhou has over 10 years of experience in client and
partner relationship management, M&A and marketing. Since 2017, Ms. Zhou has served as the Vice President of Strategic Partnership
at Beijing Galaxy Fintech Group, a fin-tech company providing finance-related solutions to micro, small and medium enterprises.
From 2015 to 2017, she worked as the Chief Executive Officer at iBeacon, a data-based marketing platform providing market targeting
services to retailers. From 2009 to 2011, Ms. Zhou worked as the Director of Sales at WeLink Group. Prior to that, Ms. Zhou was
Director of Clients at Focus Wireless Media, starting from 2007. Ms. Zhou holds a college degree from the China University of
Petroleum.
Mr. Erez Simha has served as our President and Chief Financial Officer
since August 2020. From May 2019 until August 2020, Mr. Simha was the Chief Operating Officer and Chief Financial Officer of Kangaroo
(Roo Inc.). Mr. Simha directed all aspects of executive leadership, financial stewardship, accounting, FP&A, Operations (Manufacturing,
Supply chain, Purchasing, logistic) HR, Business Development, Partnerships, and Retail. From May 2017 until March 2019, Mr. Simha served
as Chief Operating Officer and Chief Financial Officer of Just Inc. a leading plant brand. Mr. Simha directed all aspects of executive
leadership, financial stewardship, accounting, FP&A, operations (manufacturing, supply chain purchasing, quality control), international
expansion, product management, legal, HR, investor relations, and IT within food tech consumers products in a hyper growth environment.
From November 2011 until July 2017, Mr. Simha served as Chief Operating Officer and Chief Financial Officer at SSYS LTD. (NASDAQ: SSYS)
a leading 3D printing company in the world, and directed all aspects of executive leadership, financial stewardship, accounting, FP&A,
operations (manufacturing supply chain purchasing, quality control), legal, investor relations, risk management, operational excellence,
and IT. Mr. Simha received his bachelor’s degree in economics and accounting and master’s degree in business administration
and finance from Tel Aviv University. He is a certified public accountant.
Mr.
Longming Wu has served as our director since July 2019. Mr. Wu has over 20 years of experience in business administration.
He currently serves as chief executive officer of Beijing Galaxy Xingyuan Technology Co., Ltd. Prior to that, he served as president
of Beijing Shiletao E-commerce Co., Ltd. from 2013 to 2016, where he was responsible for the development and operation of the
company’s online-to-offline business. From 1996 to 2013, he worked at Qingdao Real Estate Development Operation Co., Ltd.,
where he was a vice president. Mr. Wu received his bachelor’s degree in international trade from Qingdao University in China
and completed the Media Management Program at the Cheung Kong Graduate School of Business.
Ms. Xiaoyu Li has
served as our director since May 2018. Ms. Li used to work at our company’s investor relations department from 2012 to 2013. Ms.
Li has extensive experience in investor relations and investment. Since 2015, she has served as the Investor Manager at Galaxy Internet,
an online investment platform for entrepreneurs. Ms. Li holds a master’s degree in finance from University of Illinois at Urbana-Champaign,
and a bachelor’s degree in economics from University of Minnesota.
Mr. Paul L.
Gillis has served as our independent director since June 2020. Mr. Paul L. Gillis has served as a professor of Practice at
Peking University Guanghua School of Management since 2007 and served as a co-director of International MBA program from 2011 to
2019. Since 2012, he has also served as a current affairs commentator at China Global Television Network, an international
English-language news channel, and China Radio International, an international radio broadcaster. Mr. Paul L. Gillis is widely
recognized by magazines such as The Accountant and International Financial Law Review as a leading expert in financial accounting
and has amassed substantial experience in the accounting industry. In 2004, he retired as a partner of PricewaterhouseCoopers
following a 28-year career in the United States, Singapore and China. From 2011 to 2013, Mr. Paul L. Gillis served as member of
Standing Advisory Group of the Public Company Accounting Oversight Board (PCAOB). From 2009 to 2012, he also served as an
independent director and chairman of audit committee at Pansoft Company Limited (Nasdaq: PSOF). Mr. Paul L. Gillis received his
bachelor’s degree in accounting from Western Colorado University in 1975, his master’s degree in accounting from
Colorado State University in 1976 and his Ph.D. degree in accounting from Macquarie Graduate School of Management in 2011.
Mr.
Tony C. Luh has served as our independent director since April 2015. At present, Tony is a venture partner for DFJ DragonFund
and Yifang Ventures. Mr. Luh was an independent board director for Pansoft Inc. between 2008 and 2012. Mr. Luh served as a General
Partner and Greater China President for the Westly Group between 2011 and 2014. Before joining the Westly Group, Mr. Luh was a
Founding Partner and Managing Director at DFJ DragonFund from 2006 to 2011. Mr. Luh is also one of the Founders and Managing Director
at DragonVenture, which he co-founded in 1999. Before DragonVenture, Mr. Luh was a senior executive at InfoWave Communications
from 1997 to 1999. Mr. Luh possesses over 30 years of experience in capital markets, sales, strategic alliances and business development
and has accumulated public investment expertise in sectors ranging from information technology to high volume manufacturing in
Asia.
Mr.
Samuel Yuan-Ching Shen has as our independent director since July 2020. At present, Samuel
is the chief executive officer of 21Vianet Group, Inc. (a company listed on the NASDAQ Global Select Market, Nasdaq:
VNET) Mr. Shen also serves as an independent director of Insigma Technology Co., Ltd. (a company listed on the Shanghai Stock
Exchange, stock code: 600797) and Xinyuan Real Estate Co., Ltd. (a company listed on the New York Stock Exchange, NYSE: XIN). Mr.
Shen serviced as an independent director of Kingdee International Software Group Co. Ltd. (a company listed on the Hong Kong Stock
Exchange, stock code: 0268), from January 2018 to January 2020. Mr. Shen has extensive experience in the fields of cloud, edge
computing, big data, and AI services. Mr. Shen previously served as President of JD Cloud where he led JD Cloud’s efforts to
extend its offerings of tailored service solutions to a wide range of companies in different industry verticals. Prior to JD Cloud,
Mr. Shen held various senior positions at Microsoft. Mr. Shen received his Bachelor of Science degree in chemistry from National
Tsing Hua University in 1986 and his Master of Science degree in computer science from University of California, Santa Barbara in
1991. From 2001 to 2002, he also attended executive class program at Northwestern University Kellogg School of Management.
Mr.
Haohan Xu has served as our director since July 2019. Mr. Xu has been actively engaged in entrepreneurial activities. He currently
serves as president and chief executive officer of Amazon Capital Inc. and is the founder and chief executive officer of Apifiny
Group, a company developing asset network based on blockchain technologies. Prior to founding these companies, Mr. Xu worked as
a private wealth management summer analyst at Morgan Stanley in the summer of 2018, where he focused on investments in the technology,
media and telecommunication sector. From 2016 to 2017, Mr. Xu also accumulated experience in the fintech business through multiple
positions at Galaxy Group and Haitou Capital in Beijing and New York. Mr. Xu received his bachelor of science degree from Columbia
University.
Mr.
Cong Huang
is a renowned researcher and entrepreneur in financial technology innovation. After receiving
the PhD degree in Statistics from Yale University, he worked at Columbia University
as an Assistant Professor in the Statistics Department,
conducting research focused on algorithms and implementations in data mining. After a period of time, he decided to leave campus
to develop his career in financial innovation and technology. At Goldman Sachs (GS), he played a pivotal role in developing various
new models and algorithms to improve the speed and accuracy of options pricing methods. At McKinsey & Company,
he helped financial institutions implement strategic innovation and transformation initiatives. As a founding member of PingAn
Lufax (Nasdaq: LU), he led the Innovative Product Department and developed numerous
retail loan products from zero, which have been widely used for reference by Internet finance industry. As the CEO of Xiaoying
Tech (Nasdaq: XYF), one of the top finance companies in China, he set up the management
and operations structure to lift the trading volume from RMB100 million per month
to RMB3 billion per month in two years. Meanwhile, Mr. Cong Huang is
the founder and CEO of Weiyan Tech, a leading AI company that provides risk-control and marketing solutions for financial institutions.
Mr Huang has Bachelor’s degree in Mathematics from the University of
Science & Technology of China and a PhD degree from Yale University.
Mr.
Hao Liu
is the founder and President of Columbus Fintech LTD, one of the world’s leading financial
data technology companies as well as co-founder and CEO of Jeethen Capital. Mr.
Liu is a senior fintech expert and has been invited to participate in the Global
Quantitative Finance Conference multiple times. He is a pioneer of the combination of artificial
intelligence technology and quantitative trading, and he set up a financial algorithm cloud service, which has served more than
150 listed companies and securities firms. Mr. Liu is also a leader in the field
of blockchain applications and one of the initiators of the Hong Kong Blockchain Association.
He led the team that developed cross-chain clearing technology, which achieved a breakthrough in the interconnection of multi-chain
services and greatly promoted the application and development of blockchain technology. Mr. Liu Hao is
also an angel investor in a number of financial technology companies, with extensive industry experience and excellent strategic
vision.
B. Compensation
Compensation
of Directors and Executive Officers
In
2020, we paid an aggregate of approximately US$308,708 in cash as salaries and fees to our senior executives, officers and directors
named in this annual report. Other than salaries, fees and share incentives, we do not otherwise provide pension, retirement or
similar benefits to our officers and directors.
Share
Incentive Plans
We adopted our share incentive
plan in 2011, amended it in 2015 and a new incentive plan in 2020, or 2020 Plan, to attract and retain the best available personnel,
provide additional incentives to our employees, directors and consultants, and promote the success of our business. The amended and restated
2011 share incentive plan provides for the grant of options, restricted shares and other share-based awards, collectively referred to
as “awards.” For share incentive plan 2011, amended in 2015, our board of directors has authorized the issuance of ordinary
shares of up to 15% of the issued and outstanding share capital of our company from time to time. The maximum aggregate number of shares
which may be issued pursuant to all awards under 2020 plan is 150,000,000 shares.
