(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: As
of December 31, 2020, there were (i) 20,115,570 Class A ordinary shares issued and outstanding, par value US$0.0001 per share,
and (ii) 130,953,843 Class B ordinary shares issued and outstanding, par value US$0.0001 per share.
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act.
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
This annual report on Form 20-F contains
forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking
statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify these forward-looking statements
by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,”
“estimate,” “intend,” “plan,” “believe,” “likely to” or other similar
expressions. We have based these forward-looking statements largely on our current expectations and projections about future events
and financial trends that we believe may affect our financial condition, results of operations, business strategies and financial
needs. These forward-looking statements include, but are not limited to, statements about:
We would like to caution you not to place
undue reliance on these forward-looking statements and you should read these statements in conjunction with the risk factors disclosed
in “Item 3. Key Information—3.D. Risk Factors.” Other sections of this annual report include additional factors
which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk
factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties,
nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking
statements by these cautionary statements. We do not undertake any obligation to update or revise the forward-looking statements
except as required under applicable law. You should read this annual report and the documents that we reference in this annual
report completely and with the understanding that our actual future results may be materially different from what we expect.
You should not rely upon forward-looking
statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
Except where the context otherwise indicates and for the purpose
of this annual report only:
Our reporting currency is the Renminbi.
This annual report on Form 20-F also contains translations of certain foreign currency amounts into U.S. dollars for the convenience
of the reader. Unless otherwise stated, all translations from Renminbi to U.S. dollars were made at RMB6.5249 to US$1.00, representing
the mid-point reference rate set by Peoples’ Bank of China on December 31, 2020. We make no representation that the Renminbi
or U.S. dollar amounts referred to in this annual report 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 Renminbi into foreign exchange and through restrictions on foreign trade.
PART I
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not applicable.
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not applicable.
A.
|
SELECTED FINANCIAL DATA.
|
The following selected consolidated statement
of operations and comprehensive income (loss) data for the years ended December 31, 2018, 2019 and 2020, selected consolidated balance
sheet data as of December 31, 2019 and 2020, and selected consolidated cash flow data for the years ended December 31, 2018, 2019
and 2020 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The
following selected consolidated balance sheet data as of December 31, 2018 has been derived from our audited consolidated
financial statements not included in this annual report.
The selected consolidated financial data
should be read in conjunction with our consolidated financial statements and related notes and “Item 5. Operating and Financial
Review and Prospects” included elsewhere in this annual report. The consolidated financial statements are prepared and presented
in accordance with U.S. GAAP. Our historical results are not necessarily indicative of our results for any future periods.
The following table presents our selected
consolidated statements of operations and comprehensive income (loss) for the years indicated.
Selected Consolidated Statements of Operations and
|
|
For the Years Ended December 31,
|
|
Comprehensive Income (Loss):
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
225,271,564
|
|
|
|
319,181,424
|
|
|
|
766,013,586
|
|
|
|
117,398,517
|
|
Cost of revenues
|
|
|
(85,414,061
|
)
|
|
|
(146,167,843
|
)
|
|
|
(596,578,700
|
)
|
|
|
(91,431,087
|
)
|
Gross profit
|
|
|
139,857,503
|
|
|
|
173,013,581
|
|
|
|
169,434,886
|
|
|
|
25,967,430
|
|
Operating expenses
|
|
|
(39,054,908
|
)
|
|
|
(60,162,041
|
)
|
|
|
(322,851,417
|
)
|
|
|
(49,479,904
|
)
|
Income (loss) from operations
|
|
|
100,802,595
|
|
|
|
112,851,540
|
|
|
|
(153,416,531
|
)
|
|
|
(23,512,474
|
)
|
Other (expenses) income, net
|
|
|
(3,509,207
|
)
|
|
|
(7,517,988
|
)
|
|
|
11,363,289
|
|
|
|
1,741,527
|
|
Provision for income taxes
|
|
|
(8,075,596
|
)
|
|
|
(3,129,080
|
)
|
|
|
(2,904,681
|
)
|
|
|
(445,169
|
)
|
Net income (loss)
|
|
|
89,217,792
|
|
|
|
102,204,472
|
|
|
|
(144,957,923
|
)
|
|
|
(21,770,947
|
)
|
Less: Net income attributable to non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
6,209,945
|
|
|
|
951,730
|
|
Net income (loss) attributable to WiMi Hologram Cloud, Inc.
|
|
|
89,217,792
|
|
|
|
102,204,472
|
|
|
|
(151,167,868
|
)
|
|
|
(23,167,846
|
)
|
Other comprehensive income (loss)
|
|
|
1,759,288
|
|
|
|
1,589,076
|
|
|
|
(38,876,201
|
)
|
|
|
(5,958,130
|
)
|
Less: Comprehensive income attributable to non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
5,865,631
|
|
|
|
898,961
|
|
Comprehensive income (loss) attributable to WiMi Hologram Cloud, Inc.
|
|
|
90,977,080
|
|
|
|
103,793,548
|
|
|
|
(189,699,755
|
)
|
|
|
(29,073,207
|
)
|
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
100,000,000
|
|
|
|
100,000,000
|
|
|
|
129,439,604
|
|
|
|
129,439,604
|
|
Diluted
|
|
|
100,922,621
|
|
|
|
108,611,133
|
|
|
|
129,439,604
|
|
|
|
129,439,604
|
|
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.89
|
|
|
|
1.02
|
|
|
|
(1.17
|
)
|
|
|
(0.18
|
)
|
Diluted
|
|
|
0.88
|
|
|
|
0.94
|
|
|
|
(1.17
|
)
|
|
|
(0.18
|
)
|
Non-GAAP Financial Data:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income attributable to WiMi Hologram Cloud, Inc.
|
|
|
89,217,792
|
|
|
|
102,204,472
|
|
|
|
40,250,590
|
|
|
|
6,168,766
|
|
NON-GAAP WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
100,000,000
|
|
|
|
100,000,000
|
|
|
|
129,439,604
|
|
|
|
129,439,604
|
|
Diluted(2)
|
|
|
100,922,621
|
|
|
|
108,611,133
|
|
|
|
129,453,166
|
|
|
|
129,453,166
|
|
NON-GAAP EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.89
|
|
|
|
1.02
|
|
|
|
0.31
|
|
|
|
0.05
|
|
Diluted
|
|
|
0.88
|
|
|
|
0.94
|
|
|
|
0.31
|
|
|
|
0.05
|
|
(1)
|
See “Non-GAAP Financial Measures”.
|
(2)
|
The dilutive effect was due to 45,000 shares of unvested stock based compensation.
|
The following table presents our selected
consolidated balance sheets as of December 31, 2018, 2019 and 2020.
|
|
As of December 31,
|
|
Selected Consolidated Balance Sheet Data:
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
Current assets
|
|
|
213,295,430
|
|
|
|
177,511,440
|
|
|
|
616,425,842
|
|
|
|
94,472,841
|
|
Other assets
|
|
|
394,187,996
|
|
|
|
385,987,073
|
|
|
|
555,995,843
|
|
|
|
85,211,396
|
|
Total assets
|
|
|
607,483,426
|
|
|
|
563,498,513
|
|
|
|
1,172,421,685
|
|
|
|
179,684,237
|
|
Total liabilities
|
|
|
288,561,957
|
|
|
|
140,783,496
|
|
|
|
163,369,762
|
|
|
|
25,037,894
|
|
Total WiMi Hologram Cloud, Inc. shareholders’ equity
|
|
|
318,921,469
|
|
|
|
422,715,017
|
|
|
|
997,246,189
|
|
|
|
152,837,007
|
|
Non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
11,805,734
|
|
|
|
1,809,336
|
|
Total shareholders’ equity
|
|
|
318,921,469
|
|
|
|
422,715,017
|
|
|
|
1,009,051,923
|
|
|
|
154,646,343
|
|
The following table presents our selected
consolidated cash flow data for the years indicated.
|
|
For the Years Ended December 31
|
|
Selected Consolidated Cash Flow Data:
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
Net cash provided by (used in) operating activities
|
|
|
99,452,205
|
|
|
|
143,955,544
|
|
|
|
(66,960,681
|
)
|
|
|
(10,262,333
|
)
|
Net cash used in investing activities
|
|
|
(98,597,356
|
)
|
|
|
(126,479,892
|
)
|
|
|
(228,129,543
|
)
|
|
|
(34,962,918
|
)
|
Net cash provided by (used in) financing activities
|
|
|
137,493,993
|
|
|
|
(40,974,000
|
)
|
|
|
562,639,786
|
|
|
|
86,229,642
|
|
Effect of exchange rate on cash, cash equivalents and restricted cash
|
|
|
937,466
|
|
|
|
599,384
|
|
|
|
(28,489,442
|
)
|
|
|
(4,366,263
|
)
|
Net change in cash, cash equivalents and restricted cash
|
|
|
139,286,308
|
|
|
|
(22,898,964
|
)
|
|
|
239,060,120
|
|
|
|
36,638,128
|
|
Cash, cash equivalents and restricted cash, beginning of year
|
|
|
12,661,634
|
|
|
|
151,947,942
|
|
|
|
129,048,978
|
|
|
|
19,777,924
|
|
Cash, cash equivalents and restricted cash, end of year
|
|
|
151,947,942
|
|
|
|
129,048,978
|
|
|
|
368,109,098
|
|
|
|
56,416,052
|
|
Non-GAAP Financial Measures
In evaluating our business, we consider
and use the following non-GAAP financial measures as supplemental measures to review and assess our operating performance of non-GAAP
net income (loss). The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a
substitute for the financial information prepared in accordance with U.S. GAAP.
We define non-GAAP net income (loss) attributable to us as net income
(loss) before stock compensation expenses.
Although stock compensation is an important aspect
of the compensation of our employees, we exclude stock compensation expenses from non-GAAP net income (loss) attributable to us primarily
because they are non-cash expenses and are partially discretionary in nature, which is not necessarily indicative of our ongoing business
performance. We believe that it is useful to exclude stock compensation expenses for investors to better understand the long-term underlying
performance of our core operations and to facilitate comparison of our results to our prior periods and to our peer companies.
We present these non-GAAP financial measures because they are used
by our management to evaluate our operating performance and formulate our business plans. These non-GAAP financial measures enable our
management to assess our operating results without considering the impact of non-cash charges of stock compensation expenses.
These non-GAAP financial measures are not defined
under U.S. GAAP and are not presented in accordance with U.S. GAAP. These non-GAAP financial measures have limitations as analytical tools.
One of the key limitations of using these non-GAAP financial measures is that they do not reflect all items of income and expense that
affect our operations. Stock compensation expenses have been and may continue to be incurred in our business and are not reflected in
the presentation of non-GAAP net income (loss). Further, these non-GAAP financial measures may differ from the non-GAAP financial measures
used by other companies, including our peer companies, so their utility for comparison purposes may be limited.
We compensate for these limitations by reconciling
our non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures, which should be considered when evaluating
our performance. We encourage you to review our financial information in its entirety and not rely on a single financial measure.
The following tables reconcile our non-GAAP
net income attributable to us to the most directly comparable financial measures calculated in accordance with U.S. GAAP, which
are net loss (income) attributable to our ordinary shareholders.
Reconciliation of Net Income (Loss) Attributable to WiMi Hologram Cloud, Inc.
|
|
For the Years Ended December 31,
|
|
to Non-GAAP Net Income Attributable to WiMi Hologram Cloud, Inc.:
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
Net income (loss) attributable to WiMi Hologram Cloud, Inc.
|
|
|
89,217,792
|
|
|
|
102,204,472
|
|
|
|
(151,167,868
|
)
|
|
|
(23,167,846
|
)
|
Stock compensation expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
191,418,458
|
|
|
|
29,336,612
|
|
Non-GAAP net income attributable to WiMi Hologram Cloud, Inc.
|
|
|
89,217,792
|
|
|
|
102,204,472
|
|
|
|
40,250,590
|
|
|
|
6,168,766
|
|
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
100,000,000
|
|
|
|
100,000,000
|
|
|
|
129,439,604
|
|
|
|
129,439,604
|
|
Diluted
|
|
|
100,922,621
|
|
|
|
108,611,133
|
|
|
|
129,439,604
|
|
|
|
129,439,604
|
|
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.89
|
|
|
|
1.02
|
|
|
|
(1.17
|
)
|
|
|
(0.18
|
)
|
Diluted
|
|
|
0.88
|
|
|
|
0.94
|
|
|
|
(1.17
|
)
|
|
|
(0.18
|
)
|
NON-GAAP WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
100,000,000
|
|
|
|
100,000,000
|
|
|
|
129,439,604
|
|
|
|
129,439,604
|
|
Diluted(1)
|
|
|
100,922,621
|
|
|
|
108,611,133
|
|
|
|
129,453,166
|
|
|
|
129,453,166
|
|
NON-GAAP EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.89
|
|
|
|
1.02
|
|
|
|
0.31
|
|
|
|
0.05
|
|
Diluted
|
|
|
0.88
|
|
|
|
0.94
|
|
|
|
0.31
|
|
|
|
0.05
|
|
(1)
|
The dilutive effect was due to 45,000 shares of unvested stock based compensation.
|
B.
|
CAPITALIZATION AND INDEBTEDNESS
|
Not applicable.
C.
|
REASONS FOR THE OFFER AND USE OF PROCEEDS
|
Not applicable.
Risks Relating to Our Business and Industry
We operate in a relatively new and rapidly evolving market.
We offer AR-based holographic services and products
to cater to our customers’ needs, focusing on providing an innovative, immersive and interactive holographic AR experience for our
customers and end users. We also engage in the provision of central processing algorithm services and computer chip products to enterprise
customers and the sales of comprehensive solutions for central processing algorithms and related services with software and hardware integration.
Our holographic AR business primarily depends on the continuing development and growth of the holographic AR industry in China. Growth
of the holographic AR industry in China is affected by numerous factors, including but not limited to, technological innovations, user
experience, development of internet and internet-based services, regulatory environment, and macroeconomic environment. The markets for
our products and services are relatively new and rapidly developing and are subject to significant challenges. In addition, our continued
growth depends, in part, on our ability to respond to changes in the holographic AR industry, including rapid technological evolution,
continued shifts in customer demands, introductions of new products and services and emergence of new industry standards and practices.
Developing and integrating new content, products, services or infrastructure could be expensive and time-consuming, and these efforts
may not yield the benefits we expect to achieve.
In addition, as the holographic AR industry
in China is relatively young, there are few proven methods of projecting customer demand or available industry standards on which
we can rely. Some of our current monetization methods are also in a relatively preliminary stage. We cannot assure you that our
attempts to monetize our current offerings will continue to be successful, profitable or accepted, and therefore the profit potential
of our business is difficult to gauge. Our growth prospects should be considered in light of the risks and uncertainties that fast-growing
early-stage companies with limited operating history in an evolving industry may encounter, including, among others, risks and
uncertainties regarding our ability to:
|
●
|
continue to develop new software and related solutions that are appealing to end users;
|
|
●
|
enrich our holographic AR content portfolio;
|
|
●
|
maintain stable relationships with other key participants in the holographic AR value chain;
|
|
●
|
expand our products and services into more use cases; and
|
|
●
|
expand into new geographic markets with high growth potential.
|
We believe that the application demand for holographic
3D vision in the semiconductor industry is growing rapidly and represents promising market potentials. We began to develop our semiconductor
business and explore the relevant applications of holographic 3D vision in the semiconductor industry and the provision of computer chip
products and the sales of comprehensive solutions for central processing algorithms to enterprise customers in July 2020. If the demand
for our services and products is not sustained, does not increase, if companies in the semiconductor industry expand too aggressively
in light of the increase in demand, or if we cannot take appropriate or effective actions in a timely manner during any industry-wide
downturns, such as reducing our costs to sufficiently offset declines in demand for our services, our results of operations for our semiconductor
business may be adversely affected.
Addressing these risks and uncertainties
will require significant capital expenditures and allocation of valuable management and employee resources. We cannot assure you
that we will succeed in any of these aspects or that the holographic AR industry in China will continue to grow at a rapid pace.
If we fail to successfully address any of the above risks and uncertainties, the size of our user base, our revenue and profits
may decline.
Our competitive position and results of operations could
be harmed if we do not compete effectively.
The markets for our products and services
are characterized by intense competition, new industry standards, limited barriers to entry, disruptive technology developments,
short product life cycles, customer price sensitivity and frequent product introductions (including alternatives with limited functionality
available at lower costs or free of charge). Any of these factors could create downward pressure on pricing and profitability and
could adversely affect our ability to attract new customers. Our future success will depend on our continued ability to enhance
our existing products and services, introduce new products and services in a timely and cost-effective manner, meet changing customer
expectations and needs, extend our core technology into new applications, and anticipate emerging standards, business models, software
delivery methods and other technological developments. Furthermore, we are a small-size company as compared to some of the well-established
enterprises that could potentially enter the holographic AR market and semiconductor industry. Some of our current and potential
competitors enjoy competitive advantages such as greater financial, technical, sales, marketing and other resources, broader brand
awareness, and access to larger customer bases. As a result of these advantages, potential and current customers might select the
products and services of our competitors, causing a loss of our market share.
We are a relatively young company, and we may not be able
to sustain our rapid growth, effectively manage our growth or implement our business strategies.
We have a limited operating history. Our holographic
AR business was launched in 2015 and our semiconductor business was launched in July 2020. Although we have experienced significant growth
since our business was launched, our historical growth rate may not be indicative of our future performance. We may not be able to achieve
similar results or grow at the same rate as we had in the past. As our business and the holographic AR market and the semiconductor industry
in China continue to develop, we may need to adjust our product and service offerings or modify our business model. These adjustments
may not achieve expected results and may have a material and adverse impact on our financial conditions and results of operations.
In addition, our rapid growth and expansion
have placed, and continue to place, a significant strain on our management and resources. This level of significant growth may
not be sustainable or achievable at all in the future. We believe that our continued growth will depend on many factors, including
our ability to develop new sources of revenues, diversify monetization methods, attract and retain customers, continue developing
innovative hologram-related technologies, increase brand awareness, expand into new market segments, and adjust to the rapidly
changing regulatory environment in China. We cannot assure you that we will achieve any of the above, and our failure to do so
may materially and adversely affect our business and results of operations.
If we fail to keep up with industry trends or technological
developments, our business, results of operations and financial condition may be materially and adversely affected.
The holographic AR industry and semiconductor
industry are rapidly evolving and subject to continuous technological changes. Our success depends on our ability to continue to
develop and implement services and solutions that anticipate and respond to rapid and continuing changes in technology and industry
developments and offerings to serve the evolving needs of our customers. Our growth strategy is focused on responding to these
types of developments by driving innovation that will enable us to expand our business into new growth areas. If we do not sufficiently
invest in new technology and industry developments, or evolve and expand our business at sufficient speed and scale, or if we do
not make the right strategic investments to respond to these developments and successfully drive innovation, our services and solutions,
our results of operations, and our ability to develop and maintain a competitive advantage and continue to grow could be negatively
affected. In addition, we operate in a quickly evolving environment, in which there currently are, and we expect will continue
to be, new technology entrants. New services or technologies offered by competitors or new entrants may make our offerings less
differentiated or less competitive, when compared to other alternatives, which may adversely affect our results of operations.
Technological innovations may also require substantial capital expenditures in product development as well as in modification of
products, services or infrastructure. We cannot assure you that we can obtain financing to cover such expenditure. Failure to adapt
our products and services to such changes in an effective and timely manner could materially and adversely affect our business,
financial condition and results of operations.
We incurred net loss and had net cash outflow from operating
activities in 2020, and we may not be able to maintain profitability in the future.
We incurred net loss in 2020. We had net income
from continuing operations of RMB89.2 million and RMB102.2 million in 2018 and 2019, respectively, and had net loss from continuing operations
of RMB145.0 million (US$21.8 million) in 2020. In addition, we had negative cash flows from operating activities in 2020. We generated
positive cash flows from operating activities in the amount of RMB99.4 million and RMB144.0 million in 2018 and 2019, respectively. However,
we had negative cash flows of RMB67.0 million in 2020. We have made significant investments in research and development, business acquisitions,
and employee stock compensation expenses to develop and expand our business. We expect to continue to invest significantly in research
and development to further develop and expand our business, and these investments may not result in an increase in revenue or positive
cash flow from operating activities on a timely basis, or at all.
We may not maintain profitability, or we may incur
substantial losses for a number of reasons, including the lack of demand for our products and services, increasing competition, challenging
macro-economic environment due to the COVID-19 pandemic, and we may incur unforeseen expenses, or encounter difficulties, complications
and delays in generating revenue or achieving profitability. If we are unable to achieve profitability, we may have to reduce the scale
of our operations, which may impact our business growth and adversely affect our financial condition and results of operations. In addition,
our continuous operation depends on our capability to improve operating cash flows as well as our capacity to obtain sufficient external
equity or debt financing. If we do not succeed in doing so, we may have to limit the scale of our operations, which may limit our business
growth and adversely affect our financial condition and results of operations.
If we cannot continue to develop, acquire, market and
offer new products and services or enhancements to existing products and services that meet customer requirements, our operating
results could suffer.
The process of developing and acquiring
new technology products and services and enhancing existing offerings is complex, costly and uncertain. If we fail to anticipate
customers’ rapidly changing needs and expectations, our market share and results of operations could suffer. We must make
long-term investments, develop, acquire or obtain appropriate intellectual property and commit significant resources before knowing
whether our predictions will accurately reflect customer demand for our products and services. If we misjudge customer needs in
the future, our new products and services may not succeed and our revenues and earnings may be harmed. Additionally, any delay
in the development, acquisition, marketing or launch of a new offering or enhancement to an existing offering could result in customer
attrition or impede our ability to attract new customers, causing a decline in our revenue or earnings.
We make significant investments in new products and services
that may not achieve expected returns.
We have made and will continue to make significant
investments in research, development, and marketing for existing products, services, and technologies, including holographic AR advertising
solutions, mobile payment middleware, integrated holographic AR software, other AR-based holographic offerings, holographic 3D vision-related
semiconductor application solutions, and central processing algorithms and related services, as well as new technology or new applications
of existing technology. Investments in new technology are speculative. Commercial success depends on many factors, including but not limited
to, innovativeness, developer support, and effective distribution and marketing. If customers do not perceive our latest offerings as
providing significant new functionality or other value, they may reduce their purchases of our services or products, unfavorably affecting
our revenue and profits. We may not achieve significant revenue from new product, service or distribution channel investments, or new
applications of existing new product, service or distribution channel investments, for several years, if at all. New products and services
may not be profitable, and even if they are profitable, operating margins for some new products and businesses may not be as high as the
margins we have experienced historically. Furthermore, developing new technologies is complex and can require long development and testing
periods. Significant delays in new releases or significant problems in creating new products or offering new services could adversely
affect our revenue and profits.
We cannot guarantee our monetization strategies will be
successfully implemented or generate sustainable revenues and profit.
Our monetization model is evolving. We generate
our revenues from holographic AR advertising services, payment middleware licensing, semiconductor products and related accessories,
and central processing algorithms and related services with software and hardware integration, including customized central processing
units, or CPUs, based on customers’ specific demands. We plan to further increase revenue contribution from our other hologram-related
monetization methods and semiconductor product offerings. If our strategic initiatives do not enhance our monetization ability
or enable us to develop new approaches to monetization, we may not be able to maintain or increase our revenues or profits or recover
any associated costs. In addition, we may in the future introduce new services to further diversify our revenue streams, including
services with which we have little or no prior development or operating experience. If these new or enhanced services fail to engage
customers, we may fail to attract or retain users or to generate sufficient revenues or profits to justify our investments, and
our business and operating results may suffer as a result.
Our results of operations could materially suffer if we
are not able to obtain sufficient pricing to enable us to meet our profitability expectations.
If we are not able to obtain sufficient
pricing for our services and solutions, our revenues and profitability could materially suffer. The rates we are able to charge
for our services and solutions are affected by a number of factors, including:
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general economic and political conditions;
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the competitive environment in our industry;
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our customers’ desire to reduce their costs; and
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our ability to accurately estimate, attain and sustain contract revenues, margins and cash flows over the full contract period.
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In addition, our profitability with respect
to our services and solutions for new technologies may be different when compared to the profitability of our current business,
due to factors such as the use of alternative pricing, the mix of work and the number of service providers, among others.
The competitive environment in our industry
affects our ability to obtain favorable pricing in a number of ways, any of which could have a material negative impact on our
results of operations. The less we are able to differentiate our services and solutions and/or clearly convey the value of our
services and solutions, the more risk we have that they will be seen as commodities, with price being the driving factor in selecting
a service provider. In addition, the introduction of new services or products by competitors could reduce our ability to obtain
favorable pricing for the services or products we offer. Competitors may be willing, at times, to price contracts lower than us
in an effort to enter new markets or increase market share. Further, if competitors develop and implement methodologies that yield
greater efficiency and productivity, they may be better positioned to offer services similar to ours at lower prices.
We require a significant amount of capital to fund our
research and development investments. If we cannot obtain sufficient capital on favorable terms or at all, our business, financial
condition and prospects may be materially and adversely affected.
Operating our holographic AR business and semiconductor
business requires significant, continuous investment in acquiring, maintaining and upgrading contents and technologies. Historically,
we have financed our operations primarily with net cash generated from operating activities, financial support from our shareholders and
equity financings and loans from third parties. As part of our growth strategy, we plan to continue to invest substantial capital in our
research and development activities in the future, which may require us to obtain additional equity or debt financing. Our ability to
obtain additional financing in the future is subject to a number of uncertainties, including but not limited to those relating to:
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our future business development, financial condition and results of operations;
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general market conditions for financing activities; and
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macro-economic and other conditions in China and elsewhere.
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Although we expect to rely increasingly on net
cash provided by operating activities and financing through capital markets for our liquidity needs as our business continues to grow
and after we become a public company, we cannot assure you that we will be successful in our efforts to diversify our sources of liquidity.
If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer
significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders
of our ordinary shares. Any debt financing that we secure in the future could involve restrictive covenants relating to our capital raising
activities and other financial and operational matters, including the ability to pay dividends. This may make it more difficult for us
to obtain additional capital to fund our research and pursue business opportunities, including potential acquisitions. If we cannot obtain
sufficient capital to meet our capital needs, we may not be able to implement our growth strategies, and our business, financial condition
and prospects may be materially and adversely affected.
If we fail to attract, retain and engage appropriately
skilled personnel, including senior management and technology professionals, our business may be harmed.
Our future success depends on our retention
of highly skilled executives and employees. Competition for well-qualified and skilled employees is intense, and our future success
also depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees, including,
in particular, software engineers, artificial intelligence scientists and AR technology professionals. Our continued ability to
compete effectively depends on our ability to attract new employees and to retain and motivate existing employees. All of our senior
management and key personnel are employees at will and, as a result, any of these employees could leave with little or no prior
notice. If any member of our senior management team or other key employees leave our company, our ability to successfully operate
our business and execute our business strategy could be adversely affected. In particular, such individuals are free to compete
with us in the event that they leave. Furthermore, under PRC law, certain of our employees may have ownership rights to our intellectual
property, which rights would continue in the event they left our company. We may also have to incur significant costs in identifying,
hiring, training and retaining replacements of departing employees.
If existing or new customers are less willing to cooperate
with us, our revenues and profits may be adversely affected.
We
offer holographic AR advertising solutions primarily through contracts entered into with advertisers or third-party advertising
agencies and middleware services primarily through contracts entered into with app developers and content providers. We offer semiconductor
products and accessories, and design software for central processing units, and offer comprehensive solutions for central processing
algorithms and related
services with software and hardware integration
to manufacturers of electronic products and internet information infrastructure service providers. We promote our products and
services directly through our experienced and creative sales and marketing team by making direct office visits, attending conferences
and industry exhibitions, and through word-of-mouth referral. Our ability to retain existing customers or attract new customers
depends on many factors, some of which are out of our control, including:
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Our ability to innovate and rapidly respond to customer needs;
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The competitiveness of our pricing and payment terms for our customers,
which may, in turn, be constrained by our capital and financial resources;
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Sufficient capital support;
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Our ability to acquire complementary technologies, products and businesses to enhance the features and functionality of our applications; and
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Brand awareness and reputation.
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We cannot assure you that we will be able
to continue retain these customers or attract new customers. If we fail to retain and enhance our business relationships with new
and existing customers, our business and results of operations may be materially and adversely affected.
If we fail to successfully compete with other advertising
platforms, media companies, AR or traditional advertisement producers, our revenues and profits may be adversely affected.
Revenue generated from our advertising business
is affected by the online advertising industry in China and advertisers’ allocation of budgets to Internet advertising and
promotion in general, and specifically with respect to online holographic AR advertising. Companies that decide to advertise or
promote online may utilize more established methods or channels for online advertising and promotion, such as key words advertising
on established Chinese search engines, over in-video holographic AR advertising. In addition, we compete with media companies,
AR or traditional advertisement producers. If the holographic AR advertising market size does not increase from current levels,
if we are unable to capture and retain a sufficient share of that market, or if we are unable to compete effectively with our competitors,
our ability to maintain or increase our current level of advertisement revenue and our profitability and prospects could be adversely
affected.
Our products and software are highly technical and may
contain undetected software bugs or vulnerabilities, which could manifest in ways that could seriously harm our reputation and
our business.
Our products and software are highly technical
and complex. Our software or any of our products may contain undetected software bugs, hardware errors, and other vulnerabilities.
These bugs and errors can manifest in any number of ways in our products, including through diminished performance, security vulnerabilities,
malfunctions, or even permanently disabled products. We have a practice of regularly updating our products and some errors in our
products may be discovered only after a product has been used by users, and may in some cases be detected only under certain circumstances
or after extended use. Any errors, bugs or other vulnerabilities discovered in our code or backend after release could damage our
reputation, drive away users, allow third parties to manipulate or exploit our software, lower revenue and expose us to claims
for damages, any of which could seriously harm our business.
Our business could be materially harmed by the ongoing
coronavirus (COVID-19) pandemic.
The outbreak of novel coronavirus (COVID-19)
starting from late January 2020 has spread rapidly to many parts of the world. In March 2020, the World Health Organization declared
the COVID-19 as a pandemic. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores
and business facilities in China for the first half of 2020. Given the rapidly expanding nature of the COVID-19 pandemic, and because
substantially all of our business operations and our workforce are concentrated in China, we believe there is a substantial risk
that our business, results of operations, and financial condition may be materially and adversely affected. Potential impact to
our results of operations will also depend on future developments and new information that may emerge regarding the duration and
severity of the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19 or mitigate
its impact, almost all of which are beyond our control.
The impacts of COVID-19 on our business,
financial condition, and results of operations include, but are not limited to, the following:
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We temporarily closed our offices and implemented work from home policy in February 2020, as required by relevant PRC regulatory authorities. Since March 16, 2020, our offices have reopened and have been fully operational.
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Our customers were negatively impacted by the outbreak and reduced their budgets for online advertising and marketing in 2020. As a result, our gross profit and net income for 2020 were negatively impacted. However, to date, none of our customers have terminated contracts with us.
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Certain of our customers were negatively impacted by the outbreak and reduced
their budgets for MR software development in 2020. As a result, we reduced our future cash flow forecast and recorded an impairment
in the amount of approximately RMB7.3 million (US$1.1 million).
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The situation may worsen if the COVID-19 outbreak continues, and our customers may request additional time to pay us or fail to pay us on time, or at all, which may require us to record additional allowances. We have not experienced significant collection issues in 2020. We will continue to closely monitor our collections throughout 2021.
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The global stock markets have experienced, and may continue to experience, significant decline from the COVID-19 outbreak. It is possible that the price of our ADSs will decline significantly, in which case you may lose your investment.
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While many
of the restrictions on movement within China have been relaxed as of the date of this annual report, there is great uncertainty as to
the future progress of the pandemic. Relaxation of restrictions on economic and social life may lead to new cases, which may lead to re-imposition
of restrictions. Consequently, the continuance of COVID-19 pandemic may materially and adversely affect our business, financial condition
and results of operations in the future. The extent to which this pandemic impacts our results of operations will depend on future developments,
which are highly uncertain and unpredictable, including new outbreaks of COVID-19, the severity of the virus infection, the success or
failure of efforts to contain or treat the cases, such as the availability of effective vaccines or cure, among others, and future actions
we or the authorities may take in response to these developments.
Our failure to protect our intellectual property rights
may undermine our competitive position.
We believe that our patents, copyrights, trademarks
and other intellectual property are essential to our success. Please see Item 4.B. “Business Overview—Intellectual Property”
for more details. We depend to a large extent on our ability to develop and maintain the intellectual property rights relating to AR technology,
our hologram contents, and semiconductor products and software designs. We have devoted considerable time and energy to the development
and improvement of our software, middleware, websites, and our IPs.
We rely primarily on a combination of patents,
copyrights, trademarks and trade secrets laws, and contractual restrictions for the protection of the intellectual property used
in our business. Nevertheless, these provide only limited protection and the actions we take to protect our intellectual property
rights may not be adequate. Our trade secrets may become known or be independently discovered by our competitors. We may have no
or limited rights to stop others’ use of our information. Moreover, to the extent that our employees or third parties with
whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights to such
intellectual property. Furthermore, it is often difficult to maintain and enforce intellectual property rights in China. Statutory
laws and regulations are subject to judicial interpretation and enforcement, and may not be applied consistently due to the lack
of clear guidance on statutory interpretation. Contractual restrictions may be breached by counterparties, and there may not be
adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual
property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is
difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the
event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs
and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation.
Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial
condition and results of operations.
We may not be able to protect our source code from copying
if there is an unauthorized disclosure.
Source code, the detailed program commands
for our middleware and software programs, is critical to our business. Although we license portions of our application and operating
system source code to several licensees, we take significant measures to protect the secrecy of large portions of our source code.
If our source code leaks, we might lose future trade secret protection for that code. It may then become easier for third parties
to compete with our products by copying functionality, which could adversely affect our revenue and operating margins.
As our patents may expire and may not be extended, our
patent rights may be contested, circumvented, invalidated or limited in scope, our patent rights may not protect us effectively.
In particular, we may not be able to prevent others from developing or exploiting competing technologies, which could have a material
and adverse effect on our business operations, financial condition and results of operations.
In China, the validity period of utility
model patent rights or design patent rights is ten years and not extendable. As of December 31, 2020, we had 195 registered patents,
56 patent applications pending in China and no additional patent applications under the patent cooperation treaty. For our pending
application, we cannot assure you that we will be granted patents pursuant to our pending applications. Even if our patent applications
succeed, it is still uncertain whether these patents will be contested, circumvented or invalidated in the future. In addition,
the rights granted under any issued patents may not provide us with sufficient protection or competitive advantages. The claims
under any pending patents that issue from our patent applications may not be broad enough to prevent others from developing technologies
that are similar to or that achieve results similar to ours. It is also possible that the intellectual property rights of others
will bar us from licensing and from exploiting any patents that issue from our pending applications. Numerous U.S. and foreign
issued patents and pending patent applications owned by others exist in the fields in which we have developed and are developing
our technology. These patents and patent applications might have priority over our patent applications and could subject our patent
applications to invalidation. Finally, in addition to those who may claim priority, any of our existing or pending patents may
also be challenged by others on the basis that they are otherwise invalid or unenforceable.
Our services or solutions could infringe upon the intellectual
property rights of others or we might lose our ability to utilize the intellectual property of others.
We cannot be sure that our services and solutions
do not infringe on the intellectual property rights of third parties, and these third parties could claim that we or our customers are
infringing upon their intellectual property rights. These claims could harm our reputation, cause us to incur substantial costs or prevent
us from offering some services or solutions in the future. Any related proceedings could require us to expend significant resources over
an extended period of time. Any claims or litigation in this area could be time-consuming and costly, damage our reputation and/or require
us to incur additional costs to obtain the right to continue to offer a service or solution to our customers. If we cannot secure this
right at all or on reasonable terms, or we cannot substitute alternative technology, our results of operations could be materially adversely
affected. The risk of infringement claims against us may increase as we expand our industry software solutions.
In the operation of our AR holographic ads
business, we do not enter into any agreements directly with the copyright owners of the videos in which ads are placed using our
software. Consequently, there is no assurance that we will not be affected by disputes between platform operators, on the one hand,
and copyright owners of such videos, on the other hand.
Additionally, in recent years, individuals and
firms have purchased intellectual property assets in order to assert claims of infringement against technology providers and customers
that use such technology. Any such action naming us or our customers could be costly to defend or lead to an expensive settlement or judgment
against us. Moreover, such an action could result in an injunction being ordered against our customers or our own services or operations,
causing further damages.
In addition, we rely on third-party software
in providing some of our services and solutions. If we lose our ability to continue using such software for any reason, including
in the event that the software is found to infringe the rights of others, we will need to obtain substitute software or seek alternative
means of obtaining the technology necessary to continue to provide such services and solutions. Our inability to replace such software,
or to replace such software in a timely or cost-effective manner, could materially adversely affect our results of operations.
Third parties may register trademarks or domain names
or purchase internet search engine keywords that are similar to our trademarks, brands or websites, or misappropriate our data
and copy our platform, all of which could cause confusion to our users, divert online customers away from our products and services
or harm our reputation.
Competitors and other third parties may
purchase (i) trademarks that are similar to our trademarks and (ii) keywords that are confusingly similar to our brands or websites
in internet search engine advertising programs and in the header and text of the resulting sponsored links or advertisements in
order to divert potential customers from us to their websites. Preventing such unauthorized use is inherently difficult. If we
are unable to prevent such unauthorized use, competitors and other third parties may continue to drive potential online customers
away from our platform to competing, irrelevant or potentially offensive platform, which could harm our reputation and cause us
to lose revenue.
Our business is highly dependent on the proper functioning
and improvement of our information technology systems and infrastructure. Our business and operating results may be harmed by service
disruptions, or by our failure to timely and effectively scale up and adjust our existing technology and infrastructure.
Our business depends on the continuous and
reliable operation of our information technology (“IT”) systems. Our IT systems are vulnerable to damage or interruption
as a result of fires, floods, earthquakes, power losses, telecommunications failures, undetected errors in software, computer viruses,
hacking and other attempts to harm our IT systems. Disruptions, failures, unscheduled service interruptions or a decrease in connection
speeds could damage our reputation and cause our customers and end-users to migrate to our competitors’ platforms. If we
experience frequent or constant service disruptions, whether caused by failures of our own IT systems or those of third-party service
providers, our user experience may be negatively affected, which in turn may have a material and adverse effect on our reputation
and business. We may not be successful in minimizing the frequency or duration of service interruptions. As the number of our end-users
increases and more user data are generated on our platform, we may be required to expand and adjust our technology and infrastructure
to continue to reliably store and process content.
Our operations depend on the performance of the Internet
infrastructure and fixed telecommunications networks in China, which may experience unexpected system failure, interruption, inadequacy
or security breaches.
Almost all access to the Internet in China
is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the
Ministry of Industry and Information Technology, or the MIIT. Moreover, we primarily rely on a limited number of telecommunication
service providers to provide us with data communications capacity through local telecommunications lines and Internet data centers
to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other
problems with China’s Internet infrastructure or the fixed telecommunications networks provided by telecommunication service
providers. Web traffic in China has experienced significant growth during the past few years. Effective bandwidth and server storage
at Internet data centers in large cities such as Beijing are scarce. With the expansion of our business, we may be required to
upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. We cannot assure you that the
Internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with
the continued growth in Internet usage. If we cannot increase our capacity to deliver our online services, we may not be able to
expand customer base, and the adoption of our services may be hindered, which could adversely impact our business and profitability.
In addition, we have no control over the
costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications and Internet
services rise significantly, our results of operations may be materially and adversely affected. Furthermore, if Internet access
fees or other charges to Internet users increase, some users may be prevented from accessing the mobile Internet and thus cause
the growth of mobile Internet users to decelerate. Such deceleration may adversely affect our ability to continue to expand our
user base.
