(Name, Telephone, E-mail
and/or Facsimile Number and Address of Company Contact Person)
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
The number of outstanding shares of each of the
issuer’s classes of capital or common stock as of August 15, 2022 was: 8,267,793 ordinary shares, par value $0.0001 per share.
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report,
indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large
accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange
Act. (Check one):
If an emerging growth company that prepares its
financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the
Exchange Act. ☐
† The term “new or revised financial
accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification
after April 5, 2012.
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked in response
to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
If this is an annual report, indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
PART I
CERTAIN INFORMATION
In this annual report on Form 20-F,
unless otherwise indicated, “we,” “us,” “our,” the “Company” or similar terms refer to
UTime Limited, a Cayman Islands exempted company, and/or its wholly-owned subsidiaries, other than the variable interest entity, unless
the context otherwise indicates; and “VIE” refers to the variable interest entity, United Time Technology Co., Ltd. UTime
Limited’s operations in China are conducted primarily through the VIE and its subsidiaries in China, and UTime Limited does not conduct
any business on its own. The financial results of the VIE and its subsidiaries are consolidated into our financial statements for accounting
purposes, but we do not hold any equity interest in the VIE or any of its subsidiaries. Investors are purchasing an interest in UTime
Limited, a Cayman Islands holding company.
Please see Item 3. Key Information
- D. Risk Factors- Risks Related to Doing Business in China” beginning on page 41 for a detailed description of various risks
related to doing business in China and other information that should be considered before making a decision to purchase any of our securities.
For details on the effects
of HFCA Act on us, see “Item 3. Key Information - D. Risk Factors- Risks Related to Doing Business in China - Our ordinary shares
may be delisted under the HFCA Act if the PCAOB is unable to adequately inspect audit documentation located in China. The delisting of
our ordinary shares, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally,
the inability of the PCAOB to conduct adequate inspections deprives our investors with the benefits of such inspections. Furthermore,
on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the
HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not
subject to PCAOB inspections for two consecutive years instead of three.” on page 44.
GLOSSARY OF TERMS
The following is a glossary
of the electronics industry and the PRC and Indian legal systems used in this annual report on Form 20-F. Other defined terms may be
found in the body of this annual report.
AQSIQ |
|
Administration of Quality Supervision,
Inspection and Quarantine |
BIS |
|
Bureau of Indian Standards |
BOM |
|
bill of materials |
CAB |
|
Conformance Assessment Body |
CAC |
|
Cyberspace Administration of China |
CCB |
|
China Construction Bank |
CCI |
|
Competition Commission of India |
CNCA |
|
Certification and Accreditation Administration of China |
CPA |
|
Consumer Protection Act, 1986 |
CRBZ |
|
China Resources Bank of Zhuhai Co., Ltd. |
CSRC |
|
China Securities Regulatory Commission |
DGFT |
|
Directorate General of Foreign Trade |
DOT |
|
The Department of Telecommunication, Government of
India |
EMS |
|
Electronics Manufacturing Services |
EPF Act |
|
Employees’ Provident Funds and Miscellaneous
Provisions Act, 1952 |
ESI Act |
|
Employees’ State Insurance Act, 1948 |
FDI |
|
Foreign Direct Investment |
FEMA |
|
Foreign Exchange and Management Act, 1999 |
FEMA Rules, 2019 |
|
Foreign Exchange Management (Non-debt Instruments)
Rules, 2019 |
FLA |
|
Foreign Liabilities and Assets |
Gratuity Act |
|
Payment of Gratuity Act, 1972 |
HFCA Act |
|
The Holding Foreign Companies Accountable Act |
ID |
|
Industrial Design |
IE Code |
|
Importer Exporter Code Number |
IMF |
|
International Monetary Fund |
IoT |
|
Internet of Things |
IPR |
|
Intellectual Property Right |
JV |
|
joint venture |
mAh |
|
Milliamp hour |
MD |
|
Mechanic Design |
MIIT |
|
Ministry of Industry and Information Technology |
MOFCOM |
|
Ministry of Commerce of the PRC |
MRP |
|
Material Requirements Planning |
NCLT |
|
National Company Law Tribunal |
NDRC |
|
National Development and Reform Commission |
ODM |
|
Original Design Manufacturer |
OEM |
|
Original Equipment Manufacturer |
OGL |
|
Open General License |
PCAOB |
|
Public Company Accounting Oversight Board (United States) |
PCBA |
|
Printed circuit board and assembly |
PFIC |
|
passive foreign investment company |
POSH Act |
|
Sexual Harassment of Women at Workplace (Prevention,
Prohibition and Redressal) Act, 2013 |
PRC |
|
People’s Republic of China |
RBI |
|
Reserve Bank of India |
Rs. |
|
Indian Rupee |
SAFE |
|
State Administration of Foreign
Exchange |
SCNPC |
|
Standing Committee of the National People’s Congress |
SEBI |
|
Securities and Exchange Board of India |
Shops Act |
|
Shops and Commercial Establishments Act |
SMF |
|
Single Master Form |
SMT |
|
Surface Mounting Technology |
TM Act |
|
Trade Marks Act, 1999 |
TQM |
|
Total Quality Management |
VIE |
|
Variable Interest Entity, which refers to United Time
Technology Co., Ltd. |
WOS |
|
Wholly owned subsidiary |
Unless the context indicates
otherwise, all references to “China” and the “PRC” refer to the People’s Republic of China, all references
to “Renminbi” or “RMB” are to the legal currency of the People’s Republic of China and all references to
“U.S. dollars,” “dollars” and “$” are to the legal currency of the United States. This annual report
contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. We make no representation
that the Renminbi or U.S. dollar amounts referred to in this 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. On March 31, 2022, the cash buying rate announced by the People’s Bank
of China was RMB6.3482 to $1.00.
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking
statements” for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 that represent our
beliefs, projections and predictions about future events. All statements other than statements of historical fact are “forward-looking
statements,” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and
objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements
regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives,
and any statements of assumptions underlying any of the foregoing. Words such as “may”, “will”, “should”,
“could”, “would”, “predicts”, “potential”, “continue”, “expects”,
“anticipates”, “future”, “intends”, “plans”, “believes”, “estimates”
and similar expressions, as well as statements in the future tense, identify forward-looking statements.
These statements are necessarily
subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance
or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied
by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including
with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, and the
accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based
or the success of our business.
Forward-looking statements
should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the
times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time
those statements are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties
that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements.
Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings “Risk
Factors”, “Operating and Financial Review and Prospects,” and elsewhere in this report.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
Our Holding Company Structure and Contractual
Arrangements with the VIE
UTime Limited is not a Chinese operating company,
but rather a Cayman Islands holding company with no equity ownership in the VIE. Our Cayman Islands holding company does not conduct business
operations directly. We conduct our operations in China through the VIE and its subsidiaries in China. Our WOS in China has maintained
a series of contractual arrangements with the VIE and its shareholders, which established the VIE structure. Investing in UTime Limited’s
ordinary shares is highly speculative and involves a significant degree of risk. This variable interest entity structure involves unique
risks to investors. There is no limitation or restriction on foreign investment in the industry where our VIE operates at present. We
adopt the VIE structure, because Chinese laws prohibit foreign investors from holding more than 50% of equity interests in value-added
telecommunication businesses, which we may explore and operate in the future, and our indirectly wholly-owned Chinese subsidiary, Shenzhen
UTime Technology Consulting Co., Ltd., or UTime WFOE, as a foreign invested enterprise under Chinese laws, is not eligible to operate
a value-added telecommunication business in China. Instead, our VIE and subsidiaries of VIE located inside the PRC are the Chinese operating
companies. We do not have any equity ownership of the VIE, instead we receive the economic benefits of the VIE’s business
operations through certain contractual arrangements. Accordingly, we operate the businesses in China through the VIE and its subsidiaries,
and rely on contractual arrangements among UTime WFOE, the VIE and its shareholders to control the business operations of the VIE. The
VIE is consolidated for accounting purposes, but are not entities in which our Cayman Islands holding company, or our investors, own equity.
Investors in our ordinary shares are not purchasing equity interest in the VIE in China, but instead are purchasing equity interest in
a holding company incorporated in the Cayman Islands. Investors in our ordinary shares may never directly hold equity in the VIE and its
subsidiaries.
A series of contractual agreements,
including business operation agreement, equity pledge agreement, exclusive technical consultation and service agreement, exclusive call
option agreement, power of attorney and spousal consent letters, have been entered into by and among UTime WFOE, the VIE and its respective
shareholders. These contractual agreements enable us to: (i) determine the most significant economic activities of the VIE; (ii) receive
substantially all of the economic benefits of the VIE; and (iii) have an exclusive option to purchase all or part of the equity interest
in and/or assets of the VIE when and to the extent permitted by PRC laws.
Despite the lack of legal majority ownership,
our Cayman Island holding company is considered the primary beneficiary of the VIE and consolidates the VIE and its subsidiaries as required
by Accounting Standards Codification topic 810, Consolidation. Accordingly, we treat the VIE as our consolidated entities under U.S. GAAP
and we consolidate the financial results of the VIE in our consolidated financial statements in accordance with U.S. GAAP. For more details
of these contractual arrangements, see “Item 4. Information on the Company—4A. History and Development of the Company-Contractual
Arrangements with the VIE and its Respective Shareholders.”
However, the contractual
agreements may not be as effective as the control provided by having a direct ownership in the VIE and we may incur substantial costs to
enforce the terms of the arrangements. We have no direct or indirect equity interests in the VIE or any of
its subsidiaries. Uncertainties in the PRC legal system may limit our ability, as a Cayman Islands holding company,
to enforce these contractual agreements. The contractual agreements have not been tested in a court of law. Meanwhile, there are very
few precedents as to whether contractual agreements would be judged to form effective control over the relevant VIE through the contractual
arrangements, or how contractual arrangements in the context of a VIE should be interpreted or enforced by the PRC courts. Should legal
actions become necessary, we cannot guarantee that the court will rule in favor of the enforceability of the VIE contractual arrangements.
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 determine the most significant economic activities of the VIE, and
our ability to conduct our business may be materially adversely affected. In addition, the enforceability of the various contracts described
above by our company against the VIE is dependent upon the shareholders of the VIE. If the shareholders of the VIE fail to perform their
obligations under the contractual arrangements, we could be unable to enforce the contractual arrangements that enable us to consolidate
the VIE’s operations and financial results in our financial statements in accordance with U.S. GAAP as the primary beneficiary.
If this happens, we would need to deconsolidate the VIE. The majority of our assets, including the necessary licenses to conduct business
in China are held by the VIE and its PRC subsidiaries and a significant part of our revenues are generated by the VIE and its subsidiaries.
Any event that results in the deconsolidation of the VIE would have a material effect on our operations and result in the value of our
ordinary shares diminishing substantially or even become worthless. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Corporate Structure—We do not hold direct equity interest in the VIE. We rely on contractual arrangements with our VIE
and its shareholders for a large portion of our business operations, which may not be as effective as direct ownership in providing operational
control.” and “—The shareholders of our VIE may have potential conflicts of interest with us, which may materially
and adversely affect our business and financial condition.”
We are subject to risks due to the uncertainty
of the interpretation and application of the laws and regulations of the PRC, regarding the VIE and the VIE structure, including, but
not limited to, regulatory review of overseas listing of PRC companies through a special purpose vehicle, and the validity and enforcement
of the contractual arrangements with the VIE. It is uncertain whether any new PRC laws or regulations relating to the VIE structure will
be adopted or if adopted, what they would provide. If we or the VIE is found to be in violation of any existing or future PRC laws or
regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have
broad discretion to take action in dealing with such violations or failures.
If the PRC government deems that our contractual
arrangements with the VIE do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these
regulations or the interpretation of existing regulations change or are interpreted differently in the future, we could be subject to
severe penalties or be forced to relinquish our interests in those operations. Our Cayman Islands holding company, our PRC subsidiaries
and the VIE, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the
enforceability of the contractual arrangements with the VIE and, consequently, significantly affect the financial performance of the VIE
and our company as a whole. We are also subject to the risk that the Chinese regulatory authorities could disallow the VIE structure,
which could result in a material change in our operations and the value of our ordinary shares, including that it could cause the value
of our ordinary shares to significantly decline or become worthless. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Corporate Structure— UTime Limited is a holding company with no material operation. We conduct substantially all
of our operations through the VIE and its subsidiaries, and we rely on contractual arrangements with the VIE and its shareholders to operate
our business. If the PRC government deems that the agreements that establish the structure for operating some of our operations in China
do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations
change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.” and
“—Substantial uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign Investment
Law and its Implementation Regulations and how they may impact the viability of our current corporate structure, corporate governance,
business operations and financial results.”
We face various risks and uncertainties related
to doing business in China. Our business operations are primarily conducted in China, and we are subject to complex and evolving PRC laws
and regulations. For example, we face risks associated with regulatory approvals on overseas offerings conducted by and foreign investment
in China-based issuers, the use of the VIE, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy. Recently,
the PRC government has indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign
investment in China-based issuers, and initiated a series of regulatory actions and made a number of public statements to regulate business
operations in China, some of which are published with little advance notice, including cracking down on illegal activities in the securities
market, enhancing supervision over China-based companies listed overseas using variable interest entity structure, adopting new measures
to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. These risks could result in a material
adverse change in our operations and the value of our ordinary shares, significantly limit or completely hinder our ability to continue
to offer ordinary shares to investors, or cause the value of such ordinary shares to significantly decline or become worthless. For a
detailed description of risks related to doing business in China, “Item 3. Key Information—D. Risk Factors—Risks Related
to Doing Business in China.”
Risks and uncertainties arising from the legal
system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China,
could result in a material adverse change in our operations and the value of our ordinary shares. For more details, see “Item 3.
Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal
system and changes in laws and regulations in China could adversely affect us.”
Permissions Required from the PRC Authorities
for Our Operations
Our operations in China
are governed by PRC laws and regulations. As of the date of this annual report, each of UTime WFOE, the VIE and the VIE’s
subsidiaries in China has obtained the requisite licenses and permits from the PRC government authorities that are material for the
business operations in China. UTime WFOE, the VIE and the VIE’s subsidiaries in China are not operating in an industry that prohibits or limits foreign investment. As a result, UTime WFOE, the VIE and the VIE’s subsidiaries in China are
not required to obtain any permission from Chinese authorities to operate other than those requisite for a domestic company in China
will need to engage in the businesses similar to ours. Such licenses and permissions include, among others, the Business License,
Record Registration Form for Foreign Trade Business Operators and Certificate of the Customs of the People’s Republic of China
on Registration of A Customs Declaration Entity, and other relevant permits required for operating our business. Neither have we nor
our subsidiaries or the VIE or the VIE’s subsidiaries received any denial of permissions for their operation.
Furthermore, the PRC government has recently indicated
an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers.
Accordingly, there have been certain new or draft laws, regulations in relation to cybersecurity and data privacy, offerings conducted
overseas by, and foreign investment in, China-based issuers (the “New Regulations”). For more detailed information, see “Item
4. Information on the Company—B. Business Overview—Regulations—Regulations on Overseas Listings.” And “Item
4. Information on the Company—B. Business Overview—Regulations—Regulation on Information Security and Censorship.”
According to the New Regulations, if enacted as currently proposed as applicable to draft laws, regulations, we may be required to fulfill
filing, reporting procedures and obtain approval from the China Securities Regulatory Commission, or the CSRC, in connection with follow-on
offering and other equivalent overseas offing activities in an overseas market, and may be required to go through cybersecurity review
by the Cyberspace Administration of China, or the CAC. If the New Regulations are enacted as currently proposed and we fail to obtain
the relevant approval or complete other filing procedures thereof, for any future overseas offering or listing, we may face sanctions
by the CSRC or other PRC regulatory authorities, which may include fines and penalties on our operations in China, limitations on our
operating privileges in China, restrictions on or prohibition of the payments or remittance of dividends by our subsidiaries in China,
restrictions on or delays to our future financing transactions offshore, or other actions that could have a material and adverse effect
on our business. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability
to continue to offer our ordinary shares, cause significant disruption to our business operations, and severely damage our reputation,
which could materially and adversely affect our financial condition and results of operations and cause our ordinary shares to significantly
decline in value or become worthless. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks
Related to Doing Business in China—We may be required to obtain permission or approval from Chinese authorities to operate and issue
ordinary shares to foreign investors in our offering and/or listing on the NASDAQ Capital Market, and if required and we or the VIE or
the VIE’s subsidiaries are not able to obtain such permission or approval in a timely manner, our ordinary shares may substantially
decline in value and become worthless. The CSRC has released for public consultation the draft rules for China-based companies seeking
to conduct initial public offerings in foreign markets. While such rules have not yet gone into effect, the Chinese government may exert
more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers, which could significantly
limit or completely hinder our ability to offer or continue to offer our ordinary shares to investors and could cause the value of our
ordinary shares to significantly decline or become worthless. We have not applied for, received or been denied approval from Chinese authorities
to list on the NASDAQ Capital Market” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business
and Industry—Security and privacy breaches may expose us to liability and harm our reputation and business.”
As of the date of this annual report, no relevant
laws or regulations in the PRC explicitly require us to seek approval from the CSRC or the CAC or any other PRC governmental authorities
for our offering and/or list on the NASDAQ Capital Market. Furthermore, we have not received any penalty, investigation or warning
in connection with the operations of UTime WFOE, the VIE and VIE’s subsidiaries from the CSRC or the CAC or any other PRC governmental
authorities, nor have we or the VIE or the VIE’s subsidiaries received any inquiry,
notice, warning or sanctions regarding our offering from the CSRC or any other PRC governmental authorities. We believe that we,
the VIE and the VIE’s subsidiaries have received has obtained all permissions and approvals to operate their respective business
and are not required to obtain additional permission or approval from Chinese authorities to issue our ordinary shares to foreign investors
or list on the NASDAQ Capital Market based on the PRC laws, regulations and rules currently in effect. However, since these statements
and regulatory actions are newly published, however, official guidance and related implementation rules have not been issued, we are subject
to the risks of uncertainty of any future actions of the PRC government in this regard including the risk that we inadvertently conclude
that the permissions or approvals discussed here are not required, that applicable laws, regulations or interpretations change such that
we or the VIE or the VIE’s subsidiaries are required to obtain approvals in the future, or that the PRC government could disallow
our structure, which would likely result in a material change in our operations, including our ability to continue our existing structure,
carry on the daily business operations of the VIE and the VIE’s subsidiaries, our ability to accept foreign investments, and our
listing on an U.S. exchange. These adverse actions could cause the value of our ordinary shares to significantly decline or become worthless.
We or the VIE or the VIE’s subsidiaries may also be subject to penalties and sanctions imposed by the PRC regulatory authorities,
including the CSRC, if we or the VIE or the VIE’s subsidiaries fail to comply with such rules and regulations, which would likely
adversely affect the ability of our securities to be listed on a U.S. exchange, which would likely cause the value of our ordinary shares
to significantly decline or become worthless.
Cash and Asset Flows through Our Organization
Our Hong Kong subsidiary, or UTime HK, may transfer
funds to UTime WFOE through an increase in the registered capital or loans to UTime WFOE. However, the receipt of funds by UTime WFOE
through an increase in registered capital or loans requires UTime WFOE to apply for, seek approval from or register with the relevant
PRC authorities or the local bank and this process may be time consuming. Because UTime Limited and its subsidiaries do not have equity
ownership in the VIE, they are not able to make direct capital contributions to the VIE and its subsidiaries. However, they may transfer
cash to the VIE by loans or by making payment to the VIE for inter-group transactions.
UTime WFOE has the exclusive right to provide
or designate any entity to provide the VIE with business support, technical and consulting services in exchange for service fees from
the VIE, pursuant to the Exclusive Technical Consultation and Service Agreement, which is part of the contractual arrangements. These
service fees shall be recognized as expenses of VIE, with a corresponding amount as revenue by UTime WFOE and then completely eliminate
in consolidation level. For income tax purposes, UTime WFOE and the VIE will file income tax returns on a separate company basis. The
service fees paid are recognized as a tax deduction by the VIE and as revenue by UTime WFOE. The PRC’s statutory Enterprise Income
Tax (“EIT”) rates is 25%. Any limitation on the ability of the VIE to pay service fees to UTime WFOE, or any tax implications
of making service fees payments to UTime WFOE, could have a material adverse effect on UTime WFOE’s financial condition. In addition,
UTime WFOE may provide loans to the VIE, subject to statutory limits and restrictions.
Our business is conducted by the VIE, including
its subsidiaries. In addition to funds generated from sales of mobile handsets and other products, the VIE’s operations may be financed
by loans from UTime WFOE, which may receive funds from UTime Limited, through either capital contributions or loans, directly or indirectly.
Funds from the VIE to UTime Limited are remitted as service fees to UTime WFOE, which, in turn, makes distributions or pays dividends
to UTime HK, then to UTime Limited. Both investment in Chinese companies, which are governed by the Foreign Investment Law, and the dividends
and distributions from UTime WFOE to UTime HK, then to UTime Limited are subject to regulations and restrictions on dividends and other
payment to parties outside of China. Applicable PRC law permits payment of dividends to UTime Limited by our PRC subsidiaries only out
of their net income, if any, which are determined in accordance with PRC accounting standards and regulations. Our PRC subsidiary and
the VIE and its subsidiaries in China are required to set aside a portion of their net income, if any, each year to fund general reserves
for appropriations until such reserves have reached 50% of such company’s registered capital. These reserves are not distributable
as cash dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC,
up to the amount of net assets held in each PRC company.
As a Cayman Islands holding company, UTime Limited
may receive dividends from UTime WFOE through UTime HK, our intermediary holding companies in Hong Kong. The PRC EIT Law and its implementing
rules provide that dividends paid by a PRC entity to a non-resident enterprise for income tax purposes are subject to PRC withholding
tax at a rate of 10%, subject to reduction by an applicable tax treaty with China. According to the Arrangement Between the Mainland of
China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income and relevant implanting
notice, if UTime HK satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, the
dividends paid to UTime HK would be subject to withholding tax at a reduced rate of 5%. See “Item 3. Key Information—D. Risk
Factors—Risks Related to Doing Business in China—There are significant uncertainties under the PRC Enterprise Income Tax Law
relating to the withholding tax liabilities of our PRC Subsidiary, and dividends payable by our PRC Subsidiary to us through our Hong
Kong subsidiary s may not qualify to enjoy certain treaty benefits”.
In addition, to the extent our cash is in the
PRC or a PRC entity, the funds may not be available to distribute dividends to our investors, or for other use outside of the PRC, due
to interventions in or the imposition of restrictions and limitations on the ability of us, our subsidiaries, or the VIE and the VIE’s
subsidiaries by the PRC government to transfer cash. The PRC government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of China. All of the VIE and VIE’s PRC subsidiaries’ income
are received in Renminbi and shortages in foreign currencies may restrict our ability to pay dividends or other payments, or otherwise
satisfy our foreign currency denominated obligations, if any. Under existing PRC foreign exchange regulations, payments of current account
items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies
without prior approval from SAFE as long as certain procedural requirements are met. Approval from appropriate government authorities
is required if Renminbi is converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of
loans denominated in foreign currencies. Our cash dividends, if any, will be paid in U.S. dollars. The PRC government may, at its discretion,
impose restrictions on access to foreign currencies for current account transactions and if this occurs in the future, we may not be able
to pay dividends in foreign currencies to our shareholders. See “D. Risk Factors — Risks Related to Doing Business in China—
Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your
investment.” In contrast, presently, there is no foreign exchange control or restrictions on capital flows into and out of Hong
Kong. Hence, our Hong Kong subsidiary is able to transfer cash without any limitation to its direct parent company, UTime Limited, under
normal circumstances.
As of the date of this annual report, there have
not been any dividends or distributions by and among UTime Limited, its subsidiaries, the VIE and subsidiaries of VIE, to investors. UTime
Limited has not declared or paid any cash dividends, nor does it have any present plan to pay any cash dividends on its ordinary shares
in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and
expand our business.
In addition, as of the date of this annual report,
no amounts owed under the contractual arrangements has been settled by or between the VIE and its subsidiaries, and UTime WFOE.
The VIE intends to distribute earnings or settle amounts owed under the contractual arrangements. We anticipate that, to the extent that
the VIE requires funds from us for its operations, UTime Limited will provide funds in the manner described above, and to the extent
that VIE generates positive cash flow from its operations in excess of its requirements for its operations, it will transfer such excess
funds to UTime Limited, through service payments to UTime WFOE.
Our subsidiaries and the VIE conduct business
transactions that include trading activities, provision of services and intercompany advances. The transactions and cash flows that have
occurred between UTime Limited (“Parent”), VIE and its consolidated subsidiaries (“VIE”), UTime WFOE that are
the primary beneficiary of the VIE (“WFOE”), an aggregation of other entities that are consolidated (“other entities”)
are summarized as the following:
| |
March 31, 2020 | |
March 31, 2021 | |
March 31, 2022 | |
| |
RMB | |
RMB | |
RMB | |
| |
Parent | |
VIE | |
WFOE | |
Other entities | |
Elimination | |
Consolidated | |
Parent | |
VIE | |
WFOE | |
Other entities | |
Elimination | |
Consolidated | |
Parent | |
VIE | |
WFOE | |
Other entities | |
Elimination | |
Consolidated | |
Intercompany
receivables | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Opening | |
6,626 | |
24,728 | |
- | |
29 | |
(31,383 | ) |
- | |
6,972 | |
38,912 | |
- | |
28 | |
(45,912 | ) |
- | |
6,466 | |
45,985 | |
- | |
392 | |
(52,843 | ) |
- | |
Sales | |
- | |
14,900 | |
- | |
55 | |
(14,955 | ) |
- | |
- | |
- | |
- | |
402 | |
(402 | ) |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
Receipts | |
- | |
(11,308 | ) |
- | |
(55 | ) |
11,363 | |
- | |
- | |
(3,815 | ) |
- | |
(38 | ) |
3,853 | |
- | |
- | |
(1,283 | ) |
- | |
- | |
1,283 | |
- | |
Payments on behalf of Parent/WFOE/Other
entities by VIE | |
- | |
9,201 | |
- | |
- | |
(9,201 | ) |
- | |
- | |
13,900 | |
- | |
- | |
(13,900 | ) |
- | |
- | |
5,430 | |
- | |
542 | |
(5,972 | ) |
- | |
IPO Proceeds received by
other entities on behalf of Parent | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
88,263 | |
- | |
- | |
- | |
(88,263 | ) |
- | |
Down payment for financing
services on behalf of Parent | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
(19,003 | ) |
- | |
- | |
- | |
19,003 | |
- | |
Expenses charged by other
entities | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
(203 | ) |
- | |
- | |
203 | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
Exchange
difference | |
346 | |
1,391 | |
- | |
(1 | ) |
(1,736 | ) |
- | |
(506 | ) |
(2,809 | ) |
- | |
- | |
3,315 | |
- | |
(2,381 | ) |
(1,513 | ) |
- | |
(13 | ) |
3,907 | |
- | |
Closing | |
6,972 | |
38,912 | |
- | |
28 | |
(45,912 | ) |
- | |
6,466 | |
45,985 | |
- | |
392 | |
(52,843 | ) |
- | |
73,345 | |
48,619 | |
- | |
921 | |
(122,885 | ) |
- | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Intercompany
payables | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Opening | |
6,319 | |
38 | |
- | |
24,960 | |
(31,317 | ) |
- | |
15,146 | |
38 | |
3 | |
30,650 | |
(45,837 | ) |
- | |
26,846 | |
237 | |
8 | |
25,604 | |
(52,695 | ) |
- | |
Purchase | |
- | |
66 | |
- | |
15,007 | |
(15,073 | ) |
- | |
- | |
199 | |
- | |
- | |
(199 | ) |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
Payments | |
- | |
(66 | ) |
- | |
(11,318 | ) |
11,384 | |
- | |
- | |
- | |
- | |
(3,956 | ) |
3,956 | |
- | |
- | |
- | |
- | |
(1,283 | ) |
1,283 | |
- | |
Payments on behalf of Parent/WFOE/Other
entities by VIE | |
8,490 | |
- | |
3 | |
708 | |
(9,201 | ) |
- | |
12,857 | |
- | |
5 | |
1,003 | |
(13,865 | ) |
- | |
5,619 | |
700 | |
3 | |
(350 | ) |
(5,972 | ) |
- | |
IPO Proceeds received by
other entities on behalf of Parent | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
88,263 | |
(88,263 | ) |
- | |
Down payment for financing
services on behalf of Parent | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
(19,003 | ) |
19,003 | |
- | |
Exchange
difference | |
337 | |
- | |
- | |
1,293 | |
(1,630 | ) |
- | |
(1,157 | ) |
- | |
- | |
(2,093 | ) |
3,250 | |
- | |
(973 | ) |
(10 | ) |
- | |
(3,024 | ) |
4,007 | |
- | |
Closing | |
15,146 | |
38 | |
3 | |
30,650 | |
(45,837 | ) |
- | |
26,846 | |
237 | |
8 | |
25,604 | |
(52,695 | ) |
- | |
31,492 | |
927 | |
11 | |
90,207 | |
(122,637 | ) |
- | |
Financial Information Related to the Condensed
Consolidated VIE
Set forth below are the condensed consolidating
schedule showing the financial position, results of operations and cash flows for the Parent, the VIE, the WFOE and the other entities,
elimination and consolidated total (in thousands of RMB or US$) as of and for the years ended March 31, 2020, 2021 and 2022.
Selected Condensed Consolidated Statements of
Comprehensive Loss Data
| |
Year
Ended March 31, 2020 | |
Year
Ended March 31, 2021 | |
Year
ended March 31, 2022 | |
| |
RMB | |
RMB | |
RMB | |
US$ | |
| |
Parent | |
VIE | |
WFOE | |
Other
entities | |
Elimination | |
Consolidated | |
Parent | |
VIE | |
WFOE | |
Other
entities | |
Elimination | |
Consolidated | |
Parent | |
VIE | |
WFOE | |
Other
entities | |
Elimination | |
Consolidated | |
Consolidated | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Net
sales (1) | |
- | |
190,115 | |
- | |
17,928 | |
(14,955 | ) |
193,088 | |
- | |
240,742 | |
- | |
6,559 | |
(402 | ) |
246,899 | |
- | |
273,979 | |
- | |
1,529 | |
- | |
275,508 | |
43,399 | |
Cost
of sales (1) | |
- | |
170,816 | |
- | |
17,992 | |
(15,073 | ) |
173,735 | |
- | |
222,567 | |
- | |
6,364 | |
(199 | ) |
228,732 | |
- | |
259,908 | |
- | |
1,815 | |
- | |
261,723 | |
41,228 | |
Gross
profit (loss) | |
- | |
19,299 | |
- | |
(64 | ) |
118 | |
19,353 | |
- | |
18,175 | |
- | |
195 | |
(203 | ) |
18,167 | |
- | |
14,071 | |
- | |
(286 | ) |
- | |
13,785 | |
2,171 | |
Operating
expenses | |
3,120 | |
31,703 | |
2 | |
4,449 | |
(212 | ) |
39,062 | |
4,009 | |
26,800 | |
3 | |
2,656 | |
(771 | ) |
32,697 | |
6,483 | |
38,885 | |
3 | |
2,804 | |
111 | |
48,286 | |
7,606 | |
Loss
from operations | |
(3,120 | ) |
(12,404 | ) |
(2 | ) |
(4,513 | ) |
330 | |
(19,709 | ) |
(4,009 | ) |
(8,625 | ) |
(3 | ) |
(2,461 | ) |
568 | |
(14,530 | ) |
(6,483 | ) |
(24,814 | ) |
(3 | ) |
(3,090 | ) |
(111 | ) |
(34,501 | ) |
(5,435 | ) |
Investment
loss from VIE/subsidiaries | |
18,581 | |
- | |
- | |
- | |
(18,581 | ) |
- | |
12,618 | |
- | |
- | |
- | |
(12,618 | ) |
- | |
32,350 | |
- | |
- | |
- | |
(32,350 | ) |
- | |
- | |
Interest
expenses | |
- | |
1,745 | |
- | |
- | |
- | |
1,745 | |
- | |
2,461 | |
- | |
- | |
- | |
2,461 | |
- | |
4,875 | |
- | |
- | |
- | |
4,875 | |
768 | |
Loss
before income taxes | |
(21,701 | ) |
(14,149 | ) |
(2 | ) |
(4,513 | ) |
18,911 | |
(21,454 | ) |
(16,627 | ) |
(11,086 | ) |
(3 | ) |
(2,461 | ) |
13,186 | |
(16,991 | ) |
(38,833 | ) |
(29,689 | ) |
(3 | ) |
(3,090 | ) |
32,239 | |
(39,376 | ) |
(6,203 | ) |
Income
tax expenses (benefit) | |
- | |
247 | |
- | |
- | |
- | |
247 | |
- | |
(364 | ) |
- | |
- | |
- | |
(364 | ) |
- | |
(46 | ) |
- | |
- | |
- | |
(46 | ) |
(7 | ) |
Net
loss | |
(21,701 | ) |
(14,396 | ) |
(2 | ) |
(4,513 | ) |
18,911 | |
(21,701 | ) |
(16,627 | ) |
(10,722 | ) |
(3 | ) |
(2,461 | ) |
13,186 | |
(16,627 | ) |
(38,833 | ) |
(29,643 | ) |
(3 | ) |
(3,090 | ) |
32,239 | |
(39,330 | ) |
(6,196 | ) |
| (1) | Relates mainly to changes in accounts receivable and accounts
payable relating to transaction as mentioned in note (1), i.e. sales of Semi-Knocked Down (“SKD”) from UTime Trading to Do
Mobile. |
Selected Condensed Consolidated Balance Sheets
Data
| |
March
31, 2021 | |
March
31, 2022 | |
| |
RMB | |
RMB | |
US$ | |
| |
Parent | |
VIE | |
WFOE | |
Other
entities | |
Elimination | |
Consolidated | |
Parent | |
VIE | |
WFOE | |
Other
entities | |
Elimination | |
Consolidated | |
Consolidated | |
Assets | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Current
Assets | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Cash
and cash equivalents | |
6 | |
8,305 | |
3 | |
663 | |
- | |
8,977 | |
1 | |
192 | |
3 | |
66,496 | |
- | |
66,692 | |
10,506 | |
Restricted
cash | |
- | |
500 | |
- | |
- | |
- | |
500 | |
- | |
500 | |
- | |
- | |
- | |
500 | |
79 | |
Accounts
receivable, net | |
- | |
17,494 | |
- | |
28 | |
- | |
17,522 | |
- | |
22,391 | |
- | |
26 | |
- | |
22,417 | |
3,531 | |
Prepaid
expenses and other current assets, net | |
13,801 | |
49,220 | |
- | |
2,093 | |
- | |
65,114 | |
23,195 | |
42,431 | |
- | |
189 | |
- | |
65,815 | |
10,368 | |
Intercompmany
receivables (1) | |
6,466 | |
45,985 | |
- | |
392 | |
(52,843 | ) |
- | |
73,345 | |
48,619 | |
- | |
921 | |
(122,885 | ) |
- | |
- | |
Due
from related parties | |
- | |
6,990 | |
- | |
- | |
- | |
6,990 | |
- | |
1,422 | |
- | |
- | |
- | |
1,422 | |
224 | |
Inventories | |
- | |
29,457 | |
- | |
2,269 | |
- | |
31,726 | |
- | |
36,018 | |
- | |
53 | |
- | |
36,071 | |
5,682 | |
Total
current assets | |
20,273 | |
157,951 | |
3 | |
5,445 | |
(52,843 | ) |
130,829 | |
96,541 | |
151,573 | |
3 | |
67,685 | |
(122,885 | ) |
192,917 | |
30,390 | |
Non-Current
assets | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Property
and equipment, net | |
- | |
35,579 | |
- | |
104 | |
- | |
35,683 | |
- | |
38,227 | |
- | |
43 | |
- | |
38,270 | |
6,028 | |
Operating
lease right-of-use assets, net | |
- | |
1,365 | |
- | |
64 | |
- | |
1,429 | |
- | |
16,319 | |
- | |
- | |
- | |
16,319 | |
2,571 | |
Intangible
assets, net | |
- | |
2,307 | |
- | |
- | |
- | |
2,307 | |
- | |
2,592 | |
- | |
- | |
- | |
2,592 | |
408 | |
Long-term
investments | |
32,181 | |
- | |
- | |
- | |
(32,181 | ) |
- | |
1,610 | |
- | |
- | |
- | |
(1,610 | ) |
- | |
- | |
Equity
method investment | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
Other
non-current assets | |
- | |
3,333 | |
- | |
- | |
- | |
3,333 | |
- | |
541 | |
- | |
- | |
- | |
541 | |
85 | |
Total
non-current assets | |
32,181 | |
42,584 | |
- | |
168 | |
(32,181 | ) |
42,752 | |
1,610 | |
57,679 | |
- | |
43 | |
(1,610 | ) |
57,722 | |
9,092 | |
Total
Assets | |
52,454 | |
200,535 | |
3 | |
5,613 | |
(85,024 | ) |
173,581 | |
98,151 | |
209,252 | |
3 | |
67,728 | |
(124,495 | ) |
250,639 | |
39,482 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Liabilities
and Stockholder’s equity | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Current
liabilities | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Accounts
payable | |
- | |
49,041 | |
- | |
79 | |
1 | |
49,121 | |
- | |
74,497 | |
- | |
34 | |
- | |
74,531 | |
11,740 | |
Short-term
borrowings | |
- | |
30,800 | |
- | |
- | |
- | |
30,800 | |
- | |
35,780 | |
- | |
- | |
- | |
35,780 | |
5,636 | |
Current
portion of long-term borrowings | |
- | |
5,580 | |
- | |
- | |
- | |
5,580 | |
- | |
800 | |
- | |
- | |
- | |
800 | |
126 | |
Due
to related parties | |
299 | |
550 | |
- | |
516 | |
- | |
1,365 | |
289 | |
3,728 | |
- | |
482 | |
- | |
4,499 | |
709 | |
Lease
liability | |
- | |
1,080 | |
- | |
64 | |
- | |
1,144 | |
- | |
3,360 | |
- | |
- | |
- | |
3,360 | |
529 | |
Other
payables and accrued liabilities | |
131 | |
59,076 | |
- | |
883 | |
| |
60,090 | |
1,382 | |
42,423 | |
- | |
343 | |
- | |
44,148 | |
6,954 | |
Intercompmany
payables (1) | |
26,846 | |
237 | |
8 | |
25,604 | |
(52,695 | ) |
- | |
31,492 | |
927 | |
11 | |
90,207 | |
(122,637 | ) |
- | |
- | |
Income
tax payables | |
- | |
18 | |
- | |
- | |
- | |
18 | |
- | |
18 | |
- | |
- | |
- | |
18 | |
3 | |
Total
current liabilities | |
27,276 | |
146,382 | |
8 | |
27,146 | |
(52,694 | ) |
148,118 | |
33,163 | |
161,533 | |
11 | |
91,066 | |
(122,637 | ) |
163,136 | |
25,697 | |
Non-current
liabilities | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Long-term
borrowings | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
8,020 | |
- | |
- | |
- | |
8,020 | |
1,263 | |
Deferred
revenue | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
Deferred
tax liability | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
466 | |
- | |
- | |
- | |
466 | |
73 | |
Lease
liability - non-current | |
- | |
285 | |
- | |
- | |
- | |
285 | |
- | |
14,549 | |
- | |
- | |
- | |
14,549 | |
2,292 | |
Total
non-current liabilities | |
- | |
285 | |
- | |
- | |
- | |
285 | |
- | |
23,035 | |
- | |
- | |
- | |
23,035 | |
3,628 | |
Total
liabilities | |
27,276 | |
146,667 | |
8 | |
27,146 | |
(52,694 | ) |
148,403 | |
33,163 | |
184,568 | |
11 | |
91,066 | |
(122,637 | ) |
186,171 | |
29,325 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Ordinary
shares | |
4 | |
- | |
- | |
- | |
- | |
4 | |
5 | |
- | |
- | |
- | |
- | |
5 | |
1 | |
Additional
paid-in capital | |
73,217 | |
72,413 | |
- | |
807 | |
(73,220 | ) |
73,217 | |
152,236 | |
72,413 | |
- | |
807 | |
(73,220 | ) |
152,236 | |
23,981 | |
Accumulated
deficit | |
(49,444 | ) |
(20,281 | ) |
(5 | ) |
(23,329 | ) |
43,615 | |
(49,444 | ) |
(88,277 | ) |
(49,427 | ) |
(8 | ) |
(26,419 | ) |
75,854 | |
(88,277 | ) |
(13,904 | ) |
Accumulated
other comprehensive income | |
1,401 | |
1,736 | |
- | |
989 | |
(2,725 | ) |
1,401 | |
1,024 | |
2,218 | |
- | |
2,274 | |
(4,492 | ) |
1,024 | |
161 | |
Total
UTime Limited shareholder’s equity | |
25,178 | |
53,868 | |
(5 | ) |
(21,533 | ) |
(32,330 | ) |
25,178 | |
64,988 | |
25,204 | |
(8 | ) |
(23,338 | ) |
(1,858 | ) |
64,988 | |
10,239 | |
Non-controlling
interests | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
(520 | ) |
- | |
- | |
- | |
(520 | ) |
(82 | ) |
Total
shareholders’ equity | |
25,178 | |
53,868 | |
(5 | ) |
(21,533 | ) |
(32,330 | ) |
25,178 | |
64,988 | |
24,684 | |
(8 | ) |
(23,338 | ) |
(1,858 | ) |
64,468 | |
10,157 | |
Total
liabilities and shareholders’ equity | |
52,454 | |
200,535 | |
3 | |
5,613 | |
(85,024 | ) |
173,581 | |
98,151 | |
209,252 | |
3 | |
67,728 | |
(124,495 | ) |
250,639 | |
39,482 | |
Selected Condensed Consolidated Cash Flows
Data
| |
Year
Ended March 31, 2020 | |
Year
Ended March 31, 2021 | |
Year
Ended March 31, 2022 | |
| |
RMB | |
RMB | |
RMB | |
US$ | |
| |
Parent | |
VIE | |
WFOE | |
Other
entities | |
Elimination | |
Consolidated | |
Parent | |
VIE | |
WFOE | |
Other
entities | |
Elimination | |
Consolidated | |
Parent | |
VIE | |
WFOE | |
Other
entities | |
Elimination | |
Consolidated | |
| |
Cash
flows from operating activities: | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Net
loss | |
(21,701 | ) |
(14,396 | ) |
(2 | ) |
(4,513 | ) |
18,911 | |
(21,701 | ) |
(16,627 | ) |
(10,722 | ) |
(3 | ) |
(2,461 | ) |
13,186 | |
(16,627 | ) |
(38,833 | ) |
(29,643 | ) |
(3 | ) |
(3,090 | ) |
32,239 | |
(39,330 | ) |
(6,196 | ) |
Adjustments
to reconcile net loss from operations to net cash provided by (used in) operating activities | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
- | |
- | |
Depreciation
and amortization | |
- | |
3,972 | |
- | |
56 | |
- | |
4,028 | |
- | |
3,921 | |
- | |
33 | |
- | |
3,954 | |
- | |
4,277 | |
- | |
56 | |
- | |
4,333 | |
683 | |
Allowances
for obsolete inventories, net | |
- | |
(1,023 | ) |
- | |
573 | |
- | |
(450 | ) |
- | |
7,092 | |
- | |
497 | |
- | |
7,589 | |
- | |
1,664 | |
- | |
(1,371 | ) |
- | |
293 | |
46 | |
Provision
for doubtful account, net | |
- | |
970 | |
- | |
216 | |
- | |
1,186 | |
- | |
(836 | ) |
- | |
- | |
- | |
(836 | ) |
- | |
1,379 | |
- | |
2,027 | |
- | |
3,406 | |
537 | |
Loss
on disposal of property and equipment | |
- | |
14 | |
- | |
- | |
- | |
14 | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
10 | |
- | |
- | |
- | |
10 | |
2 | |
Loss
on equity method investment | |
- | |
22 | |
- | |
- | |
- | |
22 | |
- | |
833 | |
- | |
- | |
- | |
833 | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
Impairment
of intangible asset | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
348 | |
- | |
- | |
- | |
348 | |
54 | |
Equity
loss of subsidiaries | |
18,581 | |
- | |
- | |
- | |
(18,581 | ) |
- | |
12,618 | |
- | |
- | |
- | |
(12,618 | ) |
- | |
32,350 | |
- | |
- | |
- | |
(32,350 | ) |
- | |
- | |
Net
changes in operating assets and liabilities: | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Accounts
receivable | |
- | |
14,931 | |
- | |
1,641 | |
- | |
16,572 | |
- | |
21,475 | |
- | |
2 | |
- | |
21,477 | |
- | |
(5,724 | ) |
- | |
(1 | ) |
- | |
(5,725 | ) |
(902 | ) |
Prepaid
expenses and other current assets | |
(2,333 | ) |
11,132 | |
- | |
(4,862 | ) |
- | |
3,937 | |
(8,424 | ) |
(18,373 | ) |
- | |
624 | |
- | |
(26,173 | ) |
(1,173 | ) |
7,329 | |
- | |
(220 | ) |
- | |
5,936 | |
935 | |
Intercompany
receivables (1) | |
- | |
(14,184 | ) |
- | |
(345 | ) |
14,529 | |
- | |
506 | |
(7,073 | ) |
| |
(364 | ) |
6,931 | |
- | |
2,381 | |
(2,634 | ) |
- | |
(529 | ) |
782 | |
- | |
- | |
Inventories | |
- | |
811 | |
- | |
238 | |
- | |
1,049 | |
- | |
(15,881 | ) |
- | |
4,947 | |
- | |
(10,934 | ) |
- | |
(8,128 | ) |
- | |
3,499 | |
- | |
(4,629 | ) |
(729 | ) |
Accounts
payable | |
- | |
(16,164 | ) |
- | |
565 | |
- | |
(15,599 | ) |
- | |
(10,987 | ) |
- | |
1,063 | |
- | |
(9,924 | ) |
- | |
26,170 | |
- | |
1,154 | |
- | |
27,324 | |
4,304 | |
Income
taxes payable | |
- | |
(573 | ) |
- | |
- | |
- | |
(573 | ) |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
Other
payables and accrued liabilities, and lease liabilities | |
- | |
(10,961 | ) |
(198 | ) |
5,752 | |
- | |
(5,407 | ) |
131 | |
27,205 | |
- | |
657 | |
- | |
27,993 | |
1,269 | |
(14,636 | ) |
- | |
1,443 | |
- | |
(11,924 | ) |
(1,878 | ) |
Intercompany
payables (1) | |
5,437 | |
9,538 | |
- | |
(454 | ) |
(14,521 | ) |
- | |
11,700 | |
199 | |
5 | |
(5,046 | ) |
(6,858 | ) |
- | |
5,619 | |
689 | |
3 | |
(5,629 | ) |
(682 | ) |
- | |
- | |
Related
parties | |
16 | |
334 | |
- | |
48 | |
- | |
398 | |
(23 | ) |
527 | |
- | |
23 | |
- | |
527 | |
- | |
(699 | ) |
- | |
- | |
- | |
(699 | ) |
(110 | ) |
Deferred
revenue | |
- | |
(600 | ) |
- | |
- | |
- | |
(600 | ) |
- | |
(400 | ) |
- | |
- | |
- | |
(400 | ) |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
Other
non-current assets | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
(208 | ) |
- | |
- | |
- | |
(208 | ) |
(32 | ) |
Net
cash provided by (used in) operating activities | |
- | |
(16,177 | ) |
(200 | ) |
(1,085 | ) |
338 | |
(17,124 | ) |
(119 | ) |
(3,020 | ) |
2 | |
(25 | ) |
641 | |
(2,521 | ) |
1,613 | |
(19,806 | ) |
- | |
(2,661 | ) |
(11 | ) |
(20,865 | ) |
(3,286 | ) |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Investing
activities: | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Payment
for property and equipment | |
- | |
(3,091 | ) |
- | |
- | |
- | |
(3,091 | ) |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
(5,858 | ) |
- | |
- | |
- | |
(5,858 | ) |
(923 | ) |
Payment
for intangible assets | |
- | |
(1,791 | ) |
- | |
- | |
- | |
(1,791 | ) |
- | |
(2,201 | ) |
- | |
- | |
- | |
(2,201 | ) |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
Cash
received from consolidation, net of cash acquired | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
28 | |
- | |
- | |
- | |
28 | |
4 | |
Proceeds
from disposal of property and equipment | |
- | |
2,613 | |
- | |
- | |
- | |
2,613 | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
Net
cash used in investing activities | |
- | |
(2,269 | ) |
- | |
- | |
- | |
(2,269 | ) |
- | |
(2,201 | ) |
- | |
- | |
- | |
(2,201 | ) |
- | |
(5,830 | ) |
- | |
- | |
- | |
(5,830 | ) |
(919 | ) |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Financing
activities: | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Proceeds
from short-term borrowings | |
- | |
15,000 | |
- | |
- | |
- | |
15,000 | |
- | |
47,600 | |
- | |
- | |
- | |
47,600 | |
- | |
46,500 | |
- | |
- | |
- | |
46,500 | |
7,325 | |
Loan
received from a shareholder | |
- | |
3,700 | |
- | |
- | |
- | |
3,700 | |
- | |
900 | |
- | |
- | |
- | |
900 | |
- | |
5,980 | |
- | |
- | |
- | |
5,980 | |
942 | |
Proceeds
from long-term borrowings | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
9,000 | |
- | |
- | |
- | |
9,000 | |
1,418 | |
Repayment
of loan from a shareholder | |
- | |
(3,950 | ) |
- | |
- | |
- | |
(3,950 | ) |
- | |
(1,500 | ) |
- | |
- | |
- | |
(1,500 | ) |
- | |
(3,000 | ) |
- | |
- | |
- | |
(3,000 | ) |
(473 | ) |
Repayment
of short-term borrowings | |
- | |
(16,000 | ) |
- | |
- | |
- | |
(16,000 | ) |
- | |
(31,800 | ) |
- | |
- | |
- | |
(31,800 | ) |
- | |
(41,520 | ) |
- | |
- | |
- | |
(41,520 | ) |
(6,540 | ) |
Repayments
of long-term borrowings | |
- | |
(900 | ) |
- | |
- | |
- | |
(900 | ) |
- | |
(1,200 | ) |
- | |
- | |
- | |
(1,200 | ) |
- | |
(5,760 | ) |
- | |
- | |
- | |
(5,760 | ) |
(907 | ) |
Down
payment for financing services | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
(19,003 | ) |
- | |
(19,003 | ) |
(2,993 | ) |
Contribution
in a subsidiary by a shareholder | |
- | |
15,000 | |
- | |
- | |
- | |
15,000 | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
6,429 | |
- | |
- | |
- | |
6,429 | |
1,013 | |
Proceeds
from issuance of ordinary shares through initial public offering | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
88,262 | |
- | |
88,262 | |
13,903 | |
Net
cash provided by financing activities | |
- | |
12,850 | |
- | |
- | |
- | |
12,850 | |
- | |
14,000 | |
- | |
- | |
- | |
14,000 | |
- | |
17,629 | |
- | |
69,259 | |
- | |
86,888 | |
13,688 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
- | |
Effect
of exchange rate changes on cash and cash equivalent and restricted cash | |
- | |
(319 | ) |
- | |
346 | |
(338 | ) |
(311 | ) |
125 | |
(838 | ) |
- | |
499 | |
(641 | ) |
(855 | ) |
(1,618 | ) |
(106 | ) |
- | |
(765 | ) |
11 | |
(2,478 | ) |
(391 | ) |
Net
increase (decrease) in cash and cash equivalent and restricted cash | |
- | |
(5,915 | ) |
(200 | ) |
(739 | ) |
- | |
(6,854 | ) |
6 | |
7,941 | |
2 | |
474 | |
- | |
8,423 | |
(5 | ) |
(8,113 | ) |
- | |
65,833 | |
- | |
57,715 | |
9,092 | |
Cash
and cash equivalents and restricted cash at beginning of year | |
- | |
6,779 | |
201 | |
928 | |
- | |
7,908 | |
- | |
864 | |
1 | |
189 | |
- | |
1,054 | |
6 | |
8,805 | |
3 | |
663 | |
- | |
9,477 | |
1,493 | |
Cash
and cash equivalents and restricted cash at end of year | |
- | |
864 | |
1 | |
189 | |
- | |
1,054 | |
6 | |
8,805 | |
3 | |
663 | |
- | |
9,477 | |
1 | |
692 | |
3 | |
66,496 | |
- | |
67,192 | |
10,585 | |
Notes to elimination adjustments to the unaudited
condensed consolidating schedules
The significant elimination
adjustments to the unaudited condensed consolidating schedules consist of the following:
| (1) | Relates
to the elimination between the receivables of UTime Technology (HK) Company Limited,
a subsidiary of United Time Technology Co., Ltd., against the trade payable
of India Private Ltd., a non-VIE subsidiary of UTime Limited, relating
to sales of Semi-Knocked Down (“SKD”) from UTime Trading to Do Mobile India Private Ltd..
In addition, it relates to the elimination between the other receivables of VIE and subsidiaries of VIE against the other payables of
UTime Limited relating to (i) expenses paid by VIE and subsidiaries of VIE on behalf of UTime Limited; (ii) payments of capital
contributions to Bridgetime Limited by UTime Technology (HK) Company Limited on
behalf of UTime Limited; (3) IPO Proceeds received by UTime International Limited on behalf of UTime Limited; and (4) down payment for
financing services paid by UTime International Limited on behalf of UTime Limited. |
3.A. [Reserved]
3.B. Capitalization
and Indebtedness
Not
Applicable.
3.C. Reasons
For The Offer And Use Of Proceeds
Not
Applicable.
3.D. Risk Factors
An
investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described
below together with all other information contained in this annual report, including the matters discussed under the headings “Forward-Looking
Statements” and “Operating and Financial Review and Prospects” before you decide to invest in our ordinary shares.
We are a holding company with substantial operations in China and are subject to a legal and regulatory environment that in many respects
differs from the United States. If any of the following risks, or any other risks and uncertainties that are not presently foreseeable
to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects could be materially
and adversely affected.
Risk Factors
Summary
Risks Related to Our Business and Industry
| ● | We have incurred significant losses and we may continue to experience losses in the future. |
| ● | Because material amounts of our funds are held in banks where only limited protection on deposit accounts
is required, the failure of any bank in which we deposit our funds could result in a loss of those funds to the extent exceeding
the amounts protected and could, depending on the amount involved, affect our ability to continue in business. |
| ● | We may need to raise additional capital or obtain loans from financial institutions from time to time
and our operations could be curtailed if we are unable to obtain the required additional funding when needed. We may not be able to do
so when necessary, and/or the terms of any financings may not be advantageous to us. |
| ● | We generate a significant portion of our net revenues from a small number of major customers and key projects
and any loss of business from these customers or key projects could reduce our net revenues and significantly harm our business. |
| ● | The outbreak of the coronavirus in China, India and across the world may have a material adverse effect
on our business. |
| ● | We depend on third party service providers for logistics and aftersales services, and any failure of our
third party service providers to perform may have a material negative impact on our business. |
| ● | We rely on outsourcing manufacturers to produce a majority of our products. If we encounter issues with
them, our business and results of operations could be materially and adversely affected. |
| ● | Our expansion into new product categories and scenarios, and substantial increases in product lines may
expose us to new challenges and more risks. |
| ● | Our international expansion is subject to a variety of costs and risks and we may not be successful, which
could adversely affect our profitability and operating results. |
| ● | Our use of open source software could materially adversely affect our business, financial condition, operating
results and cash flow. |
| ● | We operate in a rapidly evolving industry. If we fail to keep up with technological developments and changing
requirements of our customers, business, financial condition and results of operations may be materially and adversely affected. |
| ● | We face intense competition from onshore and offshore third party software providers in the mobile phone
market, and, if we are unable to compete effectively, we may lose customers and our revenues may decline. The lack of technological development
and increase in competition may lead to a decline in our sustainable growth. |
| ● | We may undertake acquisitions, investments, joint ventures or other strategic alliances in the future,
which could expose us to new operational, regulatory and market risks. In addition, such future undertakings may not be successful, which
may adversely affect our business, results of operations, financial condition and prospects. |
| ● | The international nature of our business exposes us to risks that could adversely affect our financial
condition and results of operations. |
| ● | Inadequacy of skilled personnel may lead to decline in sales of mobile phones by us. |
| ● | Our success depends substantially on the continuing efforts of our senior executives and other key personnel,
and our business may be severely disrupted if we lose their services. |
| ● | We could be impacted by unfavorable results of legal proceedings, including the pending proceeding against
Do Mobile, and may, from time to time, be involved in future litigation in which substantial monetary damages are sought. |
| ● | Compromised product quality of our mobile products may damage our brand and reputation of and customers
could stop using our mobile handsets |
| ● | We may not be able to successfully sustain our growth strategy into new geographic markets and innovative
consumer electronic products. Inability to effectively manage growth, our current and planned resources and related issues could materially
and adversely affect our business of and impact future financial performance. |
| ● | We are dependent on raw materials and mobile device components from off shore entities and from local
markets, and an increase in their cost could have an adverse effect on our business. |
| ● | We have engaged in transactions with related parties, and such transactions present possible conflicts
of interest that could have an adverse effect on our business and results of operations. |
| ● | We may be adversely affected by product liability exposure claims. |
| ● | Our management and auditors identified material weaknesses in our internal control over financial reporting
that, if not properly remediated, could result in material misstatements in our consolidated financial statements that could cause investors
to lose confidence in our reported financial information and have a negative effect on the trading price of our ordinary shares. |
| ● | Our internal controls over financial reporting may not be effective and our independent registered public
accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business
and reputation. |
| ● | We are subject to various anti-corruption and anti-bribery laws, including the U.S. Foreign Corrupt Practices
Act, and U.K., PRC and Indian anti-corruption and anti-bribery laws; any determination that we have violated such laws could damage our
business and reputation, limit our ability to bid for certain business opportunities, and subject us to significant criminal and civil
penalties, civil litigation (such as shareholder derivative suits), and commercial liabilities. |
| ● | The agreements governing the loan facilities we currently have contain restrictions and limitations that
could significantly affect our ability to operate our business, raise capital, as well as significantly affect our liquidity, and therefore
could adversely affect our results of operations. |
| ● | Defaults under either of our loan agreements with each of SRCB and CRBZ could result in a substantial
loss of our assets. |
Risks Related to Our Corporate Structure
| ● | We are a holding company, and will rely on dividends paid by our subsidiaries for our cash needs. Any
limitation on the ability of our subsidiaries to make dividend payments to us, or any tax implications of making dividend payments to
us, could limit our ability to pay our parent company expenses or pay dividends to holders of our ordinary shares. |
| ● | Minfei Bao, our founder, chairman and chief executive officer, as well as Min He, one of our directors,
will continue to have significant influence over us after our initial public offering, including control over decisions that require the
approval of shareholders, which could limit your ability to influence the outcome of matters submitted to shareholders for a vote. |
| ● | We are a “controlled company” within the meaning of Nasdaq’s Rules and, as a result,
may rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies. |
| ● | Change in the tax regime in India will increase tax burden on us. |
| ● | We may become subject to taxation in the Cayman Islands, which would negatively affect our results. |
| ● | We are subject to various changing laws and regulations regarding regulatory matters, corporate governance
and public disclosure that have increased both our costs and the risk of non-compliance. |
| ● | Because we are incorporated under the laws of the Cayman Islands, you may face difficulties in protecting
your interests, and your ability to protect your rights through the U.S. Federal courts may be limited. |
Risks Related
to Doing Business in China
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Changes in China’s economic, political or social conditions or
government policies could have a material adverse effect on our business and operations. |
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Uncertainties with respect to the PRC legal system and changes in laws
and regulations in China could adversely affect us. |
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The approval of or filing and reporting with the CSRC or other PRC
government authorities may be required in connection with our overseas offerings under PRC law, and, if required, we cannot predict
whether or for how long we will be able to obtain such approval or complete such filing or reporting procedures. The CSRC has released
for public consultation the draft rules for China-based companies seeking to conduct initial public offerings in foreign markets.
While such rules have not yet gone into effect, the Chinese government may exert more oversight and control over offerings that are
conducted overseas and foreign investment in China-based issuers, which could significantly limit or completely hinder our ability
to continue to offer our ordinary shares to investors and could cause the value of our ordinary shares to significantly decline or
become worthless. |
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The PRC government exerts substantial influence over the manner in
which we conduct our business activities. The PRC government may also intervene or influence our operations at any time, which could
result in a material change in our operations and our ordinary shares could decline in value or become worthless. Any actions by
the PRC government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based
issuers could significantly limit or completely hinder our ability to offer or continue to offer ordinary shares to investors and
cause the value of our ordinary shares to significantly decline or become worthless |
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Our ordinary shares may be delisted under the HFCA Act if the PCAOB
is unable to adequately inspect audit documentation located in China. The delisting of our ordinary shares, or the threat of their being
delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct adequate
inspections deprives our investors with the benefits of such inspections. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating
Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s
securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead
of three. |
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Governmental control of currency conversion may limit our ability to
utilize our net revenues effectively and affect the value of your investment. |
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The M&A Rules and certain other PRC regulations establish complex
procedures for some acquisitions of PRC companies by foreign investors, which could make it more difficult for us to pursue growth
through acquisitions in China. |
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PRC regulations relating to foreign exchange registration of overseas
investment by PRC residents may subject our PRC resident beneficial owners or our PRC Subsidiary to liability or penalties, limit
our ability to inject capital into our PRC Subsidiary, limit our PRC Subsidiary’s ability to increase their registered capital
or distribute profits to us, or may otherwise adversely affect us. |
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Any failure to comply with PRC regulations regarding the registration
requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative
sanctions. |
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We face uncertainty with respect to indirect transfers of equity interests
in PRC resident enterprises by their non-PRC holding companies. |
Risks Related to Doing Business in India
| ● | Our business activities in India could be subject to Indian competition laws, and any violation or alleged
violation thereof may negatively impact our operations. |
| ● | Our business is substantially affected by prevailing economic, political and other prevailing conditions
in India, and any downshift or perceived downshift in the Indian economy could negatively impact our business. |
| ● | Introduction of 5G compatible mobile handsets and other new technologies may be expensive, and if we are
unable to provide 5G compatible mobile handsets, our business will suffer. |
| ● | We are subject to supervision and regulation by the Reserve Bank of India (or “RBI”) and the
Department of Telecommunication, and any non-compliance may adversely impact our business. |
| ● | Our operating results may be adversely affected by law and regulations to which we are subject. |
| ● | Non-compliance with the Indian labor law requirements may invite criminal and civil actions against us
in India. |
| ● | Do Mobile is subject to new certification regulations for mobile handsets introduced by the Department
of Telecommunications, Government of India. |
| ● | Do Mobile is non-compliant with respect to certain issuances of its share capital and may be subject to
regulatory action by the Registrar of Companies and Ministry of Corporate Affairs, which could adversely affect our business operations
and profitability. |
| ● | Do Mobile is delayed in complying with reporting guidelines under the provisions of the Foreign Exchange
Management (Non-debt Instruments) Rules, 2019 (which replaced erstwhile Foreign Exchange Management (Transfer or issue of security by
a person resident outside India) Regulations, 2017) and may be subject to regulatory action by the Reserve Bank of India, which could
adversely affect our business and operations. |
| ● | Any foreign direct investment in Do Mobile from an entity of a country, which shares a land border with
India or the beneficial owner of an investment into India who is situated in or is a citizen of any such country, shall invest only with
governmental approval. Any delay in obtaining such governmental approval could adversely affect business operations and cash flow position
of Do Mobile. |
Risks Related to Our Ordinary Shares
| ● | The trading prices of our ordinary shares are likely to be volatile, which could result in substantial
losses to investors. |
| ● | Sales of a substantial number of our ordinary shares in the public market by our existing shareholders
could cause our share price to fall. |
| ● | There are no assurance that our securities, including our ordinary shares, will continue to be listed
or, if listed, that we will be able to comply with the continued listing standards of Nasdaq, which could limit investors’ ability
to make transactions in our securities and subject us to additional trading restrictions. |
| ● | Future issuance of our ordinary shares could cause dilution of ownership interests and adversely affect
our stock price. |
| ● | Shares eligible for future sale may depress our stock price. |
| ● | We may issue preference shares to investor that grant them superior rights than holders of our ordinary
shares without obtaining shareholder approval. |
| ● | If securities or industry analysts do not publish or cease publishing research reports about us, if they
adversely change their recommendations regarding our ordinary shares or if our operating results do not meet their expectations, the price
of our ordinary shares could decline. |
| ● | As a foreign private issuer, we are subject to different U.S. securities laws and NASDAQ governance standards
than domestic U.S. issuers. This may afford less protection to holders of our ordinary shares, and you may not receive corporate and company
information and disclosure that you are accustomed to receiving or in a manner in which you are accustomed to receiving it. |
| ● | We may lose our foreign private issuer status in the future, which could result in significant additional
costs and expenses. |
| ● | As an “emerging growth company” under the JOBS Act, we are allowed to postpone the date by
which we must comply with some of the laws and regulations intended to protect investors and to reduce the amount of information we provide
in our reports filed with the SEC, which could undermine investor confidence in our company and adversely affect the market price of our
ordinary shares. |
| ● | If we are classified as a passive foreign investment company, United States taxpayers who own our ordinary
shares may have adverse United States federal income tax consequences. |
Risks Related
to Our Business and Industry
We have incurred
significant losses and we may continue to experience losses in the future.