Amended and Restated
2011 Share Incentive Plan
Plan
Administration. Our compensation committee will administer the amended and restated 2011 share incentive plan. The committee
determines the participants to receive awards, the type and number of awards to be granted, and the terms and conditions of each
award grant.
Award
Agreements. Awards granted under our amended and restated 2011 share incentive plan are evidenced by an award agreement that
sets forth the terms, conditions and limitations for each grant, which may include the term of the award, the provisions applicable
in the event that the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend,
modify, suspend, cancel or rescind the award. Unless specifically approved by our board of directors, the purchase price per share
of an option shall not be less than 100% of the fair market value of the shares on the date of grant.
Transfer
Restrictions. The right of a grantee in an award granted under our amended and restated 2011 share incentive plan may not
be transferred in any manner by the grantee other than by will or the laws of descent and, with limited exceptions, may be exercised
during the lifetime of the grantee only by the grantee.
Option
Exercise. The term of options granted under the amended and restated 2011 share incentive plan may not exceed ten years from
the date of grant. The consideration to be paid for our ordinary shares upon exercise of an option or purchase of ordinary shares
underlying the option may include cash, check or other cash-equivalent, ordinary shares, consideration received by us in a cashless
exercise, or any combination of the foregoing methods of payment.
Acceleration
upon a Change of Control. If a change of control of our company occurs, (i) the compensation committee may determine that
any outstanding unexercisable, unvested or lapsable awards shall automatically be deemed exercisable, vested and not subject to
lapse immediately prior to the event triggering the change of control and (ii) the compensation committee may cancel such awards
for fair value, provide for the issuance of substitute awards or provide that for a period of at least 15 days prior to the event
triggering the change of control, such options shall be exercisable and that upon the occurrence of the change of control, such
options shall terminate and be of no further force and effect.
Termination
and Amendment. Our board of directors has the authority to amend or terminate our share incentive plan subject to shareholder
approval to the extent necessary to comply with applicable laws. Shareholders’ approval is required for any amendment to
the amended and restated 2011 share incentive plan that increases the number of ordinary shares available under the amended and
restated 2011 share incentive plan or changes the maximum number of shares for which awards may be granted to any participant.
Additionally, a participant’s consent is required to diminish any of the rights of the participant under any award previously
granted to such participant.
2020 Plan
The following paragraphs
summarize the principal terms of our 2020 Plan.
Type of Awards. The
2020 Plan permits the awards of options, restricted shares, restricted share units or other types of awards approved by compensation committee
of the board.
Plan Administration.
Our board of directors or compensation committee will administer the 2020 Plan. The committee or the board of directors, as applicable,
will determine the participants to receive awards, the type and number of awards to be granted to each participant, and the terms and
conditions of each grant.
Award Agreement. Awards
granted under the 2020 Plan are evidenced by an award agreement that sets forth the terms, conditions and limitations for each award,
which may include the term of the award, the provisions applicable in the event that the grantee’s employment or service terminates,
and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.
Eligibility. Persons
eligible to participate in the 2020 Plan include employees, consultants and all directors of our company.
Vesting Schedule.
The vesting schedule of each award granted under 2020 Plan will be set forth in the relevant award agreement.
Exercise of Options.
The plan administrator determines the exercise price for each award, which is stated in the relevant award agreement. Options that are
vested and exercisable will terminate if they are not exercised prior to the time as the plan administrator determines at the time of
grant. However, the maximum exercisable term is ten years from the date of grant.
Transfer Restrictions.
Awards may not be transferred in any manner by the participant other than in accordance with the exceptions provided in the 2020 Plan
or the relevant award agreement or otherwise determined by the plan administrator, such as transfers by will or the laws of descent and
distribution.
Termination and Amendment
of the 2020 Plan. With the approval of the board, our compensation committee has the authority to terminate, amend, suspend or modify
the 2020 Plan. However, without the prior written consent of the participant, no such action may adversely affect in any material way
any award previously granted pursuant to the plan.
The
following table summarizes, as of the date of this annual report, the outstanding options and restricted share units granted to our
executive officers, directors, and other individuals as a group under our amended and restated 2011 share incentive plan.
Name
|
|
Ordinary
shares
underlying options
awarded/Restricted
Share Units
|
|
|
Exercise
price
(US$/share)
|
|
|
Date
of grant
|
|
|
|
Date
of expiration
|
|
Other
Individuals as a Group
|
|
|
169,380,480
|
|
(1)
|
|
-
|
|
|
from
2011/2/1
to 2020/11/24
|
|
|
|
from
2018/9/1
to 2026/7/1
|
|
Erez
Simha
|
|
|
37,008,000
|
|
(1)
|
|
-
|
|
|
2020/11/24
|
|
|
|
2030/7/23
|
|
Other
directors and officers as a group
|
|
|
|
*
|
(1)
|
|
|
|
|
From
2020/11/24 to 2020/7/17
|
|
|
|
from
2030/7/9
to 2030/7/17
|
|
Total
|
|
|
220,488,480
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Less than one percent of our total outstanding share capital.
|
(1)
|
Restricted
share units
|
C. Board
Practices
Duties
of Directors
Under
Cayman Islands law, our directors owe certain fiduciary duties to our company, including duties of loyalty, to act honestly, and
to act in what they consider in good faith to be in our best interests. Our directors also have a duty to exercise the skills
they actually possess and such care and, diligence that a reasonably prudent person would exercise in comparable circumstances.
It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than
what may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved
towards an objective standard with regard to the required skill and care, and these authorities are likely to be followed in the
Cayman Islands. In fulfilling their duty of care to us, our directors must ensure compliance with our fourth amended and restated
memorandum and articles of association. We have the right to seek damages if a duty owed by our directors is breached.
The
powers of our board of directors include, among others:
|
•
|
convening
shareholders’ annual general meetings and reporting its work to shareholders at
such meetings;
|
|
•
|
issuing
authorized but unissued shares;
|
|
•
|
declaring
dividends and distributions;
|
|
•
|
exercising
the borrowing powers of our company and mortgaging the property of our company;
|
|
•
|
approving
the transfer of shares of our company, including the registering of such shares; and
|
|
•
|
exercising
any other powers conferred by the shareholders’ meetings or under our fourth amended
and restated memorandum and articles of association.
|
Terms
of Directors and Executive Officers
We
have eight directors on our board of directors, four of whom are independent directors. Any director on our board may be removed
by way of an ordinary resolution of shareholders. Any vacancies on our board of directors or additions to the existing board of
directors can be filled by the affirmative vote of a majority of the remaining directors. The shareholders may also by ordinary
resolution elect any person to be a director either to fill a casual vacancy or as an addition to the existing board of directors.
Any
director appointed by the board of directors to fill a casual vacancy shall hold office for the remaining term of the director
in whose place he is appointed and shall be eligible for re-election at the expiry of the said term.
Grounds
for Vacating a Director
The
office of a director shall be vacated if the director:
|
•
|
resigns
his office by notice in writing delivered to us or tendered at a meeting of the board
of directors;
|
|
•
|
becomes
of unsound mind or dies;
|
|
•
|
without
special leave of absence from the board of directors, is absent from meetings of the
board of directors for six consecutive months and the board of directors resolves that
his office be vacated;
|
|
•
|
becomes
bankrupt or has a receiving order made against him or suspends payment or compounds with
his creditors;
|
|
•
|
is
prohibited by law from being a director; or
|
|
•
|
ceases
to be a director by virtue of any provisions of Cayman Islands law or is removed from
office pursuant to the fourth amended and restated articles of association.
|
All
of our executive officers are appointed by and serve at the discretion of our board of directors. Our executive officers are elected
by and may be removed by a majority vote of our board of directors.
Board
Committees
Our
board of directors has established an audit committee and a compensation committee.
Audit
Committee
Our audit committee consists
of Paul L. Gillis, Tony C. Luh and Samuel Yuan-Ching Shen. We have determined that all the members of our audit committee satisfy the
“independence” requirements of Rule 10A-3 under the Exchange Act and Nasdaq Marketplace Rule 5605(a) and that Paul
L. Gillis is an audit committee financial expert as defined in the instructions to Item 16A of the Form 20-F. Paul L. Gillis serves as
the chairperson of the audit committee.
The
audit committee oversees our accounting and financial reporting processes and the audits of our consolidated financial statements.
Our audit committee is responsible for, among other things:
|
•
|
selecting
the independent auditor;
|
|
•
|
pre-approving
auditing and non-auditing services permitted to be performed by the independent auditor;
|
|
•
|
annually
reviewing the independent auditor’s report describing the auditing firm’s
internal quality control procedures, any material issues raised by the most recent internal
quality control review, or peer review, of the independent auditors and all relationships
between the independent auditor and our company;
|
|
•
|
setting
clear hiring policies for employees and former employees of the independent auditors;
|
|
•
|
reviewing
with the independent auditor any audit problems or difficulties and management’s
response;
|
|
•
|
reviewing
and approving all related party transactions on an ongoing basis;
|
|
•
|
reviewing
and discussing the annual audited consolidated financial statements with management and
the independent auditor;
|
|
•
|
reviewing and discussing with management and the independent auditor’s
major issues regarding accounting principles and financial statement presentations;
|
|
•
|
reviewing
reports prepared by management or the independent auditors relating to significant financial
reporting issues and judgments;
|
|
•
|
discussing
earnings press releases with management, as well as financial information and earnings
guidance provided to analysts and rating agencies;
|
|
•
|
reviewing
with management and the independent auditors the effect of regulatory and accounting
initiatives, as well as off-balance sheet structures, on our consolidated financial statements;
|
|
•
|
discussing
policies with respect to risk assessment and risk management with management, internal
auditors and the independent auditor;
|
|
•
|
timely
reviewing reports from the independent auditor regarding all critical accounting policies
and practices to be used by our company, all alternative treatments of financial information
within U.S. GAAP that have been discussed with management and all other material written
communications between the independent auditor and management;
|
|
•
|
establishing
procedures for the receipt, retention and treatment of complaints received from our employees
regarding accounting, internal accounting controls or auditing matters and the confidential,
anonymous submission by our employees of concerns regarding questionable accounting or
auditing matters;
|
|
•
|
annually
reviewing and reassessing the adequacy of our audit committee charter;
|
|
•
|
such
other matters that are specifically delegated to our audit committee by our board of
directors from time to time;
|
|
•
|
meeting
separately, periodically, with management, internal auditors and the independent auditor;
and
|
|
•
|
reporting
regularly to the full board of directors.
|
Compensation
Committee
Our compensation committee
consists of Samuel Yuan-Ching Shen and Tony C. Luh. We have determined that all the members of our compensation committee satisfy the
“independence” requirements of Rule 5605(a) of Nasdaq Stock Market Marketplace Rules.