We use third-party services and technologies in connection
with our business, and any disruption to the provision of these services and technologies to us could result in adverse publicity
and a slowdown in the growth of our users, which could materially and adversely affect our business, financial condition and results
of operations.
Our business partially depends on services
provided by, and relationships with, various third parties. Some third-party software we use in our operations is currently publicly
available and free of charge. If the owner of any such software decides to charge users or no longer makes the software publicly
available, we may need to incur significant costs to obtain licensing, find replacement software or develop it on our own. If we
are unable to obtain licensing, find or develop replacement software at a reasonable cost, or at all, our business and operations
may be adversely affected.
We exercise no control over the third parties
with whom we have business arrangements. If such third parties increase their prices, fail to provide their services effectively,
terminate their service or agreements or discontinue their relationships with us, we could suffer service interruptions, reduced
revenues or increased costs, any of which may have a material adverse effect on our business, financial condition and results of
operations.
If we are unable to collect our receivables or unbilled
services, our results of operations, financial condition and cash flows could be adversely affected.
Our business depends on our ability to successfully
and timely obtain payment from our customers of the amounts they owe us for work performed. We evaluate the financial condition of our
customers and usually bill and collect on 30 to 60 day cycles. We have established allowances for losses of receivables and unbilled services.
Actual losses on balances could differ from those that we currently anticipate, and, as a result, we might need to adjust our allowances.
We might not accurately assess the creditworthiness of our customers. Macroeconomic conditions could also result in financial difficulties
for our customers, including bankruptcy and insolvency. This could cause customers to delay payments to us, request modifications to their
payment arrangements that could increase our receivables balance, or default on their payment obligations to us. Recovery of customer
financing and timely collection of balances also depend on our ability to complete our contractual commitments and bill and collect our
contracted revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable
to collect our customer balances, and if this occurs, our results of operations and cash flows could be adversely affected. In addition,
if we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected.
If we fail to obtain or maintain the required licenses
and approvals or if we fail to comply with laws and regulations applicable to our industry, our business, financial condition and
results of operations may be materially and adversely affected.
The Internet industry in China is highly
regulated, which requires certain licenses, permits, filings and approvals to conduct and develop business. Currently, we have
obtained business performance permit, telecom value-added service license and network culture operation license business performance
permit.
Due to the uncertainties of interpretation
and implementation of existing and future laws and regulations, the licenses we held may not be sufficient to meet regulatory requirements,
which may restrain our ability to expand our business scope and may subject us to fines or other regulatory actions by relevant
regulators if our practice is deemed as violating relevant laws and regulations. As we further develop and expand our business
scope, we may need to obtain additional qualifications, permits, approvals or licenses. Moreover, we may be required to obtain
additional licenses or approvals if the PRC government adopts more stringent policies or regulations for our industry.
As the Internet industry in China is still
at a relatively early stage of development, new laws and regulations may be adopted from time to time to address new issues that
come to the authorities’ attention. Considerable uncertainties still exist with respect to the interpretation and implementation
of existing and future laws and regulations governing our business activities. We cannot assure you that we will not be found in
violation of any future laws and regulations or any of the laws or regulations currently in effect due to changes in the relevant
authorities’ interpretation of these laws and regulations.
In accordance with the Notice on Adjusting
the Scope and Standardizing the Examination and Approval Process of Network Culture Operation License (“Notice”) of
the Ministry of Culture and Tourism, dated May 14, 2019, any network culture operation licenses whose business scope contains online-games
related activities remains valid, although such licenses may not be renewed by the Ministry of Culture and Tourism upon expiration
thereof. It is not clear yet whether new licenses could be issued by an alternative governmental authority. As a result, there
is risk that we may not have a valid license to conduct online-gaming activities after the expiration of such license.
As of the date of this annual report, we
have not received any material penalties from the relevant government authorities for our past business operations. We cannot assure
you, however, that the government authorities will not do so in the future. In addition, we may be required to obtain additional
license or permits, and we cannot assure you that we will be able to timely obtain or maintain all the required licenses or permits
or make all the necessary filings in the future. If we fail to obtain, hold or maintain any of the required licenses or permits
or make the necessary filings on time or at all, we may be subject to various penalties, such as confiscation of the net revenues
that were generated through the unlicensed activities, the imposition of fines and the discontinuation or restriction of our operations.
Any such penalties may disrupt our business operations and materially and adversely affect our business, financial condition and
results of operations.
We may be materially and adversely affected by the complexity,
uncertainties and changes in PRC regulation of the Internet industry 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 uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions
may be deemed to be in violations of applicable laws and regulations. Issues, risks and uncertainties relating to PRC regulations
of the Internet business include, but are not limited to, the following:
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There are uncertainties relating to the regulation of the Internet business in China, including evolving licensing practices and the requirement for real-name registrations. Permits, licenses or operations at some of our subsidiaries and PRC variable interest entity levels may be subject to challenge, we may not be able to timely obtain or maintain all the required licenses or approvals, permits, or to complete filing, registration or other formalities necessary for our present or future operations, and we may not be able to renew certain permits or licenses or renew certain filing or registration or other formalities. See “Item 3.D. Risk Factors—If we fail to obtain or maintain the required licenses and approvals or if we fail to comply with laws and regulations applicable to our industry, our business, financial condition and results of operations may be materially and adversely affected” and ” Item 4.B. Business Overview- Regulation.”
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The evolving PRC regulatory system for the Internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office. The primary role of this new agency is to facilitate the policy-making and legislative development in this field to direct and coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to the Internet industry. We are unable to determine what policies this new agency or any new agencies to be established in the future may have or how they may interpret existing laws, regulations and policies and how they may affect us. Further, new laws, regulations or policies may be promulgated or announced that will regulate Internet activities, including online video and online advertising businesses. If these new laws, regulations or policies are promulgated, additional licenses may 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.
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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. There are also risks that we may be found to violate the existing or
future laws and regulations given the uncertainty and complexity of China’s regulation of Internet business.
Our business generates and processes a large amount of
data, and we are required to comply with PRC laws and regulations relating to cyber security. These laws and regulations could
create unexpected costs, subject us to enforcement actions for compliance failures, or restrict portions of our business or cause
us to change our data practices or business model.
Our business generates and processes a large
quantity of data. We face risks inherent in handling and protecting large volume of data. In particular, we face a number of challenges
relating to data we collect through our game distribution platform and integrated holographic AR software offering, including:
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protecting the data in and hosted on our system, including against attacks on our system by outside parties or fraudulent behavior or improper use by our employees;
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addressing concerns related to privacy and sharing, safety, security and other factors; and
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complying with applicable laws, rules and regulations relating to the collection, use, storage, transfer, disclosure and security of personal information, including any requests from regulatory and government authorities relating to this data.
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Governments around the world, including
the PRC government, have enacted or are considering legislation related to online businesses. There may be an increase in legislation
and regulation related to the collection and use of anonymous internet user data and unique device identifiers, such as IP address
or mobile unique device identifiers, and other data protection and privacy regulation. The PRC regulatory and enforcement regime
with regard to data security and data protection is evolving. We may be required by Chinese governmental authorities to share personal
information and data that we collect to comply with PRC laws relating to cybersecurity. All these laws and regulations may result
in additional expenses to us and any non-compliance may subject us to negative publicity which could harm our reputation and negatively
affect the trading price of our ADSs. There are also uncertainties with respect to how these laws will be implemented in practice.
PRC regulators have been increasingly focused on regulation in the areas of data security and data protection. We expect that these
areas will receive greater attention and focus from regulators, as well as attract continued or greater public scrutiny and attention
going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data
security and protection. If we are unable to manage these risks, we could become subject to penalties, fines, suspension of business
and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected. In
addition, regulatory authorities around the world have recently adopted or are considering a number of legislative and regulatory
proposals concerning data protection. These legislative and regulatory proposals, if adopted, and the uncertain interpretations
and application thereof could, in addition to the possibility of fines, result in an order requiring that we change our data practices,
which could have an adverse effect on our business and results of operations.
Our business depends on the market recognition of our
brand, and if we are unable to maintain and enhance brand recognition, or promote or maintain our brand in a cost-effective manner,
our business, financial conditions and results of operations may be materially and adversely affected.
We believe that maintaining and enhancing
our brand is of significant importance to the success of our business. A well-recognized brand is important to attract customers,
especially in this novel and evolving market. We promote our brand though marketing team and word-of-mouth referrals. Successful
promotion of our brand will depend on the effectiveness of our marketing efforts and amount of word-of-mouth referrals we received
from satisfied customers. We may incur extra expenses in promoting our brand. However, our brand promotion activities and marketing
efforts may not yield increased revenues, and even if they do, any increased revenues may not offset the expenses we incurred in
promoting our brand. Since we operate in a highly competitive industry, our brand recognition directly affects our ability to maintain
our market position. If we fail to successfully promote and maintain our brand, or if we incur extra expenses in an unsuccessful
attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers, and our
business and results of operations may be materially and adversely affected.
Our AR holographic business’s success depends on
the interoperability of our products and services with next-generation AR hardware.
The success of our AR holographic business
and our AR products depends upon the cooperation of AR hardware manufactures to ensure interoperability with our products and offer
compatible products and services to end users. To the extent that hardware manufactures perceive that their products and services
compete with ours, they may have an incentive to withhold their cooperation, decline to share access or sell to us their proprietary
application programming interfaces (“APIs”), protocols or formats, or engage in practices to actively limit the functionality,
compatibility and certification of our products. If any of the foregoing occurs, our product development efforts may be delayed
or foreclosed and it may be difficult and more costly for us to achieve functionality and service levels that would make our services
attractive to end users, any of which could negatively impact our business and operating results.
Future litigation could have a material and adverse impact
on our business, financial condition and results of operations.
From time to time, we have been, and may
in the future be, subject to lawsuits brought by our competitors, individuals, or other entities against us, in matters relating
to intellectual property rights, contractual disputes and competition claims. The outcomes of actions we institute may not be successful
or favorable to us. Lawsuits against us may also generate negative publicity that significantly harms our reputation, which may
adversely affect our user base. In addition to the related costs, managing and defending litigation and related indemnity obligations
can significantly divert our management’s attention from operating our business. We may also need to pay damages or settle
lawsuits with a substantial amount of cash. While we do not believe that any currently pending proceedings are likely to have a
material adverse effect on us, if there were adverse determinations in legal proceedings against us, we could be required to pay
substantial monetary damages or adjust our business practices, which could have an adverse effect on our business, financial condition
and results of operations.
Negative media coverage could adversely affect our business.
Negative publicity about us and our business,
shareholders, affiliates, directors, officers, and other employees, as well as the industry in which we operate, can harm our operations.
Negative publicity concerning these parties could be related to a wide variety of matters, including:
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alleged misconduct or other improper activities committed by our shareholders, affiliates, directors, officers and other employees;
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false or malicious allegations or rumors about us or our shareholders, affiliates, directors, officers, and other employees;
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user complaints about the quality of our products and services;
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copyright or patent infringements involving us and contents offered on our platforms; and
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governmental and regulatory investigations or penalties resulting from our failure to comply with applicable laws and regulations.
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In addition to traditional media, there
has been an increasing use of social media platforms and similar devices in China, including instant messaging applications, social
media websites and other forms of internet-based communications that provide individuals with access to a broad audience of users
and other interested persons. The availability of information on instant messaging applications and social media platforms is virtually
immediate as is its impact without affording us an opportunity for redress or correction. The opportunity for dissemination of
information, including inaccurate information, is seemingly limitless and readily available. Information concerning our company,
shareholders, directors, officers and employees may be posted on such platforms at any time. The risks associated with any such
negative publicity or incorrect information cannot be completely eliminated or mitigated and may materially harm our reputation,
business, financial condition and results of operations.
If we fail to implement and maintain an effective system
of internal controls, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent
fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.
We are subject to the reporting requirements of
the Exchange Act of 1934, or Exchange Act, the Sarbanes-Oxley Act of and the rules and regulations of the Nasdaq Stock Market. We are
not required to include an attestation report on internal control over financial reporting issued by our independent registered public
accounting firm in this annual report, since we are an emerging growth company as defined under the JOBS Act. However,
in the course of auditing our consolidated financial statements included in this annual report, we and our independent registered
public accounting firm identified four material weaknesses in our internal control over financial reporting. As defined in standards
established by the Public Company Accounting Oversight Board (“PCAOB”), a “material weakness” is a deficiency,
or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The first material weakness
is that we did not maintain an effective control environment. Specifically, we lacked sufficient resources regarding financial reporting
and accounting personnel with understanding of U.S. GAAP, in particular, to address complex U.S. GAAP technical accounting issues, related
disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the SEC. In addition, we have identified three
material weaknesses in information technology general control (“ITGC”) in the areas of: (1) risk assessment and mitigation
strategy, (2) computer operations, data backup, and disaster recovery, and (3) system security and access/segregation of duties.
We have already taken some steps and have continued to implement measures
to remediate the material weaknesses identified, including but not limited to, (1) streamlining our accounting department structure and
enhance our staff’s U.S. GAAP expertise on a continuous basis by (a) requiring our staff to participate in trainings and seminars
provided by professional service firms on a regular basis to gain knowledge on regular accounting and SEC reporting updates, and (b) providing
internal training to our accounting staff on U.S. GAAP ; (2) implementing sufficient policies and controls to enable management and other
personnel to understand and carry out their internal control responsibilities; (3) setting up internal audit department to evaluate and
monitor our internal controls; (4) developing enhanced risk assessment procedures and controls related to changes in IT systems; (5) developing
a training program for internal control staff to address ITGC principals and requirements, with a focus on issues related to user access
and change-management over IT systems impacting financial reporting; and (6) developing and maintaining documentation underlying ITGC.
However, we cannot assure you that we will not identify additional material weaknesses or significant deficiencies in the future. In addition,
if we are unable to meet the requirements of Section 404 of the Sarbanes-Oxley Act, our ADSs may not be able to remain listed on the NASDAQ
Global Market.
Section 404 of the Sarbanes-Oxley Act of 2002 requires
that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F. Our management
concluded that as of December 31, 2021, our internal control over financial reporting was not effective due to material weaknesses identified
above. Once we cease to be an “emerging growth company” as such term is defined under the JOBS Act, our independent registered
public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Even if our management
concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting
its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which
our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition,
as we are a public company, our reporting obligations may place a significant strain on our management, operational and financial resources
and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.
During the course of documenting and testing
our internal control procedures, in order to satisfy the requirements of Section 404 of the Sarbanes- Oxley Act of 2002, we may
identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain
the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time
to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting. If
we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial
statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial
information. This could in turn limit our access to capital markets, harm our results of operations and lead to a decline in the
trading price of our shares. Additionally, ineffective internal control over financial reporting could expose us to increased risk
of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory
investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.
Future strategic alliances or acquisitions may have a
material and adverse effect on our business, financial condition and results of operations.
We may enter into strategic alliances, including
joint ventures or minority equity investments, with various third parties to further our business purpose from time to time. These
alliances could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance
by the third party and increased expenses in establishing new strategic alliances, any of which may materially and adversely affect
our business. We may have limited ability to monitor or control the actions of these third parties and, to the extent any of these
strategic third parties suffers negative publicity or harm to their reputation from events relating to their business, we may also
suffer negative publicity or harm to our reputation by virtue of our association with any such third party.
As of September 27, 2020, our then wholly-owned
subsidiary, VIYI Technology Inc., which was later renamed as VIYI Algorithm Inc., or VIYI, entered into an acquisition framework agreement
with FE-DA Electronics Company Private Limited, or FE-DA, and its original shareholder, to acquire the entire equity interests of FE-DA.
FE-DA is a provider of Internet of Things solutions based in Singapore, and primarily engages in the central processing algorithm integrated
circuit (“CPA-IC”) solution business in Southeast Asia. In addition, we may continue to seek acquisition opportunities, as
appropriate, to extend our holographic content production and software development capabilities, and evaluate potential target companies
with strong software engineering and middleware development capabilities and leading patent-protected hologram technologies. Acquisitions
or expansions may not be successfully completed and we may not be able to find or consummate suitable acquisition or expansion alternatives.
If we successfully complete any acquisition or expansion, we may raise financing, either in the capital markets or in the form of bank
financing, to cover all or part of the purchase price, which will lead to changes to our capital structure and may restrict us in other
ways. In addition, to the extent we fund these business initiatives through the issuance of equity or convertible debt securities, the
ownership interest of our shareholders could be diluted.
Acquisitions
and expansions involve numerous risks, including potential difficulties in retaining and assimilating personnel, risks and difficulties
associated with integrating the operations and culture of acquired businesses, diversions of management attention and other resources,
lack of experience and industry and market knowledge of the new businesses, risks and difficulties associated with complying with
laws and regulations related to the acquisitions and acquired businesses, and failure to properly identify problems with acquisition
targets through the due diligence process. In addition, acquisitions and expansions may significantly stretch our capital, personnel
and management resources and, as a result, we may fail to manage our growth effectively. Any new acquisition or expansion plans
may also result in our assumption of debts and other liabilities, assumption of potential legal liabilities in respect of the new
businesses, and incurrence of impairment charges related to goodwill and other intangible assets, any of which could harm our businesses,
financial condition and results of operations. In particular, if any new businesses we acquire fail to perform as we expected,
we may be required to recognize a significant impairment charge, which could materially and adversely affect our business, financial
condition and results of operations. There may also be established players in these sectors and markets that enjoy significant
market share, and it may be difficult for us to win market share from them. Furthermore, some of the overseas markets that we target
may have high barriers of entry for foreign players. There can be no assurance that our acquisition or expansion plans will be
successful.
In addition, when appropriate opportunities
arise, we may acquire additional assets, products, technologies or businesses that are complementary to our existing business.
In addition to possible shareholders’ approval, we may also have to obtain approvals and licenses from relevant government
authorities for the acquisitions and to comply with any applicable PRC laws and regulations, which could result in increased delay
and costs, and may derail our business strategy if we fail to do so. Furthermore, past and future acquisitions and the subsequent
integration of new assets and businesses require significant attention from our management and could result in a diversion of resources
from our existing business, which in turn could have an adverse effect on our business operations. Acquired assets or businesses
may not generate the financial results we expect. Acquisitions could result in the use of substantial amounts of cash, potentially
dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other
intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and
consummating acquisitions may be significant. Furthermore, our equity investees may generate significant losses, a portion of which
will be shared by us in accordance with U.S. GAAP. Any such negative developments could have a material adverse effect on our business,
reputation, results of operations and financial condition.
We have limited business insurance coverage.
Insurance companies in China offer limited
business insurance products. We do not have any business liability or disruption insurance coverage for our operations in China.
Any business disruption may result in our incurring substantial costs and the diversion of our resources, which could have an adverse
effect on our results of operations and financial condition.
We have adopted
an equity incentive plan and have granted share-based awards under our equity incentive plan, which will result in increased stock compensation
expenses.
We adopted our 2020 Equity Incentive Plan, or the
2020 Plan, in July 2020 for purposes of granting stock-based compensation awards to employees, directors, officers, and consultants to
incentivize their performance and align their interests with ours. Under our 2020 Plan, we are authorized to grant restricted Class B
ordinary shares, options to purchase Class B ordinary shares of our company and restricted share units to receive Class B ordinary
shares. The maximum number of Class B ordinary shares which may be issued pursuant to all awards under the 2020 Plan is 17,500,000.
As of the date of this annual report, we have issued 17,500,000 Class B ordinary shares, of which we granted an aggregate of 16,758,240
restricted Class B ordinary shares to our directors, officers, key employees and advisors, among which 15,993,240 Class B ordinary
shares were fully vested in October and December 2020, and 765,000 restricted Class B ordinary shares are to be vested over a three-year
period. The remaining 741,760 Class B ordinary shares are held in trust designated by the administrator of the 2020 Plan. As a result,
we incurred substantial stock compensation expenses in connection with these grants in the second half of 2020, which have an adverse
effect on our results of operations and financial condition for 2020.
We believe the grant of share incentive awards
is of significant importance to our ability to attract and retain employees, and we may continue to grant share incentive awards to employees
in the future. As a result, we will incur expenses associated with stock-based compensation, which may have an adverse effect on our results
of operations and financial condition.
Risks Related to Our Corporate Structure
We are subject to changing law 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, for example, the SEC, which are charged with the protection of investors and the oversight
of companies whose securities are publicly traded, and 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 the PRC government finds that the agreements that establish
the structure for operating our businesses in China do not comply with PRC regulations relating to the relevant industries, or
if these regulations or their interpretation change in the future, we could be subject to severe penalties or be forced to relinquish
our interests in those operations.
Foreign ownership of the telecommunication
business and certain other businesses in China is extensively regulated and subject to numerous restrictions. Pursuant to the Special
Administrative Measures for Access of Foreign Investment (Negative List) (2018 Edition), or the Negative List, and Administrative
Provisions on Foreign-Invested Telecommunications Enterprises (Revised in 2016), foreign investors are generally not allowed to
own more than 50% of the equity interests in a commercial internet content provider or other value-added telecommunication service
provider other than operating e-commerce, and the major foreign investor in a value-added telecommunication service provider in
China must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance
with the Negative List, Administrative Provisions on Foreign-Invested Telecommunications Enterprises (Revised in 2016) and other
applicable laws and regulations. In addition, foreign investors are prohibited from investing in companies engaged in online operating
business, internet audio-visual programs business, internet culture business and radio and television program production business.
We are a Cayman Islands company and our PRC subsidiaries
are currently considered foreign-invested enterprises. Accordingly, none of our PRC subsidiaries are eligible to operate internet content
services, online culture activities or other businesses which foreign-owned companies are prohibited or restricted from conducting in
the PRC. To ensure strict compliance with the PRC laws and regulations, we conduct such business activities through our VIEs and their
subsidiaries. Our subsidiaries in the PRC have entered into a series of contractual arrangements with our VIEs and their respective shareholders,
in order for us to (i) exercise effective control over our VIEs, (ii) receive substantially all of the economic benefits of
our VIEs, and (iii) have an exclusive option to purchase the equity interests in our VIEs. As a result of these contractual arrangements,
we have control over and are the primary beneficiary of our VIEs and hence consolidate their financial results as our VIEs under U.S. GAAP.
See “Item 4. Information on the Company- 4.C. Organization Structure” for details.
If the PRC government finds that our contractual
arrangements do not comply with its restrictions on foreign investment in the telecommunication business and certain other businesses,
or if the PRC government otherwise finds that we, our VIE, or any of its subsidiaries is in violation of PRC laws or regulations
or lacks the necessary permits or licenses to operate our business, the relevant PRC regulatory authorities, including the MIIT
and the Ministry of Commerce of the People’s Republic of China (“MOFCOM”), would have broad discretion in dealing
with such violations or failures, including:
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revoking the business licenses and/or operating licenses of such entities;
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discontinuing or placing restrictions or onerous conditions on our operation through any transactions between our PRC subsidiaries and our VIEs;
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imposing fines, confiscating the income from our PRC subsidiaries or our VIEs, or imposing other requirements with which we or our VIEs may not be able to comply;
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requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIEs and deregistering the equity pledges of our VIEs, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our VIEs; or
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restricting or prohibiting our use of the proceeds we receive from our offshore financing activities to finance our business and operations in China.
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Any of these events could cause significant
disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our
business, financial condition and results of operations. If occurrence of any of these events results in our inability to direct
the activities of our VIEs that most significantly impacts their economic performance and/or our failure to receive the economic
benefits from our VIEs, we may not be able to consolidate the entities in our consolidated financial statements in accordance with
U.S. GAAP.
Substantial uncertainties exist with respect to the enactment
timetable, interpretation and implementation of PRC Foreign Investment Law and how it may impact the viability of our current corporate
structure, corporate governance and business operations.
In March 2019, the Standing Committee of
the National People’s Congress of the PRC passed the Foreign Investment Law of the People’s Republic of China (“Foreign
Investment Law”). Among other things, the Foreign Investment Law defines the “foreign investment” as the investment
activities in China conducted by foreign individuals, enterprises and other organizations (collectively, the “Foreign Investors”)
in a direct or indirectly manner, including any of the following circumstances: (1) the foreign investor establishes a foreign-invested
enterprise within the territory of China, independently or jointly with any other investor; (2) the foreign investor acquires shares,
equities, property shares or any other similar rights and interests of an enterprise within the territory of China; (3) the foreign
investor makes investment to initiate a new project within the territory of China, independently or jointly with any other investor;
and (4) the foreign investor makes investment in any other way stipulated by laws, administrative regulations or provisions of
the State Council. The Foreign Investment Law leaves uncertainty with respect to whether Foreign Investors control PRC onshore
variable interest entities via contractual arrangements will be recognized as “foreign investment”. PRC governmental
authorities will administrate foreign investment by applying the principal of pre-entry national treatment together with a “negative
list” (the “Negative List”, which shall be promulgated by or promulgated with approval by the State Counsel),
to be specific, Foreign Investors are prohibited from making any investments in the fields which are catalogued into prohibited
industries for foreign investment based on the Negative List, while Foreign Investors are allowed to make investments in the restricted
industries provided that all the requirements and conditions as set forth in the Negative List have been satisfied; when Foreign
Investors make investments in the fields other than those included in the Negative List, the national treatment principle shall
apply. Besides, certain approval and/or filing requirements shall be fulfilled in accordance with applicable foreign investment
laws and regulations.
The internet content service and online
culture activities that we conduct through our VIEs are subject to Special Management Measures for the Market Entry of Foreign
Investment (Negative List) (2018 Version) (the “2018 Negative List”) issued by MOFCOM and the National Development
and Reform Commission. It is unclear whether any new “negative list” to be issued under the Foreign Investment Law
will be different from the 2018 Negative List. If our control over our VIEs through contractual arrangements are deemed as foreign
investment in the future, and any business of our VIEs is restricted or prohibited from foreign investment under the “negative
list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements
that allow us to have control over our VIEs may be deemed as invalid and illegal, and we may be required to unwind such contractual
arrangements and/or restructure our business operations, any of which may have a material adverse effect on our business operation.
We rely on contractual arrangements with our VIEs and
their respective shareholders for our operations in China, which may not be as effective in providing operational control as direct
ownership.
We have relied and expect to continue to
rely on contractual arrangements with our VIEs, and their respective shareholders, and certain of their subsidiaries to operate
our business in China. These contractual arrangements may not be as effective as direct ownership in providing us with control
over our VIEs. For example, our VIEs and their respective shareholders could breach their contractual arrangements with us by,
among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to
our interests. The revenues contributed by our VIEs and their subsidiaries constituted substantially all of our revenues in 2018,
2019 and 2020.
If we had direct ownership of our VIEs,
we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIEs, which in turn
could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under
the current contractual arrangements, we rely on the performance by our VIEs and their respective shareholders of their respective
obligations under the contracts to exercise control over our VIEs. The shareholders of our VIEs may not act in the best interests
of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend
to operate certain portion of our business through the contractual arrangements with our VIEs. If any dispute relating to these
contracts remains unresolved, we will have to enforce our rights under these contracts through arbitration, litigation or other
legal proceedings and therefore will be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements
with our VIEs may not be as effective in controlling our business operations as direct ownership.
Any failure by our VIEs or their respective shareholders
to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.
If our VIEs or their shareholders fail to
perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional
resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance
or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For example, if the shareholders
of our VIEs refuse to transfer its equity interest in our VIEs to our PRC subsidiaries or their designees after we exercise the
purchase option pursuant to these contractual arrangements, or if they otherwise act in bad faith or otherwise fail to fulfill
their contractual obligations, we may have to take legal actions to compel them to perform their contractual obligations. In addition,
if any third parties claim any interest in such shareholders’ equity interests in our VIEs, our ability to exercise shareholders’
rights or foreclose the share pledge according to the contractual arrangements may be impaired. If these or other disputes between
the shareholders of our VIEs and third parties were to impair our control over our VIEs, our ability to consolidate the financial
results of our VIEs would be affected, which would in turn result in a material adverse effect on our business, operations and
financial condition.
Our shareholders or the shareholders of our VIEs may have
potential conflicts of interest with us, which may materially and adversely affect our business.
The shareholders of our VIEs may have actual
or potential conflicts of interest with us. 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. If we cannot
resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which
could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
All the agreements under our contractual arrangements
with our VIEs and their equity owners 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.
All the agreements under our contractual
arrangements with our VIEs and their equity owners 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 system in the PRC is not as developed as in some 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. Meanwhile,
there are very few precedents and little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted
or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal
action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results
in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties
may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional
expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or
other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over
our VIEs, and our ability to conduct our business may be negatively affected.
We may lose the ability to use and enjoy assets held by our VIEs
and their subsidiaries that are important to our business if our VIEs and their subsidiaries declare bankruptcy or become subject to a
dissolution or liquidation proceeding.
As part of our contractual arrangements with our
VIEs, they hold certain assets that are material to the operations of certain portion of our business. If our any of our VIE goes bankrupt
and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of
our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under
the contractual arrangements, our VIEs may not, in any manner, sell, transfer, mortgage or dispose of their assets or legal or beneficial
interests in the business without our prior consent. If any of our VIEs undergoes a voluntary or involuntary liquidation proceeding, the
independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business,
which could materially and adversely affect our business, financial condition and results of operations
Contractual arrangements we have entered into with our
VIEs may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes could negatively affect our
financial condition and the value of your investment.
Under applicable PRC laws and regulations,
arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten
years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC
tax authorities determine that the contractual arrangements between us and our VIEs were not entered into on an arm’s-length
basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust
the income of our VIEs in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result
in a reduction of expense deductions recorded by our VIEs for PRC tax purposes, which could in turn increase its tax liabilities
without reducing our PRC subsidiaries tax expenses. In addition, the PRC tax authorities may impose late payment fees and other
penalties on our VIEs for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be
materially and adversely affected if our VIEs’ tax liabilities increase or if it is required to pay late payment fees and
other penalties.
If the chops of our PRC subsidiaries, our VIEs and their
respective subsidiaries, are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the
corporate governance of these entities could be severely and adversely compromised.
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 subsidiaries and VIEs 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 safely, 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. In addition, if the chops are misused by unauthorized persons, we could experience disruption to
our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources
to resolve while distracting management from our operations.
Risks Related to Doing Business in China
Adverse changes in China’s economic, political or
social conditions or government policies could have a material adverse effect on our business, financial condition and results
of operations.
The majority of our revenues are sourced
from China. Accordingly, our results of operations, financial condition and prospects are influenced by economic, political and
legal developments in China. Economic reforms begun in the late 1970s have resulted in significant economic growth. However, any
economic reform policies or measures in China may from time to time be modified or revised. China’s economy differs from
the economies of most developed countries in many respects, including with respect to the amount of government involvement, level
of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese 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 Chinese government continues to play a significant role in regulating industry
development by imposing industrial policies. The Chinese 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 PRC economy has experienced significant
growth in the past 30 years, growth has been uneven across different regions and among different economic sectors. The Chinese
government has implemented measures to encourage economic growth and guide the allocation of the resources. Some of these measures
may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results
of operations may be adversely affected by government control over capital investments or changes in tax regulations.
Although the PRC economy has grown significantly
in the past decade, that growth may not continue, as evidenced by the slowing of the growth of the PRC economy since 2012. Any
adverse changes in economic conditions in China, in the policies of the PRC government or in the laws and regulations in China
could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business
and operating results, lead to reduction in demand for our services and adversely affect our competitive position.
A severe or prolonged downturn in the PRC or global economy
and political tensions between the United States and China could materially and adversely affect our business and our financial
condition.
The global macroeconomic environment is
facing challenges, including the end of quantitative easing by the U.S. Federal Reserve, the economic slowdown in the Eurozone
since 2014 and uncertainties over the impact of Brexit. The Chinese economy has shown slower growth compared to the previous decade
since 2012 and the trend may continue. There is considerable uncertainty over the long-term effects of the expansionary monetary
and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including
the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa,
which have resulted in market volatility.
If we plan to expand our business internationally
and do business cross-border in the future, any unfavorable government policies on international trade, such as capital controls
or tariffs, may affect the demand for our products and services, impact our competitive position, or prevent us from being able
to conduct business in certain countries. If any new tariffs, legislation, or regulations are implemented, or if existing trade
agreements are renegotiated, such changes could adversely affect our business, financial condition, and results of operations.
In particular, there have been heightened tensions in international economic relations between the United States and China. The
U.S. government has recently imposed, and has recently proposed to impose additional, new, or higher tariffs on certain products
imported from China to penalize China for what the U.S. government characterizes as unfair trade practices. China has responded
by imposing, and proposing to impose additional, new, or higher tariffs on certain products imported from the United States. Following
mutual retaliatory actions for months, on January 15, 2020, the United States and China entered into the Economic and Trade
Agreement Between the United States of America and the People’s Republic of China as a phase one trade deal, effective on
February 14, 2020. Although the direct impact of the current international trade tension, and any escalation of such tension,
on the AR industry in China is uncertain, the negative impact on general, economic, political and social conditions may adversely
impact our business, financial condition and results of operations.
Furthermore, 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,
on December 18, 2020, U.S. President Donald J. Trump signed the Holding Foreign Companies Accountable Act into law, which requires
the SEC to propose rules within 90 days after its enactment to prohibit securities of any registrant from being listed on any of
the U.S. securities exchanges or traded “over the counter” if the auditor of the registrant’s financial statements
is not subject to PCAOB inspection for three consecutive years after the law becomes effective. The Holding Foreign Companies Accountable
Act and any proposed SEC rules may have a material and adverse impact on the stock performance of China-based companies listed
in the United States. In addition, the recent market panics over the global outbreak of COVID-19 materially and negatively affected
the global financial markets in March 2020, which may cause potential slowdown of the global economy. Economic conditions in China
are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or
perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy and the political
tensions between the United States and China may materially and adversely affect our business, financial condition, results of
operations and prospects.
The recent joint statement by the
SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional
and more stringent criteria to be applied to emerging market companies, including companies based in China, upon assessing the
qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB.
On April 21, 2020,
SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement
highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including
China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work
papers in China and higher risks of fraud in emerging markets.
On May 18, 2020, Nasdaq filed three proposals
with the SEC to (i) apply minimum offering size requirement for companies primarily operating in “Restrictive Market”,
(ii) adopt a new requirement relating to the qualification of management or board of director for Restrictive Market companies,
and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s
auditors.
On May 20, 2020, the U.S. Senate passed the Holding
Foreign Companies Accountable Act requiring a foreign company to certify it is not owned or controlled by a foreign government if the
PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is
unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a
national exchange. On December 2, 2020, the U.S. House of Representatives approved the Holding Foreign Companies Accountable Act. On December
18, 2020, the Holding Foreign Companies Accountable Act was signed into law. As of March 24, 2021, the SEC adopted interim final amendments
to implement congressionally mandated submission and disclosure requirements of the Holding Foreign Companies Accountable Act.
The lack of access to the PCAOB inspection in China
prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, the investors
may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes
it more difficult to evaluate the effectiveness of these accounting firms’ audit procedures or quality control procedures as compared
to auditors outside of China that are subject to the PCAOB inspections. Our auditor, the independent registered public accounting firm
that issues the audit report included elsewhere in this report, as an auditor of companies that are traded publicly in the United States
and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections
to assess our auditor’s compliance with the applicable professional standards. Our auditor is headquartered in Manhattan, New York,
and has been inspected by the PCAOB on a regular basis with the last inspection in June 2018. However, due to the recent developments
in connection with the implementation of the Holding Foreign Companies Accountable Act, we cannot assure you whether the SEC, Nasdaq or
other regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s
audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or
experience as it relates to the audit of our financial statements.
Uncertainties in the interpretation and enforcement of
PRC laws and regulations could limit the legal protections available to you and us.
The PRC legal system is a civil law system
based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference
but have limited precedential value. 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 uniform and enforcement of these laws, regulations
and rules involves uncertainties. From time to time, we may have to resort to administrative and court proceedings to enforce our
legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing
statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the
level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on
government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive
effect. As a result, we may not be aware of our violation 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, could materially and adversely affect our business and impede our ability to continue our operations.
Under the PRC enterprise income tax law, we may be classified
as a “PRC resident enterprise”, which could result in unfavorable tax consequences to us and our shareholders and have
a material adverse effect on our results of operations and the value of your investment.
Under the PRC enterprise income tax law
that became effective on January 1, 2008, an enterprise established outside the PRC with “de facto management bodies”
within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject
to a uniform 25% enterprise income tax rate on its worldwide income. On April 22, 2009, the State Administration of Taxation, or
the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident
Enterprise on the Basis of De Facto Management Bodies, or SAT Circular 82, which provides certain specific criteria for determining
whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China.
Further to SAT Circular 82, on August 3, 2011, the SAT issued the Administrative Measures of Enterprise Income Tax of Chinese-Controlled
Offshore Incorporated Resident Enterprises (Trial), or SAT Bulletin 45, which became effective on September 1, 2011, to provide
more guidance on the implementation of SAT Circular 82.
According to SAT Circular 82, an offshore
incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be considered a PRC tax resident enterprise
by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its
worldwide income only if all of the following conditions are met: (a) the senior management and core management departments in
charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions
are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals,
and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (d) not less than half
of the enterprise’s directors or senior management with voting rights habitually reside in the PRC. SAT Bulletin 45 further
clarifies the resident status determination, post-determination administration as well as competent tax authorities.
Although SAT Circular 82 and SAT Bulletin
45 only apply to offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise group instead of those controlled
by PRC individuals or foreigners, the determination criteria set forth therein may reflect SAT’s general position on how
the term “de facto management body” could be applied in determining the tax resident status of offshore enterprises,
regardless of whether they are controlled by PRC enterprises, individuals or foreigners.
We believe none of our entities outside
of China is a PRC resident enterprise for PRC tax purposes even if the standards for “de facto management body” prescribed
in the SAT Circular 82 are applicable to us. However, the tax resident status of an enterprise is subject to determination by the
PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.”
If the PRC tax authorities determine that our company or any of our subsidiaries outside of China is a PRC resident enterprise
for enterprise income tax purposes, we may be subject to PRC enterprise income on our worldwide income at the rate of 25%, which
could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations.
Although dividends paid by one PRC tax resident
to another PRC tax resident should qualify as “tax-exempt income” under the enterprise income tax law, we cannot assure
you that dividends by our PRC subsidiaries to our Cayman Islands holding company will not be subject to a 10% withholding tax,
as the PRC foreign exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have
not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises
for PRC enterprise income tax purposes.
Non-PRC resident ADS holders may also be
subject to PRC withholding tax on dividends paid by us and PRC tax on gains realized on the sale or other disposition of ADSs or
Class B ordinary shares, if such income is sourced from within the PRC. The tax would be imposed at the rate of 10% in the case
of non-PRC resident enterprise holders and 20% in the case of non-PRC resident individual holders. In the case of dividends, we
would be required to withhold the tax at source. Any PRC tax liability may be reduced under applicable tax treaties or similar
arrangements. Although our holding company is incorporated in the Cayman Islands, it remains unclear whether dividends received
and gains realized by our non-PRC resident ADS holders will be regarded as income from sources within the PRC if we are classified
as a PRC resident enterprise. Any such tax will reduce the returns on your investment in our ADSs.
We cannot assure you that the PRC tax authorities
will not, at their discretion, adjust any capital gains and impose tax return filing and withholding or tax payment obligations
with respect to any internal restructuring, and our PRC subsidiaries may be requested to assist in the filing. Any PRC tax imposed
on a transfer of our shares not through a public stock exchange, or any adjustment of such gains would cause us to incur additional
costs and may have a negative impact on the value of your investment in our company.
We may not be able to obtain certain benefits under relevant
tax treaty on dividends paid by our PRC subsidiaries to us through our Hong Kong subsidiaries.