We
have incurred significant losses in the past. In fiscal year 2021 and 2022, respectively, we had losses from operations of RMB14.5 million
and RMB34.5 million (US$5.4 million), and net losses of RMB16.6 million and RMB39.3 million (US$6.2 million). We also had net cash used
by operating activities of RMB2.5 million in fiscal year 2021, and cash used in operations of RMB20.9 million (US$3.3 million) in fiscal
year 2022. We may continue to have an adverse effect on our shareholders’ equity and working capital in the future.
We
cannot assure you that we will be able to generate profits or positive cash flow from operating activities in the future. Our ability
to achieve profitability depends in large part on our ability to manage our costs and expenses. We intend to manage and control our costs
and expenses as a proportion of our total revenues, but there can be no assurance that we will achieve this goal. We may experience losses
in the future due to our continued investments in technology, talent, content and other initiatives. In addition, our ability to achieve
and sustain profitability is affected by various factors, some of which are beyond our control, such as changes in macroeconomic and
regulatory environment or competitive dynamics in the industry. Accordingly, you should not rely on our financial results of any prior
period as an indication of our future performance.
Because material
amounts of our funds are held in banks where only limited protection on deposit accounts is required, the failure of any bank in
which we deposit our funds could result in a loss of those funds to the extent exceeding the amounts protected and could, depending
on the amount involved, affect our ability to continue in business.
At
March 31, 2022, we had cash on hand of $10.5 million. Of that amount, approximately $10.4 million was held in banks and other financial
institutions in Hong Kong, and $0.1 million in the PRC. The Hong Kong government provides deposit protection up to a maximum amount of
HK$500,000 (approximately U.S.$63,698 based on the midpoint exchange rate for October 28, 2022 reported by “Historical
Exchange Rates” at http://www.oanda.com/fx-for-business/historical-rates) for each depositor in any individual bank in Hong Kong.
We understand that in the event of a bank failure of a bank in the PRC, a PRC-government agency is to provide some, unspecified, protections
of deposit accounts to individual depositors. After three interest rate hikes in 2011, there were recommendations in early 2012 from
China’s economists that a formal insurance system from China’s central bank is necessary to protect depositors’ assets.
On May 1, 2015, the new “Deposit Insurance Regulations” became effective in the PRC and provide that the maximum protection
would be up to RMB500,000 (including principal and interest) per depositor per insured financial institution. Depending upon the amounts
of funds we have on deposit in a Hong Kong or mainland China financial institution that fails, our inability to have immediate access
to our cash, and the lack of deposit protection in excess of applicable protection limits, could impair our operations, and, if we are
not able to access needed funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.
We may need to raise additional capital
or obtain loans from financial institutions from time to time and our operations could be curtailed if we are unable to obtain the required
additional funding when needed. We may not be able to do so when necessary, and/or the terms of any financings may not be advantageous
to us.
As of the fiscal year ended
March 31, 2021 and 2022, respectively, we had accumulated deficit of RMB49.4 million and RMB88.3 million (US$13.9 million). Due to our
accumulated deficit, we may need to obtain additional funding from outside sources, including from the sales of our securities, grants
or other forms of financing. Our accumulated deficit increases the difficulty in completing such sales or securing alternative sources
of funding, and there can be no assurances that we will be able to obtain such funding on favorable terms or at all. If we are unable
to obtain sufficient financing from the sale of our securities or from alternative sources, we may be required to reduce, defer or discontinue
certain of our research and development and operating activities or we may not be able to continue as a going concern. If we cannot continue
as a going concern, our shareholders may lose their entire investment in our ordinary shares. Future reports from our independent registered
public accounting firm may contain statements expressing doubt about our ability to continue as a going concern.
We generate a significant portion of our
net revenues from a small number of major customers and key projects and any loss of business from these customers or key projects could
reduce our net revenues and significantly harm our business.
We have derived, and believe
that in the foreseeable future we will continue to derive, a significant portion of our net revenues from a small number of major customers
and key projects. Our top three customers in fiscal year 2021 accounted for approximately 41.3%, 6.8% and 6.3% of our net revenues in
fiscal year 2021. For the year ended March 31, 2022, our top three customers accounted for approximately 42.3%, 19.8% and 5.5% of our
net revenues.
Our ability to maintain close
relationships with our major customers is essential to the growth and profitability of our business. However, the volume of work performed
for a specific customer is likely to vary from year-to-year and project-to-project, especially since we are generally not the exclusive
service solutions provider for our customers, some of our customers have in-house research and development capabilities, and we do not
have long-term purchase commitments from any of our customers. A major customer in one year may not provide the same level of net revenues
for us in any subsequent year. The products we provide to our customers, and the net revenues and income from those products, may decline
or vary as the type and quantity of products changes over time. In addition, reliance on any individual customer for a significant portion
of our net revenues may give that customer a degree of pricing leverage when negotiating contracts and terms of service with us.
In addition, a number of
factors not within our control could cause the loss of, or reduction in, business or revenues from any customer, and these factors are
not predictable. These factors include, among others, a customer’s decision to re-negotiate the royalty payment of a contract if
the volume of unit sales exceeds original expectations, pricing pressure from competitors, a change in a customer’s business strategy,
or failure of a mobile chipset manufacturer or mobile device OEM to develop competitive products. Our customers may also choose to pursue
alternative technologies and develop alternative products in addition to, or in lieu of, our products, either on their own or in collaboration
with others, including our competitors. The loss of any major customer or key project, or a significant decrease in the volume of customer
demand or the price at which we sell our products to customers, could materially adversely affect our financial condition and results
of operations.
The outbreak of the coronavirus in China,
India and across the world may have a material adverse effect on our business.
Our business could be materially
and adversely affected by the outbreak of the Coronavirus Disease 2019 (“COVID-19” or the “coronavirus”), or
the coronavirus, in China. On January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public Health
Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help
mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain
types of public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have
an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates.
Our headquarters (Shenzhen)
and our factory (Guizhou) are located in China where the coronavirus originated. The World Health Organization has declared the coronavirus
outbreak in China a public health emergency of international concern. As this virus is transmitted between humans, the Chinese government
has imposed travel restrictions in certain parts of the country and several businesses operating in China have scaled back operations.
The development of the coronavirus outbreak could materially disrupt our business and operations, slow down the overall economy, curtail
consumer spending, interrupt our sources of supply, and make it difficult to adequately staff our operations. As a result, our operating
results, financial condition and cash flows could be materially adversely impacted.
The coronavirus is impacting
several areas of the world, including Asia and the United States. Many factories in China closed during February 2020 at the mandate
of the Chinese government and did not reopen until March 2020. This has impacted the manufacturing productivity of our factories as well
as those of our suppliers, and therefore the amount of inventory we receive and can ship to customers. We are hopeful that all operations
will return to normal as soon as possible. We are doing everything we can to keep customer production running and to keep things as smooth
and stable as possible. However, the coronavirus could negatively impact our sales performance, depending on the duration and severity
of the coronavirus’ impact on the operations of our vendors and suppliers, as well as our ability to restore production to normal
levels.
The impact of COVID-19 on
our business, financial condition, and results of operations include, but are not limited to, the following:
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(a variant of Covid) since January 2022 also adversely affected our business. Our headquarters (Shenzhen) and our factory (Guizhou),
located in China, have suffered strict quarantine measures and lockdown. In particular, from March 2022 until now, its headquarters
(Shenzhen) and its factory (Guizhou) have experienced quarantine-related shutdowns for about 15 business days and 10 business days,
respectively. About one-third of the Company’s employees from each department experienced quarantine periods ranging from 3
days to 17 days. Our logistics channels were also negatively impacted by the outbreak of Omicron and the quarantine and travel restrictions
due to the strict policy. Total revenue for fiscal year ended March 31, 2022 is approximately US$1.7 million less than previously
expected. The Company has suffered delayed orders of about US$4.7 million until since January 2022, which were restarted in September
2022 and are expected to be fully delivered by the Company to the customers by the end of calendar year 2022. |
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We temporarily closed our
offices and manufacturing facility and implemented a work from-home policy beginning in February 2020, as required by relevant PRC
regulatory authorities. Our manufacturing facility in Guizhou was allowed to reopen on February 14, 2020 by the local government.
From mid-February until mid-April, our PRC office and factory have reopened on a limited, transitional basis. Although our PRC
office and factory have since become fully operational, in connection with the temporary PRC closures and lingering effects of the
pandemic since the country has reopened, we implemented a series of cost control procedures, including cutting approximately 45
redundant workers, rescheduling office hours and increasing employees’ unpaid leave to maintain our cash position and cash
flow. The outbreak of Omicron (a variant of Covid) since January 2022 also adversely affected our business. Our headquarters (Shenzhen) and
our factory (Guizhou), located in China, have suffered strict quarantine measures and lockdown. In particular, from March 2022 until now,
its headquarters (Shenzhen) and its factory (Guizhou) have experienced quarantine-related shutdowns for about 15 business days and 10
business days, respectively. About one-third of the Company’s employees from each department experienced quarantine periods ranging
from 3 days to 17 days. |
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On March 24, 2020, the
Indian government ordered a 21-day nationwide lockdown, followed by another order on April 14, 2020 and which was extended until
May 31, 2020 with numerous relaxations which inter alia permitted opening of businesses and offices with certain restrictions. On
May 30, 2020, the Indian government further extended the lockdown in specific areas identified as “containment zones”
until June 30, 2020 and permitted the re-opening of the economy in a phased manner in areas outside the containment zones. The Indian
Ministry of Home Affairs announced that from July 1, 2020 to July 30, 2020, lockdown measures were only imposed in containment zones.
In all other areas, most activities were permitted. From August 1, 2020, night curfews were removed and all inter-and intra-state
travel and transportation was permitted. However, the respective state/union territory governments have been empowered to prohibit
activities in areas outside containment zones or impose such restrictions as deemed necessary to contain the spread of COVID-19,
which has slowed down the rate of resumption of business activities. Due to the lockdown, our operations in India were halted for
several weeks. Since May 11, 2020, we resumed our sales operations in various parts of India (except those falling under containment
zones). While the Indian government lifted the lockdown throughout India and took requisite steps to bring back the Indian economy
on track in early 2021, a second larger outbreak of COVID-19 occurred in India in March 2021. To curb the spread of the virus, various
state governments have announced lockdowns and imposed curbs on movement and economic activities of different time periods. The lockdown
in the capital of India, Delhi has been lifted to a large extent. While the governments of each affected state have commenced easing
the lockdown restrictions, the same may be extended or made stringent to control the spread of COVID-19. Such restrictions on continued
business activities will have a detrimental impact on our business in India. |
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During March 2020 through
June 2020, due to the pandemic outbreak in China and subsequently the national lockdown in India, our business operations, especially
sales and marketing in India, were reduced significantly. During the fiscal year 2021, revenue generated from Do Mobile decreased
approximately RMB11.7 million or 66% compared to the fiscal year 2020. Total Do Mobile shipments were only 107,848 units during the
period, representing a decrease of approximately 62.5% from the fiscal year 2020, and we realized only about 38% of our forecasted
sales plan. We estimate that total revenue loss from Do Mobile was between RMB5 million (US$0.8 million) to RMB7 million (US$1.1
million) in the 2021 calendar year. |
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Our logistics channels have been negatively impacted by the outbreak,
which may delay our products delivery. As a result, our revenue and account receivables outside of India has been negatively impacted
in fiscal year 2021. Some of our orders have been delayed due to nationwide lockdowns in Mainland China, Europe, the United States, South
America and Africa. However, to date, none of these orders have been returned or cancelled. We had no delayed orders excluding India before
October 2020. However, from October 2020 to April 2021, delayed orders started to increase again due to the worsened situation relating
to COVID-19 outside China. Although we had approximately US$1.2 million orders delayed by COVID-19 as of early April 2021, we have managed
to complete all of them and we have no additional orders delayed by COVID-19 as of the date of this annual report. |
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Some of our customers have
been and could continue to be negatively impacted by the outbreak, which may reduce their orders. Our customers may reduce their
future purchases from us if they are not able to complete the manufacture of their products due to the shortage of components from
other suppliers. Although to date, none of our customers have terminated contracts with us, our revenue and income has been and may
continue to be negatively impacted. |
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The situation may worsen
if the COVID-19 outbreak continues. Certain of our customers have requested, and additional 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 are currently working with
customers on finalizing payment schedules and have not experienced significant collection issues so far. We will continue to closely
monitor our collections throughout 2022. |
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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 ordinary shares will decline significantly after the date of this report, in which case you may lose your investment. |
We depend on third party service providers
for logistics and aftersales services, and any failure of our third party service providers to perform may have a material negative impact
on our business.
We outsource all of our transportation
and logistics services, as well as after-sale services, for our products to third-party service providers. We rely on these outsourcing
partners to bring our products to our customers and provide after sale services. While these arrangements allow us to focus on our main
business, they also reduce our direct control over the logistics and aftersales services provided to our customers. Any failure of our
logistics partners to perform may have a material negative impact on the timely delivery of our products and customer satisfaction. In
addition, logistics in our primary locations or transit to final destinations may be disrupted for a variety of reasons including, natural
and man-made disasters, information technology system failures, commercial disputes, military actions or economic, business, labor, environmental,
public health, or political issues. We may also be unable to pass any increase in logistics costs to our customers. Errors that occur
in product maintenance processes can compromise our products and services, adversely affect customer experience, and harm our business.
We rely on outsourcing manufacturers to
produce a majority of our products. If we encounter issues with them, our business and results of operations could be materially and
adversely affected.
We rely on outsourcing manufacturers
to produce a majority of our products. However, the volume of orders designated to a specific manufacturer is likely to vary from year-to-year
and project-to-project, especially since we generally do not enter into exclusive relationship with the manufacturers and we do not have
long-term or fixed-term purchase commitments with any of our outsourcing manufacturers. A major manufacturer in one year may not provide
the same amount of products to us in any subsequent year. The products each manufacturer supplies us may decline or vary our customer
orders change over time. Additionally, our contracts with these manufacturers can be terminated at any time. Therefore, we may not be
able to maintain a long-term cooperative relationship with our outsourcing manufacturers for our existing products. We may also experience
operational difficulties with our outsourcing manufacturers, including reductions in the availability of production capacity, failure
to comply with product specifications, insufficient quality control, failure to meet production deadlines, increases in manufacturing
costs and longer lead time. Our outsourcing manufacturers may experience disruptions in their manufacturing operations due to equipment
breakdowns, labor strikes or shortages, natural disasters, component or material shortages, cost increases, violation of environmental,
health or safety laws and regulations, or other problems. We may be unable to pass the cost increases to our customers. We may have disputes
with our outsourcing manufacturers, which may result in litigation expenses, divert our management’s attention and cause supply
shortages to us. In addition, we may not be able to identify outsourcing manufacturers who are capable of producing new products we target
to launch in the future.
Our expansion into new product categories
and scenarios, and substantial increases in product lines may expose us to new challenges and more risks.
We strive to continue to
expand and diversify our product offerings to cover additional scenarios in the mobile or IoT era. Expanding into new product categories
and scenarios outside of the mobile phone and accessories category, such as to wearable devices, speakers and related consumer electronics
and substantially increasing our product lines involve new risks and challenges. Our potential lack of familiarity with new products
and scenarios and the lack of relevant customer data relating to these products may make it more difficult for us to anticipate user
demand and preferences. We may misjudge market demand, resulting in inventory buildup and possible inventory write-downs. We may not
be able to effectively control our costs and expenses in rolling out these new product categories and scenarios. We may have certain
quality issues and experience higher return rates on new products, receive more customer complaints and face costly product liability
claims, such as injury allegedly or actually caused by our products, which would harm our brand and reputation as well as our financial
performance.
Furthermore, we may need
to price our new products more aggressively to penetrate new markets, and gain market share or remain competitive. It may be difficult
for us to achieve profitability in the new product categories and our profit margin, if any, may be lower than we anticipate, which would
adversely affect our overall profitability and results of operations.
Our international expansion is subject
to a variety of costs and risks and we may not be successful, which could adversely affect our profitability and operating results.
We intend to expand or enter
into new geographic markets, such as the United States and Canada, where we have limited or no experience in marketing, selling our products
and deploying our services. International expansion has required and will continue to require us to invest significant capital and other
resources and our efforts may not be successful. Our expansion may be subject to risks such as: brand awareness, sales and distribution
network, differences in customer preference, political and economic instability, trade restrictions, difficulties in forming and managing
local staff and teams, lesser degrees of intellectual property protection.
The occurrence of any of
these risks could negatively affect our international business and consequently our business and operating results. In addition, the
concern over these risks may also prevent us from entering into or releasing certain of our products in certain markets.
Our use of open source software could materially
adversely affect our business, financial condition, operating results and cash flow.
Certain of our technology
and our suppliers’ technology may contain or may be derived from “open source” software, which, under certain open
source licenses, may offer accessibility to a portion of a product’s source code and may expose related intellectual property to
adverse licensing conditions. Licensing of such technology may impose certain obligations on us if we were to distribute derivative works
of the open source software. For example, these obligations may require us to make source code for derivative works available or license
such derivative works under a particular type of license that is different from what we customarily use to license our technology. While
we believe we have taken appropriate steps and employ adequate controls to protect our intellectual property rights, our use of open
source software presents risks that, if we inappropriately use open source software, we may be required to reengineer our technology,
discontinue the sale of our technology, release the source code of our proprietary technology to the public at no cost or take other
remedial actions, which could adversely affect our business, operating results and financial condition. There is a risk that open source
licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products
or solutions, which could adversely affect our business, operating results and financial condition.
We operate in a rapidly evolving industry.
If we fail to keep up with technological developments and changing requirements of our customers, business, financial condition and results
of operations may be materially and adversely affected.
The mobile industry is rapidly
evolving and subject to continuous technological developments. Our success depends on our ability to keep up with these technological
developments and the resulting changes in customers’ demands. There may also be changes in the industry landscape as different
types of platforms compete with one another for market share. If we do not adapt our software and service platform solutions to such
changes in an effective and timely manner as more mobile operating system platforms become available in the future, we may suffer a loss
in market share. Given that we operate in a rapidly evolving industry, we also need to continuously invest significant resources in research
and development in order to enhance our existing products and to respond to changes in customer preference, new challenges and industry
changes in a timely and effective manner. If we fail to keep up with technological developments and continue to innovate to meet the
needs of our customers, our software and service platform solutions may become less attractive to customers, which in turn may adversely
affect our reputation, competitiveness, results of operations and prospects.
We face intense competition from onshore
and offshore third party software providers in the mobile phone market, and, if we are unable to compete effectively, we may lose customers
and our revenues may decline. The lack of technological development and increase in competition may lead to a decline in our sustainable
growth.
The mobile phone market is
highly fragmented and competitive, and we expect competition to persist and intensify from both existing competitors and new market entrants.
We believe that the principal competitive factors in our industry are reliability and efficiency, performance, product features and functionality,
development complexity and time-to-market, price, support for multiple architectures and processors, interoperability with other systems,
support for emerging industry and customer standards and protocols and levels of training, technical services and customer support.
The market in which we operate
is highly competitive and is subject to frequent changes due to technological improvements and advancements, availability of new and alternative
services and frequently changing client preferences and demands. Our ability to anticipate changes in technology and regulatory standards
and to develop and introduce new and enhanced products successfully on a timely basis will be a significant factor in our ability to grow
and to remain competitive. The development and acquisition of technology requires substantial investments, and we cannot guarantee that
we will be able to achieve the technological advances that may be necessary for us to remain competitive. If we fail to update the technology
used in their handsets, it will be challenging for us to experience sustained growth in both existing and new markets and consequently,
we may lose our market share and revenue.
We may undertake acquisitions, investments,
joint ventures or other strategic alliances in the future, which could expose us to new operational, regulatory and market risks. In addition,
such future undertakings may not be successful, which may adversely affect our business, results of operations, financial condition and
prospects.
We intend to grow both organically
by expanding our current business lines and geographic coverage and through acquisitions, investments, joint ventures or other strategic
alliances if the appropriate opportunities arise. These potential business plans, acquisitions, investments, joint ventures and strategic
alliances may expose us to new operational, regulatory and market risks, as well as risks associated with additional capital requirements.
In addition, we may not be able to identify suitable future acquisition or investment candidates or joint venture or alliance partners.
Even if we identify suitable candidates or partners, we may be unable to complete an acquisition, investment or alliance on terms commercially
acceptable to us. If we fail to identify appropriate candidates or partners, or complete desired acquisitions, investments or alliances,
we may not be able to implement our strategies effectively or efficiently.
In addition, our ability to
successfully integrate acquired companies and their operations may be adversely affected by a number of factors, including, among others,
the ability to capitalize on anticipated synergies, diversion of resources and management’s attention, difficulties in retaining
personnel of the acquired companies, unanticipated problems or legal liabilities and tax and accounting issues. If we fail to integrate
any acquired company efficiently, our earnings, revenues, gross margins, operating margins and business operations could be adversely
affected. The integration of acquired companies is a complex, time-consuming and expensive process.
Security and privacy breaches may expose
us to liability and harm our reputation and business.
As part of our business, we
may receive and process information about our employees, customers and partners, and we may store (or contract with third parties to store)
our customers’ data. There are numerous laws governing privacy and the storage, sharing, use, disclosure and protection of personally
identifiable information and user data. Specifically, personally identifiable and other confidential information is increasingly subject
to legislation and regulations in numerous domestic and international jurisdictions. The regulatory framework for privacy protection in
China and worldwide, including India and the United States, is currently evolving and is likely to remain uncertain for the foreseeable
future. We could be adversely affected if legislation or regulations in China and elsewhere on the world where we have business operations
are expanded to require changes in business practices or privacy policies, or if the relevant governmental authorities in China and elsewhere
on the world where we have business operations interpret or implement their legislation or regulations in ways that negatively affect
our business, financial condition and results of operations.
For example, in the PRC,
governmental authorities have enacted a series of laws and regulations to enhance the protection of privacy and data. The
Civil Code of the PRC (issued by the PRC National People’s Congress on May 28, 2020 and effective from January 1, 2021)
provides legal basis for privacy and personal information infringement claims under the Chinese civil laws. PRC regulators,
including the CAC, the Ministry of Industry and Information Technology, and the Ministry of Public Security, have been increasingly
focused on regulation in data security and data protection. The PRC regulatory requirements regarding cybersecurity are evolving.
For instance, various regulatory bodies in China, including the CAC the Ministry of Public Security and the State Administration for
Market Regulation, have enforced data privacy and protection laws and regulations with varying and evolving standards and
interpretations. On November 7, 2016, the Standing Committee of the PRC National People’s Congress issued the
Cybersecurity Law of the PRC, or Cybersecurity Law, which became effective on June 1, 2017.The Cybersecurity Law is the first PRC
law that systematically lays out the regulatory requirements on cybersecurity and data protection, subjecting many previously
under-regulated or unregulated activities in cyberspace to government scrutiny. The Cybersecurity Law requires network operators to
perform certain functions related to cybersecurity protection and the strengthening of network information management. For instance,
under the Cybersecurity Law, network operators of key information infrastructure, including network operators of key information
infrastructures in public communications and information industry, generally shall, during their operations in the PRC, store the
personal information and important data collected and produced within the territory of the PRC and their purchase of network
products and services that may affect national securities shall be subject to national cybersecurity review. Pursuant to the
Cybersecurity Law, network operators must not, without users’ consent, collect their personal information, and may only
collect users’ personal information necessary to provide their services. Providers are also obliged to provide security
maintenance for their products and services and shall comply with provisions regarding the protection of personal information as
stipulated under the relevant laws and regulations. The legal consequences of violation of the Cybersecurity Law include penalties
of warning, confiscation of illegal income, suspension of related business, winding up for rectification, shutting down the
websites, and revocation of business license or relevant permits.
Further, the Standing Committee of the National
People’s Congress of the PRC promulgated the PRC Data Security Law on June 10, 2021, which became effective from September 1, 2021.
Also, the PRC Personal Information Protection Law was enacted on August 20, 2021, which became effective on November 1, 2021.These two
laws, together with the Cybersecurity Law, form the over-arching framework that governs data protection and cybersecurity in China. The
Cybersecurity Law has a focus on cybersecurity and the protection of the critical information infrastructure, while the PRC Data Security
Law focuses on regulating “important data” and data processing activities that would have an impact on national security.
The PRC Personal Information Protection Law focuses on protecting personal information. See “Item 4. Information on the Company—B.
Business Overview—Regulations—Regulation on Information Security and Censorship.”
Following the
promulgation of the above laws, the PRC governmental authorities have enacted or are in the process of formulating a series of
regulations and policies to enhance the protection of cybersecurity, data security and personal information. On October 29, 2021,
the CAC published the Safety Assessment Measures for Data Outbound Transfer (Draft for Comments). On November 14, 2021, the CAC
published the Regulations of Cyber Data Security Management (Draft for Comments), requiring that, among others, data processors
handling important data or the data processors to be listed overseas to complete an annual data security assessment and file a data
security assessment report to applicable regulators. On December 28, 2021, the CAC and other PRC governmental authorities jointly
released the Measures for Cybersecurity Review, which took effect on February 15, 2022, requiring that, among others, operators of
“critical information infrastructure” or data processors holding over one million users’ personal information
which intends to be listed in a foreign country are subject to a cybersecurity review. On November 14, 2021, the CAC released the
Regulations on Network Data Security (draft for public comments), or the draft Regulations on Network Data Security, which
reiterates that data processors that process the personal information of more than one million users listing in a foreign country
should apply for a cybersecurity review. Currently, the draft Regulations on Network Data Security has been released for public
comment only, and its implementation provisions and anticipated adoption or effective date remains substantially uncertain and may
be subject to change. On July 7 2022, the CAC published the Safety Assessment Measures for Data Outbound Transfer, which took
effect on September 1, 2022. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulation on
Information Security and Censorship.”
Compliance with the Cybersecurity Law, the PRC National
Security Law, the Data Security Law, the Cybersecurity Review Measures, the Personal Information Protection Law, as well as additional
laws and regulations that PRC regulatory bodies may enact in the future, may result in additional expenses to us and subject us to negative
publicity, which could harm our reputation among customers and negatively affect the trading price of our ordinary shares in the future.
As of the date of this annual report, we do not expect that the current PRC laws on cybersecurity or data security would have a material
adverse impact on our business operations and our offering. We do not believe the VIE or the VIE’s subsidiaries are among the “operator
of critical information infrastructure,” “data processor” carrying out data processing activities that affect or may
affect national security, or “operator of network platform” holding personal information of more than one million users as
mentioned above, and we have not been involved in any investigations on cybersecurity or data security initiated by related governmental
regulatory authorities, and we have not received any inquiry, notice, warning, or sanction in such respect.
However, there remains uncertainty as to how these
laws and regulations will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws,
regulations, rules, or detailed implementation and interpretation related to the PRC laws on cybersecurity or data security. We cannot
assure you that PRC regulatory agencies, including the CAC, would take the same view as we do, and we cannot assure you that we will comply
with such regulations in all respects and we may be ordered to rectify or terminate any actions that are deemed illegal by regulatory
authorities or face other penalties, which could materially and adversely affect our business, financial condition, and results of operation.
If any such new laws, regulations, rules, or implementation and interpretation comes into effect, we will take all reasonable measures
and actions to comply with and to minimize the adverse effect of such laws on us.
While we take security measures relating to service
platform solutions, specifically, and our operations, generally, those measures may not prevent security breaches that could harm our
business and we cannot assure you that the measures we have taken or will take are adequate under the Cybersecurity Law and other relevant
laws and regulations. Advances in computer capabilities, inadequate technology or facility security measures or other factors may result
in a compromise or breach of our systems and the data we store and process. Our security measures may be breached as a result of actions
by third parties or employee error or malfeasance. A party who is able to circumvent our security measures or exploit inadequacies in
our security measures, could, among other things, misappropriate proprietary information (including information about our employees, customers
and partners and our customers’ information), cause the loss or disclosure of some or all of this information, cause interruptions
in our operations or our customers’ or expose our customers to computer viruses or other disruptions or vulnerabilities. Any compromise
of our systems or the data it stores or processes could result in a loss of confidence in the security of our service platform solutions,
damage our reputation, disrupt our business, lead to legal liability and adversely affect our financial condition and results of operations.
Moreover, a compromise of our systems could remain undetected for an extended period of time, exacerbating the impact of that compromise.
Actual or perceived vulnerabilities may lead to claims against us by our customers, partners or other third parties, which could be material.
While our customer agreements typically contain provisions that seek to limit our liability, there is no assurance these provisions will
be enforceable and effective under applicable law. In addition, the cost and operational consequences of implementing further data protection
measures could be significant.
We are vulnerable to technology infrastructure
failures, which could harm our reputation and business.
We rely on our technology
infrastructure for many functions, including selling our service platform solutions, supporting our customers and billing, collecting
and making payments. We also rely on our own technology infrastructure, which is located on a third-party site, as well as the technology
infrastructure of third parties, to provide some of our back-end services. This technology infrastructure may be vulnerable to damage
or interruption from natural disasters, power loss, telecommunication failures, terrorist attacks, computer intrusions and viruses, software
errors, computer denial-of-service attacks and other events. A significant number of the systems making up this infrastructure are not
redundant, and our disaster recovery planning is not sufficient for every eventuality. This technology infrastructure is also subject
to break-ins, sabotage and intentional acts of vandalism by internal employees, contractors and third parties. Despite any precautions
we or our third-party partners may take, such problems could result in, among other consequences, interruptions in our services and loss
of data, which could harm our reputation, business and financial condition. We do not carry business interruption insurance sufficient
to protect us from all losses that may result from interruptions in our services as a result of technology infrastructure failures or
to cover all contingencies. Any interruption in the availability of our websites and on-line interactions with customers and partners
would create a large volume of questions and complaints that would need to be addressed by our support personnel. If our support personnel
cannot meet this demand, customer and partner satisfaction levels may fall, which in turn could cause additional claims, reduced revenue,
reputation damage or loss of customers.
We may not be able to continue to use or
adequately protect our intellectual property rights, which could harm our business reputation and competitive position.
We believe that patents, trademarks,
trade secrets, copyright, software registration and other intellectual property we use are important to our business. We rely on a combination
of patent, trademark, copyright, software registration and trade secret protection laws in China, the United States, the Philippines,
Kenya and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property and
brand name. Risks related to mis-branded counterfeit, unlawful copying can lead to security problems, loss of consumer confidence, losing
out on the brand image, reputation and goodwill. Presently, “Do Mobile” is not a registered trademark in India. Any failure
by us to maintain or protect our intellectual property rights, including any unauthorized use of our intellectual property by third parties
or use of “UTime” or “Do Mobile” as a company name to conduct software or services business, may adversely affect
our current and future revenues and our reputation.
In addition, the validity,
enforceability and scope of protection available under intellectual property laws with respect to the mobile and Internet industries in
China, where a significant part of our business and operations are located, are uncertain and still evolving. Implementation and enforcement
of PRC intellectual property-related laws have historically been deficient, ineffective and hampered by corruption and local protectionism.
Accordingly, protection of intellectual property rights in China may not be as effective as in the United States or other countries. Furthermore,
policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or
defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such
litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and
management attention, which could harm our business and competitive position.
We also may be required to
enter into license agreements with certain third parties to use their intellectual property for our business operations. If such third
parties fail to perform under these license agreements or if the agreements are terminated for any reason, our business and results of
operations may be negatively impacted. Furthermore, if we are deemed to be using third parties’ intellectual property without due
authorization, we may become subject to legal proceedings or sanctions, which may be time-consuming and costly to defend, divert management
attention and resources or require us to enter into licensing agreements, which may not be available on commercial terms, or at all.
The international nature of our business
exposes us to risks that could adversely affect our financial condition and results of operations.
We conduct our business
throughout the world in multiple locations. Our corporate structure also spans multiple jurisdictions, with our parent company
incorporated in the Cayman Islands and structured as a holding company and intermediate and operating subsidiaries incorporated in
mainland China, Hong Kong and India. As a result, we are exposed to risks typically associated with conducting business
internationally, many of which are beyond our control. These risks include, among others:
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significant currency fluctuations between the U.S. dollar and other currencies in which we transact business; |
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difficulty in identifying appropriate mobile chipset manufacturers, mobile device OEMs, mobile operators and/or joint venture partners, and establishing and maintaining good relationships with them; |
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legal uncertainty owing to the overlap and inconsistencies of different legal regimes, problems in asserting contractual or other rights across international borders and the burden and expense of complying with the laws and regulations of various jurisdictions; |
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potentially adverse tax consequences, such as scrutiny of transfer pricing arrangements by authorities in the countries in which we operate; |
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adverse effect of inflation and increase in labor costs; |
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current and future tariffs and other trade barriers, including restrictions on technology and data transfers; |
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general global economic downturn; |
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unexpected changes in political environment and regulatory requirements; and |
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terrorist attacks and other acts of violence or war. |
The potential for war or terrorist
attacks may also cause uncertainty and cause our business to suffer in ways that we cannot predict. Our business could also be adversely
affected by the outbreaks of epidemics in China and globally, such as the coronavirus which originated in Wuhan, China at the end of 2019,
Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome, or SARS, or other epidemics. Past occurrences of
epidemics have caused different degrees of damage to the national and local economies in India. A recurrence of an outbreak of any kind
of epidemic could cause a slowdown in the levels of economic activity generally, which may adversely affect our business, financial condition
and results of operations. Should major public health issues, including pandemics, arise, we could be adversely affected by more stringent
employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between
regions, delays in production ramps of new products and disruptions in the operations of our component suppliers.
The occurrence of any of these
events could have a material adverse effect on our results of operations and financial condition.
Furthermore, we are in the
process of implementing policies and procedures designed to facilitate compliance with laws and regulations in various jurisdictions applicable
to us, but there can be no assurance that our employees, contractors or agents will not violate such laws and regulations or our policies.
Any such violations could, individually or in the aggregate, materially and adversely affect our financial condition and operating results.
Inadequacy of skilled personnel may lead
to decline in sales of mobile phones by us.
Competition in our industry
for qualified employees, especially technical employees, is intense, and our competitors directly target our employees from time to time.
We have also experienced employees leaving us to start competing businesses or to join the in-house research and development teams of
our customers. The loss of the technical knowledge and industry expertise of any of these individuals could seriously impede our success.
Moreover, the loss of these individuals, particularly to a competitor, some of which are in a position to offer greater compensation,
and any resulting loss of customers or trade secrets and technological expertise could further lead to a reduction in our market share
and adversely affect our business. If we are required to increase the compensation payable to our qualified employees to compete with
certain competitors with greater resources than we have or to discourage employees from leaving us to start competing businesses, our
operating expenses will increase which, in turn, will adversely affect our results or operations.
Moreover, our sales team plays
a pivotal role in the success of the business of every organization. The unique and important role of sales is to bridge the gap between
the potential customer’s needs and the products/services that the organization offers that can fulfil their needs. Every organization
strives to have best sales team who possess skill set for understanding consumer behavior and consumer needs and excellent communication
skill. Our growth strategy places significant dependence on the experience and the continued efforts of our sales executives. There has
always been dearth of such skilled sales personnel, and we may need to incur significant expenditure for attracting skilled sales personnel
and for retaining its existing sales team. We may not be able to retain our existing sales team or attract and recruit new sales executives
in the future. This may result in drop in sale of mobile handsets and will consequently have an adverse effect on our revenue and sustained
growth.
Our success depends substantially on the
continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.
Our future success heavily
depends upon the continued services of our senior executives and other key employees. In particular, we rely on the expertise, experience,
customer relationships and reputation of Minfei Bao, our founder, chairman and chief executive officer. We currently do not maintain key
man life insurance for any of the senior members of our management team or other key employees. If one or more of our senior executives
or key employees are unable or unwilling to continue in their present positions, it could disrupt our business operations, and we may
not be able to replace them easily or at all. In addition, competition for senior executives and key employees in our industry is intense,
and we may be unable to retain our senior executives and key employees or attract and retain new senior executive and key employees in
the future, in which case our business may be severely disrupted, and our financial condition and results of operations may be materially
and adversely affected.
If any of our senior executives
or key employees joins a competitor or forms a competing company, it may lose customers, know-how and other key employees and staff members
to them. Also, if any of our business development managers, who generally keep a close relationship with our customers, joins a competitor
or forms a competing company, we may lose customers, and our net revenues may be materially and adversely affected. Additionally, there
could be unauthorized disclosure or use of our technical knowledge, practices or procedures by such employees. All of our executives and
key employees have entered into employment agreements with us that contain non-competition provisions, non-solicitation and nondisclosure
covenants. However, if any dispute arises between our executive officers or key employees and us, such non-competition, non-solicitation
and nondisclosure provisions might not provide effective protection to us, especially in China, where most of these executive officers
and key employees reside, in light of the uncertainties with China’s legal system.
We could be impacted by unfavorable results
of legal proceedings, including the pending proceeding against Do Mobile, and may, from time to time, be involved in future litigation
in which substantial monetary damages are sought.
The Company is subject to
various legal proceedings and claims that have arisen in the ordinary course of business, from time to time, and new claims may arise
in the future.
On September 17, 2018, Wukai
Song, the majority shareholder in Bridgetime, filed a complaint with the NCLT against Ekta Grover and Yunchuan Li, the directors of Do
Mobile at the time, alleging mismanagement of corporate affairs, embezzlement of funds and absenting themselves from the management of
Do Mobile. Further, Mr. Song sought the following relief from the NCLT:
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prevent Ms. Grover and Mr. Li from exercising any of their powers as directors of Do Mobile; |
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restrain Ms. Grover and Mr. Li from operating the bank account of Do Mobile and restraining DBS Bank from acting on the instructions of Ms. Grover and Mr. Li; |
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permit the company secretary of Do Mobile to carry out the daily affairs of Do Mobile, which are ordinarily carried out by the directors of a company, until a new board of directors of Do Mobile is constituted and to file an application seeking extension of the date for holding an annual general meeting beyond September 30, 2018; |
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appoint Mr. Amit Kumar and Mr. Huiyun Chen as interim directors of Do Mobile; and |
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direct Ms. Grover and Mr. Li, directors of Do Mobile, to hand over all documents and material related to Do Mobile in their possession, back to Do Mobile and sign all statutory documents and filings to be made for the time period when they were acting as directors of Do Mobile. |
On November 16, 2018 and November
15, 2018, Ms. Grover and Mr. Li, respectively, filed an answer with the NCLT. Further, on November 17, 2018, Mr. Wukai Song filed an application
for interim relief seeking removal of Ms. Grover and Mr. Li from the board of directors of Do Mobile.
On September 30, 2019, the
NCLT issued its interim order, which allowed Mr. Wukai Song to carry out certain statutory compliances of Do Mobile, and the NCLT has
also directed Ms. Grover, director of Do Mobile, to handover the digital signature of directors to Mr. Wukai Song for carrying out said
statutory compliances and undertaking its business pending resolution of the litigation.
Since the litigation involves
Ms. Ekta Grover and Mr. Li Yunchuan, who were the directors of Do Mobile, and who resigned on December 24, 2020 and March 3, 2021 respectively,
such directors could no longer attend to the affairs of Do Mobile. As a result, Do Mobile did not have an effective board and was facing
significant challenges in its daily operation. For instance, Do Mobile was unable to undertake certain corporate actions, such as: (a)
convening and holding board meetings of Do Mobile as mandatorily required under the provisions of the Companies Act, 2013 every year;
(b) convening an annual general meeting where among other things, the Do Mobile shareholders approve and adopt the financial statements
of Do Mobile as required under the Companies Act, 2013; (c) reporting annual compliances with the provisions of the Companies Act, 2013
through various e-forms with the office of the Registrar of Companies, Ministry of Corporate Affairs; (d) submitting an annual report
titled ‘Foreign Liabilities and Assets’ each year as required by companies receiving foreign direct investment and other related
compliances under Foreign Exchange Management Act, 1999; and (e) maintenance of statutory registers as required under various applicable
laws.
Do Mobile was also made a
party to two other matters initiated in connection with the aforesaid matter before the NCLT. These matters, which were filed at Tis Hazari
court (district court) in Delhi, India were (i) Do Mobile Pvt. Ltd. v. DBS Bank Ltd. (civil suit no. 813/2019); and (ii) Ekta Grover v.
Do Mobile India Pvt. Ltd. (civil suit no. 917/2019).
The above-mentioned instances
of non-compliance expose Do Mobile to potential fines and penalties. Do Mobile directors and officers may also be prosecuted for such
non-compliance under the official-in-default doctrine in the Companies Act, 2013, should they fail to undertake their statutory duties
to act in the best interest of Do Mobile.
The litigation against Ekta
Grover and Yunchuan Li is still pending before Delhi Bench of the NCLT and the last date of hearing in this matter was on September 23,
2021. However, the matter could not be taken up on the designated date and has been postponed. The next of date of hearing is yet to be
announced. Do Mobile is awaiting intimation regarding the revised date of hearing in this matter. In order to amicably settle such ongoing
litigation between Do Mobile and its directors, Do Mobile and Ms. Grover have entered into a settlement agreement, dated January 16, 2020
(“Settlement Agreement”). In terms of the Settlement Agreement, Do Mobile and Ms. Grover have arrived at the following understanding:
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Ms. Grover has agreed to withdraw the litigation initiated by her against Do Mobile at the Tis Hazari court. She has also agreed not to file any claim before any tribunal or court against Do Mobile and its officers in future. In furtherance of the aforesaid, Ms. Grover has filed a withdrawal application in relation to the matter of Ekta Grover v. Do Mobile India Pvt. Ltd. (civil suit no. 917/2019) before Tis Hazari Court, New Delhi, India, consequent to which the said matter has been disposed-off as settled/ withdrawn by the Tis Hazari Court, Delhi, India vide its order dated February 23, 2021. |
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Do Mobile has agreed to withdraw the name of Ms. Grover from the ongoing litigation before the NCLT by filing a withdrawal application before the NCLT. Do Mobile has also agreed that it will not file any claim against Ms. Grover pursuant to her resignation from the board of directors of Do Mobile. Mr. Wukai Song (through his authorized representative) filed a withdrawal application before the NCLT on January 21, 2021 requesting it to permit unconditional withdrawal of the petition filed by him against Ms. Grover and Mr. Li in their capacity as the directors of Do Mobile due to his inability to pursue the matter in light of the restrictions imposed due to the COVID-19 pandemic. However, the NCLT has yet to pass an order allowing the application and the requested withdrawal of the petition. |
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In consideration of the settlement so arrived, Do Mobile has issued a post-dated cheque dated April 10, 2020 for INR 5,00,000/- (Indian Rupees Five Lakhs Only) to Ms. Grover towards her full and final settlement of all claims against Do Mobile. However, this cheque could not be en-cashed due to the lockdown. Consequently, Do Mobile issued another cheque for the same amount dated January 10, 2021 which has been en-cashed by Ms. Ekta Grover. |
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Ms. Grover also agreed to cooperate in the appointment of new directors of Do Mobile as recommended by Do Mobile. |
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Do Mobile also agreed to change its registered office, which was situated at 3A/41, First Floor, WEA, Sat Nagar, Karol Bagh, New Delhi, India, to another location. The registered office of Do Mobile is now located at House No. 25, Street No. 7, Goyala Vihar, Near Saint Thomas School, New Delhi – 110071. Necessary filings with the jurisdictional Registrar of Companies have been made in this regard by Do Mobile. |
The matter of Do Mobile Pvt.
Ltd. v. DBS Bank Ltd. (civil suit no. 813/2019) was initiated by Mr. Li in the Tis Hazari district court to seek revival of the authority
granted to him and Ms. Grover to operate the bank account of Do Mobile. Since the dispute regarding the powers of Mr. Li and Ms. Grover
in their capacity as directors of Do Mobile was pending before the NCLT, the district court refused to grant any interim relief to the
then directors of Do Mobile. An application seeking withdrawal of the matter was filed by Do Mobile on April 1, 2021. The court vide its
order dated June 3, 2022 has allowed the application requesting withdrawal of the suit and the matter stands dismissed.
Since the litigation commenced,
all major decisions for Do Mobile have been made by the Company’s group headquarters in Shenzhen, China. Such decisions include
those relating to the type and quantum of products to be released in the market. Furthermore, all sales are being made and the marketing
strategy for Do Mobile is being formulated from the corporate headquarter in Shenzhen, China. However, Do Mobile is making its own decisions
relating to customer acquisition, recruitment of sales forces and office administration.
In order to avoid operational
challenges in Do Mobile on account of ongoing litigation at the NCLT, the Company nominated the following persons to manage the daily
operations of Do Mobile:
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Andy Liu, Vice President of Overseas Department at UTime SZ, managed daily external affairs related to clients, vendors, products, sales & purchase, marketing, business development, etc. from October 2019 until his resignation in August 2020. Since Mr. Liu’s resignation, Mr. Wukai Song has been managing these affairs at Do Mobile. |
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Wukai Song manages daily internal affairs related to finance, human resource, office administration, etc. |
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Do Mobile has also appointed another officer in India, Tarun Garg, to manage the banking and accounting operations of Do Mobile, as its Finance Head with effect from June 1 2020. He is working in close coordination with Shibin Yu, Chief Financial Officer of the Company, and Wendy Long, an accountant from corporate headquarters in Shenzhen, China. In addition to this, Tarun Garg is also assisting Wukai Song in relation to day-to-day operations of the Do Mobile in India. |
In order to avoid
operational challenges due to the on-going litigation in the NCLT, effective December 18, 2020, Do Mobile appointed two new
directors on its board, Mr. Song and Aayushi Gautam. The board of Do Mobile at that point in time consisted of two directors, Mr.
Song and Ms. Gautam. Ms. Grover and Mr. Li both have resigned from their directorship in Do Mobile with effect from December 24,
2020 and March 3, 2021 respectively. Further, one share of Do Mobile which was held by Ms. Grover has been transferred by her to Ms.
Aayushi Gautam. Do Mobile has also appointed Mr. Tarun Garg as its Finance Head, effective June 1, 2020. As a result of the
constitution of a new board of directors, Do Mobile has been able to overcome its operational challenges. Do Mobile appointed Mr. Tarun Garg as an additional director on its
board with effect from August 09, 2022. Thereafter, Ms. Aayushi Gautam resigned from her directorship in Do Mobile with effect from September
10, 2022. At present, the board of Do Mobile consists of two directors, Mr. Song and Mr. Garg.
Regarding the
construction contract dispute between UTime GZ and Guizhou Branch of Guangdong Jian ‘an Fire Electromechanical Engineering
Co., Ltd (“Guangdong Jian’an”), on December 1, 2021, the People’s Court of Honghuagang District of Zunyi
City, Guizhou Province (“Honghuagang Court”) issued the civil judgment (No. (2021) Qian 0302 Min Chu 20364 ), ruling
that the defendant UTime GZ shall pay the amount of RMB 223,0293.46 to the plaintiff Guangdong Jian ‘an within 10 days from
the effective date of the judgment. Utime GZ has appealed to the Intermediate People’s Court of Zunyi City, Guizhou Province
(Zunyi Intermediate Court), on December 24, 2021. On April 25, 2022, the Intermediate People’s Court of Zunyi City issued a
civil ruling (No. (2022) Qian 03 Min Zhong 642). The Zunyi Intermediate Court held that the facts determined in the first instance
were basically unclear and ruled to revoke the civil judgment of No. (2021) Qian 0302 Min Chu 20364. The case was remanded to the
Honghuagang Court for retrial. As of the date of this annual report, the Honghuagang Court has not held a new trial for this
case.
Utime SZ and Dongguan Qinling
Electronic Technology Co., Ltd (“Dongguan Qinling”) had a sales contract dispute case. On September 29, 2020, People’s
Court of Futian District of Shenzhen, Guangdong Province (“Futian Court”) issued the civil judgment (No.(2019)Yue
0304 Min Chu 51640), ruling that the defendant Dongguan Qinling should return the loan amount of RMB 300,000 and pay relevant interest
to the plaintiff Utime SZ within 10 days from the effective date of the judgment. As of the date of this annual report, Dongguan Qinling
has not actually performed the judgment, and has not paid any payment and interest to Utime SZ. Furthermore, the business license of
Dongguan Qinling has been revoked, and it is unable for Dongguan Qinling to perform this judgment for now.
Besides, there is a case
for sales contract dispute between UTime SZ and Jiangsu Jutai Technology Co., Ltd (“Jiangsu Jutai”), which was heard by Futian
Court on Nov 3, 2021. UTime SZ requests the judgment to terminate the Procurement Framework Contract signed with Jiangsu Jutai (Contract
No. CG20201231001), and orders Jiangsu Jutai to pay RMB 100,000 of liquidated damages, RMB 331,629 of compensation for losses, and bear
the litigation costs of this case. As of the date of this annual report, the judgment of the first instance of this case has not been
issued.
Regardless of the merit of
particular claims, litigation may be expensive, time consuming, disruptive to our operations and distracting to management. For instance,
if such litigation against Do Mobile stays pending, there will be no effective board of Do Mobile, which may lead to serious complications
for Do Mobile. Continued non-compliance may impact Do Mobile’s operations negatively, which could result in the imposition of substantial
penalties by the government and lead to prosecution of our management. Therefore, our business operations could be negatively impacted
by unfavorable results of legal proceedings.
In addition, we may from time
to time be involved in future litigation in which substantial monetary damages are sought. Litigation claims may relate to intellectual
property, contracts, employment, securities and other matters arising out of the conduct of our current and past business activities.
Any claims, whether with or without merit, could be time consuming, expensive to defend and could divert management’s attention
and resources. We may maintain insurance against some, but not all, of these potential claims, and the levels of insurance we do maintain
may not be adequate to fully cover any and all losses. Nonetheless, the results of any future litigation or claims are inherently unpredictable,
and such outcomes could have a material adverse effect on our results of operations, cash from operating activities or financial condition.
Compromised product quality of our mobile
products may damage our brand and reputation of and customers could stop using our mobile handsets
Quality of any product plays
a vital role towards its demand and any failure to maintain quality standards may impact sales and revenues. Much of the mobile products
we sell, for instance, the mobile handsets sold by Do Mobile, are being manufactured by third party vendors. Though we conduct frequent
vendor inspections in an effort to ensure that these vendors adhere to our prescribed quality standards; however, there remains an element
of risk about the quality of mobile handsets as we cannot guarantee that our inspections will capture all existing or latent defects.
Our inability to maintain the quality of our products, may materially impact our reputation and business.
We may not be able to successfully sustain
our growth strategy into new geographic markets and innovative consumer electronic products. Inability to effectively manage growth, our
current and planned resources and related issues could materially and adversely affect our business of and impact future financial performance.
We have experienced rapid
growth since we commenced operations. Our rapid expansion may expose us to new challenges and risks. Currently we are not involved in
any other business vertical and are solely dependent upon revenue from its mobile handset business. In the event, our mobile handset vertical
becomes vulnerable due to any unforeseen circumstance or we become unable to successfully augment our existing business of sale of mobile
handsets, then our business and financial condition could material adverse effect. Even if we introduce any new service or product as
a part of its business operations, it may take time to establish in a highly competitive Asian market, hence, there can be no assurance
that we will be able to achieve its intended return on investments.
A further principal component
of our growth strategy is to expand the geographical scope of our business. This growth strategy will require deployment of additional
funds and resources, continued expansion and enhancement of our infrastructure and technology, improvement of our operational and financial
systems and controls, and will also entail procuring additional approvals, permissions and licenses from regulatory authorities. This
will put strain on our funds position and there will always be a requirement of infusion of additional capital. For example, we currently
manage all of our human resources functions with a traditional and basic system and expect that we will need to upgrade our current system
as we continue to increase our headcount. We also need to expand, train and manage our growing employee base. In addition, our management
will be required to obtain, maintain or expand relationships with mobile chipset manufacturers, mobile device OEMs and mobile operators,
as well as other third-party business partners. We cannot assure you that our current and planned personnel, infrastructure, systems,
procedures and controls will be adequate to support our expanding operations. As we enter new markets, such expansion may subject us to
various challenges, including those relating to our lack of familiarity with the culture, legal regulations and economic conditions of
the new regions, difficulties in selection and appointment of distributors, display centers, staffing and managing such operations. The
risks involved in entering new geographical markets may be higher than expected, and we may face significant competition in such markets.
By expanding into new markets, we may be exposed to significant liabilities and could lose some or all of our investment in such regions.
If we fail to manage our expansion effectively, our business, results of operations and prospects may be materially and adversely affected.
Any delay or non-availability of additional capital will also impact our growth curve and may lead to stagnation and loss of business.
Continuous expansion also
involves challenges relating to recruitment, training and retention of human resources of caliber. Failure to train and retain employees
may result in attrition, which will put pressure on us for recruitment, which may also lead to increased human resource costs, which may
also impact our financial position.
We are dependent on raw materials and mobile
device components from off shore entities and from local markets, and an increase in their cost could have an adverse effect on our business.
The stability or variability
in the prices of materials or components depends on various factors which could have an adverse effect on our business and accordingly,
a major fluctuation should not be ruled out in the future. Several components used in handsets sold by us are sourced from offshore companies,
primarily from China. The price and availability of the materials or components depends on several factors beyond our control, including
supplier’s preferability, overall economic conditions, production levels, market demand for such material, production and transportation
cost, duties, taxes and trade restrictions. Any impact on supply of components for any reason whatsoever will have direct impact on our
business.
We have engaged in transactions with related
parties, and such transactions present possible conflicts of interest that could have an adverse effect on our business and results of
operations.
We have entered into a number
of transactions with related parties, including our significant shareholders and directors. For example, we have entered into several
transactions with persons or our Chief Executive Officer, Minfei Bao, where we borrowed funds from him for additional working capital
demand. See “Item 7. Major Shareholders And Related Party Transactions — B. Related Party Transactions — Loans from
Mr. Bao”. We may in the future enter into additional transactions with entities in which members of our board of directors and other
related parties hold ownership interests.
Transactions with related
parties present potential for conflicts of interest, as the interests of related party may not align with the interests of our shareholders.
Although we believe that these transactions were in our best interests, we cannot assure you that these transactions were entered into
on terms as favorable to us as those that could have been obtained in an arms-length transaction. We may also engage in transactions with
related parties in the future. These transactions, individually or in the aggregate, may have an adverse effect on our business and results
of operations or may result in government enforcement actions or other litigation.
We may be adversely affected by product
liability exposure claims.
We face an inherent business
risk of exposure to product liability claims in the event that our products fail to perform to their specifications. In case of any product
liability claim, we may need to incur significant expenditure in defending any such claims. We may incur losses relating to these claims
or the defense of these claims.
We may also be required to
participate in recalls involving our mobile products, if any prove to be defective, or we may voluntarily initiate a recall or make payments
related to such claims as a result of various industry or business practices or the need to maintain good customer relationships. Such
a recall would result in a diversion of resources. Where defective designs or defective components parts cause significant bodily damage
or injury, our liability risks will increase.
We do not maintain product
liability insurance, and to the extent we do obtain such insurance in the future, we cannot assure investors that it will be sufficient
to cover all product liability claims, that such claims will not exceed our insurance coverage limits or that such insurance will continue
to be available on commercially reasonable terms, if at all. Any product liability claim brought against us could have a material adverse
effect on the results of our operations.
Our management and auditors identified material
weaknesses in our internal control over financial reporting that, if not properly remediated, could result in material misstatements in
our consolidated financial statements that could cause investors to lose confidence in our reported financial information and have a negative
effect on the trading price of our ordinary shares.
Prior to
our initial public offering, we were a private company with limited accounting personnel and other resources with which we address our
internal control over financial reporting. In connection with the audits of our consolidated financial statements included in this annual
report, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial
reporting. A “material weakness”
is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
We did not maintain
appropriately designed entity-level controls impacting the control environment, risk assessment procedures, and effective monitoring
controls to prevent or detect material misstatements to the consolidated financial statements. These deficiencies were attributed
to: (i) our lack of sufficient qualified financial reporting and accounting personnel with an appropriate knowledge under accounting
principles generally accepted in the United States (“U.S. GAAP”), and (ii) our lack of comprehensive accounting policies
and procedures manual in accordance with U.S. GAAP. We are taking remedial measures to improve the effectiveness of our controls,
including by hiring additional accounting and finance personnel and by seeking to engage an outside consultant. The existence of
material weaknesses is an indication that there is a more than remote likelihood that a material misstatement of our financial
statements will not be prevented or detected in a future period, and the process of designing and implementing effective internal
controls and procedures will be a continual effort that may require us to expend significant resources to establish and maintain a
system of controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures
we take will be sufficient to remediate the material weaknesses identified by our management and Audit Alliance LLP or that we will
implement and maintain adequate controls over our financial processes and reporting in the future in order to avoid additional
material weaknesses or controlled deficiencies in our internal control over financing reporting. If our remediation efforts are not
successful or other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial
results accurately or on a timely basis, which could cause our reported financial results to be materially misstated and result in
the loss of investor confidence and cause the trading price of our ordinary shares to decline. Moreover, ineffective controls could
significantly hinder our ability to prevent fraud.
Our internal controls over financial reporting
may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which
could have a significant and adverse effect on our business and reputation.
We will be in a continuing process of developing, establishing, and maintaining internal controls and procedures
that will allow our independent registered public accounting firm to attest to, our internal controls over financial reporting if and
when required to do so under Section 404 of the Sarbanes-Oxley Act. Although our independent registered public accounting firm is not
required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley
Act until the date we are no longer an emerging growth company and neither a large accelerated filer nor an accelerated filer, our management
will be required to report on our internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act. If we fail to
achieve and maintain the adequacy of our internal controls, we would not be able to conclude on an ongoing basis that we have effective
internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. At such time, our independent registered
public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented,
designed or operating. Moreover, our testing, or the subsequent testing by our independent registered public accounting firm, may reveal
other material weaknesses or that the material weaknesses described above have not been fully remediated. If we do not remediate the material
weaknesses described above, or if other material weaknesses are identified or we are not able to comply with the requirements of Section
404 of the Sarbanes-Oxley Act in a timely manner, our reported financial results could be materially misstated or could subsequently require
restatement, we could receive an adverse opinion regarding our internal controls over financial reporting from our independent registered
public accounting firm and we could be subject to investigations or sanctions by regulatory authorities, which would require additional
financial and management resources, and the market price of our ordinary shares could decline.
We are subject to various anti-corruption
and anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, and U.K., PRC and Indian anti-corruption
and anti-bribery laws; any determination that we have violated such laws could damage our business and reputation, limit our ability to
bid for certain business opportunities, and subject us to significant criminal and civil penalties, civil litigation (such as shareholder
derivative suits), and commercial liabilities.
We are subject to anti-corruption
and anti-bribery laws in the United States, United Kingdom, China, and India that prohibit certain improper payments made directly or
indirectly to government departments, agencies, and instrumentalities; officials of those government departments, agencies, and instrumentalities;
political parties and their officials; candidates for political office; officials of public international organizations; persons acting
on behalf of the foregoing; and commercial counterparties. These laws include the U.S. Foreign Corrupt Practices Act, the PRC Criminal
Law, the PRC Anti-Unfair Competition Law, the Prevention of Corruption Act 1988 of India, the Indian Penal Code, 1860, the Prevention
of Money Laundering Act, 2002 and anti-corruption laws in various Indian states.
We are engaged in business
in a number of countries that are regarded as posing significant risks of corruption. Of particular note, we conduct operations, have
agreements with state-controlled enterprises and other third parties and make sales in the PRC, and we have research and development activities
in India, each of which may be exposed to corruption risk. It is our policy to implement safeguards and procedures to prohibit these practices
by our employees, officers, directors, or by third parties acting on our behalf. However, we cannot rule out the risk that any of our
employees, officers, directors, or third parties acting on our behalf may engage in breaches of our policies or anti-corruption laws,
for which we might be held responsible.
Allegations of violations
of these anti-corruption and anti-bribery laws, and investigation into such allegations, could negatively affect our reputation, business,
operating results, and financial condition. The violation of these laws may result in substantial monetary and even criminal sanctions,
follow-on civil litigation (such as shareholder derivative suits), and monitoring of our compliance program by the United States or other
governments, each of which could negatively affect our reputation, business, operating results, and financial condition. In addition,
the United States or other governments may seek to hold us liable for violations of these laws committed by companies in which we invest
or acquire.
The agreements governing the loan facilities
we currently have contain restrictions and limitations that could significantly affect our ability to operate our business, raise capital,
as well as significantly affect our liquidity, and therefore could adversely affect our results of operations.
We have incurred certain indebtedness
under loan facilities with various lenders including Shenzhen Rural Commercial Bank (“SRCB”) and China Resources Bank of Zhuhai
Co., Ltd (“CRBZ”).
Covenants governing our loan
facilities with SRCB and CRBZ restrict, among other things, our ability to:
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incur or permit to exist any additional indebtedness; |
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guarantee or otherwise become liable with respect to the obligations of another party or entity; |
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acquire any assets, except in the ordinary course of business, or make any investments; |
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use the loan hereunder for investment in fixed assets or equity, or for investment in securities or futures market; and |
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complete a merger, division, transfer of equity and creditor’s rights, external investment, material increase of debt financing, or a sale of all or substantially all of our assets. |
We have been subject to certain
financial covenants from our lenders. Our credit agreements with SRCB require us to meet certain monthly revenue targets, each for a term
of three years. These credit agreements require us to maintain monthly revenue at least RMB3.0 million (US$0.5 million). Such monthly
revenue amounts shall be deposited into an account established by UTime SZ and under the supervision of SRCB. UTime SZ may withdraw funds
from such account only after ensuring that the applicable principal and interest of the SRCB loans are paid off as they become due on
a monthly basis. Apart from the aforementioned restriction, UTime SZ is able to fully control the funds in the supervision account. However,
if UTime SZ fails to meet the minimum monthly revenue covenant in the credit agreement, SRCB shall have the right to raise the
interest rate by 50% from the date of funding (i.e. July 16, 2021) or to accelerate the loan.
In addition to the above-mentioned
financial covenants, the SRCB and CRBZ loan documents contain customary events of default, including but not limited to: non-payment of
principal, interest and fees or other amounts; violation of covenants; inaccuracy of representations and warranties; and certain bankruptcy
and other insolvency events. If UTime SZ is in breach of any of these credit agreements, the applicable lender shall have the right to
dispose of the collateral in accordance with the law.
Our ability to comply
with these and other provisions under our outstanding loans may be affected by events beyond our control. Although as of the date of
this annual report, we believe we are in compliance with all of our loan covenants, such covenants and obligations are ongoing, and
the breach of any such covenants or obligations not otherwise waived or cured could result in a default under the applicable debt
obligations and could trigger acceleration of those obligations.
Any defaults under our loan
arrangements could adversely affect our growth, our financial condition, our results of operations and our ability to make payments on
our debt. The ability to make payments of principal and interest on indebtedness will depend on our financial condition, which is subject
to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are
beyond our control. If sufficient cash flow is not generated from operations to service such debt, we may be required, among other things,
to:
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seek additional financing in the debt or equity markets; |
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delay, curtail or abandon altogether our research & development or investment plans; |
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refinance or restructure all or a portion of our indebtedness; or |
Such measures might be insufficient
to service the indebtedness. In addition, any such financing, refinancing or sale of assets may not be available on commercially reasonable
terms, or at all. In addition, we may not be able to grow market share, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could negatively impact our business, operating results and financial condition.
Defaults under either of our loan agreements
with each of SRCB and CRBZ could result in a substantial loss of our assets.
Historically, we have mortgaged
our assets to obtain loans with various banking institutions. We have mortgaged our office owned by UTime SZ and pledged accounts receivables
equal to RMB22,500,000 (US$3.5 million) owned by UTime SZ under our credit agreement with CCB, which was terminated in November 2020.
Additionally, we have mortgaged our office owned
by UTime SZ under our credit agreement with CRBZ. See “Item 5. Operating And Financial Review And Prospects— Liquidity and
Capital Resources — Financing Activities.”
A failure to repay any of
the indebtedness under either of our loan agreements with SRCB or CRBZ as they become due or to otherwise comply with the covenants contained
in any of such agreements could result in an event of default thereunder. If not cured or waived, an event of default under any of such
agreements could enable the lender thereunder to declare all borrowings outstanding on such debt, together with accrued and unpaid interest
and fees, to be due and payable and terminate all commitments to extend further credit. Such lenders could also elect to foreclose on
our assets securing such debt. In such an event, the Company may not be able to refinance or repay all of its indebtedness, pay dividends
or have sufficient liquidity to meet operating and capital expenditure requirements. Any such acceleration could cause us to lose a substantial
portion of our assets and will substantially adversely affect our ability to continue our operations.
Controversies affecting China’s trade
with the United States could harm our operations.
In July 2018 and again in
September 2018, the United States imposed tariffs on a wide range of products and other goods from China. In May 2019, negotiations on
tariffs and other trade matters between the United States and China came to a halt, and both sides escalated the trade dispute. In June
2019, trade talks resumed between the United States and China, and the United States indicated it would not impose additional tariffs
at this time. Although negotiation resumed in the second half of 2019 between the United States and China and the two countries reached
a trade deal in January 2020, it is possible the United States will impose additional tariffs. Given our major manufacturing in China,
the imposition of tariffs by the United States presents negative effect for us. Tariffs that have already been announced and implemented
have covered certain of our products. The trade controversy between the United States and China is still evolving, and we cannot predict
future trade policy. However, future tariffs could cover more or all of our products, resulting in an adverse effect on our operations,
including customer demand from the United States.