Our
compensation committee is responsible for, among other things:
|
•
|
reviewing
and approving our overall compensation policies;
|
|
•
|
reviewing
and approving corporate goals and objectives relevant to the compensation of our Chief
Executive Officer, evaluating our Chief Executive Officer’s performance in light
of those goals and objectives, reporting the results of such evaluation to the board
of directors, and determining our Chief Executive Officer’s compensation level
based on this evaluation;
|
|
•
|
determining
the compensation level of our other executive officers;
|
|
•
|
making
recommendations to the board of directors with respect to our incentive-compensation
plan and equity-based compensation plans;
|
|
•
|
administering
our equity-based compensation plans in accordance with the terms thereof; and
|
|
•
|
such
other matters that are specifically delegated to the compensation committee by our board
of directors from time to time.
|
Corporate
Governance
Our
board of directors has adopted a code of business conduct and ethics, which is applicable to all of our directors, officers and
employees. We have made our code of business conduct and ethics publicly available on our website.
In
addition, our board of directors has adopted a set of corporate governance guidelines. The guidelines reflect certain guiding
principles with respect to our board’s structure, procedures and committees. The guidelines are not intended to change or
interpret any law, or our fourth amended and restated memorandum and articles of association.
Remuneration
and Borrowing
The
directors may determine the remuneration to be paid to the directors. The compensation committee will assist the directors in
reviewing and approving the compensation structure for the directors. The directors may exercise all the powers of the company
to borrow money and to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures or other securities
whether outright or as security for any debt obligations of our company or of any third-party.
Qualification
There
is no requirement for our directors to own any shares in our company in order for them to qualify as a director.
Employment
Agreements
We
have entered into employment agreements with each of our executive officers. We may terminate an executive officer’s employment
for cause, at any time, without notice or remuneration, for certain acts of the officer, including, but not limited to, a conviction
or plea of guilty to a felony, willful misconduct to our detriment or a failure to perform agreed duties. We may also terminate
an executive officer’s employment under certain conditions, including, but not limited to, incapacity or disability of the
officer, by a one-month prior written notice. An executive officer may terminate his or her employment with us for cause, at any
time for certain reasons, or by a one-month prior written notice.
Our
executive officers have also agreed not to engage in any activities that compete with us, or to directly or indirectly solicit
the services of our employees, during employment or for a period of two years after termination of employment. Each executive
officer has agreed to hold in strict confidence any confidential information or trade secrets of our company. Each executive officer
also agrees to comply with all material applicable laws and regulations related to his or her responsibilities at our company
as well as all material corporate and business policies and procedures of our company.
D. Employees
As
of December 31, 2020, we had a total of 22 employees, consisting of one executive, one staff member in sales, three staff member in
marketing, eight staff members in research and development, and nine staff members in other functions. We had a total of 19
employees as of December 31, 2019 and 75 employees as of December 31, 2018
The
remuneration package for our employees includes salary, sales commissions and employee share option programs. In accordance with
applicable regulations in China, we participate in a number of social insurance schemes, namely, a pension contribution plan,
a medical insurance plan, an unemployment insurance plan, a personal injury insurance plan, a maternity insurance and a housing
reserve fund for the benefit of all of our employees. We have not experienced any material labor disputes or disputes with the
labor department of the PRC government since our inception.
E. Share
Ownership
The
following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange
Act, of our ordinary shares as of the date of this annual report (unless otherwise indicated) by:
|
•
|
each
of our directors and executive officers; and
|
|
•
|
each
person known to us to own beneficially more than 5% of our ordinary shares.
|
Beneficial
ownership is determined in accordance with the rules of the SEC and generally. includes voting power or investment power with respect
to securities. The number of ordinary shares beneficially owned including ordinary shares such person has the right to acquire within
60 days after the date of this annual report. Such shares, however, are not deemed to be outstanding and beneficially owned for the purpose
of computing the percentage ownership of any other shareholder. The total number of ordinary shares issued and outstanding as of March
31, 2021 was 3,472,895,329 (excluding 127,963,800, ordinary shares in the form of ADSs that are reserved for issuance upon the exercise
of share awards).
|
|
Ordinary Shares
Beneficially Owned
|
|
|
|
|
|
|
Number
|
|
|
Percentage (%)
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
Hua Zhou(1)
|
|
|
*
|
|
|
|
*
|
|
Haohan Xu(2)
|
|
|
—
|
|
|
|
—
|
|
Samuel Yuan-Ching Shen (3)
|
|
|
—-
|
|
|
|
—
|
|
Longming Wu(4)
|
|
|
*
|
|
|
|
*
|
|
Xiaoyu Li(5)
|
|
|
*
|
|
|
|
*
|
|
Paul L. Gillis(6)
|
|
|
—
|
|
|
|
—
|
|
Tony C. Luh(7)
|
|
|
*
|
|
|
|
*
|
|
Cong Huang(8)
|
|
|
—
|
|
|
|
—
|
|
Hao Liu(9)
|
|
|
—
|
|
|
|
—
|
|
Erez Simha(10)
|
|
|
37,008,000
|
|
|
|
1.07
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
Jianming Jing(11)
|
|
|
453,998,870
|
|
|
|
13.07
|
|
Xiaojian Xu(12)
|
|
|
322,345,938
|
|
|
|
9.28
|
|
|
|
Ordinary
Shares
Beneficially Owned
|
|
|
|
|
|
|
Number
|
|
|
Percentage (%)
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
Universal Hunter (BVI) Limited(13)
|
|
|
216,825,600
|
|
|
|
6.24
|
|
*
Less than 1% of our total issued and outstanding shares.
|
(1)
|
The
business address of Ms. Zhou is 128 Weihai Road, Room 4-3-601, Rizhao, Shandong Province,
People’s Republic of China.
|
|
(2)
|
The
business address of Mr. Haohan Xu is 12 East 49 Street, 17th Floor, New York, NY, 10017,
United States of America.
|
|
(3)
|
The
business address of Mr. Samuel Yuan-Ching Shen is F1.43, Lane 258, Xiangyang Road, Nangang
District, Taipei 11551, Taiwan.
|
|
(4)
|
The
business address of Mr. Wu is Room 601, Building No. 4, No. 89 Jiangxi Road, Shinan District,
Qingdao, Shandong Province, People’s Republic of China.
|
|
(5)
|
The
business address of Ms. Li is 6-2-301 Xi Er Qi Zhi College, Beijing, People’s Republic
of China.
|
|
(6)
|
The
business address of Mr. Gillis is Central Park, 6 Chao Wai Da Jie, Chaoyang District,
Beijing 100020, People’s Republic of China.
|
|
(7)
|
The
business address of Mr. Luh is c/o Dragon Venture, Inc., 55 East 3rd Avenue, San Mateo,
CA 94401.
|
|
(8)
|
The
business address of Mr. Huang is Floor 13, The international Fintech Center, 10 Meilin
Kaifeng Road Futian District, Shenzhen, China.
|
|
(9)
|
The
business address of Mr. Liu is Floor 7, West side, Block B. Building 7, Shenzhen Bay
Ecological Science Park, Nanshan District, Shenzhen, China.
|
|
(10)
|
Representing 37,008,000 ordinary shares issuable upon the vesting of
restricted share units held by Mr. Erez Simha as of the date of this annual report.
The
business address of Mr. Simha is 1675 7th Avenue, New York, NY 20036, USA.
|
|
(11)
|
Representing 453,998,870
ordinary shares held by Jianming Jing. The business address of Mr. Jing is No. 01, Yizu, Qinghuai Shequ,Zhen’an Xian, Shangluo
City, Shanxi Province, China .
|
|
(12)
|
Representing 322,345,938 ordinary shares held by Xiaojian Xu. The business address of Mr. Xu is No. 9, Wuzu, Dongwan Cun, Gaoqiao Zhen, Xiinning Xian, Hunan, China.
|
|
(13)
|
Representing
216,825,600 ordinary shares owned by Universal Hunter (BVI) Limited, a
British Virgin Islands company controlled by Tuo Su, the principal business address of
which is Room 505, Building No. 23, Yijuyuan, Pengjiang District, Jiangmen, Guangdong
Province, People’s Republic of China.
|
As
of March 31, 2021, we had 3,472,895,329 ordinary shares issued and outstanding (excluding 127,963,800 ordinary shares in the form
of ADSs that are reserved for issuance upon the exercise of share awards). To our knowledge, we had five record shareholders in
the United States, including Citibank, N.A. The number of beneficial owners of our ADSs in the United States is likely to be much
larger than the number of record holders of our ordinary shares in the United States.
None
of our existing shareholders has voting rights that will differ from the voting rights of other shareholders. We are not aware
of any arrangement that may, at a subsequent date, result in a change of control of our company.
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major
Shareholders
Please refer to “Item
6. Directors, Senior Management and Employees—E. Share Ownership.”
B. Related
Party Transactions
Contractual
Arrangements with Our VIEs and Their Respective Shareholders
Due
to certain restrictions under PRC law on foreign ownership of businesses engaged in internet businesses, we conduct our operations
in China principally through contractual arrangements among (i) our wholly-owned PRC subsidiary, Lianji Future, and (ii) Mercurity
Beijing and Lianji, and their respective subsidiaries and shareholders. For a description of these contractual arrangements, see
“Item 4. Information on the Company—C. Organizational Structure.”