We are an exempted limited liability company,
used as holding company, incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions
on equity from our PRC subsidiaries, as paid to us through our Hong Kong subsidiaries, to satisfy part of our liquidity requirements.
Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC “resident
enterprise” to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has
a tax treaty with China that provides for preferential tax treatment. Pursuant to the Arrangement between the Mainland China and
the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance
Arrangement, and Circular 81 issued by the State Administration of Taxation, such withholding tax rate may be lowered to 5% if
the PRC enterprise is at least 25% held by a Hong Kong enterprise throughout the 12 months prior to distribution of the dividends
and is determined by the relevant PRC tax authority to have satisfied other requirements. Furthermore, under the Administrative
Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties, which became effective in August 2015, the non-resident
enterprises shall determine whether they are qualified for preferential tax treatment under the tax treaties and file relevant
reports and materials with the tax authorities. There are also other conditions for benefiting from the reduced withholding tax
rate according to other relevant tax rules and regulations. We cannot assure you that our determination regarding our Hong Kong
subsidiaries’ qualification to benefit from the preferential tax treatment will not be challenged by the relevant PRC tax
authority or that we will be able to complete the necessary filings with the relevant PRC tax authority and benefit from the preferential
withholding tax rate of 5% under the Double Taxation Avoidance Arrangement with respect to dividends to be paid by our PRC subsidiaries
to our Hong Kong subsidiaries.
We face uncertainty with respect to indirect transfers
of equity interests in PRC resident enterprises by their non-PRC holding companies.
We face uncertainties regarding the reporting
on and consequences of previous private equity financing transactions involving the transfer and exchange of shares in our company
by non-resident investors.
In February 2015, the SAT issued the Bulletin
on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or SAT Bulletin 7, as amended
in 2017. Pursuant to this bulletin, an “indirect transfer” of assets, including equity interests in a PRC resident
enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if
such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise
income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to SAT
Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China, immovable properties located
in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder,
being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a “reasonable
commercial purpose” of the transaction arrangement, features to be taken into consideration include: whether the main value
of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant
offshore enterprise mainly consist of direct or indirect investment in China or if its income mainly derives from China; whether
the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which
is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure;
the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer
and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment,
the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being
transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates
to the immovable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC
establishment or place of business of a non-resident enterprise, a PRC enterprise income tax of 10% would apply, subject to available
preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer
payments has the withholding obligation. SAT Bulletin 7 does not apply to transactions of sale of shares by investors through a
public stock exchange where such shares were acquired from a transaction through a public stock exchange.
There is uncertainty as to the application
of SAT Bulletin 7. We face uncertainties as to the reporting and other implications of certain past and future transactions where
PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries or investments.
Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject
to withholding obligations if our company is transferee in such transactions under SAT Bulletin 7. For transfer of shares in our
company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under
SAT Bulletin 7. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 or to request the relevant
transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be
taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
Certain judgments obtained against us by our shareholders
may not be enforceable.
We are a Cayman Islands exempted company
and substantially all of our current operations are conducted in China. In addition, most of our current directors and officers
are nationals and residents of countries other than the United States. As a result, it may be difficult or impossible for you to
bring an action against us or against these individuals in the United States in the event that you believe that your rights have
been infringed under the U.S. federal 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 may render you unable to enforce a judgment against our assets or the assets of our
directors and officers.
Implementation of labor laws and regulations in China
may adversely affect our business and results of operations.
Pursuant to the labor contract law that
took effect in January 2008, its implementation rules that took effect in September 2008 and its amendment that took effect in
July 2013, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration,
determining the term of employees’ probation and unilaterally terminating labor contracts. Due to lack of detailed interpretative
rules and uniform implementation practices and broad discretion of the local competent authorities, it is uncertain as to how the
labor contract law and its implementation rules will affect our current employment policies and practices. Our employment policies
and practices may violate the labor contract law or its implementation rules, and we may thus be subject to related penalties,
fines or legal fees. Compliance with the labor contract law and its implementation rules may increase our operating expenses, in
particular our personnel expenses. In the event that we decide to terminate some of our employees or otherwise change our employment
or labor practices, the labor contract law and its implementation rules may also limit our ability to effect those changes in a
desirable or cost-effective manner, which could adversely affect our business and results of operations. According to the Social
Insurance Law and the Regulations on the Management of Housing Fund, employees must participate in pension insurance, work-related
injury insurance, medical insurance, unemployment insurance and maternity insurance and housing funds, and the employers must,
together with their employees or separately, pay the social insurance premiums and housing funds for such employees.
As the interpretation and implementation
of these laws and regulations are still evolving, we cannot assure you that our employment practice will at all times be deemed
in full compliance with labor-related laws and regulations in China, which may subject us to labor disputes or government investigations.
If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation
to our employees and our business, financial condition and results of operations could be materially and adversely affected.
Further, labor disputes, work stoppages
or slowdowns at our company or any of our third-party service providers could significantly disrupt our daily operation or our
expansion plans and have a material adverse effect on our business.
China’s M&A Rules and certain other PRC regulations
establish complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult
for us to pursue growth through acquisitions in China.
The Regulations on Mergers and Acquisitions
of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in
2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements
that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements
in some instances that the anti-monopoly law enforcement agency be notified in advance of any change-of-control transaction in
which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the anti-monopoly
law enforcement agency shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In
addition, the security review rules issued by the MOFCOM, that became effective in September 2011 specify that mergers and acquisitions
by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which
foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are
subject to strict review by the MOFCOM, and the rules prohibit any activities attempting to bypass a security review, including
by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring
complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete
such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOFCOM or
its local counterpart or anti-monopoly law enforcement agency may delay or inhibit our ability to complete such transactions, which
could affect our ability to expand our business or maintain our market share.
PRC regulations relating to offshore investment activities
by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us
or otherwise expose us to liability and penalties under PRC law.
The State Administration of Foreign Exchange
(“SAFE”) promulgated the Circular on Relevant Issues Relating to PRC Resident’s Investment and Financing and
Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities
to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for
the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations
when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change
of such PRC residents or entities, name and operation term), increases or decreases in investment amount, transfers or exchanges
of shares, or mergers or divisions.
SAFE Circular 37 is issued to replace the
Circular on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments
through Overseas Special Purpose Vehicles.
If our shareholders who are PRC residents
or entities do not complete their registration with the local SAFE branches, our PRC subsidiaries may be prohibited from distributing
their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our
ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with SAFE registration described
above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
However, we may not be informed of the identities
of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our shareholders to
comply with the requirements of SAFE Circular 37. As a result, we cannot assure you that all of our shareholders who are PRC residents
or entities have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE
Circular 37. Failure by such shareholders to comply with SAFE Circular 37, or failure by us to amend the foreign exchange registrations
of our PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities,
limit our PRC subsidiaries’ ability to make distributions or pay dividends to us or affect our ownership structure, which
could adversely affect our business and prospects.
PRC regulation of loans to and direct investment in PRC
entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds
we receive from out offshore financing activities to make loans to or make additional capital contributions to our PRC subsidiaries,
which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Any transfer of funds by us to our PRC subsidiaries,
either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration or filing with
relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises in China,
capital contributions to our PRC subsidiaries are subject to the approval of or filing with the Ministry of Commerce in its local
branches and registration with a local bank authorized by SAFE. In addition, (i) any foreign loan procured by our PRC subsidiaries
is required to be registered with SAFE or its local branches or filed with SAFE in its information system; and (ii) our PRC
subsidiaries may not procure loans which exceed the difference between their total investment amount and registered capital or,
as an alternative, only procure loans subject to the calculation approach and limitation as provided in the People’s Bank
of China Notice No. 9 (“PBOC Notice No. 9”). Any medium- or long-term loan to be provided by us to our VIEs
must be registered with the National Development and Reform Commission and SAFE or its local branches. We may not be able to obtain
these government approvals or complete such registrations on a timely basis, if at all, with respect to future capital contributions
or foreign loans by us to our PRC subsidiaries. If we fail to receive such approvals or complete such registration or filing, our
ability to use the proceeds we receive from our offshore financing activities and to capitalize our PRC operations may be negatively
affected, which could adversely affect our liquidity and our ability to fund and expand our business. There is, in effect, no statutory
limit on the amount of capital contribution that we can make to our PRC subsidiaries. This is because there is no statutory limit
on the amount of registered capital for our PRC subsidiaries, and we are allowed to make capital contributions to our PRC subsidiaries
by subscribing for their initial registered capital and increased registered capital, provided that the PRC subsidiaries complete
the relevant filing and registration procedures. With respect to loans to the PRC subsidiaries by us, (i) if the PRC subsidiaries
adopt the traditional foreign exchange administration mechanism, or the Current Foreign Debt Mechanism, the outstanding amount
of the loans shall not exceed the difference between the total investment and the registered capital of the PRC subsidiaries; and
(ii) if the PRC subsidiaries adopt the foreign exchange administration mechanism as provided in Notice of the People’s
Bank of China on Matters concerning the Macro-Prudential Management of Full-Covered Cross-Border Financing, or the PBOC Notice
No. 9, the risk-weighted outstanding amount of the loans, which shall be calculated based on the formula provided in PBOC
Notice No. 9, shall not exceed 200% of the net asset of the PRC subsidiaries. According to the PBOC Notice No. 9, after
a transition period of one year since the promulgation of PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border
financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of PBOC Notice
No. 9. As of the date hereof, neither the PBOC nor SAFE has promulgated and made public any further rules, regulations, notices
or circulars in this regard. It is uncertain which mechanism will be adopted by the PBOC and SAFE in the future and what statutory
limits will be imposed on us when providing loans to our PRC subsidiaries. Currently, our PRC subsidiaries have the flexibility
to choose between the Current Foreign Debt Mechanism and the Notice No. 9 Foreign Debt Mechanism. However, if a more stringent
foreign debt mechanism becomes mandatory, our ability to provide loans to our PRC subsidiaries or our consolidated affiliated entities
may be significantly limited, which may adversely affect our business, financial condition and results of operations.
The Circular on Reforming the Administration
of Foreign Exchange Settlement of Capital of Foreign-Invested Enterprises, or SAFE Circular 19, effective as of June 1, 2015,
as amended by Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over
Foreign Exchange Settlement under the Capital Account, or SAFE Circular 16, effective on June 9, 2016, allows FIEs to settle
their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from
their foreign exchange capitals for expenditure beyond their business scopes, and also prohibit FIEs from using such Renminbi fund
to provide loans to persons other than affiliates unless otherwise permitted under its business scope. As a result, we are required
to apply Renminbi funds converted from the net proceeds we received from our offshore financing activities within the business
scopes of our PRC subsidiaries. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to use Renminbi converted
from the net proceeds from our offshore financing activities to fund the establishment of new entities in China by our VIEs or
their subsidiaries, to invest in or acquire any other PRC companies through our PRC subsidiaries, or to establish new consolidated
VIEs in China, which may adversely affect our business, financial condition and results of operations.
Our PRC subsidiaries and VIEs are subject to restrictions
on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements, conduct
our business and to pay dividends to holders of the ADSs and our ordinary shares.
We are a holding company incorporated in
the Cayman Islands. We rely on dividends from our PRC subsidiaries which in turn relies on consulting and other fees paid by our
VIEs for our cash and financing requirements, such as the funds necessary to pay dividends and other cash distributions to our
shareholders, including holders of our ADSs, and service any debt we may incur. Current PRC regulations permit our PRC subsidiaries
to pay dividends to us only out of their accumulated after-tax profits upon satisfaction of relevant statutory condition and procedures,
if any, determined in accordance with Chinese accounting standards and regulations. In addition, our PRC subsidiaries are required
to set aside at least 10% of their accumulated profits each year, if any, to fund certain reserve funds until the total amount
set aside reaches 50% of its registered capital. Furthermore, if our PRC subsidiaries, our VIEs and their subsidiaries incur debt
on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other
payments to us, which may restrict our ability to satisfy our liquidity requirements.
In addition, the Enterprise Income Tax Law
of the PRC, or the PRC EIT Law, and its implementation rules provide that withholding tax rate of 10% will be applicable to dividends
payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements
between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.
Fluctuations in exchange rates could have a material adverse
effect on our results of operations and the value of your investment.
The value of the Renminbi against the U.S.
dollar and other currencies is affected by changes in China’s political and economic conditions and China’s foreign
exchange policies, among other things. In 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi
to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between
July 2008 and June 2010, this appreciation halted and the exchange rate between Renminbi and the U.S. dollar remained within a
narrow band. Since June 2010, Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. With the
development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization,
the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that Renminbi
will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how
market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.
Governmental control of currency conversion may limit
our ability to utilize our revenues effectively and affect the value of your investment.
The PRC government imposes controls on the
convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company may rely
on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign
exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related
foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural
requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations
of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate
government authorities 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. As a result, we need to obtain SAFE approval to use
cash generated from the operations of our PRC subsidiaries and consolidated affiliated entities to pay off their respective debt
in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in
a currency other than Renminbi.
In light of the flood of capital outflows
of China in 2016 due to the weakening Renminbi, the PRC government has imposed more restrictive foreign exchange policies and stepped
up scrutiny of major outbound capital movement including overseas direct investment. More restrictions and substantial vetting
process are put in place by SAFE to regulate cross-border transactions falling under the capital account. If any of our shareholders
regulated by such policies fails to satisfy the applicable overseas direct investment filing or approval requirement timely or
at all, it may be subject to penalties from the relevant PRC authorities. The PRC government may at its discretion further restrict
access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us
from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign
currencies to our shareholders, including holders of our ADSs.
Failure to comply with PRC regulations regarding the registration
requirements for employee stock ownership plans or share option plans may subject the PRC plan participants or us to fines and
other legal or administrative sanctions.
Pursuant to SAFE Circular 37, PRC residents
who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local
branches for the foreign exchange registration with respect to offshore special purpose companies. In the meantime, our directors,
executive officers and other employees who are PRC citizens or who are non-PRC residents residing in the PRC for a continuous period
of not less than one year, subject to limited exceptions, and who have been granted incentive share awards by us, may follow the
Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan
of Overseas Publicly-Listed Company, or 2012 SAFE notices, promulgated by the SAFE in 2012. Pursuant to the 2012 SAFE notices,
PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any
stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through
a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain other procedures.
In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock
options and the purchase or sale of shares and interests. Our executive officers and other employees who are PRC citizens or who
reside in the PRC for a continuous period of not less than one year and who have been granted options are subject to these regulations.
Failure to complete the SAFE registrations may subject them to fines, and legal sanctions and may also limit our ability to contribute
additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. We also
face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive
officers and employees under PRC law.
The SAT has issued certain circulars concerning
employee share options and restricted shares. Under these circulars, our employees working in China who exercise share options
or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents
related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of
those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according
to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities.
Our leased property interests may be defective and our
right to lease the properties affected by such defects may be challenged, which could adversely affect our business.
According to the PRC Land Administration
Law, land in urban districts is owned by the state. The owner of a property built on state-owned land must possess the proper land
and property title certificate to demonstrate that it is the owner of the premises and that it has the right to enter into lease
contracts with the tenants or to authorize a third party to sublease the premises. Some of the landlords of our learning center
locations have failed to provide the title certificates to us. Our right to lease the premises may be interrupted or adversely
affected if our landlords are not the property owners and the actual property owners should appear.
In addition, the title certificate usually
records the approved use of the state-owned land by the government and the property owner is obligated to follow the approved use
requirement when making use of the property. In the case of failure to utilize the property in accordance with the approved use,
the land administration authorities may order the tenant to cease utilizing the premises or even invalidate the contract between
the landlord and the tenant. If our use of the leased premises is not in full compliance with the approved use of the land, we
may be unable to continue to use the property, which may cause disruption to our business.
Risks Related to the ADSs
The market price for our ADSs have fluctuated and may
be volatile.
The trading price of our ADSs have fluctuated
since we first listed our ADSs on NASDAQ. The trading price of our ADSs has been volatile and has ranged from US$3.20 to US$29.50
since our ADSs started to trade on NASDAQ on April 1, 2020. The trading price of our ADSs
could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors,
including 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. In addition to market and industry factors, the price and trading volume
for our ADSs may be highly volatile for factors specific to our own operations, including the following:
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variations in our revenues, earnings, cash flow and data related to our user base or user engagement;
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announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;
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announcements of new product and service offerings, solutions and expansions by us or our competitors;
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changes in financial estimates by securities analysts;
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detrimental adverse publicity about us, our products and services or our industry;
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additions or departures of key personnel;
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release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and
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potential litigation or regulatory investigations.
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Any of these factors may result in large
and sudden changes in the volume and price at which our ADSs will trade.
In the past, shareholders of public companies
have often brought securities class action suits against those companies following periods of instability in the market price of
their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention
and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could
harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our
ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant
damages, which could have a material adverse effect on our financial condition and results of operations.
If securities or industry analysts do not publish research
or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs
and trading volume could decline.
The trading market for our ADSs will be
influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who
cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover
us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the
market price or trading volume for our ADSs to decline.
The sale or availability for sale of substantial amounts
of our ADSs could adversely affect their market price.
Sales of substantial amounts of our ADSs
in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could
materially impair our ability to raise capital through equity offerings in the future. As of the date of this report, we have 20,115,570
Class A ordinary shares and 153,300,513 Class B ordinary shares outstanding. The ADSs representing our Class B ordinary shares
sold in our public offerings are freely tradable without restriction or further registration under the Securities Act. The remaining
ordinary shares are available for sale, subject to the restrictions in Rule 144 and Rule 701 under the Securities Act. To the extent
that these ordinary shares are sold into the market, the market price of our ADSs could decline.
Certain holders of our ordinary shares have
the right to cause us to register under the Securities Act the sale of their shares. Registration of these shares under the Securities
Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately
upon the effectiveness of the registration. Sales of these registered shares in the form of ADSs in the public market could cause
the price of our ADSs to decline.
You may face difficulties in protecting your interests,
and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.
We are an exempted company limited by shares
incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association,
the Companies Law of the Cayman Islands, as amended from time to time, and the common law of the Cayman Islands. The rights of
shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties 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 the common law of
England and Wales, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands.
The rights of our shareholders and the fiduciary duties 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. Some U.S. states, such as Delaware, have more fully developed
and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have
standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted
companies like us have no general rights under Cayman Islands law to inspect corporate records (other than the memorandum and articles
of association) or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our memorandum
and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our
shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain
the information needed to establish any facts necessary for a shareholder resolution or to solicit proxies from other shareholders
in connection with a proxy contest.
As a result of all of the above, our public
shareholders may 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 company incorporated in the United States.
Techniques employed by short sellers may drive down the
market price of our ADSs.
Short selling is the practice of selling
securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities
back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between
the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that
purchase than it received in the sale. As it is in the short seller’s interest for the price of the security to decline,
many short sellers publish, or arrange for the publication of, negative opinions and allegations regarding the relevant issuer
and its business prospects in order to create negative market momentum and generate profits for themselves after selling a security
short. These short attacks have, in the past, led to selling of shares in the market. If we were to become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources
to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks,
we may be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom of speech,
applicable state law or issues of commercial confidentiality.
Because we do not expect to pay dividends in the foreseeable
future, you must rely on a price appreciation of our ADSs for a return on your investment.
We currently intend to retain most, if not
all, of our available funds and any future earnings to fund the development and growth of our business. As a result, we do not
expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source
for any future dividend income.
Our board of directors has complete discretion
as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may
by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Under Cayman
Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances
may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course
of business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends,
if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus,
the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and
other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend
entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain
the price at which you purchased our ADSs. You may not realize a return on your investment in our ADSs and you may even lose your
entire investment in our ADSs.
You may not receive dividends or other distributions on
our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available 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 ordinary shares or other deposited securities
underlying our ADSs, 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 is not responsible if it decides that 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
under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain
property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these
cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws
any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any
other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you
may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make
them available to you. These restrictions may cause a material decline in the value of our ADSs.
ADSs holders may not be entitled to a jury trial with
respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any
such action.
The deposit agreement governing the ADSs
representing our Class B ordinary shares provides that, to the fullest extent permitted by law, ADS holders waive the right to
a jury trial for any claim they may have against us or the depositary arising out of or relating to our shares, our ADSs or the
deposit agreement, including any claim under the U.S. federal securities laws.
If we or the depositary were to oppose a
jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based on the facts and circumstances
of the case in accordance with applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute
jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United
States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable,
including under the laws of the State of New York, which govern the deposit agreement, or by a federal or state court in the City
of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce
a contractual pre-dispute jury trial waiver, courts will generally consider whether a party knowingly, intelligently and voluntarily
waived the right to a jury trial. We believe that this would be the case with respect to the deposit agreement and our ADSs. It
is advisable that you consult legal counsel regarding the jury waiver provision before investing in our ADSs.
If you or any other holders or beneficial
owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or our
ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury
trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary.
If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of
the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes
than a trial by jury would have, including outcomes that could be less favorable to the plaintiff(s) in any such action.
Nevertheless, if this jury trial waiver
is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition,
stipulation or provision of the deposit agreement or the ADSs serves as a waiver by any holder or beneficial owner of ADSs or by
us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations
promulgated thereunder.
The voting rights of holders of ADSs are limited by the
terms of the deposit agreement, and you may not be able to exercise your right to direct the voting of your ordinary shares underlying
our ADSs.
Holders of ADSs do not have the same rights
as our registered shareholders. As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders
or to cast any votes at such meetings. You will only be able to exercise the voting rights which attach to the underlying Class
B ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions
of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary, as holder
of the underlying Class B ordinary shares represented by your ADSs. Upon receipt of your voting instructions, the depositary will
try, as far as is practicable, to vote the ordinary shares represented by your ADSs in accordance with your instructions. If we
ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class
B ordinary shares represented by your ADSs in accordance with these instructions. If we do not instruct the depositary to ask for
your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You
will not be able to directly exercise any right to vote with respect to the underlying Class B ordinary shares unless you withdraw
such shares and become the registered holder of such shares prior to the record date for the general meeting. When a general meeting
is convened, you may not receive sufficient advance notice of the meeting to enable you to withdraw the underlying Class B ordinary
shares represented by your ADSs and become the registered holder of such shares prior to the record date for the general meeting
to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered
and voted upon at the general meeting. In addition, under our articles of association, for the purposes of determining those shareholders
who are entitled receive notice of, to attend or vote at any general meeting, our directors may close our register of members for
a stated period not exceeding thirty calendar days and/or fix in advance a record date for determining those shareholder that are
entitled to receive notice of, attend or vote at such meeting, and such closure of our register of members or the setting of such
a record date may prevent you from withdrawing the underlying Class B ordinary shares represented by your ADSs and becoming the
registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote
directly. Where any matter is to be put to a vote at a general meeting, the depositary will use its best endeavors to notify you
of the upcoming vote and to deliver our voting materials to you. We cannot assure you that you will receive the voting material
in time to ensure you can direct the depositary to vote your shares. In addition, the depositary and its agents are not responsible
for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you
may not be able to exercise your right to direct how the underlying Class B ordinary shares represented by your ADSs are voted
and you may have no legal remedy if the underlying Class B ordinary shares represented by your ADSs are not voted as you requested.
You may experience dilution of your holdings due to the
inability to participate in rights offerings.
We may, from time to time, distribute rights
to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights
to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt
from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities
Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the
rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation
to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement
declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution
of their holdings as a result.
You may be subject to limitations on the transfer of our
ADSs.
Your ADSs are transferable on the books
of the depositary. However, the depositary may 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 may 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 may also close its books in emergencies, and on weekends and
public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register
or the books of the depositary are closed, or at any time if we or the depositary thinks that it is advisable to do so because
of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any
other reason in accordance with the terms of the deposit agreement. As a result, you may be unable to transfer your ADSs when you
wish to.
Our memorandum and articles of association contain anti-takeover
provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.
Our memorandum and articles of association
contains certain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control
transactions, including a provision that grants authority to our board of directors to establish and issue from time to time one
or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred
shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights
of that series. These provisions could have the effect of depriving our shareholders and ADSs holders of the opportunity to sell
their shares or ADSs at a premium over the prevailing market price by discouraging third parties from seeking to obtain control
of our company in a tender offer or similar transactions.
We are an emerging growth company and may take advantage
of certain reduced reporting requirements.
We are an “emerging growth company,”
as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements applicable to other public
companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation
requirements of Section 404 of Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company. As a result, if we
elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may
deem important.
The JOBS Act also provides that an emerging
growth company does not need to comply with any new or revised financial accounting standards until such date that a private company
is otherwise required to comply with such new or revised accounting standards. We plan to take advantage of such exemptions afforded
to an emerging growth company. As a result, our operating results and financial statements may not be comparable to the operating
results and financial statements of other companies who have adopted the new or revised accounting standards.
As a company incorporated in the Cayman Islands, we are
permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from Nasdaq
corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we
complied fully with Nasdaq corporate governance listing standards.
As an exempted company incorporated in the
Cayman Islands that is listed on Nasdaq, we are subject to Nasdaq corporate governance listing standards. However, Nasdaq rules
permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance
practices in the Cayman Islands, which is our home country, may differ significantly from Nasdaq corporate governance listing standards.
Pursuant to Nasdaq Listing Rule 5615, we have elected to be exempt from the requirement under Nasdaq Listing Rule 5635 to obtain
shareholder approval for the issuance of 20% or more of our outstanding ordinary shares. We may also choose to follow other home
country practices in the future. As a result, our shareholders may be afforded less protection than they otherwise would enjoy
under Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.
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, we intend to publish our results of operations through
press releases, distributed pursuant to the rules and regulations of Nasdaq. 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.
We are a “controlled company” within the meaning
of the rules of the Nasdaq Stock Market and, as a result, can rely on exemptions from certain corporate governance requirements
that provide protection to shareholders of other companies.
We are a “controlled company”
as defined under the Nasdaq Stock Market corporate governance rules because Jie Zhao, our Chairman, beneficially owns more than
50% of the total voting power. For so long as we remain a controlled company under that definition, we are permitted to rely on
certain exemptions from corporate governance rules, including an exemption from the rule that a majority of our board of directors
must be independent directors or that we have to establish a nominating committee and a compensation committee composed entirely
of independent directors. As a result, you will not have the same protection afforded to shareholders of companies that are subject
to these corporate governance requirements.
Our Chairman controls more than 50% of the total voting
power of our outstanding ordinary shares and thus his interest may differ from other shareholders and holders of our ADSs, as he
is able to exert significant control over certain actions requiring a shareholder vote.
Jie Zhao, our Chairman, controls more than
50% of the total voting power of our outstanding ordinary shares. Consequently, he is able to exert significant control over certain
actions requiring a shareholder vote. As our majority shareholder, Mr. Zhao is able to elect our board of directors, and determine
the outcome of all matters requiring the approval of the holders of a majority of our outstanding shares, including the sale of
our assets or an acquisition of assets. This concentration of ownership in our shares by Mr. Zhao limits your ability to influence
corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us. Consequently,
his interest in such matters may differ from the interest of other shareholders and holders of our ADSs.
We will incur increased costs as a result of being a public
company, particularly after we cease to qualify as an emerging growth company.
As a public company, we expect to incur
significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as
well as rules subsequently implemented by the SEC and Nasdaq, impose various requirements on the corporate governance practices
of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some
corporate activities more time-consuming and costly. We expect to incur significant expenses and devote substantial management
effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and
regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent
directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating
as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and
we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be
more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating
and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty
the amount of additional costs we may incur or the timing of such costs.
In the past, shareholders of a public company
often brought securities class action suits against the company following periods of instability in the market price of that company’s
securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention
and other resources from our business and operations, which could harm our results of operations and require us to incur significant
expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our
ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant
damages, which could have a material adverse effect on our financial condition and results of operations.
There can be no assurance that we will not be a passive
foreign investment company, or PFIC, for any taxable year, which could result in adverse U.S. federal income tax consequences to
U.S. investors in our ADSs or ordinary shares.
In general, a non-U.S. corporation is a
PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income; or (ii) 50% or more of the average
quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. For purposes
of the above calculations, a non-U.S. corporation that owns, directly or indirectly, at least 25% by value of the shares of another
corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate
share of the income of the other corporation. Passive income generally includes dividends, interest, rents, royalties and certain
gains. Cash is a passive asset for these purposes. Goodwill is generally characterized as active or passive asset based on the
nature of the income produced in the activity to which the goodwill is attributable. Based on the expected composition of our income
and assets and the value of our assets, including goodwill, which is based on the price of our ADSs, we do not believe we were
a PFIC for the taxable year ended December 31, 2020. However, it is not entirely clear how the contractual arrangements between
our subsidiaries, our VIEs and the shareholders of our VIEs will be treated for purposes of the PFIC rules. In addition, the extent
to which our goodwill should be characterized as an active asset is not entirely clear. Furthermore, our PFIC status for any taxable
year will depend on the composition of our income and assets and the value of our assets from time to time (which may be determined,
in part, by reference to the market price of our ADSs, which could be volatile). Accordingly, there can be no assurance that we
will not be a PFIC for any taxable year. If we were a PFIC for any taxable year during which a U.S. taxpayer holds ADSs or ordinary
shares, the U.S. taxpayer generally will be subject to adverse U.S. federal income tax consequences, including increased tax liability
on disposition gains and “excess distributions” and additional reporting requirements. See “Item 10.E. Taxation—U.S.
Federal Income Taxation—Passive Foreign Investment Company Rules.”
ITEM 4.
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INFORMATION ON THE COMPANY
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A.
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HISTORY AND DEVELOPMENT OF OUR COMPANY
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We commenced our commercial operations in
May 2015 through Beijing WiMi Hologram Cloud Software Co., Ltd., or Beijing WiMi (previously under the name “WiMi Lightspeed
Capital Investment Management (Beijing) Co., Ltd.”). In February 2016, Beijing WiMi formed a wholly-owned subsidiary, Micro
Beauty Lightspeed Investment Management HK Limited in Hong Kong. In addition, Beijing WiMi acquired 100% equity interest in Shenzhen
Yidian Internet Technology Co., Ltd, or Shenzhen Yidian on October 21, 2015, Shenzhen Yitian Hulian Internet Technology Co., Ltd.,
or Shenzhen Yitian on August 20, 2015 and Shenzhen Kuxuanyou Technology Co., Ltd., or Shenzhen Kuxuanyou on August 26, 2015.
We incorporated WiMi Cayman under the laws
of the Cayman Islands as our offshore holding company in August 2018 to facilitate offshore financing. In September 2018, we established
WiMi Hologram Cloud Limited, or WiMi HK, our wholly-owned Hong Kong subsidiary, and WiMi HK established a wholly-owned PRC subsidiary,
Beijing Hologram WiMi Cloud Internet Technology Co., Ltd., or Hologram WiMi, which we also referred in this annual report as WiMi WFOE.
In April 2020, we completed our initial
public offering in which we offered and sold an aggregate of 9,500,000 Class B ordinary shares in the form of 4,750,000 ADSs.
The ADSs were sold at an offering price of US$5.50 per ADS generating gross proceeds of approximately US$26.125 million, and net
proceeds of approximately US$24.2 million after deducting underwriting commission and other expenses. On April 1, 2020, our ADSs
began trading on the Nasdaq under the symbol “WIMI”. On July 27, 2020, we completed our follow-on public offering of
7,560,000 ADSs at the price of US$8.18 per ADS, resulting in net proceeds to us of approximately US$57.3 million, after deducting
placement agent fees and other expenses.
WiMi HK set up joint venture companies,
ICinit Limited and VIDA Semicon Co., Limited in June and August 2020, respectively. In August 2020, we established a wholly-owned
subsidiary, Lixin Technology, in Hainan Province, China. In September 2020, we established our then wholly-owned subsidiary, VIYI,
in Cayman Islands. As of September 27, 2020, VIYI entered into an acquisition framework agreement with FE-DA Electronics Company
Private Limited, or FE-DA, and its original shareholder, to acquire the entire equity interests of FE-DA for a total consideration
of US$35 million, which shall be paid in several installments, subject to the fulfilment of certain performance conditions by FE-DA.
The acquisition framework agreement was subsequently amended and supplemented on September 28, 2020 pursuant to which the original
shareholder of FE-DA has undertaken certain performance guarantees of FE-DA’s net profits, and VIYI is entitled to seek refund
from the original shareholder of FE-DA. VIYI paid US$ 15 million on November 27, 2020 and the remaining payments for this acquisition
are expected to be made in three installments during the next three years, subject to the fulfilment of certain performance conditions
by FE-DA. The first payment of US$ 6 million is due on March 31, 2022 if the net income of FE-DA for the year of 2021 is at least
US$ 3 million; the second payment of US$ 6 million is due on March 31, 2023 if the net income of FE-DA for the year of 2022 is
at least US$ 6 million; and the third payment of US$ 8 million is due on March 31, 2024 if the net income of FE-DA for the year
of 2023 is at least US$ 9 million. If FE-DA is unable to meet the performance target in any year, the Company is entitled to a
refund of consideration that is twice of the difference between FE-DA’s actual net profits and the guaranteed net profits.
On March 26, 2021, FE-DA and VIYI entered into a second amended agreement to amend the terms of the payment for the three installments
so that all payments will be settled on March 31, 2024. FE-DA is a provider of Internet of Things solutions based in Singapore,
and primarily engages in the central processing algorithm integrated circuit (“CPA-IC”) solution business in Southeast
Asia.
On November 15, 2020, we entered into an
equity transfer agreement with Bofeng Investment Limited and Bravo Great Enterprises Limited, pursuant to which we transferred
4.0% and 6.0% of the issued share capital of VIYI to Bofeng Investment Limited and Bravo Great Enterprises Limited, respectively,
for a total consideration of US$10.0 million. On December 7, 2020, we entered into an equity transfer agreement with Universal
Winnings Holding Limited, pursuant to which we transferred 3.5% of the issued share capital of VIYI to Universal Winnings Holding
Limited for a consideration of US$3.5 million.
On March 25, 2021, we completed our second follow-on public offering
in which we offered and sold an aggregate of 11,173,335 units, each unit consists of one ADS and four-tenths of a warrant to purchase
one ADS at an exercise price of US$8.60 per ADS. The units were sold at an offering price of US$7.50 per unit and generated gross proceeds
of approximately US$83.8 million, and net proceeds of approximately US$77.8 million after deducting placement agent fees and other expenses.
In March 2021, we changed the name of VIYI
from VIYI Technology Inc. to VIYI Algorithm Inc. On March 25, 2021, Bofeng Investment Limited and Bravo Great Enterprises Limited
transferred their respective shareholdings in VIYI to MIDI Capital Markets LLC and Guosheng Holdings Limited. As of the date of
this annual report, we hold 73% of issued and outstanding share capital of VIYI.
Due to restrictions imposed by PRC laws
and regulations on foreign ownership of companies that engage in internet and other related business, Hologram WiMi later entered
into a series of contractual arrangements with Beijing WiMi. On December 18, 2020, for the purpose of internal restructuring and
under the continuous control of Hologram WiMi, the then shareholders of Beijing WiMi, transferred all of their respective equity
interests in Beijing WiMi to Ms. Yadong Sun and Ms. Zhaohua Yao, the nominee shareholders of Beijing WiMi. On the same day, Ms.
Yadong Sun and Ms. Zhaohua Yao, Beijing WiMi, and Hologram WiMi entered into a series of contractual agreements that allow us to
exert effective control over our Beijing WiMi and its subsidiaries. On December 24, 2020, Shenzhen Weiyixin Technology Co., Ltd.,
or Shenzhen Weiyixin, a wholly-owned subsidiary of VIYI, also entered into a series of contractual agreements with Shenzhen Yitian,
and its shareholders, which allow us to exert effective control over Shenzhen Yitian. We depend on these contractual arrangements
with Beijing WiMi and Shenzhen Yitian, or our VIEs, in which we have no ownership interests, and their shareholders to conduct
most aspects of our operations. We have relied and expect to continue to rely on these contractual arrangements to conduct our
business in China. For more details, see “Item 4. Information on the Company—C. Organizational Structure — Contractual
Arrangements with the VIEs and Their Respective Shareholders”. The shareholders of our VIEs may have potential conflicts
of interest with us. See “Item 3.D. Risk Factors—Risks Related to Our Corporate Structure—Our shareholders or
the shareholders of our VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business”
for details.
Our corporate headquarters is located at
No. 6, Xiaozhuang, #101A, Chaoyang District, Beijing, the People’s Republic of China. Our telephone number at this address
is +86-10-5338-4913. Our registered office in the Cayman Islands is located at the office of Maples Corporate Services Limited
at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is Puglisi &
Associates, located at 850 Library Avenue, Suite 204, Newark, DE 19711.
We are subject to the periodic reporting
and other informational requirements of the Exchange Act as applicable to foreign private issuers. Under the Exchange Act, we are
required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within
four months after the end of each fiscal year. Copies of reports and other information, when so filed with the SEC, can be inspected
and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You
can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. The public may obtain information
regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. SEC maintains a website (http://www.sec.gov),
which contains reports, proxy and information statements, and other information regarding us that are filed electronically with
the SEC.
Capital Expenditure
Our capital expenditure amounted to approximately
RMB0.05 million, RMB0.2 million and RMB0.5 million (US$74,296) for the years ended December 31, 2018, 2019 and 2020, respectively.
The capital expenditure for the year ended December 31, 2020 was primarily used for the purchase of property and equipment, such
as office supplies and equipment, and payment for leasehold improvements.
We offer AR-based holographic services and products to cater to our
customers’ needs, focusing on providing an innovative, immersive and interactive holographic AR experience for our customers and
end users. We also engage in the provision of central processing algorithm services and computer chip products to enterprise customers
and the sales of comprehensive solutions for central processing algorithms and related services with software and hardware integration.
Our AR service and product offerings primarily consist of holographic AR advertising services and holographic AR entertainment products.
Approximately 80.5%, 83.8%, and 40.1% of our revenues were generated by our holographic AR advertising services for the years ended December
31, 2018, 2019, and 2020, respectively. Approximately 19.5%, 16.2%, and 3.9% of our revenues were generated by our holographic AR entertainment
products for the years ended December 31, 2018, 2019, and 2020, respectively. The core of our holographic AR business is holographic AR
technologies used in software engineering, content production, cloud and big data. By leveraging our strong technological capabilities
and infrastructure, we are able to deliver superior products and services and conduct our operations in a highly efficient manner. Approximately
100.0%, 100.0%, and 44.0% of our revenues were generated by our holographic AR advertising and entertainment services for the years ended
December 31, 2018, 2019, and 2020, respectively.
We
believe that the application demand for holographic 3D vision in the semiconductor sector is growing rapidly and represents huge
market potentials. Starting in July 2020, we began to develop our semiconductor business by establishing two joint ventures,
ICinit Limited and VIDA Semicon Co., Limited, and one wholly-owned subsidiary
Lixin Technology Co., Ltd. In September 2020, we established VIYI, and acquired 100% equity interests of FE-DA to further develop
our semiconductor business. For our semiconductor business, we engage in the provision of central processing algorithm services
and computer chip products to enterprise customers and the sales of comprehensive solutions for central processing algorithms and
related services with software and hardware integration. We began to generate revenues from our semiconductor business in September
2020. For the year ended December 31, 2020, approximately 56.0% of our revenues were generated from the sales of semiconductor
products and related accessories, and software for central processing units based on customers’ specific needs.
Holographic AR Advertising Services
Our holographic AR advertising software enables
users to insert into video footages real or animated three dimensional (“3D”) objects that integrate seamlessly within
the scene of such footages. Our online holographic AR advertising solution embeds holographic AR ads into films and shows that
are hosted by leading online streaming platforms in China. Through our proprietary image and video recognition technologies, our
software enables users to analyze the underlying video footages at a pixel level to identify ad spaces that can be augmented by
3D objects. Advertisers and their agencies purchase these ad spaces through application programming interfaces, or APIs, integrated
with our systems, specifying their target audience and budgets and typically providing the 3D models to be embedded in the videos.