Risks Related to Our Corporate Structure
We are a holding company, and will rely
on dividends paid by our subsidiaries for our cash needs. Any limitation on the ability of our subsidiaries to make dividend payments
to us, or any tax implications of making dividend payments to us, could limit our ability to pay our parent company expenses or pay dividends
to holders of our ordinary shares.
We are a holding company and
conduct substantially all of our business through our operating subsidiaries, including limited liability companies established in China
and in India. We will rely on dividends paid by our subsidiaries for our cash needs, including the funds necessary to pay dividends and
other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses.
We rely on dividends and other
distributions on equity paid by our PRC Subsidiary to fund any cash and financing requirements we may have, and any limitation on the
ability of our PRC Subsidiary to make payments to us could have a material adverse effect on our ability to conduct our business. If our
PRC Subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends
or make other distributions to us. Under PRC laws and regulations, our PRC Subsidiary, which is a wholly foreign-owned enterprise, may
pay dividends only out of its accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition,
a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund
a certain statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered capital. Such reserve funds cannot
be distributed to us as dividends. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits
based on PRC accounting standards to an enterprise expansion fund, or a staff welfare and bonus fund.
Our PRC Subsidiary generates
primarily all of its revenue in Renminbi, which is not freely convertible into other currencies. As result, any restriction on currency
exchange may limit the ability of our PRC Subsidiary to use its Renminbi revenues to pay dividends to us. The PRC government may continue
to strengthen its capital controls, and more restrictions and substantial vetting process may be put forward by State Administration of
Foreign Exchange (the “SAFE”) for cross-border transactions falling under both the current account and the capital account.
Any limitation on the ability of our PRC Subsidiary to pay dividends or make other kinds of payments to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund
and conduct our business.
In addition, the Enterprise
Income Tax Law and its implementation rules provide that a withholding tax rate of up to 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. Any limitation
on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability
to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
With respect to Do Mobile,
our Indian subsidiary, any limitation on declaration and payment of dividend may create a barrier for us to meet our cash and financing
requirements and this could have a material adverse effect on our ability to conduct our business. As per the extant provisions of Indian
laws and regulations, our Indian subsidiary (being a wholly foreign owned company), may pay dividends only out of its profits from the
current year or previous years or its free reserves subject to the treatment and adjustment prescribed in applicable Indian law, i.e.,
the Companies Act, 2013. Pursuant to applicable Indian taxation law until March 31, 2020, it was necessary for our Indian subsidiary to
pay tax on the dividend declared and distributed to the shareholders and, a non-resident shareholder of an Indian company was not liable
to pay any tax in India on the dividends received by it. However, Finance Act, 2020 (which became effective on April 1, 2020) amends certain
provisions relating to taxation of dividends declared by Indian companies, and provides that any distribution of dividend from April 1,
2020 onwards will only be subject to tax in the hands of the recipient shareholder and the Indian companies are not required to pay any
tax on the dividend declared and distributed to the shareholders. Furthermore, non-resident shareholders would now be paying tax on the
dividend income as per the rate prescribed under the relevant double taxation avoidance agreements or Indian law, whichever is more beneficial.
The said amendments shall entitle foreign investors to claim credit in their country of residence of tax paid in India in respect of dividend
distributed by domestic companies. The change in the tax regime by Indian Government regarding payment of taxes may increase tax burden
in the hands of the parent company of our Indian Subsidiary.
Minfei Bao, our founder, chairman and chief
executive officer, as well as Min He, one of our directors, will continue to have significant influence over us after our initial public
offering, including control over decisions that require the approval of shareholders, which could limit your ability to influence the
outcome of matters submitted to shareholders for a vote.
As of the date of this annual
report, Minfei Bao beneficially owns 4,380,000 of our ordinary shares, or 52.98% of our issued and outstanding ordinary shares, through
Grandsky Phoenix Limited, a British Virgin Islands company, of which Mr. Bao controls 100% of the equity interest. As of the date of this
annual report, Min He, one of our directors, beneficially owns 137,793 of our ordinary shares, or 1.66% of our issued and outstanding
ordinary shares through HMercury Capital Limited, a British Virgin Islands company, of which Mr. He is the controlling shareholder. As
long as Mr. Bao owns or controls a significant amount of our outstanding voting power of our ordinary shares, Mr. Bao, or Mr. Bao and
Mr. He, if they act together, has or have the ability to exercise substantial control over all corporate actions requiring shareholder
approval, irrespective of how our other shareholders may vote, including:
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the election and removal of directors and the size of our board of directors; |
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any amendment of our memorandum or articles of association; or |
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the approval of mergers, consolidations and other significant corporate transactions, including a sale of substantially all of our assets. |
Moreover, beneficial ownership
of our ordinary shares by Mr. Bao may also adversely affect the trading price of our ordinary shares on Nasdaq to the extent investors
perceive disadvantages in owning shares of a company with a controlling shareholder. As a result, this concentration of ownership may
not be in the best interests of our other shareholders.
We are a “controlled company”
within the meaning of Nasdaq’s Rules and, as a result, may rely on exemptions from certain corporate governance requirements that
provide protection to shareholders of other companies.
We are a “controlled
company” as defined under Nasdaq’s Rules because Mr. Bao holds more than 50% of our voting power, and we continue to be a
controlled company upon completion of our initial public offering. For so long as we remain a controlled company under that definition,
we are permitted to elect to rely, and may rely, on certain exemptions from the obligation to comply with certain corporate governance
requirements, including:
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the requirement that our directors must be selected or recommended solely by independent directors; and |
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the requirement that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. |
As a result, you will not
have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the
NASDAQ Stock Market Rules, if we utilize such exemptions. We currently do not intend to utilize the controlled company exemptions. To
the extent we cease to qualify as a controlled company, we will no longer be able to rely on any of these exemptions.
Change in the tax regime in India will increase
tax burden on us.
Bridgetime Limited holds 99.99%
shareholding in Do Mobile in India. Until March 31, 2020, a non-resident shareholder of an Indian company was not liable to pay any tax
in India on the dividends received by it. However, with the introduction of the Finance Act, 2020 (which became effective from April 1,
2020), non-resident shareholders will now be paying tax on the dividend income distributed by an Indian company from April 1, 2020 onwards
as per the rate prescribed under the relevant double taxation avoidance agreements or Indian law, whichever is more beneficial. Accordingly,
this will increase tax burden on Bridgetime Limited. Further, there are number of taxes and other levies imposed at the level of the Central
Government and State Government in India. In addition to income tax, it includes: (i) goods and service tax; (ii) stamp duty charges;
and (iii) surcharges and cess. These tax rates may increase in future creating more financial burden on Do Mobile and may affect the overall
tax efficiency of Do Mobile. Additional tax exposure could adversely affect its business and results of operations.
We may become subject to taxation in the
Cayman Islands, which would negatively affect our results.
We have received an undertaking
from the Financial Secretary of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Act (As Revised) of the Cayman
Islands, until the date falling 20 years after October 15, 2018, being the date of such undertaking, no law which is enacted in the Cayman
Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to us or our operations and, in addition,
that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall
be payable (i) on or in respect of the shares, debentures or other obligations of our company or (ii) by way of the withholding in whole
or in part of a payment of dividend or other distribution of income or capital by our company to its members or a payment of principal
or interest or other sums due under a debenture or other obligation of our company. If we otherwise were to become subject to taxation
in the Cayman Islands, our financial condition and results of operations could be materially and adversely affected. See “Item 10.E.
Taxation — Cayman Islands Taxation”.
We are subject to various changing laws
and regulations regarding regulatory matters, corporate governance and public disclosure that have increased both our costs and the risk
of non-compliance.
We are subject to rules and
regulations by various governing bodies, including, for example, the SEC, which is 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.
Because we are incorporated under the laws
of the Cayman Islands, you may face difficulties in protecting your interests, and your ability to protect your rights through the U.S.
Federal courts may be limited.
We are a Cayman Islands exempted
company with limited liability and substantially all of our assets will be located outside the United States. In addition, most of our
directors and officers are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their
assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United
States upon us or our directors or executive officers, or enforce judgments obtained in the United States courts against us or our directors
or officers.
Further, mail addressed to
us and received at our registered office will be forwarded unopened to the forwarding address supplied by our directors. Our directors
will only receive, open or deal directly with mail which is addressed to them personally (as opposed to mail which is only addressed to
us). We, our directors, officers, advisors or service providers (including the organization which provides registered office services
in the Cayman Islands) will not bear any responsibility for any delay, howsoever caused, in mail reaching this forwarding address.
Our corporate affairs are
governed by our amended and restated memorandum and articles of association, the Companies Act (As Revised) (as the same may be supplemented
or 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 responsibilities of our directors to us under Cayman Islands law are to a large extent
governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from judicial precedent in the
Cayman Islands as well as from English common law, the decisions of whose courts are of persuasive authority, but are not technically
binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman
Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States.
In particular, the Cayman Islands has a less exhaustive body of securities laws as compared to the United States, and certain states,
such as Delaware, have more fulsome and judicially interpreted bodies of corporate law. As a result, there may be significantly less protection
for investors than is available to investors in companies organized in the United States, particularly Delaware. In addition, Cayman Islands
companies may not have standing to initiate a shareholders’ derivative action in a Federal court of the United States.
The Cayman Islands courts
are also unlikely:
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to recognize or enforce against us judgments of courts of the United States based on the civil liability provisions of United States securities laws; and |
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to impose liabilities against us, in original actions brought in the Cayman Islands, based on the civil liability provisions of United States securities laws that impose liabilities that are penal in nature. |
In those circumstances, although
there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will
recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the
principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment
has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be
final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands
judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be of a kind the enforcement
of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be
held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought
elsewhere.
Like many jurisdictions in
the United States, in certain circumstances Cayman Islands law permits mergers and consolidations between Cayman Islands companies and
between Cayman Islands companies and non-Cayman Islands companies (provided that is facilitated by the laws of that other jurisdiction)
and any such company may be the surviving entity for the purposes of mergers or the consolidated company for the purposes of consolidations.
For these purposes, (a) “merger” means the merging of two or more constituent companies and the vesting of their undertaking,
property and liabilities in one of such companies as the surviving company and (b) a “consolidation” means the combination
of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and liabilities of such
companies to the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must
approve a written plan of merger or consolidation, which must, in most instances, then be authorized by a special resolution (usually
a majority of 66 2/3% in value) of the shareholders of each constituent company and such other authorization, if any, as may be specified
in such constituent company’s articles of association. A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries
does not require authorization by a resolution of shareholders provided a copy of the plan of merger is given to every member of each
subsidiary company to be merged (unless waived by such member). For this purpose a subsidiary is a company of which at least 90% of the
votes cast at its general meeting are held by the parent company. The consent of each holder of a fixed or floating security interest
over a constituent company is required unless this requirement is waived by a court in the Cayman Islands. The plan of merger or consolidation
must be filed with the Registrar of Companies who, if satisfied that the requirements of the Companies Act (As Revised) which includes
certain other formalities, have been complied with, will register it. The filing must include a declaration as to the solvency of the
consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a copy of
the certificate of merger or consolidation will be given to the members and creditors of each constituent company and published in the
Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their shares (which, if not agreed between
the parties, will be determined by the Cayman Islands court) if they follow the required procedures, subject to certain exceptions. Court
approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures.
In addition, there are statutory
provisions that facilitate the reconstruction and amalgamation of companies in certain circumstances, provided that the arrangement is
approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in
addition represent two-thirds in value of each such class of shareholders or creditors, as the case may be, that are present and voting
either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the
arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the
court the view that the transaction ought not be approved, the court can be expected to approve the arrangement if it determines that:
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the company is not proposing to act illegally or beyond the scope of its corporate authority and the statutory provisions as to the required majority vote have been met; |
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the shareholders have been fairly represented at the meeting in question, the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class and that the meeting was properly constituted; |
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the arrangement is such that it may reasonably be approved by an intelligent and honest man of that share class acting in respect of his interest; and |
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the arrangement is not one which would be more properly sanctioned under some other provision of the Companies Act, or that would amount to “fraud on the minority.” |
If the arrangement and reconstruction
is approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available
to dissenting shareholders of U.S. corporations, providing rights to receive payment in cash for the judicially determined value of the
shares.
In addition, there are further
statutory provisions to the effect that, when a take-over offer is made and approved by holders of 90.0% in value of the shares affected
(within four months after the making of the offer), the offeror may, within two months following the expiry of such period, require the
holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the
Cayman Islands, but this is unlikely to succeed unless there is evidence of fraud, bad faith, collusion or inequitable treatment of shareholders.
Further, transactions similar
to a merger, reconstruction and/or an amalgamation may in some circumstances be achieved through other means to these statutory provisions,
such as a share capital exchange, asset acquisition or control, through contractual arrangements, of an operating business.
As a result of all of the
above, 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 U.S. company.
Provisions of our amended and restated memorandum
and articles of association or Cayman Islands law could delay or prevent an acquisition of our company, even if the acquisition may be
beneficial to our shareholders, could make it more difficult for you to change management, and could have an adverse effect on the market
price of our ordinary shares.
Provisions in our amended
and restated memorandum and articles of association may discourage, delay or prevent a merger, acquisition or other change in control
that shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares.
In addition, these provisions may frustrate or prevent any attempt by our shareholders to replace or remove our current management by
making it more difficult to replace or remove our board of directors. Such provisions may reduce the price that investors may be willing
to pay for our ordinary shares in the future, which could reduce the market price of our ordinary shares. These provisions include:
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a prohibition on shareholder action through written consent; |
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a requirement that extraordinary general meetings of shareholders be called only by a majority of the board of directors or, in limited circumstances, by the board upon shareholder requisition; |
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an advance notice requirement for shareholder proposals and nominations to be brought before an annual general meeting; |
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the authority of our board of directors to issue preference shares with such terms as our board of directors may determine; and |
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a requirement of approval of not less than two-thirds of the votes cast by shareholders entitled to vote thereon in order to amend any provisions of our amended and restated memorandum and articles of association. |
UTime Limited is a holding company with
no material operation. We conduct substantially all of our operations through the VIE and its subsidiaries, and we rely on contractual
arrangements with the VIE and its shareholders to operate our business. If the PRC government deems that the agreements that establish
the structure for operating some of our operations in China do not comply with PRC regulations relating to the relevant industries, or
if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be
forced to relinquish our interests in those operations.
We are a holding company incorporated
in the Cayman Islands and our PRC Subsidiary is considered foreign-invested enterprise. As a holding company with no material operations
of our own, we conduct a substantial majority of our operations through the VIE and its subsidiaries. In December 2018, UTime HK established
a wholly owned subsidiary in China, UTime WFOE, our wholly-owned foreign enterprise (“WFOE”). In March 2019, we obtained control
over UTime SZ via UTime WFOE by entering into a series of contractual arrangements with UTime SZ, our VIE, and its shareholder. In August
2019, the amended and restated contractual agreements were entered into among UTime SZ, our VIE, and its shareholders, which were further
amended and restated in September 2019.
UTime WFOE has entered into
a series of contractual arrangements with our VIE and its shareholders, respectively, which enable us to (i) determine the most significant
economic activities of the VIE, (ii) receive substantially all of the economic benefits of our VIE, and (iii) have an exclusive option
to purchase all or part of the equity interests and assets in our VIE when and to the extent permitted by PRC laws. As a result of these
contractual arrangements, we have control over and are considered the primary beneficiary of our VIE for accounting purposes and hence
consolidate its financial results into our consolidated financial statements under U.S. GAAP. See “Item 4A. — History and
Corporate Structure — Contractual Arrangements with the VIE and its Respective Shareholders” for further details.
In the opinion of B&D
Law Firm, our PRC legal counsel, (i) the ownership structures of the VIE in China and UTime WFOE, both currently and immediately after
giving effect to our initial public offering, comply with all existing PRC laws and regulations; and (ii) the contractual arrangements
between UTime WFOE, our VIE and its shareholders governed by PRC law are valid, binding and enforceable, and will not result in any violation
of PRC laws or regulations currently in effect. However, our PRC legal counsel has also advised us that there are substantial uncertainties
regarding the interpretation and application of current and future PRC laws, regulations and rules. The contractual arrangements have
not been tested in a court of law. Accordingly, the PRC regulatory authorities may ultimately take a view that is contrary to the opinion
of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to the VIE structure will be adopted or if
adopted, what they would provide. If we or our VIE is found to be in violation of any existing or future PRC laws or regulations, or fail
to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to
take action in dealing with such violations or failures, including:
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revoking the business license and/or operating licenses of our WFOE or our VIE; |
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discontinuing or placing restrictions or onerous conditions on our operations through any transactions between our WFOE and our VIE; |
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imposing fines, confiscating the income from our WFOE or our VIE, or imposing other requirements with which we or our VIE 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 VIE and deregistering the equity pledges of our VIE, which in turn would affect our ability to consolidate, derive economic interests from, or determine the most significant economic activities of the VIE; or |
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restricting or prohibiting our use of the proceeds of our initial public offering to finance our business and operations in China. |
Furthermore, new PRC laws,
rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate structure and contractual
arrangements. See “Risks Related to Our Corporate Structure—Substantial uncertainties exist with respect to the interpretation
and implementation of the newly enacted PRC Foreign Investment Law and its Implementation Regulations and how they may impact the viability
of our current corporate structure, corporate governance, business operations and financial results.” Occurrence of any of these
events could materially and adversely affect our business and financial condition and results of operations.
The imposition of any of these
penalties would result in a material and adverse effect on our ability to conduct our business and the market price of our ordinary shares.
In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results
of our VIE in our consolidated financial statements, if the PRC government authorities were to find our legal structure and contractual
arrangements to be in violation of PRC laws and regulations, or if these regulations change or are interpreted differently in the future.
If the imposition of any of these government actions causes us to lose our right to direct the activities of our VIE or our right to receive
substantially all the economic benefits and residual returns from our VIE and we are not able to restructure our ownership structure and
operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our VIE in our consolidated financial
statements, which may cause the value of our ordinary shares to significantly decline or even become worthless. Either of these results,
or any other significant penalties that might be imposed on us in this event, would have a material change in our operation and a material
adverse effect on our financial condition and results of operations, could significantly limit or completely hinder our ability to offer
ordinary shares to investors and could cause the value of our ordinary shares to significantly decline or be worthless.
We do not hold direct equity interest in
the VIE. We rely on contractual arrangements with our VIE and its shareholders for a large portion of our business operations, which may
not be as effective as direct ownership in providing operational control.
UTime Limited is a
Cayman Islands holding company and does not hold direct equity interest in the VIE. We have relied and expect to continue to rely on
contractual arrangements with our VIE and its shareholders to conduct certain of our key businesses. These contractual arrangements
may not be as effective as the control provided by having a direct ownership in our VIE. For example, our VIE and its 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. We have no direct or indirect equity interests in the VIE or any of its subsidiaries.
If we had direct ownership
of our VIE, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIE, 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 VIE and its shareholders of their obligations under the contracts
to exercise control over our VIE. The shareholders of our consolidated VIE 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 portions
of our business through the contractual arrangements with our VIE. All of these contractual arrangements are governed by PRC law and provide
for the resolution of disputes through arbitration in the PRC. The legal environment in the PRC is not as developed as in some other jurisdictions,
such as the United States. If any disputes relating to these contracts remains unresolved, we will have to enforce our rights under these
contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings and therefore will be subject to
uncertainties in the PRC legal system. In the event we are unable to enforce these contractual arrangements, we may not be able to determine
the most significant economic activities of the VIE and we may be precluded from operating our business, which would have a material adverse
effect on our financial condition and results of operations. Therefore, our contractual arrangements with our VIE may not be as effective
in ensuring our control over the relevant portion of our business operations as direct ownership would be. If we are unable to assert
our contractual control rights over the assets of the VIE that conduct all or substantially all of our operations, our ordinary shares
may decline in value or become worthless.
We may not be able to consolidate the financial
results of some of our affiliated companies or such consolidation could materially adversely affect our operating results and financial
condition.
A substantial majority of
our business is conducted through UTime SZ, which currently is considered for accounting purposes as a VIE, and we are considered as the
primary beneficiary, enabling us to consolidate our financial results in our consolidated financial statements. In the event that in the
future the VIE would no longer meet the definition of a VIE, or we are deemed not to be the primary beneficiary, we would not be able
to consolidate line by line the VIE’s financial results in our consolidated financial statements for PRC purposes. Also, if in the
future an affiliate company becomes a VIE and we become the primary beneficiary, we would be required to consolidate that entity’s
financial results in our consolidated financial statements for PRC purposes. If such entity’s financial results were negative, this
could have a corresponding negative impact on our operating results for PRC purposes. However, any material variations in the accounting
principles, practices, and methods used in preparing financial statements for PRC purposes from the principles, practices, and methods
generally accepted in the United States and in the SEC accounting regulations must be discussed, quantified, and reconciled in financial
statements for the United States and SEC purposes.
Any failure by our VIE or its shareholders
to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.
We refer to the shareholders
of our VIE as its nominee shareholders because although they remain the holders of equity interests on record in our VIE, pursuant to
the terms of the relevant power of attorney, such shareholders have irrevocably authorized our WFOE or any individual duly appointed by
WFOE to exercise their rights as a shareholder of the relevant VIE. However, if our VIE or its 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 laws, 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 VIE refuse to transfer
their equity interest in our VIE to us or our designee if we exercise the purchase option pursuant to these contractual arrangements,
or if they otherwise act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.
Our contractual arrangements are governed
by PRC laws. Accordingly, these contracts would be interpreted in accordance with PRC laws, and any disputes would be resolved in accordance
with PRC legal procedures, which may not protect you as much as those of other jurisdictions, such as the United States.
All of the agreements under
our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly,
these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures.
The legal 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. See “Risks
Related to Doing Business in China —Changes in China’s economic, political or social conditions or government policies could
have a material adverse effect on our business and operations.” Meanwhile, there is very little precedent and formal guidance
as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC laws. There remain significant
uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, 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 delays or other obstacles in the process of enforcing these contractual arrangements, we may
not be able to determine the most significant economic activities of the VIE, and our ability to conduct our business may be negatively
affected.
PRC regulation of loans to and direct investment
in PRC entities by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions
to our PRC operating subsidiaries.
As an offshore holding company
of our PRC Subsidiary, we may make loans to our PRC Subsidiary, our VIE and the VIE’s subsidiaries, or may make additional capital
contributions to our PRC Subsidiary, subject to satisfaction of applicable governmental registration and approval requirements.
Any loans we extend to our
PRC Subsidiary, which are treated as foreign-invested enterprises under PRC law, cannot exceed the statutory limit and must be registered
with the local counterpart of the SAFE.
We may also decide to finance
our PRC Subsidiary by means of capital contributions. According to the relevant PRC regulations on foreign-invested enterprises in China,
these capital contributions are subject to registration with or approval by local Administration for Market Regulation (“AMR”).
In addition, the PRC government also restricts the convertibility of foreign currencies into Renminbi and use of the proceeds. On March
30, 2015, SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange
Settlement of Capital of Foreign-invested Enterprises, or SAFE Circular 19, which took effect and replaced certain previous SAFE regulations
from June 1, 2015. SAFE further promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing
the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which, among other
things, amend certain provisions of SAFE Circular 19. According to SAFE Circular 19 and SAFE Circular 16, the flow and use of the Renminbi
capital converted from foreign currency denominated registered capital of a foreign-invested company is regulated such that Renminbi capital
may not be used for business beyond its business scope or to provide loans to persons other than affiliates unless otherwise permitted
under its business scope. Violations of the applicable circulars and rules may result in severe penalties, including substantial fines
as set forth in the Foreign Exchange Administration Regulations. If our VIE requires financial support from us or our WOS in the future
and we find it necessary to use foreign currency-denominated capital to provide such financial support, our ability to fund our VIE’s
operations will be subject to statutory limits and restrictions, including those described above. These circulars may limit our ability
to transfer any foreign currency we hold, including the net proceeds from our initial public offering, to our VIE and our PRC subsidiary,
which may adversely affect our liquidity and our ability to fund and expand our business in China. Despite the restrictions under these
SAFE circulars, our PRC Subsidiary may use its income in Renminbi generated from their operations to finance the VIE through entrustment
loans to the VIE or loans to the VIE’s shareholders for the purpose of making capital contributions to the VIE. In addition, our
PRC Subsidiary can use Renminbi funds converted from foreign currency registered capital to carry out any activities within their normal
course of business and business scope. On October 23, 2019, the SAFE promulgated the Notice of the State Administration of Foreign Exchange
on Further Promoting the Convenience of Cross-border Trade and Investment, or the SAFE Circular 28, which, among other things, allows
all foreign-invested companies to use Renminbi converted from foreign currency-denominated capital for equity investments in China, as
long as the equity investment is genuine, does not violate applicable laws, and complies with the negative list on foreign investment.
In light of the various requirements
imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we cannot assure you that
we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if
at all, with respect to future loans to our PRC Subsidiary or our VIE or future capital contributions by us to our PRC Subsidiary. If
we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from our initial
public offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely
affect our liquidity and our ability to fund and expand our business.
The shareholders of our VIE may have potential
conflicts of interest with us, which may materially and adversely affect our business and financial condition.
As of the date of this annual
report, Mr. Bao and Mr. He hold 96.95% and 3.05% equity interest in UTime SZ, respectively. The shareholders of our VIE may have potential
conflicts of interest with us. The shareholders may breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements
we have with them and our VIE, which would have a material and adverse effect on our ability to determine the most significant economic
activities of the VIE and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with our
VIE 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 the 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 the shareholders and our Company. If we cannot resolve any conflict of interest or dispute between us and the 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.
Currently, we do not have
any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise
our purchase option under the exclusive call option agreements with these shareholders to request them to transfer all of their equity
interests in the VIE to a PRC entity or individual designated by us, to the extent permitted by PRC law. For Mr. Bao, who is our
chairman and Chief Executive Officer and also a major shareholder of the VIE, we rely on him to abide by the laws of the Cayman Islands,
which provide that directors and officers owe a fiduciary duty to the company that requires them to act in good faith and in what they
believe to be the best interests of the company and not to use their position for personal gains. The shareholders of the VIE have executed
powers of attorney to appoint our WFOE to vote on their behalf and exercise voting rights as shareholders of the VIE. If we cannot resolve
any conflict of interest or dispute between us and the shareholders of the VIE, 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.
The shareholders of our VIE
may be involved in personal disputes with third parties or other incidents that may have an adverse effect on their equity interests in
our VIE and the validity or enforceability of our contractual arrangements with our VIE and its shareholder. For example, in the event
that one of the shareholders of our VIE divorces his spouse, the spouse may claim that the equity interest of our VIE held by such shareholder
is part of their community property and should be divided between such shareholder and his spouse. If such claim is supported by the court,
the relevant equity interest may be obtained by the shareholder’s spouse or any third party who is not subject to obligations under
our contractual arrangements, which could result in a loss of our major influence on the VIE. Similarly, if any of the equity interests
of our VIE is inherited by a third party on whom the current contractual arrangements are not binding, we could lose our economic benefits
over the VIE or have to incur unpredictable costs to maintain such economic benefits, which could cause significant disruption to our
business and operations and harm our financial condition and results of operations.
Although under our current
contractual arrangements, each of the spouses of Mr. Bao and Mr. He have executed spousal consent letters, under which each of them agreed
that she will not take any actions or raise any claims to interfere with the performance by her spouse of the obligations under these
contractual arrangements, including claiming community property ownership on the equity interest, and renounce any and all right and interest
related to the equity interest that she may be entitled to under applicable laws. We cannot assure you that these undertakings and arrangements
will be complied with or effectively enforced. In the event that any of them is breached or becomes unenforceable and leads to legal proceedings,
it could disrupt our business, distract our management’s attention and subject us to substantial uncertainties as to the outcome
of any such legal proceedings.
Contractual arrangements in relation to
our VIE may be subject to scrutiny by the PRC tax authorities and they may determine that we or our VIE owes additional taxes, which 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.
We could face material and adverse tax consequences if the PRC tax authorities determine that the VIE contractual arrangements 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 VIE 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 VIE for PRC tax purposes, which could in turn increase
its tax liabilities without reducing our WFOE’s tax expenses. In addition, the PRC tax authorities may impose late payment fees
and other penalties on our VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could
be materially and adversely affected if our VIE’s tax liabilities increase or if it is required to pay late payment fees and other
penalties.
We may lose the ability to use and enjoy
assets held by our VIE that are material to the operation of certain portion of our business if our VIE goes bankrupt or becomes subject
to a dissolution or liquidation proceeding.
As part of our contractual
arrangements with our VIE, our VIE and its subsidiaries hold certain assets that are material to the operation of certain portion of our
business, including intellectual property and premise. If 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 VIE may not, in any manner,
sell, transfer, mortgage or dispose of its assets or legal or beneficial interests in the business without our prior consent. However,
in the event that the shareholders breach this obligation and voluntarily liquidate our VIE, or our VIE declares bankruptcy, or 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 operations,
which could materially and adversely affect our business, financial condition and results of operations. Furthermore, if our VIE or its
subsidiaries undergo a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim
rights to some or all of its assets, hindering our ability to operate our business, which could materially and adversely affect our business,
financial condition and results of operations.
Substantial uncertainties exist with respect
to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and its Implementation Regulations and how they
may impact the viability of our current corporate structure, corporate governance, business operations and financial results.
On March 15, 2019, the National
People’s Congress approved the Foreign Investment Law, which took effect on January 1, 2020. On December 26, 2019, the Regulation
on the Implementation of the Foreign Investment Law of the People’s Republic of China, was issued by the State Council and came
into force on January 1, 2020. The Foreign Investment Law defines the “foreign investment” as the investment activities in
China conducted directly or indirectly by foreign investors in the following manners: (i) a foreign investor, individually or collectively
with other investors establishes a foreign-invested enterprise within China; (ii) a foreign investor acquires stock shares, equity shares,
shares in assets, or other like rights and interests of an enterprise within China; (iii) a foreign investor, individually or collectively
with other investors, invests and establishes new projects within China; and (iv) a foreign investor invests through other approaches
as stipulated by laws, administrative regulations, or otherwise regulated by the State Council. Since the Foreign Investment Law is relatively
new, uncertainties exist in relation to its interpretation and implementation. The Foreign Investment Law does not explicitly classify
whether variable interest entities that are controlled through contractual arrangements would be deemed as foreign invested enterprises
if they are ultimately “controlled” by foreign investors. The VIE structure, has been adopted by many PRC-based companies,
including us. Though these regulations do not explicitly classify contractual arrangements as a form of foreign investment, there is no
assurance that foreign investment via contractual arrangements would not be interpreted as a type of indirect foreign investment activities
under the definition in the future. In addition, it has a catch-all provision under definition of “foreign investment” that
includes investments made by foreign investors in China through other means as provided by laws, administrative regulations or the State
Council. The Foreign Investment Law still leaves leeway for future laws, administrative regulations or provisions of the State Council
to provide for contractual arrangements as a form of foreign investment. Therefore, there can be no assurance that our control over our
VIE through contractual arrangements will not be deemed as foreign investment in the future under the PRC laws and regulations.
The Foreign Investment Law
grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified
as either “restricted” or “prohibited” from foreign investment in a “negative list”. The Foreign Investment
Law provides that foreign-invested entities operating in “restricted” or “prohibited” industries will require
market entry clearance and other approvals from relevant PRC government authorities. On December 27, 2021, the Ministry of Commerce of
the PRC (the “MOFCOM”) and the National Development and Reform Commission (the “NDRC”) jointly issued the latest
version of Negative List (Edition 2021), which became effective on January 1, 2022. See “Regulations — Regulations relating
to Foreign Investment — The Guidance Catalogue of Industries for Foreign Investment”. Currently, our business related to the
operation of designing, manufacturing and marketing mobile communication devices, and selling a variety of related accessories falls within
the permitted category. However, we cannot assure you that our current operations or any newly-developed business in the future will still
deemed to be “permitted” in the “negative list”, which may be promulgated or be amended from time to time by the
MOFCOM and the NDRC. If our control over our VIE through contractual arrangements are deemed as foreign investment in the future, and
any business of our VIE is “restricted” or “prohibited” from foreign investment under the “negative list”
promulgated or amended in the future, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements
that allow us to have control over our VIE 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.
Furthermore, if future laws,
administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements,
we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely
and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our
current corporate structure and business operations.
Risks Related to Doing Business in China
Changes in China’s economic, political
or social conditions or government policies could have a material adverse effect on our business and operations.
Substantially most of our
assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be
influenced to a significant degree by political, economic and social conditions in China generally. The Chinese economy differs from the
economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate,
control of foreign exchange and allocation of resources. Although the 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 Chinese economy
has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the
economy, and the rate of growth has been slowing since 2012. Any adverse changes in economic conditions in China, in the policies of the
Chinese 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. The Chinese government has implemented various measures to encourage economic growth and guide the allocation
of 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.
In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace
of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and operating
results.
Uncertainties with respect to the PRC legal
system and changes in laws and regulations in China could adversely affect us.
We conduct our business primarily
through the VIE and its subsidiaries. Our operations in China are governed by PRC laws and regulations. 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. In addition, any new or changes in PRC laws and regulations related to foreign investment
in China could affect the business environment and our ability to operate our business in China.
From time to time, we may
have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court proceedings in China
may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court
authorities have significant discretion in interpreting and implementing statutory provisions 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. These uncertainties may impede our ability to enforce the contracts into which we have entered and could materially and adversely
affect our business and results of operations. Furthermore, the PRC legal system is based in part on government policies and internal
rules, some of which are not published on a timely basis or at all and may have retroactive effect. As a result, we may not be aware of
our violation of any of these policies and rules until sometime after the violation. Such unpredictability towards our contractual, property
and procedural rights could adversely affect our business and impede our ability to continue our operations.
We may be required to obtain permission
or approval from Chinese authorities to operate and issue ordinary shares to foreign investors in our offering and/or listing on the NASDAQ
Capital Market, and if required and we or the VIE or the VIE’s subsidiaries are not able to obtain such permission or approval in
a timely manner, our ordinary shares may substantially decline in value and become worthless. The CSRC has released for public consultation
the draft rules for China-based companies seeking to conduct initial public offerings in foreign markets. While such rules have not yet
gone into effect, the Chinese government may exert more oversight and control over offerings that are conducted overseas and foreign investment
in China-based issuers, which could significantly limit or completely hinder our ability to continue to offer our ordinary shares to investors
and could cause the value of our ordinary shares to significantly decline or become worthless. We have not applied for, received or been
denied approval from Chinese authorities to list on the NASDAQ Capital Market.
On December 24, 2021, the
CSRC released the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic
Enterprises (Draft for Comments) (the “Draft Administrative Provisions”) and the Measures for the Overseas Issuance of Securities
and Listing Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures,” collectively with the
Draft Administrative Provisions, the “Draft Rules Regarding Overseas Listing”), both of which have a comment period that expired
on January 23, 2022. The Draft Rules Regarding Overseas Listing lay out the filing regulation arrangement for both direct and indirect
overseas listing, and clarify the determination criteria for indirect overseas listing in overseas markets. The Draft Rules Regarding
Overseas Listing stipulate that the Chinese-based companies, or the issuer, shall fulfill the filing procedures within three working days
after the issuer makes an application for initial public offering and listing in an overseas market. The required filing materials for
an initial public offering and listing should include at least the following: record-filing report and related undertakings; regulatory
opinions, record-filing, approval and other documents issued by competent regulatory authorities of relevant industries (if applicable);
and security assessment opinion issued by relevant regulatory authorities (if applicable); PRC legal opinion; and prospectus.
In addition, an overseas offering
and listing is prohibited under any of the following circumstances: (1) if the intended securities offering and listing are specifically
prohibited by the laws, regulations or relevant provisions of the PRC; (2) if the intended securities offering and listing may constitute
a threat to or endangers national security as reviewed and determined by competent authorities under the State Council in accordance with
law; (3) if there are material ownership disputes over the equity, major assets, and core technology, etc. of the issuer; (4) if, in the
past three years, the domestic enterprise or its controlling shareholders or actual controllers have committed corruption, bribery, embezzlement,
misappropriation of property, or other criminal offenses disruptive to the order of the socialist market economy, or are currently under
judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (5) if, in past
three years, directors, supervisors, or senior executives have been subject to administrative punishments for severe violations, or are
currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations;
(6) other circumstances as prescribed by the State Council. We do not believe any of the six prohibited situations aforementioned applies
to us. The Draft Administrative Provisions further defines the legal liabilities of breaches such as failure in fulfilling filing obligations
or fraudulent filing conducts, imposing a fine between RMB 1 million and RMB 10 million, and in cases of severe violations, a parallel
order to suspend relevant business or halt operation for rectification, revoke relevant business permits or operational license.
As of the date of this annual
report, considering that (i) the Draft Rules Regarding Overseas Listings have not been promulgated and have not come into effect; (ii)
no explicit provisions under currently effective PRC laws, regulations and rules clearly classifies indirect listing through contractual
arrangements like ours are required to obtain approvals from PRC authorities, we or the VIE or the VIE’s subsidiaries have not been
required to submit applications for the approval of the CSRC or other equivalent PRC government authorities for any offering pursuant
to this annual report according to currently effective PRC laws, regulations and rules at this stage. However, as the Draft Rules Regarding
Overseas Listings have not been formally adopted and the Negative List (Edition 2021) was newly published, and due to the lack of further
clarifications or detailed rules and regulations, our PRC legal counsel as to law, has further advised us that, there are still uncertainties
as to how the aforementioned rules will be interpreted or implemented and whether the PRC regulatory agencies may adopt new laws, regulations,
rules, or detailed implementation and interpretation and there is no assurance that PRC regulatory agencies, including the CSRC, would
take the same view as we do.
Substantial uncertainties
exist with respect to the enactment timetable and final content of the Draft Rules Regarding Overseas Listing. As the CSRC may formulate
and publish guidelines for filings in the future, the Draft Filing Measures does not provide for detailed requirements of the substance
and form of the filing documents. In a Q&A released on its official website, the respondent CSRC official indicated that the proposed
new filing requirement will start with IPO candidates and listed companies seeking to carry out activities such as follow-on overseas
financing. As for the filings for the existing companies, the regulator will grant adequate transition period and apply separate arrangements.
The Q&A also addressed the contractual arrangements and pointed out that if relevant domestic laws and regulations have been observed,
companies with compliant VIE structure may seek overseas listing after completion of the CSRC filings. Nevertheless, it does not specify
what qualify as compliant VIE structures and what relevant domestic laws and regulations are required to be complied with. Given the substantial
uncertainties surrounding the latest CSRC filing requirements at this stage, we cannot assure you that we will be able to complete the
filings and fully comply with the relevant new rules on a timely basis, if at all, in our future overseas offerings, if any.
As of the date of this annual
report, no currently effective laws or regulations in the PRC explicitly require us to seek approval from the CSRC or any other PRC governmental
authorities for our offering and/or list on the NASDAQ Capital Market, nor has we, any of our subsidiaries or the VIE or the VIE’s
subsidiaries received any inquiry, notice, warning or sanctions regarding our planned offering from the CSRC or any other PRC governmental
authorities. We believe that we are not required to obtain permission or approval from Chinese authorities to operate and issue these
ordinary shares to foreign investors or list on the NASDAQ Capital Market based on the PRC laws, regulations and rules currently in effect.
However, the Draft Rules Regarding Overseas Listing, if enacted, may subject us to additional compliance requirement in the future, and
we cannot assure you that we will be able to get the clearance of filing procedures under the Draft Rules Regarding Overseas List on a
timely basis, or at all. There is also the possibility that we may not be able to obtain or maintain such approval or that we inadvertently
concluded that such approval was not required. Any failure of us to fully comply with new regulatory requirements may significantly limit
or completely hinder our ability to continue to offer our ordinary shares, cause significant disruption to our business operations, and
severely damage our reputation, which would materially and adversely affect our financial condition and results of operations and cause
our ordinary shares to significantly decline in value or become worthless.
The
PRC government exerts substantial influence over the manner in which we conduct our business activities. The PRC government may also intervene
or influence our operations at any time, which could result in a material change in our operations and our ordinary shares could decline
in value or become worthless.
We are currently not required to obtain approval
from Chinese authorities to list on U.S. exchanges nor the execution of contractual arrangements with the VIE (“VIE Agreements”),
however, if our VIE or the holding company were required to obtain approval in the future and were denied permission from Chinese authorities
to list on U.S. exchanges, we will not be able to continue listing on U.S. exchange, continue to offer ordinary shares to investors.
The loss of permission or denial will have a material, negative impact on our investors and would likely significantly reduce of our price
of ordinary shares.
The Chinese government has exercised and continues
to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability
to operate in the PRC may be significantly harmed by changes in its laws and regulations, including those relating to taxation, environmental
regulations, land use rights, property and other matters. The central or local governments of these jurisdictions may impose new, stricter
regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our
compliance with such regulations or interpretations. Accordingly, government actions in the future, including regional or local variations
in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof,
and could require us to divest ourselves of any interest we then hold in our operations in China.
For example, the Chinese cybersecurity regulator
announced on July 2, 2021, that it had begun an investigation of a U.S.-listed company with Chinese operations and two days
later ordered that the company’s app be removed from smartphone app stores. Similarly, our business segments may be subject to various
government and regulatory interference in the regions in which we operate. We could be subject to regulation by various political and
regulatory entities, including various local and municipal agencies and government sub-divisions. We may incur increased costs necessary
to comply with existing and newly adopted laws and regulations or penalties for any failure to comply.
Furthermore, it is uncertain when and whether we
will be required to obtain permission from the PRC government to list on U.S. exchanges or enter into VIE Agreements in the future,
and even when such permission is obtained, whether it will be denied or rescinded. Although we are currently not required to obtain permission
from any of the PRC central or local government to obtain such permission and has not received any denial to list on the U.S. exchange
and or enter into VIE Agreements, our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations
relating to our business or industry. Recent statements by the Chinese government indicating an intent, and the PRC government may take
actions to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in PRC-based issuers,
which could significantly limit or completely hinder our ability to offer or continue to offer ordinary shares to investors and cause
the value of our ordinary shares to significantly decline or become worthless.
Changes in international trade policies,
trade dispute or the emergence of a trade war, may have a material adverse effect on our business.
Political events, international
trade disputes, and other business interruptions could harm or disrupt international commerce and the global economy, and could have a
material adverse effect on us and our customers, service providers, network carriers and other partners.
International trade disputes
could result in tariffs and other protectionist measures that could adversely affect our business. Tariffs could increase the cost of
the goods and products which could affect consumers’ discretionary spending levels and therefore adversely impact our business.
In addition, political uncertainty surrounding international trade disputes and the potential of the escalation to trade war and global
recession could have a negative effect on consumer confidence, which could adversely affect our business.
There are significant uncertainties under
the PRC Enterprise Income Tax Law relating to the withholding tax liabilities of our PRC Subsidiary, and dividends payable by our PRC
Subsidiary to us through our Hong Kong subsidiary may not qualify to enjoy certain treaty benefits.
We are an exempted company
incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity from our PRC Subsidiary
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 came into effect on December 8, 2006, and four conventions implemented as of June 11, 2008, December
20, 2010, December 29, 2015 and December 6, 2019, such withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns
no less than 25% of a PRC enterprise. Under the Circular on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax
Treaties issued in February 2009 by the SAT, the taxpayer needs to satisfy certain conditions to enjoy the benefits under a tax treaty.
These conditions include: (i) the taxpayer must be the beneficial owner of the relevant dividends, and (ii) the corporate shareholder
to receive dividends from the PRC Subsidiary must have met the direct ownership thresholds during the 12 consecutive months preceding
the receipt of the dividends. However, if the main purpose of an offshore arrangement is to obtain a preferential tax treatment, the PRC
tax authorities have the discretion to adjust the preferential tax rate enjoyed by the relevant offshore entity. Further, the SAT promulgated
the Notice on How to Understand and Recognize the “Beneficial Owner” in Tax Treaties in 2009, which limits the “beneficial
owner” to individuals, enterprises or other organizations normally engaged in substantive operations, and sets forth certain detailed
factors in determining “beneficial owner” status; and based on the Announcement on Certain Issues with Respect to the “Beneficial
Owner” in Tax Treaties, issued on February 3, 2018, and effective on April 1, 2018, that the business activities conducted by the
applicant do not constitute substantive business activities is one of the factors which are not conductive to the determination of an
applicant’s status as a “beneficial owner”.
In addition, the Administrative
Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties, or SAT Public Notice No.60, which became effective in August
2015, require non-resident enterprises to determine whether they are qualified to enjoy the preferential tax treatment under the tax treaties
and file relevant report and materials with the tax authorities. In October 2019, the State Administration of Taxation (SAT) issued the
Announcement of the SAT on Issuing the Measures for the Administration of Non-resident Taxpayers’ Enjoyment of Treaty Benefits (SAT
Public Notice No.35), which took effect on January 1, 2020, while SAT Public Notice No.60 will be abolished at the same time. SAT Public
Notice No.35 stipulates that non-resident taxpayers can enjoy tax treaty benefits via the “self-assessment of eligibility, claiming
treaty benefits, retaining documents for inspection” mechanism. There are also other conditions for enjoying the reduced withholding
tax rate according to other relevant tax rules and regulations. As of March 31, 2021 and 2020, we did not record any withholding tax on
the retained earnings of our subsidiaries in the PRC as we intended to re-invest all earnings generated from our PRC Subsidiary for the
operation and expansion of our business in China, and we intend to continue this practice in the foreseeable future. Should our tax policy
change to allow for offshore distribution of our earnings, we would be subject to a significant withholding tax. We cannot assure you
that our determination regarding our qualification to enjoy the preferential tax treatment will not be challenged by the relevant tax
authority or we will be able to complete the necessary filings with the relevant tax authority and enjoy the preferential withholding
tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC Subsidiary to UTime HK, our Hong
Kong subsidiary.
Our ordinary shares may be delisted under
the HFCA Act if the PCAOB is unable to adequately inspect audit documentation located in China. The delisting of our ordinary shares,
or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of
the PCAOB to conduct adequate inspections deprives our investors with the benefits of such inspections. Furthermore, on June 22, 2021,
the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require
the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections
for two consecutive years instead of three.
The
HFCA Act, which was signed into law on December 18, 2020, states if the SEC determines that we have filed audit reports issued by a registered
public accounting firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall
prohibit our shares from being traded on a national securities exchange or in the over-the-counter trading market in the United States.
On December 2, 2021, the SEC adopted final amendments implementing the disclosure and submission requirements of the HFCA Act, pursuant
to which the SEC will identify an issuer as a “Commission-Identified Issuer” if the issuer has filed an annual report containing
an audit report issued by a registered public accounting firm that the PCAOB has determined it is unable to inspect or investigate completely,
and will then impose a trading prohibition on an issuer after it is identified as a Commission-Identified Issuer for three consecutive
years. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB is unable to inspect or investigate
completely registered public accounting firms headquartered in mainland China and Hong Kong.
On August
26, 2022, the PCAOB announced that it had signed the Statement of Protocol with the CSRC and the MOFCOM. The terms of the Statement of
Protocol would grant the PCAOB complete access to audit work papers and other information so that it may inspect and investigate PCAOB-registered
accounting firms headquartered in mainland China and Hong Kong. According to the PCAOB, its December 2021 determinations under the HFCA
ACT remain in effect. The PCAOB is required to reassess these determinations by the end of 2022. Under the PCAOB’s rules, a reassessment
of a determination under the HFCAA may result in the PCAOB reaffirming, modifying or vacating the determination.
Our auditor
Audit Alliance LLP. (“AA”), 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 its compliance with the applicable professional standards. Our auditor
is headquartered in Singapore, and is subject to inspection by the PCAOB on a regular basis.
However,
majority of the audit workpapers for our company and the VIE’s operations are located in China, and the PCAOB is currently unable
to conduct inspections in China without the approval of Chinese government authorities, but access to audit work and papers may be available
in the near future, as a result of the Statement of Proposal. If the PCAOB does gain such access, there is no assurance that it may not
later be determined that the PCAOB is unable to inspect or investigate our auditor completely, and investors may be deprived of the benefits
of such inspection. Any audit reports not issued by auditors that are completely inspected by the PCAOB, or a lack of PCAOB inspections
of audit work undertaken in China that prevents the PCAOB from regularly evaluating our auditor’ audits and their quality control
procedures, could result in a lack of assurance that our financial statements and disclosures are adequate and accurate, then such lack
of inspection could cause our securities to be delisted from the stock exchange.
Whether
the PCAOB will be able to conduct inspections of our auditor before the issuance of our financial statements on the annual report on Form
20-F for the year ending March 31, 2024 which is due by July 31, 2024, or at all, is subject to substantial uncertainty and depends on
a number of factors out of our and our auditor’s control. If our shares are prohibited from trading in the United States, there
is no certainty that we will be able to list on additional non-U.S. exchange to facilitate the trading in our securities. Such a prohibition
would substantially impair your ability to sell or purchase our shares when you wish to do so, and the risk and uncertainty associated
with delisting would have a negative impact on the price of our shares. Also, such a prohibition would significantly affect our ability
to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition,
and prospects.
On
June 22, 2021, the U.S. Senate passed a bill which would reduce the number of consecutive non-inspection years required for triggering
the prohibitions under the HFCA Act from three years to two. On February 4, 2022, the U.S. House of Representatives passed a bill which
contained, among other things, an identical provision. If this provision is enacted into law and the number of consecutive non-inspection
years required for triggering the prohibitions under the HFCA Act is reduced from three years to two, then our shares could be prohibited
from trading in the United States in 2023.
You may experience difficulties in effecting
service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in this report based
on foreign laws.
We are an exempted company
incorporated under the laws of the Cayman Islands, we conduct substantially most of our operations in China and substantially most of
our assets are located in China. In addition, most of our senior executive officers, including Mr. Minfei Bao, Mr, Yihuang Chen, Mr. Honggang Cao, Mr.
Shibin Yu, Mr. Min He, Mr. Weiyuan Wang and Mr. Mo Zou, are PRC nationals and reside within China for a significant portion of the
time. As a result, it may be difficult for you to effect service of process upon us or those persons inside
mainland China. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability
provisions of the U.S. federal securities laws against us and our officers and directors who reside and whose assets are located outside
the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce
judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United
States or any state.
The recognition and enforcement
of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance
with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made
or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of reciprocity with the United States
that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law,
the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates
the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what
basis a PRC court would enforce a judgment rendered by a court in the United States.
See also “Risks Related
to our Corporate Structure — Because we are incorporated under the laws of the Cayman Islands, you may face difficulties in protecting
your interests, and your ability to protect your rights through the U.S. Federal courts may be limited” for risks associated with
investing in us as a Cayman Islands company.
There are uncertainties under the PRC laws
relating to the procedures for U.S. regulators to investigate and collect evidence from companies located in the PRC.
According to Article 177 of
the newly amended PRC Securities Law which became effective in March 2020 (the “Article 177”), the securities regulatory authority
of the PRC State Council may collaborate with securities regulatory authorities of other countries or regions in order to monitor and
oversee cross border securities activities. Article 177 further provides that overseas securities regulatory authorities are not allowed
to carry out investigation and evidence collection directly within the territory of the PRC, and that any Chinese entities and individuals
are not allowed to provide documents or materials related to securities business activities to overseas agencies without prior consent
of the securities regulatory authority of the PRC State Council and the competent departments of the PRC State Council.
Our PRC counsel has advised
us of their understanding that (i) the Article 177 is applicable in the limited circumstances related to direct investigation or evidence
collection conducted by overseas authorities within the territory of the PRC (in such case, the foregoing activities are required to be
conducted through collaboration with or by obtaining prior consent of competent Chinese authorities); (ii) from the view of the internal
logical relations of the Article 177, it seems that the Article 177 does not limit or prohibit the Company, as a company duly incorporated
in Cayman Islands and to be listed on NASDAQ, from providing the required documents or information to NASDAQ or the SEC pursuant to applicable
Listing Rules and U.S. securities laws; and (iii) as the Article 177 is relatively new and there is no implementing rules or regulations
which have been published regarding application of the Article 177, it remains unclear how the law will be interpreted, implemented or
applied by the Chinese Securities Regulatory Commission or other relevant government authorities. As of the date hereof, we are not aware
of any implementing rules or regulations which have been published regarding application of Article 177. However, we cannot assure you
that relevant PRC government agencies, including the securities regulatory authority of the PRC State Council, would reach the same conclusion
as we do. As such, there are uncertainties as to the procedures and time requirement for the U.S. regulators to bring about investigations
and evidence collection within the territory of the PRC.
Our principal business operation
is conducted in the PRC. In the event that the U.S. regulators carry out investigation on us and there is a need to conduct investigation
or collect evidence within the territory of the PRC, the U.S. regulators may not be able to carry out such investigation or evidence collection
directly in the PRC under the PRC laws. The U.S. regulators may consider cross-border cooperation with securities regulatory authority
of the PRC by way of judicial assistance, diplomatic channels or regulatory cooperation mechanism established with the securities regulatory
authority of the PRC. However, there is no assurance that the U.S. regulators could succeed in establishing such cross-border cooperation
in a specific case or could establish the cooperation in a timely manner. If U.S. regulators are unable to conduct such investigations,
such U.S. regulators may determine to suspend and ultimately delist our ordinary shares from the Nasdaq Capital Market or choose to suspend
or de-register our SEC registration.
If we become directly subject to the scrutiny, criticism, and
negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the
matter which could harm our business operations, stock price, and reputation.
U.S. public companies that have substantially
all of their operations in China have been the subject of intense scrutiny, criticism, and negative publicity by investors, financial
commentators, and regulatory agencies, such as the SEC. Much of the scrutiny, criticism, and negative publicity has centered on financial
and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance
policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism, and negative
publicity, the publicly traded stock of many U.S. listed Chinese companies sharply decreased in value and, in some cases, has become
virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal
and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism, and negative publicity
will have on us, our business, and the price of our ordinary shares. If we become the subject of any unfavorable allegations, whether
such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or
defend our company. This situation will be costly and time consuming and distract our management from developing our business. If such
allegations are not proven to be groundless, we and our business operations will be severely affected and you could sustain a significant
decline in the value of our ordinary shares.
Fluctuations in exchange rates could have
a material and adverse effect on our results of operations and the value of your investment.
The conversion of Renminbi
into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated
against the U.S. dollar, at times significantly and unpredictably. The value of Renminbi against the U.S. dollar and other currencies
is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other
things. 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.
Significant revaluation of
the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars
we receive from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would
have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into
U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the
U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.
Very limited hedging options
are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions
in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future,
the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In
addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi
into foreign currency.
Governmental control of currency conversion
may limit our ability to utilize our net 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 exempted company primarily
relies on dividend payments from our PRC Subsidiary 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
Subsidiary 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 Subsidiary, VIE and UTime GZ 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 RMB, 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.
The M&A Rules and certain other PRC
regulations establish complex procedures for some acquisitions of PRC 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 Enterprises by Foreign Investors, or the M&A Rules, and other recently adopted 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. For example, the M&A Rules require that MOFCOM be notified in advance of any
change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry
is concerned, (ii) such transaction involves factors that impact or may impact national economic security, or (iii) such transaction will
lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly
Law promulgated by the SCNPC effective in 2008 requires that transactions which are deemed concentrations and involve parties with specified
turnover thresholds (i.e., during the previous fiscal year, (i) the total global turnover of all operators participating in the transaction
exceeds RMB10 billion (US$1.5 billion) and at least two of these operators each had a turnover of more than RMB400 million (US$60.9 million)
within China, or (ii) the total turnover within China of all the operators participating in the concentration exceeded RMB2 billion, and
at least two of these operators each had a turnover of more than RMB400 million (US$60.9 million) within China) must be cleared by MOFCOM
before they can be completed.
In addition, in 2011, the
General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, also known as Circular 6, which officially established a security review system for mergers and acquisitions
of domestic enterprises by foreign investors. Further, MOFCOM promulgated the Regulations on Implementation of Security Review System
for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, effective 2011, to implement Circular 6. Under Circular 6,
a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns
and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises with “national
security” concerns. Under the foregoing MOFCOM regulations, MOFCOM will focus on the substance and actual impact of the transaction
when deciding whether a specific merger or acquisition is subject to security review. If MOFCOM decides that a specific merger or acquisition
is subject to a security review, it will submit it to the Inter-Ministerial Panel, an authority established under Circular 6 led by the
NDRC, and MOFCOM under the leadership of the State Council, to carry out security review. The regulations prohibit foreign investors from
bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual
arrangements or offshore transactions. Moreover, the Anti-Monopoly Law requires that the MOFCOM shall be notified in advance of any concentration
of undertaking if certain thresholds are triggered.
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 MOFCOM
or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our
business or maintain our market share. It is unclear whether our business would be deemed to be in an industry that raises “national
defense and security” or “national security” concerns. However, MOFCOM or other government agencies may publish explanations
in the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in
China, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited.
There is no assurance that, if we plan to make an acquisition, we can obtain such approval from the MOFCOM or any other relevant PRC governmental
authorities for our mergers and acquisitions, and if we fail to obtain those approvals, we may be required to suspend our acquisition
and be subject to penalties. Any uncertainties regarding such approval requirements could have a material adverse effect on our business,
results of operations and corporate structure. Any action by the PRC government to exert more oversight and control over foreign investment
in China-based companies could result in a material change in our operation, cause the value of our ordinary shares to significantly decline
or become worthless, and significantly limit, or completely hinder our ability to continue to offer our ordinary shares to investors.
PRC regulations relating to the establishment
of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC Subsidiary to liability
or penalties, limit our ability to inject capital into our PRC Subsidiary, limit our PRC Subsidiary’s ability to increase their
registered capital or distribute profits to us, or may otherwise adversely affect us.
In July 2014, SAFE promulgated
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, to replace the Circular
on Several Issues Concerning Foreign Exchange Administration for Domestic Residents to Engage in Return Investments via Overseas Special
Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires
PRC residents (including PRC individuals and PRC corporate entities) to register with SAFE or its local branches in connection with their
direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be
applicable to any offshore acquisitions that we make in the future.
Under SAFE Circular 37, PRC
residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments in offshore special purpose
vehicles, or SPVs, will be required to register such investments with SAFE or its local branches. In addition, any PRC resident who is
a direct or indirect shareholder of a SPV, is required to update its filed registration with the local branch of SAFE with respect to
that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders
to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration
or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or
the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional
capital contributions into its subsidiary in China. 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 13, which became effective on June 1, 2015. Under
SAFE Circular 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments,
including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks will directly
examine the applications and accept registrations under the supervision of SAFE.
If our shareholders who are
PRC residents or entities do not complete their registration with the local SAFE branches, our PRC Subsidiary may be prohibited from distributing
their profits and any 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 Subsidiary. Moreover, failure to comply with SAFE registration requirements could result in
liability under PRC laws for evasion of applicable foreign exchange restrictions.
Mr. Bao and Mr. He, who indirectly
hold a majority of our shares, and who are known to us as being PRC residents have completed the initial SAFE registration in connection
with our financings and will update their registration filings with SAFE under SAFE Circular 37 when any changes should be registered
under SAFE Circular 37.
However, we may not at all
times be fully aware or informed of the identities of all our shareholders or beneficial owners that are required to make or update such
registrations, and we cannot compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure
you that all of our shareholders or beneficial owners 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 regulations. Failure by such shareholders or beneficial owners to
comply with SAFE regulations or failure by us to amend the foreign exchange registrations of our PRC Subsidiary, could subject us to fines
or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiary’s ability to make distributions
or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
Any failure to comply with PRC regulations
regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other
legal or administrative sanctions.
In February 2012, SAFE promulgated the Notices
on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas
Publicly Listed Company, or SAFE Circular 7. Under SAFE Circular 7 and other relevant rules and regulations, PRC residents who participate
in stock incentive plan in an overseas publicly listed company are required to register with SAFE or its local branches and complete
certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could
be a PRC subsidiary of such overseas publicly listed company or another qualified institution selected by such PRC subsidiary, to conduct
the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. Such participants
must also retain an overseas entrusted institution to handle matters in connection with their exercise of share-based awards, the purchase
and sale of corresponding shares or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration
with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted
institution or other material changes. We and our PRC employees who have been granted share-based awards are subject to SAFE Circular
7 and other relevant rules and regulations these regulations. Failure of our PRC share-based award holders to complete their SAFE registrations
may subject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our
PRC subsidiary, limit our PRC subsidiary’s ability to distribute dividends to us, adopt additional incentive plans for our directors
or employees under PRC law or otherwise materially adversely affect our business.
In addition, the State Administration of Taxation,
or 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 subsidiary
has 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 government
authorities.
If we are classified as a PRC resident enterprise
for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.
Under the PRC Enterprise Income
Tax Law and its implementation rules, an enterprise established outside of the PRC with “de facto management body” within
the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the
rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial
control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State
Administration of Taxation, or SAT, issued the Circular on Issues Concerning the Identification of Chinese-Controlled Overseas Registered
Enterprises as Resident Enterprises in Accordance With the Actual Standards of Organizational Management, known as SAT Circular 82, which
has been revised by the Decision of the State Administration of Taxation on Issuing the Lists of Invalid and Abolished Tax Departmental
Rules and Taxation Normative Documents on December 29, 2017 and by the Decision of the State Council on Cancellation and Delegation of
a Batch of Administrative Examination and Approval Items on November 8, 2013. Circular 82 has provided 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, the SAT issued the Administrative Measures for Enterprise Income Tax of PRC-Controlled Offshore Incorporated Resident
Enterprises (Trial), or SAT Bulletin 45, effective 2011, to provide more guidance on the implementation of SAT Circular 82. SAT Bulletin
45 clarified certain issues in the areas of resident status determination, post-determination administration and competent tax authorities’
procedures.
According to SAT Circular
82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident
by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global
income only if all of the following conditions are met: (i) the places where the senior management and senior management departments responsible
for the daily production, operation and management of the enterprise perform their duties are mainly located within the territory of the
PRC; (ii) decisions relating to the enterprise’s financial matters (such as money borrowing, lending, financing and financial risk
management) and human resource matters (such as appointment, dismissal and salary and wages) are made or are subject to approval by organizations
or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder
resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside
in the PRC. Although SAT Circular 82 and SAT Bulletin 45 only apply to offshore incorporated enterprises controlled by PRC enterprises
or PRC enterprise groups and not those controlled by PRC individuals or foreigners, the determination criteria set forth therein may reflect
the 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.
In addition, the SAT issued
the Announcement of the State Administration of Taxation on Issues concerning the Determination of Resident Enterprises Based on the Standards
of Actual Management Institutions in January 2014 to provide more guidance on the implementation of SAT Circular 82. This bulletin further
provides that, among other things, an entity that is classified as a “resident enterprise” in accordance with the circular
shall file the application for classifying its status of residential enterprise with the local tax authorities where its main domestic
investors are registered. From the year in which the entity is determined to be a “resident enterprise,” any dividend, profit
and other equity investment gain shall be taxed in accordance with the enterprise income tax law and its implementing rules.
We believe that none of our
entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Regulation — Regulations on Tax —
PRC Enterprise Income Tax”. 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.” Our PRC legal counsel
has also advised us that there is a risk that the PRC tax authorities may deem us as a PRC resident enterprise since a substantial majority
of the members of our management team are located in China. If the PRC tax authorities determine that we are a PRC resident enterprise
for enterprise income tax purposes, we will be subject to the enterprise income tax on our global income at the rate of 25% and we will
be required to comply with PRC enterprise income tax reporting obligations. In addition, we may be required to withhold a 10% withholding
tax from dividends we pay to our shareholders that are non-resident enterprises, and non-resident enterprise shareholders may be subject
to PRC tax on gains realized on the sale or other disposition of ordinary shares, if such income is treated as sourced from within the
PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to our non-PRC individual shareholders and any gain realized
on the transfer of ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% unless a reduced rate is available
under an applicable tax treaty. 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. Any such tax
may reduce the returns on your investment in the ordinary shares.
We face uncertainty with respect to indirect
transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On December 10, 2009, SAT
issued the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT
Circular 698, with retroactive effect from January 1, 2008. Pursuant to the SAT Circular 698, where a non-resident enterprise transfers
the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, or
an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than
12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the competent
tax authority of the PRC resident enterprise this Indirect Transfer.
On February 3, 2015, the
SAT issued the Announcement of the State Administration of Taxation on Several Issues Relating to Enterprise Income Tax of Transfers
of Assets between Non-resident Enterprises, or SAT Bulletin 7. SAT Bulletin 7 has introduced a new tax regime that is significantly different
from the previous one under former SAT Circular 698 (which was repealed by the Announcement of the State Administration of Taxation on
Matters Concerning Withholding of Income Tax of Non-resident Enterprises at Source by SAT). SAT Bulletin 7 extends its tax jurisdiction
to not only Indirect Transfers set forth under former SAT Circular 698 but also transactions involving transfer of other taxable assets
through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 provides clearer criteria than former
SAT Circular 698 for assessment of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and
the purchase and sale of equity of a same listed foreign enterprise by a non-resident enterprise through a public securities market.
SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer)
of taxable assets. Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas
holding company, which is an Indirect Transfer, the non-resident enterprise, being the transferor, or the transferee, or the PRC entity
that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over
form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial
purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect
Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is
obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and
the transferor fails to pay the taxes. However, according to the aforesaid safe harbor rule, the PRC tax would not be applicable to the
transfer by any non-resident enterprise of our ordinary shares acquired and sold on public securities markets.