Related
Party Transactions
As of December 31, 2020,
we had US$665,916 due from Mr. Kaiming Hu, a principal shareholder as of December 31, 2020, related to capital contribution and US$30,866
payable of payroll tax reimbursement.
Employment
Agreements
See
“Item 6. Directors, Senior Management and Employees—C. Board Practices—Employment Agreements.”
Share
Options
See
“Item 6. Directors, Senior Management and Employees—B. Compensation—Compensation of Directors and Executive
Officers—Share Incentive Plan.”
Related
Party Transactions with Mr. Haohan Xu
Acquisition
of Mercurity Limited
On
May 21, 2019, we entered into a share purchase agreement with Mercurity Limited (formerly known as Unicorn Investment Limited)
and Mr. Haohan Xu, one of our shareholders, pursuant to which we acquired all the issued and outstanding shares of Mercurity Limited
held by Mr. Haohan Xu, in consideration for the issuance of 632,660,858 new ordinary shares.
Registration
Rights Agreement with Mr. Haohan Xu
On
May 21, 2019, in connection with our acquisition of Mercurity Limited in consideration for the issuance of 632,660,858 new ordinary
shares to the former shareholder of Mercurity Limited, Mr. Haohan Xu, we entered into a registration rights agreement with Mr.
Haohan Xu, pursuant to which we agreed to provide Mr. Haohan Xu with certain registration rights in respect of our ordinary shares
held by him.
Upon
receipt of a written request from the holder of 10% of the registrable securities then outstanding requesting us effect a registration
under the Securities Act covering all of part of the shares held by them, we shall, as soon as it is practicable, but in no event
later than ninety days after receipt of such written request, file with the SEC, and use our reasonable best efforts to cause
to be declared effective, a registration statement, or a shelf registration statement. However, we shall not be obligated to effect
any such registration if the aggregate price (net of any underwriters’ discounts or commissions) of the sale of shares relating
to such registration is less than US$5,000,000.
If,
at any time, we file a registration statement with the SEC, the holder of registration rights under this agreement will be entitled,
subject to certain exceptions, to exercise “piggyback” registration rights requiring us to include in any such registration
that number of shares held by him, subject to certain prescribed limitations provided in the registration rights agreement.
We
may, on a limited number of occasions, and in certain prescribed circumstances, delay the filing or effectiveness of any registration
statement required to be filed pursuant to the registration rights agreement.
C. Interests
of Experts and Counsel
Not
applicable.
ITEM
8. FINANCIAL INFORMATION
A. Consolidated
Statements and Other Financial Information
Please refer to “Item
18. Financial Statements” for our audited consolidated financial statements filed as part of this annual report.
Legal Proceedings
From time to time, we may become a party to various legal or administrative
proceedings arising in the ordinary course of our business, including actions with respect to intellectual property infringement, breach
of contract and labor and employment claims. Excepts as otherwise disclosed in this annual report, we are currently not a party to, and
we are not aware of any threat of, any legal or administrative proceedings that, in the opinion of our management, are likely to have
any material and adverse effect on our business, financial condition, cash flows or results of operations.
Dividend
Policy
Since
our inception, we have not declared or paid any dividends on our ordinary shares. We have no present plan to pay any dividends
on our ordinary shares in the foreseeable future. We intend to retain most, if not all, of our available funds and any future
earnings to operate and expand our business.
Any
future determination to pay dividends will be made at the discretion of our board of directors subject to certain restrictions
under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always
that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall
due in the ordinary course of business. In addition, our shareholders may declare a dividend at a general meeting of our company.
Our board of directors’ decision to declare and pay dividends may be based on a number of factors, including our future
operations and earnings, capital requirements and surplus, the amount of distributions, if any, received by us from our PRC subsidiary,
our general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If
we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of
the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will
be paid in U.S. dollars.
We
are a holding company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and
ADS holders, we will rely on dividends distributed by Our WFOE. Certain payments from our PRC subsidiary to us are subject to
PRC taxes, such as withholding income tax. In addition, regulations in China currently permit payment of dividends of a PRC company
only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting
standards and regulations in China. Our PRC subsidiary is required to set aside at least 10% of its after-tax profit based on
PRC accounting standards every year to a statutory common reserve fund until the aggregate amount of such reserve fund reaches
50% of the registered capital of such subsidiary. Such statutory reserves are not distributable as loans, advances or cash dividends.
Our PRC subsidiary may set aside a certain amount of its after-tax profits to other funds at its discretion. These reserve funds
can only be used for specific purposes and are not transferable to the company’s parent in the form of loans, advances or
dividends. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure and Dependence
on our Contractual Arrangements with our Affiliates—We rely principally on dividends and other distributions on equity paid
by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we might have. Any limitation on the ability
of our PRC and Hong Kong subsidiaries to pay dividends to us could have an adverse effect on our ability to conduct our business.”
B. Significant
Changes
We
are headquartered in Beijing, China, which has been seriously impacted by the COVID-19 epidemic. The severity of the current COVID-19
pandemic resulted in lockdowns, travel restrictions and quarantines imposed by the PRC government. We have been adversely affected
by the foregoing measures and experienced disruption to our business operations, such as closure of office facilities and shortage
of human resources.
Except
as disclosed in this Item 8B or elsewhere in this annual report, we have not experienced any significant changes since the date
of our audited consolidated financial statements included in this annual report.
ITEM
9. THE OFFER AND LISTING.
A. Offer
and Listing Details
See
“C. Markets.”
B. Plan
of Distribution
Not
applicable.
C. Markets
Our
ADSs are listed on The Nasdaq Capital Market under the symbol “MFH.” Each ADS represents 360 ordinary shares.
D. Selling
Shareholders
Not
applicable.
E. Dilution
Not
applicable.
F. Expenses
of the Issue
Not
applicable.
ITEM
10. ADDITIONAL INFORMATION
A. Share
Capital
Not
applicable.
B. Memorandum
and Articles of Association
We
are a Cayman Islands exempted company with limited liability and our affairs are governed by our memorandum and articles of association,
and the Companies Act (As Revised), of the Cayman Islands, which is referred to as the Companies Act below. The following are
summaries of material provisions of our fourth amended and restated memorandum and articles of association and the Companies Act
insofar as they relate to the material terms of our ordinary shares.
Registered
Office and Objects
Our
registered office in the Cayman Islands is at Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman KY1-1104,
Cayman Islands. The objects for which our company is established are unrestricted and we have full power and authority to carry
out any object not prohibited by the Companies Act, as amended from time to time, or any other law of the Cayman Islands.
Board
of Directors
A director is not required
to hold any shares in our company by way of qualification. A director who to his knowledge is in any way, whether directly or indirectly,
interested in a contract or arrangement or proposed contract or arrangement with us shall declare the nature of his interest at the meeting
of the board of directors at which the question of entering into the contract or arrangement is first considered, if he knows his interest
then exists, or in any other case at the first meeting of the board of directors after he knows that he is or has become so interested.
Subject to any separate requirement for the approval of the audit committee of the board of directors under applicable law or the listing
rules of Nasdaq, and unless disqualified by the chairman of the relevant board meeting, such director may vote with respect to any contract,
proposed contract or arrangement in which he is so interested. A director may exercise all the powers of our company to raise or borrow
money, and to mortgage or charge all or any part of its undertaking, property and assets (present and future) and uncalled capital, and
issue debentures, bonds or other securities, whether outright or as collateral security for any debt, liability or obligation of our company
or of any third-party. The directors may receive such remuneration as our board may from time to time determine. There is no age limit
requirement with respect to the retirement or non-retirement of a director. See also “Item 6. Directors, Senior Management and Employees—C.
Board Practices.”
Ordinary
Shares
General
All
of our issued and outstanding ordinary shares are fully paid and non-assessable. Our ordinary shares are issued in registered
form and are issued when registered in our register of members. Our shareholders who are non-residents of the Cayman Islands may
freely hold and vote their ordinary shares. Our fourth amended and restated memorandum and articles of association do not permit
us to issue bearer shares.
Dividends
The
holders of our ordinary shares are entitled to such dividends as may be declared by our shareholders or board of directors subject
to the Companies Act and to the fourth amended and restated articles of association. Under Cayman Islands law, dividends may be
declared and paid only out of funds legally available therefor, namely out of either profit or our share premium account, and
provided further that a dividend may not be paid if this would result in our company being unable to pay its debts as they fall
due in the ordinary course of business.
Voting
Rights
Each
ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote. Voting at any meeting
of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any one
shareholder present in person or by proxy.
An
ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of votes attached to the
ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of at least two-thirds of
votes cast attached to the ordinary shares in a meeting. A special resolution will be required for important matters such as a
change of name or making changes to our memorandum and articles of association.
General
Meetings of Shareholders
Shareholders’
meetings may be convened by our board of directors. Cayman Islands law provides shareholders with only limited rights to requisition
a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these
rights may be provided in a company’s articles of association. Our fourth amended and restated articles of association allow
our shareholders holding shares representing in aggregate not less than 30% of our voting share capital in issue, to requisition
an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put
the resolutions so requisitioned to a vote at such meeting; however, our fourth amended and restated articles of association do
not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings
not called by such shareholders. Advance notice in writing of at least ten clear days is required for the convening of our annual
general shareholders’ meeting and any other general meeting of our shareholders. A quorum required for a meeting of shareholders
consists of at least two shareholders present or by proxy, representing not less than one-third in nominal value of the total
issued voting shares in our company.
Transfer
of Ordinary Shares
Subject
to the restrictions contained in our fourth amended and restated articles of association, as applicable, any of our shareholders
may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form
approved by our board of directors.