When the ad space is detected and 3D objects are generated, the 3D objects are embedded into the underlying streaming videos automatically
on a batch-processing basis as determined by our software. For the year ended December 31, 2019, holographic AR ads produced using
our advertising solutions generated approximately 9.7 billion views, representing an increase of 47.0% from approximately 6.6 billion
views for the year ended December 31, 2018. For the year ended December 31, 2020, holographic AR ads produced using our advertising
solutions generated approximately 11.3 billion views, representing an increase of 16.5% from approximately 9.7 billion views for
the year ended December 31, 2019.
The following diagram illustrates the key
steps of our online holographic AR advertising business:
As compared with traditional forms of digital
ads, we believe that ads generated using our holographic AR technology have the following key benefits:
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Engaging and interactive. Holographic AR ads tend to create a more engaging, memorable experience that likely stimulates the purchase impulse. Holographic AR ads encourage engagement between the consumers and brands, creating a relationship that is more interactive than other forms of ads.
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Natural and non-disruptive. As compared with traditional banner ads and video-based ads that flash and spin on the screen, holographic AR ads are naturally blended with the scenes in the films or TV shows, which helps to overcome advertising blindness and create a natural, non-disruptive viewing experience.
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Cost-effectiveness and flexibility. Our technologies identify appropriate ad space that can be used repeatedly for ads of multiple brands. While video-embedded 3D objects provide substantially the same level of reality as compared to tangible ads, they tend to be more cost-effective as they save the costs associated with shooting a commercial.
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Holographic AR Entertainment Products
Our holographic AR entertainment products
primarily consist of payment middleware software, game distribution platform and holographic MR software.
Payment middleware is a software solution
that connects mobile apps to payment channels, giving mobile app users convenient access to a wide range of online payment options.
We cooperate with app developers to embed our payment middleware, most of which feature AR functions, in mobile apps.
Our advanced payment middleware streamlines
the often time-consuming mobile payment process. Our mobile payment middleware facilitates app developers to build an in-app payment
infrastructure that allows micropayments to be made or received through an efficient, secure system, without any interface redirection.
Such mobile payment middleware enables app developers to store users’ payment credentials in a trusted and safe environment
and eases user’s burden of repeatedly entering and authenticating payment information for each transaction.
Our payment middleware can be fully integrated
with various types of mobile apps, especially those employing AR technologies, such as live streaming, gaming, selfie, photo editing,
and video-sharing apps. Currently, our payment middleware supports substantially all of the major online payment channels in China,
and is compatible with the mainstream mobile operating systems.
The following graphic illustrates the key
steps involved in the holographic AR payment middleware services that we provide to app developers:
We generate revenues from our mobile payment
middleware by sharing revenues with app developers at an agreed-upon percentage. In addition, in 2018, we launched 233 Game
Platform, an online game distribution platform. This platform provides game developers with technical support and value-added
services that may help them target, reach and monetize their audiences. For the year ended December 31, 2020, over 3,532 apps were
operated on or docked into our 233 Game Platform, which attracted over 3,866,622 active members, defined as the number of
registered accounts that logged in at least once during a specified time period. We started generating revenue from our platform
in the second quarter of 2019, as we started adding new apps to the platform that gained polarity with users, and certain existing
games became more popular among users.
We also sell MR software, a comprehensive
holographic application platform independently developed by our research and development team, which includes holographic audio-visual
integrated operation, holographic advertising service, holographic media asset management and holographic data management on the
platform level and holographic interactive system, holographic recognition system, holographic labeling system, holographic tracking
system, holographic capture system and holographic analysis system. Our MR software also includes multiple modules that allow end-users
to edit and display holographic AR contents and create their own custom visual effects.
Our AR holographic entertainment business
is based on users’ demand for entertainment applications in the field of 3D computer vision. We charge the customers software
license fees. With the development and popularization of AR holographic hardware devices, we expect that there will be more applications
in the future for our AR holographic entertainment products.
Semiconductor Business
We engage in the provision of central processing
algorithm services and computer chip products to enterprise customers and the sales of comprehensive solutions for central processing
algorithms and related services with software and hardware integration. Through optimizing advertising content and content matching,
as well as integrating the hardware performance optimization of the central processing algorithm with software algorithm optimization,
our central processing algorithm services enable internet integration agencies to enhance their cloud service computing and processing
capabilities. We also provide central processing algorithm services, hardware performance optimization and software algorithm optimization
services to online game developers and game distributors to help them reach the target end-users. Our smart chip optimization solutions
refer to the provision of more efficient data services under optimizations of algorithm software as well as through equipping instruction
chip central processing unit (“CPU”) with smart chips that have outstanding computing power. Different CPU and smart
chip combinations are equipped in accordance to the diverse requirements of data processing and various data type of different
industries with an aim to enhance the overall energy efficiency ratio of data services. Through the provision of CPU products and
smart application solutions and value-added services, we meet the specific needs of customers. Through the sales of CPU products,
we have expanded the provision of integrated smart application solutions and value-added services to our customers, which is an
important link between the upstream and downstream of the CPU industry chain.
Our Technology
We have developed powerful, cutting-edge
holographic AR technologies.
Holographic Image Processing and Recognition
Intelligence Technology
We insert holographic AR advertisements into
online videos based on our imaging detection and recognition technology, template matching and detection technology, video processing
and recognition technology, holographic 3D layer replacement technology in imaging recognition and dynamic fusion processing technology
in imaging tracking. We expect that these technologies will be applied to our future strategic blueprint, such as the development
and application of holographic 3D facial recognition technology and holographic facial change technology.
Development and Application in Holographic
3D Facial Recognition Technology
The development of holographic 3D facial
recognition software is based on our holographic imaging featured imaging detection and recognition technology, template matching
holographic imaging detection technology, and deep learning and training based video processing and recognition technology. Traditional
2D facial recognition technology is a biographic recognition technology based on facial features, which captures the information
from the facial images or facial video streaming, and automatically detects and tracks the targeted face. By contrast, we believe
our holographic 3D facial recognition technology is a biographic recognition technology consisting of a combination of holographic
imaging capture and 3D portrait. We focus on the development and application of our software technology, and have technologies
in AI, machine recognition, machine learning, model theory, and video imaging processing. Holographic 3D facial recognition technology
is a technology using the collection of structured light and infrared light, and the collected featured points can exceed 30,000
points. By contrast, the collected featured points for traditional 2D facial recognition technology is less than 1,000 points.
Our 3D technology is also expected to be less affected by the surrounding environment and is expected to overcome many of the issues
found in traditional 2D facial recognition technology, such as light, posture, occlusion, dynamic recognition and facial expression.
Development and Application of Holographic
Facial Change Technology
Holographic facial change technology is based
on our holographic 3D layer replacement technology involving image recognition and dynamic fusion processing technology based on
AI, tracking images in real time and replacing faces with other faces. This technology replaces faces in video frames, synthesizing
the video and adding the original audio. We have validated these technology modules in holographic AR plug-in advertisement applications
and continue to develop and upgrade these technology modules. We believe this technology will bring new business growth to applications
such as celebrity advertising, film distribution, and live video streaming.
Software Engineering
Since our inception, we have devoted the
majority of our research and development resources to software development. Our software engineering team is responsible for building
the company-wide software platform, supporting the integration of our products and applications within our cloud infrastructure,
as well as developing the holographic AR-related and MR-related software and solutions we license to our entertainment industry
customers.
Our holographic AR software development services
provide customers with the following benefits:
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Convenience. We design our software for simplicity, ease of use and user-friendly experience. Through our software’s intuitive, visual interface, users can rapidly and easily manage, distribute and implement holographic AR contents.
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Adaptability. Our integrated holographic AR software is built with broad compatibility and can run on various computer operating systems, including Windows, Mac OS and Linux. Customers can install our software in the cloud, on-premises or using a hybrid approach.
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Functionality and Intelligence. We continue to leverage our software engineering capabilities to improve our offerings, which allows for richer software functionality. As our customer base continues to grow, we believe we will be able to further enhance our software intelligence with the increased volume of data processed.
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Reliability. We value the long-term relationship with our customers and provide our customers continuous ancillary technical support and services. We perform security and code quality reviews before releasing the software to our customers and we also embed mature security practices throughout the whole life span of our holographic AR software to protect our customers’ data and proprietary information.
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Content Production
Our leading holographic AR content production
capabilities are built around image acquisition, object recognition, automated image process, and computer vision technologies.
Our software engineering team and visualization design team work closely to consistently advance such visualization-related technologies,
and harness them to design and produce innovative holographic AR contents. Through real-time computer vision algorithms which provide
an accurate pose estimation, we are able to perform scene recognition and tracking within seconds. Such cutting-edge algorithms
also allow us to perform visualization of photorealistic high-resolution renderings of products on a pixel basis. In the course
of scene reconstruction, our automated image processing tools can perform noise cleaning and feature enhancement on the image we
initially captured, enabling us to create best-in-class holographic AR designs with an industry-leading simulation degree.
We have built a comprehensive holographic
AR content library. The formats of our holographic AR contents range from 3D models to holographic short videos. As of December
31, 2020, we owned over 4,600 ready-to-use AR holographic contents that were available to be adapted to our holographic AR products
and solutions, including animals, cartoon characters, vehicles and foods. Our AR holographic contents can be applied in various
scenarios, such as education, tourism, arts and entertainment, and popular science. In addition, our content library is also enriched
by copyrighted contents that we have licensed from third parties. We cooperate with various content owners, including brands, film
producers and talent agencies, to adapt high-quality, popular IPs into holographic AR formats.
Cloud
We believe that the next-generation cloud
delivery technology provides the flexibility and scalability necessary for holographic AR experience. Cloud technology is of high
importance to build our comprehensive holographic AR ecosystem. We have developed our cloud architecture to work effectively in
a flexible cloud environment that has a high degree of elasticity. Meanwhile, benefiting from our cloud storage and connecting
capabilities, users of our integrated holographic AR software are able to access our large-size holographic AR content library
on their own devices.
Big Data
We have developed advanced data analytics capabilities to derive actionable
insights from the large amounts of data we collected from our products and third party sources, enabling us to maintain a solid end-user
base in order to collect raw data. Our processing capabilities enable us to manage extremely large volumes of data and deliver real-time
analysis at scale, making it possible for us to continue to improve and innovate our products and services. Our data mining and user behavioral
data analytics technologies allow us to build and segment context-rich user profiles and apply such analysis in numerous applications.
For instance, we have created over 2,560 user tags by analyzing user data we collected through our holographic AR advertising services.
Artificial Intelligence
Our holographic image processing capabilities
are regularly optimized and improved, including two core technologies: holographic AI facial recognition technology and holographic
AI facial change technology. As a result of the development of our video processing and recognition technology, our holographic
AR advertising and holographic imaging services, which are based on image detection, recognition, template matching, image dynamic
fusion and replacement, are currently in a leading position in the industry.
5G+
We believe that our holographic services
will adapt to 5G technology. Due to the high speed and low latency of 5G technology, the transmission delay of the long-distance
communication and data transmission from the system terminal to the service server is lower than the 4G network transmission delay.
Such improvement ensures less stagnation, low delay, high efficiency, and diversity of the interaction of multiple terminals in
holographic AR remote communication and data transmission. We expect our holographic AR advertising business to develop accordingly.
Our Customers
We have a broad and diverse customer base.
Currently, our customers for holographic AR business mainly consist of advertisers, distribution channels, app developers and entertainment
companies. Our customer base covers a wide range of industries, including manufacturing, real estate, entertainment, technology,
media and telecommunications, travel, education and retails. Our customers typically enter into a master agreement with us for
a term of one year, although they do not necessarily purchase products or services from us during each quarter of such year. A
separate request is submitted by a customer for each order of products or services.
Generally, we enter into service agreements
with customers relating to our holograph AR ad services and our AR SDK payment customers relating to our AR SDK services. We provide
customized holographic MR software and middleware software to distributors under software development agreements, who subsequently
sub-license the customized software to enterprises and individual end users. The software development agreements entered into between
us and the distributors include customization of our integrated holographic AR and MR entertainment software, ancillary technical
training, as well as professional service and support. We charge distributors on a fixed-price basis. For our AR ad services, we
charge service fees based on the number of views. For our AR SDK payment services, we charge a percentage of the total fees paid
by the end users. We generally maintain annual agreements with our customers.
Our customers for semiconductor business
primarily include manufacturers of electronic products and internet information infrastructure service providers. We provide manufacturers
of electronic products with software and hardware integrated solutions that combine chip hardware and intelligent application software.
We offer hardware products and server algorithm optimization and integration solution services to internet information infrastructure
service providers.
Sales and Marketing
We promote our products and services directly
through our experienced and creative sales and marketing team by making direct office visits, attending conferences and industry
exhibitions. Customers unfamiliar with our services and products may also consult with our support team to achieve best solutions.
We believe that our sales and marketing team is well respected and helps attracting more customers.
We also grow our customer base through word-of-mouth
referrals. We focus on continuously improving the quality of our products and services as we believe satisfied customers are more
likely to continue using our products and recommend our products and services to others.
Intellectual Property
We regard our patents, copyrights, trademarks,
trade secrets and other intellectual properties as critical to our success. We rely on a combination of patent, copyright, trademark
and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Details of our intellectual properties
portfolio as of December 31, 2020 are set out as follows:
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Patent: We had 195 registered patents in China, which covers technologies for image processing and display, model input/output and 3D modeling, 56 pending patent applications with the PRC China National Intellectual Property Administration, and no patent under the patent cooperation treaty. 193 of our 195 registered patents were granted as patent for utility model;
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Software copyrights. We maintain a large portfolio of copyright-protected software. We had 325 registered software copyrights in China;
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Trademarks. We had 26 registered trademark in China, and no pending trademark application with the PRC State Administration for Industry and Commerce; and
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Domain names. We had 25 registered domain names in China.
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In addition to the foregoing protections,
we generally control access to and use of our proprietary and other confidential information through the use of internal and external
controls. For example, for external controls, we enter into confidentiality agreements or agree to confidentiality clauses with
our customers and, for internal controls, we adopt and maintain relevant policies governing the operation and maintenance of our
systems and the management of user-generated data.
Competition
There are many other companies addressing
various aspects/verticals of the holographic AR market. The competitive landscape we are faced with is fragmented and evolving.
With respect to our holographic AR advertising products, we compete against both holographic AR advertisement producers and traditional
advertisement producers. The semiconductor industry is also highly competitive. Our major competitors include digital marketing
service providers and online game service providers.
We believe the principal competitive factors
in our market are:
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breadth of use cases supported;
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product features and functionality;
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capability for customization, configurability, integration, security, scalability and reliability;
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quality of technologies and research and development capabilities;
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ability to innovate and rapidly respond to customer needs;
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availability of holographic compatible, high-quality content;
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diversified customer base;
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relationships with key participants in holographic AR value chain;
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sufficient capital support;
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platform extensibility and ability to integrate with other holographic AR infrastructures; and
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brand awareness and reputation.
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We believe we compete favorably on the basis
of the above factors; however, we expect competition to intensify in the future. Our ability to remain competitive will largely
depend on the quality of our applications, the effectiveness of our sales and marketing efforts, the quality of our customer service
and our ability to acquire complementary technologies, products and businesses to enhance the features and functionality of our
applications.
Insurance
We do not maintain insurance policies covering
damages to our Information Technology systems. We also do not maintain business interruption insurance or general third-party liability
insurance, nor do we maintain product liability insurance or key-man insurance. We consider our insurance coverage to be in line
with that of other companies in the same industry of similar size in China.
Regulations
We are subject to a variety of PRC laws,
rules and regulations across a number of aspects of our business. The following is a summary of the principal PRC laws and regulations
relating to our business and operations within the territory of the PRC.
Regulation on Foreign Investment Restrictions
Investment activities in the PRC by
foreign investors are principally governed by the Catalog of Industries for Encouraging Foreign Investment, or the Encouraging
Catalog, and the Special Administrative Measures (Negative List) for Foreign Investment Access, or the Negative List, which were
promulgated and are amended from time to time by Ministry of Commerce, or MOFCOM, and National Development and Reform Commission,
or NDRC, and together with the Foreign Investment Law and its respective implementation rules and ancillary regulations. The Encouraging
Catalog and the Negative List lay out the basic framework for foreign investments in China, classifying businesses into three categories
with regard to foreign investments: “encouraged”, “restricted” and “prohibited”. Industries
not listed in the Encouraging Catalog or the Negative List are generally deemed as falling into a fourth category “permitted”
unless specifically restricted by other PRC laws.
On June 30, 2019, MOFCOM and NDRC released
the Catalog of Industries for Encouraging Foreign Investment (2019 Version) and on December 27, 2020, MOFCOM and NDRC released
the Catalog of Industries for Encouraging Foreign Investment (2020 Version) which took effect on January 27, 2021 and replace the
Catalog of Industries for Encouraging Foreign Investment (2019 Version). On June 23, 2020, MOFCOM and NDRC promulgated the Special
Administrative Measures (Negative List) for Foreign Investment Access (2020 Version), which became effective on July 23, 2020.
On March 15, 2019, the Foreign Investment
Law was formally issued, and become effective on January 1, 2020, on which Regulation for the Implementation of Foreign Investment
Law of the People’s Republic of China and Measures for Reporting of Information on Foreign Investment become effective. The
Foreign Investment Law and its implementation regulation mainly focuses on the foreign investment promotion, foreign investment
protection and foreign investment management. Comparing with the draft Foreign Investment Law (2015), the Foreign Investment Law
does not mention concepts such as “De facto control” and “controlling PRC companies by contracts or trusts”,
nor did it specify the regulation requirements on controlling through contractual arrangements. Pursuant to Measures for Reporting
of Information on Foreign Investment, a foreign investor or foreign-invested enterprise shall, through the enterprise registration
system and the enterprise credit information disclosure system, report investment information to the competent departments in charge
of commerce. The foreign investment information reports include the initial report, report of changes, report of deregistration,
and annual report.
Regulations on AR Industry
On December 21, 2018, Ministry of Industry
and Information Technology issues the Guidance on Accelerating the Development of AR Industry, which requires that the AR Industry
in China shall be promoted and application innovation in AR technology shall be promoted.
Regulations on Value-added Telecommunication Services
On September 25, 2000, the State Council
promulgated the Telecommunications Regulations of the People’s Republic of China, or the Telecom Regulations, which
was amended on July 29, 2014 and February 6, 2016. The Telecom Regulations is the primary PRC law governing telecommunication services
and sets out the general regulatory framework for telecommunication services provided by PRC companies. The Telecom Regulations
distinguishes between “basic telecommunication services” and “value-added telecommunication services.”
The Telecom Regulations defines value-added telecommunications services as telecommunications and information services provided
through public networks. Pursuant to the Telecom Regulations, commercial operators of value-added telecommunications services must
first obtain an operating license from the MIIT, or its provincial level counterparts.
The Catalog of Telecommunications Business,
or the Catalog, which was issued as an attachment to the Telecom Regulations and updated in February 21, 2003 and December 28,
2015, further categorizes value-added telecommunication services into two classes: Class 1 value-added telecommunication services
and Class 2 value-added telecommunication services. Information services provided via cable networks, mobile networks or internet
fall within Class 2 value-added telecommunications services.
On July 3, 2017, the MIIT issued the Measures
on the Administration of Telecommunications Business Operating Permits, or the Telecom License Measures, which became effective
on September 1, 2017, to supplement the Telecom Regulations. The Telecom License Measures sets forth the types of licenses required
to operate value-added telecommunications services and the qualifications and procedures for obtaining such licenses. The Telecom
License Measures also provides that an operator providing value-added services in multiple provinces is required to obtain an inter-regional
license, whereas an operator providing value-added services in one province is required to obtain an intra-provincial license.
Any telecommunication services operator must conduct its business in accordance with the specifications in its license.
Regulations on Internet Content Providers
The Administrative Measures on Internet Information
Services, or the Internet Content Measures, which was promulgated by the State Council on September 25, 2000 and amended on January
8, 2011, set out guidelines on the provision of internet information services. The Internet Content Measures classifies internet
information services into commercial internet information services and non-commercial internet information services. Commercial
internet information services refer to services that provide information or services to internet users with charge. A provider
of commercial internet information services must obtain an ICP License.
Regulations on Foreign Direct Investment in Value-Added Telecommunications
Companies
Foreign direct investment in telecommunications
companies in China is governed by the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises,
which was promulgated by the State Council on December 11, 2001 and amended on September 10, 2008 and February 6, 2016. These regulations
require that foreign-invested value-added telecommunications enterprises in China must be established as Sino-foreign equity joint
ventures and that the foreign investors may acquire up to 50% equity interests in such joint ventures. In addition, a major foreign
investor in a value-added telecommunications business in China must demonstrate a good track record and experience in operating
value-added telecommunications business. Moreover, foreign investors that meet these requirements must obtain approvals from the
MIIT and the MOFCOM, to provide value-added telecommunication services in China.
On July 13, 2006, the Ministry of Information
Industry, or the MII, released the Notice on Strengthening the Administration of Foreign Investment in the Operation of
Value-added Telecommunications Business, or the MII Notice, pursuant to which, for any foreign investor to invest in telecommunications
business in China, a foreign-invested telecommunications enterprise must be established and such enterprise must apply for the
relevant telecommunications business operation licenses. Furthermore, under the MII Notice, domestic telecommunications enterprises
may not rent, transfer or sell a telecommunications business operation license to foreign investors in any form, and they may not
provide any resources, premises, facilities and other assistance in any form to foreign investors for their illegal operation of
any telecommunications business in China. In addition, under the MII Notice, the internet domain names and registered trademarks
used by a value-added telecommunication service operator shall be legally owned by such operator or its shareholders.
Regulations on Infringement upon Intellectual Property Rights
via Internet
The Civil Code of the People’s Republic
of China, which was adopted by the National People’s Congress on May 28, 2020 and became effective on January 1, 2021, provides
that (i) network users and network service providers shall assume tort liability if they infringe upon another person’s civil
rights and interests through the network. Where it is otherwise prescribed in law, such provisions shall prevail; (ii) where a
network user commits any tortious act through network services, the right holder shall have the right to notify the network service
provider to take necessary action such as deletion, block or disconnection. The notice shall include preliminary evidence of the
infringement and the real identity information of the right holder. After receiving the notice, the network service provider shall
promptly forward the notice to the relevant network user and take necessary measures in light of the preliminary evidence of infringement
and the type of service; if the network service provider fails to take necessary action after being notified, it shall assume joint
and several liability with the network user with regard to the aggravated part of the damage. If the network user or network service
provider is damaged due to wrong notice, the right holder shall assume tort liability. Where it is otherwise prescribed in law,
such provisions shall prevail; (iii) Where a network service provider knows or should have known that a network user is infringing
upon another person’s civil rights and interests through its network service but fails to take necessary action, it shall assume
joint and several liability with the network user.
Regulation on Intellectual Property Rights
The PRC has adopted comprehensive legislation
governing intellectual property rights, including patents, trademarks, copyrights and domain names.
Patents
Pursuant to the PRC Patent Law, most recently
amended on December 27, 2008, and its implementation rules, most recently amended on January 9, 2010, patents in China fall into
three categories: invention, utility model and design. An invention patent is granted to a new technical solution proposed in respect
of a product or method or an improvement of a product or method. A utility model is granted to a new technical solution that is
practicable for application and proposed in respect of the shape, structure or a combination of both of a product. A design patent
is granted to the new design of a certain product in shape, pattern or a combination of both and in color, shape and pattern combinations
aesthetically suitable for industrial application. Under the PRC Patent Law, the term of patent protection starts from the date
of application. Patents relating to invention are effective for twenty years, and utility models and designs are effective for
ten years from the date of application. The PRC Patent Law adopts the principle of “first-to-file” system, which provides
that where more than one person files a patent application for the same invention, a patent will be granted to the person who files
the application first. Existing patents can become narrowed, invalid or unenforceable due to a variety of grounds, including lack
of novelty, creativity, and deficiencies in patent application. In China, a patent must have novelty, creativity and practical
applicability. Under the PRC Patent Law, novelty means that before a patent application is filed, no identical invention or utility
model has been publicly disclosed in any publication in China or overseas or has been publicly used or made known to the public
by any other means, whether in or outside of China, nor has any other person filed with the patent authority an application that
describes an identical invention or utility model and is recorded in patent application documents or patent documents published
after the filing date. Creativity means that, compared with existing technology, an invention has prominent substantial features
and represents notable progress, and a utility model has substantial features and represents any progress. Practical applicability
means an invention or utility model can be manufactured or used and may produce positive results. Patents in China are filed with
the State Intellectual Property Office, or SIPO. Normally, the SIPO publishes an application for an invention patent within 18
months after the filing date, which may be shortened at the request of applicant. The applicant must apply to the SIPO for a substantive
examination within three years from the date of application. Article 20 of the PRC Patent Law provides that, for an invention or
utility model completed in China, any applicant (not just Chinese companies and individuals), before filing a patent application
outside of China, must first submit it to the SIPO for a confidential examination. Failure to comply with this requirement will
result in the denial of any Chinese patent for the relevant invention. This added requirement of confidential examination by the
SIPO has raised concerns by foreign companies who conduct research and development activities in China or outsource research and
development activities to service providers in China.
Patent Enforcement
Unauthorized use of patents without consent
from owners of patents, forgery of the patents belonging to other persons, or engagement in other patent infringement acts, will
subject the infringers to infringement liability. Serious offences such as forgery of patents may be subject to criminal penalties.
When a dispute arises out of infringement of the patent owner’s patent right, Chinese law requires that the parties first
attempt to settle the dispute through mutual consultation. However, if the dispute cannot be settled through mutual consultation,
the patent owner, or an interested party who believes the patent is being infringed, may either file a civil legal suit or file
an administrative complaint with the relevant patent administration authority. A Chinese court may issue a preliminary injunction
upon the patent owner’s or an interested party’s request before instituting any legal proceedings or during the proceedings.
Damages for infringement are calculated as the loss suffered by the patent holder arising from the infringement, and if the loss
suffered by the patent holder arising from the infringement cannot be determined, the damages for infringement shall be calculated
as the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may
be determined by using a reasonable multiple of the license fee under a contractual license. Statutory damages may be awarded in
the circumstances where the damages cannot be determined by the above mentioned calculation standards. The damage calculation methods
shall be applied in the aforementioned order. Generally, the patent owner has the burden of proving that the patent is being infringed.
However, if the owner of an invention patent for manufacturing process of a new product alleges infringement of its patent, the
alleged infringer has the burden of proof.
Trademark Law
The PRC 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. In addition, pursuant to the PRC Trademark Law, counterfeit or unauthorized production
of the label of another person’s registered trademark, or sale of any label that is counterfeited or produced without authorization
will be deemed as an infringement to the exclusive right to use a registered trademark. The infringing party will be ordered to
stop the infringement immediately, a fine may be imposed and the counterfeit goods will be confiscated. The infringing party may
also be held liable for the right holder’s damages, which will be equal to the gains obtained by the infringing party or
the losses suffered by the right holder as a result of the infringement, including reasonable expenses incurred by the right holder
for stopping the infringement. If the gains or losses are difficult to determine, the court may render a judgment awarding damages
of no more than RMB3 million.
Software Copyright Law
On September 7, 1990, Standing Committee
of the National People’s Congress promulgated The Copyright Law of the PRC or the Copyright Law, which was amended on October
27, 2001 and April 1, 2010. The Copyright Law provides that Chinese citizens, legal persons, or other organizations shall, whether
published or not, enjoy copyright in their works, which include, among others, works of literature, art, natural science, social
science, engineering technology and computer software.
The Computer Software Copyright Registration
Measures or the Software Copyright Measures promulgated by the National Copyright Administration on April 6, 1992, which was
amended on February 20, 2002, regulate registrations of software copyright, exclusive licensing contracts for software copyright
and transfer contracts. The National Copyright Administration of China shall be the competent authority for the nationwide administration
of software copyright registration and the Copyright Protection Centre of China (the “CPCC”), is designated as the
software registration authority. The CPCC shall grant registration certificates to the Computer Software Copyrights applicants
which conforms to the provisions of both the Software Copyright Measures and the Computer Software Protection Regulations (Revised
in 2013).
Regulation on Domain Name
The domain names are protected under the
Administrative Measures for Internet Domain Names promulgated by MIIT on August 24, 2017, the effective date of which was November
1, 2017. MIIT is the major regulatory body responsible for the administration of the PRC Internet domain names, under supervision
of which China Internet Network Information Center, or CNNIC, is responsible for the daily administration of CN domain names and
Chinese domain names. On September 25, 2002, CNNIC promulgated the Implementation Rules of Registration of Domain Name, or the
CNNIC Rules, which was renewed on June 5, 2009 and May 29, 2012, respectively. Pursuant to the Administrative Measures on the Internet
Domain Names and the CNNIC Rules, the registration of domain names adopts the “first to file” principle and the registrant
shall complete the registration via the domain name registration service institutions. In the event of a domain name dispute, the
disputed parties may lodge a complaint to the designated domain name dispute resolution institution to trigger the domain name
dispute resolution procedure in accordance with the CNNIC Measures on Resolution of the Top Level Domains Disputes, file a suit
to the People’s Court or initiate an arbitration procedure.
Regulations on Online Advertising Services
On April 24, 2015, the Standing Committee
of the National People’s Congress enacted the revised Advertising Law of the PRC, or the Advertising Law, effective on September
1, 2015 which was further amended on October 26, 2018. The Advertising Law increases the potential legal liability of advertising
services providers and strengthens regulations of false advertising. The Advertising Law sets forth certain content requirements
for advertisements including, among other things, prohibitions on false or misleading content, superlative wording, socially destabilizing
content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest.
On July 4, 2016, the SAIC issued the Interim
Measures on the Administration of Online Advertising, or the SAIC Interim Measures, which came into effect on September 1, 2016.
The Advertising Law and the SAIC Interim Measures require that online advertisements may not affect users’ normal use of
internet and internet pop-up ads must display a “close” sign prominently and ensure one-key closing of the pop-up windows.
The SAIC Interim Measures provide that all online advertisements must be marked “advertisement” so that consumers can
distinguish them from non-advertisement information. Moreover, the SAIC Interim Measures require that, among other things, sponsored
search advertisements shall be prominently distinguished from normal research results and it is forbidden to send advertisements
or advertisement links by email without the recipient’s permission or induce internet users to click on an advertisement
in a deceptive manner.
Regulations on Internet Security
On December 28, 2000, the Standing Committee
of the National People’s Congress enacted the Decision on the Protection of Internet Security, as amended on August 27, 2009,
which provides that the following activities conducted through the internet are subject to criminal liabilities: (a) gaining improper
entry into any of the computer information networks relating to state affairs, national defensive affairs, or cutting-edge science
and technology; (b) spreading rumor, slander or other harmful information via the internet for the purpose of inciting subversion
of the state political power; (c) stealing or divulging state secrets, intelligence or military secrets via internet; (d) spreading
false or inappropriate commercial information; or (e) infringing on the intellectual property. The Ministry of Public Security
issued the Administrative Measures on Security Protection for International Connections to Computer Information Networks on December
16, 1997 and amended it on January 8, 2011, which prohibits using internet to leak state secrets or to spread socially destabilizing
content.
On November 23, 2005, the Ministry of Public
Security issued the Provisions on the Technical Measures for the Protection of the Security of the Internet, which requires that
internet services providers shall have the function of backing up the records for at least 60 days. Also, internet services providers
shall (a) set up technical measures to record and keep the information as registered by users; (b) record and keep the corresponding
relation between the internet web addresses and Intranet web addresses as applied by users; (c) record and follow up the net operation
and have the functions of security auditing.
On January 21, 2010, the MIIT promulgated
the Administrative Measures for Communications Network Security Protection, which requires that all communication network operators
including telecommunications services providers and internet domain name service providers divide their own communication networks
into units. The unit category shall be classified in accordance with degree of damage to national security, economic operation,
social order and public interest. In addition, the communication network operators must file the division and ratings of their
communication network with MIIT or its local counterparts. If a communication network operator violates these measures, the MIIT
or its local counterparts may order rectification or impose a fine up to RMB30,000 in case such violation is not duly rectified.
Regulations on Privacy Protection
On December 29, 2011, the MIIT promulgated
the Several Provisions on Regulation of Order of Internet Information Service Market, which prohibit internet information service
providers from collecting personal information of any user without prior consent. Internet information service providers shall
explicitly inform the users of the means of collecting and processing personal information, the scope of contents, and purposes.
In addition, internet information service providers shall properly keep the personal information of users, if the preserved personal
information of users is divulged or may possibly be divulged, internet information service providers shall immediately take remedial
measures and report any material leak to the telecommunications regulatory authority.
On December 28, 2012, the Decision on Strengthening
Network Information Protection promulgated by the Standing Committee of the National People’s Congress emphasizes the need
to protect electronic information that contains individual identification information and other private data. The decision requires
internet service providers to establish and publish policies regarding the collection and use of electronic personal information
and to take necessary measures to ensure the security of the information and to prevent leakage, damage or loss.
In July 2013, the MIIT promulgated the Regulations
on Protection of Personal Information of Telecommunications and Internet Users, or the Regulations on Network Information Protection,
effective on September 1, 2013, to enhance and enforce legal protection over user information security and privacy on the internet.
The Regulations on Network Information Protection require internet operators to take various measures to ensure the privacy and
confidentiality of users’ information.
Pursuant to the Ninth Amendment to the Criminal
Law of the PRC issued by the Standing Committee of the National People’s Congress on August 29, 2015, effective on November
1, 2015, any internet service provider that fails to fulfill the obligations related to internet information security as required
by applicable laws and refuses to take corrective measures, will be subject to criminal liability for (i) any large-scale dissemination
of illegal information; (ii) any severe effect due to the leakage of users’ personal information; (iii) any serious loss
of evidence of criminal activities; or (iv) other severe situations, and any individual or entity that (a) sells or provides personal
information to others unlawfully or (b) steals or illegally obtains any personal information will be subject to criminal liability
in severe situations.
On May 9, 2017, the Supreme People’s
Court and the Supreme People’s Procuratorate released the Interpretations of the Supreme People’s Court and the Supreme
People’s Procuratorate on Several Issues Concerning the Application of Law in the Handling of Criminal Cases Involving Infringement
of Citizens’ Personal Information, effective from June 1, 2017, which clarify several concepts regarding the crime of “infringement
of citizens’ personal information” stipulated by Article 253A of the Criminal Law of the People’s Republic of,
including “citizen’s personal information”, “provision”, and “unlawful acquisition”.
Also, the Interpretations specify the standards for determining “serious circumstances” and “particularly serious
circumstances” of this crime.
On November 7, 2016, the Standing Committee
of the National People’s Congress promulgated the Cyber Security Law of the PRC, or the Cyber Security Law, which came into
effect on June 1, 2017. Pursuant to the Cyber Security Law, network operators shall follow their Cyber Security obligations according
to the requirements of the classified protection system for Cyber Security, including: (a) formulating internal security management
systems and operating instructions, determining the persons responsible for Cyber Security, and implementing the responsibility
for Cyber Security protection; (b) taking technological measures to prevent computer viruses, network attacks, network intrusions
and other actions endangering Cyber Security; (c) taking technological measures to monitor and record the network operation status
and Cyber Security incidents; (d) taking measures such as data classification, and back-up and encryption of important data; and
(e) other obligations stipulated by laws and administrative regulations. In addition, network operators shall follow the principles
of legitimacy to collect and use personal information and disclose their rules of data collection and use, clearly express the
purposes, means and scope of collecting and using the information, and obtain the consent of the persons whose data is gathered.
Regulations on Online Games
Regulations Relating to Operation Permits for Online Games
The Provisional Regulations for the Administration
of Online Culture (the “Online Culture Regulations”) which were issued by the Ministry of Culture (“MOC”)
and took effect on April 1, 2011 and were amended on December 15, 2017, apply to entities engaging in activities related to “online
cultural products,” which include cultural products that are produced specifically for Internet use, such as online music
and entertainment, online games, online plays, online performances, online works of art and web animation, and other online cultural
products that through technical means, produce or reproduce music, entertainment, games, plays and other art works for Internet
dissemination. Under the Online Culture Regulations, commercial entities are required to apply to the relevant local branch of
the MOC for an Online Culture Operating Permit if they engage in for-profit Internet cultural activities, including the production,
duplication, importation, release or broadcasting of online cultural products; the dissemination of online cultural products on
the Internet or the transmission of such products via Internet or mobile phone networks to player terminals, such as computers,
phones, television sets and gaming consoles, or Internet surfing service sites such as Internet cafés; or the holding of
exhibition or contests related to online cultural products. The MOC issued the Circular on Implementation of the Newly Revised
Provisional Regulations for the Administration of Online Culture Interim Provisions on the Administration of Internet Culture on
March 18, 2011, which provides that the authorities will temporarily not accept applications by foreign-invested Internet content
providers for operation of Internet culture business (other than online music business).
The Notice on Adjusting the Scope and Standardizing
the Examination and Approval Process of Network Culture Operation License (“Notice”), issued by the Office of Ministry
of Culture and Tourism on May 14, 2019, provides that any network culture operation licenses whose business scope contains online-games
related activities remains valid, while such licenses may not be renewed upon expiration thereof.
The Notice on Interpretation of the State
Commission Office for Public Sector Reform on Several Provisions relating to Animation, Online Game and Comprehensive Law Enforcement
in Culture Market in the ‘Three Provisions’ jointly promulgated by the MOC, the State Administration of Radio Film
and Television, or the SARFT, and the General Administration of Press and Publication (“GAPP”), which was issued by
the State Commission Office for Public Sector Reform (a division of the State Council) which became effective on September 7, 2009,
provides that the GAPP will have responsibility for the examination and approval of online games to be uploaded on the Internet
and that, after such upload, online games will be administered by the MOC.
Regulations on Online Gambling and Virtual Currency
On January 25, 2007, the Ministry of Public
Security, the MOC, the MIIT and the GAPP jointly issued the Notice on Regulating Operation Order of Online Games and Inspection
of Gambling via Online Games (the “Anti-gambling Notice”). To curtail online games that involve online gambling while
addressing concerns that virtual currency might be used for money laundering or illicit trade, the notice (a) prohibits online
game operators from charging commissions in the form of virtual currency in connection with winning or losing of games; (b) requires
online game operators to impose limits on use of virtual currency in guessing and betting games; (c) bans the conversion of virtual
currency into real currency or property; and (d) prohibits services that enable game players to transfer virtual currency to other
players.
The Notice on the Reinforcement of the Administration
of Internet Cafés and Online Games (the “Internet Cafés Notice”) jointly issued by the MOC, the PBOC
and other governmental authorities in February 15, 2007 with the goal of strengthening the administration of virtual currency in
online games and to avoid any adverse impact on the PRC economy and financial system, places strict limits on the total amount
of virtual currency issued by online game operators and the amount purchased by individual players and requires a clear division
between virtual transactions and real transactions carried out by way of electronic commerce. The Internet Cafés Notice
further provides that virtual currency should only be used to purchase virtual items and prohibits any resale of virtual currency.
The Notice on Strengthening the Administration
of Online Game Virtual Currency (the “Virtual Currency Notice”) jointly issued by the MOC and the MOFCOM on June 4,
2009, defines the meaning of the term “virtual currency” and places a set of restrictions on the trading and issuance
of virtual currency. The Virtual Currency Notice also states that online game operators are not allowed to give out virtual items
or virtual currency through lottery base activities, such as lucky draws, betting or random computer sampling, in exchange for
players’ cash or virtual money.