On October 17, 2017, SAT
issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income
Tax at Source, or SAT Bulletin 37, which, among others, repealed the Circular 698 on December 1, 2017. SAT Bulletin 37 further details
and clarifies the tax withholding methods in respect of income of non-resident enterprises under Circular 698. And certain rules stipulated
in SAT Bulletin 7 are replaced by SAT Bulletin 37. Where the non-resident enterprise fails to declare the tax payable pursuant to Article
39 of the Enterprise Income Tax Law, the tax authority may order it to pay the tax due within required time limits, and the non-resident
enterprise shall declare and pay the tax payable within such time limits specified by the tax authority; however, if the non-resident
enterprise voluntarily declares and pays the tax payable before the tax authority orders it to do so within required time limits, it
shall be deemed that such enterprise has paid the tax in time.
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 and investments. Our company may be subject to withholding obligations
if our company is transferee in such transactions, under SAT Bulletin 37 and SAT Bulletin 7. For transfer of shares in our company by
investors who are non-PRC resident enterprises, our PRC Subsidiary may be required to expend valuable resources to comply with SAT Bulletin
37 and 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 an adverse effect on our financial condition
and results of operations.
The approval of or filing and reporting
with the CSRC or other PRC government authorities may be required in connection with our overseas offerings under PRC law, and, if required,
we cannot predict whether or for how long we will be able to obtain such approval or complete such filing and reporting procedures.
The Regulations on Mergers
and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies requires an
overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies
or individuals to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities
on an overseas stock exchange. However, the application of the M&A Rules remains unclear.
Our PRC counsel, B&D
Law Firm, has advised us based on their understanding of the current PRC laws, rules and regulations that the CSRC’s approval is
not required for the listing and trading of our ordinary shares on NASDAQ in the context of our initial public offering, given that:
(i) our PRC Subsidiary was incorporated as wholly foreign-owned enterprises by means of direct investment rather than by merger or acquisition
of 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; and (ii) no provision in the M&A Rules clearly classifies contractual arrangements as a type of transaction
subject to the M&A Rules.
However, our PRC counsel
has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context
of an overseas offering and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations
and interpretations in any form relating to the M&A Rules. The interpretation and application of the regulations remain unclear,
and our future overseas offerings may ultimately require approval of the CSRC. If the CSRC approval is required, it is uncertain whether
we can or how long it will take us to obtain the approval and, even if we obtain such CSRC approval, the approval could be rescinded.
Any failure to obtain or delay in obtaining the CSRC approval for any of our future overseas offerings, or a rescission of such approval
if obtained by us, would subject us to sanctions imposed by the CSRC or other PRC regulatory authorities, which could include fines and
penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of
sanctions that may materially and adversely affect our business, financial condition, and results of operations.
The General Office of the
Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Strictly
Cracking Down on Illegal Securities Activities, or the Opinions, which was made available to the public on July 6, 2021. The Opinions
emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over
overseas listings by Chinese companies. Pursuant to the Opinions, Chinese regulators are required to accelerate rulemaking related to
the overseas issuance and listing of securities, and update the existing laws and regulations related to data security, cross-border
data flow, and management of confidential information. As the Opinions was recently issued, there are great uncertainties with respect
to the interpretation and implementation thereof. The Chinese government may promulgate relevant laws, rules and regulations that may
impose additional and significant obligations and liabilities on overseas listed Chinese companies regarding data security, cross-border
data flow, and compliance with China’s securities laws. These laws and regulations can be complex and stringent, and many are subject
to change and uncertain interpretation, which could result in claims, change to our data and other business practices, regulatory investigations,
penalties, increased cost of operations, or declines in user growth or engagement, or otherwise affect our business. It is uncertain
whether or how these new laws, rules and regulations and the interpretation and implementation thereof may affect us, but among other
things, our ability and the ability of our subsidiaries to obtain external financing through the issuance of equity securities overseas
could be negatively affected.
Numerous regulations, guidelines
and other measures are expected to be adopted under the umbrella of or in addition to the Cybersecurity Law and Data Security Law. Effective
measures, such as promoting the construction of relevant regulatory systems will be taken to deal with the risks and incidents of China-concept
overseas listed companies, and cybersecurity and data privacy protection requirements and similar matters. On July 10, 2021, the CAC
issued a revised draft of the Measures for Cybersecurity Review for public comments. Further, on On December 28, 2021, thirteen PRC regulatory
agencies, namely, the CAC, the NDRC, the Ministry of Industry and Information Technology, the Ministry of Public Security, the Ministry
of State Security, the Ministry of Finance, MOFCOM, SAMR, CSRC, the People’s Bank of China, the National Radio and Television Administration,
National Administration of State Secrets Protection and the National Cryptography Administration, jointly adopted and published the Measures
for Cybersecurity Review (2021), which became effective on February 15, 2022. The Measures for Cybersecurity Review (2021) authorized
the relevant government authorities to conduct cybersecurity review on a range of activities that affect or may affect national security,
and required that, among others, in addition to “operator of critical information infrastructure” any “operator of
network platform” holding personal information of more than one million users which seeks to list in a foreign stock exchange should
also be subject to cybersecurity review, and further elaborated the factors to be considered when assessing the national security risks
of the relevant activities. On November 14, 2021, the CAC released the Regulations on Network Data Security (draft for public comments),
or the draft Regulations on Network Data Security, which reiterates that data processors that process the personal information of more
than one million users listing in a foreign country should apply for a cybersecurity review. The draft Regulations on Network Data Security
will accept public comments until December 13, 2021. We do not believe the VIE or the VIE’s subsidiaries are among the “operator
of critical information infrastructure,” “data processor” carrying out data processing activities that affect or may
affect national security, or “operator of network platform” holding personal information of more than one million users as
mentioned above, however, the revised draft Regulations on Network Data Security is in the process of being formulated and subject to
further changes, and the Opinions remain unclear on how it will be interpreted, amended and implemented by the relevant PRC governmental
authorities.
On July 7, 2022, the CAC promulgated the Outbound Data Transfer Security
Assessment Measures, which became effective on September 1, 2022. According to the Outbound Data Transfer Security Assessment Measures,
to provide data abroad under any of the following circumstances, a data processor shall declare security assessment for its outbound data
transfer to the CAC through the local cyberspace administration at the provincial level: (i) where the data processor will provide important
data abroad; (ii) where operator of critical information infrastructure or the data processor processing the personal information of more
than one million individuals will provide personal information abroad; (iii) where the data processor who has provided personal information
of 100,000 individuals or sensitive personal information of 10,000 individuals in total abroad since January 1 of the previous year, will
provide personal information abroad; and (iv) other circumstances where the security assessment is required as prescribed by the CAC.
Prior to declaring security assessment for outbound data transfer, the data processor shall conduct self-assessment on the risks of the
outbound data transfer. For outbound data transfers that have been carried out before the effectiveness of the Outbound Data Transfer
Security Assessment Measures, if it is not in compliance with these measures, rectification shall be completed within six months starting
from September 1, 2022. Since the Outbound Data Transfer Security Assessment Measures is extremely new, there remain substantial uncertainties
about its interpretation and implementation, it is unclear whether we shall declare a security assessment. As of the date of this annual
report, we have not received any penalty, investigation or warning with respect to our business operation from the CAC, nor have we received
any notice or instructions from the CAC requiring us to declare a security assessment. If it is determined in the future that we are required
to declare a security assessment, it is uncertain whether we can or how long it will take us to complete such declaration or rectification.
On December 24, 2021, the
CSRC released the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic
Enterprises (Draft for Comments) and the Measures for the Overseas Issuance of Securities and Listing Record-Filings by Domestic Enterprises
(Draft for Comments), both of which have a comment period that expired on January 23, 2022, and if enacted, may subject us to additional
compliance requirement in the future. See “Risk Factors – We may be required to obtain permission or approval from Chinese
authorities to operate and issue securities to foreign investors in our offering and/or listing on the NASDAQ Capital Market, and if required
and we or the VIE or the VIE’s subsidiaries are not able to obtain such permission or approval in a timely manner, our securities
may substantially decline in value and become worthless. The CSRC has released for public consultation the draft rules for China-based
companies seeking to conduct initial public offerings in foreign markets. While such rules have not yet gone into effect, the Chinese
government may exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers,
which could significantly limit or completely hinder our ability to continue to offer our ordinary shares to investors and could cause
the value of our ordinary shares to significantly decline or become worthless. We have not applied for, received or been denied approval
from Chinese authorities to list on the NASDAQ Capital Market.” Thus, it is still uncertain as to how PRC governmental authorities
will regulate overseas listing in general and whether we are required to obtain any specific regulatory approvals or to fulfill any record-filing
requirements. In addition, if we do not receive any required approvals or record-filing or if we incorrectly conclude that approvals or
record-filing are not required or if the CSRC or other regulatory agencies promulgate new rules, explanations or interpretations requiring
that we obtain their prior approvals or ex-post record-filing for this offering and any follow-on offering, we or the VIE or the VIE’s
subsidiaries may be unable to obtain such approvals and record-filing which could significantly limit or completely hinder our ability
to offer or continue to offer securities to our investors. Furthermore, the PRC government authorities may strengthen oversight and control
over offerings that are conducted overseas and/or foreign investment in China-based issuers like us. Such actions taken by the PRC government
authorities may intervene or influence operations of the VIE or the VIE’s subsidiaries at any time, which are beyond our control.
Therefore, any such actions may adversely affect our operations and significantly limit or hinder our ability to offer or continue to
offer ordinary shares to you and reduce the value of such ordinary shares.
Uncertainties regarding the
enforcement of laws and the fact that rules and regulations in China can change quickly with little advance notice, along with the risk
that the Chinese government may intervene or influence operations of the VIE or the VIE’s subsidiaries at any time, or may exert
more control over offerings conducted overseas and/or foreign investment in China-based issuers could result in a material change in our
operations, financial performance and/or the value of our ordinary shares or impair our ability to raise capital on terms acceptable to
us, or at all. We cannot assure you that any new rules or regulations promulgated in the future will not impose additional requirements
on us. If it is determined in the future that approval and filing from the CSRC or other regulatory authorities or other procedures, such
as a cybersecurity review, are required for our future overseas offerings, it is uncertain whether we can or how long it will take us
to obtain such approval or complete such filing procedures and any such approval or filing could be rescinded or rejected. Any failure
to obtain or delay in obtaining such approval or completing such filing procedures for our overseas offerings, or a rescission of any
such approval or filing if obtained by us, would subject us to sanctions by the CSRC or other PRC regulatory authorities for failure to
seek CSRC approval or filing or other government review or authorization for our overseas offerings. These regulatory authorities may
impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges
in China, delay or restrict the repatriation of the proceeds from our overseas offerings into China or take other actions that could materially
and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our listed
ordinary shares. The CSRC or other PRC regulatory authorities also may take actions requiring us, or making it advisable for us, to halt
our overseas offerings before settlement and delivery of the shares offered. Consequently, if investors engage in market trading or other
activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not occur.
In addition, if the CSRC or other regulatory authorities later promulgate new rules or explanations requiring that we obtain their approvals
or accomplish the required filing or other regulatory procedures for our prior overseas offerings, we may be unable to obtain a waiver
of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity
regarding such approval requirement could materially and adversely affect our business, prospects, financial condition, reputation, and
the trading price of our listed ordinary shares.
Failure to make adequate contributions
to various government-sponsored employee benefits plans as required by PRC laws and regulations may subject us to penalties.
Companies operating in China
are required to participate in various government-sponsored employee benefit plans, including certain social insurance, housing provident
funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries,
including bonuses and allowances, of employees up to a maximum amount specified by the local government from time to time at locations
where the labor relations between us and our employees are based. The laws and regulations on employee benefit plans have not been enforced
consistently by the local governments in China given the different levels of economic development in different locations. Following local
common practice, we do not pay certain social insurance or housing fund contributions for each of our employees and the amount we paid
was lower than the requirements of relevant PRC regulations. Therefore, in our consolidated financial statements, we have made an estimate
and accrued a provision in relation to the potential make-up of our contributions for these plans. If we are determined by local authorities
to have failed to make adequate contributions to any employee benefits as required by relevant PRC laws and regulations, we may face
late fees or fines in relation to the underpaid employee benefits. As a result, our financial condition and results of operations may
be materially and adversely affected.
Increases in labor costs and enforcement
of stricter labor laws and regulations in the PRC may adversely affect our business and our profitability.
China’s overall economy
and the average wage in China have increased in recent years and are expected to continue to grow. The average wage level for our employees
has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will continue to increase.
Unless we are able to pass on these increased labor costs to those who pay for our services, our profitability and results of operations
may be materially and adversely affected.
In addition, we have been
subject to stricter regulatory requirements in terms of entering into labor contracts with our employees and paying various statutory
employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity
insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract Law and its implementation
rules, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining
the term of employee’s probation and unilaterally terminating labor contracts. In the event that we decide to terminate some of
our employees or otherwise change our employment or labor practices, the PRC Labor Contract Law and its implementation rules may limit
our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of
operations.
In October 2010, the SCNPC
promulgated the Law on Social Insurance of the PRC, effective on July 1, 2011. On April 3, 1999, the State Council promulgated the Regulations
on the Administration of Housing Provident Fund, which was amended on March 24, 2002. Companies registered and operating in China are
required under the Law on Social Insurance of the PRC and the Regulations on the Administration of Housing Provident Fund to apply for
social insurance registration and housing fund deposit registration within 30 days of their establishment and to pay for their employees
different social insurance including pension insurance, medical insurance, work-related injury insurance, unemployment insurance and
maternity insurance to the extent required by law. We could be subject to orders by the competent labor authorities for rectification
and failure to comply with the orders which may further subject us to administrative fines. See “Regulations — Regulations
on Labor Protection”.
As the interpretation and
implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment practices do not and
will not violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. We
cannot assure you that we have complied or will be able to comply with all labor-related law and regulations including those relating
to obligations to make social insurance payments and contribute to the housing provident funds. 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 will be adversely affected.
If our preferential tax treatments are
revoked, become unavailable or if the calculation of our tax liability is successfully challenged by the PRC tax authorities, we may
be required to pay tax, interest and penalties in excess of our tax provisions, and our results of operations could be materially and
adversely affected.
The PRC government has provided
tax incentives to our VIE. These incentives include reduced enterprise income tax rates.
For example, under the Enterprise Income Tax Law and its implementation rules, the statutory enterprise income tax rate is 25%. However,
the income tax of an enterprise that has been determined to be a high and new technology enterprise can be reduced to a preferential
rate of 15%, and the certificate of a high and new technology enterprise is valid for three years.
Our VIE has obtained
the Certificate of High and New Technology Enterprise since November 2, 2015, which is renewed on December 23, 2021 and is thus eligible
to enjoy a preferential tax rate of 15% for the periods presented, to the extent it has taxable income under the PRC Enterprise Income
Tax Law. Any increase in the enterprise income tax rate applicable to our VIE in China, or any discontinuation or retroactive or
future reduction of any of the preferential tax treatments currently enjoyed by our VIE, could adversely affect our business, financial
condition and results of operations. In addition, in the ordinary course of our business, we are subject to complex income tax and other
tax regulations and significant judgment is required in the determination of a provision for income taxes. Although we believe our tax
provisions are reasonable, if the PRC tax authorities successfully challenge our position and we are required to pay tax, interest and
penalties in excess of our tax provisions, our financial condition and results of operations would be materially and adversely affected.
Discontinuation of any of the government
subsidies or imposition of any additional taxes and surcharges could adversely affect our financial condition and results of operations.
Our VIE and UTime GZ have
received various financial subsidies from PRC local government authorities. The financial subsidies result from discretionary incentives
and policies adopted by PRC local government authorities. Meanwhile, to promote our productions and operations, our VIE and UTime GZ built
cooperative relations with government authorities, based on which financial subsidies and a series of other governmental supports are
provided for the purpose of facilitation of more tax payment to the local tax authorities. In order to attract investment, the Management
Committee of Guizhou Xinpu Economic Development Zone offers preferential policies to UTime GZ, the PRC Subsidiary of our VIE, to establish
its operations in Xinpu Economic Development Zone. As of the date of this annual report, UTime GZ has received subsidies of approximately
RMB1.2 million (US$0.2 million) in the form of logistics and employees’ rent subsidies for public rental housing from the Management
Committee of Guizhou Xinpu Economic Development Zone. However, local governments may decide to change, withdraw or discontinue such financial
subsidies at any time. The discontinuation of such financial subsidies or imposition of any additional taxes could adversely affect our
financial condition and results of operations.
If the custodians or authorized users of
controlling non-tangible assets of our company, including our corporate chops and seals, fail to fulfill their responsibilities, or misappropriate
or misuse these assets, our business and operations could be materially and adversely affected.
Under PRC laws, legal documents
for corporate transactions are executed using the chops or seal of the signing entity or with the signature of a legal representative
whose designation is registered and filed with the relevant branch of the Administration for Market Regulation.
Although we usually utilize
company seals to enter into contracts, the designated legal representatives of our PRC Subsidiary, VIE and UTime GZ have the apparent
authority to enter into contracts on behalf of such entities without chops and bind such entities. All designated legal representatives
of our PRC Subsidiary, VIE and UTime GZ are members of our senior management team who have signed employment agreements with us or our
PRC Subsidiary, VIE and UTime GZ under which they agree to abide by various duties they owe to us. In order to maintain the physical
security of our chops and chops of our PRC entities, we generally store these items in secured locations accessible only by the authorized
personnel in the legal or finance department of PRC Subsidiary, VIE and UTime GZ. Although we monitor such authorized personnel, there
is no assurance such procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse
or misappropriate our corporate chops or seals, we could encounter difficulties in maintaining control over the relevant entities and
experience significant disruption to our operations. If a designated legal representative obtains control of the chops in an effort to
obtain control over PRC Subsidiary, VIE and UTime GZ, we or our PRC Subsidiary, VIE and UTime GZ would need to pass a new shareholder
or board resolution to designate a new legal representative and we would need to take legal action to seek the return of the chops with
the relevant authorities, or otherwise seek legal redress for the violation of the representative’s fiduciary duties to us, which
could involve significant time and resources and divert management attention away from our regular business. In addition, the affected
entity may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation
if a transferee relies on the apparent authority of the representative and acts in good faith.
We face certain risks relating to the real
properties that we lease.
We lease real properties
from third parties primarily for our office and processing workshops being used in China, and most of our lease agreements for these
properties have not been registered with the PRC governmental authorities as required by PRC laws. Although the failure to do so does
not in itself invalidate the leases, we may be ordered by the PRC government authorities to rectify such noncompliance and, if such noncompliance
were not rectified within a given period of time, we may be subject to fines imposed by PRC government authorities ranging from RMB1,000
and RMB10,000 for each lease agreement that has not been registered with the relevant PRC governmental authorities.
Most of the proof of ownership
or proof of right to lease in relation to our leased real properties have not been provided to us by the relevant lessors. Therefore,
we cannot assure you that such lessors are entitled to lease the relevant real properties to us. If the lessors are not entitled to lease
the real properties to us and the owners of such real properties decline to ratify the lease agreements between us and the respective
lessors, we may not be able to enforce our rights to keep leasing such properties under the respective lease agreements against the owners.
As of the date of this annual report, we are not aware of any claim or challenge brought by any third parties concerning the use of our
leased properties. If our lease agreements are claimed as null and void by third parties who are the real owners of such leased real properties,
we could be required to vacate the properties, in the event of which we could only initiate the claim against the lessors under relevant
lease agreements for indemnities for their breach of the relevant leasing agreements.
Furthermore, the
registered office of UTime SZ is 64D-403, Tian Zhan Building F2, Tian’an Che Kung Temple Industrial Zone, Xiangmi Lake, Futian
District, Shenzhen, while the principal executive office is located at 7th Floor, Building 5A, Shenzhen Software Industry
Base, Nanshan District, Shenzhen. According to PRC laws, rules and regulations, a company shall register its main office as
registered office. Where a company fails to undergo the relevant modification registration in accordance with relevant regulations
for any modification of the contents of company registration, the company registration authority shall order the company to register
within a prescribed time limit, and, if the company fails to do so, impose a fine of not less than RMB10,000 but not more than
RMB100,000 on the company.
We cannot assure you that
suitable alternative locations are readily available on commercially reasonable terms, or at all, and if we are unable to relocate our
offices or processing workshops in a timely manner, our operations may be interrupted.
Risks Related to Doing Business in India
Our business activities in India could
be subject to Indian competition laws, and any violation or alleged violation thereof may negatively impact our operations.
The Competition Commission
of India (“CCI”) is the market regulator in India and the Competition Act, 2002 specifically provides that any agreement
which restricts the production, supply, distribution, acquisition or control of goods or provision of services, which causes or is likely
to cause an appreciable adverse effect on competition (AAEC) within India, is prohibited and void. Anti-competitive agreements may include
horizontal and vertical agreements. The definition of the term ‘agreement’ envisaged under the Competition Act, 2002 is wide
enough to include any tacit or explicit practice, any arrangement, understanding or action in concert. Any company entering into such
kind of agreements may come under the investigation by CCI, and if found violating provisions of the Competition Act, 2002, may be subjected
to prosecution and penalty which may extend to 10% of the turnover of preceding 3 financial years. Therefore, any exclusive supply or
exclusive distribution agreement(s) may lead to competition law concerns.
Further, any combinations,
such as merger, amalgamation, acquisition or similar arrangement, which meet a certain asset/turnover threshold as prescribed in the
Competition Act, 2002 mandates CCI approval which involves complex filing requirements. CCI has extra territorial jurisdiction, to investigate,
order inquiry and pass order, in respect of the acts taken place outside India which has or may have appreciable adverse effect in India.
Therefore, our business activities
of are also subject to the provisions of the Competition Act, 2002 and any violation or alleged violation thereof may seriously impact
our operations and business and our parent companies.
Our business is substantially affected
by prevailing economic, political and other prevailing conditions in India, and any downshift or perceived downshift in the Indian economy
could negatively impact our business.
Do Mobile is a company incorporated
in India, and the substantial portion of our assets and employees are located in India. Therefore, we are highly dependent on prevailing
economic conditions in India and its operational results are significantly affected by factors influencing the Indian economy. Factors
that may adversely affect the Indian economy, and hence results of our operations, may include:
| a) | any
increase in foreign exchange rates; |
| b) | any
increase in interest rates or the inflation; |
| c) | any
scarcity of credit or other financing in India, resulting in an adverse impact on economic
conditions in India and scarcity of financing of our business developments and expansions; |
| e) | changes
in Indian tax rates and other monetary policies; |
| f) | political
instability, terrorism or military conflict in India or in countries in the region or globally
including India’s neighboring countries; |
| g) | occurrence
of natural or man-made disasters; |
| h) | prevailing
regional or global economic conditions, including in India’s principal export markets;
and |
| i) | other
significant regulatory or economic developments in or affecting India or its telecom sector. |
Any downshift or perceived
downshift in the Indian economy could negatively impact our business, results of operations and financial condition.
Introduction of 5G compatible mobile handsets
and other new technologies may be expensive, and if we are unable to provide 5G compatible mobile handsets, our business will suffer.
In the Indian market, 5th
Generation (5G) cellular network technology is being unveiled and once 5G tenders are issued, mobile manufacturing companies are
required to update the technology to make 5G compatible mobile handsets. Updating to 5G technology will be a costly affair for us. In
order to remain in business and ahead of competition, we will need to upgrade their handsets or otherwise integrate 5G capabilities into
its products and services so as to provide 5G services. If we are not able to provide 5G compatible mobile handsets, then its market
share will get significantly eroded, thus having material adverse effect on its operations and revenues.
We are subject to supervision and regulation
by the Reserve Bank of India (or “RBI”) and the Department of Telecommunication, and any non-compliance may adversely impact
our business.
Do Mobile is a wholly owned
subsidiary of a foreign company. The foreign investment in India is regulated by the Reserve Bank of India and business of telecommunication
is regulated by the Department of Telecommunication. Currently, the business of Do Mobile falls within the meaning of “manufacturing
sector.” Foreign investment in manufacturing sector is automatically permitted and an Indian company can sell its products, without
obtaining any government permission. Any change in legislative and regulatory requirements may impact the business activity of Do Mobile
and may also lead to higher cost of compliance. This may adversely impact our business.
Our operating results may be adversely
affected by law and regulations to which we are subject.
We are required to comply
with central, state, local and foreign laws and regulations governing the protection of the environment and occupational health and safety,
including laws stringent norms prescribed by Bureau of Indian Standards and Department of Telecommunication. We cannot assure you that
we will at all times be in complete compliance with such laws, regulations and norms. If we violate or fail to comply with the requirements,
we could be fined or otherwise sanctioned by regulators. In some instances, such a fine or sanction could be material. In addition, these
requirements may become more stringent over time and we cannot assure you that we will not incur material costs or liabilities in the
future. These could include new regulations that we may be unable to comply with and this will impact our business.
Moreover, there are number
of taxes and other levies imposed at the level of the Central Government and State Government in India. These include: (i) income tax;
(ii) goods and service tax; (iii) state duty; (iv) stamp duty charges; and (v) other taxes and surcharges. These tax rates may increase
in future creating more financial burden on us and may affect our overall tax efficiency. Additional tax exposure could adversely affect
its business and results of operations.
Non-compliance with the Indian labor law
requirements may invite criminal and civil actions against us in India.
India has stringent labor
legislation that protects the interests of workers, including legislation that govern relationships with employees, in such areas as
minimum wage and maximum working hours, overtime, working conditions, and hiring and terminating of employees. Do Mobile is irregular
in labor law compliances, primarily relating to maintenance of statutory records and registers. Do Mobile has not obtained any registration
under applicable Shops and Establishment Act, wherever applicable. Furthermore, Sexual Harassment of Women at Workplace (Prevention,
Prohibition and Redressal) Act, 2013, mandatorily requires companies to have a defined policy on Prevention of Sexual Harassment at Workplace
and must set up an Internal Complaints Committee to redress grievances related to sexual harassment. Do Mobile neither has any defined
written policy on Prevention of Sexual Harassment nor have constituted any Internal Complaints Committee to redress the issues relating
to sexual harassment at workplace. Any non-compliance of applicable labor laws, will expose Do Mobile and its key managerial personnel
to penalties and fines which may impact our operations and growth.
Do Mobile is subject to new certification
regulations for mobile handsets introduced by the Department of Telecommunications, Government of India.
The Department of Telecommunication,
Government of India (“DOT”) is a nodal regulator to regulate the telecommunication industry in India. DOT issues several
regulations and guidelines to govern the telecommunication market. Since Do Mobile is involved in marketing and selling of mobile handset,
the business activity of Do Mobile falls within the ambit of telecommunication.
Recently, the Telecommunication
Engineering Centre of DOT has notified the Procedure for Mandatory Testing and Certification of Telecommunication (“Certification
Procedures”) vide its notification dated October 2, 2018 as per the Indian Telegraph Act, 1885 and the Indian Telegraph Rules,
1951. The Certification Procedure has been enforced in phases. Phase-I came into effect from October 1, 2019 for the telecom equipment
covered under Simplified Certification Scheme prescribed by the Government of India (i.e. SCS) which inter alia included two wire telecom
equipment, modem, G3 fax machine, ISDN CPE and in respect of certain telecom equipment under General Certification Scheme prescribed by
the Government of India (i.e. GCS) which inter alia included cord-less phones and PABX. Thereafter, Phase II was enforced from October
1, 2020 and covered equipment which inter alia covered transmission terminal equipment, PON (passive optical network) family of broadband
equipment and feedback devises. The DOT vide its notification dated September 22, 2021 has announced mandatory certification of certain
equipment under Phase III and Phase IV with effect from July 01, 2022 and February 01, 2022 respectively. However, DOT vide an amendment
notification dated January 31, 2022 has extended the date of mandatory certification of Phase IV products from February 01, 2022 to July
01, 2022. DOT through another amendment notification dated June 13, 2022 has extended the date of mandatory certification of Phase III
and Phase IV products by one year i.e. from July 01, 2022 to July 01, 2023.
In accordance with the Certification
Procedures, every original equipment manufacturer, importer and dealer of the telecom equipment (i.e., mobile phones) engaged in sale
or import of any telecom equipment in India is required to mandatorily obtain a certificate from Telecommunication Engineering Centre
and mark or affix the equipment with the appropriate certification label. Additionally, in order to obtain the Certification, it is mandatory
that the equipment needs to be tested only from a designated Conformance Assessment Body (“CAB”) or recognized CAB of Mutual
Recognition Agreement partner country. The Certification Procedures mandate the certification of mobile handsets manufactured by mobile
manufacturers and mobile manufacturer cannot sell the mobile handsets without such certification.
The Ministry of Electronics
and Information Technology (MEITY) also carries out compulsory registration of specified goods (including mobile phones) under the Electronics
and Information Technology (Requirement for Compulsory Registration) Order, 2012, as amended, which is similar to Certification Procedures
prescribed by DOT.
In order to address the regulatory
overlap with respect to mandatory testing procedures, recently, the DOT (in consultation with MEITY) vide its notification dated May 24,
2022 (“Exemption Notification”), has exempted ‘Mobile user equipment/ mobile handset’ from prior mandatory testing
and certification in respect of parameters as determined by the concerned authority.
Do Mobile is not engaged in
manufacturing mobile handsets and outsources such manufacture to third-party manufacturers. We believe post the Exemption Notification,
the Certification Procedures as prescribed by DOT will not be applicable to such third-party manufacturers. However, third-party manufacturers
will still be required to obtain certification as prescribed by MEITY. The cost of obtaining the certification will result in an increase
of the cost of mobile handsets and thus, may impact sales of mobile handsets of Do Mobile. Therefore, we will be required to more carefully
assess the market when launching new models of our products.
Do Mobile is non-compliant with respect
to certain issuances of its share capital and may be subject to regulatory action by the Registrar of Companies and Ministry of Corporate
Affairs, which could adversely affect our business operations and profitability.
Do Mobile, being an Indian
company, is required to comply with certain procedures with respect to its share capital. However, there have been some lapses on the
part of Do Mobile with respect to its share capital. Procedural lapses include but are not limited to:
| a) | Under
the extant provisions of Companies Act, 2013, an Indian company cannot issue and allot shares
in excess of its authorized share capital. The board of directors of Do Mobile at their meeting
dated December 15, 2017 had approved and allotted 483,940 shares of Rs. 10 to Bridgetime.
The authorized share capital of Do Mobile as on December 15, 2017 was Rs. 35,000,000. Whereas,
on account of the aforesaid allotment the paid-up share capital of Do Mobile increased to
Rs. 35,509,150, which was in excess of its then authorized share capital of Rs. 35,000,000. |
| b) | There
have been certain inconsistencies regarding historical increases in authorized share capital
of Do Mobile from Rs. 35,000,000 to Rs. 50,000,000. |
| c) | In
terms of Section 89 of the Companies Act, 2013 read with the Companies (Management and Administration)
Rules, 2014, a person whose name is entered in the register of members of a company but who
does not hold the beneficial interest in such shares must file a declaration to such effect
with the company in the prescribed form. Further, every person holding beneficial interest
in shares of a company must file with the company, a declaration disclosing such interest
in the prescribed form. Such declarations are to be noted by the company in its register
of members and make filings with the Registrar of Companies evidencing the same. Ms. Grover
held 1 share of Do Mobile as a nominee of Bridgetime, parent company of Do Mobile, and her
name was entered in the register of members. Thus, Ms. Grover had the registered ownership
and Bridgetime Limited has beneficial ownership of said 1 share. No declaration with respect
to registered and beneficial ownership of 1 share has been made by Ms. Grover and Bridgetime
Limited respectively, nor has Do Mobile made any filing in this regard with the Registrar
of Companies. Pursuant to Ms. Grover’s resignation, the said share was transfer to
Ms. Aayushi Gautam who is now its registered owner while Bridgetime Limited continues to
the beneficial owner of the said share. A declaration with respect to the registered and
beneficial ownership of this one share is yet to be made by Do Mobile with the Registrar
of Companies. |
Do Mobile may be subject
to regulatory action by the Registrar of Companies and Ministry of Corporate Affairs on account of the aforesaid non-compliances in relation
to issuance of its share capital, thus exposing it to certain fines and penalties. Directors and key management of Do Mobile are also
liable for such non-compliance and may be subjected to fines and penalties.
In addition to the aforesaid,
Do Mobile has not maintained its statutory registers and minutes of the meetings of the board of directors and shareholders as mandated
under the extant provisions of the Companies Act, 2013. Do Mobile has also not been in compliance with regard to the holding of its board
meetings at regular intervals as provided under the Companies Act, 2013 read with rules and regulations made thereunder.
While no penalties have been
imposed on Do Mobile for the aforesaid non-compliance thus far, Do Mobile cannot assure that any regulatory authorities will not impose
any penalty on Do Mobile or will not take any penal action with respect to the aforesaid non-compliance. If any adverse actions are taken
against Do Mobile, results of operations and profitability of Do Mobile could be adversely affected.
Do Mobile is delayed in complying with
reporting guidelines under the provisions of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (which replaced erstwhile
Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2017) and may be subject
to regulatory action by the Reserve Bank of India, which could adversely affect our business and operations.
Under the extant provisions
of Foreign Exchange Management Act, 1999 read with Foreign Exchange Management (Non-debt Instruments) Rules, 2019, every Indian company
receiving foreign direct investment for issuance of shares shall within a period of 30 days from the date of issue of shares to the foreign
entity file a form FC-GPR (now part of Single Entity Master Form) with the Reserve Bank of India. There has been some delay on the part
of Do Mobile in complying with aforesaid filing of form FC-GPR within the stipulated timelines. Also, in terms of the Foreign Exchange
Management (Non-debt Instruments) Rules, 2019, an Indian company receiving foreign direct investment must file an annual report titled
‘Foreign Liabilities and Assets’ (“FLA”) on or before July 15 of each year. Do Mobile has not filed its FLA for
the financial year 2017-18, 2018-19, 2019-20, 2020-21 and 2021-22 with the Reserve Bank of India. While no penalties have been imposed
on Do Mobile for the aforesaid non-compliances thus far; there cannot be any assurance that Reserve Bank of India will not impose any
penalty on Do Mobile or will not take any penal action in relation aforesaid non-compliances. If any penalties or other penal measures
are enforced, this could adversely affect our business and operations.
Any foreign direct investment in Do Mobile
from an entity of a country, which shares a land border with India or the beneficial owner of an investment into India who is situated
in or is a citizen of any such country, shall invest only with governmental approval. Any delay in obtaining such governmental approval
could adversely affect business operations and cash flow position of Do Mobile.
Do Mobile liquidity and its
working capital requirements are mainly met through foreign direct investment. Do Mobile’s potential investors are either based
out of China, or such investments are from persons or entities whose ultimate beneficial ownership is situated in or is from a citizen
of such countries which share land borders with India including China. Additionally, as per current corporate structure, Mr. Bao Minfei,
who is a citizen of China, holds ultimate beneficial ownership in Do Mobile indirectly through various subsidiaries. The Government of
India vide Notification S.O. 1278 (E) dated April 22, 2020 (i.e., Foreign Exchange Management (Non-debt Instruments) Amendment Rules,
2020) introduced a crucial amendment in the provisions of the FEMA Rules and has now stipulated that any investment by an entity of a
country, which shares land border with India, or where the beneficial owner of an investment into India is situated in or is a citizen
of any such country, can be made only upon seeking prior approval of the Government of India. These restrictions will also apply in the
case of transfer of ownership. Although Mr. Bao’s existing beneficial ownership in Do Mobile is not subject to approval, any new
investment in Do Mobile by a Chinese entity or Chinese citizen or entities that are beneficially owned by Chinese entities or citizens,
will be subject to prior approval of the Government of India. The Government of India will grant approval depending upon the facts and
circumstances of each case. Any delay in receipt of such approvals, will adversely impact operations and cash flow position of Do Mobile
and will put Do Mobile in a challenging position.
Risks Related to Our Ordinary Shares
The trading prices of our ordinary shares
are likely to be volatile, which could result in substantial losses to investors.
The market price of the ordinary
shares on Nasdaq may fluctuate after listing as a result of several factors, including the following:
| ● | volatility
in the mobile telecommunications and IoT industry, both in China and internationally; |
| ● | variations
in our operating results; |
| ● | risks
relating to our business and industry, including those discussed above; |
| ● | strategic
actions by us or our competitors; |
| ● | reputational
damage from accidents or other adverse events related to our company or its operations; |
| ● | investor
perception of us, the technology sector in which we operate, the investment opportunity associated
with the ordinary shares and our future performance; |
| ● | addition
or departure of our executive officers or directors; |
| ● | changes
in financial estimates or publication of research reports by analysts regarding our ordinary
shares, other comparable companies or our industry generally; |
| ● | trading
volume of our ordinary shares; |
| ● | future
sales of our ordinary shares by us or our shareholders; |
| ● | domestic
and international economic, legal and regulatory factors unrelated to our performance; or |
| ● | the
release or expiration of lock-up or other transfer restrictions on our outstanding ordinary
shares. |
Furthermore, the stock markets
often experience significant price and volume fluctuations that have affected and continue to affect the market prices of equity securities
of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies.
These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions or interest
rate changes may cause the market price of ordinary shares to decline.
Sales of a substantial number of our ordinary
shares in the public market by our existing shareholders could cause our share price to fall.
Sales of a substantial number
of our ordinary shares in the public market, or the perception that these sales might occur, could depress the market price of our ordinary
shares and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect
that sales may have on the prevailing market price of our ordinary shares. All of the ordinary shares owned by our directors, officers
and existing shareholders are subject to lock-up agreements with the underwriters in our initial public offering that restrict the shareholders’
ability to transfer our ordinary shares until after October 3, 2021. Substantially all of our outstanding ordinary shares will become
eligible for unrestricted sale upon expiration of the lock-up period. In addition, ordinary shares issued or issuable upon exercise of
options and warrants vested as of the expiration of the lock-up period will be eligible for sale at that time. Sales of ordinary shares
by these shareholders could have a material adverse effect on the trading price of our ordinary shares.
There are no assurance that our securities,
including our ordinary shares, will continue to be listed or, if listed, that we will be able to comply with the continued listing standards
of Nasdaq, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.
Even though our ordinary
shares are currently listed on the NASDAQ, we cannot assure you that we will be able to meet NASDAQ’s continued listing requirement
or maintain other listing standards. If our ordinary shares are delisted by NASDAQ, and we are not able to list our securities on another
national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, then, we
could face significant material adverse consequences, including:
| ● | less
liquid trading market for our securities; |
| ● | more
limited market quotations for our securities; |
| ● | determination
that our ordinary shares are a “penny stock” that requires brokers to adhere
to more stringent rules and possibly resulting in a reduced level of trading activity in
the secondary trading market for our securities; |
| ● | more
limited research coverage by stock analysts; |
| ● | more
difficult and more expensive equity financings in the future. |
The National Securities Markets
Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities,
which are referred to as “covered securities.” If our ordinary shares remain listed on NASDAQ, our ordinary shares will be
covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the
states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states
can regulate or bar the sale of covered securities in a particular case. If our securities were no longer listed on NASDAQ and therefore
not “covered securities”, we would be subject to regulation in each state in which we offer our securities.
Future issuance of our ordinary shares
could cause dilution of ownership interests and adversely affect our stock price.
We may choose to raise additional
capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating
plans. To the extent that additional capital is raised through the sale of our equity or convertible debt securities, the issuance of
such securities could result in further dilution to our shareholders or result in downward pressure on the price of our ordinary shares
Shares eligible for future sale may depress
our stock price.
As of the date of this annual
report, we had 8,267,793 ordinary shares outstanding. All of the ordinary shares of held by affiliates are restricted or control securities
under Rule 144 promulgated under the Securities Act. Sales of ordinary shares under Rule 144 or another exemption under the Securities
Act or pursuant to a registration statement could have a material adverse effect on the price of the ordinary shares and could impair
our ability to raise additional capital through the sale of equity securities.
We may issue preference shares to investor
that grant them superior rights than holders of our ordinary shares without obtaining shareholder approval.
Our amended and restated
memorandum and articles of association authorize our board of directors to issue one or more series of preference shares and set the
terms of the preference shares without seeking any further approval from our shareholders. Any preference shares that are issued may
rank ahead of our ordinary shares, in terms of dividends, liquidation rights and voting rights.
If securities or industry analysts do not
publish or cease publishing research reports about us, if they adversely change their recommendations regarding our ordinary shares or
if our operating results do not meet their expectations, the price of our ordinary shares could decline.
The trading market for our
ordinary shares will be influenced by the research and reports that industry or securities analysts may publish about us, our business,
our market or our competitors. Securities and industry analysts currently publish limited research on us. If there is limited or no securities
or industry analyst coverage of our company, the market price and trading volume of our ordinary shares would likely be negatively impacted.
Moreover, if any of the analysts who may cover us downgrade our ordinary shares, provide more favorable relative recommendations about
our competitors or if our operating results or prospects do not meet their expectations, the market price of our ordinary shares could
decline. If any of the analysts who may cover us were to cease coverage or fail to regularly publish reports on us, we could lose visibility
in the financial markets, which in turn could cause our share price or trading volume to decline.
As a foreign private issuer, we are subject
to different U.S. securities laws and NASDAQ governance standards than domestic U.S. issuers. This may afford less protection to holders
of our ordinary shares, and you may not receive corporate and company information and disclosure that you are accustomed to receiving
or in a manner in which you are accustomed to receiving it.
As a foreign private issuer,
the rules governing the information that we disclose differ from those governing U.S. corporations pursuant to the Exchange Act. Although
we intend to report quarterly financial results and report certain material events, we are not required to file quarterly reports on
Form 10-Q or provide current reports on Form 8-K disclosing significant events within four days of their occurrence and our quarterly
or current reports may contain less information than required for domestic issuers. In addition, we are exempt from the SEC’s proxy
rules, and proxy statements that we distribute will not be subject to review by the SEC. Our exemption from Section 16 rules regarding
sales of ordinary shares by insiders means that you will have less data in this regard than shareholders of U.S. companies that are subject
to the Exchange Act. As a result, you may not have all the data that you are accustomed to having when making investment decisions with
respect to U.S. public companies.
As a foreign private issuer,
we are exempt from complying with certain corporate governance requirements of the NASDAQ applicable to a U.S. issuer. As the corporate
governance standards applicable to us are different than those applicable to domestic U.S. issuers, you may not have the same protections
afforded under U.S. law and the Nasdaq Stock Market rules as shareholders of companies that do not have such exemptions.
We may lose our foreign private issuer
status in the future, which could result in significant additional costs and expenses.
We could cease to be a foreign
private issuer if a majority of our outstanding voting securities are directly or indirectly held of record by U.S. residents and we
fail to meet additional requirements necessary to avoid loss of foreign private issuer status. The regulatory and compliance costs to
us under U.S. securities laws as a U.S. domestic issuer may be significantly higher than costs we incur as a foreign private issuer,
which could have a material adverse effect on our business and financial results.
As an “emerging growth company”
under the JOBS Act, we are allowed to postpone the date by which we must comply with some of the laws and regulations intended to protect
investors and to reduce the amount of information we provide in our reports filed with the SEC, which could undermine investor confidence
in our company and adversely affect the market price of our ordinary shares.
For so long as we remain
an “emerging growth company” as defined in the JOBS Act, we have taken and intend to continue to take advantage of certain
exemptions from various requirements that are applicable to public companies that are not “emerging growth companies” including:
| ● | being
permitted to provide only two years of audited financial statements, in addition to any required
unaudited interim financial statements, with correspondingly reduced “Item 5. Operating
And Financial Review And Prospects” disclosure; |
| ● | not
being required to comply with the auditor attestation requirements for the assessment of
our internal control over financial reporting provided by Section 404 of the Sarbanes-Oxley
Act of 2002; |
| ● | not
being required to comply with any requirements adopted by the Public Company Accounting Oversight
Board requiring mandatory audit firm rotation or a supplement to the auditor’s report
in which the auditor would be required to provide additional information about the audit
and our financial statements; |
| ● | reduced
disclosure obligations regarding executive compensation; and |
| ● | not
being required to hold a nonbinding advisory vote on executive compensation or seek shareholder
approval of any golden parachute payments not previously approved. |
We have taken and intend
to continue to take advantage of certain of these exemptions until we are no longer an “emerging growth company.” We will
remain an emerging growth company until the earlier of: (1) the last day of the fiscal year (a) following the fifth anniversary of the
completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which
we are deemed to be a large accelerated filer, which means the market value of our ordinary shares that is held by non-affiliates exceeds
$700 million as of the last business day of our most recently completed second fiscal quarter, and (2) the date on which we have issued
more than $1 billion in non-convertible debt during the prior three-year period.
If we are classified as a passive foreign
investment company, United States taxpayers who own our ordinary shares may have adverse United States federal income tax consequences.
A non-U.S. corporation such
as ourselves will be classified as a passive foreign investment company (“PFIC”) for any taxable year if, for such year,
either
| ● | At
least 75% of our gross income for the year is passive income; or |
| ● | The
average percentage of our assets (determined at the end of each quarter) during the taxable
year which produce passive income or which are held for the production of passive income
is at least 50%. |
Passive income generally
includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business)
and gains from the disposition of passive assets.
If we are determined to be
a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our ordinary shares,
the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.
Taking the amount of cash
we raised in our initial public offering into account, together with any other assets held for the production of passive income, it is
possible that, for our 2021 taxable year or for any subsequent year, more than 50% of our assets may be assets which produce passive
income. We will make this determination following the end of any particular tax year. Although the law in this regard is unclear, we
treat our consolidated affiliated entities as being owned by us for United States federal income tax purposes, not only because we exercise
effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits.
For purposes of the PFIC analysis, in general, a non-U.S. corporation is deemed to own its pro rata share of the gross income and assets
of any entity in which it is considered to own at least 25% of the equity by value.
For a more detailed discussion
of the application of the PFIC rules to us and the consequences to U.S. taxpayers if we were determined to be a PFIC, see “Taxation
— Material U.S. Federal Income Tax Considerations — Passive Foreign Investment Company”.
ITEM 4. INFORMATION ON THE COMPANY
4A. History and Development of the Company
We commenced our operations
in June 2008 through UTime SZ, a PRC company established by Mr. Bao, Mr. Junlin Zhou and Mr. Bo Tang. As of March 31, 2017, Mr. Bao, Mr.
Zhou and Mr. Tang held 52%, 28% and 20% of the equity interests of UTime SZ, respectively. In February 2018, Mr. Bao acquired the equity
interests of UTime SZ held by Mr. Zhou and Mr. Tang and became UTime SZ’s sole shareholder. In April 2019, UTime SZ approved a board
resolution and in August 2019 approved a shareholder resolution, both of which approved Mr. He, the controlling shareholder of HMercury
Capital Limited, to purchase a RMB21.4 million equity interest in UTime SZ which has been received as of the date of this annual report.
On September 3, 2019, UTime SZ approved a shareholder resolution to allow Mr. Bao to invest an additional RMB23.9 million equity interest
in UTime SZ, for which the consideration primarily consisted of the amount due to Kaiweixin of RMB23.0 million as of March 31, 2019. Kaiweixin
was controlled by Mr. Bao through an entrust agreement with Mr. Wukai Song, who owned 100% of equity interest of Kaiweixin and Mr. Bao
assumed all creditor rights after Kaiweixin was deregistered on June 21, 2019. As of the date of this annual report, Mr. Bao and Mr. He
held 96.95% and 3.05% equity interests of UTime SZ, respectively.
Beginning in late 2018, the
following transactions were undertaken to reorganize the legal structure (the “Reorganization”) of the Company. In October
2018, UTime Limited was incorporated in the Cayman Islands. In November 2018, UTime HK, a WOS of the Company, was incorporated in Hong
Kong and in December 2018, UTime WFOE, a WOS of the Company, was incorporated in China, respectively.
In March 2019, UTime WFOE
entered into a series of contractual agreements with our VIE, UTime SZ and its principal shareholder, Mr. Bao, which were further
amended and restated in August and September of 2019, respectively, and were entered into among UTime WFOE, VIE, Mr. Bao and Mr. He,
respectively. Pursuant to these agreements, we believe that these contractual arrangements enable us to (1) have power to direct the
activities that most significantly affects the economic performance of UTime SZ and its subsidiaries, and (2) receive the economic benefits
of UTime SZ and its subsidiaries that could be significant to UTime SZ and its subsidiaries. As a result of these contractual arrangements,
under U.S. GAAP, the Company is considered the primary beneficiary of UTime SZ for accounting purpose and is able to consolidate UTime
SZ and its subsidiaries in its consolidated financial statements.
Do Mobile is a Company
subsidiary that was incorporated by the Company on October 24, 2016 in New Delhi, India. Do Mobile is an operating entity that sells
cell phone products and provides after-sale services of our own in-house brand in India. Prior to the Reorganization, the majority
of Do Mobile’s equity interests were held by Mr. Bao through an entrustment agreement with Mr. Wukai Song through a holding
company, Bridgetime. Bridgetime was incorporated on September 5, 2016 in the BVI under the laws of the BVI, with Mr. Wukai Song
owning 70% of the equity interest of Bridgetime through an entrust agreement between him and Mr. Bao, and Mr. Yunchuan Li owning 30%
of the equity interest of Bridgetime. Do Mobile has w.e.f. 15.04.2022 changed its registered office from House No. 25, Street No. 7, Goyala Vihar,
Near Saint Thomas School, New Delhi-110071 to another location. The registered office of Do Mobile is now situated at New State Bank of
Patyal New Sabzi Mandi Azadpur, New Delhi 110033. Further, Do Mobile is yet to make its annual filings with the Registrar of Companies
in respect of the FY 2021-22.
On March 5, 2018, Bridgetime
issued 100,000 ordinary shares to Mr. Wukai Song, changing the shareholders’ structure of Bridgetime so that Mr. Wukai
Song owned a 90% equity interest in Bridgetime, which were controlled by Mr. Bao through an entrust agreement between him and Mr. Wukai
Song, and Mr. Li owning 10% of equity interest. On December 5, 2018, Bridgetime approved a board resolution that appointed and registered
Mr. Yihuang Chen a new director. On March 11, 2019, Bridgetime approved a board resolution that transferred 1 share of
Do Mobile to Mr. Yihuang Chen and made him nominal shareholder of Do Mobile, removed Mr. Li as the director of Bridgetime and authorized
representative of Do Mobile, and appointed Mr. Wukai Song as the authorized representative of Do Mobile. On April 4, 2019, Bridgetime
approved a board resolution that forfeited 15,000 ordinary shares of Bridgetime held by Mr. Li, cancelled those shares accordingly and
amended Bridgetime’s memorandum of association that changed the number of its authorized shares from 150,000 to 135,000 at a par
value of US$1.00. After this, Mr. WuKai Song owned 100% of the equity interest of Bridgetime, which was controlled by Mr. Bao through
an entrust agreement between him and Mr. Wukai Song. On May 23, 2019, Bridgetime approved a board resolution that transferred the 135,000
ordinary shares owned by Mr. Wukai Song to UTime Limited. As a result, Bridgetime is currently a WOS of the Company. Since inception,
Bridgetime has only made nominal investments in Do Mobile and no substantial business operations have occurred.
On May 20, 2019, the Company
approved a board resolution that agreed to transfer 12,000,000 of its ordinary shares then owned by Mr. Bao to Grandsky Phoenix Limited,
a company that was established under the laws of the BVI and 100% owned by Mr. Bao.
On June 3, 2019, the Company
entered into a share subscription agreement with HMercury Capital Limited, a company that was incorporated under the laws of the BVI
and controlled by Mr. He, one of our directors, pursuant to which HMercury Capital Limited purchased an aggregate of 377,514 of the Company’s
ordinary shares. On the same day, the Company approved a board resolution for issuance of 377,514 of the Company’s ordinary shares
at par value US$0.0001 to HMercury Capital Limited based on the share subscription agreement. As a result, Mr. Bao, through Grandsky
Phoenix Limited, and Mr. He, through HMercury Capital Limited, owned 96.95% and 3.05% of the equity interest of the Company, respectively.
On April 29, 2020, the Company approved a board
resolution that agreed to repurchase 7,620,000 and 239,721 ordinary shares, which were subsequently cancelled, at par value from Grandsky
Phoenix Limited and HMercury Capital Limited, respectively, pursuant to a share repurchase agreement that the Company entered into with
Grandsky Phoenix Limited and HMercury Capital Limited on April 29, 2020. On August 13, 2020, the Company approved a board resolution and
signed capital contribution letter with Grandsky Phoenix Limited and HMercury Capital Limited, respectively. Based on the capital contribution
letter, each shareholder opted not to receive the consideration for the Repurchased Shares and made a pure capital contribution in the
sum of the purchase price in favor of the Company without the issue of additional shares of the Company. In April 2021, we completed
our initial public offering of 3,750,000 ordinary shares. As a result, Mr. Bao, through Grandsky Phoenix Limited, and Mr. He, through
HMercury Capital Limited, own 4,380,000 ordinary shares, representing 52.98% of equity interest and 137,793 ordinary shares, representing
1.66% of equity interest of the Company, respectively, as of the date of this annual report.
On February 7, 2019, UTime India Private Limited
(“UTime India”) is incorporated in India and became a wholly owned subsidiary of UTime Trading.
On November 1, 2021, Guangxi
Utime Technology Co., Ltd. (“UTime Guangxi”) is incorporated in Guangxi, China and became a wholly owned subsidiary of UTime
Trading.
On December 17, 2021, UTime
Trading acquired 51% of the equity interest of Gesoper S De R.L. De C.V. (“Gesoper”). Gesoper is incorporated in Mexico and
is a subsidiary of UTime Trading.
On January 17, 2022, Gesoper
S De R.L. De C.V. (“Gesoper”) acquired 85% of Firts Communications And Technologies De Mexico S.A. De C.V. (“Firts”)
equity interest. Firts was incorporated in Mexico and is a subsidiary of Gesoper.
The following diagram illustrates
our corporate structure as of the date of this annual report.
Ownership and Organization Chart
As of the date of this annual
report, details of the material subsidiaries of the Company and UTime SZ are set forth below:
Name |
|
Date
of Incorporation |
|
Jurisdiction
of Incorporation |
|
Percentage
of beneficial ownership |
|
Principal Activities |
Subsidiaries
of the Company |
|
|
|
|
|
|
|
|
UTime
International Limited |
|
November 1, 2018 |
|
Hong Kong |
|
100% |
|
Investment
holding company |
Shenzhen
UTime Technology Consulting Co., Ltd. |
|
December 18, 2018 |
|
China |
|
100% |
|
Investment
holding company |
Bridgetime
Limited |
|
September 5, 2016 |
|
British Virgin Island |
|
100% |
|
Investment
holding company |
Do
Mobile India Private Ltd. |
|
October 24, 2016 |
|
India |
|
99.99% |
|
Sales
of in-house brand products in India |
|
|
|
|
|
|
|
|
|
VIE |
|
|
|
|
|
|
|
|
United
Time Technology Co., Ltd. |
|
June 12, 2008 |
|
China |
|
100% |
|
Research
and development of products, and sales |
|
|
|
|
|
|
|
|
|
Subsidiaries
of the VIE |
|
|
|
|
|
|
|
|
Guizhou
United Time Technology Co., Ltd. (“UTime GZ”) |
|
September 23, 2016 |
|
China |
|
UTime SZ’s subsidiary |
|
Manufacturing |
UTime
Technology (HK) Company Limited (“UTime Trading”) |
|
June 25, 2015 |
|
Hong Kong |
|
UTime SZ’s subsidiary |
|
Trading |
UTime
India Private Limited (“UTime India”) |
|
February 7, 2019 |
|
India |
|
UTime Trading’s Subsidiary |
|
Trading |
Guangxi
Utime Technology Co., Ltd. (“UTime Guangxi”) |
|
November 1, 2021 |
|
China |
|
UTime Trading’s Subsidiary |
|
Manufacturing
of mobile devices and components |
Gesoper
S De R.L. De C.V. (“Gesoper”) |
|
October 21, 2020 |
|
Mexico |
|
UTime Trading’s subsidiary |
|
Trading |
Firts
Communications And Technologies De Mexico S.A. De C.V. (“Firts”) |
|
November 12, 2021 |
|
Mexico |
|
Gesoper’s subsidiary |
|
Trading |
Contractual Arrangements with the VIE and
its Respective Shareholders
We conduct substantially all
of our business in the PRC through a series of contractual arrangements with our VIE and its shareholders. The VIE and its subsidiaries
hold the requisite licenses and permits necessary to conduct the Company’s business. In addition, the VIE and its subsidiaries hold
the assets necessary to operate the Company’s business and generate substantially all of the Company’s revenues.
Our contractual arrangements
with our VIE and its respective shareholders allow us to: (i) determine the most significant economic activities of the VIE; (ii) receive
substantially all of the economic benefits of our VIE; and (iii) have an exclusive option to purchase all or part of the equity interest
in and/or assets of our VIE when and to the extent permitted by PRC laws.
As a result of our direct
ownership in UTime WFOE and the contractual arrangements with our VIE, we are regarded as the primary beneficiary of our VIE for accounting
purposes, and we treat the VIE and its subsidiaries as our consolidated affiliated entities under U.S. GAAP. We have consolidated the
financial results of our VIE and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.
The following is a summary
of the contractual arrangements by and among UTime WFOE, the VIE and the shareholders of the VIE and their spouses, as applicable.
Power of Attorney. Pursuant
to a series of powers of attorney issued by each shareholder of the VIE, each shareholder of the VIE irrevocably authorizes UTime WFOE
or any natural person duly appointed by UTime WFOE to exercise on the behalf of such shareholder with respect to all matters concerning
the shareholding of such shareholder in the VIE, including without limitation, attending shareholders’ meetings of the VIE, exercising
all the shareholders’ rights and shareholders’ voting rights, and designating and appointing the legal representative, the
chairperson, directors, supervisors, the chief executive officer and any other senior management of the VIE.
On September 4, 2019,
UTime WFOE, the VIE and Mr. Bao, a shareholder of the VIE, entered into the second amended and restated power of attorney, while
UTime WFOE, the VIE and Mr. He, a shareholder of the VIE, entered into an amended and restated power of attorney, which contain
terms substantially similar to the power of attorney executed by the shareholders of the VIE described above.
Equity Pledge Agreement.
Pursuant to the Equity Pledge Agreement entered into among UTime WFOE, the VIE and the shareholders of the VIE, the shareholders
of the VIE agreed to pledge their 100% equity interests in the VIE to UTime WFOE to secure the performance of the VIE’s obligations
under the applicable existing exclusive call option agreement, power of attorney, exclusive technical consultation and service agreement,
business operation agreement and also the equity pledge agreement. If events of default defined therein occur, upon giving written notice
to the VIE shareholders, UTime WFOE may exercise its rights to enforce the pledged equity interest to the extent permitted by PRC laws.
On September 4, 2019,
UTime WFOE, the VIE and the shareholders of the VIE entered into the second amended and restated equity pledge agreement, which contains
terms substantially similar to the equity pledge agreement described above.
As of the date of this annual
report, we have completed the equity pledge registration with the competent Administration for Market Regulation in accordance with the
PRC Property Rights Law and the Civil Code of the PRC.
Spouse Consent Letter.
Pursuant to a series of spousal consent letters, executed by the spouses of the shareholders of the VIE, Mr. Bao and Mr. He,
such signing spouses confirmed and agreed that the equity interests of the VIE are the own property of their applicable spouses and shall
not constitute the community property of the couples. Such spouses also irrevocably waived any potential right or interest that may be
granted by operation of applicable law in connection with the equity interests of the VIE held by their applicable spouses.
On September 4, 2019,
Mr. Bao’s spouse executed the second amended and restated spousal consent letter while Mr. He’s spouse executed
an amended and restated spousal consent letter, which contains terms substantially similar to the spousal consent letter described above.
Business Operation Agreement.
Pursuant to the business operation agreement entered into among UTime WFOE, the VIE and the shareholders of the VIE, the shareholders
of the VIE agreed that without the prior written consent of UTime WFOE or any party designated by UTime WFOE, the VIE shall not engage
in any transaction which may have a material or adverse effect on any of its assets, businesses, employees, obligations, rights or operations
(except for those occurring in the due course of business or in day-to-day business operations, or those already disclosed to UTime
WFOE and with the explicit prior written consent of UTime WFOE). In addition, the VIE and its shareholders jointly agreed to accept and
strictly implement any proposal made by UTime WFOE from time to time regarding the employment and removal of the VIE’s employees,
its day-to-day business management and the financial management system of the VIE.
On September 4, 2019,
UTime WFOE, the VIE and the shareholders of the VIE entered into the second amended and restated business operation agreement, which
contains terms substantially similar to the business operation agreement described above.
Exclusive Technical Consultation
and Service Agreement. Pursuant to the exclusive technical consultation and service agreement entered into between UTime WFOE and
the VIE, dated March 19, 2019, UTime WFOE has the exclusive right to provide or designate any entity to provide the VIE business support,
technical and consulting services. Pursuant to such agreement, the VIE agreed to pay UTime WFOE (i) the service fees equal to the sum
of 100% of the net income of the VIE of that year or such other amount otherwise agreed by UTime WFOE and the VIE; and (ii) a service
fee otherwise confirmed by UTime WFOE and the VIE for specific technical services and consulting services provided by UTime WFOE in accordance
with the VIE’s needs from time to time. The exclusive consultation and service agreement will continue to be valid unless the written
agreement is signed by all parties thereto to terminate it or a mandatory termination is requested in accordance with applicable PRC
laws and regulations.
Exclusive call option
agreement. Pursuant to the exclusive call option agreement entered into among UTime WFOE, the VIE and the shareholders of the VIE,
each of the shareholders has irrevocably granted UTime WFOE an exclusive option to purchase all or part of its equity interests in the
VIE, and the VIE has irrevocably granted UTime WFOE an exclusive option to purchase all or part of its assets.
With regard to the equity
transfer option, the total transfer price to be paid by UTime WFOE or any other entity or individual designated by UTime WFOE for exercising
such option shall be the capital contribution mirrored by the corresponding transferred equity in the registered capital of the VIE,
provided that if the lowest price permitted by the then-effective PRC laws is lower than the above capital contribution, the transfer
price shall be the lowest price permitted by the PRC laws. With regard to the asset purchase option, the transfer price to be paid by
UTime WFOE or any other entity or individual designated by UTime WFOE for exercising such option shall be the lowest price permitted
by the then-effective PRC laws.
On September 4, 2019,
UTime WFOE, VIE and the shareholders of VIE entered into the second amended and restated exclusive call option agreement, which contains
terms substantially similar to the exclusive call option agreement described above.
4B. Business Overview
We are committed to providing
cost-effective mobile devices to consumers globally and to helping low-income individuals from established markets, including
the United States, and emerging markets, including India and countries in South Asia and Africa, have better access to updated mobile
technology.
We are mainly engaged in
the design, development, production, sales and brand operation of mobile phones, accessories and related consumer electronics. We also
provide Electronics Manufacturing Services (“EMS”), including Original Equipment Manufacturer (“OEM”), which
we manufacture products solely pursuant to customers’ orders, and Original Design Manufacturer (“ODM”) services, which
we not only manufacture but also design products based on clients’ demand, for well-known brands, such as TCL Communication
Technology Holdings, Ltd., a subsidiary of TCL Corporation, Swagtek Inc., Shanghai Sunvov Communications Technology Co., Ltd. and T2Mobile
International Limited. Our operations are based in China but most of our products are sold overseas, including India, Brazil, the United
States, and other emerging markets countries in South Asia, Africa and Europe. We have two in-house brands, “UTime,” which
is our middle-to-high end label and targets middle class consumers from emerging markets; and “Do”, our low- to mid-end brand,
which is positioned to target grassroots consumers and price-sensitive consumers in emerging markets. Our prime end user groups are segmented
into regions like South America, South Asia, Southeast Asia and Africa.
We value systematic management
and organize production with strictly high-quality standards and production technology. We continuously endeavor to improve our
overall manufacturing service level, to strengthen our cost control processes, and to enhance our ability to respond rapidly to market
dynamics in order to ensure a sustainable development in our EMS segment, especially in Printed Circuit Board and Assembly (“PCBA”)
for consumer electronic products.
Market Opportunities
Global Mobile Phone Market Overview
We believe that the global mobile phone market
has huge potential and broad development prospects
Benefiting from the continuous
upgrading of communication technologies and mobile phone parts, we believe that the global mobile phone market is currently maintaining
a steady growth trend. With the advent of the Fifth-Generation (“5G”) era, we estimate that the average annual shipments
value of mobile phones worldwide are expected to increase steadily from 2019 to 2022.
Due to a fast increase in
the population of Fourth-Generation (“4G”) mobile phones from 2013 to 2015, we believe that the global mobile phone
shipments volume reached its peak and the speed has tended to slow down because of the saturated market of 4G mobile phones. However,
we estimate that the mobile phone manufacturing industry, especially in China, will continue to grow and we expect the mobile phone shipments
value will increase mainly driven by the growing demand for 5G mobile phones.
Tablets and wearable devices,
especially smart watch, are the next driven markets that we believe have great opportunities. 5G implementation will bring more orders
of tablets and smart accessories in both developed and emerging markets.
We believe that the industry is in a transitional
period and product performance continues to evolve.
The strong demand for new
products triggered by technology upgrades and functional innovations has driven the mobile phone industry to achieve rapid penetration
rate. However, as the industry matures and enters the transition period from 4G to 5G, we believe that the industry growth rate will
slow down along with product homogenization. At the same time, we believe that the gradual increase driven by the demand of 5G will make
the relevant manufacturers in the mobile phone industry pay more attention to the sales growth brought by higher quality products, which
may also encourage the users to increase their frequency in changing models.