Our
board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully
paid up to a person of whom it does not approve, or any share issued under any share incentive scheme for employees upon which
a restriction on transfer imposed thereby still subsists. Our board of directors may also decline to register any transfer of
any ordinary share unless (a) the instrument of transfer is lodged with us or such other place at which the register of members
is kept in accordance with Cayman Islands law, accompanied by the certificate for the ordinary shares to which it relates and
such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer;
(b) the instrument of transfer is in respect of only one class of shares; (c) the instrument of transfer is properly stamped,
if required and; (e) a fee of such maximum sum as the Nasdaq Capital Market may determine to be payable or such lesser sum as
the board may from time to time require is paid to us in respect thereof.
If
our directors refuse to register a transfer they are required, within three months after the date on which the instrument of transfer
was lodged, to send to each of the transferor and the transferee notice of such refusal.
The
registration of transfers may, after compliance with any notice requirement of the Nasdaq Capital Market, be suspended and the
register closed at such times and for such periods as our directors may from time to time determine; provided, however, that the
registration of transfers shall not be suspended nor the register closed for more than 30 days in any year as our directors may
determine.
Liquidation
On
a return of capital on winding up or otherwise (other than on redemption or purchase of ordinary shares), assets available for
distribution among the holders of ordinary shares will be distributed among the holders of the ordinary shares on a pro rata basis.
If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed
so that the losses are borne by our shareholders proportionately.
Calls
on Ordinary Shares and Forfeiture of Ordinary Shares
Our
board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a notice
served to such shareholders at least 14 clear days prior to the specified time of payment. The ordinary shares that have been
called upon and remain unpaid are subject to forfeiture.
Share
Repurchases
We
are empowered under our fourth amended and restated memorandum of association to purchase our shares subject to the Companies
Act and our fourth amended and restated articles of association. Our fourth amended and restated articles of association provide
that this power is exercisable by our board of directors in such manner, upon such terms and subject to such conditions as it
in its absolute discretion thinks fit subject to the Companies Act and, where applicable, the rules of the Nasdaq Capital Market
and the applicable regulatory authority.
Variations
of Rights of Shares
If
at any time our share capital is divided into different classes of shares, all or any of the special rights attached to any class
of shares may, subject to the provisions of the Companies Act, be varied, modified or abrogated with the sanction of a special
resolution passed at a separate general meeting of the holders of the shares of that class. Consequently, the rights of any class
of shares cannot be detrimentally altered without a majority of two-thirds of the vote of all of the shares in that class. The
special rights conferred upon the holders of the shares of any class issued with preferred or other rights will not, unless otherwise
expressly provided by the terms of issue of the shares of that class, be deemed to be varied, modified or abrogated by the creation
or issue of further shares ranking pari passu with such existing class of shares.
Inspection
of Books and Records
Holders
of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders
or our corporate records (except for our memorandum and articles of association and our register of mortgages and charges). However,
our fourth amended and restated articles of association provide our shareholders with the right to inspect our list of shareholders
(on such days as our board of directors shall determine) and to receive annual audited financial statements.
Changes
in Capital
We
may from time to time by ordinary resolution: (a) increase the share capital by such sum, to be divided into shares of such classes
and amount, as the resolution shall prescribe; (b) consolidate and divide all or any of our share capital into shares of a larger
amount than our existing shares; (c) without prejudice to the powers of the board of directors under our articles of association,
divide our shares into several classes and without prejudice to any special rights previously conferred on the holders of existing
shares attach thereto respectively and preferential, deferred, qualified or special rights, privileges, conditions or such restrictions
which in the absence of any such determination by the Company in general meeting, as the board of directors may determine (d)
sub-divide our existing shares, or any of them into shares of a smaller amount; or (e) cancel any shares which, at the date of
the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of our share capital
by the amount of the shares so cancelled. We may by special resolution reduce our share capital or any capital redemption reserve
in any manner permitted by law.
Register
of Members
Under
Cayman Islands law, we must keep a register of members and there should be entered therein: (a) the names and addresses of the
members, together with a statement of the shares held by each member, and such statement shall confirm (i) the amount paid or
agreed to be considered as paid, on the shares of each member; (ii) the number and category of shares held by each member, and
(iii) whether each relevant category of shares held by a member carries voting rights under the articles of association of the
company, and if so, whether such voting rights are conditional; (b) the date on which the name of any person was entered on the
register as a member; and (c) the date on which any person ceased to be a member.
Under
Cayman Islands law, the register of members of our company is prima facie evidence of the matters set out therein (i.e. the register
of members will raise a presumption of fact on the matters referred to above unless rebutted) and a member registered in the register
of members should be deemed as a matter of Cayman Islands law to have legal title to the shares as set against its name in the
register of members. Once our register of members has been updated, the shareholders recorded in the register of members will
be deemed to have legal title to the shares set against their name.
If
the name of any person is incorrectly entered in or omitted from our register of members, or if there is any default or unnecessary
delay in entering on the register the fact of any person having ceased to be a member of our company, the person or member aggrieved
(or any member of our company or our company itself) may apply to the Cayman Islands Grand Court for an order that the register
be rectified, and the Court may either refuse such application or it may, if satisfied of the justice of the case, make an order
for the rectification of the register.
Differences
in Corporate Law
The
Companies Act is derived, to a large extent, from the older Companies Acts of England but does not follow recent statutory enactments
in England. In addition, the Companies Act differs from laws applicable to United States corporations and their shareholders.
Set forth below is a summary of the significant differences between the provisions of the Companies Act applicable to us and the
laws applicable to companies incorporated in the United States.
Mergers
and Similar Arrangements
The
Companies Act permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman
Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent companies and the
vesting of their undertaking, property and liabilities in one of such companies as the surviving company and (b) a “consolidation”
means the combination of two or more constituent companies into a combined company and the vesting of the undertaking, property
and liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors
of each constituent company must approve a written plan of merger or consolidation, which must then be authorized by (a) a special
resolution of the shareholders of each constituent company, and (b) such other authorization, if any, as may be specified in such
constituent company’s articles of association.
The
written plan of merger or consolidation must be filed with the Registrar of Companies together with a declaration as to the solvency
of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking
that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company
and that notification of the merger or consolidation will be published in the Cayman Islands Gazette. Dissenting shareholders
have the right to be paid the fair value of their shares (which, if not agreed between the parties, will be determined by the
Cayman Islands court) if they follow the required procedures, subject to certain exceptions. Court approval is not required for
a merger or consolidation which is effected in compliance with these statutory procedures.
In
addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement
is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who
must, in addition, represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that
are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the
meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder
has the right to express to the court the view that the transaction ought not to be approved, the Grand Court of the Cayman Islands
can be expected to approve the arrangement if it determines that (a) the statutory provisions as to the required majority vote
have been met; (b) the shareholders have been fairly represented at the meeting in question and the statutory majority are acting
bona fide without coercion of the minority to promote interests adverse to those of the class; (c) the arrangement is such that
may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and (d) the arrangement
is not one that would more properly be sanctioned under some other provision of the Companies Act .
If
an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights,
which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive
payment in cash for the judicially determined value of the shares.
When
a takeover offer is made and accepted by holders of 90% of the shares affected within four months, the offeror may, within a two-month
period commencing on the expiration of such four month period, require the holders of the remaining shares to transfer such shares
on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in
the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
Shareholders’
Suits
In
principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be brought by a minority
shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands,
there are exceptions to the foregoing principle, including when (a) a company acts or proposes to act illegally or ultra vires;
(b) the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority
vote that has not been obtained; and (c) those who control the company are perpetrating a “fraud on the minority.”
Indemnification
of Directors and Executive Officers and Limitation of Liability
Cayman
Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers
and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy,
such as to provide indemnification against civil fraud or the consequences of committing a crime. Our fourth amended and restated
memorandum and articles of association permit indemnification of officers and directors for losses, damages, costs and expenses
incurred in their capacities as such unless such losses or damages arise from dishonesty or fraud which may attach to such directors
or officers. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware
corporation. In addition, we intend to enter into indemnification agreements with our directors and senior executive officers
that will provide such persons with additional indemnification beyond that provided in our fourth amended and restated memorandum
and articles of association.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling
us under the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Anti-Takeover
Provisions in the Memorandum and Articles of Association
Some
provisions of our fourth amended and restated memorandum and articles of association may discourage, delay or prevent a change
in control of our company or management that shareholders may consider favorable, including provisions that authorize our board
of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and
restrictions of such preference shares without any further vote or action by our shareholders.
However,
under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our memorandum and articles
of association, as amended and restated from time to time, for what they believe in good faith to be in the best interests of
our company.
Directors’
Fiduciary Duties
As
a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company
and therefore it is considered that he owes the following duties to the company—a duty to act bona fide in the best interests
of the company, a duty not to make a profit based on his or her position as director (unless the company permits him to do so)
and a duty not to put himself in a position where the interests of the company conflict with his or her personal interest or his
or her duty to a third-party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It
was previously considered that a director need not exhibit in the performance of his or her duties a greater degree of skill than
may reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have
moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed
in the Cayman Islands.
In
addition, directors of a Cayman Islands company must not place themselves in a position in which there is a conflict between their
duty to the company and their personal interests. However, this obligation may be varied by the company’s articles of association,
which may permit a director to vote on a matter in which he has a personal interest provided that he has disclosed that nature
of his interest to the board. Our fourth amended and restated memorandum and articles of association provides that a director
with an interest (direct or indirect) in a contract or arrangement or proposed contract or arrangement with the company must declare
the nature of his interest at the meeting of the board of directors at which the question of entering into the contract or arrangement
is first considered, if he knows his interest then exists, or in any other case at the first meeting of the board of directors
after he is or has become so interested.
A
general notice may be given at a meeting of the board of directors to the effect that (i) the director is a member/officer of
a specified company or firm and is to be regarded as interested in any contract or arrangement which may after the date of the
notice in writing be made with that company or firm; or (ii) he is to be regarded as interested in any contract or arrangement
which may after the date of the notice in writing to the board of directors be made with a specified person who is connected with
him, will be deemed sufficient declaration of interest. Following the disclosure being made pursuant to our fourth amended and
restated memorandum and articles of association and subject to any separate requirement for audit committee approval under applicable
law or the listing rules of Nasdaq, and unless disqualified by the chairman of the relevant board meeting, a director may vote
in respect of any contract or arrangement in which such director is interested and may be counted in the quorum at such meeting.