Regulations on Anti-fatigue Compliance System and Real-name
Registration System
On July 25, 2014, the SAPPRFT issued the
Notice on Deepening Implementation of Authentication of Real Names for Anti-addiction System on Online Games and effected on October
1, 2014, which specifies that subject to the hardware, technology and other factors, the anti-addiction compliance system applies
to all online games excluding mobile games temporarily. The Service Guidance for the Approval of Publishing Domestic Online Games
issued by the SAPPRFT on January 12, 2017 further clarifies that, the introduction of the adopted anti-addiction system and the
evidential documents of the real-name authentication procedures are required for applying for publishing online games excluding
mobile games temporarily.
On August 30, 2018, the NRTA, the MOE, the
NAPP and five other PRC regulatory authorities jointly issued the Notice of Issuance of the Implementation Program on Comprehensive
Prevention and Control of Adolescent Myopia (the “Myopia Prevention Program”), proposing to limit the number of new
online games in operation, and to restrict the time minors spend playing online games. As of the Latest Practicable Date, the press
and publication authorities have not issued any detailed rules to enforce the Myopia Prevention Program and therefore, its impact
on our future operations and financial performance remains unclear.
Regulations on Employment and Social Welfare
Labor Contract Law
The Labor Contract Law of the PRC,
or the Labor Contract Law, which was promulgated on January 1, 2008 and amended on December 28, 2012, is primarily aimed at regulating
rights and obligations of employer and employee relationships, including the establishment, performance and termination of labor
contracts. Pursuant to the Labor Contract Law, labor contracts shall be concluded in writing if labor relationships are to be or
have been established between employers and the employees. Employers are prohibited from forcing employees to work above certain
time limit and employers shall pay employees for overtime work in accordance to national regulations. In addition, employee wages
shall be no lower than local standards on minimum wages and shall be paid to employees timely.
Social Insurance and Housing Fund
As required under the Regulation of Insurance
for Labor Injury implemented on January 1, 2004 and amended in 2010, the Provisional Measures for Maternity Insurance of
Employees of Corporations implemented on January 1, 1995, the Decisions on the Establishment of a Unified Program for Old-Aged
Pension Insurance of the State Council issued on July 16, 1997, the Decisions on the Establishment of the Medical Insurance
Program for Urban Workers of the State Council promulgated on December 14, 1998, the Unemployment Insurance Measures
promulgated on January 22, 1999 and the Social Insurance Law of the PRC implemented on July 1, 2011, employers are required
to provide their employees in the PRC with welfare benefits covering pension insurance, unemployment insurance, maternity insurance,
labor injury insurance and medical insurance.
In accordance with the Regulations on
the Management of Housing Fund which was promulgated by the State Council in 1999 and amended in 2002, employers must register
at the designated administrative centers and open bank accounts for depositing employees’ housing funds. Employer and employee
are also required to pay and deposit housing funds, with an amount no less than 5% of the monthly average salary of the employee
in the preceding year in full and on time. See “Risk Factors—Risks Related to Doing Business in China—The enforcement
of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and results of operations.”
Employee Stock Incentive Plan
Pursuant to the Notice of Issues Related
to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Company,
or Circular 7, which was issued by the SAFE on February 15, 2012, employees, directors, supervisors, and other senior management
who participate in any stock incentive plan of a publicly-listed overseas company and who are PRC citizens or non-PRC citizens
residing in China for a continuous period of no less than one year, subject to a few exceptions, are required to register with
SAFE through a qualified domestic agent, which may be a PRC subsidiary of such overseas listed company, and complete certain other
procedures. In addition, the SAT has issued certain circulars concerning employee stock options and restricted shares. Under these
circulars, employees working in the PRC who exercise stock options or are granted restricted shares will be subject to PRC individual
income tax. The PRC subsidiaries of an overseas listed company are required to file documents related to employee stock options
and restricted shares with relevant tax authorities and to withhold individual income taxes of employees who exercise their stock
option or purchase restricted shares. If the employees fail to pay or the PRC subsidiaries fail to withhold income tax in accordance
with relevant laws and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities or other PRC governmental
authorities.
Regulations on Taxation
Enterprise Income Tax
On March 16, 2007, the Standing Committee
of the National People’s Congress promulgated the Enterprise Income Tax Law of the PRC which was amended on February 24,
2017 and December 29, 2018. On December 6, 2007, the State Council enacted the Implementation Regulations for the Enterprise Income
Tax Law of the PRC (with the Enterprise Income Tax Law of the PRC, collectively called the PRC EIT Law), which was amended on April
23, 2019. Under the PRC EIT Law, both resident enterprises and non-resident enterprises are subject to tax in the PRC. Resident
enterprises are defined as enterprises that are established in China in accordance with PRC laws, or that are established in accordance
with the laws of foreign countries but are actually or in effect controlled from within the PRC. Non-resident enterprises are defined
as enterprises that are organized under the laws of foreign countries and whose actual management is conducted outside the PRC,
but have established institutions or premises in the PRC, or have no such established institutions or premises but have income
generated from inside the PRC. Under the PRC EIT Law and relevant implementing regulations, a uniform enterprise income tax rate
of 25% is applied. However, if non-resident enterprises have not formed permanent establishments or premises in the PRC, or if
they have formed permanent establishment or premises in the PRC but there is no actual relationship between the relevant income
derived in the PRC and the established institutions or premises set up by them, enterprise income tax is set at the rate of 10%
with respect to their income sourced from inside the PRC. Pursuant to the PRC EIT Law, the EIT tax rate of a high and new technology
enterprise or HNTE, is 15%. According to the Administrative Measures for the Recognition of HNTE, effective on January 1, 2008
and amended on January 29, 2016, for each entity accredited as HNTE, its HNTE status is valid for three years if it meets the qualifications
for HNTE on a continuing basis during such period.
Value-added Tax
The Provisional Regulations of on Value-added
Tax of the PRC were promulgated by the State Council on December 13, 1993 and came into effect on January 1, 1994 which were subsequently
amended on November 10, 2008 and came into effect on January 1, 2009, and were further amended on February 6, 2016 and November
19, 2017. The Detailed Rules for the Implementation of Provisional Regulations of on Value-added Tax of the PRC were promulgated
by the Ministry of Finance on December 25, 1993 and subsequently amended on December 15, 2008 and October 28, 2011, or collectively,
VAT Law. On November 19, 2017, the State Council promulgated The Order on Abolishing the Provisional Regulations of the PRC on
Business Tax and Amending the Provisional Regulations of on Value-added Tax of the PRC, or Order 691. According to the VAT Law
and Order 691, all enterprises and individuals engaged in the sale of goods, the provision of processing, repair and replacement
services, sales of services, intangible assets, real property and the importation of goods within the territory of the PRC are
the taxpayers of VAT. The VAT rates generally applicable are simplified as 17%, 11%, 6% and 0%, and the VAT rate applicable to
the small-scale taxpayers is 3%.
On April 4, 2018, the Ministry of Finance
and the State Administration of Taxation issued the Circular on Adjustment of VAT Rates, which became effective as of May 1, 2018.
According to the Circular on the Adjustment of VAT Rates, relevant VAT rates have been reduced from May 1, 2018, such as: (i) VAT
rates of 17% and 11% applicable to the taxpayers who have VAT taxable sales activities or imported goods are adjusted to 16% and
10%, respectively; (ii) VAT rate of 11% originally applicable to the taxpayers who purchase agricultural products is adjusted to
10% and so on.
Dividend Withholding Tax
The PRC EIT Law provides that since January
1, 2008, an enterprise income tax rate of 10% will normally be applicable to dividends declared to non-PRC resident investors which
do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant
income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from
sources within the PRC.
Pursuant to the Arrangement Between the Mainland
of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Incomes, or the Double Tax Avoidance Arrangement and other applicable PRC laws, if a Hong Kong resident
enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under such
Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends the Hong Kong resident enterprise
receives from a PRC resident enterprise may be reduced to 5%. However, based on the Circular on Certain Issues with Respect to
the Enforcement of Dividend Provisions in Tax Treaties, or the SAT Circular 81, issued on February 20, 2009 by the State Administration
of Taxation, or the SAT, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such
reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the
preferential tax treatment. According to the Circular on Several Issues regarding the “Beneficial Owner” in Tax Treaties,
which was issued on February 3, 2018 by the SAT, effective as of April 1, 2018, when determining the applicant’s status of
the “beneficial owner” regarding tax treatments in connection with dividends, interests or royalties in the tax treaties,
several factors, including without limitation, whether the applicant is obligated to pay more than 50% of its income in twelve
months to residents in third country or region, whether the business operated by the applicant constitutes the actual business
activities, and whether the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption on
relevant incomes or levy tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual
circumstances of the specific cases. This circular further provides that applicants who intend to prove his or her status of the
“beneficial owner” shall submit the relevant documents to the relevant tax bureau according to the Announcement on
Issuing the Measures for the Administration of Non-Resident Taxpayers’ Enjoyment of the Treatment under Tax Agreements.
Tax on Indirect Transfer
On February 3, 2015, the SAT issued the Circular
on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or SAT Circular 7. Pursuant
to SAT Circular 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC
resident enterprises, may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does
not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax.
As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. When determining whether there
is a “reasonable commercial purpose” of the transaction arrangement, features to be taken into consideration include,
inter alia, whether the main value of the equity interest of the relevant offshore enterprise derives directly or indirectly from
PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consist of direct or indirect investment in China
or if its income is mainly derived from China; and whether the offshore enterprise and its subsidiaries directly or indirectly
holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure. According
to SAT Circular 7, where the payor fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the
tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default
interest. SAT Circular 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such
shares were acquired on a public stock exchange. On October 17, 2017, the SAT issued the Circular on Issues of Tax Withholding
regarding Non-PRC Resident Enterprise Income Tax, or SAT Circular 37, which further elaborates the relevant implemental rules regarding
the calculation, reporting and payment obligations of the withholding tax by the non-resident enterprises. Nonetheless, there remain
uncertainties as to the interpretation and application of SAT Circular 7. SAT Circular 7 may be determined by the tax authorities
to be applicable to our offshore transactions or sale of our shares or those of our offshore subsidiaries where non-resident enterprises,
being the transferors, were involved.
Regulation on Foreign Exchange
The principal regulations governing foreign
currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended on August 5, 2008. Under
the Foreign Exchange Administration 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. However, 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.
On March 30, 2015, SAFE issued SAFE Circular
No. 19, which took effective and replaced SAFE Circular No. 142 on 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 China, 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. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing
the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, effective on June 9, 2016, which reiterates
some of the rules set forth in Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated
registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue
loans to non-associated enterprises. Violations of SAFE Circular 19 or Circular 16 could result in administrative penalties.
On November 19, 2012, SAFE promulgated the
Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment 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 accounts, foreign exchange capital accounts and guarantee accounts),
the reinvestment of lawful incomes derived by foreign investors in China (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. 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 China based on the registration information provided by SAFE and its branches.
On February 13, 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.
Regulation on Foreign Exchange Registration of Offshore Investment
by PRC Residents
On July 4, 2014, SAFE issued the Circular
on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip
Investment through Special Purpose Vehicles, or SAFE Circular 37, and its implementation guidelines. Pursuant to SAFE Circular
37 and its implementation guidelines, PRC residents (including PRC institutions and individuals) must register with local branches
of SAFE in connection with their direct or indirect offshore investment in an overseas special purpose vehicle, or SPV, directly
established or indirectly controlled by PRC residents for the purposes of offshore investment and financing with their legally
owned assets or interests in domestic enterprises, or their legally owned offshore assets or interests. Such PRC residents are
also required to amend their registrations with SAFE when there is a change to the basic information of the SPV, such as changes
of a PRC resident individual shareholder, the name or operating period of the SPV, or when there is a significant change to the
SPV, such as changes of the PRC individual resident’s increase or decrease of its capital contribution in the SPV, or any
share transfer or exchange, merger, division of the SPV. Failure to comply with the registration procedures set forth in the Circular
37 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment
of dividends and other distributions to its offshore parent or affiliate, the capital inflow from the offshore entities and settlement
of foreign exchange capital, and may also subject relevant onshore company or PRC residents to penalties under PRC foreign exchange
administration regulations.
Regulation on Dividend Distributions
The principal regulations governing distribution
of dividends paid by wholly foreign-owned enterprises include:
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Company Law of the PRC (1993), as amended in 1999, 2004, 2005 and 2013;
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Foreign Investment Enterprise Law of the PRC (1986), as amended in 2000 and 2016; and
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Administrative Rules under the Foreign Investment Enterprise Law (1990), as amended in 2001 and 2014.
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Under these laws and regulations, foreign-invested
enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a wholly foreign-owned enterprise in China is required to set aside at least 10.0% of its
after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves
reach 50.0% of its registered capital. These reserves are not distributable as cash dividends. The foreign-invested enterprise
has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds. A PRC company is not permitted
to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may
be distributed together with distributable profits from the current fiscal year.
Regulation on Overseas Listings
On August 8, 2006, six PRC regulatory agencies,
namely, the Ministry of Commerce, the State Assets Supervision and Administration Commission, SAT, SAIC, China Securities Regulatory
Commission, or the CSRC, and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors, or the M&A Rules, which became effective on September 8, 2006 and were amended on June 22, 2009. The M&A Rules
purport, among other things, to require that offshore special purpose vehicles, or SPVs, that are controlled by PRC companies or
individuals and that have been formed for overseas listing purposes through acquisitions of PRC domestic interest held by such
PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock
exchange. On September 21, 2006, the CSRC published a notice on its official website specifying documents and materials required
to be submitted to it by SPVs seeking CSRC approval of their overseas listings. In our case, the CSRC approval was considered not
required under the M&A Rules for the listing and trading of our ADSs on the Nasdaq Global Market given that (i) our PRC subsidiary
was directly established by us as wholly foreign-owned enterprises, and we have not acquired any equity interest or assets of a
PRC domestic company owned by PRC companies or individuals as defined under the M&A Rules that are our beneficial owners after
the effective date of the M&A Rules, and (ii) no provision in the M&A Rules clearly classifies the contractual arrangements
as a type of transaction subject to the M&A Rules. However, there can be no assurance that the relevant PRC government agencies,
including the CSRC, would reach the same conclusion.
Loans by Foreign Companies to their PRC Subsidiaries
Loans made by foreign investors as shareholders
in foreign invested enterprises established in China are considered to be foreign debts and are mainly regulated by the Regulation
of the People’s Republic of China on Foreign Exchange Administration, the Interim Provisions on the Management of Foreign
Debts, the Statistical Monitoring of Foreign Debts Tentative Provisions, the Detailed Rules for the Implementation of Provisional
Regulations on Statistics and Supervision of External Debt, and the Administrative Measures for Registration of Foreign Debts.
Pursuant to these regulations and rules, a shareholder loan in the form of foreign debt made to a PRC entity does not require the
prior approval of SAFE, but such foreign debt must be registered with and recorded by SAFE or its local branches within 15 business
days after entering into the foreign debt contract. Under these regulations and rules, the balance of the foreign debts of a foreign
invested enterprise shall not exceed the difference between the total investment and the registered capital of the foreign invested
enterprise, or Total Investment and Registered Capital Balance.
The Interim Provisions of the State Administration
for Industry and Commerce on the Ratio of the Registered Capital to the Total Investment of a Sino-Foreign Equity Joint Venture
Enterprise was promulgated by SAIC on February 17, 1987 and effective on March 1, 1987. According to these provisions, with respect
to a sino-foreign equity join venture, the registered capital shall be (i) no less than seven-tenths of its total investment, if
the total investment is US$3 million or under US$3 million; (ii) no less than one-half of its total investment, if the total investment
is ranging from US$3 million to US$10 million (including US$10 million), provided that the registered capital shall not be less
than US$2.1 million if the total investment is less than US$4.2 million; (iii) no less than two-fifths of its total investment,
if the total investment is ranging from US$10 million to US$30 million (including US$30 million), provided that the registered
capital shall not be less than US$5 million if the total investment is less than US$12.5 million; and (iv) no less than one-third
of its total investment, if the total investment exceeds US$30 million, provided that the registered capital shall not be less
than US$12 million if the total investment is less than US$36 million.
The Notice of the People’s Bank of
China on Matters concerning the Macro-Prudential Management of Full-Covered Cross-Border Financing, or PBOC Notice No. 9, issued
by the PBOC on January 12, 2017, provides that within a transition period of one year from January 12, 2017, the foreign invested
enterprises may adopt the currently valid foreign debt management mechanism, or Current Foreign Debt Mechanism, or the mechanism
as provided in PBOC Notice No. 9, or Notice No. 9 Foreign Debt Mechanism, at their own discretion. PBOC Notice No. 9 provides that
enterprises may conduct independent cross-border financing in RMB or foreign currencies as required. According to the PBOC Notice
No. 9, the outstanding cross-border financing of an enterprise (the outstanding balance drawn, here and below) shall be calculated
using a risk-weighted approach, or Risk-Weighted Approach, and shall not exceed the specified upper limit, namely: risk-weighted
outstanding cross-border financing ≤ the upper limit of risk-weighted outstanding cross-border financing. Risk-weighted outstanding
cross-border financing = Σ outstanding amount of RMB and foreign currency denominated cross-border financing x maturity risk
conversion factor x type risk conversion factor + Σ outstanding foreign currency denominated cross-border financing x exchange
rate risk conversion factor. Maturity risk conversion factor shall be 1 for medium- and long-term cross-border financing with a
term of more than one year and 1.5 for short-term cross-border financing with a term of less than one year. Type risk conversion
factor shall be 1 for on-balance-sheet financing and 1 for off-balance-sheet financing (contingent liabilities) for the time being.
Exchange rate risk conversion factor shall be 0.5. The PBOC Notice No. 9 further provides that the upper limit of risk-weighted
outstanding cross-border financing for enterprises shall be 200% of its net assets, or Net Asset Limits. Enterprises shall file
with SAFE in its capital item information system after entering into a cross-border financing agreement, but no later than three
business days before making a withdrawal.
Based on the foregoing, if we provide funding
to our wholly foreign owned subsidiaries through shareholder loans, the balance of such loans shall not exceed the Total Investment
and Registered Capital Balance and we will need to register such loans with SAFE or its local branches in the event that the Current
Foreign Debt Mechanism applies, or the balance of such loans shall be subject to the Risk-Weighted Approach and the Net Asset Limits
and we will need to file the loans with SAFE in its information system in the event that the Notice No. 9 Mechanism applies. Under
the PBOC Notice No. 9, after a transition period of one year from January 11, 2017, the PBOC and SAFE will determine the cross-border
financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of PBOC Notice
No. 9. As of the date hereof, neither the PBOC nor SAFE has promulgated and made public any further rules, regulations, notices
or circulars in this regard. It is uncertain which mechanism will be adopted by the PBOC and SAFE in the future and what statutory
limits will be imposed on us when providing loans to our PRC subsidiaries.
C.
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ORGANIZATIONAL STRUCTURE
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The following diagram illustrates our corporate
structure as of the date of this annual report, including our significant subsidiaries and VIEs.
The Principal shareholders of Beijing WiMi
are Jie Zhao and Minwen Wu. Jie Zhao, our Chairman, beneficially owns 100% of our outstanding Class A ordinary shares, 27.1% of
our outstanding Class B ordinary shares and 82.05% of the outstanding capital stock of Beijing WiMi. Minwen Wu, the controlling
person of Sensefuture Holdings Limited and Sensebright Holdings Limited, beneficially owns approximately 5.7% of our issued and
outstanding Class B ordinary shares, and 11.32% of the outstanding capital stock of Beijing WiMi.
Contractual Arrangements with Our VIEs and Their Respective
Shareholders
Currently, substantially all of our users
and business operations are located in the PRC and our primary focus is the PRC hologram market, which we believe possesses tremendous
growth potential and attractive monetization opportunities. In addition, we plan to grow our presence in international markets
and become a global holographic enterprise. We believe that our hologram technology is applicable to global markets and anticipates
expanding our business to new markets.
Current PRC laws and regulations impose certain
restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunication services, internet
audio-video program services and certain other businesses. The Special Administrative Measures for Entrance of Foreign Investment
(Negative List) (2018 Version) provides that foreign investors are generally not allowed to own more than 50% of the equity interests
in a value-added telecommunication service provider other than an e-commerce service provider, and the Provisions on the Administration
of Foreign-Invested Telecommunications Enterprises (2016 Revision) require that the major foreign investor in a value-added telecommunication
service provider in China must have experience in providing value-added telecommunications services overseas and maintain a good
track record. In addition, foreign investors are prohibited from investing in companies engaged in certain online and culture related
businesses. See “Item 3.D. Risk Factors—Risks Related to Our Corporate Structure—We are subject to changing law
and regulations regarding regulatory matters, corporate governance and public disclosure that have increased both our costs and
the risk of non-compliance” and “Item 4.B. Business Overview— Regulation—Regulations on Foreign Direct
Investment in Value Added Telecommunications Companies.” We are a company incorporated in the Cayman Islands. Hologram WiMi
and Shenzhen Weiyixin, our PRC subsidiaries, are considered foreign-invested enterprises. To comply with the foregoing PRC laws
and regulations, we primarily conduct our business in China through Beijing WiMi and Shenzhen Weiyixin, our VIEs and their subsidiaries
in the PRC, based on a series of contractual arrangements. As a result of these contractual arrangements, we exert effective control
over our VIEs and their subsidiaries, and consolidate their operating results in our consolidated financial statements under GAAP.
These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIEs. If our VIEs
or their respective shareholders fail to perform their respective obligations under the contractual arrangements, we could be limited
in our ability to enforce the contractual arrangements that give us effective control over our business operations in the PRC and
may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal
remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure
will be effective under PRC law. For details of these and other risks associated with our VIE structure, see “Item 3.D. Risk
Factors—Risks Related to Our Corporate Structure.”
The following is a summary of the currently
effective contractual arrangements by and among our PRC subsidiaries, our VIEs and their respective shareholders. We entered into
a series of contractual agreements with Beijing WiMi and its shareholders on November 6, 2018 that allowed us to exert effective
control over Beijing WiMi and its subsidiaries. On December 18, 2020, for the purpose of internal restructuring and under the continuous
control of Hologram WiMi, the then shareholders of Beijing WiMi transferred all of their respective equity interests in Beijing
WiMi to Ms. Yadong Sun and Ms. Zhaohua Yao, the nominee shareholders of Beijing WiMi. On the same day, the original series of contractual
agreements were terminated and replaced by another series of contractual agreements among us, Beijing WiMi, Ms. Yadong Sun and
Ms. Zhaohua Yao, to reflect the change with respect to the nominee shareholders. On December 24, 2020, Shenzhen Weiyixin entered
into a series of contractual agreements with Shenzhen Yitian and its shareholders. These contractual arrangements enable us to
(i) exercise effective control over our VIEs; (ii) receive substantially all of the economic benefits of our VIEs; (iii) have
an exclusive option to purchase the equity interests in our VIEs, and (iv) have an exclusive option to purchase all or part
of the assets of Beijing WiMi when and to the extent permitted by PRC law.
However, there are substantial uncertainties
regarding the interpretation and application of current and future PRC laws, regulations and rules. If the PRC government finds
that the agreements that establish the structure for operating our hologram business do not comply with PRC government restrictions
on foreign investment in our businesses, we could be subject to severe penalties including being prohibited from continuing operations.
See “Item 3.D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements
that establish the structure for operating our businesses in China do not comply with PRC regulations relating to the relevant
industries, or if these regulations or their interpretation change in the future, we could be subject to severe penalties or be
forced to relinquish our interests in those operations.”
Agreements that provide us with effective control over
Beijing WiMi
Power of Attorney. Pursuant
to the power of attorney dated December 18, 2020, by Hologram WiMi and each shareholder of Beijing WiMi, respectively, each shareholder
of Beijing WiMi irrevocably authorized Hologram WiMi or any person(s) designated by Hologram WiMi to exercise such shareholder’s
voting rights in Beijing WiMi, including, without limitation, the power to participate in and vote at shareholder’s meetings,
the power to nominate directors and appoint senior management, the power to sell or transfer such shareholder’s equity interest
in Beijing WiMi, and other shareholders’ voting rights permitted by PRC law and the Articles of Association of Beijing WiMi.
The power of attorney remains irrevocable and continuously valid from the date of execution so long as each shareholder remains
as a shareholder of Beijing WiMi.
Equity Interest Pledge Agreement.
Pursuant to the equity interest pledge agreement dated December 18, 2020, by and among Hologram WiMi, Beijing WiMi and the shareholders
of Beijing WiMi, the shareholders of Beijing WiMi pledged all of their equity interests in Beijing WiMi to Hologram WiMi to guarantee
their and Beijing WiMi’s obligations under the contractual arrangements including the exclusive business cooperation agreement,
the exclusive option agreement, the exclusive asset purchase agreement and the power of attorney and this equity interest pledge
agreement, as well as any loss incurred due to events of default defined therein and all expenses incurred by Hologram WiMi in
enforcing such obligations of Beijing WiMi or its shareholders. The shareholders of Beijing WiMi agree that, without the prior
written approval of Hologram WiMi, during the term of each of the equity interest pledge agreements, they will not dispose of the
pledged equity interests or create or allow any other encumbrance on the pledged equity interests. We have completed the registration
of the equity pledges with the relevant office of SAIC in accordance with the PRC Property Rights Law.
Spousal Consent Letters. Pursuant
to these letters, the spouses of the applicable shareholders of Beijing WiMi unconditionally and irrevocably agreed that the equity
interest in Beijing WiMi held by them and registered in their names will be disposed of pursuant to the equity interest pledge
agreement, the exclusive option agreement, the exclusive asset purchase agreement and the power of attorney. Each of their spouses
agreed not to assert any rights over the equity interest in Beijing WiMi held by their respective spouses. In addition, in the
event that any spouse obtains any equity interest in Beijing WiMi held by his or her spouse for any reason, he or she agreed to
be bound by the contractual arrangements.
Agreements that allow us to receive economic benefits
from Beijing WiMi
Exclusive Business Cooperation Agreement.
Under the exclusive business cooperation agreement between Hologram WiMi and Beijing WiMi, dated December 18, 2020, Hologram WiMi
has the exclusive right to provide to Beijing WiMi consulting and services related to, among other things, use of software, operation
maintenance, product development, and management and marketing consulting. Hologram WiMi has the exclusive ownership of intellectual
property rights created as a result of the performance of this agreement. Beijing WiMi agrees to pay Hologram WiMi service fee
in the amount equal to the consolidated profit minus the loss (if any). This agreement will remain effective until the date when
it is terminated by WiMi WFOE.
Agreements that provide us with the option to purchase
the equity interests in Beijing WiMi
Exclusive Share Purchase Option Agreement.
Pursuant to the exclusive share purchase option agreement dated December 18, 2020, by and among Hologram WiMi, Beijing WiMi and
each of the shareholders of Beijing WiMi, each of the shareholders of Beijing WiMi irrevocably granted Hologram WiMi an exclusive
call option to purchase, or have its designated person(s) to purchase, at its discretion, all or part of their equity interests
in Beijing WiMi, and the purchase price shall be the lowest price permitted by applicable PRC law. Each of the shareholders of
Beijing WiMi undertakes that, without the prior written consent of Hologram WiMi or us, they may not increase or decrease the registered
capital, amend the articles of association or change the registered capital structure of Beijing WiMi. This agreement will remain
effective for ten years and can be renewed at Hologram WiMi’s sole discretion. Any transfer of shares pursuant to this agreement
would be subject to PRC regulations and to any changes required thereunder.
Agreements that provide us with the option to purchase
the assets in Beijing WiMi
Exclusive Asset Purchase Agreement.
Pursuant to the exclusive asset purchase agreement dated December 18, 2020 by Hologram WiMi and Beijing WiMi, Beijing WiMi irrevocably
granted Hologram WiMi an exclusive call option to purchase, or have its designated person(s) to purchase, at its discretion, all
or part of Beijing WiMi’s current or future assets (including intellectual property rights), and the purchase price shall
be the lowest price permitted by applicable PRC law. Beijing WiMi undertakes that, without the prior written consent of Hologram
WiMi, it may not sell, transfer, pledge, dispose of its assets, incur any debts or guarantee liabilities. It will notify Hologram
WiMi any potential litigation, arbitration or administrative procedures regarding the assets, and defend the assets if necessary.
This agreement will remain effective for ten years and can be renewed at Hologram WiMi’s sole discretion. Any transfer of
assets pursuant to this agreement would be subject to PRC regulations and to any changes required thereunder.
Agreements that provide us with effective control over
Shenzhen Yitian
Power of Attorney. Pursuant
to the power of attorney dated December 24, 2020, by Shenzhen Weiyixin and each of the shareholders of Shenzhen Yitian, respectively,
each shareholder of Shenzhen Yitian irrevocably authorized Shenzhen Weiyixin or any person(s) designated by Shenzhen Weiyixin to
exercise such shareholder’s voting rights in Shenzhen Yitian, including, without limitation, the power to participate in
and vote at shareholder meetings, the power to nominate directors and appoint senior management, the power to sell or transfer
such shareholder’s equity interest in in Shenzhen Yitian, and other shareholders’ voting rights permitted by PRC law
and the Articles of Association of Shenzhen Yitian. The power of attorney remains irrevocable and continuously valid from the date
of execution so long as each shareholder remains as a shareholder of Shenzhen Yitian.
Equity Interest Pledge Agreement.
Pursuant to the equity interest pledge agreement dated December 24, 2020, by and among Shenzhen Weiyixin, Shenzhen Yitian and the
shareholders of Shenzhen Yitian, the shareholder of Shenzhen Yitian pledged all of their equity interest in Shenzhen Yitian to
Shenzhen Weiyixin to guarantee the payment of the secured debt under the loan agreement, the performance of their other obligations
under the exclusive business cooperation agreement, the exclusive share purchase option agreement and the power of attorney, as
well as any loss incurred due to events of default defined therein and all expenses incurred by Shenzhen Weiyixin in enforcing
such obligations. The shareholders of Shenzhen Yitian agree that, without the prior written approval of Shenzhen Weiyixin, during
the term of each of the equity interest pledge agreements, they will not dispose of the pledged equity interests or create or allow
any other encumbrance on the pledged equity interests. We have completed the registration of the equity pledges with the relevant
office of SAIC in accordance with the PRC Property Rights Law.
Spousal Consent Letters. Pursuant
to these letters, the spouses of the applicable shareholders of Shenzhen Yitian unconditionally and irrevocably agreed that the
equity interest in Shenzhen Yitian held by them and registered in their names will be disposed of pursuant to the equity interest
pledge agreements, the exclusive option agreements, and the powers of attorney. Each of their spouses agreed not to assert any
rights over the equity interest in Shenzhen Yitian held by their respective spouses. In addition, in the event that any spouse
obtains any equity interest in Shenzhen Yitian held by his or her spouse for any reason, he or she agreed to be bound by the contractual
arrangements.
Agreements that allow us to receive economic benefits
from Shenzhen Yitian
Exclusive Business Cooperation Agreement.
Under the exclusive business cooperation agreement between Shenzhen Weiyixin and Shenzhen Yitian, dated December 24, 2020, Shenzhen
YIYI has the exclusive right to provide Shenzhen Yitian with technical support, consulting and other services, in exchange for
a service fee in the amount equal to the consolidated profits of Shenzhen Yitian minus the loss (if any). These exclusive business
cooperation agreements will remain effective unless and until terminated by Shenzhen Weiyixin, as applicable.
Agreements that provide us with the option to purchase
the equity interests in Shenzhen Yitian
Exclusive Share Purchase Option Agreement.
Pursuant to the exclusive share purchase option agreement dated December 24, 2020, by and among Shenzhen Weiyixin, Shenzhen Yitian
and each of the shareholders of Shenzhen Yitian, each of the shareholders of Shenzhen Yitian irrevocably granted Shenzhen Weiyixin
an exclusive option to purchase, or have its designated person(s) to purchase, at its discretion, all or part of their equity interests
in Shenzhen Yitian, and the purchase price shall be the lowest price permitted by applicable PRC law. Each of the shareholders
of Shenzhen Yitian undertakes that, without the prior written consent of Shenzhen Weiyixin, they may not increase or decrease the
registered capital, amend the articles of association or change the registered capital structure of Shenzhen Yitian. Any
transfer of shares pursuant to this agreement would be subject to PRC regulations and to any changes required thereunder.
Loan Agreement
In addition, pursuant to the loan agreement
dated December 24, 2020, between Shenzhen Weiyixin and the shareholders of Shenzhen Yitian, Shenzhen Weiyixin agreed to provide
loans to the shareholders of Shenzhen Yitian to be used exclusively for the capital injection into Shenzhen Yitian. The term of
the loan agreement ends on the date when Shenzhen Weiyixin exercises its exclusive share purchase option under the aforementioned
exclusive share purchase option agreement.
D.
|
PROPERTY, PLANT AND EQUIPMENT
|
Our headquarters is located in Beijing, China
and we maintain offices in Shenzhen, China, where we currently lease approximately 2,620 square meters of office space in the aggregate.
We also lease approximately 655 square feet of office space in Hong Kong, and approximately 1,500 square feet of office space in
Singapore. We believe our existing facilities are adequate for our current requirements and that additional space can be obtained
on commercially reasonable terms to meet our future requirements.
ITEM 4A.
|
UNRESOLVED STAFF COMMENTS
|
Not applicable.
ITEM 5.
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
The following discussion and analysis
should be read in conjunction with our consolidated financial statements, which have been prepared in accordance with GAAP, included
elsewhere in this Annual Report. This discussion contains forward-looking statement that involves risks and uncertainties. Our
actual results and timing of 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.D. Risk Factors” and elsewhere in this annual report.
Overview
Our revenue increased by approximately RMB 446.8
million, or 140.0 %, from approximately RMB 319.2 million for the year ended December 31, 2019 to approximately RMB 766.0 million (US$
117.4 million) for the year ended December 31, 2020. Our non-GAAP net income, which is defined as net income (loss) before the impact
of stock compensation expenses, of RMB 40.3 million (US$ 6.2 million) for the year ended December 31, 2020. Research and development expenses
increased by approximately RMB 66.6 million, or 362.8%, from approximately RMB 18.4 million for the year ended December 31, 2019 to approximately
RMB 85.0 million (US$ 13.0 million) for the year ended December 31, 2020.
We offer AR-based holographic services and
products to cater to our customers’ needs, focusing on providing an innovative, immersive and interactive holographic AR
experience for our customers and end users. We also engage in the provision of central processing algorithm services and computer
chip products to enterprise customers and the sales of comprehensive solutions for central processing algorithms and related
services with software and hardware integration. Our AR service and product offerings primarily consist of holographic AR
advertising services and holographic AR entertainment products. Approximately 80.5%, 83.8%, and 40.1% of our revenues were generated
by our holographic AR advertising services for the years ended December 31, 2018, 2019, and 2020, respectively. Approximately 19.5%,
16.2% and 3.9% of our revenues were generated by our holographic AR entertainment products for the years ended December 31, 2018,
2019, and 2020, respectively. The core of our holographic AR business is holographic AR technologies used in software engineering,
content production, cloud and big data. By leveraging our strong technological capabilities and infrastructure, we are able to
deliver superior products and services and conduct our operations in a highly efficient manner. Approximately 100.0%, 100.0%, and
44.0% of our revenues were generated by our holographic AR advertising and entertainment services for the years ended December 31,
2018, 2019, and 2020, respectively.
We believe that the application demand for holographic 3D vision in
the semiconductor sector is growing rapidly and represents huge market potentials. Starting in July 2020, we began to develop our semiconductor
business by establishing two joint ventures, ICinit Limited and VIDA Semicon Co., Limited, and one wholly-owned subsidiary Lixin Technology
Co., Ltd. In September 2020, we established VIYI, which acquired 100% equity interests of FE-DA to further develop our semiconductor business.
For our semiconductor business, we engage in the provision of central processing algorithm services and computer chip products to enterprise
customers and the sales of comprehensive solutions for central processing algorithms and related services with software and hardware integration.
Approximately 56.0% of our revenues were generated by our semiconductor business for the year ended December 31, 2020 from sale of semiconductor
products and related accessories, and software for CPUs based on customers’ specific needs.
We have grown rapidly since our inception. We generate revenues primarily
from holographic AR advertising services and holographic AR entertainment products since our inception, and we began to generate revenues
from our semiconductor business from September 2020. Our total revenues increased by RMB 93.9 million, or 41.7%, from RMB 225.3 million
for the year ended December 31, 2018 to RMB 319.2 million for the year ended December 31, 2019, and further increased by RMB 446.8 million,
or 140.0%, to RMB 766.0 million for the year ended December 31, 2020. Our net income was RMB 89.2 million and RMB 102.2 million for the
years ended December 31, 2018 and 2019, respectively, and our net loss was RMB 145.0 million for the year ended December 31, 2020.
Impact of COVID-19
The ongoing outbreak of the novel coronavirus
(COVID-19) has spread rapidly to many parts of the world. In March 2020, the World Health Organization declared the COVID-19 as
a pandemic. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities
in China for the first couple months in 2020. As the majority of our business operations and our workforce are located in China,
our business, results of operations, and financial condition have been adversely affected for the first half of 2020. Our business
and results of operations have been resumed to normal level in the second half of 2020. However, potential impact to our future
results of operations will also depend on future developments and new information that may emerge regarding the duration and severity
of the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19 or mitigate its impact,
almost all of which are beyond our control.
The impacts of COVID-19 on our business,
financial condition, and results of operations include, but are not limited to, the following:
|
●
|
We temporally closed our offices and implemented work from
home policy in February 2020, as required by relevant PRC regulatory authorities. Since March 16, 2020, our offices have reopened
and have been fully operational.
|
|
●
|
Due to the nature of our business, the impact of the closure
on our operational capabilities was not significant, as most of our work force continued working offsite during such closure.
|
|
●
|
Our customers were negatively impacted by the outbreak
and reduced their budgets for online advertising and marketing in 2020. As a result, our gross profit on AR advertising of 2020
were negatively impacted. However, to date, none of our customers have terminated contracts with us.
|
|
●
|
Certain of our customers were negatively impacted by the outbreak and
reduced their budgets for MR software development in 2020. As a result, we reduced our future cash flow forecast and recorded an impairment
in the amount of approximately RMB 7.3 million (US$ 1.1 million).
|
|
●
|
The situation may worsen if the COVID-19 outbreak resurges,
and our customers may request additional time to pay us or fail to pay us on time, or at all, which may require us to record additional
allowances. We have not experienced significant collection issues so far. We have closely monitored our collections throughout
2020 and will continuing to monitor collection from 2021 and beyond.
|
Key Factors Affecting Results of Operations
Our results of operations are affected by
the factors discussed below.
Our ability to increase number of customers
Approximately 80.5%, 83.8%, and 40.1% of our revenues were generated
by our AR advertising services for the years ended December 31, 2018, 2019, and 2020, respectively. The number of our customers for our
AR advertising services increased from 121 for the year ended December 31, 2018, to 153 for the year ended December 31, 2019, and further
increased to 294 for the year ended December 31, 2020. In addition, average revenue per customer for AR advertising services was approximately
RMB 1.5 million, RMB 1.7 million, and RMB 1.0 million for the years ended December 31, 2018, 2019, and 2020, respectively. The decrease
in average revenue per customer for AR advertising services was due to lower price for our AR advertising services in order to retain
and attract new customers, as they reduced their budgets on online advertising and marketing as a result of the COVID-19 pandemic. We
expect that our pricing for AR advertising services will return to the pre-COVID level in 2021. Furthermore, approximately 56.0% of our
revenues for the year ended December 31, 2020 were generated from sale of semiconductor products and related accessories, and software
for CPUs based on customers’ specific needs. Our customers for semiconductor business include manufacturers of electronic products
and internet information infrastructure service providers. Our ability to increase our revenues and our profitability will depend on our
ability to continue to increase our customer base and revenue per customer for our AR advertising services and semiconductor business.
To achieve this, we strive to increase our marketing efforts and to enhance the quality and capabilities of our technologies.