Emerging Markets Mobile Phone Markets Overview
The market starts late and has great potential
to grow.
Consumer electronics, for
instance, mobile phones, focus more on emerging markets, where disposable income is growing fast and the market is far less penetrated.
Emerging markets are typically referred to as areas in Asia, South America, Eastern Europe and Africa. The populations in those areas
are large and the increasing household income makes consumer electronics, like mobile phones, more affordable. We believe that predicted
rapid economic development, the release of demographic dividends (in the form of an accelerated economic growth and improved productivity
from youth) and the construction of communication technology facilities will drive rapid growth in sales in emerging markets.
The proportion of smartphones has increased
with a stronger demand.
Currently, we believe the
proportion of feature phones is still higher than that of smartphones. However, with the gradual maturity of emerging markets, the smartphones
market continues to expand. The market share of smartphones in this market has increased, and we anticipate there will be a large structural
improvement. Combining the factors of great growth potential in emerging markets and the demand for smartphones due to the development
of 5G infrastructure, we believe that the smartphone shipment volume is expected to increase over from 2019 to 2022.
Why We are Focusing on Emerging Markets
We estimate that from 2019
to 2022, the average annual growth rate of smartphone shipments in the world’s major emerging markets, represented
by Africa, Latin America, and other South Asia countries, among others, will be significantly higher than the annual growth of smartphone
shipments in global established markets. Therefore, we believe that emerging markets will be the main sources of growth in global mobile
phone sales for many years to come.
As far as emerging markets
are concerned, feature phones still retain a large market share. On one hand, due to the differences in the level of economic development
in various countries, a certain proportion of the population in emerging markets has not obtained got access to mobile phones, and the
upgrade of telecommunication infrastructures from Second-Generation (“2G”) to Third-Generation (“3G”)
and 4G is constrained due to a shortage of foundational funding in emerging markets. Meanwhile, emerging markets can be affected by factors
like shortage of power supply and lagging telecommunication infrastructure, extending the life cycle of feature phones in the market
to a certain extent. In summary, feature phones still have a large market and structural demand in major emerging markets around the
world.
On the other hand, emerging
markets generally have a relatively younger population structure in terms of age. Millions of young people rush into labor market every
year, forming a rigid demand for mobile phone consumption.
Reinforce our Focus in Established Markets
We have developed a partnership
with Quality One Wireless LLC, our client in the United States, through ODM orders since 2015, and those orders contributed a significant
portion, over 10%, of our entire revenue stream from 2017 to 2019. In fiscal year 2022, orders from Quality One Wireless LLC contributed
5.5% of total revenue. We also develop other clients like Swagetk Inc., which is our second largest client, representing 6.8% and 4.7%
of the total revenue in fiscal year 2021 and 2022. To align our corporate strategy with the global trend of consumer electronics, especially
mobile phones, we believe that expanding our business in established markets, like the United States and European countries, is vital
to our future. Compared to emerging markets, established markets are well developed in terms of telecommunication infrastructure and more
saturated.
In fiscal year 2022, We
entered the Japan market through an ODM order and we are developing our first tablet product for our Japanese client. Tablets have a
relatively higher margin compared to some of our other products ranging from 25% to 30% due to our client’s demand. We
launched the tablet and deliver the order to our Japanese client in September 2022.
We are transforming from
an EMS provider to a comprehensive technology company engaging in the design, development, production, sales and brand operation of mobile
phones, accessories and related consumer electronics. We intend to bring our own products to established markets, including the United
States, Canada and European countries. Our Amazon stores have been established in Europe, and we believe that our recently launched products
like triple-proof mobile phones and sunglasses with built-in speakers will be competitive in those markets. We are actively
evaluating the feasibility of business opportunities with wireless carriers, such as Verizon, AT&T, Sprint and T-Mobile, in the United
States.
Our Strategies
We intend to achieve our
mission through successful execution of the key elements of our growth strategy, which include:
Optimize the structure of OEM/ODM customers
and orders.
We have accumulated business
resources and experience in both domestic and overseas OEM/ODM markets for the last decade. We are seeking to leverage our first mover
advantage in changing markets to become an international enterprise through continuous innovation. In addition, we will seek to optimize
current customer and order structure by deprioritizing small and unstable customers and eliminating low margin orders to increase our
gross profit margin. Small customers typically cannot provide sustainable OEM/ODM orders when comparing to large customers, like TCL,
and those small customers tend to negotiate a lower price per order that can decrease gross margin. Therefore, keeping relatively large
clients will help us maintain sustainable OEM/ODM orders and a higher margin.
Develop our own brand and enhance brand
recognition.
We have sought, and will
continue to develop, our brands by delivering a superior user experience to our customers in emerging markets, such as India, Southeast
Asia and Africa. We are seeking to offer an enhanced shopping experience by effectively managing our existing distribution network and
upgrading our franchised stores. Our first step will be to open (direct-sell) retail stores in key and high-traffic locations in India
and to establish a comprehensive sales network with our distributors. Then, we intend to replicate this pattern in other emerging markets
and adjust it accordingly. As a result, we intend to increase our market share and expand our brand recognition for both “UTime”
and “Do”.
Expand our (local) sales network overseas.
We are seeking to
develop and expand our sales network in Mexico and to establish a representative office in the United States. In addition, we plan to
further explore the African and South American markets. We believe that the representative office will help us strengthen our
business network and marketing channels in the United States and other North American regions, for instance, through participating
in telecom and technology exhibitions. We will seek to strengthen our efficient sales network and streamline our supply chain
process to keep our products and services at a reasonable price level in order to increase our user base.
As part of our expansion strategy,
we are actively evaluating opportunities for strategic cooperation with telecommunication carriers through our existing clients in Southern
Asia, Africa, the United States and South America. We intend to expand into more markets including emerging and established markets through
business with carriers. We have acquired two companies in Mexico in fiscal year 2022 and have built our local team there to develop business
with local telecom carriers, such as, Firts, and have started with OEM/ODM orders. Meanwhile, our Mexican subsidiaries are in the process
of becoming certified vendors of these local telecom carriers. Once the process is completed, we will be able to use our “UTime”
and “Do” brands.
Dual-brand pricing strategy.
We plan to restructure our
existing product pipeline by developing the “Do” and “UTime” brands at the same time, but targeted to different
segments. Through the “Do” brand, we target customers who are price-sensitive and cost-effective, and let them enjoy
the latest communication technology products with an affordable price. At the same time, through the “UTime” brand, we target
the newly emerging quasi-middle-class customer base in both established and emerging market countries.
Expand and diversify our product portfolio.
We plan to expand and diversify
our product portfolio to meet the fast-changing market. More types of consumer electronics will be added and offered to our customers.
We plan to develop a range of distinctive electronic products, including triple-proof mobile phones that are water-proof, dust-proof and
puncture-, shock-, pressure- and impact-proof, portable Bluetooth speakers, sunglasses with built-in speakers, tablets, and wearable
devices, among others.
Our Products and Services
We design, manufacture, and
distribute mobile phones and other consumer electronics through our operation plants in and outside China. Our products are categorized
into three major categories:
Feature phones
Feature phones do not have
an independent operating system nor adapted third party software applications. Feature phones have tangible keyboards, smaller screen
size that is usually below 3 inches, and integrate basic functions, such as cellular call and cellular message. Camera, FM radio and
Bluetooth are typically optional functions.
Smartphones
Since March 2020 the
Company has participated in efforts to stop the spread of the COVID-19 epidemic, namely, by serving as a temporary distributor of face
masks to an existing overseas client in Brazil. The Company does not intend for this revenue stream to become part of its long-term business
strategy and ceased face masks orders in 2020.
Face masks
Since March 2020 the
Company has participated in efforts to stop the spread of the COVID-19 epidemic, namely, by serving as a temporary distributor of face
masks to an existing overseas client in Brazil. The Company does not intend for this revenue stream to become part of its long-term business
strategy and ceased face masks orders in 2020.
Others
Our other products mainly
consists of cell phone accessories, parts of mobile phone and molds for mobile phones, as well as other consumer electronic accessories.
Our mobile phone accessories contain two categories. One is for our OEM/ODM clients, mainly including spare parts and supplemental components
that we sell to our clients. The other is for our in-house brand including consumer electronics, such as, power bank, Bluetooth speaker,
and spare parts like batteries, chargers, and cell phone shells.
Most of our products are
produced through OEM/ODM orders received from our long-term clients and sold overseas. The following charts display our product
contribution for the years ended March 31, 2020, 2021 and 2022:
| |
Year ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
Category | |
Amount | | |
% | | |
Amount | | |
% | | |
Amount | | |
% | |
| |
RMB | | |
| | |
RMB | | |
| | |
RMB | | |
US$ | | |
| |
| |
(in thousands, except for percentages) | |
Feature phone | |
| 173,190 | | |
| 89.7 | | |
| 144,032 | | |
| 58.4 | | |
| 111,066 | | |
| 17,496 | | |
| 40.3 | |
Smart phone | |
| 19,228 | | |
| 10.0 | | |
| 56,885 | | |
| 23.0 | | |
| 154,143 | | |
| 24,281 | | |
| 56.0 | |
Face mask | |
| - | | |
| - | | |
| 44,747 | | |
| 18.1 | | |
| - | | |
| - | | |
| - | |
Others | |
| 670 | | |
| 0.3 | | |
| 1,235 | | |
| 0.5 | | |
| 10,299 | | |
| 1,622 | | |
| 3.7 | |
Total | |
| 193,088 | | |
| 100.0 | | |
| 246,899 | | |
| 100.0 | | |
| 275,508 | | |
| 43,399 | | |
| 100.0 | |
Do Feature Phones
Do Feature Phones are a feature
phones with dual-SIM function that offer our customers a cost-effective product by implementing call features like Speed Dial,
Auto-Call Recording with folder and Blacklist. Built with 1.77 to 2.4 inches bright display, batteries sized from 800 to 1450 mAh,
a physical numeric keyboard and a loud front-facing speaker, Do Feature Phones offer reliable voice experience to customers and
enrich leisure experience by attaching Bluetooth and FM radio function inside. Do Feature Phones also enable end users an expandable
memory card slot up to 32 GB.
Do Smartphones
The Smartphones are Android-based 4G
VoLTE smartphone that is certified as Android Enterprise Recommended by Google. The Do Mate 1 equips with a 5.7-inch durable full
display, 2000 to 3000 mAh batteries, a set of 5 to 13 plus 0.3 MP dual rear camera and 8 MP front camera with flash. Do Smartphones have
Mode SC 9832E, a product of Spreadtrum Communications, Inc. or MT 6580, a product of MediaTek Inc., processor, 1 to 2GB RAM and 8 to
16GM ROM and light, proximity and gravity sensors inside. Do Smartphones also enable end users to experience Dual-SIM with Micro
and Nano SIM card.
Others
The Bluetooth speaker has
a 400 mAh capacity battery and 4 Omega/3W speaker power. Play mode contains: Micro card, Line-in and Bluetooth connection. The Bluetooth
Box uses Bluetooth 5.0 profiles and has 12-meter connection distance. Output power is 15W with two batteries of 2500 mAh. Its frequency
range is from 2.4 to 2.480 GHz. The Bluetooth glasses apply Bluetooth 5.0 profile and True Wireless Stereo, the battery size is
70 mAh.
Our Operations
Order Placement and Fulfillment Process
Procurement
We adopt an order-oriented procurement
model. Specifically, according to our forecasts towards the market and customer orders, we estimate the total demand and actual demand
of materials through Material Requirements Planning (“MRP”), plus a certain level of inventory, and finally place the procurement
order to our suppliers. MRP is a production planning, scheduling, and inventory control system used to manage manufacturing processes.
Most MRP systems are software-based, but it is possible to conduct MRP by hand as well.
The main raw materials purchased
by us can be classified into electronic components, optical components, electronic components and packaging materials, and structural
devices. According to the different procurement areas, the Company’s procurement activities can be divided into domestic procurement
and overseas procurement. The raw materials from overseas mainly include baseband chips and memory which originally produced outside
of China, and we purchase other raw materials primarily in mainland China.
Production
Our production schedule department
is responsible for coordinating all the materials planning, production planning and shipping planning, arranging the production of our
own factories, outsourcing factories and other ODMs. We also focus on improving production efficiency and cost control while meeting
customer needs. We determine the applicable production method based on our sales prospects, capacity utilization, cost control requirements
and other factors. Our production cycle takes on average 75 days, which was calculated from receiving orders to completing production,
for each new launched OEM/ODM order or own brand product. Usually, we will spend about 40 days in preparation including material procurement,
prototyping, testing and obtaining certifications. Then, it takes approximately 30 days for mass production and fulfill the OEM/ODM order.
Our Factory
We established our own factory
in Guizhou, China through UTime GZ. We have built a diversified flexible manufacturing system that adopts multi-order, small-batch production
methods to meet market differentiation needs under a global strategy. With the continuous growth of business and the entry into the emerging
markets, we are always striving to meet the needs of customers, taking into account the factors such as sales forecast and orders, capacity
utilization, cost control requirements and product positioning. Our factory takes almost all the production assignments including our
orders from OEM/ODM clients and our own brand products. However, before assigning the order to our factory, the production management
department will evaluate the overall cost and production schedule, if the order failed to meet our cost budget, we will outsource the
order to our collaborating factories.
On October 6, 2021, we entered
into an investment agreement (the “Investment Agreement”) with the local government of Jiangnan, Nanning (the “Jiangnan
Government”) pursuant to which UTime SZ agreed to invest an aggregate of RMB 150 million (approximately US$23.2 million) by establishing
manufacturing facilities and producing electronic devices at Jiangnan, Nanning. Our second factory in Nanning went into service in May,
2022.
Outsourcing Factories
Our production management
department is responsible for the resource development and management of factories on which we rely to outsource our manufacturing needs.
We manage the outsourced manufacturers by imposing certain requirements such as processing requirements, limiting labor costs, and imposing
quality control and other special requirements. We signed an entrusted production agreement with the outsourcing manufacturers. We are
responsible for the product design and development as well as the raw materials procurement. The outsourcing manufacturer is responsible
for processing and assembling products according to our requirements. We provide design and production plans to the outsourcing manufacturers
and guide them to finish qualified products.
For the feature phones offering
to our American clients, we cooperate with other ODMs. We provide bill of materials (“BOM”) requirements to other ODMs, and
they participate in design, raw materials procurement, manufacturing and sell finished products to us. We often assist other ODMs in
managing the production process and offer critical structural components referring to PCBA, mobile screen and batteries, to ensure production
yield and product quality, as well as “Just-in-time” delivery rates.
For our “Do”
brand, we cooperate with an outsourced factory in India due to cost consideration. The Indian government imposes a higher import tax
on finished goods than the partially assembled one, such as a Semi-Knocked Down (“SKD”) for consumer electronics. Therefore,
we ship SKD to Do Mobile from our factory operated by UTime GZ and finish final assembling process in our outsourced factory in India.
Quality Control Management
We believe that the quality
of our products is crucial to our continued growth. We place great emphasis on quality control and have implemented Total Quality Management
(“TQM”) to manage our operations. Before entering our production flow, the raw materials must be certified for quality. We
also perform inspections on raw materials in the mass production flow.
Our quality control system
covers each stage of our production process. When we establish or adapt an assembly line for a new product or model, we trial-run the
assembly line to produce a sample for quality examination. The assembly line can start mass production only if the produced sample is
of adequate quality. When the in-progress product moves from one work station to another one along the assembly line, it must be
checked for quality by the responsible assembly specialists in both work stations. A product may be shipped out of manufacturing facility
only after it passes all quality control examinations and is properly documented as such. By logging and breaking down the pass rates
along our products in the production process, we are able to identify our quality control weak spots, and improve our operation accordingly.
Supply Chain Management
Supply Chain Management Process
Materials, Products and Other Suppliers
We purchase key components
from our suppliers, such as chips, batteries, mainboard, screens, battery chargers and controllers. We strategically select our suppliers
to minimize over-concentration, control our cost and maintain a good relationship with our suppliers.
To reduce over-concentration of
supply, to manage costs and to control product quality, we generally engage at least two (2) suppliers for each of our key components.
We select our suppliers based on a variety of criteria, including, among others, production capacity, technological sophistication, quality
assurance, professional certification, manpower adequacy, financial position and environmental compliance. In addition, we review the
performance of our suppliers quarterly, and make necessary adjustments to our supply chain, including termination of under-performing suppliers.
Although we have been able to maintain good and long-lasting relationships with our suppliers, we do not formally engage them under
long-term contracts or on an exclusive basis, so we retain considerable pricing power in the meantime.
Distribution and Logistics
We deliver our products to
overseas end customers through the services provided by the third-party supply chain companies. The third-party supply chain
companies provide import and export customs declaration, customs clearance, logistics and other services, so that we can operate more
efficiently. In order to reduce the concentration of third-party delivery supply chain companies, we usually have more than three
delivery supply chain companies to provide services at the same time.
Our Technology
We are an EMS service provider,
mainly offering OEM/ODM services to our engaged clients. We continue investing in technology to improve our ability in design, production,
testing and software application. Our subsidiary, UTime SZ, is a national certified high technology enterprise that has certain benefits
in tax deduction and government grants through 2024 and the certification is renewable every three years.
Our technology focuses on
process optimization, which can contribute to improved accuracy or efficiency during production, and industrial design as well as mechanical
design, which enables us to meet requirements from our OEM/ODM clients and fulfill the orders.
Major technologies applied
in our operations are listed below:
Number |
|
Category |
|
Name |
|
Description |
|
Source |
1 |
|
Production |
|
SMT Production line |
|
The length of each SMT production line is 28 meters
with antistatic function attached. |
|
Purchased |
2 |
|
Production |
|
Assembly line |
|
The assembly line has a capacity of 45 operators
working together |
|
Purchased |
3 |
|
Testing |
|
General Testing line |
|
N/A |
|
Purchased |
4 |
|
Design |
|
Mobile phone Industrial Design Patent |
|
An exterior used for smartphones |
|
Self-developed |
5 |
|
Production |
|
PCBA Calibration Fixture Tools |
|
A clip that improves the accuracy for assembly activities |
|
Self-developed |
6 |
|
Design |
|
Flex Print Circuit Board (FPCB) for Smartphone |
|
Circuit board used in smartphones with enhanced function |
|
Self-developed |
7 |
|
Testing |
|
Application for Water proof Test |
|
Application used to test water damage of electronic
components |
|
Self-developed |
8 |
|
Design |
|
Application for Access to Public Warning System |
|
Application installed in mobile phones to enhance signal |
|
Self-developed |
9 |
|
Design |
|
Call Filter |
|
Application installed in mobile phones to filter harmful
incoming messages |
|
Self-developed |
Research and Development
Our research and development
activities include two major sections, which are our EMS section and our own brand section. EMS section’s purpose is to allocate
a significant amount of resources and funds to developing cost-effective and reliable products for the OEM/ODM clients and ensuring
that these products meet their exacting requirements for functionality and reliability. Own brand section’s purpose is to launch
new products to obtain more market shares. Our research and development initiatives are led by our internal teams and are supported by
third parties as needed. Our product management team and our sales and marketing team spend their time interacting with a combination
of end users, distributors in our target markets, and wireless carriers to better understand the market requirements for our products.
Once defined, our design and manufacturing team develops and tests the products against these requirements to be delivered to our clients
and to be sold to the end users.
Customers
The majority of our selling
items are the feature phones and the smartphones as mentioned above. Our sales depend heavily on our major clients, Philco Eletronicos
S/A, TCL Communication Limited and PCD International, representing 42.3%, 19.8% and 5.5% of the total revenue for fiscal year 2022, respectively.
We regularly provide OEM and ODM business for them. In addition, we export our in-house brand products to emerging markets.
The following is a list of
our top three customers for the fiscal year 2022:
Country/Area | |
Customer | |
Brand | |
Percentage of total revenue | |
South America | |
Philco Eletronicos S/A | |
ODM | |
| 42.3 | % |
Asia | |
TCL Communication Limited | |
ODM | |
| 19.8 | % |
United States | |
PCD International | |
ODM | |
| 5.5 | % |
The following is a list of our top three customers
for the fiscal year 2021:
Country/Area | |
Customer | |
Brand | |
Percentage of total revenue | |
Asia | |
TCL Communication Limited | |
ODM | |
| 41.3 | % |
United States | |
Swagtek Inc. | |
ODM | |
| 6.8 | % |
Asia | |
Shanghai Sunvov Communications Technology Co., Ltd. | |
ODM | |
| 6.3 | % |
The following is a list of our top three customers
for the fiscal year 2020:
Country/Area | |
Customer | |
Brand | |
Percentage of total revenue | |
Asia | |
TCL Communication Limited | |
ODM | |
| 57.3 | % |
Asia | |
T2 Mobile International Limited | |
ODM | |
| 9.6 | % |
United States | |
Quality One Wireless LLC | |
ODM | |
| 6.0 | % |
Customer Services
To meet the requirements
of our OEM and ODM customers, we support customized services for them. We assist our customers in research and development while launching
new mobile products based on our industry experience. To date, we have maintained long-term cooperation with our main customers
listed above. We have also built nearly 800 service centers for our in-house brand customer in India. During the one-year warranty
period that we provide on our phone products, customers can phone returned or repaired according to the actual situation.
Global Operations
Historically, most of
our OEM and ODM customers have come from established markets, including the United States, and emerging economies, including India
and countries in South Asia and Africa, which have contributed considerably to our revenue. In line with our vision to expand
globally, we started to use our new brand name “Do” in India in 2017 to develop in-house brand business. Emerging
markets are the main consideration for our in-house brand sales and marketing, and historically India has been the primary
focus of Do Mobile because of its large population. However, due to a negative change of business environment in India since
mid-2020, we have decided to shift our strategic focus from India to Latin America. Mexico is our first step for business expansion
in Latin America and in December 2021, we have acquired two local companies in telecom industries to expand our business in Mexico
with local telecom carriers. We also plan to establish a representative office in the United States to further strengthen our
business network in established markets.
Sales and Marketing
China and other markets
We directly provide OEM and
ODM business for our customers in China and overseas. In order to maintain close relationships with these customers, we have built a
strong marketing team consisting of 15 sales force members, including a domestic client division, overseas client division and key
accounts division. Our marketing efforts consist of product marketing and orders partner marketing. Product marketing focuses on ensuring
OEM/ODM requirements related to products. Order partner marketing focuses on engaging sustainable clients, participating in telecom and
technology exhibitions, as well as developing supplemental sales tools, industry trade show materials and brand awareness.
India
We have launched 7 mobile
phone models in the Indian market, including 5 smartphones and 2 feature phones. We strive to launch products that serve users of different
demographics, and 3 to 4 additional mobile phones are currently being designed and are in development. Additionally, we plan to offer
wireless speakers, power banks, car chargers and fit bands in the future. However, due the outbreak of the COVID-19 pandemic, our
operations in India were significantly affected and our original marketing plan was delayed. We restarted our operations in India after
the Indian government began to lift lockdown measures in July 2020. However, in March 2021, the second wave of COVID-19 spread in India
resulting in lockdowns being imposed in various states of India. While we have been able to continue our operations during the second
wave of COVID-19 and have taken several steps to minimize our costs, our supply of inventory has been affected due to the lockdown which
has resulted in a significant impact on our revenue.
Due to our strategic shift,
our Indian operations were maintained at a limited level.
Warehousing and Distributor
Due to our limited operation
in India, as of August 2022, we have kept one warehouse in India. Logistic transportation costs average between approximately US$60 to
US$100 per month. Our self-branded products are sold only through offline retail distributors. For our offline network, we work with
local distributors. There are no instalment or other credit strategies between our distributors and us. We have kept two professionals
in sales team to manage 23 active distributors.
After-sales service
An excellent user experience
is one of our major goals. We provide customers with a one-year warranty on our phone products. Customers can get their phones repaired
during the maintenance period, usually within one year, by taking their receipts and goods to any one of the nearly 800 service centers
that has cooperated with us. Based on historical collection records, product return rate is about 0.2%. We believe our after-sales service
creates a satisfying user experience. We kept three persons in after-sales team to handle after-sale services to existing orders.
United States
We cooperate with our clients
in the United States through ODM orders. We intend to strengthen our business connections by establishing a representative office in the
United States. This office will help us increase our marketing efforts, such as by participating in conferences and events that focus
on the United States and other regions in North America. Our operation in this region through online platform Amazon were maintained at
a relatively low level and only launched our experimental products.
Mexico
We have started to develop Mexico
market as part of a broader corporate strategic shift, in connection with which we have decided to shift our emerging markets from India
to Mexico. As a result, we have acquired two local companies in Mexico during the fiscal year 2022 and started business with local telecom
carriers through ODM/OEM orders in August, 2022. We are in the process of obtaining vendor certificates with these telecom carriers and
plan to sell products through these carriers with our own brand “UTime” and “Do”.
Africa
We entered the African market
through ODM orders, including smartphones and feature phones, in 2018. Our African team contains two account managers, a product manager
and two marketing specialists, because having a local distribution network is our main focus in the African market. We stopped cooperation
with online platform, such as Jumia, during the fiscal year 2022 and have been focusing solely on local distribution channels.
Seasonality
Our business has historically
been subject to seasonal fluctuations, which may be caused by product launches and various promotional events hosted by us and our distributors.
Although we have generally experienced higher sales during the fourth quarter since our customers usually launch new products during
the fourth quarter of the calendar years, this pattern does not repeat itself every year. We typically experience our lowest sales volume
in the first quarter of each year.
Competition
Overall Competition Landscape
We operate in a highly competitive
environment serving industrial enterprises and end customers. Competition in our market is high and tends to increase. Price is a major
source of competition, while product quality, differentiation, service, research, development and commercialization capacity, and distribution
channels are also critical factors. Competition in our industry is intense and has been characterized by technology levels, production
scale and economies of scale, evolving industry standards, frequent new product introductions and rapid changes in end user requirements.
We face competition from
manufacturers that also provide EMS, such as Wentai and XiaoMi, to the extent industrial enterprises decide to engage and outsource production.
We also face competition from mobile phone manufacturers that have a portfolio of products covering low-end feature phones and high-end smartphones,
such as Samsung Electronics Co. Ltd. We also face competition from mobile phone companies who also target emerging markets, such as,
Shenzhen Transsion Holding Limited. We believe that we compete favorably with respect to the factors described above.
Our Competitive Strengths
We believe that the following
competitive strengths have contributed to, or will contribute to, our recent and ongoing growth:
| ● | Experienced
management. Our core management team members (Chief Executive Officer, Chief Operating Officer and Chief Manufacturing Officer) have
at least 10 years of experience in the mobile phone industry, and most of them formerly worked at well-known publicly traded companies. |
| ● | Comprehensive global industry ecosystem. Our integration of development,
manufacturing, PCBA, Industrial Design (“ID”), Mechanic Design (“MD”), sales and after-sale services in China,
India, Africa, the United States and South America, combined with our extensive industry experience, provides us a comprehensive global
ecosystem for our products. We acquired two companies in Mexico which are mainly focus on business with telecom carriers and manage local
distributors and after-sales services. |
| ● | Strong
production capacity. Currently, we have six high-end Surface Mounting Technology (“SMT”) production lines and test
lines, eleven assembly lines of which six lines are leased, and four leased packaging lines. Each SMT has a production capacity of 600,000
units per month, and our monthly assembling capacity has reached over one million units. Due to the seasonality of the mobile phone
industry, we also cooperate with six manufacturers to fulfill our peak season orders, and we believe this strategy is cost-effective. |
| ● | Niche market positioning. We have accumulated extensive business resources
and partners both domestic and abroad over the past 10 years, and we have laid our focus in the middle and low-end markets of developing
countries, where the markets are fairly new and generally devoid of intense competition that could create new demands, ahead of our competitors
in the same industry segment, such as the markets in Mexico. |
| ● | Cost-effective products.
We primarily cover two product categories: 13 types of smartphones and 8 types of feature phones. We believe our products are comparable
in quality to the large brands and are price competitive. We believe we fit the needs of low-to-mid income groups of many developing
countries and we believe we avoid the vicious competition from large international brands. |
Intellectual Property
Protection of our intellectual
property is a strategic priority for our business. We rely on a combination of patent, copyright, trademark and trade secret laws, as
well as confidentiality agreements, to establish and protect our proprietary rights. Except for certain licenses for the off-the-shelf software
used in connection with our day-to-day operations, we generally do not rely on third-party licenses of intellectual property
for use in our business.
As of the date of this annual
report, we had obtained 43 patents and 44 registered software copyrights, registered 43 trademarks inside and outside of China, and submitted
6 additional trademark applications.
Patents. We had
43 registered patents in China, which cover technologies for PCAB processing, Industrial Design and testing process. All registered
patents in China are currently registered under the name of UTime SZ owning 35 and UTime GZ owning 8. Among them, 23 registered
patents were granted as utility model patents, 18 registered patents were granted as design patents and 2 registered patents were
granted as invention patents.
Software copyrights. We
maintain a portfolio of copyright-protected software. We had 44 registered software copyrights in China.
Trademarks. We had
23 registered trademarks in China and 20 registered trademarks outside of China in Africa, Asia, America and Europe. We also have 6 pending
trademark applications outside of China in the Philippines, Kenya and other jurisdictions.
Domain names. We had
7 registered domain names in China and 7 global domain names.
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, such as use of confidentiality agreement with our employees and outside consultants.
Employees
As of the date of this annual
report, we had 384 full-time employees and no part-time employees. Our employees are not represented by a labor organization
or covered by a collective bargaining agreement. We believe we maintain good relationships with our employees. The table below sets forth
the breakdown of our employees by function as of the date of this annual report:
Function | |
Number of Employees | | |
% of Total | |
Administration and Human Resources | |
| 23 | | |
| 6 | % |
Finance and Accounting | |
| 13 | | |
| 3 | % |
Production | |
| 239 | | |
| 62 | % |
Procurement | |
| 9 | | |
| 2 | % |
Sales and Marketing | |
| 10 | | |
| 3 | % |
Customer Services | |
| 15 | | |
| 4 | % |
Research and Development | |
| 41 | | |
| 11 | % |
Quality Control | |
| 21 | | |
| 6 | % |
Project and Scheduling | |
| 13 | | |
| 3 | % |
Total | |
| 384 | | |
| 100 | % |
Properties
Our headquarters are located
in Shenzhen, China, where we own the office building with an aggregate floor area of approximately 640 square meters. Our operations
facilities, including those for accounting, supply chain management, quality assurance and customer services, are located at our headquarters.
We have supply chain management, sales and marketing, communication and business development personnel at our office in Shenzhen. Our
manufacturing facilities, including those for engineering and assembling, are located at our leased factory in Guizhou. Our second factory
was established in May 2022 and started operation since then.
We currently lease and occupy
approximately 17,478 square meters of office and factory space in Guizhou, China and approximately 279 square meters of office space
in New Delhi, India. These leases vary in duration from 1 year to 5 years. We believe that our facilities are adequate to meet our needs
for the immediate future.
Insurance
We do not maintain property
insurance policies covering potential damage to our property. 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.
Regulations
China
This section sets forth a
summary of the most significant rules and regulations that affect our business activities in China.
Regulations relating to Foreign Investment
The Guidance Catalogue of Industries
for Foreign Investment
Investment activities in
the PRC by foreign investors are subject to the Catalogue for the Guidance of Foreign Investment Industry, or the Catalogue, which was
promulgated and is amended from time to time by the MOFCOM and the NDRC. The Foreign Investment Catalogue which was promulgated jointly
by MOFCOM and the NDRC, on June 28, 2017 and became effective on July 28, 2017, classifies industries into three categories
with regard to foreign investment: (1) “encouraged”, (2) “restricted”, and (3) “prohibited”. The
latter two categories are included in a negative list, which was first introduced into the Foreign Investment Catalog in 2017 and specified
the restrictive measures for the entry of foreign investment.
On June 28, 2018, MOFCOM
and NDRC jointly promulgated the Special Administrative Measures for Access of Foreign Investment (Negative List), or the Negative List
(Edition 2018), which replaced the negative list attached to the Foreign Investment Catalogue in 2017. On June 30, 2019, MOFCOM
and NDRC jointly issued the Special Administrative Measures for Access of Foreign Investment (Negative List), or the Negative List (Edition
2019), which replaced the Negative List (Edition 2018), and the Catalogue of Industries for Encouraging Foreign Investment (Edition 2019),
or the Encouraging Catalogue (Edition 2019), which replaced the encouraged list attached to the Foreign Investment Catalogue in 2017.
On June 23, 2020, MOFCOM and NDRC jointly issued the Special Administrative Measures for Access of Foreign Investment (Negative
List), or the Negative List (Edition 2020), which replaced the Negative List (Edition 2019).
On December 27, 2021, the
NDRC and the MOFCOM promulgated the latest Special Entry Management Measures (Negative List) for the Access of Foreign Investment (Edition
2021), or the Negative List (Edition 2021), which came into effect on January 1, 2022. Pursuant to the Negative List (Edition 2021),
any industry that is not listed in any of the restricted or prohibited categories is classified as a permitted industry for foreign investment.
Establishment of wholly foreign-owned enterprises is generally allowed for industries outside of the Negative List. For the restricted
industries within the Negative List, some are limited to equity or contractual joint ventures, while in some cases Chinese partners are
required to hold the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level government
approvals and certain special requirements. Foreign investors are not allowed to invest in industries in the prohibited category. Industries
not listed in the Negative List are generally open to foreign investment unless specifically restricted by other PRC regulations.
In addition, the NDRC and
the Ministry of Commerce promulgated the Encouraged Industry Catalogue for Foreign Investment (Edition 2020), or the Encouraging Catalogue
(Edition 2020), which came into effect on January 27, 2021 and replaced the Encouraging Catalogue (Edition 2019) effective on July 30,
2019. The Encouraging Catalogue (Edition 2020) is divided into two parts, namely the Nationwide Catalogue of Encouraged Industries for
Foreign Investment and the Catalogue of Priority Industries for Foreign Investment in Central and Western China. The Nationwide Catalogue
of Encouraged Industries for Foreign Investment lists a total of 480 industry sectors that encourage foreign investments; the Catalogue
of Priority Industries for Foreign Investment in Central and Western China lists industry sectors that each province and city wish to
introduce.
In October 2016, the MOFCOM
issued the Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises
or FIE Record-filing Interim Measures, which was revised in June 2018. Pursuant to FIE Record-filing Interim Measures, the
establishment and change of FIE are subject to record-filing procedures, instead of prior approval requirements, provided that the
establishment or change does not involve special entry administration measures. If the establishment or change of FIE matters involves
the special entry administration measures, the approval of the MOFCOM or its local counterparts is still required. Pursuant to the Announcement
[2016] No. 22 of the NDRC and the MOFCOM dated October 8, 2016, the special entry administration measures for foreign investment
apply to restricted and prohibited categories specified in the Catalogue, and the encouraged categories are subject to certain requirements
relating to equity ownership and senior management under the special entry administration measures. However, as the PRC Foreign Investment
Law has taken effect, the MOFCOM and the SAMR, jointly approved the Foreign Investment Information Report Measures on December 19, 2019,
which went into effect on January 1, 2020. According to the Foreign Investment Information Report Measures, which repealed the FIE Record-filing
Interim Measures, foreign investors or FIEs shall report their investment-related information to the competent local counterparts of
the MOFCOM through the Enterprise Registration System and National Enterprise Credit Information Notification System.
Currently, our business related
to the operation of designing, manufacturing and marketing mobile communication devices, and selling a variety of related accessories
falls within the permitted category.
The Foreign Investment Law
On March 15, 2019, the
National People’s Congress approved the Foreign Investment Law, which took effect on January 1, 2020 and replaced three existing
laws on foreign investments in China, namely, the PRC Sino-foreign Equity Joint Venture Law, the PRC Sino-foreign Cooperative
Joint Venture Law and the PRC Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations.
On December 26, 2019, the Regulation on the Implementation of the Foreign Investment Law of the People’s Republic of China,
was issued by the State Council and came into force on January 1, 2020. The organization form, organization and activities of foreign-invested enterprises
shall be governed, among others, by the PRC Company Law and the PRC Partnership Enterprise Law. Foreign-invested enterprises established
before the implementation of this Law may retain the original business organization and so on within five years after the implementation
of this Law. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime
in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign
and domestic invested enterprises in China. The Foreign Investment Law establishes the basic framework for the access to, and the promotion,
protection and administration of foreign investments in view of investment protection and fair competition.
According to the Foreign
Investment Law, “foreign investment” refers to investment activities directly or indirectly conducted by one or more natural
persons, business entities, or otherwise organizations of a foreign country (collectively referred to as “foreign investor”)
within China, and the investment activities include the following situations: (i) a foreign investor, individually or collectively with
other investors establishes a foreign-invested enterprise within China; (ii) a foreign investor acquires stock shares, equity shares,
shares in assets, or other like rights and interests of an enterprise within China; (iii) a foreign investor, individually or collectively
with other investors, invests and establishes new projects within China; and (iv) a foreign investor invests through other approaches
as stipulated by laws, administrative regulations, or otherwise regulated by the State Council.
According to the Foreign
Investment Law, the State Council will publish or approve to publish the “negative list” for special administrative measures
concerning foreign investment. The Foreign Investment Law grants national treatment to foreign-invested entities, or FIEs, except
for those FIEs that operate in industries deemed to be either “restricted” or “prohibited” in the “negative
list”. The Foreign Investment Law provides that FIEs operating in foreign restricted or prohibited industries will require market
entry clearance and other approvals from relevant PRC governmental authorities. If a foreign investor is found to invest in any prohibited
industry in the “negative list”, such foreign investor may be required to, among other aspects, cease its investment activities,
dispose of its equity interests or assets within a prescribed time limit and have its income confiscated. If the investment activity
of a foreign investor is in breach of any special administrative measure for restrictive access provided for in the “negative list”,
the relevant competent department shall order the foreign investor to make corrections and take necessary measures to meet the requirements
of the special administrative measure for restrictive access. On December 27, 2021, MOFCOM and NDRC jointly issued the latest version
of Negative List (Edition 2021). See “Regulations — Regulations relating to Foreign Investment — The Guidance
Catalogue of Industries for Foreign Investment”.
Besides, the PRC government
will establish a foreign investment information reporting system, according to which foreign investors or foreign-invested enterprises
shall submit investment information to the competent department for commerce concerned through the enterprise registration system and
the enterprise credit information publicity system, and a security review system under which the security review shall be conducted for
foreign investment affecting or likely affecting the state security.
Furthermore, the Foreign
Investment Law provides that foreign invested enterprises established according to the existing laws regulating foreign investment may
maintain their structure and corporate governance within five years after the implementing of the Foreign Investment Law.
In addition, the Foreign
Investment Law also provides several protective rules and principles for foreign investors and their investments in the PRC, including,
among others, that a foreign investor may freely transfer into or out of China, in Renminbi or a foreign currency, its contributions,
profits, capital gains, income from disposition of assets, royalties of intellectual property rights, indemnity or compensation lawfully
acquired, and income from liquidation, among others, within China; local governments shall abide by their commitments to the foreign
investors; governments at all levels and their departments shall enact local normative documents concerning foreign investment in compliance
with laws and regulations and shall not impair legitimate rights and interests, impose additional obligations onto FIEs, set market access
restrictions and exit conditions, or intervene with the normal production and operation activities of FIEs; except for special circumstances,
in which case statutory procedures shall be followed and fair and reasonable compensation shall be made in a timely manner, expropriation
or requisition of the investment of foreign investors is prohibited; and mandatory technology transfer is prohibited.
Company Law
Pursuant to the PRC Company
Law, promulgated by the Standing Committee of the National People’s Congress (the “SCNPC”) on December 29, 1993, effective
as of July 1, 1994, and as revised on December 25, 1999, August 28, 2004, October 27, 2005, December 28, 2013
and October 26, 2018, the establishment, operation and management of corporate entities in the PRC are governed by the PRC Company
Law. The PRC Company Law defines two types of companies: limited liability companies and companies limited by shares.
Our PRC Subsidiary is a limited
liability company. Unless otherwise stipulated in the related laws on foreign investment, foreign invested companies are also required
to comply with the provisions of the PRC Company Law.
Regulations Relating to Overseas Investment
On December 26, 2017,
the NDRC issued the Management Rules for Overseas Investment by Enterprises, or the NDRC Order 11. As defined in the NDRC Order 11,
“overseas investment” refers to the investment activities conducted by an enterprise located in the territory of China, either
directly or through an offshore enterprise under its control, by making investment with assets and equities or providing financing or
a guarantee in order to acquire overseas ownership, control, management rights and other related interests. Furthermore, overseas investment
by a Chinese individual through overseas enterprises under his/her control is also subject to the NDRC Order 11. According to the
NDRC Order 11, (i) direct overseas investment by Chinese enterprises or indirect overseas investment by Chinese enterprises or individuals
in sensitive industries or sensitive countries and regions requires prior approval by the NDRC; (ii) direct overseas investment by Chinese
enterprises in non-sensitive industries and non-sensitive countries and regions requires prior filing with the NDRC; and (iii)
indirect overseas investment of over US$300 million by Chinese enterprises or individuals in non-sensitive industries and non-sensitive countries
and regions requires reporting with the NDRC. Uncertainties remain with respect to the application of the NDRC Order 11, there are
very few interpretations, implementation guidance or precedents to follow in practice. We are not sure if UTime Limited was to use a
portion of the proceeds raised from our initial public offering to fund investments in and acquisitions of complementary business and
assets outside of China, such use of U.S. dollars funds held outside of China would be subject to the NDRC Order 11. We will continue
to monitor any new rules, interpretation and guidance promulgated by the NDRC and communicate with the NDRC and its local branches to
seek their opinions, when necessary.
Regulations Relating to Manufacture and Sale
of Mobile Phones
General Administration of Manufacturing
and Selling Mobile Phones
According to the Administrative
Regulations for Compulsory Product Certification, which was promulgated by the General Administration of Quality Supervision, Inspection
and Quarantine PRC (the “AQSIQ”) (which has merged into the State Administration for Market Regulation) on July 3, 2009,
products specified by the state shall not be delivered, sold, imported or used in other business activities until they are certified
(the “Compulsory Product Certification”) and labeled with China Compulsory Certification mark. For products that are subject
to Compulsory Product Certification, the state implements unified product catalogs (the “3C Catalog”), unified compulsory
requirements, standards and compliance assessment procedures in technical specification, unified certification marks and unified charging
standards. Pursuant to the First Batch Compulsory Product Certification Product Catalog (the “First Batch 3C Product Catalog”)
by the AQSIQ and the Certification and Accreditation Administration of the People’s Republic of China (the “CNCA”)
on December 3, 2001, mobile user terminals and CDMA digital cellular mobile station are required to obtain the Compulsory Product
Certification in order to be delivered, sold, imported or used.
The Regulations on Radio
Administration of the PRC jointly issued by the State Council and the Central Military Commission on November 11, 2016 and became
effective on December 1, 2016, provide requirements concerning verification and approval of the models of radio transmission equipment.
Pursuant to this law, except for micro-power short-range radio transmission equipment, whoever manufactures or imports other
radio transmission equipment for sales or use on the domestic market shall apply to the State Radio Administration for model verification
and approval. Whoever manufactures or imports radio transmission equipment that has not obtained model verification and approval for
sales or use on the domestic market shall be ordered by the relevant radio administration to make correction and subject to fines.
In addition, the Administrative
Measures for the Network Access of Telecommunications Equipment, which was promulgated by the Ministry of Information Industry on May 10,
2001 and revised by the Ministry of Industry and Information Technology (the “MIIT”) on September 23, 2014 provide that
the State applies the network access permit system to the telecommunications terminal equipment, radio communications equipment, and
equipment relating to network interconnection that is connected to public telecommunications networks. The telecommunications equipment
subject to the network access permit system shall obtain the Telecommunications Equipment Network Access Permit issued by the MIIT (the
“Network Access Permit”). Without the Network Access Permit, no telecommunications equipment is allowed to be connected to
the public telecommunications networks for use nor sold on the domestic market. In the event of an application for the Network Access
Permit, a production enterprise shall submit a testing report issued by a telecommunications equipment testing institution or a Compulsory
Product Certification. In the event of an application for the network access permit for radio transmission equipment, a Radio Transmission
Equipment Type Approval Certificate issued by the MIIT shall also be submitted.
Regulations on Production Safety
Pursuant to the Production
Safety Law of the PRC, or the Production Safety Law, which took effect on November 1, 2002 and was amended on August 31, 2014,
the entities that are engaged in production and business operation activities must implement national industrial standards which guarantee
the production safety and comply with production safety requirements provided by the laws, administrative regulations and national or
industrial standards. An entity must take effective measures for safety production, maintain safety facilities, examine the safety production
procedures, educate and train employees and take any other measures to ensure the safety of its employees and the public. An entity or
its relevant persons-in-charge which has failed to perform such safety production liabilities will be required to make amends within
a time limit or face administrative penalties. If it fails to amend within the prescribed time limit, the production and business operation
entity may be ordered to suspend business for rectification, and serious violations may result in criminal liabilities.
Regulations on Product Quality
The PRC Product Quality Law,
or the Product Quality Law, which was promulgated by the MOFCOM in February 1993 and most recently amended in December 2018, applies
to all production and sale activities in China. Pursuant to this law, products offered for sale must satisfy the relevant quality and
safety standards. Enterprises may not produce or sell counterfeit products in any fashion, including forging brand labels or giving false
information regarding a product’s manufacturer. Any producer or seller producing or selling products that do not conform to the
national standards or trade standards for ensuring human health and the personal or property safety shall be ordered to stop production
or sale of the products; the products illegally produced or sold shall be confiscated; a fine no less than the equivalent of, but not
more than three times, the value of the products illegally produced or sold (including those already sold and those not yet sold, hereinafter
the same) shall be imposed concurrently; if there are illegal proceeds, such proceeds shall be confiscated concurrently; if the circumstances
are serious, the business license shall be revoked. If the case constitutes a crime, criminal liability shall be investigated. Where
a defective product causes physical injury to a person or damage to another person’s property, the victim may claim compensation
from the manufacturer or from the seller of the product. If the seller pays compensation and it is the manufacturer that should bear
the liability, the seller has a right of recourse against the manufacturer and may seek full reimbursement from the manufacturer. Similarly,
if the manufacturer pays compensation and it is the seller that should bear the liability, the manufacturer has a right of recourse against
the seller and may seek full reimbursement from the seller.
Pursuant to the General Principles
of the Civil Law of the PRC promulgated by the National People’s Congress, or NPC, on April 12, 1986 and amended on August 27,
2009, both manufacturers and sellers shall be held liable where the defective products result in property damages or bodily injuries
to others. Pursuant to the Tort Liability Law of the PRC promulgated by the Standing Committee of the NPC on December 26, 2009 and
effective from July 1, 2010, manufacturers shall assume tort liabilities where the defects in products cause damages to others.
Sellers shall assume tort liabilities where the defects in products that have caused damages to others are attributable to the sellers.
The aggrieved party may claim for compensation from the manufacturer or the seller of the defected product that has caused damage.
On May 28, 2020, the
Third Session of the 13th National People’s Congress passed the Civil Code of the People’s Republic of China
which took effect on January 1, 2021, and replaced the Tort Liability Law of the PRC. According to the Civil Code of the People’s
Republic of China, the aggrieved party shall be entitled to require the manufacturer or seller to assume the tort liability by ceasing
infringement, removing the obstruction, or eliminating the danger when the defect of a product endangers the personal or property safety.
Regulations on Consumer Protection
The PRC Consumer Protection
Law, as amended on October 25, 2013 and effective on March 15, 2014, sets out the obligations of business operators and the
rights and interests of the consumers. Pursuant to this law, business operators must guarantee that the commodities they sell satisfy
the requirements for personal or property safety, provide consumers with authentic information about the commodities, and guarantee the
quality, function, usage and term of validity of the commodities. Failure to comply with the Consumer Protection Law may subject business
operators to civil liabilities such as refunding purchase prices, exchange of commodities, repairing, ceasing damages, compensation,
and restoring reputation, and even subject the business operators or the responsible individuals to criminal penalties if business operators
commit crimes by infringing the legitimate rights and interests of consumers. The amended PRC Consumer Protection Law further strengthens
the protection of consumers and imposes more stringent requirements and obligations on business operators, especially on the business
operators through the Internet. For example, the consumers are entitled to return the goods (except for certain specific goods) within
seven days upon receipt without any reasons when they purchase the goods from business operators via the Internet. The consumers whose
interests have been damaged due to their purchase of goods or acceptance of services on online marketplace platforms may claim damages
from sellers or service providers.
Where business operators
use internet, television, telephone, mail or other means to provide goods or services, or provide securities, insurance, banking or other
financial services, they shall provide consumers with information in regard to themselves and the goods or services provided such as
business address, contact information, quantity and quality, price or fees, term and method of performance, safety precautions, risk
warnings, after-sale services, and civil liabilities. Consumers whose legitimate rights and interests are infringed while purchasing
goods or receiving services via an online trading platform shall have the right to claim compensation from the vendor of the goods or
the provider of the services. If the goods or services a business operator provide have caused personal injuries to consumers or other
victims, the business operator shall compensate for the medical expenses, nursing expenses, transportation expenses and other reasonable
fees for treatment and rehabilitation as well as the reduced income for loss of working time.
According to the Civil Code
of the People’s Republic of China effective on January 1, 2021, producers shall bear tortious liability for any damage caused by
their defective products, while distributors shall bear tortious liability for any damage caused due to defects resulting from their
own fault.
Registrations for Import and Export
of Goods
The major PRC laws and regulations governing import
and export of goods are Foreign Trade Law of the PRC, or the Foreign Trade Law, Regulations of the PRC on the Administration of Import
and Export of Goods, or the Regulations on Import and Export of Goods, Customs Law of the PRC and Provisions of the Customs of the PRC
on the Administration of Registration of Customs Declaration Entities.
Pursuant to the Customs Law of the People’s Republic of China
promulgated by the SCNPC on January 22, 1987, as amended on April 29, 2021, unless otherwise stipulated, the declaration of import
and export goods may be made by consignees and consignors themselves, and such formalities may also be completed by their entrusted customs
brokers that have registered with the Customs. The consignees and consignors for import or export of goods and the customs brokers engaged
in customs declaration shall register with the Customs in accordance with the laws. The Regulations on Import and Export Duties of the
People’s Republic of China, promulgated by the State Council on March 7, 1985, as amended on March 1, 2017, further stipulated that,
unless otherwise provided by the relevant laws and regulations, goods permitted to be imported into or exported out of China shall be
subject to payment of customs duties. The consignees of imported goods, consigners of exported goods or owners of inward articles shall
undertake the obligation of the payment of customs duties. The State Council also promulgated implementation rules and tariff schedules
to regulate the items and rates of the customs duties.
In light of the Foreign Trade Law promulgated by
the SCNPC on May 12, 1994, amended on April 6, 2004 and November 7, 2016 respectively, save as otherwise provided by laws and administrative
regulations, foreign trade operators engaging in goods or technology import and export shall go through the record-filing registration
formalities with the competent department of foreign trade under the State Council of the PRC or its authorized institutions. Failing
to do the same, the customs shall refuse to process the declaration and clearance of goods imported or exported submitted by such foreign
trade operators. A legally registered foreign trade operator is entitled to act as other parties’ agent to handle foreign trade
businesses within its business scope. Furthermore, in accordance with the Measures for the Archival Filing and Registration of Foreign
Trade Business Operators amended on May 10, 2021, any foreign trade business operator undertaking the import or export of goods or technology
shall go through the archival filing and registration to the MOFCOM or the institutions entrusted by the MOFCOM. But those for whom there
is no need to make archival filing and registration as prescribed by laws, administrative regulations and the provisions of the MOFCOM
shall be excluded. In case a foreign trade business operator fails to go through the archival filing and registration according to the
present Measures, the customs shall not handle the formalities for declaration of release for import and export.
Pursuant to the Administrative
Provisions of the Customs of the People’s Republic of China on Record-filing of Customs Declaration Entities promulgated by the
General Administration of Customs on November 19, 2021 and became effective on January 1, 2022, a consignor or consignee of imported and
exported goods shall go through customs declaration entity record-filing formalities with the competent customs in accordance with the
applicable provisions. Customs declaration entities may handle customs declarations business within the customs territory of the PRC.
According to the Import and Export Commodity Inspection
Law of the People’s Republic of China promulgated by the SCNPC on February 21, 1989, as amended on April 29, 2021 and its implementation
rules, the imported and exported goods that are subject to compulsory inspection listed in the catalog compiled by the import and export
commodity inspection department established by the State Council shall be inspected by the commodity inspection organizations, and the
imported and exported goods that are not subject to statutory inspection shall be subject to random inspection. Consignees and consignors
or their entrusted customs brokers may apply for inspection to the goods inspection authorities.
Regulation on Security Review
In August 2011, the MOFCOM promulgated the Rules
of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors,
or the MOFCOM Security Review Rule, which came into effect on September 1, 2011, to implement the Notice of the General Office of the
State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated
on February 3, 2011. Under these regulations, a security review is required for foreign investors’ mergers and acquisitions having
“national defense and security” implications and mergers and acquisitions by which foreign investors may acquire “de
facto control” of domestic enterprises having “national security” implications. In addition, when deciding whether
a specific merger or acquisition of a domestic enterprise by foreign investors is subject to a security review, the MOFCOM will look
into the substance and actual impact of the transaction. The MOFCOM Security Review Rule further prohibits foreign investors from bypassing
the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through
contractual arrangements or offshore transactions.
On December 19, 2020, the NDRC and MOFCOM promulgated
the Measures for the Security Review of Foreign Investments which became effective on January 18, 2021. Under the Security Review of
Foreign Investments, for foreign investments that affect or may affect national security, security review shall be conducted by the office
led by NDRC and MOFCOM. For the purpose of these Measures, the term “foreign investment” refers to the investment activities
carried out by foreign investors directly or indirectly within the territory of the PRC, including the following circumstances:
| ● | where foreign investors invest, solely or jointly with other
investors, in new projects or establishing enterprises in the PRC; |
| ● | where foreign investors acquire equity or assets of domestic
enterprises by way of merger and acquisition; or |
| ● | where foreign investors make investments in the PRC in any
other form. |
Regulation on Information Security and Censorship
On July 1, 2015, the Standing Committee of the
National People’s Congress promulgated the PRC National Security Law, which came into effect on the same day. The PRC National
Security Law provides that the state shall safeguard the sovereignty, security and cyber security development interests of the state,
and that the state shall establish a national security review and supervision system to review, among other things, foreign investment,
key technologies, internet and information technology products and services, and other important activities that are likely to impact
the national security of the PRC.
The SCNPC promulgated the
Cybersecurity Law of the PRC, or the Cybersecurity Law, which became effective on June 1, 2017, to protect cyberspace security and
order. Pursuant to the Cybersecurity Law, any individual or organization using the network must comply with the constitution and the
applicable laws, follow the public order and respect social moralities, and must not endanger cyber security, or engage in activities
by making use of the network that endanger the national security, honor and interests, or infringe on the fame, privacy, intellectual
property and other legitimate rights and interests of others. The Cybersecurity Law sets forth various security protection obligations
for network operators, which are defined as “owners and administrators of networks and network service providers”, including,
among others, complying with a series of requirements of tiered cyber protection systems; verifying users’ real identity; localizing
the personal information and important data gathered and produced by key information infrastructure operators during operations within
the PRC; and providing assistance and support to government authorities where necessary for protecting national security and investigating
crimes. To comply with these laws and regulations, we have adopted security policies and measures to protect our cyber system and user
information.
On July 6, 2021, certain
PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities, which, among others, provides
for improving relevant laws and regulations on data security, cross-border data transmission, and confidential information management.
It provided that efforts will be made to revise the regulations on strengthening the confidentiality and file management relating to
the offering and listing of securities overseas, to implement the responsibility on information security of overseas listed companies,
and to strengthen the standardized management of cross-border information provision mechanisms and procedures.
On June 10, 2021, the Standing
Committee of the PRC National People’s Congress published the PRC Data Security Law, which took effect on September 1, 2021. The
PRC Data Security Law requires data processing, which includes the collection, storage, use, processing, transmission, provision, publication
of data, to be conducted in a legitimate and proper manner. The PRC Data Security Law provides for data security and privacy obligations
on entities and individuals carrying out data activities. The PRC Data Security Law also introduces a data classification and hierarchical
protection system based on the importance of data in economic and social development, and the degree of harm it may cause to national
security, public interests, or legitimate rights and interests of individuals or organizations if such data are tampered with, destroyed,
leaked, illegally acquired or illegally used. The appropriate level of protection measures is required to be taken for each respective
category of data. For example, a processor of important data is required to designate the personnel and the management body responsible
for data security, carry out risk assessments of its data processing activities and file the risk assessment reports with the competent
authorities. State core data, i.e. data having a bearing on national security, the lifelines of national economy, people’s key
livelihood and major public interests, shall be subject to stricter management system. Moreover, the PRC Data Security Law provides a
national security review procedure for those data activities which affect or may affect national security and imposes export restrictions
on certain data and information. In addition, the PRC Data Security Law also provides that any organization or individual within the
territory of the PRC shall not provide any foreign judicial body and law enforcement body with any data without the approval of the competent
PRC governmental authorities.
On August 17, 2021, the State
Council promulgated the Regulations on Security Protection of Critical Information Infrastructure, which became effective on September
1, 2021. Pursuant to such regulation, critical information infrastructure refers to any important network facilities and information
systems of an important industry and field such as public communication and information service, energy, transport, water conservation,
finance, public services, e-government affairs and national defense related science and technology industry, and other industries and
fields that may seriously endanger national security, people’s livelihood and public interest in case of damage, function loss
or data leakage. In addition, relevant administration departments of each important industry and field are responsible for formulating
eligibility criteria and determining the critical information infrastructure in the respective industry or field. The operators will
be informed by the relevant regulatory authority about the final determination as to whether they are categorized as “critical
information infrastructure operators.”
On August 20, 2021, the Standing
Committee of the National People’s Congress of the PRC promulgated the PRC Personal Information Protection Law, which integrates
the scattered rules with respect to personal information rights and privacy protection and took effect on November 1, 2021. Pursuant
to the PRC Personal Information Protection Law, “personal information” refers to any kind of information related to an identified
or identifiable individual as electronically or otherwise recorded but excluding the anonymized information. The processing of personal
information includes the collection, storage, use, processing, transmission, provision, disclosure and deletion of personal information.
The PRC Personal Information Protection Law applies to the processing of personal information of individuals within the territory of
the PRC, as well as personal information processing activities outside the territory of the PRC, for the purpose of providing products
or services to natural persons located within China, for analyzing or evaluating the behaviors of individuals located within China, or
for other circumstances as prescribed by laws and administrative regulations. The PRC Personal Information Protection Law provides a
personal information processor may process the personal information of this individual only under the following circumstances: (i) where
consent is obtained from the individual; (ii) where it is necessary for the execution or performance of a contract to which the individual
is a party, or where it is necessary for carrying out human resource management pursuant to employment rules legally adopted or a collective
contract legally concluded; (iii) where it is necessary for performing a statutory responsibility or statutory obligation; (iv) where
it is necessary in response to a public health emergency, or for protecting the life, health or property safety of a natural person in
the case of an emergency; (v) where the personal information is processed within a reasonable scope to carry out any news reporting,
supervision by public opinions or any other activity for public interest purposes; (vi) where the personal information, which has already
been disclosed by an individual or otherwise legally disclosed, is processed within a reasonable scope; or (vii) any other circumstance
as provided by laws or administrative regulations. In principle, the consent of an individual must be obtained for the processing of
his or her personal information, except under the circumstances of the aforementioned items (ii) to (vii). Where personal information
is to be processed based on the consent of an individual, such consent shall be a voluntary and explicit indication of intent given by
such individual on a fully informed basis. If laws or administrative regulations provide that the processing of personal information
shall be subject to the separate consent or written consent of the individual concerned, such provisions shall prevail. In addition,
the processing of the personal information of a minor under 14 years old must obtain the consent by a parent or a guardian of such minor
and the personal information processors must adopt special rules for processing personal information of minors under 14 years old. The
PRC Personal Information Protection Law also contains certain specific provisions with respect to the obligations of a personal information
processor and imposes further obligations on a personal information processor that provides for basic internet platform services, has
large amount of users, or has complicated business activities. These obligations include, without limitation, formulation of an independent
institution mainly comprising of outside members to supervise personal information processing activities, termination of provision of
services for product or service providers on the platform whose personal information processing activities are in material violation
of laws and regulations, and issuing personal information protection social responsibilities reports regularly.
On November 14, 2021, the
CAC published the Regulations on Network Data Security (draft for public comments), or the draft Regulations on Network Data Security,
which reiterates that data processors that process the personal information of more than one million users intends to list overseas should
apply for a cybersecurity review. In addition, data processors that process important data or are listed overseas shall carry out an
annual data security assessment on their own or by engaging a data security services institution, and the data security assessment report
for the prior year should be submitted to the local cyberspace affairs administration department before January 31 of each year.
On December 28, 2021, thirteen
PRC regulatory agencies, namely, the CAC, the NDRC, the Ministry of Industry and Information Technology, the Ministry of Public Security,
the Ministry of State Security, the Ministry of Finance, MOFCOM, SAMR, CSRC, the People’s Bank of China, the National Radio and
Television Administration, National Administration of State Secrets Protection and the National Cryptography Administration, jointly
adopted and published the Measures for Cybersecurity Review (2021), which became effective on February 15, 2022. The Measures for Cybersecurity
Review (2021) authorized the relevant government authorities to conduct cybersecurity review on a range of activities that affect or
may affect national security, and required that, among others, in addition to “operator of critical information infrastructure”
any “operator of network platform” holding personal information of more than one million users which seeks to list in a foreign
stock exchange should also be subject to cybersecurity review. The Measures for Cybersecurity Review (2021) further elaborated the factors
to be considered when assessing the national security risks of the relevant activities, including, among others, (i) the risk of core
data, important data or a large amount of personal information being stolen, leaked, destroyed, and illegally used or exited the country;
(ii) the risk of critical information infrastructure, core data, important data or a large amount of personal information being affected,
controlled, or maliciously used by foreign governments if going public; and (iii) the risks of network information security. The cybersecurity
review will also look into the potential national security risks from overseas IPOs.
On July 6, 2021, certain
PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities, which, among others, provides
for improving relevant laws and regulations on data security, cross-border data transmission, and confidential information management.
It provided that efforts will be made to revise the regulations on strengthening the confidentiality and file management relating to
the offering and listing of securities overseas, to implement the responsibility on information security of overseas listed companies,
and to strengthen the standardized management of cross-border information provision mechanisms and procedures.
On June 10, 2021, the Standing
Committee of the PRC National People’s Congress published the PRC Data Security Law, which took effect on September 1, 2021. The
PRC Data Security Law requires data processing, which includes the collection, storage, use, processing, transmission, provision, publication
of data, to be conducted in a legitimate and proper manner. The PRC Data Security Law provides for data security and privacy obligations
on entities and individuals carrying out data activities. The PRC Data Security Law also introduces a data classification and hierarchical
protection system based on the importance of data in economic and social development, and the degree of harm it may cause to national
security, public interests, or legitimate rights and interests of individuals or organizations if such data are tampered with, destroyed,
leaked, illegally acquired or illegally used. The appropriate level of protection measures is required to be taken for each respective
category of data. For example, a processor of important data is required to designate the personnel and the management body responsible
for data security, carry out risk assessments of its data processing activities and file the risk assessment reports with the competent
authorities. State core data, i.e. data having a bearing on national security, the lifelines of national economy, people’s key
livelihood and major public interests, shall be subject to stricter management system. Moreover, the PRC Data Security Law provides a
national security review procedure for those data activities which affect or may affect national security and imposes export restrictions
on certain data and information. In addition, the PRC Data Security Law also provides that any organization or individual within the
territory of the PRC shall not provide any foreign judicial body and law enforcement body with any data without the approval of the competent
PRC governmental authorities.
On August 17, 2021, the State
Council promulgated the Regulations on Security Protection of Critical Information Infrastructure, which became effective on September
1, 2021. Pursuant to such regulation, critical information infrastructure refers to any important network facilities and information
systems of an important industry and field such as public communication and information service, energy, transport, water conservation,
finance, public services, e-government affairs and national defense related science and technology industry, and other industries and
fields that may seriously endanger national security, people’s livelihood and public interest in case of damage, function loss
or data leakage. In addition, relevant administration departments of each important industry and field are responsible for formulating
eligibility criteria and determining the critical information infrastructure in the respective industry or field. The operators will
be informed by the relevant regulatory authority about the final determination as to whether they are categorized as “critical
information infrastructure operators.”
On August 20, 2021, the Standing
Committee of the National People’s Congress of the PRC promulgated the PRC Personal Information Protection Law, which integrates
the scattered rules with respect to personal information rights and privacy protection and took effect on November 1, 2021. Pursuant
to the PRC Personal Information Protection Law, “personal information” refers to any kind of information related to an identified
or identifiable individual as electronically or otherwise recorded but excluding the anonymized information. The processing of personal
information includes the collection, storage, use, processing, transmission, provision, disclosure and deletion of personal information.