However, even if a director discloses his interest and is therefore permitted to vote, he must still comply with his duty to act
bona fide in the best interest of our company.
In
comparison, under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its
shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director
act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty,
a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant
transaction. The duty of loyalty requires that a director act in a manner he or she reasonably believes to be in the best interests
of the corporation. He or she must not use his or her corporate position for personal gain or advantage. This duty prohibits self-dealing
by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed
by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director
are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best
interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties.
Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the
transaction, and that the transaction was of fair value to the corporation.
Shareholder
Proposals
Under
the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders,
provided it complies with the notice provisions in the governing documents. The Delaware General Corporation Law does not provide
shareholders an express right to put any proposal before the annual meeting of shareholders, but in keeping with common law, Delaware
corporations generally afford shareholders an opportunity to make proposals and nominations provided that they comply with the
notice provisions in the certificate of incorporation or bylaws. A special meeting may be called by the board of directors or
any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
There
are no statutory requirements under Cayman Islands law allowing our shareholders to requisition a shareholders’ meeting.
However, under our fourth amended and restated articles of association, on the requisition of shareholders representing not less
than 30% of the voting rights entitled to vote at general meetings, the board shall convene an extraordinary general meeting.
As an exempted Cayman Islands company, we are not obliged by law to call shareholders’ annual general meetings. Our fourth
amended and restated articles of association provide that we may (but shall not be obliged to) in each calendar year hold a general
meeting as our annual general meeting.
Cumulative
Voting
Under
the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s
certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority
shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder
is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director.
As permitted under Cayman Islands law, our fourth amended and restated articles of association do not provide for cumulative voting.
As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal
of Directors
Under
the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the
approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise.
Under our fourth amended and restated articles of association, directors may be removed by an ordinary resolution of shareholders.
Transactions
with Interested Shareholders
The
Delaware General Corporation Law contains a business combination statute applicable to Delaware public corporations whereby, unless
the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation or
bylaws that is approved by its shareholders, it is prohibited from engaging in certain business combinations with an “interested
shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder
generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting stock or who
or which is an affiliate or associate of the corporation and owned 15% or more of the corporation’s outstanding voting stock
within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for
the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to
the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination
or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of
a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
Cayman
Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware
business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant
shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and for
a proper corporate purpose and not with the effect of constituting a fraud on the minority shareholders.
Dissolution;
Winding Up
Under
the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved
by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of
directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware
corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions
initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands
or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution
of its members. The court has authority to order winding up in a number of specified circumstances including where it is, in the
opinion of the court, just and equitable to do so.
Under
the Companies Act of the Cayman Islands and our fourth amended and restated articles of association, our company may be dissolved,
liquidated or wound up by a special resolution of our shareholders. The court has authority to order winding up in a number of
specified circumstances including where it is, in the opinion of the court, just and equitable to do so.
Variation
of Rights of Shares
Under
the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of
the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and
our fourth amended and restated articles of association, if our share capital is divided into more than one class of shares, we
may vary the rights attached to any class only with the sanction of a special resolution passed at a separate meeting of the holders
of the shares of that class.
Amendment
of Governing Documents
Under
the Delaware General Corporation Law, a corporation’s certificate of incorporation may be amended only if adopted and declared
advisable by the board of directors and approved by a majority of the outstanding shares entitled to vote, and the bylaws may
be amended with the approval of a majority of the outstanding shares entitled to vote and may, if so provided in the certificate
of incorporation, also be amended by the board of directors. Under Cayman Islands law, our fourth amended and restated memorandum
and articles of association may only be amended by a special resolution of our shareholders.
Rights
of Non-Resident or Foreign Shareholders
There
are no limitations imposed by our fourth amended and restated memorandum and articles of association on the rights of non-resident
or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our fourth amended
and restated memorandum and articles of association that require our company to disclose shareholder ownership above any particular
ownership threshold.
Directors’
Power to Issue Shares
Subject
to applicable law, our board of directors is empowered to issue or allot shares or grant options and warrants with or without
preferred, deferred, qualified or other special rights or restrictions.
C. Material
Contracts
We have not entered into
any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the
Company,” elsewhere in this annual report or below.
D. Exchange
Controls
The Cayman Islands currently
has no exchange control regulations or currency restrictions. See “Item 4. Information on the Company—B. Business
Overview—Regulation—Regulations Relating to Foreign Exchange.”
E. Taxation
The
following is a general summary of the material Cayman Islands, People’s Republic of China and U.S. federal income tax consequences
relevant to an investment in our ADSs and ordinary shares. The discussion is not intended to be, nor should it be construed as,
legal or tax advice to any particular prospective purchaser. The discussion is based on laws and relevant interpretations thereof
as of the date of this annual report, all of which are subject to change or different interpretations, possibly with retroactive
effect. The discussion does not address U.S. state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands,
the People’s Republic of China and the United States. You should consult your own tax advisors with respect to the consequences
of acquisition, ownership and disposition of our ADSs and ordinary shares.
Cayman
Islands Taxation
The
Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and
there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied
by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution,
brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable
to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Payments
of dividends and capital in respect of the shares will not be subject to taxation in the Cayman Islands and no withholding will
be required on the payment of a dividend or capital to any holder of the Shares, nor will gains derived from the disposal of the
shares be subject to Cayman Islands income or corporation tax.
People’s
Republic of China Taxation
Under
the Enterprise Income Tax Law and the Regulations on the Implementation of the Enterprise Income Tax Law of the People’s
Republic of China, enterprises established outside of China but whose “de facto management body” is located in China
are considered “resident enterprises” for PRC tax purposes. Under the applicable implementation regulations, “de
facto management body” is defined as the organizational body that effectively exercises overall management and control over
production and business operations, personnel, finance and accounting, and properties of the enterprise. Substantially all of
our management is currently based in China, and may remain in China in the future. If we are treated as a “resident enterprise”
for PRC tax purposes, foreign enterprise holders of our ADSs or ordinary shares may be subject to a 10% PRC income tax upon dividends
payable by us and on gains realized on their sales or other dispositions of our ADSs or ordinary shares. See “Item 3. Key
Information—D. Risk Factors—Risks Relating to Doing Business in China—Under the PRC enterprise income tax law,
we could be classified as a ‘resident enterprise’ of China. Such classification could result in unfavorable tax consequences
to us and our non-PRC shareholders.” In addition, gains derived by our non-PRC individual shareholders from the sale of
our shares and ADSs may be subject to a 20% PRC withholding tax. It is unclear whether our non-PRC individual shareholders (including
our ADS holders) would be subject to any PRC tax on dividends obtained by such non-PRC individual shareholders in the event we
are determined to be a PRC resident enterprise. If any PRC tax were to apply to dividends realized by non-PRC individuals, it
would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. However, it is unclear
either whether our non-PRC shareholders would be able to claim the benefits of any tax treaties between their country of tax residence
and the PRC in the event that we are treated as a PRC resident enterprise.
Material
United States Federal Income Tax Considerations
The following summary describes
the material U.S. federal income tax consequences generally applicable to U.S. Holders (as defined below) of the ownership of our ordinary
shares and ADSs as of the date hereof. Except where noted, this summary deals only with ordinary shares and ADSs held as capital assets
for U.S. federal income tax purposes. As used herein, the term “United States Holder” or “U.S. Holders” means
a beneficial owner of our ordinary share or ADS that is for United States federal income tax purposes:
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an
individual citizen or resident of the United States;
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a corporation (or other entity treated as a corporation for U.S. federal
income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
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an
estate the income of which is subject to United States federal income taxation regardless
of its source; or
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a
trust if it (1) is subject to the primary supervision of a court within the United States
and one or more United States persons have the authority to control all substantial decisions
of the trust or (2) has a valid election in effect under applicable United States Treasury
regulations to be treated as a United States person.
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This summary does not represent
a detailed description of all of the U.S. federal income tax consequences, including those that may be applicable to U.S. Holders if
you are subject to special treatment under the United States federal income tax laws, such as::
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a broker-dealer in securities or currencies;
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a bank or other financial institution;
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a regulated investment company;
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a real estate investment trust;
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a tax-exempt organization (including a private foundation);
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Certain former U.S. citizens or long-term residents;
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a person holding our ordinary shares or ADSs as part of a hedging, integrated or conversion transaction, a constructive or wash sale or a straddle;
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a dealer or trader in securities that use the mark-to-market method of accounting;
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a person who owns or is deemed to own 10% or more of our stock (by voter or value);
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a partnership or other pass-through entity for U.S. federal income tax purposes (or an investor therein);
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a person whose “functional currency” for U.S. federal income tax purposes is not the United States dollar;
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a person who acquires our ordinary shares or ADSs through the exercise of an employee share option or otherwise as compensation; or
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persons holding our ordinary shares or ADSs in connection with a trade or business, permanent establishment, or fixed place of business outside the United States.
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In addition, this discussion
does not address any state, local, estate, gift, alternative minimum or non-United States tax considerations, special accounting rules
under Section 451(b) of the Code or the Medicare contribution tax on net investment income. Each U.S. Holder is urged to consult its
tax advisor regarding the U.S. federal, state, local and non-United States income and other tax considerations of an investment in our
ADSs or ordinary shares.
The discussion below is
based upon the provisions of the Code, final, temporary and proposed Treasury regulations promulgated thereunder, rulings, administrative
pronouncements and judicial decisions as of the date hereof. Such authorities may be interpreted differently, replaced, revoked or modified,
possibly with retroactive effect, so as to result in U.S. federal income tax consequences different from those discussed below. No ruling
has been sought from the Internal Revenue Service, or the IRS, with respect to any U.S. federal income tax consequences described below,
and there can be no assurance that the IRS or a court will not take a contrary position. In addition, this summary is based, in part,
upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed
in accordance with their terms.