Investment in technology and talent
We believe that a core element of the competitiveness of the holographic
AR industry and semiconductor business is research and development related to technology development. The advancement of technology related
to holographic AR will take the holographic AR experience, new services, products and capabilities, to newer stages of development. To
retain and attract existing and potential customers, we must continue to innovate to keep pace with the growth of our business and bring
forward cutting-edge technologies. Our current research and development efforts are primarily focused on enhancing our artificial intelligence
technology, holographic AR and image processing technology, intelligent hardware technology, and photosensitive signal transmission technology
to create novel service and product offerings. We spent approximately RMB 8.0 million, RMB 18.4 million, and RMB 85.0 million (US$ 13.0
million) on research and development for the years ended December 31, 2018, 2019, and 2020, respectively. In order to retain and provide
incentive to our employees, during the year ended December 31, 2020, approximately RMB 191.4 million (US$ 29.3 million) was recorded as
stock compensation expenses.
China’s per capita expenditure
on education, cultural and recreation
Our business and results of operations are affected by a number of
general factors affecting China’s holographic AR industry, which include the per capita expenditure on education, culture and recreation
in China. The increase in expenditure on education, culture and recreation boosts the growth of relevant markets, such as entertainment
market and consuming electronic device market, which in turn will increase the market demand for our services and products.
Our ability to pursue strategic opportunities
for growth
We intend to continue to pursue strategic
acquisitions and investments in selective technologies and businesses in the holographic AR industry and semiconductor industry
that will enhance our technology capabilities. We believe that a solid acquisition and investment strategy may be critical for
us to accelerate our growth and strengthen our competitive position in the future. Our ability to identify and execute strategic
acquisitions and investments will likely have an effect on our operating results over time.
Our ability to expand our application
fields and diversifying customer base
Currently, the existing applications of holographic
AR include primarily the entertainment and advertising industries, which are the industries we are currently focused on. With increasing
awareness and acceptance of this technology, we expect that more applications will be identified to magnify the value of this technology,
such as assistance in surgery and tele-diagnosis, and assistance in training and education. Our ability to expand our application
fields and diversify our customer base may affect our operating results in the future.
Key Components of Our Results of Operations:
Revenues
Our revenues consist of AR advertising services
revenues, AR entertainment revenues and semiconductor business revenues. AR advertising services use holographic AR materials and
integrate them into advertisement on the online media platforms or offline displays. We generate revenues when we completed our
performance obligation to deliver related services based on the specific terms of the contract, which are commonly based on specific
action (i.e. cost per impression”(“CPM”) or cost per action (“CPA”)) for online display and service
period for offline display contracts. Over 90% of our contracts with customers are based on CPM. Prior to 2019, our AR advertising
markets were mainly in desktop applications. Starting in the second half of 2019, we began to provide AR advertising services to
short form mobile video streaming market, namely advertising on Tik-Tok or similar medium.
AR entertainment revenues include revenues
generated from software development kit (“SDK”) payment channel services, software development, mobile games services
and technology developments. We generate related revenues when a user completes the payment transaction for SDK payments, net of
payments to content providers. We also generate revenues from sales of software development services. Revenues generated from mobile
games include royalty payments from licensee operators of our mobile games and fees collected from game developers for using our
game portal.
Semiconductor
business revenues include revenues generated from the
sales of semiconductor products and related accessories. We generate revenues when the control of products are transferred to customers
as evidenced by customers signed acceptances. We also generate revenues
from software development. We design software for central processing units based on customers’ specific needs. Revenues
are recognized over time during the development period.
Our breakdown of revenues for the years ended
December 31, 2018, 2019, and 2020, respectively, is summarized below:
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
AR advertising
|
|
|
181,241,346
|
|
|
|
267,514,061
|
|
|
|
307,328,308
|
|
|
|
47,100,846
|
|
AR entertainment
|
|
|
44,030,218
|
|
|
|
51,667,363
|
|
|
|
29,740,544
|
|
|
|
4,558,008
|
|
Semiconductor business
|
|
|
-
|
|
|
|
-
|
|
|
|
428,944,734
|
|
|
|
65,739,663
|
|
Total revenue
|
|
|
225,271,564
|
|
|
|
319,181,424
|
|
|
|
766,013,586
|
|
|
|
117,398,517
|
|
Cost of Revenues
For AR advertising services, the cost of revenues consists of the costs
paid to channel providers in accordance with revenue-sharing arrangements. For AR entertainment, the cost of revenues consist of the shared
costs with content providers based on the profit sharing arrangements, third-party consulting services expenses and compensation expenses
for our professionals. For semiconductor business, the cost of revenues consists primarily of the costs of products sold and third-party
software development costs.
Our breakdown of cost of revenues for the
years ended December 31, 2018, 2019, and 2020, respectively, is summarized below:
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
AR advertising
|
|
|
81,437,761
|
|
|
|
140,716,036
|
|
|
|
211,297,881
|
|
|
|
32,383,313
|
|
AR entertainment
|
|
|
3,976,300
|
|
|
|
5,451,807
|
|
|
|
3,137,805
|
|
|
|
480,897
|
|
Semiconductor business
|
|
|
-
|
|
|
|
-
|
|
|
|
382,143,014
|
|
|
|
58,566,877
|
|
Total cost of revenues
|
|
|
85,414,061
|
|
|
|
146,167,843
|
|
|
|
596,578,700
|
|
|
|
91,431,087
|
|
Operating expenses
Operating expenses include selling, general and administrative and
research and development expenses. Selling expenses are mainly salary and benefit expenses for our sales team and related travel expenses.
General and administrative expenses are mainly salary and benefit of management, professional fees, services fees, rental and other operating
expenses of attributable to general and administrative activities. Research and development expenses are mainly salary and benefits for
in house software engineers and payments made to outside subcontractors. Stock compensation expenses are expenses related to the shares
awards granted to employees and consultants pursuant to the 2020 stock compensation plan.
We anticipate that our operating expenses
will continue to increase as we hire additional personnel and incur additional costs in connection with the expansion of our business
operations as well as becoming a publicly traded company.
Results of Operations
Our consolidated results of operations for
the years ended December 31, 2018, 2019, and 2020 are summarized below:
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
Revenues
|
|
|
225,271,564
|
|
|
|
319,181,424
|
|
|
|
766,013,586
|
|
|
|
117,398,517
|
|
Cost of revenues
|
|
|
(85,414,061
|
)
|
|
|
(146,167,843
|
)
|
|
|
(596,578,700
|
)
|
|
|
(91,431,087
|
)
|
Gross profit
|
|
|
139,857,503
|
|
|
|
173,013,581
|
|
|
|
169,434,886
|
|
|
|
25,967,430
|
|
Selling expenses
|
|
|
(1,212,400
|
)
|
|
|
(1,924,784
|
)
|
|
|
(3,746,873
|
)
|
|
|
(574,242
|
)
|
General and administrative expenses
|
|
|
(29,822,426
|
)
|
|
|
(39,881,854
|
)
|
|
|
(42,728,460
|
)
|
|
|
(6,548,523
|
)
|
Research and development expenses
|
|
|
(8,020,082
|
)
|
|
|
(18,355,403
|
)
|
|
|
(84,957,626
|
)
|
|
|
(13,020,527
|
)
|
Stock compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(191,418,458
|
)
|
|
|
(29,336,612
|
)
|
Income (loss) from operations
|
|
|
100,802,595
|
|
|
|
112,851,540
|
|
|
|
(153,416,531
|
)
|
|
|
(23,512,474
|
)
|
Other (expense) income, net
|
|
|
(3,509,207
|
)
|
|
|
(7,517,988
|
)
|
|
|
11,363,289
|
|
|
|
1,741,527
|
|
Income (loss) before provision for income taxes
|
|
|
97,293,388
|
|
|
|
105,333,552
|
|
|
|
(142,053,242
|
)
|
|
|
(21,770,947
|
)
|
Provision for income taxes
|
|
|
(8,075,596
|
)
|
|
|
(3,129,080
|
)
|
|
|
(2,904,681
|
)
|
|
|
(445,169
|
)
|
Net income (loss)
|
|
|
89,217,792
|
|
|
|
102,204,472
|
|
|
|
(144,957,923
|
)
|
|
|
(22,216,116
|
)
|
Other comprehensive income (loss)
|
|
|
1,759,288
|
|
|
|
1,589,076
|
|
|
|
(38,876,201
|
)
|
|
|
(5,958,130
|
)
|
COMPREHENSIVE INCOME (LOSS)
|
|
|
90,977,080
|
|
|
|
103,793,548
|
|
|
|
(183,834,124
|
)
|
|
|
(28,174,246
|
)
|
Year Ended December 31, 2020 Compared to Year Ended December
31, 2019
Revenues
Our revenues increased by approximately RMB 446.8 million, or 140.0
%, from approximately RMB 319.2 million for the year ended December 31, 2019 to approximately RMB 766.0 million (US$ 117.4 million) for
the year ended December 31, 2020, due to an increase of approximately RMB 39.8 million (US$ 6.1 million) in AR advertising revenue, and
an increase of approximately RMB 428.9 million (US$ 65.7 million) in our semiconductor business revenues, as we began to generate revenues
from our semiconductor business in September 2020. The increase in revenues was partially offset by the decrease of approximately RMB
21.9 million (US$ 3.4 million) in AR entertainment revenue.
Our AR advertising revenue increased by approximately
RMB 39.8 million, or 14.9%, from approximately RMB 267.5 million for the year ended December 31, 2019 to approximately RMB 307.3 million
(US$ 47.1 million) for the year ended December 31, 2020. The increase was primarily attributable to the increase in the number of advertisers
who became our customers as a result of more referrals from existing customers who were satisfied with our services. The number of our
customers for advertising services increased by 141, from 153 for the year ended December 31, 2019 to 294 for the year ended December
31, 2020. Average revenue per customer for AR advertising services decreased from approximately RMB 1.7 million for the year ended December
31, 2019 to approximately RMB 1.0 million for the year ended December 31, 2020. The decrease in average revenue per customer for AR advertising
services was due to temporary lower price on our AR advertising services in order to retain customers and attract new customers, as our
customers reduced their budgets on online advertising and marketing as a result of the COVID-19 pandemic. The number of paid impressions
through our AR advertising increased by 16.5% from approximately 9.7 billion in the year ended December 31, 2019 to approximately 11.3
billion in the year ended December 31, 2020 primarily due to an increase in the number of advertisers and the launch of our advertising
services in the short form mobile streaming market, where we derived approximately 31.8% of our AR advertising revenue. Prior to May 2019,
most of our AR advertising revenue was from more traditional desktop markets.
Our AR entertainment revenue decreased by approximately
RMB 21.9 million, or 42.4%, from approximately RMB 51.7 million for the year ended December 31, 2019 to approximately RMB 29.7 million
(US$ 4.6 million) for the year ended December 31, 2020. The decrease in AR entertainment revenues was primarily attributable to a decrease
in mobile games and SDK payment channel services fee revenues recognized in the year ended December 31, 2020. The decrease in SDK payment
revenues was due to competition, as payment channels have been dominated by a few tech companies. The decrease in mobile games was primarily
caused by reduced revenues related to AR games, which were adversely affected by the outbreak of the COVID-19, as the pandemic reduced
the demand for AR games, which include real-time interactions among players in the first half of 2020 and our mobile games services fee
revenues have resumed to normal level in the second half of 2020.
We began to generate revenues from our semiconductor business in September
2020. Our semiconductor business revenues amounted to approximately RMB 429.0 million (US$ 65.7 million) for the year ended December 31,
2020. Semiconductor business revenues include revenues generated from the sales of semiconductor products and related accessories and
revenues from software development catering to our customers’ specific demands. We expect the semiconductor business revenues will
continue to grow with the increasing demand for holographic 3D vision-related semiconductor application solutions, and we plan to combine
holographic 3D vision application demand scene to provide corresponding semiconductor solutions to meet the market demand, and promote
the application and popularization of holographic 3D vision technology in the semiconductor industry.
Cost of Revenues
Our total cost of revenues increased by approximately
RMB 450.4 million, or 308.1%, from approximately RMB 146.2 million for the year ended December 31, 2019 to approximately RMB 596.6
million (US$ 91.4 million) for the year ended December 31, 2020.
Our cost of revenues for AR advertising services
increased by approximately RMB 70.6 million, or 50.2%, from approximately RMB 140.7 million for the year ended December 31, 2019
to approximately RMB 211.3 million (US$ 32.4 million) for the year ended December 31, 2020. Starting in the second half of 2019,
we started to provide AR advertising services in short form mobile video streaming market, which accounted for 46.3% of our AR
advertising cost of revenues for the year ended December 31, 2020. Due to the nature of the media, fewer ads can be placed on a
short video based on current technology. In addition, since the market was dominated by a few major channel providers, the average
cost of revenues of AR advertising services from short video streaming market was relatively higher, compared with that of other
AR advertising channels from desktop applications.
Our cost of revenues for AR entertainment
decreased by approximately RMB 2.3 million, or 42.4%, from approximately RMB 5.5 million for the year ended December 31, 2019 to
approximately RMB 3.1 million (US$ 0.5 million) for the year ended December 31, 2020. The decrease was in line with the decrease
in our AR entertainment revenue, as our AR entertainment revenue was adversely affected during the first half of 2020 due to impact
of COVID-19.
Our cost of revenues for semiconductor business was approximately RMB
382.1 million (US$ 58.6 million) for the year ended December 31, 2020. The cost of revenues for our semiconductor business includes costs
of products sold and third-party software development costs. We expect the cost of revenues of semiconductor business will grow in line
with our expectation on the growth in semiconductor business revenue.
Gross Profit
Our gross profit decreased by approximately
RMB 3.6 million, from approximately RMB 173.0 million for the year ended December 31, 2019 to approximately RMB 169.4 million (US$
26.0 million) during the year ended December 31, 2020. For the years ended December 31, 2019 and 2020, our overall gross margin
was 54.2% and 22.1%, respectively. The decrease in gross margin was primarily due to the relatively low profit margin for our semiconductor
business, which accounted for approximately 56.0% of our revenues in 2020.
Our gross profit and gross profit margin
from our major business segments are summarized as follows:
|
|
For the Years ended December 31,
|
|
|
Variance
|
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
Amount/%
|
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
|
|
|
AR advertising
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
126,798,025
|
|
|
|
96,030,427
|
|
|
|
14,717,532
|
|
|
|
(30,767,598
|
)
|
Gross margin
|
|
|
47.4
|
%
|
|
|
31.2
|
%
|
|
|
|
|
|
|
(24.3
|
)%
|
AR entertainment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
46,215,556
|
|
|
|
26,602,739
|
|
|
|
4,077,111
|
|
|
|
(19,612,817
|
)
|
Gross margin
|
|
|
89.4
|
%
|
|
|
89.4
|
%
|
|
|
|
|
|
|
(42.4
|
)%
|
Semiconductor business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
46,801,782
|
|
|
|
7,172,787
|
|
|
|
46,801,720
|
|
Gross margin
|
|
|
-
|
%
|
|
|
10.9
|
%
|
|
|
|
|
|
|
100.0
|
%
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
173,013,581
|
|
|
|
169,434,886
|
|
|
|
25,967,430
|
|
|
|
(3,578,695
|
)
|
Gross margin
|
|
|
54.2
|
%
|
|
|
22.1
|
%
|
|
|
|
|
|
|
(2.1
|
)%
|
Our gross margin for AR advertising services decreased from 47.4% for
the year ended December 31, 2019 to 31.2% for the year ended December 31, 2020 mainly due to the higher cost of revenues for AR advertising
services for short form videos. We also offered lower price for our AR advertising services, as our customers had been negatively affected
by outbreak of the COVID-19. As a result, our gross margin for AR advertising services decreased comparing to the same period in 2019.
Our gross margin for AR entertainment services
remained relatively stable, at 89.4% and 89.4% for the years ended December 31, 2019 and 2020, respectively.
Our gross margin for semiconductor business was 10.9% for the year
ended December 31, 2020, due to the relatively high cost involved in the purchase of CPUs. We expect our gross margin for semiconductor
business will increase as we improve our capabilities to integrate products with our existing AR technology in the central processing
algorithm areas to provide more comprehensive solutions to our customers.
Operating Expenses
For the year ended December 31, 2020, we
incurred approximately RMB 322.9 million (US$ 49.5 million) in operating expenses, representing an increase of approximately RMB
262.7 million, or 436.6%, from approximately RMB 60.2 million for the year ended December 31, 2019, primarily due to significant
increases in stock compensation expenses and research and development expenses.
Selling expenses increased by approximately RMB 1.8 million, or 94.7%,
from approximately RMB 1.9 million for the year ended December 31, 2019 to approximately RMB 3.7 million (US$ 0.6 million) for the year
ended December 31, 2020. The increase was mainly due to an increase in salary and benefit expenses for our expanding sales team, as a
result of increased number of employees as we set up and acquired new subsidiaries since August 2020. Selling expenses accounted for 0.6%
and 0.5% of total revenues for the years ended December 31, 2019 and 2020, respectively.
General
and administrative expenses increased by approximately RMB 2.8 million, or 7.1%, from RMB 39.9 million for the year ended December
31, 2019 to approximately RMB 42.7 million (US$ 6.5 million) for the year ended December 31, 2020. The increase was mainly due
to an increase in goodwill impairment loss of approximately RMB 7.3
million as a result of COVID-19 pandemic and its impact on Skystar reporting unit. The increase was partially offset by the decrease
in professional fees, including legal, accounting and other professional fees of approximately RMB 1.8 million in relation to our
initial public offering during the year ended December 31, 2019, which we did not incur in the same period in 2020, and a decrease
in employees and office related expenses for our general and administrative team of approximately RMB 1.9 million, due to the reduced
travel, meal and entertainment activities for our employees during the COVID-19 outbreak and the temporary reduction and exemption
of social security as a result of the COVID-19 outbreak.
Research and development expenses increased by approximately RMB 66.6
million, or 362.8%, from approximately RMB 18.4 million for the year ended December 31, 2019 to approximately RMB 85.0 million (US$ 13.0
million) for the year ended December 31, 2020. The increase was attributable to the increase in salary of approximately RMB 5.3 million
as we hired more IT engineers to work on research and development of advanced AR holographic and related projects. In addition, we
also focus on the research and development of the application of holographic AR technologies in the area of semiconductor, cloud computing,
artificial intelligence, big data 5G and other areas, which we incurred approximately RMB 59.1 million in outsourced technical development
services to focus on developing our technological capabilities in order to maintain our competitive advantage in the AR holographic industry
and semiconductor industry.
Stock compensation expenses increased by approximately RMB 191.4 million,
or 100.0%, from nil for the year ended December 31, 2019 to approximately RMB 191.4 million (US$ 29.3 million) for the year ended December
31, 2020. Stock compensation expenses increased significantly from the year ended December 31, 2019 to the same period in 2020, as we
granted stock-based awards in 2020 to attract and retain high caliber employees, consultants and directors, who are essential to the our
success, and to motivate these individuals to meet our goals.
Other income (expenses), net
Total
other expenses, net, for the year ended December 31, 2019 was approximately RMB 7.5 million as compared to other income, net of
RMB 11.4 million (US$ 1.7 million) for the year ended December 31, 2020.
For the year ended December 31, 2020, we had investment income of approximately
RMB 12.3 million (US$ 1.9 million). We invested total approximately RMB 173.6 million (US$ 26.6 million) in publicly traded securities
listed in either US or Hong Kong. There was no such investment in 2019.
Interest income decreased from approximately
RMB 1.2 million for the year ended December 31, 2019 to approximately RMB 0.5 million (US$ 73,000) for the year ended December
31, 2020. The decrease in interest income was due to less deposit in bank with maturities less than three months for the year ended
December 31, 2020.
Finance expenses, net, mainly consist of
amortization of debt discount, interest expenses and currency exchange gain or loss. Finance expenses, net, decreased by
approximately RMB 7.3 million from approximately RMB11.1 million for the year ended December 31, 2019 to approximately RMB 3.8
million (US$0.6 million) for the year ended December 31, 2020. The decrease of approximately RMB 10.7 million in debt discount was
due to repayment of business acquisition payable for the year ended December 31, 2019, while only approximately RMB 0.9 million in
debt discount was recorded in connection with FE-DA Electronics acquisition in 2020. The decrease was offset by an increase in
interest expense of approximately RMB 2.4 million (US$ 0.4 million) for the year ended December 31, 2020, in connection with loans
we borrowed from Shanghai Junei Internet Co. and DBS Bank Ltd in 2020. In addition, we had foreign exchange loss of
approximately RMB 0.3 million (US$ 46,000) for the year ended December 31, 2020 compared with foreign exchange gains of
approximately RMB 0.8 million for the year ended December 31, 2019. The change was mainly due to U.S. dollar depreciation in 2020
when we transferred U.S. dollars to our subsidiaries, whose functional currency is RMB.
Other income also included government subsidies and VAT refund. As
part of VAT reform in 2019, a taxpayer in certain service industries was allowed to reclaim additional 10% of input VAT credit against
the amount of VAT payable from April 1, 2019 to December 31, 2021. We had approximately RMB 2.4 million (US$ 0.4 million) other income,
net for both 2019 and 2020.
Provision for income taxes
Our income tax expenses decreased by approximately
RMB 0.2 million, or 7.2%, from approximately RMB 3.1 million for the year ended December 31, 2019 to approximately RMB 2.9 million
(US$ 0.4 million) for the year ended December 31, 2020. Current income tax increased by approximately RMB 0.2 million due to the
decreased taxable income.
Net income (loss)
As a result of the combination of factors discussed above, our net
income decreased from approximately RMB 102.2 million for the year ended December 31, 2019 to a net loss of approximately RMB 145.0 million
(US$ 22.2 million) for the year ended December 31, 2020. After the deduction of non-controlling interest, net income attributable to us
was approximately RMB 102.2 million for the year ended December 31, 2019, compared to net loss of RMB 151.2 million (US$ 23.2 million)
for the year ended December 31, 2020. Comprehensive income attributable to us was RMB 103.8 million for the year ended December 31, 2019,
compared to comprehensive loss of RMB 183.8 million (US$ 28.2 million) for year ended December 31, 2020.
Year Ended December 31, 2019 Compared to Year Ended December
31, 2018
For a discussion of our results of operations
for the year ended December 31, 2018 compared with the year ended December 31, 2019, see “Item 5. Operating and Financial
Review and Prospects — A. Operating Results — year Ended December 31, 2019 Compared to Year Ended December 31, 2018”
of our annual report on Form 20-F for the year ended December 31, 2019, filed with the SEC on April 29, 2020.
Taxation
Cayman Islands
The Cayman Islands currently levy 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. In addition, the Cayman Islands does not impose withholding tax on dividend payments.
Hong Kong
WiMi HK, Micro Beauty, VIDA, ICinit, VIYI Technology Ltd. and Excel
Crest are incorporated in Hong Kong and are subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial
statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. We have not made any
provisions for Hong Kong profit tax as there has been no assessable profit derived from or earned in Hong Kong since their respective
inceptions. Under Hong Kong tax laws, WiMi HK is exempted from income tax on its foreign-derived income. Hong Kong does not impose a withholding
tax on dividends.
Seychelles
Skystar, a company incorporated in Seychelles,
is not subject to tax on income generated outside of Seychelles under the current tax laws, which do not impose withholding tax
upon payments of dividends.
Singapore
FE-DA is incorporated in Singapore and is subject to Singapore Profits
Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant Singapore tax laws. The
applicable tax rate in Singapore is 17%, with 75% of the first SGD 10,000 (approximately RMB 49,000) taxable income and 50% of the next
SGD 190,000 (approximately RMB 937,000) taxable income are exempted from income tax.
PRC
The subsidiaries and VIEs incorporated in the PRC
are governed by the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable
tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. Under
the Enterprise Income Tax Laws of the PRC”(the “EIT Laws”), domestic enterprises and Foreign Investment Enterprises
(the “FIE”) are usually subject to a unified 25% enterprise income tax rate, while preferential tax rates, tax holidays and
tax exemption may be granted on case-by-case basis. EIT grants preferential tax treatment to certain High and New Technology Enterprises
(“HNTEs”). Under this preferential tax treatment, HNTEs are entitled to an income tax rate of 15%, subject to the requirement
that they re-apply for HNTE status every three years. Shenzhen Kuxuanyou obtained the HNTE tax status in October 2015, which reduced its
statutory income tax rate to 15% from November 2016 to November 2019. Shenzhen Kuxuanyou renewed the HNTE tax status in December 2020,
which will expire in December 2023.
Shengzhen Yiruan, Shenzhen Yiyun, Shenzhen Yidian
and Shenzhen Duodian were qualified as software companies by the local taxing authority and obtained two years of tax exemption status
and three years at a reduced income tax rate of 12.5% for three years, due to the local tax policies to attract companies in various industries.
After the initial 5 years, these companies can apply for the reduced rate on an annual basis. In addition, 75% of R&D expenses of
Shenzhen Kuxuanyou and Shenzhen Yiruan are subject to additional deduction from pre-tax income.
Korgas Shengyou, Korgas WiMi, Korgas Duodian, Korgas
233 and Korgas Weidong were formed and registered in Korgas in Xinjiang Provence, China, between 2016 and 2020, and Kashi Duodian was
formed and registered in Kashi in Xinjiang Provence, China in 2019. These companies are not subject to income tax for 5 years after their
incorporation.
Shenzhen Qianhai was formed
and registered in Qianhai District in Guangdong Provence, China in 2015. It is subject to income tax at a reduced rate of 15% due to
the local tax policies to attract companies in various industries.
Lixin Technology and Weidong were formed
and registered in the free tax zone in Hainan Provence, China in 2020. These companies are subject to income tax at a reduced rate
of 15% due to the local tax policies to attract companies in various industries.
Critical Accounting Policies and Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates
and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies,
if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These
accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting
policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s
difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their
significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly
from management’s current judgments. While our significant accounting policies are more fully described in Note 2 to our
consolidated financial statements included elsewhere in this report, we believe the following critical accounting policies involve
the most significant estimates and judgments used in the preparation of our financial statements.
Basis of Presentation and Principals
of Consolidation
Basis of presentation
The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
for information pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).
Principles of consolidation
The consolidated financial statements include
the financial statements of our company and our subsidiaries, which include the wholly- foreign owned enterprise (“WFOE”)
and variable interest entities (“VIEs”) over which we exercise control and, when applicable, entities for which we
have a controlling financial interest or is the primary beneficiary. All transactions and balances among us and our subsidiaries
have been eliminated upon consolidation.
Use of Estimates and Assumptions
The preparation of consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in our
consolidated financial statements include the useful lives of property and equipment and intangible assets, impairment of long-lived
assets and goodwill, allowance for doubtful accounts, provision for contingent liabilities, revenue recognition, and deferred taxes,
uncertain tax position, purchase price allocations for business combination, valuation of stock-based compensation. Actual results
could differ from these estimates.
Business combination
The purchase price of an acquired company
is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their
estimated fair values, with the residual of the purchase price recorded as goodwill. Transaction costs associated with business
combinations are expensed as incurred, and are included in general and administrative expenses in the our consolidated statements
of operations. The results of operations of the acquired business are included in our operating results from the date of acquisition.
On September 28, 2020, we acquired 100% equity interests of FE-DA Electronics
with an acquisition consideration at fair value of approximately US$ 15.2 million (RMB 103.4 million). We included any contingent consideration
based on the present value of the probability-weighted expected amount of the future payments when we estimated the fair value
of the acquisition consideration. We then allocated the fair value of consideration of FE-DA Electronics based upon the fair value of
the identifiable assets acquired and liabilities assumed on the acquisition date. We estimated the fair values of the assets acquired
and liabilities assumed at the acquisition date in accordance with the business combination standard issued by the FASB with the valuation
methodologies using level 3 inputs, except for other current assets and current liabilities, which were valued using the cost approach.
Our management is responsible for determining the fair value of assets acquired, liabilities assumed and intangible assets identified
as of the acquisition date and considered a number of factors, including valuations from independent appraisers. The fair value of total
net assets we acquired on September 28, 2020 was approximately US$ 7.0 million (RMB 47.9 million), with the residual of the purchase price
approximately US$ 8.1 million (RMB 55.5 million) recorded as goodwill.
Stock compensation expenses
We record stock compensation expenses for employees
and non-employees at fair value on the grant date and recognize the expenses over the employee’s or the service provider’s
requisite service period.
In July 2020, our shareholders approved our 2020
Equity Incentive Plan (the “2020 Plan”). The maximum aggregate number of Class B ordinary shares that may be issued under
the 2020 Equity Incentive Plan is 17,500,000. On June 6, 2020, the board of directors approved and granted 15,890,000 Class B ordinary
shares under the 2020 Plan to employees, which were valued at US$ 1.73 per share on the grant date, and vested on October 1, 2020. On
September 12, 2020, the board of directors approved and granted 148,240 Class B ordinary shares to our employees and consultants, which
were valued at US$ 3.31 per share on the grant date, of which 103,240 shares vested on October 15, 2020. The remaining 45,000 shares granted
to consultants on September 12, 2020 will vest in three equal annual installments, with the first installment vesting on October 15, 2021,
the second installment vesting on October 15, 2022 and the third installment vesting on October 15, 2023.
As of December
31, 2020, a total of 16,038,240 Class B ordinary shares were granted and issued under the 2020 Plan. For the years ended December
31, 2018, 2019 and 2020, we recorded nil, nil and approximately RMB 191.4 million (US$ 29.3 million) as compensation expenses related
to restricted stock grants, respectively.
Goodwill Impairment Testing
We perform annual goodwill impairment analysis as of December 31 with
the assistance of independent valuation expert in accordance with the subsequent measurement provisions of FASB ASU 2017-04, Intangible
- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminated the calculation of implied goodwill
fair value and allowed us to use a simpler one-step impairment test. Under ASU 2017-04, we must record goodwill impairment charges if
a reporting unit’s carrying value exceeds its fair value.
The reporting units’ fair values are
determined by income approach where projected future cash flows discounted at rates commensurate with the risks involved, (“Discounted
Cash Flow” or “DCF” of the income approach). This approach is supplemented by the market approach, (Guideline
Company Method) to ensure the typical multiple such as EBITDA was within range of comparable companies.
Assumptions used in a DCF analysis require
the exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates, and
the amount and timing of expected future cash flows. The forecasted cash flows are based on current plans and for years beyond
that plan, the estimates are based on assumed growth rates. We believe that our assumptions are consistent with the plans and estimates
used to manage the underlying businesses. The discount rates, which are intended to reflect the risks inherent in future cash flow
projections, used in a DCF analysis are based on estimates of the weighted-average cost of capital “WACC”) of a market
participant. Such estimates are derived from our analysis of peer companies and consider the industry weighted average return on
debt and equity from a market participant perspective and adjusted for our specific risks.
We have four reporting units that have goodwill.
The following table categorizes our goodwill by reporting unit as of December 31, 2020 according to the level of excess between
the reporting’ unit’s fair value and carrying value and one reporting unit failed “Step 1” of a goodwill
impairment analysis. We performed a quantitative assessment of our fair value of goodwill as of December 31, 2020 using an income
approach with assumptions that are considered level 3 inputs. The carrying value of Skystar (AR entertainment - MR software reporting
unit) exceeded its respective fair value, resulting in a goodwill impairment of approximately RMB 7.3 million (US$ 1.1 million)
for the year ended December 31, 2020. Our goodwill impairment analysis is performed, and related impairment charges recorded, after
the impairment analysis and recognition, if any, of impairment charges for long-lived assets other than goodwill and indefinite-lived
intangible assets.
The net carrying amount of goodwill allocated
to reportable segments as of December 31, 2019 and 2020 are as follows:
Segment
|
|
Reporting
Unit
|
|
Fair Value
Exceeds
Carrying Value
|
|
|
Net Goodwill as of
December 31, 2019
|
|
|
Net Goodwill as of
December 31, 2020
|
|
|
|
|
|
|
|
|
(in RMB thousands)
|
|
AR advertising services
|
|
AR advertising services unit
|
|
|
125
|
%
|
|
|
137,060
|
|
|
|
137,060
|
|
AR Entertainment
|
|
AR application and technology solutions unit
|
|
|
196
|
%
|
|
|
92,990
|
|
|
|
92,990
|
|
AR advertising services
|
|
AR advertising services unit
|
|
|
8
|
%
|
|
|
87,909
|
|
|
|
87,909
|
|
AR Entertainment
|
|
MR software unit
|
|
|
99
|
%
|
|
|
34,121
|
|
|
|
25,170
|
|
Semiconductor business
|
|
Semiconductor business unit
|
|
|
8
|
%
|
|
|
-
|
|
|
|
53,100
|
|
|
|
|
|
|
|
|
|
|
352,080
|
|
|
|
396,229
|
|
We also performed sensitivity analysis on
revenue growth rates and discount rates which shows there were no signs of impairment if actual revenue dropped to 85% of the forecast
or the discount rate increases to 18.5% from 18.0% for all our reporting units.
Revenue recognition
We adopted Accounting Standards Update (“ASU”)
2014-09 Revenue from Contracts with Customers (ASC Topic 606) for the year ended December 31, 2019, using the modified retrospective
method for contracts that were not completed as of December 31, 2018. The ASU requires the use of a new five-step model to recognize
revenue from customer contracts. The five-step model requires that we (i) identify the contract with the customer, (ii) identify
the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent
that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance
obligations in the contract, and (v) recognize revenue when (or as) we satisfy our performance obligation.
Prior to 2019, we recognize revenue when
all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have
been rendered, (iii) the price or fees are fixed or determinable, and (iv) the ability to collect is reasonably assured. Revenue
is presented in the consolidated statements of income and comprehensive income net of sales taxes. We do not offer rights of refund
of previously paid or delivered amounts, rebates, rights of return or price protection. In all instances, we limit the amount of
revenue recognized to the amounts for which we have the right to bill our customers.
The application of the five-step model to
the revenue streams compared to the prior guidance did not result in significant changes in the way we record our revenue. Upon
adoption, we evaluated our revenue recognition policy for all revenue streams within the scope of the ASU under previous standards,
using the five-step model under the new guidance, and confirmed that there were no differences in the pattern of revenue recognition.
(i) AR Advertising Services
AR advertisements are the use holographic
materials integrated into advertisement on the online media platforms or offline display. Our performance obligation is to identify
advertising spaces and embed holographic AR images or videos into films, shows and short form videos that are hosted by online
streaming platforms in China. Revenue is recognized at the time when the related services have been delivered based on the specific
terms of the contract, which are commonly based on specific action (i.e. cost per impression (“CPM”) or cost per action
(“CPA”) for online display and service period for offline display contracts.
We enter into advertising contracts with
advertisers where the amounts charged per specific action are fixed and determinable, the specific terms of the contracts were
agreed on by us, the advertisers and channel providers, and collectability is probable. Revenue is recognized on a CPM basis as
impressions or clicks are delivered while revenue on a CPA basis is recognized once agreed actions are performed or service period
is completed.
We consider ourselves as provider of the
services as we have control of the specified services and products at any time before they are transferred to the customers, which
is evidenced by (1) we are primarily responsible to our customers for products and services offered where the products were designed
in house and we have customer services team to directly serve the customers; and (2) we have discretion in establish pricing. Therefore,
we act as the principal of these arrangements and report revenue earned and costs incurred related to these transactions on a gross
basis.
(ii) AR Entertainment
Our AR entertainment services mainly include
three sub categories: SDK payment channel services, software development and mobile games operations and technology developments.
a. SDK Payment Channel Services
Our SDK payment channel services enable game
players and app users to make online payments through Alipay, Unipay or Wechat pay, etc., to various online content providers.
When game players and app users make payments in the game or app, the SDK payment channel will automatically populate payment services
for the users to fulfill payments.
We charge a fee for the payment channel services,
the pricing of which is based on the pre-determined rates specified in the contract. Our performance obligation is to facilitate
payment services and we recognize SDK payment channel service revenue at the time when a user completes a payment transaction via
a payment channel and is entitled to payment. Related fees are generally billed monthly, based on a per transaction basis. We believe
that our promise to customer is to facilitate the services of third party, instead of providing the payment services ourselves,
as we not have control of the services provided or serve the users directly, and we do not have the discretion in establishing
pricing. Therefore, revenue from SDK payment service is recorded on a net basis.
b. MR software development services
Our MR software development service contracts
are primarily on a fixed price basis, which require us to perform services for MR application design, content development and integrating
based on customers’ specific needs. These services also require significant production and customization. The required customization
work period is generally less than one year. We currently do not have any modification of contract and the contracts currently
do not have any variable consideration.
The software customization, application design,
upgrades and integration are considered as one performance obligation. The promises to transfer software, customization and upgrades
are not separately identifiable as the customers do not obtain benefits from these services on its own.
Our MR software development service contracts
are generally recognized over time during the contract period as we have no alternative use of the customized software and application
without incurring significant additional costs. Revenue is recognized based on our measurement of progress towards completion based
on input or output methods. Input methods are used only when there is a direct correlation between hours incurred and the end product
delivered, while output method is used when we could appropriately measure the customization progress towards completion. Assumptions,
risks and uncertainties inherent in the estimates used to measure progress could affect the amount of revenues, receivables and
deferred revenues at each reporting period. We have a long history of developing various MR software, and we believe we can reasonably
estimate the progress toward completion on each fixed price customized contracts.
c. Mobile Games Services
We generate revenue from jointly operated
mobile game publishing services and the licensed out games. In accordance with ASC 606, Revenue Recognition: Principal Agent Considerations,
we evaluate agreements with the game developers, distribution channels and payment channels in order to determine whether or not
we act as the principal or as an agent in the arrangement with each party respectively. The determination of whether to record
the revenues gross or net is based on whether our promise to our customers is to provide the products or services, or to facilitate
a sale by a third party. The nature of the promise depends on whether we control the products or services prior to transferring
it to our customers. Control is evidenced if we are primarily responsible for fulling the provision of services and have discretion
in establishing the selling price. When we control the products or services, our promise is to provide and deliver the products
and we record the revenues on a gross basis. When we do not control the products, our promise is to facilitate the sale and we
record the revenue on a net basis.
—Jointly operated mobile game publishing
services
We offer publishing services for mobile games
developed by third-party game developers. We act as a distribution channel that publishes the games on our own app or a third-party
owned app or website, named game portals. Through these game portals, game players can download the mobile games to their mobile
devices and purchase coins, the virtual currency, for in game premium features to enhance their game playing experience. We enter
into contracts with third-party payment platforms for collection services offered to game players who have purchased coins. The
third-party game developers, third party payment platforms and the co-publishers are entitled to profit sharing based on a prescribed
percentage of the gross amount charged to the game players. Our obligation in the publishing services is completed at the time
when the game players makes a payment to purchase coins.
With respect to the publishing services arrangements
between us and the game developer, we considered that we do not control the services, as (i) developers are responsible for providing
the game product desired by the game players; (ii) the hosting and maintenance of game servers for running the online mobile games
are the responsibilities of the third party platforms; (iii) the developers or third party platforms have the right to change the
pricing of in-game virtual items. Our responsibilities are publishing, providing payment solutions and market promotion services,
and thus we view the game developers as our customers and consider ourselves as the facilitator of the game developers in the arrangements
with game players. Accordingly, we record the game publishing service revenue from these games, net of amounts paid to the game
developers.
—Licensed out mobile games
We also license third parties to operate
our mobile games developed internally through mobile portal and receives revenue based royalty payments from the third-party licensee
operators on a monthly basis. Our performance obligation is to provide mobile games to game operators, which enable players of
the mobile games to make in game purchases, and we recognize revenue at the time when game players complete the purchases. We record
revenues on a net basis, as we do not have the control of the services provided, nor do we have the primary responsibility for
fulfillment or the right to change the pricing of the game services.
d. Technology developments
Our technology development contract requires
us to design applications based on customers’ specific needs. The duration of the design period usually lasts for approximately
3 months or less. Revenues are generally recognized at a point in time where we have transferred control of the asset upon completion
of the design and after the acceptance by our customer with no more future obligation of the design project.