The PRC Personal Information Protection Law applies to the processing of personal information of individuals within the territory of
the PRC, as well as personal information processing activities outside the territory of the PRC, for the purpose of providing products
or services to natural persons located within China, for analyzing or evaluating the behaviors of individuals located within China, or
for other circumstances as prescribed by laws and administrative regulations. The PRC Personal Information Protection Law provides a
personal information processor may process the personal information of this individual only under the following circumstances: (i) where
consent is obtained from the individual; (ii) where it is necessary for the execution or performance of a contract to which the individual
is a party, or where it is necessary for carrying out human resource management pursuant to employment rules legally adopted or a collective
contract legally concluded; (iii) where it is necessary for performing a statutory responsibility or statutory obligation; (iv) where
it is necessary in response to a public health emergency, or for protecting the life, health or property safety of a natural person in
the case of an emergency; (v) where the personal information is processed within a reasonable scope to carry out any news reporting,
supervision by public opinions or any other activity for public interest purposes; (vi) where the personal information, which has already
been disclosed by an individual or otherwise legally disclosed, is processed within a reasonable scope; or (vii) any other circumstance
as provided by laws or administrative regulations. In principle, the consent of an individual must be obtained for the processing of
his or her personal information, except under the circumstances of the aforementioned items (ii) to (vii). Where personal information
is to be processed based on the consent of an individual, such consent shall be a voluntary and explicit indication of intent given by
such individual on a fully informed basis. If laws or administrative regulations provide that the processing of personal information
shall be subject to the separate consent or written consent of the individual concerned, such provisions shall prevail. In addition,
the processing of the personal information of a minor under 14 years old must obtain the consent by a parent or a guardian of such minor
and the personal information processors must adopt special rules for processing personal information of minors under 14 years old. The
PRC Personal Information Protection Law also contains certain specific provisions with respect to the obligations of a personal information
processor and imposes further obligations on a personal information processor that provides for basic internet platform services, has
large amount of users, or has complicated business activities. These obligations include, without limitation, formulation of an independent
institution mainly comprising of outside members to supervise personal information processing activities, termination of provision of
services for product or service providers on the platform whose personal information processing activities are in material violation
of laws and regulations, and issuing personal information protection social responsibilities reports regularly.
On November 14, 2021, the
CAC published the Regulations on Network Data Security (draft for public comments), or the draft Regulations on Network Data Security,
which reiterates that data processors that process the personal information of more than one million users intends to list overseas should
apply for a cybersecurity review. In addition, data processors that process important data or are listed overseas shall carry out an
annual data security assessment on their own or by engaging a data security services institution, and the data security assessment report
for the prior year should be submitted to the local cyberspace affairs administration department before January 31 of each year.
On December 28, 2021, thirteen
PRC regulatory agencies, namely, the CAC, the NDRC, the Ministry of Industry and Information Technology, the Ministry of Public Security,
the Ministry of State Security, the Ministry of Finance, MOFCOM, SAMR, CSRC, the People’s Bank of China, the National Radio and
Television Administration, National Administration of State Secrets Protection and the National Cryptography Administration, jointly
adopted and published the Measures for Cybersecurity Review (2021), which became effective on February 15, 2022. The Measures for Cybersecurity
Review (2021) authorized the relevant government authorities to conduct cybersecurity review on a range of activities that affect or
may affect national security, and required that, among others, in addition to “operator of critical information infrastructure”
any “operator of network platform” holding personal information of more than one million users which seeks to list in a foreign
stock exchange should also be subject to cybersecurity review. The Measures for Cybersecurity Review (2021) further elaborated the factors
to be considered when assessing the national security risks of the relevant activities, including, among others, (i) the risk of core
data, important data or a large amount of personal information being stolen, leaked, destroyed, and illegally used or exited the country;
(ii) the risk of critical information infrastructure, core data, important data or a large amount of personal information being affected,
controlled, or maliciously used by foreign governments if going public; and (iii) the risks of network information security. The cybersecurity
review will also look into the potential national security risks from overseas IPOs.
On July 7, 2022, the CAC promulgated the Outbound Data Transfer Security
Assessment Measures, which became effective on September 1, 2022. According to the Outbound Data Transfer Security Assessment Measures,
to provide data abroad under any of the following circumstances, a data processor shall declare security assessment for its outbound data
transfer to the CAC through the local cyberspace administration at the provincial level: (i) where the data processor will provide important
data abroad; (ii) where operator of critical information infrastructure or the data processor processing the personal information of more
than one million individuals will provide personal information abroad; (iii) where the data processor who has provided personal information
of 100,000 individuals or sensitive personal information of 10,000 individuals in total abroad since January 1 of the previous year, will
provide personal information abroad; and (iv) other circumstances where the security assessment is required as prescribed by the CAC.
Prior to declaring security assessment for outbound data transfer, the data processor shall conduct self-assessment on the risks of the
outbound data transfer. For outbound data transfers that have been carried out before the effectiveness of the Outbound Data Transfer
Security Assessment Measures, if it is not in compliance with these measures, rectification shall be completed within six months starting
from September 1, 2022.
Regulations 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, promulgated in December 2008 and which was revised by the SCNPC on October 17, 2020 and became effective on June 1, 2021, 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 a new design of the shape, pattern, or a
combination thereof, as well as a combination of the color, shape and pattern, of the entirety or a portion of a product, which creates
an aesthetic feeling and is fit for industrial application. Under the PRC Patent Law, the term of patent protection starts from the date
of application. The duration of patent right for inventions shall be twenty years, and the duration of patent right for utility models
shall be ten years, and the duration of patent right for designs shall be 15 years, counted from the date of filing. 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, or 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. 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.
As of the date of this annual
report, we had 43 patents granted in China.
Trademark Law
The PRC Trademark Law and
its implementation rules protect registered trademarks. The PRC Trademark Office of National Intellectual Property Administration 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. The validity period of registered trademarks is ten years from the date of approval
of trademark application, and may be renewed for another ten years provided relevant application procedures have been completed within
twelve months before the end of the validity period. As of the date of this annual report, we owned 23 registered trademarks in different
applicable trademark categories in China and we owned 20 registered trademarks in different applicable trademark categories outside of
China and were in the process of applying to register 6 trademarks outside of China.
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 RMB5 million.
Software Copyright Law
The newly amended
Copyright Law or the Copyright Law, consists of 67 articles in six chapters, and came into force on June 1, 2021. The Copyright Law
provides that Chinese citizens, legal entities or unincorporated organizations, whether published or not, shall enjoy copyright in
their works, which refer to ingenious intellectual achievements in the fields of literature, art and science that can be presented
in a certain form. The purpose of the Copyright Law aims to encourage the creation and dissemination of works that are beneficial
for the construction of socialist spiritual civilization and material civilization and promote the development and prosperity of
Chinese culture. The term of protection for copyrighted software of legal persons is fifty years and ends on December 31 of the
50th year from the date of first publishing of the software.
In order to further implement
the Computer Software Protection Regulations promulgated by the State Council in 2001, and amended subsequently, the State Copyright
Bureau issued the Computer Software Copyright Registration Procedures in 2002, which apply to software copyright registration, license
contract registration and transfer contract registration.
As of the date of this annual
report, we had registered 44 software copyrights in China.
Regulation on Domain Name
The domain names are protected
under the Administrative Measures on the Internet Domain Names of China promulgated by MIIT on November 5, 2004 and effective on
December 20, 2004, and was replaced by the Administrative Measures on the Internet Domain Names promulgated by MIIT on August 24,
2017, which became effective on 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.
As of the date of this annual
report, we had registered 14 domain names.
Regulations on Labor Protection
The principal laws that govern
employment include: (i) the Labor Law of the PRC, or the Labor Law, promulgated by the SCNPC on July 5, 1994, which has been effective
since January 1, 1995 and most recently amended on December 29, 2018; and (ii) the Labor Contract Law of the PRC, or the Labor
Contract Law, which was promulgated by the SCNPC on June 29, 2007, came into effect on January 1, 2008, and was amended on
December 28, 2012 and became effective as of July 1, 2013, and the Implementation Regulations on Labor Contract Law, which
was promulgated on September 18, 2008, and became effective since the same day.
According to the Labor Law,
an employer shall develop and improve its rules and regulations to safeguard the rights of its workers. An employer shall develop and
improve its labor safety and health system, stringently implement national protocols and standards on labor safety and health, conduct
labor safety and health education for workers, guard against labor accidents and reduce occupational hazards. Labor safety and health
facilities must comply with relevant national standards. An employer must provide workers with the necessary labor protection gear that
complies with labor safety and health conditions stipulated under national regulations, as well as provide regular health checks for
workers that are engaged in operations with occupational hazards. Laborers engaged in special operations shall have received specialized
training and have obtained the pertinent qualifications. An employer shall develop a vocational training system. Vocational training
funds shall be set aside and used in accordance with national regulations and vocational training for workers shall be carried out systematically
based on the actual conditions of the company.
The Labor Contract Law and
its implementation rules regulate both parties through a labor contract, namely the employer and the employee, and contain specific provisions
involving the terms of the labor contract. It is stipulated under the Labor Contract Law and the Implementation Regulations on Labor
Contract Law that a labor contract must be made in writing. If an employer fails to enter into a written employment contract with an
employee within one year from the date on which the employment relationship is established, the employer must rectify the situation by
entering into a written employment contract with the employee and pay the employee twice the employee’s salary for the period from
the day following the lapse of one month from the date of establishment of the employment relationship to the day prior to the execution
of the written employment contract. In addition, an employer is obligated to sign an indefinite term labor contract with an employee
if the employer continues to employ the employee after two consecutive fixed term labor contracts. The Labor Contract Law and its implementation
rules also require compensation to be paid upon certain terminations, which significantly affects the cost of reducing workforce for
employers. In addition, if an employer intends to enforce a non-compete provision in an employment contract or non-competition agreement
with an employee, it has to compensate the employee on a monthly basis during the term of the restriction period after the termination
or expiry of the labor contract. Employers in most cases are also required to provide severance payment to their employees after their
employment relationships are terminated.
Enterprises in China are
required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension
plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan,
and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses
and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses
or where they are located.
According to the Interim
Regulations on the Collection and Payment of Social Insurance Premiums, the Regulations on Work Injury Insurance, the Regulations on
Unemployment Insurance and the Trial Measures on Employee Maternity Insurance of Enterprises, enterprises in the PRC shall provide benefit
plans for their employees, which include basic pension insurance, unemployment insurance, maternity insurance, work injury insurance
and basic medical insurance. An enterprise must provide social insurance by processing social insurance registration with local social
insurance agencies, and shall pay or withhold relevant social insurance premiums for or on behalf of employees. The Law on Social Insurance
of the PRC, which was promulgated by the SCNPC on October 28, 2010, became effective on July 1, 2011, and was most recently
updated on December 29, 2018, has consolidated pertinent provisions for basic pension insurance, unemployment insurance, maternity
insurance, work injury insurance and basic medical insurance, and has elaborated in detail the legal obligations and liabilities of employers
who do not comply with relevant laws and regulations on social insurance. Without force majeure reasons, employers must not suspend or
reduce their payment of social insurance for employees, otherwise, competent governmental authorities will have the power to enforce
employers to pay up social insurance within a prescribed time limit, and a fine of 0.05% of the unpaid social insurance can be charged
on the part of the employers per day commencing from the first day of default. Provided that the employers still fail to make the payment
within the prescribed time limit, a fine of over one time and up to three times of the unpaid sum of social insurance can be charged.
According to the Regulations
on the Administration of Housing Provident Fund, which was promulgated by the State Counsel and became effective on April 3, 1999,
and was amended on March 24, 2002 and was partially revised on March 24, 2019 by Decision of the State Council on Revising
Some Administrative Regulations (Decree No. 710 of the State Council), housing provident fund contributions by an individual employee
and housing provident fund contributions by his or her employer shall belong to the individual employee. Registration by PRC companies
at the applicable housing provident fund management center is compulsory and a special housing provident fund account for each of the
employees shall be opened at an entrusted bank.
The employer shall timely
pay up and deposit housing provident fund contributions in full amount and late or insufficient payments shall be prohibited. The employer
shall process housing provident fund payment and deposit registrations with the housing provident fund administration center. Under the
circumstances where financial difficulties do exist due to which an employer is unable to pay or pay up housing provident funds, permission
of labor union of the employer and approval of the local housing provident funds commission must first be obtained before the employer
can suspend or reduce their payment of housing provident funds. With respect to companies who violate the above regulations and fail
to process housing provident fund payment and deposit registrations or open housing provident fund accounts for their employees, such
companies shall be ordered by the housing provident fund administration center to complete such procedures within a designated period.
Those who fail to process their registrations within the designated period shall be subject to a fine ranging from RMB10,000 to RMB50,000.
When companies breach these regulations and fail to pay up housing provident fund contributions in full amount as due, the housing provident
fund administration center shall order such companies to pay up within a designated period, and may further apply to the People’s
Court for mandatory enforcement against those who still fail to comply after the expiry of such period.
Regulations on Tax
PRC Enterprise Income Tax
The PRC Enterprise Income
Tax Law, or EIT Law, which was promulgated on March 16, 2007 and took effect on January 1, 2008, and further amended on February 24,
2017 and December 29, 2018, imposes a uniform enterprise income tax rate of 25% on all PRC resident enterprises, including foreign-invested enterprises,
unless they qualify certain exceptions. The enterprise income tax is calculated based on the PRC resident enterprise’s global income
as determined under PRC tax laws and accounting standards. Under the PRC EIT Law, an enterprise established outside China with “de
facto management bodies” within China 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 regulations to
the PRC Enterprise Income Tax Law, a “de facto management body” is defined as the body that exercises full and substantial
control and overall management over the business, productions, personnel, accounts and properties of an enterprise. If a non-resident enterprise
sets up an organization or establishment in the PRC, it will be subject to enterprise income tax for the income derived from such organization
or establishment in the PRC and for the income derived from outside the PRC but with an actual connection with such organization or establishment
in the PRC. However, if non-resident enterprises have not formed permanent establishments or premises in the PRC, or if they have
formed permanent establishments or premises in the PRC but their relevant income derived in the PRC is not related to those establishments,
then their enterprise income tax would be set at a rate of 10% for their income sourced from inside the PRC.
The PRC EIT Law and its implementation
rules, which was promulgated on December 6, 2007 and took effect on January 1, 2008 and partly amended on April 23, 2019
and became effective on the same date, permit certain “high and new technology enterprises strongly supported by the state”
that independently own core intellectual property and meet statutory criteria, to enjoy a reduced 15% enterprise income tax rate. On
January 29, 2016, the State Administration for Taxation, or SAT, the Ministry of Science and Technology and the Ministry of Finance
jointly issued the Administrative Rules for the Certification of High and New Technology Enterprises specifying the criteria and procedures
for the certification of High and New Technology Enterprises, and the certificate of a high and new technology enterprise, is valid for
three years.
Pursuant to Circular of the
State Administration of Taxation on Printing and Distributing the Implementing Measures for Special Tax Adjustments (for Trial Implementation),
effective on January 1, 2008, enterprises shall adopt a reasonable transfer pricing method when conducting transactions with their
affiliates. Tax authorities have the power to assess whether related transactions conform to the principle of equity and make adjustments
accordingly. Therefore, the invested enterprise should faithfully report relevant information of its related transactions. Pursuant to
the Announcement of the State Administration of Taxation on Issuing the Administrative Measures for Special Tax Adjustment and Investigation
and Mutual Consultation Procedures, effective on May 1, 2017, an enterprise may adjust and pay taxes at its own discretion when
it receives a special tax adjustment risk warning or identifies its own special tax adjustment risks, and the tax authorities may also
carry out special tax investigation and adjustment in accordance with the relevant provisions in regard to enterprises that adjust and
pay taxes at their own discretion.
In January 2009, the SAT
promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises,
or the Non-resident Enterprises Measures, which was repealed by Announcement of the State Administration of Taxation on Issues Relating
to Withholding at Source of Income Tax of Non-resident Enterprises in December 2017. According to the new announcement, it shall
apply to handling of matters relating to withholding at source of income tax of non-resident enterprises pursuant to the provisions
of Article 37, Article 39 and Article 40 of the Enterprise Income Tax Law. According to Article 37, Article 39 of the Enterprise
Income Tax Law, income tax over non-resident enterprise income pursuant to the provisions of the third paragraph of Article 3 shall
be subject to withholding at the source, where the payer shall act as the withholding agent. The tax amount for each payment made or
due shall be withheld by the withholding agent from the amount paid or payable. Where a withholding agent fails to withhold tax or perform
tax withholding obligations pursuant to the provisions of Article 37, the taxpayer shall pay tax at the place where the income is
derived. Where the taxpayer fails to pay tax pursuant to law, the tax authorities may demand payment of the tax amount payable, from
a payer of the taxpayer with payable tax amounts from other taxable income items in China.
On April 30, 2009, the
MOFCOM and the SAT jointly issued the Circular on Issues Concerning Treatment of Enterprise Income Tax in Enterprise Restructuring Business,
or Circular 59, which became effective retroactively as of January 1, 2008 and was partially revised on January 1, 2014.
By promulgating and implementing this circular, the PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer
of equity interests in a PRC resident enterprise by a Non-resident Enterprise.
On February 3, 2015,
the SAT issued the Announcement of the State Administration of Taxation on Several Issues Relating to Enterprise Income Tax of Transfers
of Assets between Non-resident Enterprises, or SAT Bulletin 7, which was partially abolished on December 29, 2017. SAT
Bulletin 7 extends its tax jurisdiction to transactions involving transfer of immovable property in China and assets held under the establishment,
and placement in China, of a foreign company through the offshore transfer of a foreign intermediate holding company. SAT Bulletin 7
also addresses transfer of the equity interest in a foreign intermediate holding company broadly. In addition, SAT Bulletin 7 introduces
safe harbor scenarios applicable to internal group restructurings. However, it also brings challenges to both the foreign transferor
and transferee of the Indirect Transfer as they have to assess whether the transaction should be subject to PRC tax and to file or withhold
the PRC tax accordingly.
On October 17, 2017,
the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise
Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017 and was revised on June 15, 2018.
The SAT Bulletin 37 further clarifies the practice and procedure of withholding of non-resident enterprise income tax.
If non-resident investors
were involved in our private equity financing, if such transactions were determined by the tax authorities to lack reasonable commercial
purpose, we and our non-resident investors may be at risk of being required to file a return and be taxed under SAT Bulletin 7 and
we may be required to expend valuable resources to comply with SAT Bulletin 7 or to establish that we should not be held liable for any
obligations under SAT Bulletin 7.
PRC Value Added Tax
According to the Temporary
Regulations on Value-added Tax, which was most recently amended on November 19, 2017, and the Detailed Implementing Rules of
the Temporary Regulations on Value-added Tax, which was amended on October 28, 2011, and became effective on November 1,
2011, all taxpayers selling goods, providing processing, repair or replacement services or importing goods within the PRC shall pay Value-Added Tax.
The tax rate of 17% shall be levied on general taxpayers selling or importing various goods; the tax rate of 17% shall be levied on the
taxpayers providing processing, repairing or replacement service; the applicable rate for the export of goods by taxpayers shall be zero,
unless otherwise stipulated.
On January 1, 2012,
the State Council officially launched a pilot value-added tax reform program, or the Pilot Program, applicable to businesses in
selected industries. Businesses in the Pilot Program would pay value added tax, or VAT, instead of business tax. The Pilot Program initially
applied only to transportation industry and “modern service industries” in Shanghai and would be expanded to eight trial
regions (including Beijing and Guangdong province) and nationwide if conditions permit. The pilot industries in Shanghai included industries
involving the leasing of tangible movable property, transportation services, research and development and technical services, information
technology services, cultural and creative services, logistics and ancillary services, certification and consulting services. Revenues
generated by advertising services, a type of “cultural and creative services”, are subject to the VAT tax rate of 6%. According
to official announcements made by competent authorities in Beijing and Guangdong province, Beijing launched the same Pilot Program on
September 1, 2012, and Guangdong province launched it on November 1, 2012.
On May 24, 2013, the
MOFCOM and the SAT issued the Circular on Tax Policies in the Nationwide Pilot Collection of Value Added Tax in Lieu of Business Tax
in the Transportation Industry and Certain Modern Services Industries, or the Pilot Collection Circular. The scope of certain modern
services industries under the Pilot Collection Circular extends to the inclusion of radio and television services.
On March 23, 2016, the
MOFCOM and the SAT jointly issued the Circular on the Pilot Program for Overall Implementation of the Collection of Value Added Tax Instead
of Business Tax, or Circular 36, which took effect on May 1, 2016. Pursuant to the Circular 36, all of the companies operating
in construction, real estate, finance, modern service or other sectors which were required to pay business tax are required to pay VAT,
in lieu of business tax. The VAT rate is 6%, except for rate of 11% for real estate sale, land use right transferring and providing service
of transportation, postal sector, basic telecommunications, construction, real estate lease; rate of 17% for providing lease service
of tangible property; and rate of zero for specific cross-bond activities.
At the State Council executive
meeting on March 28, 2018, China’s State Council has announced the VAT rate on manufacturing is to be cut by one percent to
16% which took effect on May 1, 2018. On April 4, 2018, the Ministry of Finance and the SAT promulgated the Notice on Adjusting
Value-added Tax Rates, which reduced the tax rates for sale, import and export of goods, as well as the deduction rate for taxpayer’s
purchaser of agricultural products. According to the Announcement on Relevant Policies for Deepening the Value-Added Tax Reform,
which is jointly issued by Ministry of Finance, SAT and the General Administration of Customs on March 20, 2019 and took effect
on April 1, 2019, The tax rate of 16% applicable to the VAT taxable sale or import of goods by a general VAT taxpayer shall be adjusted
to 13%.
According to the Circular
of the SAT on Printing and Distributing the Administrative Measures for Tax Refund (Exemption) for Exported Goods (for Trial Implementation),
effective on May 1, 2005, unless otherwise provided by law, for the goods as exported via an export agency, the exporter may, after
the export declaration and the conclusion of financial settlement for sales, file a report to competent State Taxation Bureau for the
approval of refund or exemption of VAT or consumption tax on the strength or the relevant certificates.
PRC Dividend Withholding Tax
Under the PRC tax laws effective
prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises were exempt from PRC withholding
tax. Pursuant to the EIT Law and the Implementation Rules, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise
in China to its foreign enterprise investors are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction
of incorporation has a tax treaty with China that provides for a different withholding arrangement.
Pursuant to an Arrangement
Between the Mainland of 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 came into effect on December 8, 2006, and other applicable PRC laws and regulations,
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 and regulations, the 10% withholding tax on the dividends the Hong
Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5%. According to the Announcement of the SAT on Issuing
the Measures for the Administration of Non-resident Taxpayers’ Enjoyment of Treaty Benefits effective on January 1, 2020,
non-resident taxpayers can enjoy tax treaty benefits via the “self-assessment of eligibility, claiming treaty benefits,
retaining documents for inspection” mechanism. Non-resident taxpayers who have self-assessed that they are eligible for
the treaty benefits can claim such tax treaty benefits accordingly provided that they have collected and retained relevant supporting
documents for inspection by the tax authorities in their post-filing administration process. Pursuant to the Announcement on Certain
Issues with Respect to the “Beneficial Owner” in Tax Treaties, issued by the SAT on February 3, 2018, and effective
on April 1, 2018, when determining an applicant’s “beneficial owner” status regarding tax treatments in connection
with dividends, interests or royalties in tax treaties, several factors set forth below will be taken into account, although the actual
analysis will be fact-specific: (i) whether the applicant is obligated to pay more than 50% of his or her income in 12 months to
residents in a third country or region; (ii) whether the business operated by the applicant constitutes a substantial business operation;
and (iii) 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. The applicant must submit relevant documents to the competent tax authorities to prove his or her
“beneficial owner” status. Although our WFOE is currently wholly owned by UTime International Limited, we cannot assure you
that we will be able to enjoy the preferential withholding tax rate of 5% under the China-HK Taxation Arrangement.
Regulations on Foreign Exchange
The principal regulations
governing foreign currency exchange in China are the PRC Foreign Exchange Administration Regulations, which were promulgated by the State
Council on January 29, 1996 and last 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 State Administration of Foreign Exchange, or 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 August 29, 2008,
SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement
of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise
of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that
the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes
within the business scope approved by the applicable government authority and may not be used for equity investments within China. SAFE
also strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises.
The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may not in any case be used to repay
RMB loans if the proceeds of such loans have not been used. On March 30, 2015, SAFE issued SAFE Circular 19, which took effective
and replaced SAFE Circular 142 on June 1, 2015. Although SAFE Circular 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 SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE 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 SAFE 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 13, which took effect on June 1, 2015. SAFE Circular 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.
Regulations on loans to and direct investment
in the PRC entities by offshore holding companies
According to the Implementation
Rules for the Provisional Regulations on Statistics and Supervision of Foreign Debt promulgated by SAFE on September 24, 1997 and
the Interim Provisions on the Management of Foreign Debts promulgated by SAFE, the NDRC and the MOFCOM and effective from March 1,
2003, loans by foreign companies to their subsidiaries in China, which accordingly are FIEs, are considered foreign debt, and such loans
must be registered with the local branches of the SAFE. Under the provisions, the total amount of accumulated medium-term and long-term foreign
debt and the balance of short-term debt borrowed by a FIE is limited to the difference between the total investment and the registered
capital of the foreign-invested enterprise.
On January 12, 2017,
the People’s Bank of China promulgated the Circular of the People’s Bank of China on Matters relating to the Macro-prudential Management
of Comprehensive Cross-border Financing, or PBOC Circular 9, which took effect on the same date. The PBOC Circular 9 established
a capital or net assets-based constraint mechanism for cross-border financing. Under such mechanism, a company may carry out
cross-border financing in Renminbi or foreign currencies at their own discretion. The total cross-border financing of a company
shall be calculated using a risk-weighted approach and shall not exceed an upper limit. The upper limit is calculated as capital
or assets multiplied by a cross-border financing leverage ratio and multiplied by a macro-prudential regulation parameter.
In addition, according to
PBOC Circular 9, as of the date of the promulgation of PBOC Circular 9, a transition period of one year is set for foreign-invested enterprises
and during such transition period, FIEs may apply either the current cross-border financing management mode, namely the mode provided
by Implementation Rules for the Provisional Regulations on Statistics and Supervision of Foreign Debt and the Interim Provisions on the
Management of Foreign Debts, or the mode in this PBOC Circular 9 at its sole discretion. After the end of the transition period, the
cross-border financing management mode for FIEs will be determined by the People’s Bank of China and SAFE after assessment
based on the overall implementation of this PBOC Circular 9.
According to applicable PRC
regulations on FIEs, capital contributions from a foreign holding company to its PRC subsidiaries, which are considered FIEs, may be
made when approval by or registration with the SAFE and MOFCOM or their respective local counterpart is obtained.
Regulations 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, which abolished
and superseded the Circular on Several Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing
and in Return Investments via Overseas Special Purpose Companies, SAFE Circular 75. 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.
Mr. Bao and Mr. He,
our PRC resident shareholders, have completed the required registrations with the local counterpart of SAFE in relation to our financing
and restructuring to our shareholding structure.
Regulations on Dividend Distributions
The principal regulations
governing distribution of dividends paid by wholly foreign-owned enterprises include:
|
● |
Company
Law of the PRC (1993), as amended in 1999, 2004, 2005, 2013 and 2018; |
|
● |
The Foreign
Investment Law, which came into effect on January 1, 2020; |
|
● |
The Implementation
of the Foreign Investment Law of the People’s Republic of China, which came into effect on January 1, 2020. |
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% 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% 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.
Regulations on Stock Incentive Plans
Pursuant to the Notice on Issues Concerning the
Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued
by SAFE on February 15, 2012, employees, directors, supervisors and other senior management participating in any stock incentive plan
of an overseas publicly listed company who are PRC citizens or who are non PRC citizens residing in China for a continuous period of
not less than one year, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could
be a PRC subsidiary of such overseas listed company, and complete certain other procedures. 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 wholly foreign
owned subsidiary in China and limit this subsidiary’s ability to distribute dividends to us. The PRC agents shall, on behalf of
the PRC residents who have the right to exercise the employee share options, apply to SAFE or its local branches for an annual quota
for the payment of foreign currencies in connection with the PRC residents’ exercise of the employee share options. The foreign
exchange proceeds received by the PRC residents from the sale of shares under the stock incentive plans granted and dividends distributed
by the overseas listed companies must be remitted into the bank accounts in the PRC established by the PRC agents before distribution
to such PRC residents. In addition, the PRC agents shall quarterly submit the form for record-filing of information of the Domestic Individuals
Participating in the Stock Incentive Plans of Overseas Listed Companies with SAFE or its local branches. We and our PRC citizen employees
who have been granted share options, or PRC optionees, are subject to the Stock Option Rules. If we or our PRC optionees fail to comply
with the Individual Foreign Exchange Rule or the Stock Option Rules, we and our PRC optionees may be subject to fines and other legal
sanctions. In addition, the PRC agents are required to amend the SAFE registration with respect to the stock incentive plan if there
is any material change to the stock incentive plan. Moreover, the SAFE Circular 37 provides that PRC residents who participate in a share
incentive plan of an overseas unlisted special purpose company may register with local branches of SAFE before exercising rights.
In addition, the SAT has issued circulars concerning
employee share options, under which our employees working in the PRC who exercise share options will be subject to PRC individual income
tax. Our PRC subsidiaries have obligations to file documents related to employee share options 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 if we fail to withhold their
income taxes as required by relevant laws and regulations, we may face sanctions imposed by the PRC tax authorities or other PRC government
authorities.
Regulations 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. While the application of the M&A Rules remains unclear,
our PRC legal counsel has advised us that based on its understanding of the current PRC laws, rules and regulations and the M&A Rules,
prior approval from the CSRC is not required under the M&A Rules for the listing and trading of our ordinary shares on the NASDAQ
given that (i) our PRC Subsidiary was directly established by us as a wholly foreign-owned enterprise, 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.
On December 24, 2021, the
CSRC released the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic
Enterprises (Draft for Comments) (the “Draft Administrative Provisions”) and the Measures for the Overseas Issuance of Securities
and Listing Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures”, collectively with the
Draft Administrative Provisions, the “Draft Rules Regarding Overseas Listing”), both of which have a comment period that
expires on January 23, 2022. The Draft Rules Regarding Overseas Listing lay out the filing regulation arrangement for both direct and
indirect overseas listing, and clarify the determination criteria for indirect overseas listing in overseas markets.
The Draft Rules Regarding
Overseas Listing stipulate that the Chinese-based companies, or the issuer, shall fulfill the filing procedures within three working
days after the issuer makes an application for initial public offering and listing in an overseas market. The required filing materials
for an initial public offering and listing shall include but not limited to: record-filing report and related undertakings; regulatory
opinions, record-filing, approval and other documents issued by competent regulatory authorities of relevant industries (if applicable);
and security assessment opinion issued by relevant regulatory authorities (if applicable); PRC legal opinion; and prospectus. In addition,
an issuer who issues overseas listed securities after overseas listing shall, within three working days after the completion of the issuance,
submit required filing materials to the CSRC, including but not limited to: filing report and relevant commitment; and domestic legal
opinion. Furthermore, an overseas offering and listing is prohibited under any of the following circumstances: (1) if the intended securities
offering and listing is specifically prohibited by national laws and regulations and relevant provisions; (2) if the intended securities
offering and listing may constitute a threat to or endangers national security as reviewed and determined by competent authorities under
the State Council in accordance with law; (3) if there are material ownership disputes over the equity, major assets, and core technology,
etc. of the issuer; (4) if, in the past three years, the domestic enterprise or its controlling shareholders or actual controllers have
committed corruption, bribery, embezzlement, misappropriation of property, or other criminal offenses disruptive to the order of the
socialist market economy, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation
for suspicion of major violations; (5) if, in past three years, directors, supervisors, or senior executives have been subject to administrative
punishments for severe violations, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation
for suspicion of major violations; (6) other circumstances as prescribed by the State Council. The Administration Provisions defines
the legal liabilities of breaches such as failure in fulfilling filing obligations or fraudulent filing conducts, imposing a fine between
RMB 1 million and RMB 10 million, and in cases of severe violations, a parallel order to suspend relevant business or halt operation
for rectification, revoke relevant business permits or operational license.
On April 2, 2022, the CSRC
published the Provisions on Strengthening the Confidentiality and Archives Administration Related to the Overseas Securities Offering
and Listing by Domestic Enterprises (Draft for Comments), or the Draft Provisions on Confidentiality and Archives Administration, and
will accept public comments until April 17, 2022. The Draft Provisions on Confidentiality and Archives Administration requires that, in
the process of overseas issuance and listing of securities by domestic entities, the domestic entities, and securities companies and securities
service institutions that provide relevant securities service shall strictly implement the provisions of relevant laws and regulations
and the requirements of these provisions, establish and improve rules on confidentiality and archives administration. Where the domestic
entities provide with or publicly disclose documents, materials or other items related to the state secrets and government work secrets
to the relevant securities companies, securities service institutions, overseas regulatory authorities, or other entities or individuals,
the companies shall apply for approval of competent departments with the authority of examination and approval in accordance with law
and report the matter to the secrecy administrative departments at the same level for record filing. Where there is unclear or controversial
whether or not the concerned materials are related to state secrets, the materials shall be reported to the relevant secrecy administrative
departments for determination. However, the Draft Provisions on Confidentiality and Archives Administration have not yet been settled
or become effective, and there remain uncertainties regarding the further interpretation and implementation of the Draft Provisions on
Confidentiality and Archives Administration.
Enforceability of Civil Liabilities
We conduct substantially most
of our operations in China and substantially most of our assets are located in China. In addition, most of our senior executive officers
reside within China for a significant portion of the time and most are PRC nationals. As a result, it may be difficult or impossible for
a shareholder to effect service of process within the United States upon us or these persons, or to enforce against us or them judgments
obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United
States or any state in the United States. It may also be difficult for a shareholder to enforce judgments obtained in U.S. courts based
on the civil liability provisions of the U.S. federal securities laws against us and our executive officers and directors.
The recognition and enforcement
of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance
with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made
or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of reciprocity with the United States
that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law,
the PRC courts will not enforce a foreign judgment against us or our directors and officers if they determine that the judgment violates
the basic principles of PRC laws or national sovereignty, national security or public interest. As a result, it is uncertain whether a
PRC court would enforce a judgment rendered by a court in the United States. Although under the PRC Civil Procedures Law, foreign shareholders
may originate actions based on PRC law against us in the PRC, if they can establish sufficient nexus to the PRC for a PRC court to have
jurisdiction, and meet other procedural requirements, including, among others, the foreign shareholders as plaintiff must have a direct
interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit.
India
This section sets forth a
summary of the most significant laws, rules and regulations that affect our business activities in India.
Regulations relating to Foreign Investment
under Foreign Exchange and Management Act, 1999
Foreign Investment in India and
Regulatory Approvals
Investment by person resident
outside India in an Indian entity is regulated by the provisions laid down in the Foreign Exchange and Management Act, 1999 (“FEMA”),
as amended from time to time by the Foreign Exchange Department of the Reserve Bank of India (“RBI”).
Foreign Direct Investment
(“FDI”) is freely permitted in almost all sectors. Under the FDI Policy, investments can be made by non-residents in
the equity shares; fully, compulsorily and mandatorily convertible debentures; or fully, compulsorily and mandatorily convertible preference
shares, partly paid equity shares and warrants of an Indian company, through two routes: (a) the Automatic Route; and (b) the Government
Route. Under the automatic route, the non-resident investor or the Indian company does not require any approval from the Reserve
Bank or Government of India for the investment. An Indian company, not engaged in any activity/sectors where FDI is prohibited, can issue
shares or convertible debentures to a person resident outside India, subject to entry routes and sectoral caps prescribed in the FDI
Policy. FDI in activities covered under the approval route requires prior approval of the Government which are considered by respective
ministry/ department of the Government of India, as the case may be. In few sectors, there is prohibition on FDI in any form. It is pertinent
to note that 100% FDI through automatic route is allowed in all activities/ sectors which are neither covered in automatic route, approval
route nor in prohibited sector.
RBI has issued the Foreign
Exchange Management (Non-debt Instruments) Rules, 2019 (“FEMA Rules, 2019”), vide Notification No.
S.O. 3732(E) dated October 17, 2019 (which replaced erstwhile Foreign Exchange Management (Transfer or issue of security by a person
resident outside India) Regulations, 2017), which is a principal regulation governing foreign investment in an Indian entity by any person
resident outside India.
FEMA Rules, 2019 stipulates
that any investment in an Indian entity by a person resident outside India (which also includes a body corporate incorporated outside
India) shall always remain subject to the entry routes, sectoral caps and other conditions laid down therein. Therefore, in order to
subscribe, purchase or sell equity instruments (including equity shares) of an Indian company, a person resident outside India must adhere
to terms and conditions given in Schedule 1 of FEMA Rules, 2019.
Since Do Mobile operates
in the manufacturing sector, it is permitted to receive 100% FDI under the automatic route as per the provisions of FEMA Rules, 2019.
Important Compliances pertaining
to FDI under FEMA Rules, 2019
Pricing Guidelines on Issuance of
Shares and Filing of Form FC-GPR for Allotment of Shares
Pricing: Any Indian company
intending to issue equity instruments including equity shares to a person resident outside India must ensure that the price of such equity
instruments shall not be less than: (a) the price worked out on the basis of Securities and Exchange Board of India (SEBI) guidelines
in case of listed companies or in case of a company going through a delisting process as per SEBI (Delisting of Equity Shares) Regulations,
2021; and (b) the valuation of such equity instruments arrived at as per any internationally accepted pricing methodology on arm’s
length basis duly certified by a SEBI registered Merchant Banker or a Chartered Accountant or a practicing Cost Accountant, in case of
an unlisted Indian Company.
Filing Requirements: Allotment
of shares by an Indian entity to a person resident outside India (including a body corporate incorporated outside India) will require
an Indian entity to file form FC-GPR (Foreign Currency-Gross Provisional Return) within 30 days from the date of allotment
of shares, in the manner prescribed by the RBI, along with a certificate from the company secretary of the Indian company certifying
the eligibility to issue shares in terms of FEMA Rules, 2019 and a certificate from SEBI registered Merchant Banker or Chartered Accountant
indicating the manner of arriving at the price of the shares issued to the persons resident outside India. Such certificates along with
the Form FC-GPR must be submitted to the Foreign Exchange Department of RBI.
Do Mobile is also required
to adhere to the aforesaid compliances regarding allotment of shares to its parent company Bridgetime Limited and or to its prospective
investors.
Compliance of Pricing Guidelines on
Transfer of Shares and Filing of Form FC-TRS for Transfer of Shares
Pricing: Any transfer of
the equity instruments (including shares) of an Indian entity from a resident Indian to a person resident outside India or vice-versa,
will be subject to the pricing guidelines and reporting requirements prescribed under the FEMA Rules, 2019.
In the case of transfer of
equity instruments (including shares) from a person resident in India to a person resident outside India, price of such equity instruments
transferred shall not be less than:
|
a) |
the price
worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company; |
|
b) |
the price
at which a preferential allotment of shares can be made under the SEBI guidelines, as applicable, in case of a listed Indian company
or in case of a company going through a delisting process as per the SEBI (Delisting of Equity Shares) Regulations, 2021. |
|
c) |
in case
of an unlisted Indian Company, the valuation of equity instruments done as per any internationally accepted pricing methodology for
valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing
Cost Accountant. |
In the case of transfer of
equity instruments (including shares) by a person resident outside India to a person resident in India, the price of equity instruments
(including shares) transferred shall not exceed:
|
a) |
The price
worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company; |
|
b) |
The price
at which a preferential allotment of shares can be made under the SEBI guidelines, as applicable, in case of a listed Indian company
or in case of a company going through a delisting process as per the SEBI (Delisting of Equity Shares) Regulations, 2021.
The price is determined for such duration as specified in the SEBI guidelines, preceding the relevant date, which shall be the date
of purchase or sale of shares; |
|
c) |
The valuation
of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly
certified by a Chartered Accountant or a Securities and Exchange Board of India registered Merchant Banker or a practicing Cost Accountant,
in case of an unlisted Indian Company. |
The principal intent of the
government is that the person resident outside India is not guaranteed any assured exit price at the time of making such investment/
agreement and shall exit at the price prevailing at the time of exit. The above pricing guidelines are also applicable for issue of shares/preference
shares against payment of lump sum technical know-how fee/royalty due for payment/repayment or conversion of external commercial
borrowings in convertible foreign currency into equity shares/fully compulsorily and mandatorily convertible preference shares or capitalization
of pre incorporation expenses/import payables (with prior approval of Government).
Filing Requirements: Any
transfer of shares of Indian entity from a person resident outside India to a person resident in India or vice-versa will also require
the filing of form FC-TRS (Foreign Currency — Transfer of Shares) with the RBI within 60 days of transfer of equity instruments
or receipt/remittance of funds, whichever is earlier.
In the case of buy-back of
shares pursuant to a scheme of merger /de-merger/ amalgamation of Indian companies approved by National Company Law Tribunal, the filing
of form FC-TRS is mandatory by Indian companies.
Reporting under Single Master Form
RBI has issued guidelines
on ‘Foreign Investment in India — Reporting in Single Master Form’ vide A.P (DIR Series) Circular
No. 30 dated June 07, 2018 to integrate the extant reporting structures of various types of foreign investment in India in a Single
Master Form (“SMF”), which is required to be filed online. With effect from September 1, 2018, the reporting requirements
for foreign investment in India, irrespective of the instrument through which foreign investment is made, has been integrated into a
SMF. SMF subsumes filing of form FC-GPR, FC-TRS, Form ESOP, Form DRR, Form DI and other forms into one single form.
Filing of Foreign Liabilities and
Assets Annual Return
An Indian Company which has
received FDI in the previous year including the current year, should submit Foreign Liabilities and Assets Annual Return in form FLA
to RBI on or before the 15th day of July of each year. Year for this purpose shall be reckoned as April to March.
Repatriation of Dividend
Dividends declared by Indian
companies are freely repatriable without any restrictions (net after Tax deduction at source or Dividend Distribution Tax, if any, as
the case may be). The repatriation is governed by the provisions of the Foreign Exchange Management (Current Account Transactions) Rules,
2000.
Repatriation of Interest
Interest on fully, mandatorily
and compulsorily convertible debentures is also freely repatriable without any restrictions (net of applicable taxes). The repatriation
is governed by the provisions of the Foreign Exchange Management (Current Account Transactions) Rules, 2000.
Regulations relating to Overseas Investment
under FEMA
Investment in Joint Venture or Wholly
Owned Subsidiary
RBI has issued the Foreign
Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (“ODI Regulations”) pursuant to the provisions
of FEMA to govern the investment in a foreign entity by an Indian party, including an Indian company. The foreign entities in which such
overseas investment is made are referred to as joint venture (“JV”) or wholly owned subsidiary (“WOS”). An Indian
company is allowed to make overseas investment in JV or WOS either by way of contribution towards capital or subscription to the memorandum
of association of JV or WOS. Further, overseas direct investment is also permitted by way of purchase of existing shares of JV or WOS
through market or stock exchange, excluding the portfolio investment.
Like FDI, Indian companies
can make overseas investment under automatic route and approval route.
An Indian company may make
overseas direct investment in JV or its WOS up to 400% of its net worth (as per its last audited balance sheet) without any prior regulatory
approval. However, if this limit is breached, then prior approval from RBI is required.
The eligible ceiling limit
under prior approval of RBI is also required if financial commitment by an Indian party becomes equal or exceeds US$1 billion in
a financial year (April to March), even when the total financial commitment of an Indian party is within the eligible limit of automatic
route. Further, an Indian party is eligible to extend loan/guarantee as a part of financial commitment only to JV or WOS in which it
has equity participation. However, if an Indian party wants to extend loan/ guarantee as a part of financial commitment without equity
contribution in JV or WOS, it may apply to RBI under the approval route. It may be note that term ‘financial commitment’
as used in above paragraphs means amount of direct investment by way of contribution to equity, loan and 100% of the amount of guarantees
and 50% of the performance guarantees issued by an Indian party to or on behalf of its JV or WOS.
Reporting of Overseas Investment
An Indian company undertaking
FC should approach an authorized dealer category — I bank (“AD Bank”) with an application in Form ODI (Master Document
on Reporting) and prescribed enclosures / documents in Form ODI for effecting FC, such as, certified copy of the board resolution, statutory
auditors certificate and valuation report, along with Form A2. Additionally, all transactions relating to a JV / WOS should be routed
through one branch of an AD Bank to be designated by the Indian Party.
Pricing of Overseas Investment
While subscribing any shares
by an India company in JV or WOS, it is relevant to consider that if such financial commitment is more than US$5 million, valuation
of the shares should be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India
registered with the appropriate regulatory authority in the foreign country. In all other cases the valuation should be carried out by
a Chartered Accountant or a Certified Public Accountant.
Regulatory compliances under Companies Act,
2013
The Companies Act, 2013 (“Companies
Act, 2013”) is a principal law regulating the rights and duties of a company incorporated in India. Do Mobile being an Indian company
is under an obligation to undertake several compliances mentioned under the Companies Act, 2013.
Board of Directors
A private limited company
is required to have minimum 2 directors and maximum 15 directors on its board of directors (“Board”). However, a private
limited company may appoint more than 15 directors after passing a special resolution by its members in general meeting. Further, in
terms of the Companies Act it is mandatory to have at least one director who stays in India for a total period of not less than 182 days
during a financial year (April to March).
Dividends
As per the Companies Act,
2013 a company may if authorized by its articles of association (“Articles”), pay dividends in proportion to the amount paid-up on
each share. A company in its general meeting may declare dividends, but no dividend shall exceed the amount recommended by the Board
of a company. The shareholders do not have any power to declare any dividend, however, the same shall be approved by the shareholders
in the annual general meeting of the company. Similarly, under the Companies Act, the dividend shall be declared or paid only out of
profits of the company of that year after providing depreciation or out of the profits of the company for any previous financial year
or years after providing for depreciation remaining undistributed, or out of both. Dividends are generally declared as a percentage of
the par value of a company’s equity shares.
Bonus Shares
In addition to permitting
dividends to be paid out of current or retained earnings as described above, the Companies Act, 2013 permits a company to distribute
an amount transferred from the reserve or surplus in the company’s profit and loss account to its shareholders in the form of fully
paid-up bonus shares. The Companies Act, 2013 permits issue of bonus shares when authorized by its Articles and shall not be issued
in lieu of dividend. Bonus shares are distributed to shareholders in the proportion recommended by the Board of the company which has
been authorized in annual general meeting.
Pre-emptive Rights and Issue of
Additional Shares
The Companies Act, 2013 gives
equity shareholders a right to subscribe for new shares in proportion to their respective existing shareholdings, unless otherwise determined
by a special resolution passed by a general meeting of the shareholders. Under the Companies Act, in the event of an issuance of securities,
subject to the limitations set forth above, a company must first offer the new shares to the shareholders on a fixed record date through
“letter of offer”. The Companies Act, 2013 permits any other person authorized by special resolution passed in a general meeting
of the shareholders to subscribe new share of the company either for cash or consideration and company shall comply with the provisions
of private placement for such issue to other person.
Meetings of Shareholders
A company must convene an
annual general meeting of its shareholders each year within 15 months from the previous annual general meeting or within 6 months
of the end of the previous fiscal year, whichever is earlier. In certain circumstances a 3 months extension may be granted by the
Registrar of Companies to hold the annual general meeting. In addition, the board may convene an extraordinary general meeting of shareholders
when necessary or at the request of a shareholder or shareholders holding at least 10% of the paid up capital carrying voting rights.
Written notice setting out the agenda of any meeting must be given at least 21 days prior to the date of the general meeting to the shareholders
of record, excluding the days of mailing and date of the meeting.
Register of Shareholders; Record
Dates; Transfer of Shares
A company is required to
maintain a register of shareholders either in physical form or held in electronic form. For the purpose of determining the shares entitled
to annual dividends, the register is closed for a specified period prior to the annual general meeting. The date on which this period
begins is the record date.
Audit and Annual Report
Under the Companies Act,
a company must file its annual report with the Registrar of Companies within 30 days from the date of the annual general meeting.
At least 21 days before the annual general meeting of shareholders, a company must distribute a detailed version of the company’s
audited balance sheet and profit and loss account and the reports of the board of directors and the auditors thereon. A company must
also file an annual return containing a list of the company’s shareholders and other company information, within 60 days of the
conclusion of the annual general meeting.
Compliances on Employment or Labor Laws
In India, labor laws are
considered as social-welfare legislation to govern the conditions of employment, with an aim to provide social security and to safeguard
interests of both the employer and the employees. Labor law defines the rights and obligations as workers/employees and employers with
respect to the workplace health and safety, employment standards including adequate wages, and limited hours of work.
An Indian company is governed
by several labor laws, pursuant to which it has to mandatorily provide the employment benefits to its employees which include equal remuneration,
gratuity, bonus, pension, provident funds (social security), employees’ insurance, maternity benefits and all other benefits to
which an Indian company is mandatorily required to comply with.
Besides that, an Indian company
must comply with the filing of periodical filings requirements and maintenance of registers under different labor statutes. The Shops
and Establishment Act, Payment of Gratuity Act, 1972, Maternity Benefit Act, 1961 and Employees’ State Insurance Act, 1948 are
some of the important labor laws which are applicable to an Indian company. Moreover, an Indian company is under an obligation to get
the registration done under the Shops and Establishment Act and any other statute which obliges an Indian company to get itself registered
mandatorily. An Indian company has exposure to various sanctions, fines, and penalties under the relevant laws upon non-compliance or
violations of the provisions.
There are numerous Central
and State labor legislations in India. The important ones and those relevant in relation to Do Mobile are described herein below:
|
1. |
Employees’
Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”): The EPF Act provides for the institution of provident
funds, pension funds, and deposit linked insurance funds for employees. It applies to all factories and establishments employing
20 or more persons or class of persons. An establishment to which the EPF Act applies shall continue to be governed by the EPF Act,
notwithstanding that the number of persons employed therein at any time falls below 20. Once an establishment gets covered under
the EPF Act, branches of such establishment situated at any other place shall also be treated as parts of the same establishment.
Employees drawing wages exceeding Rs. 15,000/- per month are excluded from the provisions of the EPF Act. |
|
2. |
Employees’
State Insurance Act, 1948 (“ESI Act”): The ESI Act is a social welfare legislation enacted with the objective of providing
certain benefits to employees in case of sickness, maternity and employment injury. It is applicable to all factories and establishment
employing 10 or more persons with respect to the employees, including casual, temporary or contract employees drawing wages less
than Rs. 21,000/- per month. The existing total employee state insurance contribution is 4% of wages, where the employer contribution
is 3.25% and employees’ contribution is 0.75% of wages. |
|
3. |
Payment of Gratuity Act, 1972 (“Gratuity Act”): Under the Gratuity Act, employee needs to provide continuous service of 5 years to be eligible to receive gratuity. Gratuity becomes payable to an employee on retirement, resignation or termination of employment due to death/disablement on account of accident/disease. Condition of providing minimum 5 years of continuous service is not applicable in case of death/disablement. The Gratuity Act is applicable to every establishment in which 10 or more persons are employed or were employed on any day of the preceding 12 months. The gratuity is payable at the rate of 15 days wages based on the wages last drawn, for every year of completed service or part thereof in excess of 6 months, subject to an aggregate amount of Rs. 20,00,000/-. However, if an employee has the right to receive higher gratuity under a contract or under an award, then the employee is entitled to get higher gratuity. |
|
4. |
The Shops and Commercial Establishments Act (“Shops Act”): The Shops Act of the respective States in India generally contain provisions relating to registration of an establishment, working hours, overtime, leave, notice pay, working conditions for women employees, etc. Certain industries like IT and IT-enabled services have been given relaxations by various State Governments in respect of the observance of certain provisions of their respective Shops Act. |
|
5. |
Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“POSH Act”): The POSH Act was enacted by the Indian Parliament to provide protection against sexual harassment of women at workplace and prevention and redressal of complaints of sexual harassment and for matters connected therewith. The POSH Act makes it mandatory for every organization to frame an anti-sexual harassment policy. Further an organization having 10 or more employees is required to constitute an Internal Complaints Committee to entertain complaints that may be made by an aggrieved woman. |
Applicability of Social Security Schemes i.e.
Employees Provident Fund and Employees Pension Scheme to Expatriates working in India
The Government of India (Ministry
of Labor and Employment) has extended the applicability of the Employees’ Provident Fund Scheme (EPFS) and the Employees’
Pension Scheme (EPS), notified under the EPF Act, to international workers through its notification Nos. G.S.R. 705(E) and 706(E), both
dated October 01, 2008.
“International Worker” means:
|
a) |
an Indian employee having worked or going to work in a foreign country with which India has entered into a social security agreement and being eligible to avail the benefits under a social security programme of that country, by virtue of the eligibility gained or going to gain, under the said agreement; or |
|
b) |
an employee other than an Indian employee, holding other than an Indian passport, working for an establishment in India to which the Act applies. |
The aforesaid notifications
further define the term “excluded employee” with reference to an international worker to mean “an international worker,
who is contributing to a social security program of his/her country of origin, either as a citizen or resident, with whom India has entered
into a social security agreement on a reciprocity basis and enjoying the status of a detached worker for the period and terms, as specified
in such an agreement”.
Pursuant to the above notifications,
every international worker employed with an establishment in India to whom the EPF Act applies (the EPF Act applies to an establishment
employing 20 or more employees) would be required to become a member of the Employees Provident Fund, unless he/she qualifies as an excluded
employee. International workers working in India with an establishment to which the EPF Act applies are required to contribute 12% of
their salary (which includes basic pay, dearness allowance, retaining allowance and cash value of food concessions) under the EPF Act.
However, in case the expatriates are from such countries with which India has entered into Social Security Agreements and are making contributions
towards social security in their home countries, such expatriates would not be required to make contribution under the EPF Act. An International
Worker may withdraw the full amount of accumulations in the fund on retirement from services at any time after the attainment of 58 years
or on retirement on account of permanent or total incapacity to work due to bodily or mental infirmity.
New Labor Law Codes in India
Since many of the Indian labor
laws are overlapping and archaic in nature, the Indian government has amalgamated twenty-nine existing labor laws into four codes, namely,
the Code on Wages, 2019, the Industrial Relations Code, 2020, the Occupational Safety, Health and Working Conditions Code, 2020 and the
Code of Social Security, 2020 (collectively referred to as the “Codes”). These four Codes together consolidate laws
relating to: (i) wages; (ii) industrial relations; (iii) safety, working conditions and welfare and (iv) social security. The Code on
Wages, 2019 already received Presidential assent on August 8, 2019 and the rest of the three Codes, i.e., the Industrial Relations
Code, 2020; the Occupational Safety, Health and Working Conditions Code, 2020 and the Code of Social Security, 2020, received Presidential
assent on September 28, 2020. The four Codes post receiving Presidential assent have also been published in the Official Gazette
of India, they will however, be brought into force only once the appointed date for their implementation is notified by the Central Government.
Accordingly, till date the earlier labour laws are in force and governing conditions of employment in India.
Regulations related to Consumer Protection
With changing times, the economic
and business environment of India also went through a change. India has now become a global trading partner with the world. This indeed
exposed customers not only to new products but also new problems. The increase in usage of mobile handsets in India required protecting
the interests of the consumers against deficiency in services and harassment by way of unfair trade practices and poor quality products.
The Consumer Protection Act, 1986 (“CPA 1986”) was the law of the Parliament of India which addresses the aforementioned concerns
of the consumers in India. This statute also casts obligation on the traders, service providers and person to provide customer satisfaction
through guarantee of quality, function, usage and after sales-services. The Indian Government recently on July 20, 2020 introduced
the Consumer Protection Act, 2019 (“CPA 2019”) replacing the erstwhile CPA 1986. Accordingly, CPA 2019 will
now overhaul the administration and settlement of consumer disputes in India in place of CPA 1986. CPA 2019 now specifically provides
for prevention of unfair trade practice by e-commerce platforms and for the same Consumer Protection (E-Commerce) Rules, 2020 are
promulgated.
Forums for Redressal under CPA 2019
With the aim to redress the
consumer disputes, CPA 2019 provides for establishment of different consumer commissions i.e. District Consumer Disputes Redressal Commission,
State Consumer Disputes Redressal Commission and National Consumer Disputes Redressal Commission. CPA 2019 lays down the pecuniary jurisdiction
in relation to each of the aforesaid commissions for the purpose of entertaining the dispute arose in relation of value of particular
goods or service. Accordingly, in case the consumer finds deficiency in goods or services, then he can file a complaint against the person
before appropriate commission having pecuniary jurisdiction to entertain the dispute for such deficiency. In addition to the aforesaid
redressal commissions, CPA 2019 provides for an establishment of the Central Consumer Protection Authority which is, inter alia,
empowered to conduct investigations into violations of consumer rights, institute complaints and order discontinuance of unfair trade
practices to promote, protect and enforce the rights of consumers.
Regulations governing the Intellectual Property
Rights
Intellectual Property Right
(“IPR”) is a legal right governing the use of creations of the human mind. In India, there are several legislations which
protects different IPRs, like trademark, patent, copyright, and domain name.
Trademark under Trade Marks Act,
1999
With the globalization of
trade, brand names, trade names and marks have attained an immense value that require uniform minimum standards of protection and efficient
procedures. India being a member nation to World Trade Organization has ratified the Agreement on Trade-Related Aspects of Intellectual
Property Rights along with other member nations of WTO. In view of the same, India has amended and repealed its old Indian Trade and Merchandise
Marks Act, 1958 and enacted new Trade Marks Act, 1999 (“TM Act”), to align with the international systems and practices.
The TM Act envisages the recognition
and protection of the well-known trademark. The TM Act also provides for registration of trademarks, duration, removal, renewal and
revocation of the trade mark. The Indian judiciary has been proactive in the protection of trademarks, and it has extended the protection
to domain names under the TM Act. The trademark is initially registered for a period of 10 years, which is calculated from the date of
filing of the application and in case of convention application from the date of priority.
Further, the registration
of the trademark may be renewed for a period of 10 years from the date of expiration of the original registration or of the last renewal
of registration. Such renewal application should be made at least 6 months prior to expiry of registration of the trademark. However,
if such renewal application not is made within the said period, it can be filed within 6 months after the expiry of registration
or the renewal as the case may be along with a late filing fee. Additionally, if such late filing fee is not paid, upon expiry of one
year from the date of expiry of registration or the renewal as the case may be, such trademark will automatically be removed from the
register of trademarks of concerned authority.
Regulations governing Import and Export of
Goods
In India, the import and export
of goods is governed by the Foreign Trade (Development & Regulation) Act, 1992 and India’s Export Import (EXIM) Policy. India’s
Directorate General of Foreign Trade (“DGFT”) is the nodal authority to regulate all matters related to EXIM Policy. Importers
are required to register with DGFT to obtain an Importer Exporter Code Number (“IE Code”) for undertaking import activities.
Moreover, an exporter is not allowed to take benefits of exports from DGFT without having IE Code. After an IEC has been obtained, the
source of items for import must be identified and declared by an importer.
The Indian Trade Classification
— Harmonized System (ITC-HS) allows for the free import of most goods without a special import license. Majority of import items
fall within the scope of India’s EXIM Policy regulation of Open General License (OGL) which means that they are deemed to be freely
importable without restrictions and without a license, except to the extent that they are regulated by the provisions of the EXIM Policy
or any other law. Imports of items not covered by OGL are regulated.
4C. Organizational Structure
The following chart reflects
our organizational structure as of the date of this annual report. For descriptions of our subsidiaries and variable interest entity,
please see “4A. History and Development of the Company.”
4D. Property, Plants and Equipment
Under PRC law, land is owned
by the state. “Land use rights” are granted to an individual or entity after payment of a land use right fee is made to the
applicable state or rural collective economic organization. Land use rights allow the holder the right to use the land for a specified
long-term period. We do not currently own any real estate or land use rights. For descriptions of our leased properties, please see “Item
4B. Business Overview – Facilities.”
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, the notes to those financial statements and other financial data that
appear elsewhere in this annual report. In addition to historical information, the following discussion contains forward-looking statements
based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly
from those projected in such forward-looking statements due to a number of factors, including those set forth in “Risk Factors”
and elsewhere in this report. Our consolidated financial statements are prepared in conformity with U.S. GAAP.
5A. Operating Results
We design, manufacture, and distribute mobile phones
and other consumer electronics through our operation plants in China. Our products are categorized into the following major categories:
feature phone, smartphone, face mask and mobile phone accessories. Most of our products are produced to fulfill OEM/ODM orders received
from our long-term clients and sold globally, including India, Brazil, the United States, and other emerging markets in South Asia
and Africa as well as Europe. The following charts display our products contribution for the fiscal years ended March 31, 2020, 2021 and
2022.
The following table sets forth our revenues by type
of contract and as a percentage of revenue for the fiscal years indicated:
| |
Year ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
Category | |
Amount | | |
% | | |
Amount | | |
% | | |
Amount | | |
% | |
| |
RMB | | |
| | |
RMB | | |
| | |
RMB | | |
US$ | | |
| |
| |
(in thousands, except for percentages) | |
OEM/ODM | |
| 175,215 | | |
| 90.7 | | |
| 195,995 | | |
| 79.4 | | |
| 273,979 | | |
| 43,159 | | |
| 99.4 | |
In-house brand | |
| 17,873 | | |
| 9.3 | | |
| 6,157 | | |
| 2.5 | | |
| 1,529 | | |
| 241 | | |
| 0.6 | |
Face mask | |
| - | | |
| - | | |
| 44,747 | | |
| 18.1 | | |
| - | | |
| - | | |
| - | |
Total | |
| 193,088 | | |
| 100.0 | | |
| 246,899 | | |
| 100.0 | | |
| 275,508 | | |
| 43,400 | | |
| 100.0 | |
The following table sets forth
our revenues by product lines and as a percentage of revenue for the fiscal years indicated:
| |
Year ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
Category | |
Amount | | |
% | | |
Amount | | |
% | | |
Amount | | |
% | |
| |
RMB | | |
| | |
RMB | | |
| | |
RMB | | |
US$ | | |
| |
| |
(in thousands, except for percentages) | |
Feature phone | |
173,190 | | |
89.7 | | |
144,032 | | |
58.4 | | |
111,066 | | |
17,496 | | |
40.3 | |
Smart phone | |
| 19,228 | | |
| 10.0 | | |
| 56,885 | | |
| 23.0 | | |
| 154,143 | | |
| 24,281 | | |
| 56.0 | |
Face mask | |
| - | | |
| - | | |
| 44,747 | | |
| 18.1 | | |
| - | | |
| - | | |
| - | |
Others | |
| 670 | | |
| 0.3 | | |
| 1,235 | | |
| 0.5 | | |
| 10,299 | | |
| 1,622 | | |
| 3.7 | |
Total | |
| 193,088 | | |
| 100 | | |
| 246,899 | | |
| 100 | | |
| 275,508 | | |
| 43,399 | | |
| 100 | |
The following table sets forth
our revenues by geographic region and as a percentage of revenue for the fiscal years indicated:
| |
Year ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
Category | |
Amount | | |
% | | |
Amount | | |
% | | |
Amount | | |
% | |
| |
RMB | | |
| | |
RMB | | |
| | |
RMB | | |
US$ | | |
| |
| |
(in thousands, except for percentages) | |
PRC | |
83,124 | | |
43.0 | | |
112,400 | | |
45.5 | | |
70,314 | | |
11,076 | | |
25.5 | |
Hong Kong | |
| 51,885 | | |
| 26.9 | | |
| 30,030 | | |
| 12.2 | | |
| 18,949 | | |
| 2,985 | | |
| 6.9 | |
India | |
| 17,873 | | |
| 9.3 | | |
| 6,157 | | |
| 2.5 | | |
| 1,529 | | |
| 241 | | |
| 0.6 | |
Africa | |
| 18,003 | | |
| 9.3 | | |
| 19,536 | | |
| 7.9 | | |
| 25,905 | | |
| 4,081 | | |
| 9.4 | |
The United States | |
| 19,904 | | |
| 10.3 | | |
| 17,277 | | |
| 7.0 | | |
| 28,154 | | |
| 4,435 | | |
| 10.2 | |
Mexico | |
| - | | |
| - | | |
| - | | |
| - | | |
| 12,372 | | |
| 1,949 | | |
| 4.5 | |
South America | |
| - | | |
| - | | |
| 45,743 | | |
| 18.5 | | |
| 118,285 | | |
| 18,632 | | |
| 42.9 | |
Others | |
| 2,299 | | |
| 1.2 | | |
| 15,756 | | |
| 6.4 | | |
| - | | |
| - | | |
| - | |
Total | |
| 193,088 | | |
| 100 | | |
| 246,899 | | |
| 100 | | |
| 275,508 | | |
| 43,399 | | |
| 100 | |
Overview
The table below sets forth
certain line items from our consolidated statement of comprehensive loss (income) for the fiscal years ended March 31, 2020, 2021 and
2022:
| |
Year ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
RMB | | |
RMB | | |
RMB | | |
US$ | |
| |
(in thousands) | |
Revenues | |
193,088 | | |
246,899 | | |
275,508 | | |
43,399 | |
Costs of sales | |
| 173,735 | | |
| 228,732 | | |
| 261,723 | | |
| 41,228 | |
Gross profit | |
| 19,353 | | |
| 18,167 | | |
| 13,785 | | |
| 2,171 | |
Operating expenses | |
| 39,062 | | |
| 32,697 | | |
| 48,286 | | |
| 7,606 | |
Interest expenses | |
| 1,745 | | |
| 2,461 | | |
| 4,875 | | |
| 768 | |
Income (loss) before income taxes | |
| (21,454 | ) | |
| (16,991 | ) | |
| (39,376 | ) | |
| (6,203 | ) |
Income tax expenses | |
| 247 | | |
| (364 | ) | |
| (46 | ) | |
| (7 | ) |
Net income (loss) | |
| (21,701 | ) | |
| (16,627 | ) | |
| (39,330 | ) | |
| (6,196 | ) |
|
● |
We incurred net loss of RMB21.7 million and RMB16.6 million for the fiscal years ended March 31, 2020 and 2021, respectively. The 23% reduction of net loss was mainly due to the increase in OEM/ODM sales in China, selling of face masks in the South America, and reduction of operating expenses. For the fiscal years ended March 31, 2021 and 2022, we incurred net loss of RMB16.6 million and net loss of RMB39.3 million (US$6.2 million). The 136% increase was mainly due to the decrease of gross profit, increase of operating expenses and increase of interest expenses. |
|
● |
OEM/ODM revenue increased from RMB175.2 million for the fiscal year ended March 31, 2020 to RMB196.0 million for the year ended March 31, 2021, representing a 12% increase, which was due to the increase in smartphone and feature phone sales to customers in mainland China and Singapore. OEM/ODM revenue increased from RMB196.0 million for the year ended March 31, 2021 to RMB274.0 million (US$43.2 million) for the year ended March 31, 2022, representing a 40% increase, which was mainly due to the increase in smart phone and feature phone sales to customers in South America, Africa and Mexico, partially offset by the decrease in OEM/ODM sales in China. |
|
● |
In-house brand products generated RMB17.9 million and RMB6.2 million for the fiscal years ended March 31, 2020 and 2021, respectively, representing a 66% decrease, which was primarily due to the lockdown and related restriction of business activities in India. In-house brand products generated RMB6.2 million and RMB1.5 million (US$0.2 million) for the fiscal years ended March, 2021 and 2022, respectively, representing a 75% decrease, which was primarily due to restrictions of business activities in India. |
|
● |
We started online sales in Africa and the United States through e-commerce platform in August 2019, in order to develop our brand influence and further expand the markets in these areas. Rollout of ecommerce platform was temporarily stayed due to the impact of COVID-19 and we plan to re-launch this sales channel at a later date. During August 2019 to March 2022, RMB0.7 million (US$0.1 million) e-commerce sales were recorded. |
|
● |
We
developed new long-term OEM/ODM customers in China and Southeast Asia. We received smartphone orders from these customers which contributed
to approximately 12.5% of total revenue for the fiscal year ended March 31, 2021. We established sales channels in South America,
Mexico and Africa in 2022. We had a rapid growth in OEM/ODM revenue, especially in sales of smart phone products,
in these areas, such that aggregate sales in South America, Mexico and Africa contributed 26% and 56.8% of total revenue for the
fiscal year ended March 31, 2021 and 2022, respectively. |
|
● |
Operating expenses consist of selling expenses, general and administrative expenses, research and development (“R&D”) expenses and other (income) expense. The decrease in operating expense for the fiscal year ended March 31, 2021 (against fiscal year ended March 31, 2020) was mainly due to the decrease in selling expenses and R&D expenses. The increase in operating expense for the fiscal year ended March 31, 2022 (compared to year ended March 31, 2021) was mainly due to the increase in general and administrative expenses, increase in R&D expenses and increase in selling expenses. |
|
● |
Exchange rate between RMB and US Dollar considerably affected our financial results as more than 50% of our products were sold to customers outside of mainland China, and the exchange rate between the Indian Rupee and US Dollar considerably affected our financial results as our subsidiaries, Do Mobile, operated in India. We incurred RMB0.3 million, RMB3.7 million and RMB2.3 million of exchange loss for fiscal years ended March 31, 2020, 2021 and 2022, respectively, mainly due to fluctuations of exchange rates of RMB against US Dollar. |
|
● |
We wrote off impairment
reserve of RMB0.5 million for the obsolete inventories disposed for the fiscal year ended March 31, 2020 and provided impairment
reserve of RMB7.6 million and RMB0.3 million (US$0.05 million) on obsolete inventory for the fiscal years ended March 31, 2021 and
2022. We also provided allowances of RMB1.2 million, reversed allowances of RMB0.8 million and provided allowance of RMB3.5 million
(US$0.6 million) on doubtful receivables for the fiscal years ended March 31, 2020, 2021 and 2022, respectively. |
|
● |
Due to
an overall change of business environment in India since July 2021, we have decided to make a strategic shift and switch focus from
India to Mexico. We acquired two local companies in Mexico during fiscal year 2022 and plan to further develop business with
local telecom carriers in Mexico. Meanwhile, our business in India has been maintained at a limited level to fulfill existing orders.
|
Comparison of the fiscal years ended March
31, 2022 and 2021
Revenue
Revenue for the year ended
March 31, 2022 was RMB275.5 million (US$43.4 million), an increase of RMB28.6 million, or 11.6%, from RMB246.9 million for the year ended
March 31, 2021. The increase was attributable to the increase in OEM/ODM sales of RMB78.0 million, partially offset by the decrease in
sales of face masks of RMB44.8 million and the decrease of in-house brand sales of RMB4.6 million.