If a partnership (or other
entity treated as a partnership for U.S. federal income tax purposes) holds our ordinary shares or ADSs, the tax treatment of a partner
in the partnership will generally depend upon the status of the partner and the activities of the partnership. Such partnership or their
partners should consult their tax advisors regarding an investment in our ordinary shares or ADSs.
This
summary does not contain a detailed description of all the United States federal income tax consequences that may be applicable
to you in light of your particular circumstances and, except as set forth below with respect to PRC tax considerations, does not
address the effects of any state, local or non-United States tax laws. If you are considering the purchase, ownership or disposition
of our ordinary shares or ADSs, you should consult your own tax advisors concerning the United States federal income tax consequences
to you in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction.
ADSs
If you hold ADSs, for U.S.
federal income tax purposes, you generally will be treated as the owner of the underlying ordinary shares that are represented by such
ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax. The U.S.
Treasury has expressed concerns that intermediaries in the chain of ownership between a U.S. holder of an ADS and the issuer of the underlying
share may be taking actions inconsistent with the beneficial ownership of the underlying share. Accordingly, the creditability of foreign
taxes, if any, could be affected by actions taken by such intermediaries if, as a result of such actions, the U.S. holder of the ADS
is not properly treated as the beneficial owner of the underlying share.
Taxation
of Dividends and Other Distributions on the ADSs
Subject
to the discussion under “—Passive Foreign Investment Company” below, the gross amount of any distributions on our ADSs
or ordinary shares (including any amounts withheld to reflect PRC withholding taxes) will be taxable as dividends, to the extent paid
out of our current or accumulated earnings and profits, as determined under United States federal
income tax principles. Such income (including withheld taxes) will be includable in a U.S Holder’s gross income as ordinary income
on the day actually or constructively received by the U.S Holder, in the case of the ordinary shares, or by the depositary, in the case
of ADSs. Such dividends will not be eligible for the dividends received-deduction allowed to corporations under the Code.
Dividends paid to certain
non-corporate United States Holders may be taxable at preferential rates applicable to long-term capital gain if we are treated as a “qualified
foreign corporation,” provided certain holding period requirements are met (as discussed below).A foreign corporation is treated
as a qualified foreign corporation with respect to dividends received from that corporation on ordinary shares (or ADSs backed by such
shares) that are readily tradable on an established securities market in the United States. Our ADSs are listed on the Nasdaq Capital
Market, and thus, pursuant to the United States Treasury Department guidance, our ADSs are treated as readily tradable on an established
securities market in the United States. Thus, we believe that dividends we pay on our ADSs will meet the conditions required for the reduced
tax rate. Since we do not expect that our ordinary shares will be listed on an established securities market, we do not believe that dividends
that we pay on our ordinary shares that do not back ADSs currently meet the conditions required for these reduced tax rates. There can
be no assurance that our ADSs will continue to be considered readily tradable on an established securities market in later years.
A qualified foreign corporation
also includes a foreign corporation that is eligible for the benefits of certain income tax treaties with the United States. In the event
that we are deemed to be a PRC resident enterprise under the PRC tax law, we believe that we would be eligible for the benefits of the
income tax treaty between the United States and the PRC (including any protocol thereunder), or the Treaty, and if we are eligible for
such benefits, dividends we pay on our ordinary shares, regardless of whether such shares are represented by ADSs or are readily tradable
on an established securities market in the United States, would be eligible for the reduced tax rates. For a discussion regarding whether
we may be classified as a PRC resident enterprise, see “Item 10. Additional Information—E. Taxation—People’s Republic
of China Taxation.”
Even if dividends we pay
on our ADSs or ordinary shares would be treated as paid by a qualified foreign corporation, non-corporate U.S. Holders will not be eligible
for the reduced tax rates if they do not hold our ADSs or ordinary shares for more than 60 days during the 121-day period beginning 60
days before the ex-dividend date or to the extent that such U.S. Holders elect to treat the dividend income as “investment income”
under the Code. In addition, the tax rate reduction will not apply if the recipient of a dividend is obligated to make related payments
with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has
been met. The U.S Holders should consult their tax advisors regarding the application of these rules in their particular circumstances.
Non-corporate U.S. Holders
will not be eligible for the reduced tax rate on any dividends received from us if we are a PFIC for the taxable year in which such dividends
are paid or for the preceding taxable year.
In the event that we are
deemed to be a PRC resident enterprise under the PRC tax law, a U.S. Holder may be subject to PRC withholding taxes on dividends paid
to the U.S. Holder with respect to our ADSs or ordinary shares. See “Item 10. Additional Information—E. Taxation—People’s
Republic of China Taxation.” In that case, PRC withholding taxes on dividends (limited, in the case of a U.S. holder who qualifies
for the benefits of the Treaty, to the extent not exceeding the applicable dividend withholding rate under the Treaty) generally will
be treated as foreign taxes eligible for credit against the U.S. Holder’s United States federal income tax liability. For purposes
of calculating the foreign tax credit, dividends paid on the ADSs or ordinary shares will be treated as foreign-source income and generally
will constitute passive category income. The rules governing the foreign tax credit are complex. U.S. Holders are urged to consult their
tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
To the extent that the amount
of any distribution exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal
income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis
of the ADSs or ordinary shares (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by a U.S. Holder
on a subsequent disposition of the ADSs or ordinary shares), and the balance in excess of adjusted basis will be taxed as capital gain
recognized on a sale or exchange. However, we do not expect to calculate our earnings and profits in accordance with United States federal
income tax principles. Therefore, U.S. Holders should expect that a distribution generally will be treated as a dividend (as discussed
above).
Passive
Foreign Investment Company
If we are a PFIC for any
taxable year during which a U.S. Holder holds our ADSs or ordinary shares, the U.S. Holder will generally be subject to the special tax
rules discussed below, regardless of whether we remain a PFIC, except if the U.S. Holder makes a timely mark-to-market election discussed
below.
These special tax rules
generally apply to any “excess distribution” (generally any distribution paid during a taxable year to a U.S. Holder which
is greater than 125% of the average annual distributions paid in the three preceding taxable years or, if shorter, the U.S. Holder’s
holding period for the ADSs or ordinary shares) we make to the U.S. Holder and any gain realized from a sale or other disposition of
our ADSs or ordinary shares. Distributions received in a taxable year that are greater than 125% of the average annual distributions
received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated
as excess distributions. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over the U.S Holder’s holding period for the ADSs or ordinary shares,
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the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC with respect to the U.S. Holder (each, a “pre-PFIC year”), will be treated as ordinary income, and
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the amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in effect for individuals or corporations, as appropriate, for that taxable year; and.
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the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each prior taxable year, other than a pre-PFIC year.
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If we are a PFIC for any
taxable year during which a U.S. Holder holds our ADSs or ordinary shares and any of our non-United States subsidiaries, including our
VIEs, is also a PFIC, the U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC
for purposes of the application of these rules. U.S. Holders are urged to consult their tax advisors regarding the application of the
PFIC rules to any of our subsidiaries, including our VIEs
As an alternative to the
excess distribution rules discussed above, a U.S. Holder of “marketable stock” in a PFIC may make a mark-to-market election
with respect to such stock. “Marketable stock” is generally stock that is regularly traded on a qualified exchange. Our ADSs,
but not our ordinary shares, will be treated as traded on a qualified exchange upon their listing on the Nasdaq Capital Market, which
constitutes a qualified exchange. We anticipate that our ADSs should qualify as being “regularly traded” but no assurance
can be given in this regard.
If the U.S. Holder makes
an effective mark-to-market election, which is generally effective for the taxable year for which the election is made and all subsequent
taxable years, the U.S. Holder will generally (i) include as ordinary income for each taxable year that we are a PFIC the excess, if
any, of the fair market value of the ADSs held at the end of the taxable year over the adjusted tax basis in the ADSs, and (ii) deduct
as an ordinary loss in each such taxable year the excess, if any, of the adjusted tax basis in the ADSs over their fair market value
at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market
election. The U.S. Holder’s adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market
election. Any gain the U.S. Holder recognizes upon the sale or other disposition of its ADSs in a year when we are a PFIC will be treated
as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income
as a result of the mark-to-market election. If we cease to be a PFIC, the U.S. Holder will not be required to take into account the gain
or loss described above during any period that we are not a PFIC. Because a mark-to-market election cannot technically be made for any
lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules with respect to such U.S. Holder’s
indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes.
U.S. Holders are urged to consult their tax advisors about the availability of the mark-to-market election, and whether making the election
would be advisable in their particular circumstances.
Instead of making a mark-to-market
election, a U.S. investor in a PFIC may generally mitigate the adverse consequences of the excess distribution rules described above
by electing to treat the PFIC as a “qualified electing fund” under the Code. However, we do not intend to provide the information
necessary for U.S. Holders to make such an election.
We expect to file annual
reports on Form 20-F with the U.S. Securities and Exchange Commission in which we will indicate whether we believe we were a PFIC for
the relevant taxable year. We do not intend to make any other annual determination or otherwise notify U.S. Holders regarding our status
as a PFIC for any taxable year. U.S. Holders are urged to consult their tax advisors regarding the U.S. federal income tax consequences
of holding our ADSs or ordinary shares if we are a PFIC in any taxable year.
If a U.S. Holder owns (or is deemed to
own) our ADSs or ordinary shares during any taxable year that we are a PFIC, the U.S. Holder must generally file an annual IRS Form 8621
or such other form as is required by the United States Treasury Department with respect to us. Taxation of Capital Gains
For U.S. federal income tax
purposes, a U.S. Holder will generally recognize gain or loss on any sale or exchange of our ADSs or ordinary shares in an amount equal
to the difference between the amount realized for the ADSs or ordinary shares and the U.S. Holder’s adjusted tax basis in the ADSs
or ordinary shares. Subject to the discussion under “—Passive Foreign Investment Company” above, such gain or loss will
generally be capital gain or loss. Any capital gain or loss will be long-term if the ADSs or ordinary shares have been held for more than
one year. The deductibility of capital losses may be subject to limitations.