(iii) Semiconductor business
Our semiconductor business includes two sub
categories: sale of products and sale of software.
a. Sale of products
Starting in July 2020, we also engage in
the sales of semiconductor products and related accessories. We typically enter into written contracts with its customer where
the rights of the parties, including payment terms, are identified and sales prices to the customers are fixed with no separate
sales rebate, discount, or other incentive and no right of return exists on sales of inventory. Our performance obligation is to
deliver products according to contract specifications. We recognize gross product revenue at a time when the control of products
or services are transferred to customers as evidenced by customers signed acceptances.
To distinguish a promise to provide products
from a promise to facilitate the sale from a third party, we consider the guidance of control in ASC 606-10-55-37A and the indicators
in 606-10-55-39. We consider this guidance in conjunction with the terms in our arrangements with both suppliers and customers.
In general, we control the products as it
has the obligation to (i) fulfill the products delivery and (ii) bear any inventory risk as legal owners. In addition, when establishing
the selling prices for delivery of the resale products, we have control to set its selling price to ensure it would generate profit
for the products delivery arrangements. We believe that all these factors indicate that we are acting as a principal in this transaction.
As a result, revenue from the trading of products is presented on a gross basis.
b. Revenue from software development
We also design software for central processing
units based on customers’ specific needs. The contract is typically fixed priced and does not provide any post contract customer
support or upgrades. Our performance obligation is to design, develop, test and install the related software for customers, all
of which are considered one performance obligation as the customers do not obtain benefit for each separate service. The duration
of the development period is short, usually less than one year.
Our revenue from software development contracts
are generally recognized over time during the development period and we have no alternative use of the customized software and
application without incurring significant additional costs. Revenue is recognized based on our measurement of progress towards
completion based on output methods when we could appropriately measure the customization progress towards completion by reaching
certain milestones specified in contracts. Assumptions, risks and uncertainties inherent in the estimates used to measure progress
could affect the amount of revenues, receivables and deferred revenues at each reporting period.
Contract balances
We record receivable related to revenue when
we have an unconditional right to invoice and receive payment. Payments received from customers before all of the relevant criteria
for revenue recognition are met are recorded as deferred revenues.
Contract costs
Contract costs represent costs incurred in
advance of revenue recognition arising from direct costs in respect of the revenue contracts according to the customer’s
requirements prior to the delivery of services, and such deferred costs will be recognized upon the recognition of the related
revenue. Estimated contract costs are based on the budgeted service hours, which are updated based on the progress toward completion
on a monthly basis. Pursuant to the contract terms, we have an enforceable right on payments for the work performed. Provisions
for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable based on
the current contract estimates. We reviewed impairment of contract costs on December 31, 2020 and determined that all contract
costs were recoverable.
Accounts receivable, net
Accounts receivable include trade accounts
due from customers. Accounts are considered overdue after 90 days. Management reviews our receivables on a regular basis to determine
if the bad debt allowance is adequate, and provides allowance when necessary. The allowance is based on management’s best
estimates of specific losses on individual customer exposures, as well as the historical trends of collections. Account balances
are charged off against the allowance after all means of collection have been exhausted and the likelihood of collection is not
probable.
Intangible assets, net
Our intangible assets with definite useful
lives primarily consist of copyrights, non-compete agreements, and technology know-hows. Identifiable intangible assets resulting
from the acquisitions of subsidiaries accounted for using the purchase method of accounting are estimated by management based on
the fair value of assets received. We amortize our intangible assets with definite useful lives over their estimated useful lives
and reviews these assets for impairment. We typically amortizes our intangible assets with definite useful lives on a straight-line
basis over the shorter of the contractual terms or the estimated useful lives of five to ten years.
Income taxes
We account for current income taxes in accordance
with the laws of the relevant tax authorities. The charge for taxation is based on the results for the fiscal year as adjusted
for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted
by the balance sheet date.
Deferred taxes is accounted for using the
asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and
liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of assessable tax
profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized
to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability
is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged
directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will
not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
An uncertain tax position is recognized as
a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with
a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit
is recorded. No penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the
period incurred. PRC tax returns filed in 2018 to 2020 are subject to examination by any applicable tax authorities.
Leases
We determine if a contract contains a lease
at inception. US GAAP requires that our leases be evaluated and classified as operating or finance leases for financial reporting
purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the
non-cancellable period for which we have the right to use the underlying asset, together with renewal option periods when the exercise
of the renewal option is reasonably certain and failure to exercise such option which result in an economic penalty. All of our
real estate leases are classified as operating leases.
We have entered into seven non-cancellable
operating lease agreements for seven office spaces expiring through December 2022. Upon adoption of FASB ASU 2016-02, we recognized
approximately RMB 1.8 million right of use (“ROU”) assets and same amount of lease liabilities based on the present
value of the future minimum rental payments of leases, using a weighted average discount rate of 7% based on duration of lease
terms. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The leases
generally do not contain options to extend at the time of expiration and the weighted average remaining lease terms are 1.5 years.
Operating lease expenses are allocated between the cost of revenues and selling, general, and administrative expenses.
Recent Issued Accounting Pronouncements
For detailed discussion on recent accounting
pronouncements, see Note 2 to the consolidated financial statements included elsewhere in this annual report.
B.
|
LIQUIDITY AND CAPITAL RESOURCES
|
As of December 31, 2020, we had cash, cash
equivalents and restricted cash of approximately RMB 368.1 million (US$ 56.4 million). Our working capital was approximately RMB
484.2 million (US$ 74.2 million) as of December 31, 2020. In assessing our liquidity, we monitor and analyze our cash on-hand and
our operating and capital expenditure commitments. To date, we have financed our working capital requirements through cash flow
generated from operations, debt and equity financings and capital contributions from our existing shareholders.
We completed our initial public offering in April, 2020 and received
net proceeds of approximately US$ 24.2 million (RMB 171.5 million). On July 27, 2020, we completed our follow-on public offering of 7,560,000
ADSs at the price of US$8.18 per ADS, resulting in net proceeds to us of approximately US$57.3 million (RMB 401.3 million), after deducting
placement agent fees and other expenses. On March 23, 2021, we completed our registered direct offering of 11,173,335 units, with each
unit consisting of one ADS and four-tenths of a warrant to purchase one ADS at an exercise price of US$ 8.60 per ADS, at the public offering
price of US$7.50 per unit, resulting in net proceeds to us of approximately US$77.8 million (RMB 507.9 million), after deducting placement
agent fees and other expenses. We believe our current working capital is sufficient to support our operations for the next twelve months.
We may, however, need additional cash resources in the future if we experience changes in business conditions or other developments, or
if we find and wish to pursue opportunities for investment, acquisition, capital expenditure or similar actions. If we determine that
our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt
securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders.
The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict
our operations. Our obligation to bear credit risk for certain financing transactions we facilitate may also strain our operating cash
flow. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
Although we consolidate the results of our
VIEs and its subsidiaries, we only have access to cash balances or future earnings of our VIEs and their subsidiaries through our
contractual arrangements with our VIEs.
Current foreign exchange and other regulations
in the PRC may restrict our PRC entities in their ability to transfer their net assets to the Company and its subsidiaries in Cayman
Islands, and Hong Kong. However, these restrictions have no impact on the ability of these PRC entities to transfer funds to the
Company as we have no present plans to declare dividend which we plan to retain our retained earnings to continue to grow our business.
In addition, these restrictions have no impact on the ability for us to meet our cash obligations as all of our current cash obligations
are due within the PRC.
To utilize the proceeds we received from
our initial public offering and the follow-on offering in July 2020, we may make additional capital contributions to our PRC subsidiaries,
establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, or make loans to the PRC subsidiaries.
However, most of these uses are subject to PRC regulations. Foreign direct investment and loans must be approved by and/or registered
in accordance with the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, as amended, and its local branches. The
total amount of loans we can make to any of our PRC subsidiaries cannot exceed statutory limits and must be registered with the
local counterpart of SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference
between the amount of total investment as approved by the Ministry of Commerce or its local counterpart and the amount of registered
capital of such foreign-invested company.
We are permitted under PRC laws and regulations
to provide funding to our PRC subsidiaries only through loans or capital contributions, and to our consolidated VIEs only through
loans, and only if we satisfy the applicable government registration and approval requirements. The relevant filing and registration
processes for capital contributions typically take approximately eight weeks to complete. The filing and registration processes
for loans typically take approximately four weeks or longer to complete. While we currently see no material obstacles to completing
the filing and registration procedures with respect to future capital contributions and loans to our PRC subsidiaries or VIEs,
we cannot assure you that we will be able to complete these filings and registrations on a timely basis, or at all. See “Item
3.D. Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC
entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds
we receive from our offshore financing activities to make loans to or make additional capital contributions to our PRC subsidiary,
which could materially and adversely affect our liquidity and our ability to fund and expand our business.” Additionally,
while there is no statutory limit on the amount of capital contribution that we can make to our PRC subsidiaries, loans provided
to our PRC subsidiaries and consolidated VIEs in the PRC are subject to certain statutory limits. We are able to use all of the
net proceeds from this offering for investment in our PRC operations by funding our PRC subsidiaries through capital contributions
which is not subject to any statutory limit on the amount under PRC laws and regulations. See “Item 4. Regulation—Loans
by Foreign Companies to their PRC Subsidiaries.” We expect the net proceeds from this offering to be used in the PRC will
be in the form of RMB and, therefore, our PRC subsidiaries and consolidated VIEs will need to convert any capital contributions
or loans from U.S. dollars into Renminbi in accordance with applicable PRC laws and regulations.
The following table summarizes the key components
of our cash flows for the years ended December 31, 2018, 2019 and 2020.
|
|
For the Years Ended December 31
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
Net cash provided by (used in) operating activities
|
|
|
99,452,205
|
|
|
|
143,955,544
|
|
|
|
(66,960,681
|
)
|
|
|
(10,262,332
|
)
|
Net cash used in investing activities
|
|
|
(98,597,356
|
)
|
|
|
(126,479,892
|
)
|
|
|
(228,129,543
|
)
|
|
|
(34,962,918
|
)
|
Net cash provided by (used in) financing activities
|
|
|
137,493,993
|
|
|
|
(40,974,000
|
)
|
|
|
562,639,786
|
|
|
|
86,229,642
|
|
Effect of exchange rate change on cash, cash equivalents and restricted cash
|
|
|
937,466
|
|
|
|
599,384
|
|
|
|
(28,489,442
|
)
|
|
|
(4,366,263
|
)
|
Net change in cash, cash equivalents and restricted cash
|
|
|
139,286,308
|
|
|
|
(22,898,964
|
)
|
|
|
239,060,120
|
|
|
|
36,638,128
|
|
Cash, cash equivalents and restricted cash, beginning of year
|
|
|
12,661,634
|
|
|
|
151,947,942
|
|
|
|
129,048,978
|
|
|
|
19,777,924
|
|
Cash, cash equivalents and restricted cash, end of year
|
|
|
151,947,942
|
|
|
|
129,048,978
|
|
|
|
368,109,098
|
|
|
|
56,416,052
|
|
Operating activities
Net cash provided by operating activities
was approximately RMB 67.0 million (US$ 10.3 million) for the year ended December 31, 2020, as compared to approximately 144.0
million (US$ 20.6 million) for the year ended December 31, 2019 and approximately RMB 99.5 million for the year ended December
31, 2018.
Net cash used in operating activities for
the year ended December 31, 2020 was primarily attributable to net loss of approximately 145.0 million (US$ 22.2 million), with
non-cash depreciation and amortization expenses of approximately RMB 14.6 million (US$ 2.2 million), stock compensation expenses
of approximately RMB 191.4 million (US$ 29.3 million), gain from short-term investments of approximately RMB 12.3 million (US$
1.9 million) and goodwill impairment loss of approximately RMB 7.2 million (US$ 1.1 million). Cash outflow was also attributable
to (i) the increase in accounts receivable of approximately RMB 110.6 million (US$ 17.0 million), which was consistent with our
increase in revenue, and (ii) the increase in prepaid expenses and deposits of approximately RMB 25.5 million (US$ 3.9 million),
as we prepaid more professional fees and we made more advances to secure advertising channels for advertising. Cash outflow was
partially offset by the increase in deferred revenues of approximately RMB 9.2 million (US$ 1.4 million) as we require new customers
to pay in advance.
Net cash provided by operating activities
for the year ended December 31, 2019 was primarily attributable to net income of approximately RMB 102.2 million (US$ 14.7 million)
with non-cash depreciation and amortization expenses of approximately RMB 13.9 million (US$ 2.0 million), provision for doubtful
accounts of approximately RMB 1.6 million (US$ 0.2 million) and amortization of debt discount of RMB 11.5 million (US$ 1.7 million),
which was partially offset by deferred tax benefits of approximately RMB 1.5 million (US$ 0.2 million). Cash inflow was also attributable
to (i) the collection of accounts receivable of approximately RMB 9.1 million (US$ 1.3 million), (ii) the decrease of RMB 5.3 million
(US$ 0.8 million) in contract costs as we recognized some of the costs incurred for revenue that had not met recognition criteria,
(iii) the increase of approximately RMB 5.7 million (US$ 0.8 million) in accounts payable, (iv) the increase of approximately RMB
0.3 million (US$ 46,000) in deferred revenues, and (v) the increase of other payables and accrued liabilities of approximately
RMB 0.4 million (US$ 64,000). Cash inflow was partially offset by (i) the increase of prepayments of approximately RMB 3.1 million
(US$ 0.4 million), as we had to make more advances to secure advertising channels for advertising in short form mobile video streaming
market, (ii) the increase of approximately RMB 0.4 million (US$ 58,000) in prepaid expenses and deposits, and (iii) the increase
of approximately RMB 1.1 million (US$ 0.2 million) in taxes payable as we made more tax payments in 2019.
Net cash provided by operating activities
was approximately RMB 99.5 million for the year ended December 31, 2018. Net cash provided by operating activities for the year
ended December 31, 2018 was primarily attributable to net income of approximately RMB 89.2 million with non-cash depreciation and
amortization expense of approximately RMB 13.5 million and amortization of debt discount of RMB 5.1 million, which was partially
offset by non-cash deferred tax benefits of RMB 1.5 million. The cash inflow was also attributable to (i) the increase of approximately
RMB 7.7 million in accounts payable, and (ii) the increase of taxes payable of approximately RMB 8.1 million due to more income
tax and VAT incurred as a result of increase in revenues and expiration of tax exempt status for some of our subsidiaries. Cash
inflow was offset by (i) the increase of approximately RMB 11.3 million in account receivable, as we expanded our operations by
providing more credit sales, (ii) the increase of approximately RMB 2.3 million in prepaid expenses and other current assets, and
(iii) the increase of approximately RMB 8.4 million in contract costs.
Investing activities
Net cash used in investing activities was
approximately RMB 228.2 million (US$ 35.0 million) for the year ended December 31, 2020, compared to net cash used in investing
activities of approximately RMB 126.5 million (US$ 18.1 million) for the year ended December 31, 2019, and approximately RMB 98.6
million for the year ended December 31, 2018.
Cash used in investing activities for the
year ended December 31, 2020 was mainly due to payments for cost method investments of approximately RMB 109.7 million (US$ 16.8
million) as strategic alliance to secure our leading position in the industry, the net acquisition payments on Fe-DA of approximately
RMB 95.6 million (US$ 14.6 million) and purchase of short term investments of approximately RMB 173.6 million (US$ 26.6 million)
which are publicly traded securities listed in either US or Hong Kong. Cash outflow was partially offset by the redemption of short
term investments of approximately RMB 151.1 million (US$ 23.2 million).
Cash used in investing activities for the
year ended December 31, 2019 was mainly due to payments for cost method investments of approximately RMB 3.9 million (US$ 0.6 million),
the repayments for the business acquisition payables to the related parties of approximately RMB 122.4 million (US$ 17.6 million),
and purchases of property, plant and equipment of approximately RMB 0.2 million (US$ 28,000).
Cash used in investing activities for the
year ended December 31, 2018 was mainly due to the repayments of business acquisition payables to former shareholders of Skystar,
Shenzhen Kuxuanyou, Shenzhen Yidian and Shenzhen Yitian in the amount of RMB 98.9 million and purchases of property, plant and
equipment of approximately RMB 47,000.
Financing activities
Cash used in financing activities was approximately
RMB 562.6 million (US$ 86.2 million) for the year ended December 31, 2020, compared with cash provided by financing activities
of approximately RMB 41.0 million for the year ended December 31, 2019, and cash provided by financing activities of approximately
RMB 137.5 million for the year ended December 31, 2018.
For the year ended December 31, 2020, cash
provided by financing activities was mainly the proceeds from public offering of approximately RMB 572.8 million (US$ 87.8 million),
capital contribution from non-controlling interests of approximately RMB 5.9 million (US$ 0.9 million) as we set up three joint
ventures with our minority shareholders and we borrowed additional loans from Shanghai Junei Internet Co. (which is under common
control of Jie Zhao) in the amount of RMB 96.3 million (US$ 14.8 million), which has an annual interest rate of 7% and is due in
2021. Cash inflow was partially offset by the repayment of approximately RMB 96.4 million (US$ 14.8 million) to Shanghai Junei
Internet Co. for loans we borrowed from 2019 and 2020 and the repayment of approximately RMB 16.1 million (US$ 2.5 million) to
DBS Bank Ltd. we borrowed in 2020.
For the year ended December 31, 2019, cash
used in financing activities was mainly the repayment of approximately RMB 125.3 million (US$ 18.0 million) to Jie Zhao, our Chairman,
for loans we made from 2016 to 2018, and the repayment of RMB 4.2 million (US$ 0.6 million) to Enweiliangzi Investment Co. (which
is under common control of Jie Zhao). Cash provided by financing activities for the year ended December 31, 2019 was due to the
additional loans we received Jie Zhao in the amount of RMB 13.0 million (US$ 1.9 million). The loans are free of interest and collateral,
and are due in 2020 and 2021. We also borrowed loans from Shanghai Junei Internet Co. (which is under common control of Jie Zhao)
in the amount of RMB 75.5 million (US$ 10.8 million), which has an annual interest rate of 7% and is due in 2020 and 2021.
For the year ended December 31, 2018, cash
provided by financing activities was mainly due to proceeds from issuance of Series A convertible preferred shares of approximately
RMB 137.7 million and proceeds from related party loans of approximately RMB 14.6 million, consisting of approximately RMB 10.4
million from Jie Zhao and approximately RMB 4.2 million from Enweiliangzi Investment Co. (which is under common control of Jie
Zhao) for cash flow purpose. The loans are free of interest and collateral, and are due in 2020 and 2021. The inflow of cash flow
was offset by our repayment to Jie Zhao of approximately RMB 14.8 million.
Commitments and Contingencies
In the normal course of business, we are
subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters,
including, among others, government investigations and tax matters. In accordance with ASC No. 450-20, “Loss Contingencies”,
we will record accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss
can be reasonably estimated.
Holding Company Structure
WiMi Cayman is a holding company with no
material operations of its own. We conduct our operations primarily through our PRC subsidiary, our VIEs and their subsidiaries
in China. As a result, WiMi Cayman’s ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our
existing PRC subsidiaries or newly formed ones incur debt on their own behalf in the future, the instruments governing their debt
may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to
pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and
regulations. Under PRC law, each of our PRC subsidiaries, our VIEs and their subsidiaries in China is required to set aside at
least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50%
of its registered capital. In addition, our wholly foreign-owned subsidiaries in China may allocate a portion of their after-tax
profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at their discretion,
and our variable interest entities may allocate a portion of their after-tax profits based on PRC accounting standards to a discretionary
surplus fund at their discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends.
Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE.
Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until they generate accumulated profits and
meet the requirements for statutory reserve funds.
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%, 2.5% and 5.4%, respectively.
Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of
inflation in the future.
C.
|
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
|
We have focused on and will continue to focus
on investment in our technology system. Our research and development expenses were approximately RMB8.0 million, RMB18.4 million,
RMB85.0 million (US$13.0 million) for the years ended December 31, 2018, 2019, and 2020, respectively.
We believe that a core element of the competitiveness
of the holographic AR industry is research and development related to technology development, and we rely on a combination of patent,
copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. For details
of our intellectual property portfolio, please refer to Item 4 B. Business Overview—Intellectual Property”.
Other than as disclosed in the foregoing
disclosures and elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events
for the year ended December 31, 2020 that are reasonably likely to have a material adverse effect on our net revenue, income, profitability,
liquidity or capital resources, or that would cause our disclosed financial information to be not necessarily indicative of future
operating results or financial conditions.
E.
|
OFF-BALANCE SHEET ARRANGEMENTS
|
We have not entered into any off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition that is material
to investors. In particular, we (i) have not entered into any financial guarantees or other commitments to guarantee the payment
obligations of any unconsolidated entity; (ii) have not entered into any derivative contracts that are both indexed to our own
stock and classified in stockholders’ equity, or not reflected in our statement of financial position; and (iii) do not have
any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market
risk support to such entity.
F.
|
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|
As of December 31, 2020, the future minimum payments
under certain of our contractual obligations were as follows:
|
|
|
|
|
Payments Due In
|
|
|
|
Total
RMB
|
|
|
Less than 1
year
|
|
|
1 - 2 years
|
|
|
3 - 5 years
|
|
|
Thereafter
|
|
Contractual obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases obligations
|
|
|
3,475,290
|
|
|
|
2,834,662
|
*
|
|
|
640,628
|
|
|
|
-
|
|
|
|
-
|
|
Loans—related parties
|
|
|
86,561,665
|
|
|
|
63,876,153
|
|
|
|
22,685,512
|
|
|
|
-
|
|
|
|
-
|
|
Acquisition payable
|
|
|
1,864,131
|
|
|
|
-
|
|
|
|
1,864,131
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
91,901,086
|
|
|
|
66,710,815
|
|
|
|
25,190,271
|
|
|
|
-
|
|
|
|
-
|
|
|
*
|
Include the operating leases with a term less than one year.
|
See the section headed “Forward-looking
Statements” at the beginning of this annual report.
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
DIRECTORS AND SENIOR MANAGEMENT
|
The following table sets forth certain information
concerning our directors and executive officers as of the date of this annual report.
Directors and Executive Officers
|
|
Age
|
|
Position/Title
|
Jie Zhao
|
|
44
|
|
Chairman
|
Shuo Shi
|
|
38
|
|
Chief Executive and Operations Officer and Director
|
Songrui Guo
|
|
37
|
|
Chief Technology Officer and Director
|
Guanghui Zheng
|
|
31
|
|
Chief Financial Officer
|
Hongtao Zhao
|
|
44
|
|
Independent Director
|
Yuanyuan Liu
|
|
37
|
|
Independent Director
|
Shan Cui
|
|
48
|
|
Independent Director
|
Michael W. Harlan
|
|
60
|
|
Independent Director
|
Jie Zhao, founder of our company,
has been serving as the Chairman of our board of directors since November 2018 and has also been serving as the Chairman of board
of directors of our VIE, Beijing WiMi, since its founding in July 2015. He has more than 10 years of experience in company management.
From February 2008 to May 2015, Mr. Zhao served as Director of Xiamen Xiangtong Animation Co., Ltd., a mobile animation company
in China. Mr. Zhao served as Director of Shenzhen WeiXun YiTong Technology Co., Ltd., a mobile internet company in China from December
2004 to December 2012. Previously, Mr. Zhao served as a software developer of AsiaInfo Beijing Co., Ltd., a company specializing
in computer system in China, from October 2002 to December 2004. Mr. Zhao received a bachelor’s degree from Wuhan University
of Technology in China and a master’s degree from Tsinghua University in China.
Shuo Shi has served as our Chief
Executive and Operations Officer and a director of the board since October 2020. He has also served as Vice General Manager of our VIE,
Beijing WiMi, since February 2017. He has more than 10 years of experience in sales marketing, internet management and culture media.
From February 2014 to December 2016, Mr. Shi served as Secretary-General of Shenzhen Three-Dimension Film Association, an association
specializing in 3D film making in China. Previously, Mr. Shi served as Vice General Manager in Shenzhen Stereoscopic Internet Culture
Media Company, a culture media company in China, from November 2011 to February 2014. Mr. Shi received a bachelor’s degree from
Renmin University in China in 2006.
Songrui Guo has served as our Chief
Technology Officer and a director of the board since October 2020. He has also been our vice president of the R&D department since
November 2016. Prior to joining our company, he was an assistant researcher at the Digital Media Research Institute of Hunan University
from 2011 to 2016 and a client-side programmer at Fujian Netdragon Network Technology Co. Ltd. from 2010 to 2011. Mr. Songrui Guo received
a bachelor’s degree in mathematics and applied mathematics from Hengyang Normal University in 2007, a master’s degree in software
theory from Hunan Normal University in 2010, and a PhD in computer science and technology from Hunan University in 2016.
Guanghui Zheng has served as
the general manager of our investment department since January 2018. From August 2013 to November 2017, Mr. Zheng served as the
chief financial officer of Qiansheng Investment Co., Ltd. From September 2011 to September 2013, he served as the chief operating
officer of Jiangxi Wanshan Industry Co., Ltd. Mr. Zheng received a bachelor’s degree from Jiangxi University of Finance and
Economics in 2012, and a master’s degree from the University of Sunderland in 2019.
Hongtao Zhao has been serving
as our independent director since May 2019. Mr. Zhao has served as Vice General Manager at Ping An Caizhi Investment Management
Co., Ltd, an investment management firm in China, since April 2017. Mr. Zhao has more than 17 years of experience in capital management.
He served as Investment Director of Zhongxin Rongchuang Capital Management Co., Ltd., an asset management firm in China, from April
2015 to April 2017. He served as Vice President of Beijing Grain Group Industrial Fund, an investment fund in China, from July
2012 to April 2015. From January 2009 to May 2012, Mr. Zhao served as Senior Manager of Beijing Dagong International Credit Evaluation
Co., Ltd., a credit evaluation institution in China. Mr. Zhao received a bachelor’s degree from Ningxia University in China
and a master’s degree from Peking University in China.
Yuanyuan Liu has been serving
as our independent director since May 2019. Ms. Liu has served as Executive Director of Hangzhou Youxiang Investment Management
Co., Ltd., an investment management firm in China, since October 2017. Ms. Liu served as Deputy Secretary General of Equity Investment
Committee in Shengshijing Asset Management Group Co., Ltd., an asset management firm in China, from November 2014 to September
2017. From August 2013 to November 2014, Ms. Liu worked for Beijing Jingtian & Gongcheng Law Firm in China. From April 2010
to August 2013, Ms. Liu worked for Beijing Kangda Law Firm in China. She received a bachelor’s degree from Qufu Normal University
in China and a master’s degree from Renmin University in China.
Shan Cui has been serving as
our independent director since May 2020. She is currently an independent director of Addentax Group Corp. She has been an independent
director and the chairwoman of the audit committee of Greenland Acquisition Corp. from April 2019 to October 2019, an independent
director and the chairwoman of the audit committee and compensation committee of Fuqin Fintech Limited, an online lending information
intermediary platform, since August 2018. She has been the executive director of First Capital International Limited since 2010
and provided consulting services for private equity companies and venture capital companies. She was the chief financial officer
of Lizhan Environmental Corporation, a then Nasdaq-listed company engaged in the business of green leather material manufacturing
from 2011 to 2013. Ms. Cui received her master’s degree in Business Administration from Georgia State University and her
bachelor’s degree in International Business English from Ocean University of China.
Michael W. Harlan, has been
serving as our independent director since April 7, 2020. He has been serving as a member of the board of directors of Brewer Crane
Holdings, LLC, a construction services company, since July 2018. Mr. Harlan has also served as the Chairman and Chief Executive
Officer of TruHorizon Environmental Solutions, an environmental solutions company, since September 2013. Moreover, Mr. Harlan has
served as President of Harlan Capital Advisors, LLC, a business consulting firm, since September 2011. In addition, Mr. Harlan
has served as a member of the board of directors of Waste Connection, Inc. (NYSE: WCN), a publicly-traded solid waste management
firm, since its founding in 1997. From June 2015 to February 2017, Mr. Harlan served as a member of the board of directors of Yulong
Eco-Materials Limited (Nasdaq: YECO), a manufacturer of eco-friendly building products in China. Mr. Harlan served as a member
of the board of directors of Travis Trailer and Body, Inc. a leading manufacturer of specialized trailers used in the construction,
environmental services, agriculture and energy industries, from August 2013 to September 2016. From May 2007 to August 2011, Mr.
Harlan served as President and Chief Executive Officer of U.S. Concrete, Inc. (NASDAQ: USCR). Mr. Harlan also served as Executive
Vice President and Chief Operating Officer of U.S. Concrete, Inc. from November 2004 to May 2007. Mr. Harlan received a bachelor’s
degree from University of Mississippi. Due to his extensive operational experience in the public companies, we believe Mr. Harlan’s
is well qualified to serve as a Director.
Compensation
In 2020, we paid an aggregate cash compensation
of approximately RMB 810,518 (US$124,219) to our directors and executive officers. We have not set aside or accrued
any amount to provide pension, retirement or other similar benefits to our directors and executive officers. Our PRC subsidiaries
and consolidated VIEs are required by law to make contributions equal to certain percentages of each employee’s salary for
his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund.
Employment Agreements
We have entered into employment agreements
with each of our executive officers. Each of our executive officers is employed for an unspecified time period, which can be terminated
upon both parties’ agreement or by law. We may terminate an executive officer’s employment for cause at any time without
advance notice in certain events. We may terminate an executive officer’s employment by giving a prior written notice or
by paying certain compensation. An executive officer may terminate his or her employment at any time by giving a prior written
notice.
Each executive officer has agreed to hold,
unless expressly consented to by us, at all times during and within one year after the termination of his or her employment agreement,
in strict confidence and not to use, any of our confidential information or the confidential information of our customers and suppliers.
Our board of directors consists of seven
directors, including four independent directors, Hongtao Zhao and Yuanyuan Liu, Shan Cui, and Michael W. Harlan. A director is
not required to hold any shares in our company to qualify to serve as a director. The Corporate Governance Rules of the Nasdaq
generally require that a majority of an issuer’s board of directors must consist of independent directors.
A director who is in any way, whether directly
or indirectly, interested in a contract or transaction or proposed contract or transaction with our company is required to declare
the nature of his or her interest at a meeting of our directors. A general notice given to the directors by any director to the
effect that he or she is a member of any specified company or firm and is to be regarded as interested in any contract or transaction
which may thereafter be made with that company or firm shall be deemed a sufficient declaration of interest in regard to any contract
so made or transaction so consummated. Subject to the Nasdaq rules and disqualification by the chairman of the relevant board meeting,
a director may vote in respect of any contract or proposed contract or arrangement notwithstanding that he/she may be interested
therein and if he/she does so, his/her vote shall be counted and he/she may be counted in the quorum at any meeting of the directors
at which any such contract or proposed contract or arrangement is considered. Our board of directors may exercise all of the powers
of our company to borrow money, to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and
to issue debentures, debenture stock or other securities whenever money is borrowed or as security for any debt, liability or obligation
of our company or of any third party.
Committees of the Board of Directors
We have established three committees under
the board of directors, an audit committee, a compensation committee and a nominating and corporate governance committee. We have
adopted a charter for each of the three committees. Each committee’s members and functions are described below.
Audit Committee. Our audit committee
consists of three members, and is chaired by Shan Cui. We have determined that Shan Cui, Hongtao Zhao and Yuanyuan Liu satisfy the requirements
of Rule 5605(a)(2) of the Listing Rules of the Nasdaq and meet the independence standards under Rule 10A 3 under the Securities Exchange
Act of 1934, as amended. We have determined that Shan Cui qualifies as an “audit committee financial expert.” The audit committee
oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee
is responsible for, among other things:
|
●
|
reviewing and recommending to our board for approval, the appointment, re-appointment or removal of the independent auditor, after considering its annual performance evaluation of the independent auditor;
|
|
●
|
approving the remuneration and terms of engagement of the independent auditor and pre approving all auditing and non-auditing services permitted to be performed by our independent auditors at least annually;
|
|
●
|
obtaining a written report from our independent auditor describing matters relating to its independence and quality control procedures;
|
|
●
|
reviewing with the independent registered public accounting firm any audit problems or difficulties and management’s response;
|
|
●
|
discussing with our independent auditor, among other things, the audits of the financial statements, including whether any material information should be disclosed, issues regarding accounting and auditing principles and practices;
|
|
●
|
reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S K under the Securities Act;
|
|
●
|
reviewing and recommending the financial statements for inclusion within our quarterly earnings releases and to our board for inclusion in our annual reports;
|
|
●
|
discussing the annual audited financial statements with management and the independent registered public accounting firm;
|
|
●
|
reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any special steps taken to monitor and control major financial risk exposures;
|
|
●
|
at least annually, reviewing and reassessing the adequacy of the committee charter;
|
|
●
|
approving annual audit plans, and undertaking an annual performance evaluation of the internal audit function;
|
|
●
|
establishing and overseeing procedures for the handling of complaints and whistleblowing;
|
|
●
|
meeting separately and periodically with management and the independent registered public accounting firm;
|
|
●
|
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance; and
|
|
●
|
reporting regularly to the board.
|
Compensation Committee.
Our compensation committee consists of two members, and is chaired by Hongtao Zhao. We have determined that Hongtao Zhao and Yuanyuan
Liu satisfy the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of the Nasdaq. The compensation
committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating
to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which their
compensation is deliberated upon. The compensation committee is responsible for, among other things:
|
●
|
overseeing the development and implementation of compensation programs in consultation with our management;
|
|
●
|
at least annually, reviewing and approving, or recommending to the board for its approval, the compensation for our executive officers;
|
|
●
|
at least annually, reviewing and recommending to the board for determination with respect to the compensation of our non-executive directors;
|
|
●
|
at least annually, reviewing periodically and approving any incentive compensation or equity plans, programs or other similar arrangements;
|
|
●
|
reviewing executive officer and director indemnification and insurance matters;
|
|
●
|
overseeing our regulatory compliance with respect to compensation matters, including our policies on restrictions on compensation plans and loans to directors and executive officers;
|
|
●
|
at least annually, reviewing and reassessing the adequacy of the committee charter;
|
|
●
|
selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s independence from management; and
|
|
●
|
reporting regularly to the board.
|
Nominating and Corporate Governance
Committee. Our nominating and corporate governance committee consists of two members, and is chaired by Hongtao Zhao. We
have determined that Hongtao Zhao and Yuanyuan Liu satisfy the “independence” requirements of Rule 5605(a)(2) of the
Listing Rules of the Nasdaq. The nominating and corporate governance committee assists the board in selecting individuals qualified
to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance
committee is responsible for, among other things:
|
●
|
recommending nominees to the board for election or re-election to the board, or for appointment to fill any vacancy on the board;
|
|
●
|
reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience, expertise, diversity and availability of service to us;
|
|
●
|
developing and recommending to our board such policies and procedures with respect to nomination or appointment of members of our board and chairs and members of its committees or other corporate governance matters as may be required pursuant to any SEC or Nasdaq rules, or otherwise considered desirable and appropriate;
|
|
●
|
selecting and recommending to the board the names of directors to serve as members of the audit committee and the compensation committee, as well as of the nominating and corporate governance committee itself;
|
|
●
|
at least annually, reviewing and reassessing the adequacy of the committee charter;
|
|
●
|
developing and reviewing at least annually the corporate governance principles adopted by the board and advising the board with respect to significant developments in the law and practice of corporate governance and our compliance with such laws and practices; and
|
|
●
|
evaluating the performance and effectiveness of the board as a whole.
|
Duties and Functions of Directors
Under Cayman Islands law, our directors owe
fiduciary duties to our company, including a duty of loyalty, a duty to act honestly and a duty to act in what they consider in
good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors
also owe to our company a duty to exercise the skill they actually possess and such care and diligence that a reasonable 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 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 memorandum and articles of association, as amended and restated from time to time. Our company has the right to seek damages
if a duty owed by our directors is breached. In limited exceptional circumstances, a shareholder may have the right to seek damages
in our name if a duty owed by our directors is breached. In accordance with our second amended and restated articles of association,
the functions and powers of our board of directors include, among others, (i) convening shareholders’ annual general meetings
and reporting its work to shareholders at such meetings, (ii) declaring dividends, (iii) appointing officers and determining their
terms of offices and responsibilities, and (iv) approving the transfer of shares of our company, including the registering of such
shares in our share register. In addition, in the event of an equality of votes, the chairman of our board of directors has a second
or casting vote.
Terms of Directors and Officers
Our officers are appointed by and serve at
the discretion of the board of directors and may be removed by our board of directors. Our directors may be appointed by a resolution
of our board of directors, or by an ordinary resolution of our shareholders. Our directors are not subject to a term of office
and hold office until such time as they are removed from office by ordinary resolution of the shareholders. A director will be
removed from office automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition
with his creditors; (ii) dies or is found by our company to be of unsound mind; (iii) resigns by notice in writing to our company;
(iv) without special leave of absence from our board of directors, is absent from three consecutive meetings of the board and the
board resolves that his office be vacated; or (v) is removed from office pursuant to any other provisions of our post offering
amended and restated memorandum and articles of association.
Share Incentive Plan
2020 Equity Incentive Plan
Our 2020 Equity
Incentive Plan was adopted to attract and retain the best available personnel for positions of substantial responsibility, provide
additional incentive to employees, directors, officers and consultants and promote the success of our business. The equity incentive
plan provides for the grant of an option, restricted shares, restricted share units and local awards. In September 2020, we issued
17,500,000 Class B ordinary shares pursuant to our 2020 Plan. As of the date of this annual report, we have granted an aggregate
of 16,758,240 restricted Class B ordinary shares to our directors, officers, key employees and advisors, among which 15,993,240
Class B ordinary shares were fully vested in October and December 2020, and 765,000 restricted Class B ordinary shares are
to be vested over a three-year period. The remaining 741,760 Class B ordinary shares are held in trust designated by the administrator
of the 2020 Plan.
Authorized Shares
The maximum aggregate number of Class B ordinary shares that may be issued under the 2020 Equity Incentive Plan is 17,500,000.
Ordinary shares issued pursuant to awards under the 2020 Equity Incentive Plan that are forfeited or cancelled or otherwise expired,
will become available for future grant under the 2020 Equity Incentive Plan. The shares that are tendered by a participant of the
2020 Equity Incentive Plan or withheld by us to pay the exercise price of an option or to satisfy the participant’s tax withholding
obligations in connection with an award shall not be added back to the limit of the 2020 Equity Incentive Plan. During the term
of the 2020 Equity Incentive Plan, we will at all times reserve and keep available a sufficient number of ordinary shares available
for issue to satisfy the requirements of the 2020 Equity Incentive Plan.
Plan Administration
The 2020 Equity Incentive Plan is administered by the board. The administrators may delegate limited authority over the day-to-day
administration of the 2020 Equity Incentive Plan to such other subcommittees or specified officers. Subject to the provisions of
the 2020 Equity Incentive Plan, the administrator has the power to determine the terms of awards, including the eligible participants,
the exercise price, if any, the number of shares subject to each award, the fair market value of a share of our ordinary shares,
the vesting schedule applicable to the awards, together with any vesting acceleration, and the form of settlement of awards in
shares or cash or a combination thereof and the terms of the award agreement for use under the 2020 Equity Incentive Plan. In the
event that any dividend or other distribution, recapitalization, share division, share consolidation, reorganization or any change
in the corporate structure of the Company affecting the shares occurs, the administrators will make adjustment with respect to
the number and class of shares that may be delivered under the 2020 Equity Incentive Plan and/or the number, class and price of
shares covered by outstanding awards, in order to prevent diminution of the benefits intended to be made available under the 2020
Equity Incentive Plan.