Cost of sales
Cost of sales for the
fiscal year ended March 31, 2022 was RMB261.7 million (US$41.2 million), an increase of RMB33.0 million, or 14.4%, from RMB228.7
million for the year ended March 31, 2021. The increase was in line with the Increase of revenue.
Our cost of sales mainly consists
of cost of raw materials, third party processing fees and rental of building and machinery.
We import screens and mother
boards from overseas and purchase camera, battery and electronic components from domestic markets for mobile phone processing and assembling.
We provided impairment reserve
on obsolete inventory of RMB7.6 million and RMB0.3 million (US$0.05 million), which are recorded in cost of sales for the year ended March
31, 2021 and 2022.
Gross profit
Gross profit for the year
ended March 31, 2022 was RMB13.8 million (US$2.2 million), representing a decrease of RMB4.4 million, or 24.1%, from the gross profit
of RMB18.2 million for the year ended March 31, 2021 as a result of factors mentioned above.
Overall gross profit margin
for the fiscal year ended March 31, 2022 was 5.00%, or 2.4% lower, as compared to gross profit margin of 7.4% for the fiscal year ended
March 31, 2021. The decrease was mainly due to squeeze of margin in feature phone sales for the fiscal year ended March 31, 2022 and
cessation of face mask sales in 2020, which had contributed to higher margin in fiscal year 2021.
Operating expenses
| |
Year ended March 31, | |
| |
2021 | | |
2022 | |
| |
RMB | | |
RMB | | |
US$ | |
| |
(in thousands) | |
Selling expenses | |
4,127 | | |
5,459 | | |
860 | |
General and administrative expenses(1) | |
| 18,502 | | |
| 25,429 | | |
| 4,006 | |
R&D related expenses(1) | |
| 7,193 | | |
| 14,070 | | |
| 2,216 | |
Other expenses, net | |
| 2,875 | | |
| 3,328 | | |
| 524 | |
Total | |
| 32,697 | | |
| 48,286 | | |
| 7,606 | |
(1) |
These expenses are combined as general and administrative expenses in consolidated statements of comprehensive income (loss). |
Our operating expenses consist
of selling expenses, general and administrative expenses, R&D expenses and other expenses, net. Operating expenses increased by RMB15.6
million, or 47.7%, from RMB32.7 million for the year ended March 31, 2021 to RMB48.3 million (US$7.6 million) for year ended March 31,
2022. The net increase in our operating expenses was attributed to (i) increase in general and administrative expenses by RMB6.9 million
(ii) increase in R&D expenses by RMB6.9 million (iii) increase in selling expenses by RMB1.3 million and (iv) net increase of other
income by RMB0.5 million for the year ended March 31, 2022.
Selling expenses consist of
salary and benefits, business travel, shipping expenses, entertainment, market promotion and other expenses relating to our sales and
marketing activities. The increase in selling expense was mainly due to increase in shipping and customs handling expenses.
General and administrative
expenses primarily include salary and benefits to our accounting, human resources, design and executive office staff, rental expenses,
property management and utilities, office supplies. The increase was mainly due to the compensation for the independent directors of the
Company, office rental and other general and administration expenses incurred to support the activities of new subsidiaries carried out
in Mexico and China.
R&D related expenses mainly
consist of salary and benefits, material and consumables and other expenses to carry out R&D activities. The increase in R&D expenses
was mainly due to increase in expenses on moulds and consumables for R&D activities. R&D related expenses are included in general
and administrative expenses in the income statement.
Other expenses, net for the
year ended March 31, 2022 was net expense of RMB3.3 million (US$0.5 million), as compared to net expense of RMB2.9 million for the year
ended March 31, 2021. The increase was mainly attributed to changes in doubtful account provision, partially offset by increase in government
subsidy and the decrease in exchange loss of U.S. Dollar against RMB.
Income tax expenses (benefits)
Income tax provision is RMB0.3
million and RMB0.05 million for the year ended March 31, 2021 and 2022, respectively.
Net loss
As a result of the above,
net loss was RMB39.3 million (US$6.2 million) for the year ended March 31, 2022 compared to net loss of RMB16.6 million for the year ended
March 31, 2021.
Comparison of the fiscal years ended March
31, 2021 and 2020
Revenue
Revenue for the year ended
March 31, 2021 was RMB246.9 million (US$37.6 million), an increase of RMB53.8 million, or 28%, from RMB193.1 million for the year ended
March 31, 2020. The increase was attributable to the increase in OEM/ODM sales of RMB20.8 million and sales of face masks of RMB44.8 million,
partially offset by the decrease of in-house brand sales of RMB11.8 million.
Cost of sales
Cost of sales for the year
ended March 31, 2021 was RMB228.7 million (US$34.8 million), an increase of RMB55.0 million, or 31.7%, from RMB173.7 million for the year
ended March 31, 2020. The increase was mainly due to the increase in material costs and sales quantity.
Our cost of sales mainly consists
of cost of raw materials, third party processing fees and rental of building and machinery.
We import screens and mother
boards from overseas and purchase camera, battery and electronic components from domestic markets for mobile phone processing and assembling.
We wrote off impairment reserve
of RMB0.5 million for the obsolete inventories disposed in the year ended March 31, 2020. We provided impairment reserve on obsolete inventory
of RMB7.6 million (US$1.2 million), which are recorded in cost of sales for year ended March 31, 2021.
Gross profit
Gross profit for the year
ended March 31, 2021 was RMB18.2 million (US$2.8 million), representing a decrease of RMB1.2 million, or 6.1%, from the gross profit of
RMB19.4 million for the same period of 2020 as a result of factors mentioned above.
Overall gross profit margin
for the year ended March 31, 2021 was 7.4%, or 2.6% lower, as compared to gross profit margin of 10.0% for the year ended March 31, 2020.
The decrease was mainly attributable to the increasing purchase prices of raw materials resulted from global shortage of key components,
including chips and screens, in the year ended March 31, 2021.
Operating expenses
| |
Year ended March 31, | | |
Year ended March 31, | |
| |
2020 | | |
2021 | |
| |
RMB | | |
RMB | | |
US$ | |
| |
(in thousands) | | |
(in thousands) | |
Selling expenses | |
9,510 | | |
4,127 | | |
628 | |
General and administrative expenses(1) | |
| 18,791 | | |
| 18,502 | | |
| 2,815 | |
R&D related expenses(1) | |
| 10,754 | | |
| 7,193 | | |
| 1,095 | |
Other (income) expenses, net | |
| 7 | | |
| 2,875 | | |
| 438 | |
Total | |
| 39,062 | | |
| 32,697 | | |
| 4,976 | |
(1) |
These expenses are combined as general and administrative expenses in consolidated statements of comprehensive income (loss). |
Our operating expenses consist
of selling expenses, general and administrative expenses, R&D expenses and other (income) expenses. Operating expenses decreased by
RMB6.4 million, or 16.3%, from RMB39.1 million for the year ended March 31, 2020 to RMB32.7 million (US$5.0 million) for the year ended
March 31, 2021. The decrease in our operating expenses was mainly due to decrease in selling expenses and R&D expenses
Selling expenses consist of
salary and benefits, business travel, shipping expenses, entertainment, market promotion and other expenses relating to our sales and
marketing activities. The decrease in selling expense was mainly due to (i) cost saving in travelling and entertainment expenses and (ii) reduction
in overhead costs in India.
General and administrative
expenses consist of salary and benefits to our accounting, human resources, design and executive office staff, rental expenses, property
management and utilities, office supplies and etc. The decrease is mainly due to reduction in manpower cost in India as the result of
the COVID-19 related suspension of business.
R&D related expenses mainly
consist of salary and benefits, material and consumables and other expenses to carry out R&D activities. The decrease in R&D expenses
was mainly due to decrease in overhead costs (e.g. Salaries, travelling, entertainment etc.) for R&D activities. R&D related expenses
are included in general and administrative expenses in the income statement.
Other expenses (income), net
year ended March 31, 2021 was net expense of RMB2.9 million (US$0.4 million), as compared to net expense of RMB0.0 million for the same
period of 2020. The increase in expenses was mainly attributed to the increase in exchange loss due to depreciation of U.S. Dollar against
RMB and recognized impairment losses on equity method investment, partially offset by the reversal of provision on doubtful receivables.
Income tax expenses (benefits)
For the year ended March 31,
2021, an income tax credit of about RMB0.4 million (US$0.06 million) was recorded as compared to income tax provision of RMB0.2 million
for the year ended March 31, 2020.
Net loss
As a result of the above,
net loss was RMB16.6 million (US$2.5 million) for the year ended March 31, 2021, representing a decrease in loss of RMB5.1 million, or
23.4% from a net loss of RMB21.7 million for the year ended March 31, 2020.
5B. Liquidity and Capital Resources
As of March 31, 2022, we had
current assets of RMB192.9 million (US$30.4 million) and current liabilities of RMB163.1 million (US$25.7 million), resulting in a working
capital of approximately RMB29.8 million (US$4.7 million). As of March 31, 2021, we had current assets of RMB130.8 million and current
liabilities of RMB148.1 million, resulting in a working capital deficit of approximately RMB17.3 million.
We had accumulated deficit
of RMB49,444 and RMB88,277 (US$13.9 million) as of March 31, 2021 and 2022, respectively. For the fiscal year ended March 31, 2022, we
incurred a net loss of RMB39.3 million (US$6.2 million). Our net cash outflow was RMB20.9 million (US$3.3 million) from operations for
the fiscal year ended March 31, 2022, an increase of cash outflow of RMB18.4 million compared to the net cash outflow of RMB2.5 million
for the fiscal year ended March 31, 2021 as a result of decrease in gross profit and increased operating expenses on expanding business.
We continue to focus on improving operational
efficiency and cost reductions, developing core cash-generating business and enhancing efficiency. We expect that the existing and future cash generated from operation
will be sufficient to fund the future operating expenses and capital expenditure requirements.
Cash, Cash Equivalents and restricted cash
The following table sets forth
certain historical information with respect to our statements of cash flows:
| |
Year ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
RMB | | |
RMB | | |
RMB | | |
US$ | |
| |
(in thousands) | |
Net cash used in operating activities | |
| (17,124 | ) | |
| (2,521 | ) | |
| (20,865 | ) | |
| (3,286 | ) |
Net cash used in investing activity | |
| (2,269 | ) | |
| (2,201 | ) | |
| (5,830 | ) | |
| (919 | ) |
Net cash provided by financing activities | |
| 12,850 | | |
| 14,000 | | |
| 86,888 | | |
| 13,688 | |
Effect of exchange rate changes on cash and cash equivalents | |
| (311 | ) | |
| (855 | ) | |
| (2,478 | ) | |
| (391 | ) |
Net (decrease) increase in cash and cash equivalents and restricted cash | |
| (6,854 | ) | |
| 8,423 | | |
| 57,715 | | |
| 9,092 | |
We had cash, cash equivalent
and restricted cash of approximate RMB1.1 million, RMB9.5 million and RMB67.2 million (US$10.6 million) as of March 31, 2020 and 2021
and March 31, 2022, respectively.
Operating activities
Net cash used in operating
activities was RMB20.9 million (US$3.3 million) for the year ended March 31, 2022 as compared with RMB2.5 million for the year ended March
31, 2021. Net loss for the year ended March 31, 2022 was RMB39.3 million (US$6.2 million) compared to RMB16.6 million for the year ended
March 31, 2021. The difference between net loss and the net cash used in operating activities are attributed to the changes in various
asset and liability account balances throughout the year ended March 31, 2022. Major changes are (i) increase of accounts receivable in
the amount of RMB5.7 million (US$0.9 million, a decrease to cash), (ii) increase of accounts payable in the amount of RMB27.3 million
(US$4.3 million, an increase to cash), (iii) increase of RMB4.6 million (US$0.7 million, a decrease to cash) in the ending inventory balance
as of March 31, 2022, (iv) decrease of RMB5.9 million (US$0.9 million, an increase to cash) in prepayment and other current assets, and
(v) decrease of RMB11.9 million (US$1.9 million, a decrease to cash) in other payables and accrued liabilities. In addition, the Company
had non-cash expenses relating to depreciation and amortization in the amount of RMB4.3 million (US$0.7 million), provision of RMB0.3
million (US$0.04 million) for obsolete inventory and provision of RMB3.4 million (US$0.5 million) on doubtful receivables
Net cash used in
operating activities was RMB2.5 million for the year ended March 31, 2021 as compared with RMB17.1 million used for the year ended
March 31, 2020. Net loss for the year ended March 31, 2021 was RMB16.6 million compared to net loss of RMB21.7 million for the year
ended March 31, 2020. The difference between net loss and the net cash used in operating activities are attributed to the changes in
various asset and liability account balances for the year ended March 31, 2021. Major changes are i) decrease of accounts receivable
in the amount of RMB21.5 million (an increase to cash), ii) decrease of accounts payable in the amount of RMB9.9 million (a decrease
to cash), iii) increase of 10.9 million (a decrease to cash) in the ending inventory balance as of March 31, 2021, iv) increase of
26.2 million in prepayment and other current assets (a decrease to net cash) v) increase of RMB28.0 million in other payables and
accrued liabilities (an increase to net cash), and vi) increase of RMB0.5 million in net amount of related parties (an increase to
net cash) year ended March 31, 2021. In addition, the Company had non-cash expenses relating to depreciation and amortization in the
amount of RMB4.0 million, impairment provision of RMB7.6 million for obsolete inventory and reversal of provision of RMB0.8 million
on doubtful receivables.
Investing activities
Net cash used in investing
activities for fiscal year ended March 31, 2022 was RMB5.8 million (US$0.9 million) as compared to net cash used in investing activities
of RMB2.2 million for the fiscal year ended March 31, 2021. Cash used in the year ended March 31, 2022 were for payments of property and
equipment of RMB5.9 million (US$0.9 million).
Net cash used in investing
activities was RMB2.2 million for year ended March 31, 2021 as compared to net cash used in investing activities of RMB2.3 million for
the fiscal year ended March 31, 2020. Cash used in the year ended March 31, 2021 were mainly for payments of licensed software.
Financing activities
Net cash provided by financing
activities for year ended March 31, 2022 was RMB86.9 million (US$13.7 million) as compared to RMB14.0 million for the year ended March
31, 2021. The cash inflow was mainly attributable to proceeds from issuance of ordinary shares through IPO, capital contributions and
short-term and long-term borrowings.
Net cash provided by financing
activities for the year ended March 31, 2021 was RMB14.0 million as compared to RMB12.9 million for the year ended March 31, 2020. The
cash inflow was mainly attributable to loans from bank and financial institutions.
In August 2022, UTime SZ
entered into a credit line agreement with Shenzhen Nanshan Baosheng County Bank Co., Ltd. (“Baosheng County Bank”)
according to which Baosheng County Bank agreed to provide UTime SZ with a credit facility of up to RMB3.0 million with a one-year
term from August 31, 2022 to August 31, 2023. On 31, 2022, UTime SZ entered into a working capital loan agreement with Baosheng
County Bank to borrow RMB3.0 million as working capital for one year at an annual effective interest rate of 8%. It is payable at
monthly interest plus monthly installment of RMB100,000 from October 2022 to August 2023, with a balloon payment of the remaining
balance in the last installment.
On June 29, 2021, UTime
SZ entered into a credit agreement with SRCB to borrow RMB7.0 million for a term of 3 years, which is payable at monthly installment
of RMB70,000 from August 2022 to July 2024, with a balloon payment of the remaining balance in the last installment. The loan bears
a fixed interest rate of 4.5% per annum. The loan was secured by real estate owned by Mr. Bao and guaranteed by Mr. Bao.
On June 29, 2021, UTime SZ entered
into a credit agreement with SRCB to borrow RMB2.0 million for a term of 3 years, which is payable at monthly installment of RMB20,000
from July 2021 to July 2024, with a balloon payment of the remaining balance in the last installment. The annual effective rate is 7%.
The loan was secured by real estate owned by Mr. Bao and guaranteed by Mr. Bao.
On November 13, 2020,
UTime SZ entered into a credit agreement with CRBZ, according to which CRBZ agreed to provide UTime SZ with a credit facility of up
to RMB22,000,000 with a two-year term from November 13, 2020 to November 13, 2022. Based on this credit facility, on November 18,
2020, UTime SZ entered into a working capital loan agreement with CRBZ to borrow RMB22,000,000 as working capital for one year at an
annual effective interest rate of 5.5%. The loan is secured by the office owned by UTime SZ and guaranteed by UTime GZ, Mr. Bao and
his spouse. UTime SZ repaid the loan on November 18, 2021 and signed a new working capital loan agreement with CRBZ to borrow
RMB22,000,000 as working capital for one year at an annual effective interest rate of 5.5% on November 22, 2021.
In November 2020, UTime SZ
and TCL Factoring executed a factoring agreement, pursuant to which UTime SZ received a revolving credit facility and may submit unlimited
number of loan applications, so long as, among other conditions, the balance of the loan does not exceed the credit line. The annual effective
interest rate range is 8.0% to 9%. TCL Factoring has the right of recourse to UTime SZ, and as a result, these transactions were recognized
as secured borrowings. UTime SZ agreed to pledge to TCL Factoring its accounts receivable from TCL Huizhou. This credit facility was also
guaranteed respectively by Mr. Bao and UTime GZ, each for an amount up to RMB20,000,000. UTime SZ agreed not to withdraw, utilize or dispose
the accounts receivables paid to it by TCL Huizhou without the prior consent of TCL Factoring.
In December 2021, UTime SZ entered
into a credit agreement with CRBZ, according to which CRBZ agreed to provide UTime SZ with a credit facility of up to RMB2,000,000 with
a term from December 2, 2021 to October 21, 2022. Based on this credit facility, on December 2 and December 3, 2021, UTime SZ entered
into four loan agreements respectively with CRBZ, to borrow RMB2,000,000 in total as working capital at an annual effective interest rate
of 8%. The loan was originally due on October 21, 2022, however UTime SZ has been in discussions with CRBZ to renew and/or amend the credit
facility and payment terms thereunder. The discussions with CRBZ were delayed due to quarantine.
In November 2021, UTime SZ
entered into a credit agreement with PingAn Bank Co., Ltd. to borrow RMB2,000,000 for a term of 3 years, with an annual effective rate
of 12.96%. The loan is guaranteed by Mr. Bao and his spouse.
On May 19, 2022, UTime SZ
entered into a Credit Line Agreement with Huaneng Guicheng Trust Co., Ltd, according to which Huaneng Guicheng Trust Co., Ltd agreed to provide
UTime SZ with a credit facility of up to RMB 3,000,000 with a term of one year. On May 19, 2022, UTime SZ entered into two loan agreements
with Huaneng Guicheng Trust Co., Ltd., to borrow RMB 1,990,000 in total as working capital at an annual
effective interest rate of 9.45%. The loan will be due on May 19, 2024. The loan is guaranteed by Mr. Bao.
On November 23, 2021, UTime SZ entered into a Comprehensive Credit Line Agreement with Qianhai WeBank Co., Ltd, according to which Qianhai
WeBank Co., Ltd agreed to provide UTime SZ with a revolving credit facility with a term of one year. On May 19, 2022, UTime SZ
entered into a loan agreement with Shenzhen Qianhai WeBank Co., Ltd., to borrow RMB 1,000,000 in total as working capital at an annual
effective interest rate of 3.6%. The loan expired on May 26, 2022. On the same day, UTime SZ entered into another loan agreement with
Shenzhen Qianhai WeBank Co., Ltd., to borrow RMB 1,000,700 in total as working capital at an annual effective interest rate of 9%. The
loan will be due on May 26, 2024. The loan is guaranteed by Mr. Bao.
On June 14, 2022, UTime SZ
entered into a loan agreement with Jiangsu Suning Bank Co., Ltd. (“Suning Bank”), according to which Suning Bank agreed to
provide UTime SZ with a credit facility of up to RMB 2.0 million with a term from June 13, 2022 to May 5, 2025. UTime SZ may submit unlimited
number of loan applications, so long as, among other conditions, the balance of the loan does not exceed the credit line. The annual effective
interest rate range is 12%.
On May 19, 2022, UTime GZ
entered into a credit line agreement with China Resources SZITIC Trust Co., Ltd., according to which China Resources SZITIC Trust Co.,
Ltd. agreed to provide UTime GZ with a credit facility of up to RMB 3.0 million with a one-year term from (the term may be automatically
extended for one year from the expiration date if both parties do not propose to terminate the agreement before the expiration). UTime
GZ may submit unlimited number of loan applications to China Resources SZITIC Trust Co., Ltd. or its entrusted third party, so long as,
among other conditions, the balance of the loan does not exceed the credit line. On May 18, 2022, UTime GZ entered into two loan agreements
with Huaneng Guicheng Trust Co., Ltd to borrow RMB 2.0 million in total for 2 years at an annual effective interest rate of 11.34%. On
May 19, 2022, UTime GZ entered into a loan agreement with China Resources SZITIC Trust Co., Ltd to borrow RMB 1.0 million for 2 years
at an annual effective interest rate of 11.34 %. The above loans are guaranteed by Mr. Bao.
Contractual Obligations
In December 2017, UTime SZ
signed a property sale contract with Shenzhen Fumeibang Technology Co., Ltd (“Fumeibang”), previously known as “BuTa
Entertainment” for selling office real estate in Nanshan District, Shenzhen, China for a cash price of RMB20.1 million (US$3.1 million).
BuTa Entertainment agreed to lease the office estate back to the Company for a term of up to 3 years, with an annual rental payment
of approximately RMB1.0 million (US$0.15 million). According the lease agreement, the eleven months from February 2018 to December 2018
is free of rental charge.
In September 2019, UTime SZ signed
a lease agreement with Fumeibang for a term of one year, with an annual rental payment of approximately RMB1.0 million (US$0.15 million)
and was most recently renewed on April 1, 2022.
On September 1, 2017, UTime
GZ entered a lease agreement with Guizhou Jietongda Technology Co., Ltd. (“Jietongda”). Jietongda agreed to lease the factory
building located in Xinpu District of Guizhou, China to UTime GZ, for a term of up to 4.5 years, with an annual rental payment of approximately
RMB 4.2 million (US$0.6 million).
During the year ended March
31, 2020, UTime GZ entered into supplementary agreement with Jietongda and modified the original warehouse lease contract effective since
September 1, 2017. Total lease amount reduced from RMB18.9 million (US$2.7 million) to RMB7.5 million (US$1.1 million) for the 4 years
and 6 months’ lease period.
On September 1, 2017, UTime
GZ entered into a lease agreement with Jietongda. Jietongda agreed to lease the equipment for processing mobile phones to UTime GZ, for
a term of up to 5 years, with an annual rental payment of approximately RMB0.6 million (US$0.1 million).
In November 2021, UTime Guangxi
entered into a Factory Lease Agreement to lease Factory for production from Nanning Industrial Investment Group Cp., Ltd, for a term of
up to 5 years, with a monthly rental payment of RMB 384,853.8 (including 6 months rent-free period).
In March 2022, UTime
Guangxi entered into a Lease Agreement to lease dormitory for staff from Nanning Industrial Investment Group Cp., Ltd, for a term from
March 25, 2022 to March 31, 2027, with a monthly rental payment of RMB 30,706.06.
The following table sets forth
our contractual obligations as of March 31, 2022, which included the lease and loan arrangement described above:
Payments due by period (in thousands) |
Contractual obligations | |
Total | | |
Less than 1 year | | |
1-2 years | | |
2-3 years | | |
More than 3 years | |
Short term borrowings | |
| 35,780 | | |
| 35,780 | | |
| - | | |
| - | | |
| - | |
Current portion of long-term borrowings | |
| 800 | | |
| 800 | | |
| - | | |
| - | | |
| - | |
Long term borrowings | |
| 8,020 | | |
| - | | |
| 1,080 | | |
| 6,940 | | |
| - | |
Operating lease payments | |
| 21,020 | | |
| 4,514 | | |
| 4,575 | | |
| 4,575 | | |
| 7,356 | |
Total | |
| 65,620 | | |
| 41,094 | | |
| 5,655 | | |
| 11,515 | | |
| 7,356 | |
5C. Research and Development, Patents and Licenses, etc.
See the discussion under the
headings “Research and Development” and “Intellectual Property” in Item 4 above.
5D. Trend Information
The factors that will most
significantly affect results of operations will be (i) the industry outlook of cell phone and consumer electronics, (ii) the sustainability
of our client source, (iii) the development and penetration of existing market and new market, (iv) the ability of our R&D capacity,
and (v) the outbreak of coronavirus. Our revenues will be significantly impacted by the combination of the above factors discussed.
The coronavirus is impacting
several areas of the world, including Asia and the United States. Factories in China that produced our products were closed during February
2020 at the mandate of the Chinese government and reopened in March 2020. Our manufacturing facility in Guizhou was allowed to reopen
on February 14, 2020 by the local government. This impacts the manufacturing productivity of the factories, and therefore the amount of
inventory we receive and can ship to customers. We are doing everything we can to keep customer production running and to keep things
as smooth and stable as possible. Furthermore, our customers in China and elsewhere may reduce their future purchases from us if they
are not able to complete the manufacture of their products due to the shortage of components from other suppliers. The coronavirus pandemic
also created global shortage of key components, such as Integrated Circuit Chip and touch screens, for consumer electronics. Procurement
cost of these key components increased considerably. If the shortage continued spreading, it might cause significant delay of orders or
further increase of procurement cost. The coronavirus has impacted and likely will continue to impact our sales performance in a negative
way, depending on the duration and severity of the coronavirus’ impact on the operations of our vendors and suppliers.
The global consumer electronics,
network communication and other products have a shorter update cycle, which has brought huge market demand and is expected to maintain
rapid development in the future. However, the shorter product update cycle and increasing market demand also strengthen the competition.
Overall, demand of feature phones is decreasing and being replaced by smartphones while smartphones are upgraded faster and demand of
them becomes more unstable.
OEM/ODM orders were our principal
source of revenue, which contributed 90.7%, 79.4% and 99.4% to our revenue, for the fiscal years ended March 31, 2020, 2021 and 2022,
respectively. Revenue from TCL Communication Limited accounted for 57.6%, 41.3% and 19.8% of total revenue, for the fiscal years ended
March 31, 2020, 2021 and 2022, respectively. T2 Mobile International Limited contributed 9.6%, 5.6% and 2.6% of total revenue, for the
fiscal years ended March 31, 2020, 2021 and 2022, respectively. Shanghai Sunvov Communications Technology Co., Ltd contributed 6.3% and
3.3% of total revenue, for the fiscal year ended March 31, 2021 and 2022, respectively. Sustaining the customer source may help us secure
our OEM/ODM orders. For the fiscal year ended March 31, 2021, we developed a few new customers in mainland China and Southeast Asia. Two
new OEM/ODM customers contributed 6.3% and 3.5% of total revenue, respectively for the year ended March 31, 2021. We are also trying to
tap into broader markets in South America, Mexico and Africa. During the fiscal year ended March 31, 2020, 2021 and 2022, aggregate sales
in these areas contributed 9.3%, 26% and 56.8% of total revenue, respectively.
The implementation of our
strategy in new markets depends on our R&D capacity in feature phones, smartphones and other consumer electronics considerably. If
we had sufficient R&D capacity, we might have the opportunity to penetrate the existing market faster, retain more market shares and
be able to develop another replicable market.
Although we intend to grow
our in-house brands, it is expected that in the near term, both OEM/ODM orders and sale of our own in-house brand sales will be our principal
sources of cash flow over the next two years. Cash flow from the OEM/ODM orders depends on the quantity and the price of the order, whereas
cash flow from sale of in-house brand cell phone product depends on the quality of production and the profit obtained by the production.
An increase in OEM/ODM orders or sale of in-house brand cell phone products will enable us to expand our operations with the increasing
internally-generated funds and may allow us to obtain equity and debt financing more easily or on better terms, lessening the difficulty
of obtaining financing.
A decline in sales (i) will
reduce our internally-generated cash flow, which in turn will reduce the available funds for securing clients and developing existing
markets, (ii) will increase the difficulty of obtaining equity and debt financing and worsen the terms on which such financing may be
obtained, and (iii) will affect the activities of R&D which considerably determines our development in new products and new markets.
The continuing outbreak of
the coronavirus in China and globally (i) could affect our production utilization and logistics, which could directly affect our timely
delivery of our products and collection of cash flow, (ii) if outbreaks recur worldwide, the entire industry could be negatively affected,
leading to a certain extent of shortages in supply that could eventually raise key components price overall. As a consequence, our production
cost could increase whereas our profit could decrease.
A change of overall business
environment in India (i) could affect our business stability by the unfavorable local policies, which could directly impact our local
development, (ii) could lower growth expectation of the consumer electronic market that may force us to search and development other emerging
markets with ideal growth potential.
Other than the foregoing,
the management is unaware of any trends, events or uncertainties that will have, or are reasonably expected to have, a material impact
on sales, revenues or expenses.
5E. Critical Accounting Estimates
Management’s discussion
and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of America (US GAAP). The preparation of these financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the
reporting period.
We have identified the following
accounting estimates and assumptions which involve significant subjectivity and judgment, and changes to such estimates or assumptions
could have a material impact on our financial condition or operating results. Therefore, we consider an understanding of the variability
and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial
results.
Allowances of Doubtful Accounts
Description: Accounts receivable
and other receivables are reflected in our consolidated balance sheets at their estimated collectible amounts. A substantial majority
of our accounts receivable are derived from sales to well-known technological clients. We follow the allowance method of recognizing uncollectible
accounts receivable and other receivables, pursuant to which we regularly assess our ability to collect outstanding customer invoices
and make estimates of the collectability of accounts receivable and other receivables. We provide an allowance for doubtful accounts when
we determine that the collection of an outstanding customer receivable is not probable.
Judgments and Uncertainties:
The allowance for doubtful accounts is reviewed on a timely basis to assess the adequacy of the allowance. We take into consideration
(a) historical bad debts experience, (b) any circumstances of which we are aware of a customer’s or debtor’s inability to
meet its financial obligations, (c) changes in our customer or debtor payment history, and (d) our judgments as to prevailing economic
conditions in the industry and the impact of those conditions on our customers and debtors.
Sensitivity of Estimate to
Change: The uncollectible amounts estimated are based on review on regular basis. If circumstances change, such that the financial conditions
of our customers or debtors are adversely affected and they are unable to meet their financial obligations to us, we may need to record
additional allowances, which would result in a reduction of our net income
Impairment of Inventories
Description: Inventories of
the Company consist of raw materials, finished goods and work in process. Inventories are stated at lower of cost or net realizable value
with cost being determined on the weighted average method. Inventory is stated at cost unless an impairment exists, in which case it is
written down to fair value in accordance with GAAP.
Judgments and Uncertainties:
The Company assesses the valuation of inventory and periodically writes down the value for estimated excess and obsolete inventory based
upon the product life-cycle. The market value of the inventories are estimated based on the current
market situation and historical experience on similar inventories.
Sensitivity of Estimate to
Change: Should the estimates or expectations used in determining estimated net realizable value deteriorate in the future, we may be required
to recognize additional impairment charges and write-offs and such amounts could be material.
Impairment of long-lived assets
Description: We review the
carrying value of long-lived assets to be held and used when events and circumstances warrants such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is
less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market
value of the long-lived asset.
Judgments and Uncertainties:
Since the market value of the assets cannot be obtained reliably, we evaluate the impairment of the long-lived assets by comparing the
carrying value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and
their eventual disposition based on the historical trends and existing macroeconomic conditions.
Sensitivity of Estimate to
Change: Should the estimates or expectations deteriorate in the future, we may be required to recognize additional impairment charges
and write-offs and such amounts could be material.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. Directors, Executive Officers and Key
Employees
The following table sets forth
the name, age, positions and a brief description of the business experience of each of our directors, executive officers and key employees
as of the date hereof.
Name |
|
Age |
|
Position |
Minfei Bao |
|
49 |
|
Chief Executive Officer and Chairman of the Board of Directors |
Yihuang Chen |
|
42 |
|
Chief Operating Officer |
Honggang Cao |
|
41 |
|
Chief Manufacturing Officer |
Shibin Yu |
|
38 |
|
Chief Financial Officer |
Min He |
|
35 |
|
Director |
David Bolocan |
|
57 |
|
Independent Director |
Weiyuan Wang |
|
46 |
|
Independent Director |
Mo Zou |
|
33 |
|
Independent Director |
There are no family relationships
among our directors and officers. There are no arrangements or understandings with major shareholders, customers, suppliers or others,
pursuant to which any person referred to above was selected as a director or member of senior management. The address of each of our directors
and executive officers is c/o UTime Limited, 7th Floor, Building 5A, Shenzhen Software Industry Base, Nanshan District, Shenzhen, People’s
Republic of China, 518061.
Executive Officers and Directors
Minfei Bao,
our founder, has served as our Chief Executive Officer since December 2019 and our Chairman of the Board of Directors since October 2018.
Mr. Bao has also served as the Chief Executive Officer of UTime SZ since June 2008. From March 2006 to March 2008, Mr. Bao
served as the general manager at United Creation Technology Co., Ltd., a mobile phone manufacturer (currently publicly traded on Chinese
National Equities Exchange And Quotations Co., Ltd., or NEEQ). From March 1999 to March 2006, Mr. Bao served as Vice President at
TCL Communication Technology Holdings Limited, a global mobile terminal manufacturer and internet service provider. From May 1997 to March
1999, Mr. Bao served as a manager in wireless technology application department at UTStarcom Incorporated, a global telecom infrastructure
provider (NASDAQ: UTSI). Mr. Bao received a B.A. from the University of Electronic Science and Technology of China (UESTC). We believe
Mr. Bao’s extensive experience qualifies him to serve on our board of directors.
Yihuang Chen has
served as our Chief Operating Officer since December 2019 and has been the Senior Vice President of Product of UTime SZ since March 2015.
From July 2011 to August 2015, Mr. Chen served as a Vice President of Product at Shenzhen Hongyu Technology Co., Ltd, an optical
and optoelectronic materials provider. From April 2009 to June 2011, Mr. Chen served as a Vice President at Shenzhen Suopuxunda Technology
Co., Ltd, a mobile terminal provider. From July 2008 to March 2009, Mr. Chen served as a Director of Product at Beijing Songliankate
Co., Ltd. From July 2003 to June 2008, Mr. Chen served as a Senior Project Manager and Senior Structural Engineer at Amoi Technology
Co., Ltd, a mobile terminal manufacturer and service provider (currently publicly traded on Shanghai Stock Exchange). Mr. Chen received
a B.A. from the Guilin University of Technology.
Honggang Cao has
served as our Chief Manufacturing Officer since December 2019 and has been the Senior Vice President of Manufacture of UTime SZ since
December 2010. From December 2009 to 2010, Mr. Cao served as the Head of Quality Control and Procurement Manager at Shenzhen Geli
Telecommunication Technology Co., Ltd. From September 2006 to August 2008, Mr. Cao served as the Head of Quality Control at United
Creation Technology Co., Ltd, a mobile phone manufacturer (currently publicly traded on NEEQ). From July 2004 to August 2006, Mr. Cao
served as a Quality Engineer at TCL Communication Technology Holdings Limited, a global mobile terminal manufacturer and internet service
provider. Mr. Cao received a B.A. from the North University of China.
Shibin
Yu has served as our Chief Financial Officer since December 2019 and has been the financial manager and controller of
UTime SZ since March 2019. From June 2017 to March 2019, Mr. Yu served as a senior associate at BDO China Shu Lun Pan Certified
Public Accountants LLP. From November 2013 to April 2017, Mr. Yu served as the Taxation Supervisor at Edan Instruments, Inc, a
Medical Electronic Equipment manufacturer (currently publicly traded on SZSE: 300326). From February 2012 to September 2013,
Mr. Yu served as the Accounting Head at Shenzhen Dazu Photovoltaic Technology Co., Ltd, a photovoltaic equipment provider.
Mr. Yu received a B.A. from Dezhou University. Mr. Yu is also qualified as a Certified Public Accountants in China and is
a CFA Charterholder.
Min He, a director,
has served as Chairman at Dongyang Changhe Industry Co., Ltd.. From January 2014 to present. From August 2011 to December 2013, Mr. He
served as Chairman at Hengdian Group Zhejiang DMEGC Real Estate Development Co., Ltd.. From December 2010 to July 2011, Mr. He served
as Chairman at Kaifeng DMEGC Real Estate Development Co., Ltd. Mr. He received his B.S. from Kingston University, London. We believe
Mr. He’s extensive experience qualifies him to serve on our board of directors.
David Bolocan,
a director since April 2021, has over 25 years of experience in retail banking and payments, with extensive expertise in deposit product
development, pricing, marketing, advertising, distribution, customer segmentation, lifecycle management, and portfolio management. He
became the Executive Director for Deposits and Consumer Segments at BBVA USA, a commercial bank with $80 Billion in assets, in August
2018. In this role he is the CEO of a business line with $2 Billion in revenue, and sets the direction for consumer deposit products design,
pricing, marketing, fulfillment and servicing. In addition, Mr. Bolocan is responsible for marketing, sales incentives and analytics,
engineering prioritization, specialty programs and strategic initiatives for the Retail Line of Business. Prior to BBVA, Mr. Bolocan
was a senior managing director and Head of Retail Banking Solutions at Argus Information, which is owned by Verisk, from June 2013 to
2018. In this role Bolocan provided consulting services and managed benchmarking and scoring products for 25 retail banks in the US and
Canada. Mr. Bolocan served on the board of Cellular Biomedicine Group, Inc., a NASDAQ listed company from 2012 to 2016, and he was
the compensation committee chair and a member of the audit committee. Mr. Bolocan received an MS/MBA from the MIT Sloan School of
Management and a BA from Harvard University in Computer Science and Economics. We believe Mr. Bolocan’s extensive experience
qualifies him to serve on our board of directors.
Weiyuan Wang,
a director since May 2022, served as a member of the Supervisory Board and Principal of Zhejiang Huyin Fund Management Co., Ltd., a private
equity firm, since April 2017, where he supervises board activities and major investment and commercial transactions. Prior to that, Mr.
Wang served as the Head of the Bond Insurance Department of People’s Insurance Company of China (SSE: 601319 and SEHK: 1339), where
he was in charge of developing insurance products and coordinating different departments on marketing and operations. Mr. Wang obtained
his bachelor’s degree in Economy from Hubei University of Technology in 2005.We believe Mr. Wang’ extensive experience
qualifies him to serve on our board of directors.
Mo Zou, a director
since April 2021, served as the Head of Logistics, Marketing Management Department at Chengdu CEC Panda Co., Ltd. from December 2016 to
July 2019. From February 2015 to November 2016, Mr. Zou served as Co-Chairman at Convoy Financial Holdings Limited Sichuan Branch
(currently publicly traded on HKEx: 1019). From October 2012 to January 2015, Mr. Zou served as manager of Investment Development
Head Office, G108 Project manager of Project Bidding Office, manager of Economic Department, The First Research Institute of Head Office
at The IT Electronics Eleventh Design & Research Institute Scientific and Technological Engineering Co., Ltd. Mr. Zou received
his B.S. from University of Manchester and M.S. from Aston University. Mr. Zou is also qualified as a Financial Risks Manager (FRM)
and is a CFA Charter holder. We believe Mr. Zou’s extensive experience qualifies him to serve on our board of directors.
Each of our directors will
serve as a director until our next annual general meeting and until their successors are duly elected and qualified.
Board Diversity Matrix
The table below provides certain information regarding the diversity
of our board of directors as of the date of this annual report.
Board Diversity Matrix |
Country of Principal Executive Offices: |
|
China |
Foreign Private Issuer |
|
Yes |
Disclosure Prohibited under Home Country Law |
|
No |
Total Number of Directors |
|
5 |
|
|
Female |
|
Male |
|
Non-Binary |
|
Did Not
Disclose
Gender |
Part I: Gender Identity |
|
|
Directors |
|
- |
|
5 |
|
- |
|
- |
Part II: Demographic Background |
|
|
Underrepresented Individual in Home Country Jurisdiction |
|
- |
LGBTQ+ |
|
- |
Did Not Disclose Demographic Background |
|
- |
6.B. Compensation
For the fiscal years ended
March 31, 2022, we paid an aggregate of RMB0.7 million (approximately $0.1 million) to our executive officers, and we paid an aggregate
of US$ 320,000 cash compensation to our non-executive directors. 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 variable interest
entity 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.
Equity Awards
We have not granted any equity
awards to our directors or executive officers during the fiscal year ended March 31, 2022.
Employment Agreements
We have entered into employment
agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for an initial term
of one year and is subject to successive, automatic one-year extensions unless either party gives notice of non-extension to the other
party at least 30 days prior to the end of the applicable term.
The executive officers are
entitled to a fixed salary and to participate in our equity incentive plans, if any and other company benefits, each as determined by
the Board from time to time.
We may terminate the executive
officer’s employment for cause, at any time, without notice or remuneration, for certain acts, such as conviction or plea of guilty
to a felony or grossly negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. In such case,
the executive officer will not be entitled to receive payment of any severance benefits or other amounts by reason of the termination,
and his right to all other benefits will terminate, except as required by any applicable law. We may also terminate his employment without
cause upon 30 days’ advance written notice. In such case of termination by us, we are required to provide the following severance
payments and benefits to the executive officer: a cash payment of one month of base salary as of the date of such termination for each
year (which is any period longer than six months but no more than one year) and a cash payment of half month of base salary as of the
date of such termination for any period of employment no more than six months, provided that the total severance payments shall not exceed
twelve months of base salary.
The executive officer may
terminate his employment at any time with 30 days’ advance written notice if there is any significant change in his duties and
responsibilities or a material reduction in his annual salary. In such a case, the executive officer will be entitled to receive compensation
equivalent to 3 months of his base salary. In addition, if we or our successor terminates the employment agreements upon a merger, consolidation,
or transfer or sale of all or substantially all of our assets with or to any other individual(s) or entity, the executive officer
shall be entitled to the following severance payments and benefits upon such termination: (1) a lump sum cash payment equal to 3
months of base salary at a rate equal to the greater of his annual salary in effect immediately prior to the termination, or his then
current annua1 salary as of the date of such termination; (2) a lump sum cash payment equal to a pro-rated amount of target annual
bonus for the year immediately preceding the termination; (3) payment of premiums for continued health benefits under our health
plans for 3 months fo1lowing the termination; and (4) immediate vesting of 100% of the then-unvested portion of any outstanding
equity awards held by the executive officer. The employment agreements also contain customary restrictive covenants relating to confidentiality,
non-competition and non-solicitation, as well as indemnification of the executive officer against certain liabilities and expenses incurred
by him in connection with claims made by reason of him being an officer of our company.
Director Agreements
In connection with the IPO,
on April 5, 2021, the Company entered into director offer letters with David Bolocan, Lawrence G. Eckles and Mo Zou, respectively setting
forth the terms and conditions of each of their service as independent directors to the Company. As such, effective April 5, 2021, the
annual cash compensation for Mr. Bolocan, Mr. Eckles and Mr. Zou are $120,000, $100,000 and $100,000, respectively. Pursuant to the director
offer letters, all or a portion of such fees may, in the sole discretion of the Board of Directors of the Company or a designated committee
thereof, be paid in equity in lieu of cash; provided, that any such equity payments shall be made from the Company’s equity incentive
plan.
On May 24, 2022, Mr. Eckles
resigned from the board of directors, member of the Audit Committee and the Compensation Committee and Chairperson of the Nominating
and Corporate Governance Committee of the Company due to his personal reasons. Mr. Eckles’ decision to resign did not arise or
result from any disagreement with the Board or the Company on any matter relating to the Company’s operations, policies or practices.
Effective May 25, 2022, the
Board appointed Weiyuan Wang to serve as a director on the Board, member of the Audit Committee and the Compensation Committee and Chairperson
of the Nominating and Corporate Governance Committee to fill in the vacancy created by Mr. Eckles’ resignation until the Company’s
next general meeting called for the election of directors. On May 27, 2022, the Company entered into a director offer letter with Mr.
Wang pursuant to which Mr. Wang shall receive an annual compensation of $50,000.
6.C. Board Practices
Terms of Directors and Officers
Expiration of Term of Directors
Our officers are appointed
by and serve at the discretion of our board of directors and the shareholders voting by ordinary resolution. Our directors are not subject
to a set term of office and hold office until the next general meeting called for the election of directors and until their successor
is duly appointed or such time as they die, resign or are removed from office by a shareholders’ ordinary resolution. The office
of a director will be vacated automatically if, among other things, the director resigns in writing, becomes bankrupt or makes any arrangement
or composition with his/her creditors generally or is found to be or becomes of unsound mind.
Director Remuneration Upon Termination
The directors may receive
such remuneration as our board of directors may determine from time to time. The compensation committee will assist the directors in
reviewing and approving the compensation structure for the directors. Currently, our directors are not entitled to receive any remuneration
upon termination of employment.
Audit Committee
Our board of directors consists
of five directors, including two executive directors and three independent directors. We have also established an Audit Committee, a
Nominating and Corporate Governance Committee and a Compensation Committee. We have adopted a charter for each of the three committees.
Each of the committees of our board of directors has the composition and responsibilities described below.
David Bolocan, Weiyuan Wang
and Mo Zou serve as members of our Audit Committee. Mr. Bolocan serves as the chairman of the Audit Committee. Each of our
Audit Committee members satisfies the “independence” requirements of the Nasdaq listing rules and meet the independence
standards under Rule 10A-3 under the Exchange Act. We have determined that David H. Sherman possesses accounting or related financial
management experience that qualifies him as an “audit committee financial expert” as defined by the rules and regulations
of the SEC. Our Audit Committee oversees our accounting and financial reporting processes and the audits of our financial statements.
Our Audit Committee performs several functions, including:
| ● | selecting
the independent registered public accounting firm and pre-approving all auditing and
non-auditing services permitted to be performed by the independent registered public
accounting firm; |
| ● | reviewing
with the independent registered public accounting firm any audit problems or difficulties
and management’s response; |
| ● | reviewing
and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under
the Securities Act; |
| ● | 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; |
| ● | annually
reviewing and reassessing the adequacy of our audit committee charter; |
| ● | meeting
separately and periodically with management and the independent registered public accounting
firm; |
| ● | monitoring
compliance with our code of ethics, including reviewing the adequacy and effectiveness of
our procedures to ensure proper compliance; and |
| ● | reporting
regularly to the board. |
Compensation Committee
David Bolocan, Weiyuan Wang
and Mo Zou serve as members of our Compensation Committee. Mr. Zou serves as the chair of the Compensation Committee. All of our Compensation
Committee members satisfy the “independence” requirements of the Nasdaq listing rules and meet the independence standards
under Rule 10A-3 under the Exchange Act. Our Compensation Committee is responsible for overseeing and making recommendations to
our board of our directors regarding the salaries and other compensation of our executive officers and general employees and providing
assistance and recommendations with respect to our compensation policies and practices.
Nominating and Corporate Governance Committee
David Bolocan, Weiyuan Wang
and Mo Zou serve as members of our Nominating and Corporate Governance Committee. Mr. Weiyuan Wang serves as the chair of the Nominating
and Corporate Governance Committee. All of our Nominating and Corporate Governance Committee members satisfy the “independence”
requirements of the Nasdaq listing rules and meet the independence standards under Rule 10A-3 under the Exchange Act. Our Nominating
and Corporate Governance Committee is responsible for identifying and proposing new potential director nominees to the board of directors
for consideration and reviewing our corporate governance policies.
6.D. Employees
See the section entitled
“Employees” in Item 4.B above.
6.E. Share Ownership
As of August 15, 2022, 8,267,793
of our ordinary shares were outstanding. Holders of our ordinary shares are entitled to vote together as a single class on all matters
submitted to shareholders for approval. No holder of ordinary shares has different voting rights from any other holders of ordinary shares.
We are not aware of any arrangement that may, at a subsequent date, result in a change of control of the Company.
Beneficial ownership is determined
in accordance with the rules and regulations of the SEC. The percentages of shares beneficially owned in the table below are based
on 8,267,793 ordinary shares outstanding as of August 15, 2022.
The following table sets
forth information with respect to the beneficial ownership of our common shares as of August 15, 2022 by:
|
● |
each of our directors and
executive officers; and |
|
● |
each person known to us
to beneficially own more than 5% of our outstanding ordinary shares. |
Unless otherwise noted below,
the address for each listed shareholder, director or executive officer is 7th Floor, Building 5A, Shenzhen Software Industry Base, Nanshan
District, Shenzhen, People’s Republic of China, 518061.
| |
Ordinary shares beneficially owned | |
Name | |
Number | | |
% | |
Directors and Executive
Officers(1): | |
| | |
| |
Minfei Bao | |
| 4,380,000 | | |
| 52.98 | % |
Yihuang Chen | |
| - | | |
| - | % |
Honggang Cao | |
| - | | |
| - | % |
Shibin Yu | |
| - | | |
| - | |
Min He | |
| 137,793 | | |
| 1.66 | % |
David Bolocan | |
| - | | |
| - | |
Weiyuan Wang | |
| - | | |
| - | |
Mo Zou | |
| | | |
| | |
All directors and executive officers as a group (eight persons) | |
| 4,517,793 | | |
| 54.64 | % |
Principal Shareholders: | |
| | | |
| | |
Grandsky Phoenix Limited | |
| 4,380,000 | | |
| 52.98 | % |
(1) |
Unless otherwise noted,
the business address of each of the following entities or individuals is 7th Floor, Building 5A, Shenzhen Software Industry Base,
Nanshan District, Shenzhen, People’s Republic of China, 518061. |
None of our major
shareholders have differing voting rights, and as of the date of this annual report, none of our outstanding ordinary shares are
held by record holders in the United States. We are not aware of any arrangement that may, at a subsequent date, result in a change
of control of our company.
Incentive Compensation
On June 29, 2022, our board
of directors approved the UTime Limited 2022 Performance Incentive Plan (the “Plan”), which allows for issuance of an aggregate
of 10,000,000 ordinary shares to an Eligible Person (as defined in the Plan), including an employee, a director or an individual consultant
or advisor rendering bona fide services to the Company.
On June 29, 2022, we registered
the aggregate of 10,000,000 ordinary shares, par value US$0.0001 per share under the registration statement on Form S-8 filed with the
SEC on June 29, 2022, which are reserved for issuance under the Plan. We have not granted any shares as of the date of this report.
The following is a summary of the principal terms
of the Plan.
The purpose of the Plan is to promote the success
of the Company and to increase shareholder value by providing an additional means through the grant of awards to attract, motivate, retain
and reward selected employees and other eligible persons and to enhance the alignment of the interests of the selected participants with
the interests of the Company’s shareholders.
| ● | Eligibility
and Plan Administration |
Employees or directors or consultants or advisors
may be determined as Eligible Persons and be granted awards under the Plan. The Board or committees established by the Board will administer
the Plan as Administrator.
| ● | Ordinary
Shares Subject to The Plan; Share Limits |
The shares that may be issued under this Plan
shall be the Company’s authorized but unissued Ordinary Shares and any Ordinary Shares held as treasury shares. The maximum number
of Ordinary Shares that may be issued pursuant to awards granted to each Eligible Person under this Plan is equal to 1,000,000 Ordinary
Shares; the maximum number of Ordinary Shares that may be issued under this Plan is 10,000,000 Ordinary Shares.
The types of awards that may be granted under
this Plan are (i) Share Options, the grant of a right to purchase a specified number of Ordinary Shares during a specified period as
determined by the Administrator; (ii) Share Appreciation Rights (“SAR”), a right to receive a payment, in cash and/or Ordinary
Shares, equal to the excess of the fair market value of a specified number of Ordinary Shares on the date the SAR is exercised over the
“base price” of the award, which base price shall be determined by the Administrator and set forth in the applicable award
agreement; (iii) other awards, including restricted shares, restricted share units, and dividend equivalent rights.
| ● | Effective
Date, Termination and Suspension, Amendments |
Unless earlier terminated by the Board, this
Plan shall terminate at the close of business on the day before the tenth anniversary of the Effective Date. After the termination of
this Plan, no additional awards may be granted under this Plan, but previously granted awards shall remain outstanding in accordance
with their applicable terms and conditions and the terms and conditions of this Plan. The Board may, at any time, terminate or, from
time to time, amend, modify or suspend this Plan, in whole or in part. No awards may be granted during any period that the Board suspends
this Plan.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
7.A. Major Shareholders
See Item 6.E., “Share
Ownership,” for a description of our major shareholders.
7.B. Related Party Transactions
Set forth below are the related
party transactions of our company that occurred since the beginning of the last fiscal year up to the date of this report. The transactions
are identified in accordance with the rules prescribed under Form 20-F and may not be considered as related party transactions
under PRC law.
Amounts due from/to Philectronics Inc. (“Philectronics”)
As of the date of this
annual report, the amount due from Philectronics was RMB0.5 million (US$0.1 million). As of the date of this annual report, the
amount due to Philectronics was RMB0.5 million (US$0.1 million).
Due from Related Parties
As of March 31, 2022, the
Company had amounts due from Mr. Bao of RMB0.05 million (US$0.01 million). which was received by the Company on August 15, 2022. As of the
date of this annual report, the Company had no amounts due from Mr. Bao.
As of March 31, 2022, the
Company had amounts due from Grandsky Phoenix Limited of RMB0.9 million (US$0.1 million), which was received by the Company on August 26, 2022.
As of the date of this annual report, the Company had no amounts due from Grandsky Phoenix Limited.
Due to Related Parties
As of March 31, 2022,
the Company had amounts due to Mr. Bao of RMB3.8 million (US$0.6 million). In April and May 2020, Mr. Bao provided loans of
RMB0.9 million (US$0.1 million) to the Company and the Company paid RMB1.5 million (US$0.2 million) to Mr. Bao. On September 17,
2021, Mr. Bao entered into a loan agreement with China Resources Bank of Zhuhai Co., Ltd. and borrowed RMB3.0 million (US$0.5
million). The loan is restricted on purpose only to support daily operation for the Companies that is controlled by Mr. Bao. The
loan was repaid on March 17, 2022 and the agreement was renewed on March 18, 2022. As of the date of this annual report, the Company
has amounts due to Mr. Bao of RMB3.8 million (US$0.6 million).
Loans from Mr. Bao
As of March 31, 2020, a loan
balance of RMB2.0 million (US$0.3 million) was included in the total amounts due to Mr. Bao. See “Due to Related Parties”
above. From April 2020 to May 2020, UTime SZ borrowed an aggregate of RMB0.9 million (US$0.1 million) from Mr. Bao for
additional working capital demand arisen in connection with the COVID-19 outbreak. Such loans are non-interest bearing and
carry 10-year terms. Transaction details are listed below:
| |
RMB’000 | |
Balance as of March 31, 2020 | |
| 2,000 | |
Addition | |
| | |
April 2020 | |
| 500 | |
May 2020 | |
| 400 | |
Repayment | |
| | |
April 2020 | |
| (1,000 | ) |
May 2020 | |
| (500 | ) |
Offset by amount due from Mr. Bao | |
| (1,400 | ) |
Balance as of March 31, 2022 and the date of this report | |
| - | |
Variable Interest Entity Arrangements
See “History and Corporate
Structure — Contractual Arrangements with the VIE and its Respective Shareholders.”
Share Issuances
In April 2020, we repurchased
7,620,000 and 239,721 ordinary shares, which were subsequently cancelled, at par value from our shareholders Grandsky Phoenix Limited
and HMercury Capital Limited, respectively, pursuant to a share repurchase agreement that the Company entered into with Grandsky Phoenix
Limited and HMercury Capital Limited on April 29, 2020. Both Grandsky Phoenix Limited and HMercury Capital Limited confirmed that
they have opted not to receive the consideration for the Repurchased Shares and made a pure capital contribution in the sum of the purchase
price in favor of the Company without the issue of additional shares of the Company. In April 2021, we completed our initial public offering
of 3,750,000 ordinary shares. As a result, Mr. Bao, through Grandsky Phoenix Limited, and Mr. He, through HMercury Capital Limited, own
4,380,000 ordinary shares, representing 52.98% of equity interest and 137,793 ordinary shares, representing 1.66% of equity interest
of the Company, respectively, as of the date of this annual report.
7.C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
8.A. Consolidated Statements and Other Financial
Information
The financial statements
required by this item may be found at the end of this report on 20-F, beginning on page F-1.
Legal Proceedings
We are subject to legal proceedings
and claims that have not been fully resolved and that have arisen in the ordinary course of business. Except as described below, there
was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual,
with respect to loss contingencies for asserted legal and other claims.
On September 17, 2018,
Mr. Wukai Song, the majority shareholder in Bridgetime filed a complaint with THE NCLT against Ms. Grover and Mr. Li, the directors
of Do Mobile at the time, alleging mismanagement of corporate affairs, embezzlement of funds and absenting themselves from the management
of Do Mobile. Further, Mr. Wukai Song sought the following relief from the NCLT:
| ● | prevent
Ms. Grover and Mr. Li from exercising any of their powers as directors of Do Mobile; |
| ● | restrain
Ms. Grover and Mr. Li from operating the bank account of Do Mobile and restraining DBS Bank
from acting on the instructions of Ms. Ekta Grover and Mr. Yunchuan Li; |
| ● | permit
the company secretary of Do Mobile to carry out the daily affairs of Do Mobile which are
ordinarily carried out by the directors of a company, until a new board of directors of Do
Mobile is constituted and to file an application seeking extension of the date for holding
an annual general meeting beyond September 30, 2018; |
| ● | appoint
Mr. Amit Kumar and Mr. Chen Huiyun as interim directors of Do Mobile; and |
| ● | direct
Ms. Grover and Mr. Li, directors of Do Mobile, to hand over all documents and material related
to Do Mobile in their possession, back to Do Mobile and sign all statutory documents and
filings to be made for the time period when they were acting as directors of Do Mobile. |
On November 16, 2018
and November 15, 2018, Ms. Grover and Mr. Li, respectively, filed an answer with the NCLT. Further, on November 17, 2018, Mr. Wukai
Song filed an application for interim relief seeking removal of Ms. Grover and Mr. Li from the board of directors of Do Mobile.
On September 30, 2019,
the NCLT issued its interim order which allowed Mr. Wukai Song to carry-out certain statutory compliances of Do Mobile, and
the NCLT has also directed Ms. Grover, director of Do Mobile, to handover the digital signature of directors to Mr. Wukai Song for
carrying-out said statutory compliances and undertaking its business pending resolution of the litigation.
Since the litigation involves
Ms. Ekta Grover and Mr. Li, who were the directors of Do Mobile and who resigned on December 24, 2020 and March 3, 2021 respectively,
such directors could no longer attend to the affairs of Do Mobile. As a result, Do Mobile did not have an effective board for some time
and faced significant challenges in its daily operation. For instance, Do Mobile was unable to undertake certain corporate actions, such
as: (a) convening and holding board meetings of Do Mobile as mandatorily required under the provisions of the Companies Act, 2013 every
year; (b) convening an annual general meeting where among other things, the Do Mobile shareholders approve and adopt the financial statements
of Do Mobile as required under the Companies Act, 2013; (c) reporting annual compliances with the provisions of the Companies Act, 2013
through various e-forms with the office of the Registrar of Companies, Ministry of Corporate Affairs; (d) submitting an annual report
titled ‘Foreign Liabilities and Assets’ each year as required by companies receiving foreign direct investment and other
related compliances under Foreign Exchange Management Act, 1999; and (e) maintenance of statutory registers as required under various
applicable laws.
Do Mobile was also made a
party to two other matters initiated in connection with the aforesaid matter before the NCLT. These matters, which were filed at Tis
Hazari court (district court) in Delhi, India were (i) Do Mobile Pvt. Ltd. v. DBS Bank Ltd. (civil suit no. 813/2019); and (ii) Ekta
Grover v. Do Mobile India Pvt. Ltd. (civil suit no. 917/2019).
The above-mentioned instances
of non-compliance expose Do Mobile to potential fines and penalties. Do Mobile directors and officers may also be prosecuted for
such non-compliance under the official-in-default doctrine in the Companies Act, 2013, should they fail to undertake their
statutory duties to act in the best interest of Do Mobile.
The litigation against
Ekta Grover and Yunchuan Li is still pending before Delhi Bench of the NCLT and the last date of hearing in this matter was on
September 23, 2021. However, the matter could not be taken up on the designated date and has been postponed. The next date of
hearing is yet to be announced. Do Mobile is awaiting intimation regarding the revised date of hearing
in this matter. In order to amicably settle such ongoing litigations between Do Mobile and its directors, Do Mobile and Ms. Grover
have entered into a settlement agreement, dated January 16, 2020 (“Settlement Agreement”). In terms of the Settlement
Agreement, Do Mobile and Ms. Grover have arrived at the following understanding:
| ● | Ms.
Grover has agreed to withdraw the litigation initiated by her against Do Mobile at the Tis
Hazari court. She has also agreed not to file any claim before any tribunal or court against
Do Mobile and its officers in future. In furtherance of the aforesaid, Ms. Grover has filed
a withdrawal application in relation to the matter of Ekta Grover v. Do Mobile India Pvt.