Any such gain or loss the
U.S. Holder recognizes will generally be treated as United States source income or loss for foreign tax credit limitation purposes, which
will generally limit the availability of foreign tax credits. However, if we are treated as a PRC resident enterprise for PRC tax purposes
and PRC tax were imposed on any gain, and if the U.S. Holder is eligible for the benefits of the Treaty, the U.S. Holder may elect to
treat such gain as PRC source gain under the Treaty and, accordingly, the U.S. Holder may be able to credit the PRC tax against the U.S.
Holder’s United States federal income tax liability. If the U.S. Holder is not eligible for the benefits of the Treaty or fails
to make the election to treat any gain as PRC source, then the U.S. Holder generally would not be able to use the foreign tax credit
arising from any PRC tax imposed on the disposition of our ADSs or ordinary shares unless such credit can be applied (subject to applicable
limitations) against tax due on other income treated as derived from foreign sources. The U.S. Holder will be eligible for the benefits
of the Treaty if, for purposes of the Treaty, the U.S. Holder is a resident of the United States, and the U.S. Holder meets other factual
requirements specified in the Treaty. Because qualification for the benefits of the Treaty is a fact-intensive inquiry which depends
upon the particular circumstances of each investor, U.S. Holders are specifically urged to consult their tax advisors regarding their
eligibility for the benefits of the Treaty and the availability of the foreign tax credit and the election to treat any gain as PRC source
under their particular circumstances.
Information
Reporting and Backup Withholding
Payments
of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries
generally are subject to information reporting, and may be subject to backup withholding, unless (i) the U.S. Holder is a corporation
or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification
number and certifies that it is not subject to backup withholding.
Backup withholding is not
an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. holder’s
U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the IRS.
Foreign
Asset Reporting
Certain U.S. Holders who
are individuals (and under proposed regulations, certain entities) may be required to report information relating to an interest in our
ordinary shares or ADSs, subject to certain exceptions (including an exception for shares held in accounts maintained by U.S. financial
institutions) on IRS Form 8938. U.S. Holders are urged to consult their tax advisors regarding their information reporting obligations,
if any, with respect to their ownership and disposition of our ordinary shares or ADSs.
F. Dividends
and Paying Agents
Not
applicable.
G. Statement
by Experts
Not
applicable.
H. Documents
on Display
We
are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers.
Accordingly, we are required to file reports, including annual reports on Form 20-F, and other information with the SEC. As a
foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of proxy statements
to shareholders, and our executive officers, directors and principal shareholders are not subject to the insider short-swing profit
disclosure and recovery provisions of Section 16 of the Exchange Act.
All
information that we have filed with the SEC can be accessed through the SEC’s website at www.sec.gov. This information can
also be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C.
20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC
at 1-800-SEC-0330 for further information on the operation of the public reference rooms.
We
intend to furnish the depositary with our annual reports, which will include a review of operations and annual audited consolidated
financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meeting and other reports and
communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications
available to holders of ADSs and, upon our written request, will mail to all record holders of ADSs the information contained
in any notice of a shareholders’ meeting received by the depositary from us.
In
accordance with Nasdaq Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at ir.mercurity.com.
In addition, we will provide hard copies of our annual report free of charge to shareholders and ADS holders upon request.
I. Subsidiary
Information
For a list of our subsidiaries, see “Item 4. Information
on the Company—C. Organizational Structure.”
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign
Exchange Risk
Pursuant
to the agreements with our current customer, the service fees we receive from our customer are denominated in U.S. dollars. Substantially
all of our costs and operating expenses are paid in RMB. We do not believe that we currently have any significant direct foreign
exchange risk and have not used any derivative financial instruments to hedge our exposure to such risk.
From
July 21, 2005, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies.
For RMB against U.S. dollar, there was depreciation of approximately 5.7% and 1.3% in the years ended December 31, 2018 and 2019
respectively and appreciation of approximately 6.2% in the year ended December 31, 2020. It is difficult to predict how market
forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
To
the extent that we need to convert U.S. dollar into RMB for capital expenditures and working capital and other business purposes,
appreciation of RMB against U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely,
if we decide to convert RMB into U.S. dollar for the purpose of making payments for dividends on ordinary shares, strategic acquisitions
or investments or other business purposes, appreciation of U.S. dollar against RMB would have a negative effect on the U.S. dollar
amount available to us. In addition, a significant depreciation of the RMB against the U.S. dollar may significantly reduce the
U.S. dollar equivalent of our earnings or losses.
Interest
Rate Risk
Our
exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing
bank deposits and lending to the discontinued business that was disposed. We had net interest income of US$8,181 for the year
ended December 31, 2020. We had cash and cash equivalents of US$174,783 as of December 31, 2020. Assuming such amount of cash
and cash equivalents are held entirely in interest-bearing bank deposits, a hypothetical one percentage point (100 basis-point)
decrease in interest rates would decrease our interest income from these interest-bearing bank deposits for one year by approximately
US$1,748. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to, nor do we anticipate
being exposed to, material risks due to changes in market interest rates. However, our future interest income may fall short of
expectations due to changes in market interest rates.
ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt
Securities
Not
applicable.
B. Warrants
and Rights
Not
applicable.
C. Other
Securities
Not
applicable.
D. American
Depositary Shares
Fees
and Charges Our ADS Holders May Have to Pay
Citibank,
N.A. is our depositary. The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing
ordinary shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects
fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable
property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions
or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary
may generally refuse to provide fee-attracting services until its fees for those services are paid.
An
ADS holder will be required to pay the following fees under the terms of the deposit agreement:
Services:
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Fees:
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Issuance
of ADSs upon deposit of shares (excluding issuances as a result of distributions of shares)
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Up
to US$0.05 per ADS issued
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Cancellation
of ADSs
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Up
to US$0.05 per ADS cancelled
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Distribution
of cash dividends or other cash distributions (i.e., sale of rights and other entitlements)
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Up
to US$0.05 per ADS held
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Distribution
of ADSs pursuant to (i) stock dividends or other fee stock distributions, or (ii) exercise of rights to purchase additional ADSs
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Up
to US$0.05 per ADS held
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Distribution
of securities other than ADSs or rights to purchase additional ADSs (i.e., spin-off shares)
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Up
to US$0.05 per ADS held
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ADS
Services
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Up
to US$0.05 per ADS held on the applicable record date(s) established by the depositary
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The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
Prior to the acquisition of Mercurity
Limited, Mercurity limited formed contractual arrangements through its wholly owned subsidiary Lianji Future with the VIE. As a result
of the Company's acquisition of Mercurity limited, the Company through the Company’s wholly owned subsidiary, Lianji Future, has
(1) power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (2) the right
to receive economic benefits of the VIEs that could be significant to the VIEs. Accordingly, the Company is considered the primary beneficiary
of the VIEs and has consolidated the VIEs’ financial results of operations, assets, and liabilities in the Company’s consolidated
financial statements. The Company also believes that this ability to exercise control ensures that the VIE will continue to execute and
renew the exclusive business operation agreements and pay service fees to the Company. The ability to charge service fees in amounts
determined at the Company’s sole discretion, and by ensuring that the exclusive services agreements are executed and renewed indefinitely,
the Company has the right to receive substantially all of the economic benefits from the VIEs.
From January 1, 2020,the company adopted
the new CECL rule and recognizes its estimate of expected credit losses as an allowance to its account receivable.
The Group has determined to perform
the annual impairment tests on December 31 of each year. Prior to the acquisition of Mercurity Limited, goodwill was attributable to
the Food Supply Chain business which is classified as discontinued operation in the year ended December 31 2018. The impairment loss
of $105,818,351 was recognized for this business for the year ended December 31, 2018. The goodwill as of December 31, 2020 was attributable
solely to the Mercurity Limited and NBPay business and no impairment loss was recognized for the year ended December 31, 2020.
On November 24, 2020, the Board of
Directors approved the Company 2020 Share Incentive Plan (‘‘2020 Plan’’). The 2020 Plan permits the awards of
options, restricted shares, restricted share units or other types of awards approved by compensation committee of the board.
The Group recognized compensation cost
on the share options to employees under 2020 Plan on a straight-line basis over the requisite service period.
$nil, $nil and $286,132 ($182 common
stock and $285,950 additional paid-in capital) share-based compensation charged to operating expenses of continuing operations for the
years ended December 31, 2018, 2019 and 2020 under 2011 Plan. The share-based compensation of $56,705, $53,967 were credited to operating
expenses of discontinued operations for the years ended December 31, 2018 and 2019 under 2011 Plan, respectively. The Company’s
payroll in operating expenses for the year ended December 31, 2018 was substantially reduced in the year ended December 31, 2019, along
with a substantial reduction in the Company’s head-count of employees. The July 1, 2016 grants of both the 32,028,700 share options
and the 10,430,000 RSUs require participants have continuous employment to qualify for vesting of their benefits under the 2011 Plan.
Accordingly, during the year ended December 31, 2019, the credit to operating expenses of discontinued operations of $53,967 is net of
forfeitures related to terminated employees of $248,463 which represents prior charges for benefits that will never be received by the
former employees. In addition, during the year ended December 31, 2019, the net credit of $53,967 includes a reduced charge of discontinued
operations of $194,496 for the cost at benefits for remaining continuing employees (not terminated employees) still qualifying for benefits
under the 2011 Plan.
On April 13, 2021, the group entered
into a Share Subscription and Warrant Purchase Agreement with three investors to sell 537,143,470 ordinary shares and warrants purchase
up to 537,143,470 ordinary shares within one year at US$0.022340 per ordinary share for 172.9354 Bitcoin or approximately US$10,000,000.
The agreement is expected to be closed by May 15, 2021.