Awards under the Equity Incentive Plan
Share Options Share options may be
granted under the 2020 Equity Incentive Plan. The exercise price of each option shall be determined by the administrator; provided,
however, that the per share exercise price may be no less than 100% of the fair market value per share on the date of grant. Our
administrator shall also determine the time or times at which the options shall vest and may be exercised and will determine any
conditions that must be satisfied.
Restricted Shares A restricted share
award agreement will specify restrictions on the duration of the restricted period, the number of shares granted, and any other
terms and conditions specified by the administrator. Except to the extent otherwise provided in the award agreement, the holder
of restricted shares will be entitled to receive all dividends and other distributions paid with respect to the shares, subject
to the same restrictions on transferability and forfeitability as the underlying shares of restricted shares. Restricted shares
may not be sold, transferred, assigned or pledged until the end of the restricted period and may be subject to forfeiture upon
a termination of employment or service with us.
Restricted Share Units Awards of restricted
share units may be granted by the administrator. At the time of grant of restricted share units, the administrator may impose conditions
that must be satisfied, such as continued employment or service or attainment of corporate performance goals, and may place restrictions
on the grant and/or vesting of the restricted share units. A restricted share unit award agreement will specify applicable vesting
criteria, the number of restricted share units granted, the terms and conditions on time and form of payment and any such terms
and conditions determined by the administrator. Each restricted share unit, upon fulfilment of any applicable conditions, represents
a right to receive an amount equal to the fair market value of one share.
Other Local Awards
The administrator may cause a local PRC subsidiary of our Company to grant local cash-settled awards in lieu of any other award
under the 2020 Equity Incentive Plan, which such local awards shall be paid wholly by the such PRC subsidiary. Each local award
shall be linked to the fair market value of a share.
Change in Control
The 2020 Equity Incentive Plan provides that in the event of a change in control of our Company, each outstanding award will
be assumed or substituted by the successor corporation. Unless the administrator determines otherwise, in the event that the successor
corporation does not assume or substitute for the award, the portion of the award that remains outstanding will fully vest and
all applicable restrictions will lapse. The holders of any outstanding options will be provided notice and a specified period of
time to exercise awards to the extent vested (with awards terminating upon the expiration of the specified period of time). An
award will be considered assumed if, following the change in control transaction, the award confers the right to purchase or receive,
for each share subject to the award, the same consideration received in the change in control transaction by the holders of ordinary
shares for each share held on the effective date of the transaction.
Plan Amendment and Termination Our
board of directors may amend, alter, suspend or terminate the 2020 Equity Incentive Plan, subject to certain exceptions. The 2020
Equity Incentive Plan will automatically terminate in 2030, unless we terminate it sooner. The termination of the 2020 Equity Incentive
Plan will not limit the administrator’s ability to exercise the powers granted to it with respect to awards granted under the plan
prior to the date of termination.
The following table
summarizes, as of the date of this annual report, the number of Class B ordinary shares under outstanding equity awards that we
granted to our directors and executive officers.
Name
|
|
Class B Ordinary
Shares Underlying
Equity Awards
Granted
|
|
|
Date of Grant
|
|
|
Date of Expiration
|
|
Shuo Shi
|
|
|
*
|
|
|
June 6, 2020 and
January 26, 2021
|
|
|
June 6, 2030 and
January 26, 2031
|
|
Michael W. Harlan
|
|
|
*
|
|
|
September 12, 2020
|
|
|
September 12, 2030
|
|
Guanghui Zheng
|
|
|
*
|
|
|
January 26, 2021
|
|
|
January 26, 2031
|
|
Songrui Guo
|
|
|
*
|
|
|
January 26, 2021
|
|
|
January 26, 2031
|
|
Other individual grantees as a group
|
|
|
16,390,000
|
|
|
June 6, 2020, September 12, 2020, and January 26, 2021
|
|
|
June 6, 2030, September 12, 2030, and January 26, 2031
|
|
*
|
Less than 1% of our total outstanding shares.
|
We had 122, 147 and 202 full-time employees,
respectively, as of December 31, 2018, 2019 and 2020. As of the date of this annual report, all of our employees are based in China.
The following table sets forth the number
of our employees as of December 31, 2020:
Function
|
|
Number of
full-time
employees
|
|
Research and Development
|
|
|
87
|
|
Business and Marketing
|
|
|
67
|
|
Administrative, Human Resources and Finance
|
|
|
48
|
|
Total
|
|
|
202
|
|
Under PRC law, we participate in various
employee social security plans that are organized by municipal and provincial governments for our PRC-based full-time employees,
including pension, unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing fund.
We are required under PRC law to make contributions monthly to employee benefit plans for our PRC-based full-time employees at
specified percentages of the salaries, bonuses and certain allowances of such employees, up to a maximum amount specified by the
local governments in China.
We enter into labor contracts and standard
confidentiality and intellectual property agreements with our key employees. We believe that we maintain a good working relationship
with our employees, and we have not experienced any labor disputes. None of our employees are represented by labor unions.
The following table sets forth information
concerning the beneficial ownership of our ordinary shares on an as-converted basis as of the date of this annual report by:
|
●
|
each of our directors and executive officers; and
|
|
●
|
each person known to us to beneficially own more than 5% of our ordinary shares.
|
We have adopted a dual-class ordinary share
structure. The calculations in the table below are based on (i) 173,416,083 ordinary shares outstanding as of the date of this
annual report, consisting of 20,115,570 Class A ordinary shares and 153,300,513 Class B ordinary shares.
Beneficial ownership is determined in accordance
with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage
ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the
exercise of any option, warrant, or other right or the conversion of any other security. These shares, however, are not included
in the computation of the percentage ownership of any other person.
|
|
Class A
Ordinary
Shares
|
|
|
Class B
Ordinary
Shares
|
|
|
Voting
Power
|
|
|
|
Number
|
|
|
%
|
|
|
Number
|
|
|
%
|
|
|
%**
|
|
Directors and Executive Officers:†
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jie Zhao(1)
|
|
|
20,115,570
|
|
|
|
100.0
|
%
|
|
|
41,591,895
|
|
|
|
27.1
|
%
|
|
|
68.5
|
%
|
Shuo Shi
|
|
|
—
|
|
|
|
—
|
|
|
|
56,680
|
|
|
|
*
|
%
|
|
|
*
|
%
|
Songrui Guo
|
|
|
—
|
|
|
|
—
|
|
|
|
5,000
|
|
|
|
*
|
%
|
|
|
*
|
%
|
Guanghui Zheng
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
*
|
%
|
|
|
*
|
%
|
Hongtao Zhao
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Yuanyuan Liu
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Shan Cui
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Michael W. Harlan
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
All directors and officers as a group:
|
|
|
20,115,570
|
|
|
|
100.0
|
%
|
|
|
41,626,815
|
|
|
|
27.1
|
%
|
|
|
68.5
|
%
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vital Success Global Ltd.(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
26,591,885
|
|
|
|
17.3
|
%
|
|
|
7.5
|
%
|
Wonderful Seed Ltd.(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
15,000,010
|
|
|
|
9.8
|
%
|
|
|
4.2
|
%
|
Sensefuture Holding Limited(4)
|
|
|
—
|
|
|
|
—
|
|
|
|
8,455,800
|
|
|
|
5.5
|
%
|
|
|
2.4
|
%
|
Notes:
*
|
Less than 1% of our total outstanding shares.
|
**
|
For each person and group included in this column, percentage of voting power is calculated by dividing the voting power beneficially owned by such person or group by the voting power of all of our ordinary shares as a single class.
|
†
|
The business address of our directors and executive officers is No. 6, Xiaozhuang, #101A, Chaoyang District, Beijing, the People’s Republic of China, 100020.
|
(1)
|
The number of ordinary shares beneficially owned represents 20,115,570
Class A ordinary shares held by Wimi Jack Holdings Ltd., 26,591,885 Class B ordinary shares held by Vital Success Global Ltd. and
15,000,010 Class B ordinary shares held by Wonderful Seed Limited. Both Vital Success Global Limited and Wonderful Seed Limited are
ultimately controlled by Zhao—Vital Success Personal Trust and Zhao—Wonderful Seed Personal Trust, respectively. Jie
Zhao is the settlor of Zhao—Vital Success Personal Trust, and the settlor and the sole beneficiary of Zhao—Wonderful
Seed Personal Trust. Jie Zhao exercises voting and dispositive power of the securities held by Wimi Jack Holdings Ltd., Vital
Success Global Ltd. and Wonderful Seed Limited.
|
(2)
|
Jie Zhao exercises voting and dispositive power of the securities held by such entity. Jie Zhao has appointed Zhao-Virtual Zone Trust as the beneficiary of the trust.
|
(3)
|
Jie Zhao exercises voting and dispositive power of the securities held by such entity.
|
(4)
|
Minwen Wu exercises voting and dispositive power over the shares held by such entities.
|
As of the date of this annual report, 85,017,502
of our Class B ordinary shares are held by one record holder in the United States, which is the depositary of our ADS program,
representing 56.3% of our total issued and outstanding ordinary shares as of such date. 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
|
Please refer to “Item 6. Directors,
Senior Management and Employees —6.E. Share Ownership.”
B.
|
RELATED PARTY TRANSACTIONS
|
Transactions with Related Parties
We borrowed funds from Jie Zhao, our major
shareholder for operation purposes. The loans are unsecured, interest free, and are due in 2021. During the year ended December
31, 2018, we borrowed RMB 14,581,993 and repaid RMB 14,826,000. During the year ended December 31, 2019, we borrowed RMB 13,000,000
and repaid RMB 129,474,000. During the year ended December 31, 2020, we repaid RMB 4,850,000 (USD 743,306) to Jie Zhao. There is
no change in carrying value of Wimi Cayman loan and Micro Beauty loan from Jie Zhao except for the foreign exchange translation
difference.
We borrowed RMB 75,500,000 from Shanghai
Junei Internet Co. (which is under common control of Jie Zhao) in 2019 for cash flow purpose. We repaid RMB 91,500,000
(USD 14,023,203) during the year ended December 31, 2020. We also borrowed additional RMB 96,300,000 (USD 14,758,847)
during the year ended December 31, 2020. The loan has an annual interest rate of 7% and is due in 2021 and 2022. During the year
ended December 31, 2020, interest expense related to this loan, included in finance expense, amounted to RMB 2,281,611 (USD 349,678).
Name of Related Party
|
|
Relationship
|
|
Nature
|
|
December 31,
2019
|
|
|
December 31,
2020
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jie Zhao
|
|
Chairman of Wimi Cayman
|
|
Loan
|
|
|
4,850,000
|
|
|
|
-
|
|
|
|
-
|
|
Jie Zhao*
|
|
Chairman of Wimi Cayman
|
|
Loan
|
|
|
6,675,789
|
|
|
|
6,261,665
|
|
|
|
959,657
|
|
Shanghai Junei Internet Co.
|
|
Under common control of Jie Zhao
|
|
Loan
|
|
|
75,500,000
|
|
|
|
80,300,000
|
|
|
|
12,306,702
|
|
Total:
|
|
|
|
|
|
|
87,025,789
|
|
|
|
86,561,665
|
|
|
|
13,266,359
|
|
Current portion of shareholder loan
|
|
|
|
|
|
|
70,987,603
|
|
|
|
63,876,153
|
|
|
|
9,789,599
|
|
Shareholder loan—non-current
|
|
|
|
|
|
|
16,038,186
|
|
|
|
22,685,512
|
|
|
|
3,476,760
|
|
*
|
There has been no change in the balance of the loan, change was due to exchange difference.
|
Contractual Arrangements
See “Item 4. Information on the Company—C.
Organizational Structure.”
Employment Agreements
See “Item 6. Directors, Senior Management
and Employees—6.B. Compensation—Employment Agreements.”
C.
|
INTERESTS OF EXPERTS AND COUNSEL
|
Not applicable.
ITEM 8.
|
FINANCIAL INFORMATION
|
A.
|
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
|
Our audited consolidated financial statements
are set forth beginning on page F-1, which can be found after Item 19.
Legal Proceedings
We are currently not a party to any legal,
arbitration, or administrative proceedings that our management believes could have a material adverse effect on our business, financial
position or results of operations. We may from time to time be subject to various legal or administrative claims and proceedings
arising in the ordinary course of business or otherwise. Litigation or any other legal or administrative proceeding, regardless
of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and
attention.
Dividend Information
We currently have no plan to declare or pay
any dividends in the near future on our shares or ADSs, as we currently intend to retain most, if not all, of our available funds
and any future earnings to operate and expand our business.
Our board of directors has discretion as
to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by
ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Under Cayman
Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances
may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course
of business. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future
operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors
that the board of directors may deem relevant. If we pay any dividends on our ordinary shares, we will pay those dividends which
are payable in respect of the underlying Class B ordinary shares represented by the ADSs to the depositary, as the registered holder
of such Class B ordinary shares, and the depositary then will pay such amounts to the ADS holders in proportion to the underlying
Class B ordinary shares represented by the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including
the fees and expenses payable thereunder.
We are a holding company incorporated in
the Cayman Islands. We rely principally on dividends from our PRC subsidiaries for our cash requirements, including any payment
of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See
“Item 3. Key Information—3.D. Risk Factors—Risk Related to Doing Business in China—Governmental control
of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.”
Except as otherwise disclosed in this report,
we have not experienced any significant changes since the date of the annual financial statements included herein.
ITEM 9.
|
THE OFFER AND LISTING
|
A.
|
OFFER AND LISTING DETAILS
|
Our ADSs have been listed on the Nasdaq Global
Market since April 1, 2020 under the symbol “WIMI.” Each ADS represents two Class B ordinary shares, US$0.0001 per
share. As of the date of this annual report, no significant trading suspensions had occurred.
Not applicable.
See “Offer and Listing Details”
above.
Not applicable.
Not applicable.
Not applicable.
ITEM 10.
|
ADDITIONAL INFORMATION
|
Not applicable.
B.
|
Memorandum and Articles of Association
|
We are a Cayman Islands company and our affairs
are governed by our second amended and restated memorandum and articles of association, as amended from time to time and the Companies
Law of the Cayman Islands and the common law of the Cayman Islands.
We incorporate by reference into this annual
report our second amended and restated memorandum and articles of association, the form of which was filed as Exhibit 3.2 to our
registration statement on Form F-1 (File Number 333-232392) filed with the Securities and Exchange Commission on July 24, 2019.
Our shareholders adopted our second amended and restated memorandum and articles of association by a special resolution on July
24, 2019, which became effective immediately prior to completion of our initial public offering of ADSs representing our Class
B ordinary shares.
Other than transactions and contracts that
are described under “Item 4. Information on the Company” and Item 7 “Major Shareholders and Related Party Transactions”
or elsewhere in this annual report, we have not entered into any material contracts outside the ordinary course of our business
within the two years immediately preceding the date of this annual report.
Item 4. Information on the Company—B.
Business Overview—Regulations—Regulation on Foreign Exchange” and “Item 4. Information on the Company—B.
Business Overview—Regulations—Regulation on Dividend Distributions.”
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 or holders of our ADSs or Class B ordinary shares 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 our ADSs or Class B ordinary 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 our ADSs or Class B ordinary shares, nor will gains derived from the disposal
of our ADSs or Class B ordinary shares be subject to Cayman Islands income or corporation tax.
People’s Republic of China Taxation
Under the PRC EIT Law, which became effective
on January 1, 2008 and amended on February 24, 2017, an enterprise established outside the PRC with “de facto management
bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally
subject to a uniform 25% enterprise income tax rate on its worldwide income. Under the implementation rules to the PRC EIT Law,
a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing
and business operations, personnel and human resources, finances and properties of an enterprise.
In addition, the SAT Circular 82 issued by
the SAT in April 2009 specifies that certain offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise
groups will be classified as PRC resident enterprises if the following are located or resident in the PRC: (a) senior management
personnel and departments that are responsible for daily production, operation and management; (b) financial and personnel decision
making bodies; (c) key properties, accounting books, company seal, minutes of board meetings and shareholders’ meetings;
and (d) half or more of the senior management or directors having voting rights. Our company is a company incorporated outside
the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located,
and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside
the PRC. As such, we do not believe that our company meets all of the conditions above or is a PRC resident enterprise for PRC
tax purposes. For the same reasons, we believe our other entities outside of China are not PRC resident enterprises either. However,
the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect
to the interpretation of the term “de facto management body.” There can be no assurance that the PRC government will
ultimately take a view that is consistent with us. If the PRC tax authorities determine that our Cayman Islands holding company
is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow.
For example, a 10% withholding tax would be imposed on dividends we pay to our non-PRC enterprise shareholders (including the ADS
holders). In addition, nonresident enterprise shareholders (including the ADS holders) may be subject to PRC tax on gains realized
on the sale or other disposition of ADSs or Class B ordinary shares, if such income is treated as sourced from within the PRC.
Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders (including the ADS
holders) and any gain realized on the transfer of ADSs or Class B ordinary shares by such shareholders may be subject to PRC tax
at a rate of 20% (which, in the case of dividends, may be withheld at source by us). These rates may be reduced by an applicable
tax treaty, but it is unclear whether non-PRC shareholders of our company 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. See “Risk
Factors—Risks Related to Doing Business in China—We may be classified as a ‘PRC resident enterprise’ for
PRC enterprise income tax purposes, which could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS
holders and have a material adverse effect on our results of operations and the value of your investment.”
U.S. Federal Income Taxation
The following are the material U.S. federal
income tax consequences to the U.S. Holders (as defined below) of owning and disposing of the ADSs or Class B ordinary shares,
but this discussion does not purport to be a comprehensive description of all of the tax considerations that may be relevant to
a particular person’s decision to acquire the ADSs or Class B ordinary shares.
This discussion applies only to a U.S. Holder
that acquires the ADSs in this offering and holds the ADSs or Class B ordinary shares as capital assets for U.S. federal income
tax purposes. In addition, it does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s
particular circumstances, including the alternative minimum tax, the Medicare contribution tax on net investment income and tax
consequences applicable to U.S. Holders subject to special rules, such as:
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certain financial institutions;
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dealers or traders in securities that use a mark-to-market method of tax accounting;
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persons holding ADSs or Class B ordinary shares as part of a straddle, conversion transaction, integrated transaction or similar transaction;
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persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
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entities classified as partnerships for U.S. federal income tax purposes and their partners;
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tax-exempt entities, including “individual retirement accounts” or “Roth IRAs”;
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persons that own or are deemed to own ADSs or Class B ordinary shares representing 10% or more of our voting power or value; or
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persons holding ADSs or Class B ordinary shares in connection with a trade or business outside the United States.
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If a partnership (or other entity that is
classified as a partnership for U.S. federal income tax purposes) owns ADSs or Class B ordinary shares, the U.S. federal income
tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships
owning ADSs or Class B ordinary shares and their partners should consult their tax advisers as to the particular U.S. federal income
tax consequences of owning and disposing of ADSs or Class B ordinary shares.
This discussion is based on the Internal
Revenue Code of 1986, as amended, or the Code, administrative pronouncements, judicial decisions, final, temporary and proposed
Treasury regulations, and the income tax treaty between the United States and the PRC, or the Treaty, all as of the date hereof,
any of which is subject to change, possibly with retroactive effect. This discussion is also based, in part, on representations
by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance
with its terms.
As used herein, a “U.S. Holder”
is a beneficial owner of the ADSs or Class B ordinary shares that is, for U.S. federal income tax purposes:
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a citizen or individual resident of the United States;
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a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or
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an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
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a trust, if (i) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons (as defined in the Code) have authority to control all substantial decisions of the trust or (ii) it has a valid election in effect under Treasury Regulations to be treated as a United States person.
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In general, a U.S. Holder who owns American
depositary shares should be treated as the owner of the underlying shares represented by those ADSs for U.S. federal income tax
purposes. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying Class B ordinary shares
represented by those ADSs.
The U.S. Treasury has expressed concern that
parties to whom American depositary shares are released before the underlying shares are delivered to the depositary (a “pre-release”),
or intermediaries in the chain of ownership between holders of American depositary shares and the issuer of the security underlying
the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by holders
of American depositary shares. These actions would also be inconsistent with the claiming of the favorable rates of tax, described
below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of PRC taxes, and the
availability of the reduced tax rates for dividends received by certain non-corporate U.S. Holders, each described below, could
be affected by actions taken by such parties or intermediaries.
U.S. Holders should consult their tax advisers
concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of ADSs or Class B ordinary shares
in their particular circumstances.
You should consult your own tax advisors
about the consequences of the acquisition, ownership and disposition of the Class B ordinary shares or ADSs, including the relevance
to your particular situation of the considerations discussed below and any consequences arising under non-U.S., state, local or
other tax laws.
Except as described below under “—Passive
Foreign Investment Company Rules,” this discussion assumes that we are not, and will not become, a PFIC, for any taxable
year.
Taxation of Distributions
Distributions paid on the ADSs or Class B
ordinary shares, other than certain pro rata distributions of ADSs or Class B ordinary shares, will be treated as dividends to
the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles.
Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that
distributions generally will be reported to U.S. Holders as dividends. Dividends will not be eligible for the dividends-received
deduction generally available to U.S. corporations under the Code. Subject to applicable limitations and the discussion above regarding
concerns expressed by the U.S. Treasury, dividends paid to certain non-corporate U.S. Holders may be taxable at favorable rates.
Non-corporate U.S. Holders should consult their tax advisers regarding the availability of these favorable rates in their particular
circumstances.
Dividends will be included in a U.S. Holder’s
income on the date of the U.S. Holder’s, or in the case of ADSs, the depositary’s, receipt. The amount of any dividend
income paid in foreign currency will be the U.S. dollar amount calculated by reference to the spot rate in effect on the date of
receipt, regardless of whether the payment is in fact converted into U.S. dollars on such date. If the dividend is converted into
U.S. dollars on the date of receipt, a U.S. Holder generally should not be required to recognize foreign currency gain or loss
in respect of the amount received. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S.
dollars after the date of receipt.
Dividends will be treated as foreign-source
income for foreign tax credit purposes. As described in “—People’s Republic of China Taxation”, dividends
paid by us may be subject to PRC withholding tax. For U.S. federal income tax purposes, the amount of the dividend income will
include any amounts withheld in respect of PRC withholding tax. Subject to applicable limitations, which vary depending upon the
U.S. Holder’s circumstances, and subject to the discussion above regarding concerns expressed by the U.S. Treasury, PRC taxes
withheld from dividend payments (at a rate not exceeding the applicable rate provided in the Treaty in the case of a U.S. Holder
that is eligible for the benefits of the Treaty) generally will be creditable against a U.S. Holder’s U.S. federal income
tax liability. The rules governing foreign tax credits are complex and U.S. Holders should consult their tax advisers regarding
the creditability of foreign tax credits in their particular circumstances. In lieu of claiming a credit, a U.S. Holder may elect
to deduct such PRC taxes in computing its taxable income, subject to applicable limitations. An election to deduct foreign taxes
instead of claiming foreign tax credits must apply to all foreign taxes paid or accrued in the taxable year.
Sale or Other Taxable Disposition of ADSs or Class B ordinary
shares
A U.S. Holder will generally recognize capital
gain or loss on a sale or other taxable disposition of ADSs or Class B ordinary shares in an amount equal to the difference between
the amount realized on the sale or disposition and the U.S. Holder’s tax basis in the ADSs or Class B ordinary shares disposed
of, in each case as determined in U.S. dollars. The gain or loss will be long-term capital gain or loss if, at the time of the
sale or disposition, the U.S. Holder has owned the ADSs or Class B ordinary shares for more than one year. Long-term capital gains
recognized by non-corporate U.S. Holders may be subject to tax rates that are lower than those applicable to ordinary income. The
deductibility of capital losses is subject to limitations.
As described in “—People’s
Republic of China Taxation” gains on the sale of ADSs or Class B ordinary shares may be subject to PRC taxes. A U.S. Holder
is entitled to use foreign tax credits to offset only the portion of its U.S. federal income tax liability that is attributable
to foreign-source income. Because under the Code capital gains of U.S. persons are generally treated as U.S.-source income, this
limitation may preclude a U.S. Holder from claiming a credit for all or a portion of any PRC taxes imposed on any such gains. However,
U.S. Holders that are eligible for the benefits of the Treaty may be able to elect to treat the gain as PRC-source and therefore
claim foreign tax credits in respect of PRC taxes on such disposition gains. U.S. Holders should consult their tax advisers regarding
their eligibility for the benefits of the Treaty and the creditability of any PRC tax on disposition gains in their particular
circumstances.
Taxation of the Warrants
Sale or Other Taxable Disposition of Warrants
Upon the sale, exchange or other taxable
disposition of a warrant, in general, a U.S. Holder will recognize taxable gain or loss measured by the difference, if any, between
(i) the amount of cash and the fair market value of any property received upon such taxable disposition, and (ii) such
U.S. Holder’s adjusted tax basis in the warrant as determined above. Such gain or loss generally will be capital gain or
loss and generally will be long-term capital gain or loss if, at the time of the sale or other disposition, a holder’s holding
period for the warrant is more than one year. The deductibility of capital losses is subject to limitations.
Exercise of Warrants
Upon the exercise of a warrant for cash,
in general, holders will not recognize gain or loss for U.S. federal income tax purposes. A U.S. Holder’s initial tax basis
in Class B ordinary shares received will equal such U.S. Holder’s adjusted tax basis in the warrant exercised. A U.S. Holder’s
holding period for Class B ordinary shares received on exercise generally will commence on the day of exercise.
In certain limited circumstances, a U.S.
Holder may be permitted to undertake a cashless exercise of warrants into our Class B ordinary shares. The U.S. federal income
tax treatment of a cashless exercise of warrants into our Class B ordinary shares is unclear, and the tax consequences of a cashless
exercise could differ from the consequences upon the exercise of a warrant described in the preceding paragraph. U.S. Holders should
consult their own tax advisors regarding the U.S. federal income tax consequences of a cashless exercise of warrants.
Expiration of Warrants
A U.S. Holder who allows a warrant to expire
will generally recognize a loss for U.S. federal income tax purposes equal to the adjusted tax basis of the warrant. In general,
such a loss will be a capital loss, and will be a short-term or long-term capital loss depending on the holder’s holding
period for the warrant.
Certain Adjustments to the
Warrants
Under Section 305 of the Code, an adjustment
to the number of warrant shares that will be issued on the exercise of the warrants, or an adjustment to the exercise price of
the warrants, may be treated as a constructive distribution to holders if, and to the extent that, such adjustment has the effect
of increasing the holder’s proportionate interest in our earnings and profits or assets, depending on the circumstances of
such adjustment (for example, if such adjustment is to compensate for a distribution of cash or other property to our shareholders).
Adjustments to the exercise price of warrants made pursuant to a bona fide reasonable adjustment formula that has the effect of
preventing dilution of the interest of the holders of the warrants should generally not be considered to result in a constructive
distribution. Any such constructive distribution would be taxable whether or not there is an actual distribution of cash or other
property. See the more detailed discussion of the rules applicable to distributions made by us under the heading “—Taxation
of Distributions”.
Passive Foreign Investment Company Rules
In general, a non-U.S. corporation is a PFIC
for any taxable year in which (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the average
quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. For purposes
of the above calculations, a non-U.S. corporation that owns, directly or indirectly, at least 25% by value of the shares of another
corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate
share of the income of the other corporation. Passive income generally includes dividends, interest, rents, royalties and certain
gains. Cash is a passive asset for these purposes.
Based on the expected composition of our income and assets and the
value of our assets, including goodwill, which is based on the price of our ADSs, we do not expect to be a PFIC for our current taxable
year. However it is not entirely clear how the contractual arrangements between us and our VIEs will be treated for purposes of the PFIC
rules, and we may be or become a PFIC if our VIEs are not treated as owned by us for these purposes. Because the treatment of our contractual
arrangements with our VIEs is not entirely clear, because we will hold a substantial amount of cash as a result of our business operations
and our follow-on offerings, and because our PFIC status for any taxable year will depend on the composition of our income and assets
and the value of our assets from time to time (which may be determined, in part, by reference to the market price of the ADSs, which could
be volatile), there can be no assurance that we will not be a PFIC for our current taxable year or any future taxable year.
If we were a PFIC for any taxable year and
any of our subsidiaries, VIEs or other companies in which we own or are treated as owning equity interests were also a PFIC (any
such entity, a “Lower-tier PFIC”), U.S. Holders would be deemed to own a proportionate amount (by value) of the shares
of each Lower-tier PFIC and would be subject to U.S. federal income tax according to the rules described in the subsequent paragraph
on (i) certain distributions by a Lower-tier PFIC and (ii) dispositions of shares of Lower-tier PFICs, in each case as if the U.S.
Holders held such shares directly, even though the U.S. Holders did not receive the proceeds of those distributions or dispositions.
In general, if we were a PFIC for any taxable
year during which a U.S. Holder holds ADSs or Class B ordinary shares, gain recognized by such U.S. Holder on a sale or other disposition
(including certain pledges) of its ADSs or Class B ordinary shares would be allocated ratably over that U.S. Holder’s holding
period. The amounts allocated to the taxable year of the sale or disposition and to any year before we became a PFIC would be taxed
as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals
or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the resulting tax liability
for each such year. Furthermore, to the extent that distributions received by a U.S. Holder in any year on its ADSs or Class B
ordinary shares exceed 125% of the average of the annual distributions on the ADSs or Class B ordinary shares received during the
preceding three years or the U.S. Holder’s holding period, whichever is shorter, such distributions would be subject to taxation
in the same manner. In addition, if we were a PFIC (or with respect to a particular U.S. Holder were treated as a PFIC) for a taxable
year in which we paid a dividend or for the prior taxable year, the favorable tax rates described above with respect to dividends
paid to certain non-corporate U.S. Holders would not apply.
Alternatively, if we were a PFIC and if the
ADSs were “regularly traded” on a “qualified exchange,” a U.S. Holder could make a mark-to-market election
that would result in tax treatment different from the general tax treatment for PFICs described in the preceding paragraph. The
ADSs would be treated as “regularly traded” for any calendar year in which more than a de minimis quantity of the ADSs
were traded on a qualified exchange on at least 15 days during each calendar quarter. The Nasdaq Global Market, where the ADSs
are listed, is a qualified exchange for this purpose. If a U.S. Holder makes the mark-to-market election, the U.S. Holder generally
will recognize as ordinary income any excess of the fair market value of the ADSs at the end of each taxable year over their adjusted
tax basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ADSs over their fair market
value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the
mark-to-market election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis in the ADSs will be adjusted to
reflect the income or loss amounts recognized. Any gain recognized on the sale or other disposition of ADSs in a year in which
we are a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the
net amount of income previously included as a result of the mark-to-market election, with any excess treated as capital loss).
If a U.S. Holder makes the mark-to-market election, distributions paid on ADSs will be treated as discussed under “—Taxation
of Distributions” above. U.S. Holders will not be able to make a mark-to-market election with respect to our Class B
ordinary shares, or with respect to any shares of a Lower-tier PFIC, because such shares will not trade on any stock exchange.
If we are a PFIC for any taxable year during
which a U.S. Holder owns ADSs or Class B ordinary shares, we will generally continue to be treated as a PFIC with respect to the
U.S. Holder for all succeeding years during which the U.S. Holder owns the ADSs or Class B ordinary shares, even if we cease to
meet the threshold requirements for PFIC status.
If we were a PFIC for any taxable year during
which a U.S. Holder owned any ADSs or Class B ordinary shares, the U.S. Holder would generally be required to file annual reports
with the Internal Revenue Service. U.S. Holders should consult their tax advisers regarding the determination of whether we are
a PFIC for any taxable year and the potential application of the PFIC rules to their ownership of ADSs or Class B ordinary shares.
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 may be subject to information reporting
and backup withholding, unless (i) the U.S. Holder is a corporation or other “exempt recipient” and (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. 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 Internal Revenue Service.
HOLDERS OF OUR COMPANY’S ADSS SHOULD
CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS
AS WELL AS ANY TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF THE ADSS, INCLUDING THE APPLICABILITY AND EFFECT
OF THE TAX LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION AND INCLUDING ESTATE, GIFT, AND INHERITANCE LAWS.
F.
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Dividends and Paying Agents
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Not applicable.
Not applicable.
We previously filed with the SEC registration
statement on Form F-1 (Registration No. 333-232392), as amended, to register our Class B ordinary shares in relation to our initial
public offering. We also filed with the SEC related registration statements on Form F-6 (Registration No. 333-232665 and Registration
No. 333-253823), as amended, to register the ADSs representing our Class B ordinary shares.
We are subject to the periodic reporting
and other informational requirements of the Exchange Act as applicable to foreign private issuers. Under the Exchange Act, we are
required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within
four months after the end of each fiscal year. Copies of reports and other information, when so filed with the SEC, can be inspected
and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You
can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. The public may obtain information
regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a web
site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make
electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules of the Exchange
Act prescribing the furnishing and content of quarterly reports and proxy statements, and our executive officers, directors and
principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the
SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
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Subsidiary Information
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Not applicable.
ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Credit Risk
Financial instruments that potentially subject
us to significant concentrations of credit risk consist primarily of cash and short term investments. In China, the insurance coverage
for cash deposits of each bank is RMB 500,000. As of December 31, 2020, cash balance of RMB 230,740,141 (USD 35,357,498) was
deposited with financial institutions located in China, of which RMB 220,283,922 (USD 33,760,505) was subject to credit risk. The
Hong Kong Deposit Protection Board pays compensation up to a limit of HKD 500,000 (approximately USD 64,000) if the bank with
which an individual/a company hold its eligible deposit fails. As of December 31, 2020, cash balance of HKD 135,648,550, approximately
RMB 114,161,819 (USD 17,496,332) was maintained at financial institutions in Hong Kong, of which HKD 131,636,626 approximately
RMB 110,785,384 (USD 16,978,863) was subject to credit risk. The Singapore Deposit Insurance Corporation Limited (SDIC) insures
deposits in a Deposit Insurance (DI) Scheme member bank or finance company up to SGD 75,000 (approximately USD 57,000) per account.
As of December 31, 2020, cash balance of SGD 1,995,466 approximately RMB 9,840,443 (USD 1,508,137) was maintained at DI Scheme
banks in Singapore, of which SGD 1,845,466 approximately RMB 9,100,733 (USD 1,394,770) was subject to credit risk. In the US, the
insurance coverage of each bank is USD 250,000. As of December 31, 2020, cash balance of USD 2,054,084 (RMB 13,402,694)
was deposited with a financial institution located in US, of which USD 63,191 (RMB 412,313) was subject to credit risk. Our short
term investments are mainly securities traded in US and Hong Kong markets held in a brokerage account in Hong Kong. The HK securities
are protected by Investor Compensation Fund regulated by Securities and Futures Commission for up to HKD 500,000 per account. As
of December 31, 2020, a total of RMB 32,457,452 (USD 4,974,398) short term investments deposited with a securities company located
in Hong Kong was subject to credit risk. While management believes that these financial institutions are of high credit quality,
it also continually monitors their credit worthiness.
A majority of our expense transactions are
denominated in RMB and a significant portion of our assets and liabilities are denominated in RMB. RMB is not freely convertible
into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized
financial institutions at exchange rates set by the PBOC. Remittances in currencies other than RMB by us in China must be processed
through the PBOC or other China foreign exchange regulatory bodies, which require certain supporting documentation in order to
affect the remittance.
To the extent that we need to convert U.S.
dollars 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, strategic acquisition 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.
Liquidity Risk
We are also exposed to liquidity risk which is
risk that we are unable to provide sufficient capital resources and liquidity to meet our commitments and business needs. Liquidity risk
is controlled by the application of financial position analysis and monitoring procedures. When necessary, we will turn to other financial
institutions and related parties to obtain short-term funding to meet the liquidity shortage.
Foreign Exchange Risk
While our reporting currency is the RMB, we have
several operating entities’ functional currency is HK dollar and two operating entities’ functional currency is USD. As a
result, we are exposed to foreign exchange risk as our results of operations may be affected by fluctuations in the exchange rate among
HK dollar, USD and RMB. If the RMB appreciates against the HK dollar and USD, the value of our HKD or USD revenues, earnings and assets
as expressed in our RMB financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our
exposure to foreign exchange risk.
As of December 31, 2019, three vendors accounted
for 32.8%, 27.9% and 11.9% of our accounts payable, respectively. As of December 31, 2020, four vendors accounted for 25.9%, 18.6%,
13.9% and 11.0% of our accounts payable.
ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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None
None
None
D.
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American Depositary Shares
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Fees and Charges Our ADS holders May Have to Pay
The depositary may charge each person to
whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in respect of share distributions,
rights and other distributions, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a
merger, exchange of securities or any other transaction or event affecting the ADSs or deposited securities, and each person surrendering
ADSs for withdrawal of deposited securities or whose ADSs are cancelled or reduced for any other reason, $5.00 for each 100 ADSs
(or any portion thereof) issued, delivered, reduced, cancelled or surrendered, as the case may be. The depositary may sell (by
public or private sale) sufficient securities and property received in respect of a share distribution, rights and/or other distribution
prior to such deposit to pay such charge.
The following additional charges shall be
incurred by the ADR holders and beneficial owners of ADSs, by any party depositing or withdrawing shares or by any party surrendering
ADSs and/or to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared
by us or an exchange of stock regarding the ADSs or the deposited securities or a distribution of ADSs), whichever is applicable:
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a fee of US$1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs;
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a fee of up to US$0.05 per ADS held upon which any cash distribution made pursuant to the deposit agreement;
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an aggregate fee of up to US$0.05 per ADS per calendar year (or portion thereof) for services performed by the depositary in administering the ADRs (which fee may be charged on a periodic basis during each calendar year and shall be assessed against ADR holders as of the record date or record dates set by the depositary during each calendar year and shall be payable in the manner described in the next succeeding provision);
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a fee for the reimbursement of such fees, charges and expenses as are incurred by the depositary and/or any of its agents (including, without limitation, the custodian and expenses incurred on behalf of ADR holders in connection with compliance with foreign exchange control regulations or any law, rule or regulation relating to foreign investment) in connection with the servicing of the shares or other deposited securities, the sale of securities (including, without limitation, deposited securities), the delivery of deposited securities or otherwise in connection with the depositary’s or its custodian’s compliance with applicable law, rule or regulation (which fees and charges shall be assessed on a proportionate basis against ADR holders as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such ADR holders or by deducting such charge from one or more cash dividends or other cash distributions);
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a fee for the distribution of securities (or the sale of securities in connection with a distribution), such fee being in an amount equal to the $0.05 per ADS issuance fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities (treating all such securities as if they were shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to those ADR holders entitled thereto;
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stock transfer or other taxes and other governmental charges;
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SWIFT, cable, telex and facsimile transmission and delivery charges incurred at your request in connection with the deposit or delivery of shares, ADRs or deposited securities;
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transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities; and
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fees of any division, branch or affiliate of the depositary utilized by the depositary to direct, manage and/or execute any public and/or private sale of securities under the deposit agreement.
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JPMorgan Chase Bank, N.A. and/or its agent
may act as principal for such conversion of foreign currency.
Fees and Other Payments Made by the Depositary to Us
The depositary may make available to us a
set amount or a portion of the depositary fees charged in respect of the ADR program or otherwise upon such terms and conditions
as we and the depositary may agree from time to time. The depositary collects its fees for issuance and cancellation of ADSs directly
from investors depositing 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 will generally set off the amounts owing from distributions made to ADR holders. If, however, no distribution
exists and payment owing is not timely received by the depositary, the depositary may refuse to provide any further services to
ADR holders that have not paid those fees and expenses owing until such fees and expenses have been paid. At the discretion of
the depositary, all fees and charges owing under the deposit agreement are due in advance and/or when declared owing by the depositary.
For the year ended December 31, 2020, we received US$344,297 from the depository.