Ltd. (civil suit no. 917/2019) before Tis Hazari Court, New Delhi, India, consequent to which
the said matter has been disposed-off as settled/ withdrawn by the Tis Hazari Court,
Delhi, India vide its order dated February 23, 2021. |
|
● |
Do Mobile has agreed to
withdraw the name of Ms. Grover from the on-going litigation before the NCLT by filing a withdrawal application before NCLT.
Do Mobile has also agreed that it will not file any claim against Ms. Grover pursuant to her resignation from the board of directors
of Do Mobile. Mr. Wukai Song (through his authorized representative) on January 21, 2021, filed a withdrawal application before the
NCLT requesting it to permit unconditional withdrawal of the petition filed by him against Ms. Grover and Mr. Li in their capacity
as the directors of Do Mobile due to his inability to pursue the matter in light of the restrictions imposed due to the COVID-19
pandemic. However, the NCLT is yet to pass an order allowing the application and the requested withdrawal of the petition. |
|
● |
In consideration of the settlement so arrived, Do Mobile has issued a post-dated cheque dated April 10, 2020 for INR 5,00,000/- (Indian Rupees Five Lakhs Only) to Ms. Grover towards her full and final settlement of all claims against Do Mobile. However, this cheque could not be en-cashed due to the lockdown. Consequently, Do Mobile issued another cheque for the same amount dated January 10, 2021 which has been en-cashed by Ms. Ekta Grover. |
|
● |
Ms. Grover also agreed
to cooperate in appointment of new directors of Do Mobile as recommended by Do Mobile. |
|
● |
Do Mobile also agreed to
change its registered office, which was situated at 3A/41, First Floor, WEA, Sat Nagar, Karol Bagh, New Delhi, India, to another
location. The registered office of Do Mobile is now located at House No. 25, Street No. 7, Goyala Vihar, Near Saint Thomas School,
New Delhi – 110071. Necessary filings with the jurisdictional Registrar of Companies have been made in this regard by Do Mobile. |
The matter of Do Mobile
Pvt. Ltd. v. DBS Bank Ltd. (civil suit no. 813/2019) was initiated by Mr. Li in the Tis Hazari district court to seek revival
of the authority granted to him and Ms. Grover to operate the bank account of Do Mobile. Since the dispute regarding the powers of
Mr. Li and Ms. Grover was pending before the NCLT, the district court refused to grant any interim relief to the then directors
of Do Mobile. An application seeking withdrawal of the matter was filed by Do Mobile on April 1, 2021. The court vide its order dated June 3, 2022 has allowed the
application requesting withdrawal of the suit and the matter stands dismissed.
Pursuant to the commencement
of the litigation against Do Mobile, all major decisions for Do Mobile have been made by the Company’s group headquarters in Shenzhen,
China. Such decisions include those relating to the type and quantum of products to be released in the market. Furthermore, all sales
are being made and the marketing strategy for Do Mobile is also presently being formulated from the corporate headquarter in Shenzhen,
China. However, Do Mobile is making its own decisions relating to customer acquisition, recruitment of sales forces and office administration.
In order to avoid operational
challenges in Do Mobile on account of on-going litigation at the NCLT, the Company has nominated the following persons to manage
the daily operations of Do Mobile:
| ● | Andy
Liu, Vice President of Overseas Department at UTime SZ, managed daily external affairs related
to clients, vendors, products, sales & purchase, marketing, business development, etc.
from October 2019 until his resignation in August 2020. Since Mr. Liu’s resignation,
Mr. Wukai Song has been managing these affairs at Do Mobile. |
| ● | Wukai
Song manages daily internal affairs related to finance, human resource, office administration,
etc. |
| ● | Do
Mobile has also appointed another officer in India, Tarun Garg, to manage the banking and
accounting operations of Do Mobile, as its Finance Head of Do Mobile with effect from June
1, 2020. He is working in close coordination with Shibin Yu, Chief Financial Officer of the
Company, and Wendy Long, an accountant from corporate headquarters in Shenzhen, China. In
addition to this, Tarun Garg is also assisting Wukai Song in relation to day-to-day operations
of the Do Mobile in India. |
In order to avoid
operational challenges due to the on-going litigation in the NCLT, effective December 18, 2020, Do Mobile, at that point in
time, appointed two new directors on its board namely, Mr. Wukai Song and Ms. Aayushi Gautam. Further, Ms. Grover and Mr.
Li both resigned from their directorship in Do Mobile with effect from December 24, 2020 and March 3, 2021
respectively. Do Mobile appointed Mr. Tarun Garg as an additional director on its
board with effect from August 09, 2022. Thereafter, Ms. Aayushi Gautam resigned from the directorship in Do Mobile with effect from September
10, 2022. At present, the board of Do Mobile consists of two directors, namely Mr. Wukai Song and Mr. Tarun Garg.
Further, one share of Do Mobile which was held by Ms. Grover has been transferred to Ms. Aayushi Gautam before resignation by Ms.
Grover. Pursuant to this transfer, Ms. Aayushi Gautam is the registered owner of the said share while Bridgetime Limited continues
to be its beneficial owner. Do Mobile has also appointed Mr. Tarun Garg as its Finance Head, effective in June 1, 2020. As a
result of the constitution of a new board of directors, Do Mobile has been able to overcome its operational challenges.
Regarding the construction
contract dispute between UTime GZ and Guizhou Branch of Guangdong Jian ‘an Fire Electromechanical Engineering Co., Ltd (“Guangdong
Jian ‘an”), on December 1, 2021, the People’s Court of Honghuagang District of Zunyi City, Guizhou Province (“Honghuagang
Court”) issued the civil judgment (No. (2021) Qian 0302 Min Chu 20364 ), ruling that the defendant UTime GZ shall pay the amount
of RMB 2,230,293.46 to the plaintiff Guangdong Jian ‘an within 10 days from the effective date of the judgment. Utime GZ has appealed
to the Intermediate People’s Court of Zunyi City, Guizhou Province (Zunyi Intermediate Court), on December 24, 2021. On April 25,
2022, the Intermediate People’s Court of Zunyi City issued a civil ruling (No. (2022) Qian 03 Min Zhong 642). The Zunyi Intermediate
Court held that the facts determined in the first instance were basically unclear and ruled to revoke the civil judgment of No. (2021)
Qian 0302 Min Chu 20364. The case was remanded to the Honghuagang Court for retrial. As of the date of this annual report, the Honghuagang
Court has not confirmed a new trial date for this case yet.
Utime SZ and Dongguan Qinling
Electronic Technology Co., Ltd (“Dongguan Qinling”) had a sales contract dispute case. On September 29, 2020, People’s
Court of Futian District of Shenzhen, Guangdong Province (“Futian Court”) issued the civil judgment (No.(2019)Yue
0304 Min Chu 51640), ruling that the defendant Dongguan Qinling should return the loan amount of RMB 300,000 and pay relevant interest
to the plaintiff Utime SZ within 10 days from the effective date of the judgment. As of the date of this annual report, Dongguan Qinling
has not actually performed the judgment, and has not paid any payment and interest to Utime SZ. Furthermore, the business license of
Dongguan Qinling has been revoked, and it is unlikely for Dongguan Qinling to perform this judgment as of the date of this annual report.
Besides, there is a case
for sales contract dispute between Utime SZ and Jiangsu Jutai Technology Co., Ltd (“Jiangsu Jutai”), which was heard by Futian
Court on Nov 3, 2021. Utime SZ requests the judgment to terminate the Procurement Framework Contract signed with Jiangsu Jutai (Contract
No. CG20201231001), and orders Jiangsu Jutai to pay RMB 100,000 of liquidated damages, RMB 331,629 of compensation for losses, and bear
the litigation costs of this case. As of the date of this annual report, the judgment of the first instance of this case has not been
issued.
The outcome of litigation
is inherently uncertain. If one or more legal matters were resolved against us in a reporting period for amounts in excess of management’s
expectations, our financial condition and operating results for that reporting period could be materially adversely affected. Refer to
the risk factor “We could be impacted by unfavorable results of legal proceedings, and may, from time to time, be involved in future
litigation in which substantial monetary damages are sought.”
Dividends
We have never declared or
paid any dividend on our ordinary shares and we do not anticipate paying any dividends on our ordinary shares in the future. We currently
intend to retain all future earnings to finance our operations and to expand our business.
8.B. Significant Changes
No significant changes to
our financial condition have occurred since the date of the annual financial statements contained herein.
ITEM 9. THE OFFER AND LISTING
9.A. Offer and Listing Details
Our ordinary shares are listed
for trading on the NASDAQ Capital Market under the symbol “UTME.” The shares began trading on April 5, 2021 on the NASDAQ
Capital Market. The closing price for the ordinary shares was $1.74 on August 11, 2022.
9.B. Plan of Distribution
Not Applicable.
9.C. Markets
Our ordinary shares are currently
traded on the NASDAQ Capital Market.
9.D. Selling Shareholders
Not Applicable.
9.E. Dilution
Not Applicable.
9.F. Expenses of the Issuer
Not Applicable.
ITEM 10. ADDITIONAL INFORMATION
10.A. Share Capital
Not Applicable.
10.B. Memorandum and Articles of Association
We are a Cayman Islands company
and our affairs are governed by our amended and restated memorandum and articles of association and the Companies Act (As Revised) of
the Cayman Islands, which we refer to as the Companies Act below.
Our authorized share
capital consists of 140,000,000 ordinary shares, par value $0.0001 per share, and 10,000,000 preference shares, par value $0.0001
per share. As of the date of this annual report, 8,267,793 ordinary shares were issued and outstanding and no preference shares were
issued and outstanding.
Share Rights
Without prejudice to any
rights attached to any existing ordinary shares or class of shares, any share may be issued with such preferred, deferred or other special
rights or subject to such restrictions as our board of directors shall determine. We may issue redeemable shares.
Our memorandum and articles
of association provide that, subject to Cayman Islands law, all or any of the special rights for the time being attached to the shares
or any class of shares may, unless otherwise provided by the terms of issue of the shares of that class, from time to time be varied,
modified or abrogated with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of
that class.
Voting Rights
A quorum required for a meeting
of shareholders consists of two or more holders of shares together holding (or representing by proxy) not less than an aggregate of a
majority of the total voting power of all shares in issue and entitled to vote present in person or by proxy or, if a corporation or
other non-natural person, by its duly authorized representative. If a quorum is not present within half an hour from the time appointed
for a general meeting to commence or if during such a general meeting a quorum ceases to be present, the meeting, if convened upon a
shareholders’ requisition, shall be dissolved and in any other case it shall stand adjourned to the same day in the next week at
the same time and/or place or to such other day, time and/or place as our board of directors may determine, and if at the adjourned meeting
a quorum is not present within half an hour from the time appointed for the meeting to commence, the shareholders present shall be a
quorum.
Voting at meetings takes
place by show of hands or by a poll of shares represented at the meeting. Subject to any special rights or restrictions attached to a
class of shares, a shareholder present in person (or if an entity, present by a duly authorized representative, which is deemed equivalent
to being present in person and is referred to as such hereafter) or by proxy is entitled to one vote on a show of hands regardless of
the number of shares held, provided that where more than one proxy is appointed by a shareholder that is a clearing house or central
depository house (or its nominee(s)), each such proxy shall have one vote on a show of hands. On a poll every shareholder present in
person or by proxy shall have one vote for every fully paid share held.
Voting will be by show of
hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a
poll is demanded by: the chairman of the meeting or a shareholder or shareholders present in person or by proxy and representing not
less than one-tenth of the total voting rights of all shareholders having the right to vote at the meeting.
An ordinary resolution to
be passed by the shareholders requires a simple majority of votes cast in a general meeting, while a special resolution requires no less
than two-thirds of the votes cast. A special resolution is required for important matters such as a change of name. Our shareholders
may effect certain changes by ordinary resolution, including increasing the amount of our authorized share capital, consolidating and
dividing all or any of our share capital into shares of larger amounts than our existing shares and cancelling any shares. As described
below, some types of corporate actions may be approved only by special resolution.
Dividends and Other Distributions; Liquidation
Rights
Subject to the capital maintenance
provisions of the Companies Act, which, inter alia, permit distributions to be made only out of profits available for the purpose or
from share premium, the directors may declare and pay dividends and other distributions out of the funds of the Company available therefor.
The Companies Act prohibits the payment of any dividend if payment would cause us to be unable to pay our debts as they fall due in the
ordinary course of business. Only our board of directors may declare dividends and, except as otherwise provided by the rights attached
to a particular class of shares, all dividends shall be declared and paid pro rata according to the amounts paid up on the ordinary shares
on which the dividend is paid.
Except as provided by the
rights and restrictions attached to any class of ordinary shares, under general law, the holders of our shares will be entitled to participate
in any surplus assets in a winding up in proportion to their shareholdings. A liquidator may, with the sanction of a special resolution
and any other sanction required by the Companies Act, divide among the members in specie the whole or any part of our assets and may,
for that purpose, value any assets and determine how the division shall be carried out as between the members or different classes of
members.
Variations of Rights of Shares
All or any of the special
rights attached to any class of shares may, subject to the provisions of the Companies Act, be varied either with the consent in writing
of the holders of not less than two thirds of the issued shares of that class or with the approval of a resolution passed by a majority
of not less than two thirds of the votes cast at a separate meeting of the holders of the shares of that class. The rights conferred
upon the holders of the shares of any class issued with preferred or other rights shall not, subject to any rights or restrictions for
the time being attached to the shares of that class, be deemed to be materially adversely varied by, inter alia, the creation, allotment
or issue of further shares ranking pari passu with or subsequent to them, the creation, allotment or issuance of further shares (whether
ranking in priority to, pari passu or subsequent to them) pursuant to the board of director’s ability to issue preference shares
in the manner described herein or the redemption or purchase of any shares of any class by the Company. The rights of the holders of
shares shall not be deemed to be materially adversely varied by the creation or issue of shares with preferred or other rights including,
without limitation, the creation of shares with enhanced or weighted voting rights.
Pre-Emption Rights
There are no pre-emption rights
applicable to the issue of new shares under either Cayman Islands law or our memorandum and articles of association.
Alteration of Share Capital
We may by ordinary resolution
increase, consolidate or sub-divide our share capital.
Purchase of Own Ordinary Shares
Subject to the provisions
of the Companies Act, our board of directors may authorize the purchase of any of our own shares of any class in any way and at any price
(whether at par or above or below par) out of our distributable profits, share premium capital, capital and/or the proceeds of a fresh
issue of shares made for the purpose of financing the purchase, in accordance with the Companies Act.
Shareholder Meetings
Meetings of shareholders
are known as general meetings and comprise of an annual general meeting and any other general meetings, known as extraordinary general
meetings, that may be called and held from time to time. We may but are not obliged by our memorandum and articles of association to
hold an annual general meeting in each year, other than the year in which these articles are adopted. General meetings may be held at
such times and places as may be determined by our board of directors.
Extraordinary general meetings
may be called only:
|
● |
by a majority of our board
of directors; or |
|
● |
on the requisition of shareholders
holding not less than one third of the votes attributable to the issued shares giving the right to attend and vote thereat. |
A general meeting must be
called by not less than 5 clear days’ notice (meaning calendar days excluding the date the notice is given or deemed given and
the date of the meeting), unless shorter notice is agreed.
No business, except for the
appointment of a chairman for the meeting, shall be transacted at any general meeting unless a quorum of shareholders is present at the
time when the meeting proceeds to business. Other than a meeting or action regarding the modification of the rights of any class of shares,
two shareholders present at a meeting in person or by proxy, entitled to vote shall be a quorum.
Directors
Our board of directors must
consist of at least one director who can be appointed by ordinary resolution of shareholders or, in the case of vacancies and newly created
directorships, by our board of directors. Our directors are not required to hold any ordinary shares in the capital of the Company to
qualify.
Our directors may receive
such compensation as they may from time to time determine. A director may be entitled to be repaid all traveling, hotel and incidental
expenses reasonably incurred by him or her in attending meetings of the board of directors or committees of the board or general meetings
or separate meetings of any class of shares or of debentures or otherwise in connection with the discharge of his or her duties as a
director.
Our board of directors may
provide benefits, whether by the payment of gratuities or pensions or by insurance or otherwise, for any past or present director or
employee of our Company or any of its subsidiaries or any corporate body associated with, or any business acquired by, any of them, and
for any member of his family or any person who is or was dependent on him.
Borrowing Powers
Our board of directors may
exercise all the powers of our Company to borrow money and to mortgage or charge its undertaking, property and assets (present and future)
and uncalled capital of our Company, and to issue debentures, debenture shares and other securities whenever money is borrowed or as
security for any debt, liability or obligation of our Company or of any third-party.
Indemnity of Directors and Officers
Our amended and restated
memorandum and articles of association provide that our current and former directors and officers will be indemnified out of our assets
against any liability, action, proceeding, claim, demand, costs, damages or expenses, including legal expenses, whatsoever which they
or any of them may incur as a result of any act or failure to act in carrying out their functions other than such liability (if any)
that they may incur by reason of their own actual fraud or willful default. In addition, our memorandum and articles of association provide
that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, unless
their liability arises out of actual fraud or willful default.
We intend to enter into agreements
with our directors and officers to provide contractual indemnification in addition to the indemnification provided in our memorandum
and articles of association. We intend to purchase a policy of directors’ and officers’ liability insurance that insures
our directors and officers against the cost of defense, settlement or payment of a judgment in some circumstances and insures us against
our obligations to indemnify the directors and officers.
These provisions may discourage
shareholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions also may have the effect
of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might
otherwise benefit us and our shareholders. Furthermore, a shareholder’s investment may be adversely affected to the extent we pay
the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that
these provisions, the insurance and the indemnity agreements are necessary to attract and retain talented and experienced directors and
officers.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
Change of Control
Provisions in our amended
and restated memorandum and articles of association may discourage, delay or prevent a merger, acquisition or other change in control
that shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares.
In addition, these provisions may frustrate or prevent any attempt by our shareholders to replace or remove our current management by
making it more difficult to replace or remove our board of directors. Such provisions may reduce the price that investors may be willing
to pay for our ordinary shares in the future, which could reduce the market price of our ordinary shares.
These provisions include:
| ● | a
requirement that extraordinary general meetings of shareholders be called only by a majority of the board of directors or, in limited
circumstances, by the board upon shareholder requisition; and |
| ● | the
authority of our board of directors to issue preference shares with such terms as our board of directors may determine. |
However, under Cayman Islands
law, our directors may only exercise the rights and powers granted to them under our post-offering memorandum and articles of association
for a proper purpose and for what they believe in good faith to be in the best interests of the Company. As described below in “—
Differences in Corporate Law — Mergers and Similar Arrangements” the Companies Act provides for arrangements or compromises
between a company and its shareholders, creditors, any class of its shareholders, or any class of its creditors that are used for certain
types of reconstructions, amalgamations, capital reorganizations or takeovers.
The Companies Act includes
provisions relating to takeovers and provides that where a takeover offer is made for the shares of a company incorporated in the Cayman
Islands and, within four months after the making of the offer the offeror has been approved by the holders of not less than 90 percent
in value of the shares affected, the offeror may, within two months, by notice require shareholders who do not accept the offer to transfer
their shares to the offeror on the terms of the offer.
Authorized but Unissued Shares
Our authorized but unissued
shares are available for future issuances without shareholder approval and could be utilized for a variety of corporate purposes, including
future offerings to raise additional capital, acquisitions and employee benefit plans. In order to increase the number of authorized
shares, we are required to obtain the approval of a majority of our shareholders.
Our board of directors is
empowered to authorize and issue, out of our authorized but unissued shares, one or more classes or series of preference shares and to
fix the designations, powers, preferences and relative, participating, optional and other rights, if any, and the qualifications, limitations
and restrictions thereof, if any, including, without limitation, the number of shares constituting each such class or series, dividend
rights, conversion rights, redemption privileges, voting powers, full or limited or no voting powers, and liquidation preferences, and
to increase or decrease the size of any such class or series (but not below the number of shares of any class or series of preference
shares then outstanding) to the extent permitted by Cayman Islands law. The resolution or resolutions providing for the establishment
of any class or series of preference shares may, to the extent permitted by law, provide that such class or series shall be superior
to, rank equally with or be junior to the preference shares of any other class or series. The existence of authorized but unissued shares
and our board of directors’ authority to issue new classes of shares could render more difficult or discourage an attempt to obtain
control of us by means of a proxy contest, tender offer, merger or otherwise.
Exempted Company
We are an exempted company
with limited liability under the Companies Act. The Companies Act distinguishes between ordinary resident companies and exempted companies.
Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered
as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except for the exemptions
and privileges listed below:
| ● | an
exempted company does not have to file an annual return of its shareholders with the Registrar of Companies; |
| ● | an
exempted company’s register of members is not open to inspection; |
| ● | an
exempted company does not have to hold an annual general meeting; |
| ● | an
exempted company may issue shares with no par value; |
| ● | an
exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20
years in the first instance); |
| ● | an
exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; |
| ● | an
exempted company may register as a limited duration company; and |
| ● | an
exempted company may register as a segregated portfolio company. |
“Limited liability”
means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company (except
in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose
or other circumstances in which a court may be prepared to pierce or lift the corporate veil).
Differences in Corporate Law
Cayman Islands companies
are governed by the Companies Act. The Companies Act is modeled on English Law but does not follow recent English Law statutory enactments,
and differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of some significant differences
between the provisions of the Companies Act applicable to us and the laws applicable to companies incorporated in the State of Delaware
in the United States and their shareholders.
We believe that the differences
with respect to our being a Cayman Islands exempted company as opposed to a Delaware corporation do not pose additional material risks
to investors, other than the risks described under “Risk Factors — As a foreign private issuer, we are subject to different
U.S. securities laws and NASDAQ governance standards than domestic U.S. issuers. This may afford less protection to holders of our ordinary
shares, and you may not receive corporate and company information and disclosure that you are accustomed to receiving or in a manner
in which you are accustomed to receiving it, “— We may become subject to taxation in the Cayman Islands which would negatively
affect our results,” “— There may be a risk of us being subject to tax in jurisdictions in which we do not currently
consider ourselves to have any tax resident subsidiaries or permanent establishments” and “— Because we are incorporated
under the laws of the Cayman Islands, you may face difficulties in protecting your interests, and your ability to protect your rights
through the U.S. Federal courts may be limited.”
Mergers and Similar Arrangements
In certain circumstances,
the Companies Act permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands
companies (provided that is facilitated by the laws of the other jurisdiction) and any such company may be the surviving entity for the
purposes of mergers or the consolidated company for the purposes of consolidations. For these purposes, (a) “merger” means
the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies
as the surviving company and (b) a “consolidation” means the combination of two or more constituent companies into a
consolidated company and the vesting of the undertaking, property and liabilities of such companies to the consolidated company. In order
to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation,
which must, in most instances, then be authorized by a special resolution (usually a majority of 66 2/3% in value) of the shareholders
of each constituent company and such other authorization, if any, as may be specified in such constituent company’s articles of
association. A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a resolution
of shareholders, provided a copy of the plan of merger is given to every member of each subsidiary company to be merged (unless waived
by such members). For this purpose a subsidiary is a company of which at least 90% of the votes cast at its general meeting are held
by the parent company. The consent of each holder of a fixed or floating security interest over a constituent company is required unless
this requirement is waived by a court in the Cayman Islands. The plan of merger or consolidation must be filed with the Registrar of
Companies who, if satisfied that the requirements of the Companies Act (As Revised) which includes certain other formalities, have been
complied with, will register it. The filing must include a declaration as to the solvency of the consolidated or surviving company, a
list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation
will be given to the members and creditors of each constituent company and published in the Cayman Islands Gazette. Dissenting shareholders
have the right to be paid the fair value of their shares (which, if not agreed between the parties, will be determined by the Cayman
Islands court) if they follow the required procedures, subject to certain exceptions. Court approval is not required for a merger or
consolidation which is effected in compliance with these statutory procedures.
In addition, there are statutory
provisions that facilitate the reconstruction and amalgamation of companies in certain circumstances, provided that the arrangement is
approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in
addition represent two-thirds in value of each such class of shareholders or creditors, as the case may be, that are present and
voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently
the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express
to the court the view that the transaction ought not be approved, the court can be expected to approve the arrangement if it determines
that:
| ● | the
company is not proposing to act illegally or beyond the scope of its corporate authority and the statutory provisions as to the required
majority vote have been met; |
| ● | the
shareholders have been fairly represented at the meeting in question, the statutory majority are acting bona fide without coercion of
the minority to promote interests adverse to those of the class and that the meeting was properly constituted; |
| ● | the
arrangement is such that it may reasonably be approved by an intelligent and honest man of that share class acting in respect of his
interest; and |
| ● | the
arrangement is not one which would be more properly sanctioned under some other provision of the Companies Act, or that would amount
to ‘fraud on the minority’. |
When a takeover offer is
made and accepted by holders of 90% of the shares affected within four months, the offeror may after the expiration of such four months,
within a two-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection
can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed unless there is evidence of fraud, bad faith, collusion
or inequitable treatment of the shareholders.
If the arrangement and reconstruction
is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be
available to dissenting shareholders of U.S. corporations, providing rights to receive payment in cash for the judicially determined
value of the shares.
Shareholder Suits
In general, we will be the
proper plaintiff in any action to protect and enforce our rights and such an action cannot be brought by a minority shareholder on behalf
of our company. However, this does not prevent a shareholder bringing proceedings to protect its individual rights. In addition, in some
circumstances, a minority shareholder may be able to bring a derivative action on behalf of our company where:
| ● | Those
who control our company are perpetrating a ‘fraud on the minority’; |
| ● | We
are acting or proposing to act illegally or beyond the scope of its authority; |
| ● | The
act complained of, although not beyond the scope of our company’s authority, could be effected only if duly authorized by more
than a simple majority vote, which has not been obtained. |
Protection of Minority Shareholders
In the case of a company
(not being a bank) having its share capital divided into shares, the Grand Court of the Cayman Islands may, on the application of members
holding not less than one fifth of the shares of the company in issue, appoint an inspector to examine the affairs of the company and
to report thereon in such manner as the Grand Court of the Cayman Islands shall direct.
Any of our shareholders may
petition the Grand Court of the Cayman Islands which may make a winding up order if the Grand Court of the Cayman Islands is of the opinion
that it is just and equitable that we should be wound up or, as an alternative to a winding up order, (a) an order regulating the
conduct of our affairs in the future, (b) an order requiring us to refrain from doing or continuing an act complained of by the
shareholder petitioner or to do an act which the shareholder petitioner has complained we have omitted to do, (c) an order authorizing
civil proceedings to be brought in our name and on our behalf by the shareholder petitioner on such terms as the Grand Court of the Cayman
Islands may direct, or (d) an order providing for the purchase of the shares of any of our shareholders by other shareholders or
us and, in the case of a purchase by us, a reduction of our capital accordingly.
Generally, claims against
us must be based on the general laws of contract or tort applicable in the Cayman Islands or individual rights as shareholders as established
by our memorandum and articles of association.
Fiduciary Duties of Directors
Under Cayman Islands law,
directors and officers owe the following fiduciary duties:
| ● | duty
to act in good faith in what the director or officer believes to be in the best interests of the company as a whole; |
| ● | duty
to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose; |
| ● | directors
should not improperly fetter the exercise of future discretion; |
| ● | duty
to exercise powers fairly as between different sections of shareholders; |
| ● | duty
not to put themselves in a position in which there is a conflict between their duty to the company and their personal interests; and |
| ● | duty
to exercise independent judgment. |
In addition to the above,
directors also owe a duty of care which is not fiduciary in nature. This duty has been defined as a requirement to act as a reasonably
diligent person having both the general knowledge, skill and experience that may reasonably be expected of a person carrying out the
same functions as are carried out by that director in relation to the company and the general knowledge skill and experience of that
director.
As set out above, directors
have a duty not to put themselves in a position of conflict and this includes a duty not to engage in self-dealing, or to otherwise benefit
as a result of their position. However, in some instances what would otherwise be a breach of this duty can be forgiven and/or authorized
in advance by the shareholders provided that there is full disclosure by the directors. This can be done by way of permission granted
in the amended and restated memorandum and articles of association or alternatively by shareholder approval at general meetings.
However, by contrast to Delaware
law, the fiduciary duties of directors are not as clearly established under Cayman Islands law.
Anti-Money Laundering — Cayman Islands
If any person in the Cayman
Islands knows or suspects or has reasonable grounds for knowing or suspecting that another person is engaged in criminal conduct or money
laundering or is involved with terrorism or terrorist financing and property and the information for that knowledge or suspicion came
to their attention in the course of business in the regulated sector, or other trade, profession, business or employment, the person
will be required to report such knowledge or suspicion to (i) the Financial Reporting Authority of the Cayman Islands, pursuant to the
Proceeds of Crime Act (As Revised) of the Cayman Islands if the disclosure relates to criminal conduct or money laundering, or (ii) a
police officer of the rank of constable or higher, or the Financial Reporting Authority, pursuant to the Terrorism Act (As Revised) of
the Cayman Islands, if the disclosure relates to involvement with terrorism or terrorist financing and property. Such a report shall
not be treated as a breach of confidence or of any restriction upon the disclosure of information imposed by any enactment or otherwise.
Data Protection — Cayman Islands
We have certain duties under
the Data Protection Act (As Revised) of the Cayman Islands (the “Data Protection Act”) based on internationally accepted
principles of data privacy.
Privacy Notice
Introduction
This privacy notice puts
our shareholders on notice that through your investment in the Company you will provide us with certain personal information which constitutes
personal data within the meaning of the Data Protection Act (“personal data”). In the following discussion, the “company”
refers to us and our affiliates and/or delegates, except where the context requires otherwise.
Investor Data
We will collect, use, disclose,
retain and secure personal data to the extent reasonably required only and within the parameters that could be reasonably expected during
the normal course of business. We will only process, disclose, transfer or retain personal data to the extent legitimately required to
conduct our activities of on an ongoing basis or to comply with legal and regulatory obligations to which we are subject. We will only
transfer personal data in accordance with the requirements of the Data Protection Act, and will apply appropriate technical and organizational
information security measures designed to protect against unauthorized or unlawful processing of the personal data and against the accidental
loss, destruction or damage to the personal data.
In our use of this personal
data, we will be characterized as a “data controller” for the purposes of the Data Protection Act, while our affiliates and
service providers who may receive this personal data from us in the conduct of our activities may either act as our “data processors”
for the purposes of the Data Protection Act or may process personal information for their own lawful purposes in connection with services
provided to us.
We may also obtain personal
data from other public sources. Personal data includes, without limitation, the following information relating to a shareholder and/or
any individuals connected with a shareholder as an investor: name, residential address, email address, contact details, corporate contact
information, signature, nationality, place of birth, date of birth, tax identification, credit history, correspondence records, passport
number, bank account details, source of funds details and details relating to the shareholder’s investment activity.
Who this Affects
If you are a natural person,
this will affect you directly. If you are a corporate investor (including, for these purposes, legal arrangements such as trusts or exempted
limited partnerships) that provides us with personal data on individuals connected to you for any reason in relation your investment
in the company, this will be relevant for those individuals and you should transmit the content of this Privacy Notice to such individuals
or otherwise advise them of its content.
How the Company May Use a Shareholder’s
Personal Data
The company, as the data
controller, may collect, store and use personal data for lawful purposes, including, in particular:
| a) | where
this is necessary for the performance of our rights and obligations under any purchase agreements; |
|
b) |
where this is necessary
for compliance with a legal and regulatory obligation to which we are subject (such as compliance with anti-money laundering
and FATCA/CRS requirements); and/or |
|
c) |
where this is necessary
for the purposes of our legitimate interests and such interests are not overridden by your interests, fundamental rights or freedoms. |
Should we wish to use personal
data for other specific purposes (including, if applicable, any purpose that requires your consent), we will contact you.
Why We May Transfer Your Personal Data
In certain circumstances
we may be legally obliged to share personal data and other information with respect to your shareholding with the relevant regulatory
authorities such as the Cayman Islands Monetary Authority or the Tax Information Authority. They, in turn, may exchange this information
with foreign authorities, including tax authorities.
We anticipates disclosing
personal data to persons who provide services to us and their respective affiliates (which may include certain entities located outside
the United States, the Cayman Islands or the European Economic Area), who will process your personal data on our behalf.
The Data Protection Measures We Take
Any transfer of personal
data by us or our duly authorized affiliates and/or delegates outside of the Cayman Islands shall be in accordance with the requirements
of the Data Protection Act.
We and our duly authorized
affiliates and/or delegates shall apply appropriate technical and organizational information security measures designed to protect against
unauthorized or unlawful processing of personal data, and against accidental loss or destruction of, or damage to, personal data.
We shall notify you of any
personal data breach that is reasonably likely to result in a risk to your interests, fundamental rights or freedoms or those data subjects
to whom the relevant personal data relates.
Written Consent
Under the Delaware General
Corporation Law, a corporation may eliminate the right of shareholders to act by written consent through amendment to its certificate
of incorporation. Cayman Islands law enables, and our memorandum and articles of association provide, that any action required or permitted
to be taken at any annual or extraordinary general meeting may be taken only upon the vote of shareholders at an annual or extraordinary
general meeting duly and may not be taken by written resolution of shareholders without a meeting.
Shareholder Proposals
Under the Delaware General
Corporation Law, a shareholder has the right to put any proposal before the shareholders at the annual meeting, provided that such shareholder
complies with the notice provisions in the governing documents. In general terms, Cayman Islands’ law does not provide shareholders
with an express right to put any proposal before a general meeting of shareholders. Depending on the provision of the relevant Cayman
Islands company’s articles of association, a shareholder may put a proposal before the shareholders at any general meeting if it
is set out in the notice calling the meeting. There is no automatic right to introduce new business at any meeting. A general meeting
may be called by the board of directors or any other person authorized to do so in the articles of association, but shareholders may be
precluded from calling general meetings, except in certain circumstances.
Under the Delaware General
Corporation Law, a corporation is required to set a minimum quorum of one-third of the issued and outstanding shares for a shareholders’
meeting. Cayman Islands law permits a company’s articles to have any quorum. Our amended and restated memorandum and articles of
association provide that a quorum consists of two qualifying persons, other than for a meeting or action regarding the modification of
the rights of any class of shares, present at a meeting and entitled to vote on the business to be dealt with.
Election of Directors
Under the Delaware General
Corporation Law, unless otherwise specified in the certificate of incorporation or bylaws of the corporation, directors shall be elected
by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election
of directors and vacancies and newly created directorships may be filled by resolution of the board. Under the laws of the Cayman Islands,
directors are appointed by the board of directors or, if provided for in the articles of association, by shareholders pursuant to an ordinary
resolution. Our amended and restated articles of association provide that directors nominated for election be elected by the shareholders
pursuant to an ordinary resolution at a general meeting and that a vacancy on our board of directors or any additions to the existing
board of directors will be filled by the resolution of directors or by ordinary resolution of our shareholders.
Cumulative Voting
Under the Delaware General
Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation
specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors
since it permits a minority shareholder to cast all the votes to which such shareholder is entitled on a single director, which increases
such shareholder’s voting power with respect to electing such director. There are no prohibitions in relation to cumulative voting
under the laws of the Cayman Islands, but our memorandum and articles of association do not provide for cumulative voting. As a result,
our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors
Under the Delaware General
Corporation Law, a director of a corporation may be removed only for cause with the approval of a majority of the outstanding shares entitled
to vote, unless the certificate of incorporation provides otherwise. Under our memorandum and articles of association, a director may
be removed by way of an ordinary resolution of the shareholders at any time before the expiration of his period of office.
Actions by the Board of Directors
Under the Delaware General
Corporation Law, unless the certificate of incorporation or bylaws of a Delaware corporation provide otherwise, a majority of the total
number of directors shall constitute a quorum for the transaction of business, but in no case shall a quorum be less than one-third of
the total number of directors unless the authorized number of directors is one, and an action of the board at a meeting with a quorum
present requires at least a majority vote of those directors present. Directors of a Delaware corporation may also act by unanimous written
consent unless the corporation’s certificate of incorporation or bylaws otherwise provide. Our amended and restated memorandum and
articles of association provide for action by majority vote at a meeting or by unanimous written consent; however, the required quorum
for a directors’ meeting is two directors unless our board of directors fixes a different number.
Dissolution;
Winding up
Under
the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by
shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors
may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to
include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board.
Under the Companies Act and our amended and restated memorandum and articles of association, our Company may be liquidated or wound up
and subsequently dissolved by special resolution of our shareholders on the basis that we are unable to pay our debts as they fall due.
Variation
of Rights of Shares
Under
the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding
shares of such class, unless the certificate of incorporation provides otherwise. Under our amended and restated memorandum and articles
of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class
only with the vote at a separate class meeting of holders of two-thirds of the shares of such class.
Amendment
of Governing Documents
Under
the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the
outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by Cayman Islands law,
except for certain amendments to the capital structure not affecting a shareholder’s economic rights, our memorandum and articles
of association may only be amended with a special resolution at a general meeting.
Rights
of Non-resident or Foreign Shareholders
There
are no limitations imposed by our amended and restated memorandum and articles of association on the rights of non-resident or foreign
shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our memorandum and articles of
association governing the ownership threshold above which shareholder ownership must be disclosed.
10.C.
Material Contracts
Below is a summary of current
material contracts to which we are a party as of the date this annual report:
Title of Contract |
|
Party A |
|
Party B |
|
Signing Date |
|
Term of Contract |
Bank Credit Agreements* |
|
|
|
|
|
|
|
|
Credit Agreement |
|
United Time Technology Co., Ltd. |
|
Shenzhen Rural Commercial Bank |
|
August 1, 2018 |
|
3 years |
Credit Agreement |
|
United Time Technology Co., Ltd. |
|
Shenzhen Rural Commercial Bank |
|
August 1, 2018 |
|
3 years |
Credit Agreement |
|
United Time Technology Co., Ltd. |
|
China Resources Bank of Zhuhai Co., Ltd. |
|
November 13, 2020 |
|
2 year |
Working Capital Loan Agreement |
|
United Time Technology Co., Ltd. |
|
China Resources Bank of Zhuhai Co., Ltd. |
|
November 22, 2021 |
|
1 year |
Factoring Agreement |
|
United Time Technology Co., Ltd. |
|
TCL Commercial Factoring (Shenzhen) Company Limited |
|
November 18, 2020 |
|
November 18, 2020
to
November 17, 2022 |
Credit Agreement |
|
United Time Technology Co., Ltd. |
|
Shenzhen Rural Commercial Bank |
|
June 29, 2021 |
|
July 16, 2021
to
July 16, 2024 |
Credit Agreement |
|
United Time Technology Co., Ltd. |
|
Shenzhen Rural Commercial Bank |
|
June 29, 2021 |
|
July 16, 2021
to
July 16, 2024 |
Credit Agreement |
|
United Time Technology Co., Ltd. |
|
PingAn Bank Co., Ltd. |
|
November 17, 2021 |
|
3 years |
Credit Line Agreement |
|
United Time Technology Co., Ltd. |
|
Shenzhen Nanshan Baosheng County Bank Co., Ltd. |
|
August 31, 2022 |
|
1 year |
Working Capital Loan Agreement
| |
United Time Technology Co., Ltd.
| |
Shenzhen Nanshan Baosheng County Bank Co., Ltd. |
|
August 31, 2022 | |
1 year
|
Loan agreement |
|
United Time Technology Co., Ltd. |
|
Jiangsu Suning Bank Co., Ltd. |
|
June 14, 2022 |
|
June 13, 2022
to
May 5, 2025 |
* |
For more information regarding these credit agreements, see information under “Item 5. Operating And Financial Review And Prospects” |
Purchase Agreements (Production line purchase agreements)
Procurement Agreement |
|
Guangxi Utime Technology Co., Ltd. |
|
P.J. Advisory Company Limited |
|
January 5, 2022 |
|
N/A |
Purchase Agreement |
|
Guangxi Utime Technology Co., Ltd. |
|
Shenzhen Chuangbaili Industrial Equipment
Co., Ltd. |
|
March 11, 2022 |
|
N/A |
On January 5, 2022, we entered
into a procurement agreement to acquire two solder pastes and ten SMT testing assembly lines for a total price of $3,997,980, inclusive
of value added tax (the “Purchase Price”) from P.J. Advisory Company Limited. Pursuant to this agreement, we need to pay (i)
90% of the Purchase Price within 90 days after the equipment are transported to our place of delivery and accepted by us, and (ii) 10%
of the Purchase Price after the installation and commissioning of the equipment.
On March 11, 2022, we entered
into a purchase agreement to acquire an assembly production line for a total price of RMB 686,895, inclusive of 10% tax (the “Purchase
Price”) from Shenzhen Chuangbaili Industrial Equipment Co., Ltd. Pursuant to this agreement, we need to pay (i) 30% of the Purchase
Price as deposit within three days of signing this agreement, (ii) 50% of the Purchase Price as deposit before the equipment are transported,
and (iii) the rest of the Purchase Price after the installation of the equipment and accepted by us.
Lease Agreements (Factory lease agreements)
Factory Lease Agreement | |
Guizhou United Time Technology Co., Ltd. | |
Guizhou Jietongda Technology Co., Ltd. | |
N/A | |
4 years and 6 months |
Supplemental Agreement to Factory Lease Agreement | |
Guizhou United Time Technology Co., Ltd. | |
Guizhou Jietongda Technology Co., Ltd. | |
October 10, 2019 | |
N/A |
Factory Lease Agreement | |
Guangxi Utime Technology Co., Ltd. | |
Nanning Industrial Investment Group Co., Ltd. | |
November 1, 2021 | |
60 months |
In September 2017, we entered
into a Factory Lease Agreement (No. JTDLD2017090102) to lease plant for production from Guizhou Jietongda Technology Co., Ltd, which was
executed in September 2017. Pursuant to this agreement, (i) the lease term is from September 1, 2017 to February 28, 2022, (ii)
the rent for the first three years shall be RMB 20 (US$3.04)/m² per month in principle and can be adjusted according to the market
price in the later period, (iii) the rent shall be paid quarterly and shall be paid before the fifteenth day of the month following each
quarter, and (iv) we shall be liable for a 5% late fee per day for any overdue payment. Furthermore, on October 10, 2019, we entered
into a Supplemental Agreement to the Factory Lease Agreement with Guizhou Jietongda Technology Co., Ltd, pursuant to which both parties
agreed to reduce the rent from RMB 20/m² per month to RMB 8 (US$1.22)/m² per month; and the total amount of rent shall be RMB
7,550,496 inclusive of tax.
In November 2021, we entered into
a Factory Lease Agreement to lease Factory for production from Nanning Industrial Investment Group Co., Ltd, which was executed in November
2021. Pursuant to this agreement, (i) the lease term is from November 1, 2021 to October 31, 2026, and (ii) the rent of factory is RMB
20/m² per month and the total amount of rent shall be RMB 19,066,152 inclusive of tax.
10.D. Exchange Controls
Cayman Islands
There are currently no exchange
control regulations in the Cayman Islands applicable to us or our shareholders.
The PRC
China regulates foreign currency
exchanges primarily through the following rules and regulations:
|
● |
Foreign Currency Administration Rules of 1996, as amended; and |
|
● |
Administrative Rules of the Settlement, Sale and Payment of Foreign Exchange of 1996. |
As we disclosed in the risk
factors above, Renminbi is not a freely convertible currency at present. Under the current PRC regulations, conversion of Renminbi is
permitted in China for routine current-account foreign exchange transactions, including trade and service related foreign exchange transactions,
payment of dividends and service of foreign debts. Conversion of Renminbi for most capital-account items, such as direct investments,
investments in PRC securities markets and repatriation of investments, however, is still subject to the approval of SAFE.
Pursuant to the above-mentioned
administrative rules, foreign-invested enterprises may buy, sell and/or remit foreign currencies for current account transactions at banks
in China with authority to conduct foreign exchange business by complying with certain procedural requirements, such as presentment of
valid commercial documents. For capital-account transactions involving foreign direct investment, foreign debts and outbound investment
in securities and derivatives, approval from SAFE is a pre-condition. Capital investments by foreign-invested enterprises outside China
are subject to limitations and requirements in China, such as prior approvals from the PRC Ministry of Commerce or SAFE.
10.E. Taxation
The
following discussion of material Cayman Islands, PRC and United States federal income tax consequences of an investment in our
ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which
are subject to change. This discussion does not deal with all possible tax consequences relating to an investment in our ordinary
shares, such as the tax consequences under state, local and other tax laws.
Cayman Islands Taxation
The following is a discussion
on certain Cayman Islands income tax consequences of an investment in the Shares. The discussion is a general summary of the present law,
which is subject to prospective and retroactive change. It is not intended as tax advice, does not consider any investor’s particular
circumstances, and does not consider tax consequences other than those arising under Cayman Islands law.
Under Existing Cayman Islands Laws:
The Cayman Islands currently
levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature
of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands
except for stamp duties which may be applicable on instruments executed in, or after execution brought within, the jurisdiction of the
Cayman Islands. No stamp duty is payable in the Cayman Islands on the issue of shares by, or any transfers of shares of, Cayman Islands
companies (except those which hold interests in land in the Cayman Islands). The Cayman Islands is not party to any double tax treaties
which 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 shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment
of dividends or capital to any holder of our shares, nor will gains derived from the disposal of our shares be subject to Cayman Islands
income or corporation tax.
The Company has been incorporated
under the laws of the Cayman Islands as an exempted company with limited liability and, as such, has applied for and received an undertaking
from the Financial Secretary of the Cayman Islands in the following form:
The Tax Concessions Act
(As Revised)
Undertaking as to Tax Concessions
In accordance with the provision
of Section 6 of The Tax Concessions Act (As Revised), the Financial Secretary undertakes with UTime Limited (the “Company”):
|
1. |
That no law which is hereafter enacted in the Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to the Company or its operations; and |
|
2. |
In addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable: |
|
2.1 |
On or in respect of the shares, debentures or other obligations of the Company; or |
|
2.2 |
by way of the withholding in whole or part, of any relevant payment as defined in Section 6(3) of the Tax Concessions Act (As Revised). |
These concessions shall be
for a period of 20 years from the date hereof.
People’s Republic of China Taxation
Under the PRC Enterprise Income
Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within
the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income.
The implementation rules define the term “de facto management body” as the body that exercises full and substantial control
over and overall and substantial management of the business, productions, personnel, accounts and properties of an enterprise. In April
2009, the State Administration of Taxation issued the Circular on Issues Concerning the Identification of Chinese-Controlled Overseas
Registered Enterprises as Resident Enterprises in Accordance With the Actual Standards of Organizational Management, known as Circular 82,
which has been revised by the Decision of the State Administration of Taxation on Issuing the Lists of Invalid and Abolished Tax Departmental
Rules and Taxation Normative Documents on December 29, 2017 and by the Decision of the State Council on Cancellation and Delegation
of a Batch of Administrative Examination and Approval Items on November 8, 2013. Circular 82 has provided certain specific criteria
for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is
located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups,
not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of
Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident
status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise
or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China
only if all of the following conditions are met: (i) the places where the senior management and senior management departments responsible
for the daily production, operation and management of the enterprise perform their duties are mainly located within the territory of the
PRC; (ii) decisions relating to the enterprise’s financial matters (such as money borrowing, lending, financing and financial risk
management) and human resource matters (such as appointment, dismissal and salary and wages) are made or are subject to approval by organizations
or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder
resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside
in the PRC.
We believe that UTime Limited
is not a PRC resident enterprise for PRC tax purposes. UTime Limited is not controlled by a PRC enterprise or PRC enterprise group and
we do not believe that UTime Limited meets all of the conditions above. UTime Limited 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. 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.
Our PRC legal counsel has
also advised us that there is a risk that the PRC tax authorities may deem us as a PRC resident enterprise since a substantial majority
of the members of our management team are located in China. If the PRC tax authorities determine that UTime Limited is a PRC resident
enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders
that are non-resident enterprises, including the holders of our ordinary shares. In addition, non-resident enterprise shareholders
may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ordinary shares, if such income is treated as sourced
from within the PRC. It is unclear whether our non-PRC individual shareholders would be subject to any PRC tax on dividends or gains
obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were
to apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable
tax treaty. It is also unclear whether non-PRC shareholders of UTime Limited would be able to claim the benefits of any tax treaties
between their country of tax residence and the PRC in the event that UTime Limited is treated as a PRC resident enterprise. See “Risk
Factors — Risks Related to Doing Business in China — If we are classified as a PRC resident enterprise for PRC income tax
purposes, such classification could result in unfavourable tax consequences to us and our non-PRC shareholders.”
In January 2009, the State
Administration of Taxation promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises,
pursuant to which the entities that have the direct obligation to make certain payments to a non-resident enterprise should be the
relevant tax withholders for the non-resident enterprise, and such payments include: income from equity investments (including dividends
and other return on investment), interest, rents, royalties and income from assignment of property as well as other income subject to
enterprise income tax received by non-resident enterprises in China. Further, the measures provide that in case of an equity transfer
between two non-resident enterprises which occurs outside China, the non-resident enterprise which receives the equity transfer
payment must, by itself or engage an agent to, file tax declaration with the PRC tax authority located at place of the PRC company whose
equity has been transferred, and the PRC company whose equity has been transferred should assist the tax authorities to collect taxes
from the relevant non-resident enterprise.
The State Administration of
Taxation issued SAT Circular 59 together with the Ministry of Finance in April 2009 and SAT Circular 698 in December 2009. On February 28,
2011, the SAT issued the Notice on Several Issues Regarding the Income Tax of Non-PRC Resident Enterprises, or SAT Circular 24,
which became effective on April 1, 2011. By promulgating and implementing these circulars, the PRC tax authorities have enhanced
their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise by a non-resident enterprise.
Under SAT Circular 698, where a non-resident enterprise transfers the equity interests of a PRC “resident enterprise”
indirectly by disposition of the equity interests of an overseas holding company, and the overseas holding company is located in a tax
jurisdiction that: (1) has an effective tax rate less than 12.5% or (2) does not tax foreign income of its residents, the non-resident enterprise,
being the transferor, must report to the relevant tax authority of the PRC “resident enterprise” the indirect transfer. On
February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties
by Non-Tax Resident Enterprises, or SAT Bulletin 7. SAT Bulletin 7 supersedes the rules with respect to the indirect transfer under
SAT Circular 698, but does not touch upon the other provisions of SAT Circular 698. SAT Bulletin 7 has introduced a new tax regime that
is significantly different from the previous one under SAT Circular 698. SAT Bulletin 7 extends its tax jurisdiction to not only indirect
transfers set forth under SAT Circular 698 but also transactions involving transfer of other taxable assets through offshore transfer
of a foreign intermediate holding company. In addition, SAT Bulletin 7 provides clearer criteria than SAT Circular 698 for assessment
of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity
through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who
is obligated to pay for the transfer) of taxable assets. On October 17, 2017, the SAT issued the Announcement of the State Administration
of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37. SAT Bulletin 37,
which took effect on December 1, 2017, superseded the Non-resident Enterprises Measures and SAT Circular 698 as a whole and
partially amended some provisions in SAT Circular 24 and SAT Bulletin 7. SAT Bulletin 37 purports to clarify certain issues in the implementation
of the above regime, by providing, among others, the definition of equity transfer income and tax basis, the foreign exchange rate to
be used in the calculation of withholding amount, and the date of occurrence of the withholding obligation. Specifically, SAT Bulletin
37 provides that where the transfer income subject to withholding at source is derived by a non-PRC resident enterprise in instalments,
the instalments may first be treated as recovery of costs of previous investments. Upon recovery of all costs, the tax amount to be withheld
must then be computed and withheld.
Provided that our Cayman Islands
exempted company, UTime Limited, is not deemed to be a PRC resident enterprise, holders of our ordinary shares who are not PRC residents
will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other disposition of our shares.
However, under SAT Bulletin 7 and SAT Bulletin 37, where a non-resident enterprise conducts an “indirect transfer”
by transferring taxable assets, including, in particular, equity interests in a PRC resident enterprise, indirectly by disposing of the
equity interests of an overseas holding company, the non-resident enterprise, being the transferor, or the transferee or the PRC
entity which directly owned such taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance
over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable
commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such
indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer
is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
We and our non-PRC resident investors may be at risk of being required to file a return and being taxed under SAT Bulletin 7 and
SAT Bulletin 37, and we may be required to expend valuable resources to comply with SAT Bulletin 7 and SAT Bulletin 37, or to
establish that we should not be taxed under these circulars. See “Risk Factors — Risks Related to Doing Business in China
— We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding
companies.”
India Taxation
The following is a general
overview about Indian tax laws for corporates under the Income Tax Act, 1961 (“IT Act”) which inter alia governs
the income tax on different categories of income accrued in the hands of an Indian company.
Corporate Taxes
As per the provisions of the
IT Act, the corporate tax is paid by the companies registered in India on the net profit that it makes from businesses. It is taxed at
a specific rate as prescribed by IT Act, subject to the changes in the rates announced every year by the Income Tax Department, Government
of India. Both domestic as well as foreign companies are liable to pay corporate tax under IT Act in India. A domestic company is taxed
on its universal income, while a foreign company is only taxed on the income earned within India.
The rates applicable to the
domestic companies and foreign companies for assessment year 2022-23 (for previous year 2021-22) based on their turnover is:
Particulars | |
Tax Rate | |
DOMESTIC COMPANIES | |
| |
Where total turnover or gross receipt during the previous year 2019-20 does not exceed Rs. 400 crore* | |
| 25 | % |
Domestic income other than referred to above | |
| 30 | % |
FOREIGN COMPANIES | |
| | |
Where royalty and technical fees is effectively connected to Permanent Establishment (PE) in India | |
| 40 | % |
Where PE is absent but the case is covered by section 115A(1) | |
| 10 | % |
Any other income | |
| 40 | % |
Note: One Crore is equivalent to Ten million
In addition to above rates,
the following surcharge is added:
Particulars | |
Tax Rate |
DOMESTIC COMPANIES | |
|
If total income exceeds Rs. 1 crore but less than Rs. 10 crore | |
7% of tax calculated |
If total income exceeds Rs. 10 crore | |
12% of tax calculated |
FOREIGN COMPANIES | |
|
If total income exceeds Rs. 1 crore but less than Rs. 10 crore | |
2% of tax calculated |
If total income exceeds Rs. 10 crore | |
5% of tax calculated |
Section 115BAA of the IT Act inserted w.e.f., AY
2020-21 provides an option to a domestic company to pay tax at lower rate of 22% (plus applicable surcharge
and cess) as opposed to normal tax rate of 30%/ 25% (plus applicable surcharge and cess), provided the income is computed:
| ● | without claiming exemption/ deduction inter
alia, under section 32(1) (iia) additional depreciation qua new plant and machinery @ 20%/ 30%, |
| ● | without set-off of any brought forward losses to
the extent such loss relates to deductions specified therein (including unabsorbed depreciation relatable to additional depreciation
claimed and not set off); such losses would also not be allowed to be carried forward to subsequent years. |
| ● | after claiming depreciation other than additional depreciation under
section 32(1) (iia) of the Act. |
Once an Indian company has
exercised this option, the chosen provision will apply for all the subsequent years.
Thus, in order to comply with
the provisions of the IT Act, it is mandatory for both Indian company and foreign company to pay corporate tax on the business income
earned in India at the prescribed rates. Both companies have to file their income tax return on or before September 30 with respect to
its preceding financial year (April to March), subject to certain exceptions.
Health and Education Cess
In all the cases, the amount
of income tax and surcharge would be charged and increased by a health and education cess of 4%.
Taxation on Dividends
As per Section 115-O of
the IT Act, any amount declared, distributed or paid by a domestic company by way of dividend shall be chargeable to dividend distribution
tax (“DDT”). This provision is only applicable on domestic company (not a foreign company). DDT is in addition to income
tax chargeable in respect of total income. It is applicable whether the dividend is interim or otherwise and whether such dividend is
paid out of the current profits or accumulated profits. An Indian company is under the obligation to pay DDT at the rate of 15% plus surcharge
and education cess on DDT. As per applicable Indian taxation law until March 31, 2020, a non-resident shareholder of an Indian
company was not liable to pay any tax on the dividends received by it. However, the Finance Act, 2020 (effective from April 1, 2020) amended
certain provisions relating to taxation of dividends declared by Indian companies, and provides that any distribution of dividend from
April 1, 2020 onwards will only be subject to tax in the hands of the recipient shareholder and the Indian companies are not required
to pay any tax on the dividend declared and distributed to the shareholders. Furthermore, non-resident shareholders would now be
paying tax on the dividend income as per the rate prescribed under the relevant double taxation avoidance agreements or domestic law,
whichever is more beneficial. The said amendments shall entitle foreign investors to claim credit in their country of residence of tax
paid in India in respect of dividend distributed by domestic companies. The change in the tax regime by Indian Government regarding payment
of taxes may increase tax burden in the hands of the parent company of our Indian Subsidiary.
Aforesaid legal provisions
under the IT Act are applicable to Do Mobile, thus, Do Mobile is under an obligation to mandatorily follow the provisions under the IT
Act.
Taxation on Sale of Shares
Transfer of shares of a private
limited company will attract capital gains tax which will be either long-term or short-term capital gains tax, on the basis
of the time period for which shares of Indian company are held. Capital gains realised in respect of shares held by a shareholder for
more than 24 months are treated as long-term capital gains, while capital gains realised in respect of shares held for 24 months
or less are treated as short-term capital gains.
Remittance on Sale Proceeds
The Foreign Exchange Management
(Non-debt Instruments) Rules, 2019 and the FEMA (Remittance of Assets) Regulations, 2016 govern the remittance of sale proceeds of
an Indian security held by a person resident outside India.
Return of Income
As per IT Act, a person having
income liable to tax in India is required to file a return of its income with the Income Tax Department, Government of India. The return
of income must be filed before specific due dates prescribed for various kinds of entities for each financial year. Every company, including
a foreign company, deriving income from India, is required to file such return in India.
Tax Treaties
The tax levied upon foreign
company shall be subject to any benefits available to it by virtue of any double taxation avoidance agreement (“DTAA”) entered
into by the Government of India with the government of that country where that foreign company has been incorporated. Where there is no
DTAA signed between India and another foreign country, the company could be taxed both by the source country (India) as well as the residence
(foreign) country. Article 5(1) of most of DTAA signed between India and other countries defines “Permanent Establishment”
as a fixed place of business through which the business of the enterprise is wholly or partly carried on. In computation of the income
of a non-resident, the provisions of DTAA between India and the country of residence of the non-resident are required
to be examined, since the IT Act provides that its provisions shall be applicable only insofar as they are more beneficial to the taxpayer.
Transfer Pricing
Section 92 of the IT Act provides
that income arising from an ‘international transaction’ shall be computed having regard to the arm’s length price. The
expression ‘international transaction’ has been defined to mean a transaction between two or more ‘associated enterprises’,
either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of
services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.
Further, two enterprises shall be treated as associated enterprises if any of the criteria as enumerated in Section 92A of the IT Act
is being satisfied.
Taxation on Buyback
Sections 115-QA to 115-QC of
the IT Act laid down that tax shall be payable by the company on buy back of its own shares at the rate 20% of the ‘distributed
income’ (plus applicable surcharge and health cess). The distributed income here refers to the amount computed by reducing the amount
received by the company on issuance of shares from the consideration paid on buyback. Such income tax paid by the company shall be the
final tax liability and consequently, the amount/ consideration received by the shareholder(s) would be exempt from tax in their respective
hands.
Withholding Tax
A person (except individuals
in certain cases) is required to withhold tax from certain specified payments. Separate provisions exist in respect of tax to be deducted
on specific transactions with residents and non-residents. The IT Act provides for withholding of taxes from payments made to non-residents,
which are chargeable to tax under the IT Act. Any person, whether resident or non-resident, making payment to a non-resident would
be liable to withhold tax from such payment and deposit the same with the Government of India within the prescribed time. Moreover, prescribed
returns are also required to be filed periodically with the tax authorities. The payee is entitled to adjust the taxes so withheld against
his tax liability in India on production of a (tax credit) certificate to be issued by the person withholding the tax.
Compliances under Goods and Services Tax
(GST)
Goods and Services Act, 2017
(“GST Act”) prescribes the applicability of indirect taxes in India, which is applicable on supplying of goods and services
by business enterprises in India. Therefore, a business enterprise in India dealing in goods and services has to comply with certain obligations
under the GST Act:
|
● |
GST Registration: An Indian company requires registration under GST Act, which will be used for the future correspondences of the business of the company. |
|
● |
Filing of Returns: An Indian company is required to file the periodical (monthly & annually) returns as prescribed under the GST Act on the prescribed due dates to provide detail regarding sale and purchase of goods & services and for claiming the input credit also. |
GST Compliances on Import of Goods
As understood generally, import
of goods means bringing goods into the territory of India. Import of goods under GST Act is treated as inter-State supplies and hence,
is subject to Integrated GST in addition to the applicable customs duties. However, in such a case, since the service provider is situated
outside India, it is the responsibility of the service recipient to deposit Integrated GST under reverse charge mechanism and undertake
related compliances.
Material United States Federal Income Tax Considerations
Subject to the limitations
described below, the following are the material U.S. federal income tax consequences of the purchase, ownership and disposition of ordinary
shares to a “U.S. Holder.” Non-U.S. Holders are urged to consult their own tax advisors regarding the U.S. federal income
tax consequences of the purchase, ownership and disposition of ordinary shares to them. For purposes of this discussion, a “U.S.
Holder” means a beneficial owner of ordinary shares that is, for U.S. federal income tax purposes:
|
● |
an individual who is a citizen or resident of the United States; |
|
● |
a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any of its political subdivisions; |
|
● |
an estate, whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or |
|
● |
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 U.S. persons have the authority to control all substantial decisions of the trust, or (ii) it has a valid election to be treated as a U.S. person. |
A “non-U.S. Holder”
is any individual, corporation, trust or estate that is a beneficial owner of ordinary shares and is not a U.S. Holder or a partnership
(or other entity treated as a partnership for U.S. federal income tax purposes).
This
discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, or the Code, applicable U.S. Treasury
Regulations promulgated thereunder, and administrative and judicial decisions as of the date of this annual report, all of which are
subject to change, possibly on a retroactive basis, and any change could affect the continuing accuracy of this discussion.
This summary does not purport
to be a comprehensive description of all of the tax considerations that may be relevant to each person’s decision to purchase ordinary
shares. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S.
Holder based on such holder’s particular circumstances, including Medicare tax imposed on certain investment income. In particular,
this discussion considers only U.S. Holders that will own ordinary shares as capital assets within the meaning of section 1221 of the
Code and does not address the potential application of U.S. federal alternative minimum tax or the U.S. federal income tax consequences
to U.S. Holders that are subject to special treatment, including:
|
● |
broker dealers or insurance companies; |
|
● |
U.S. Holders who have elected mark-to-market accounting; |
|
● |
tax-exempt organizations or pension funds; |
|
● |
regulated investment companies, real estate investment trusts, insurance companies, financial institutions or “financial services entities”; |
|
● |
U.S. Holders who hold ordinary shares as part of a “straddle,” “hedge,” “constructive sale” or “conversion transaction” or other integrated investment; |
|
● |
U.S. Holders who own or owned, directly, indirectly or by attribution, at least 10% of the voting power of our ordinary shares; |
|
● |
U.S. Holders whose functional currency is not the U.S. Dollar; |
|
● |
U.S. Holders who received ordinary shares as compensation; |
|
● |
persons holding ordinary shares in connection with a trade or business outside of the United States; and |
|
● |
certain expatriates or former long-term residents of the United States. |
This discussion does not address
the tax treatment of holders that are entities treated as partnerships for U.S. federal income tax purposes or other pass-through entities
or persons who hold ordinary shares through a partnership or other pass-through entity. In addition, this discussion does not address
any aspect of state, local or non-U.S. tax laws, or the possible application of U.S. federal gift or estate tax.
BECAUSE OF THE COMPLEXITY
OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY PARTICULAR HOLDER OF ORDINARY SHARES MAY BE AFFECTED BY MATTERS NOT DISCUSSED
HEREIN, EACH HOLDER OF ORDINARY SHARES IS URGED TO CONSULT WITH ITS TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE ACQUISITION
AND THE OWNERSHIP AND DISPOSITION OF ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS, AS
WELL AS U.S. FEDERAL TAX LAWS AND APPLICABLE TAX TREATIES.
Taxation of Dividends Paid on Ordinary Shares
Subject to the passive foreign
investment company rules discussed below, the gross amount of distributions made by us with respect to our ordinary shares generally will
be includable in the gross income of U.S. Holders as dividend income. Because we do not determine our earnings and profits for U.S. federal
income tax purposes, a U.S. Holder will be required to treat any distribution paid on ordinary shares, including the amount of non-U.S.
taxes, if any, withheld from the amount paid, as a dividend on the date the distribution is received. Such distribution generally will
not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from
other U.S. corporations.
Cash distributions paid in
a non-U.S. currency will be included in the income of U.S. Holders at a U.S. Dollar amount equal to the spot rate of exchange in
effect on the date the dividends are includible in the income of the U.S. Holders, regardless of whether the payment is in fact converted
to U.S. Dollars, and U.S. Holders will have a tax basis in such non-U.S. currency for U.S. federal income tax purposes equal to such U.S. Dollar
value. If a U.S. Holder converts a distribution paid in non-U.S. currency into U.S. Dollars on the day the dividend is includible
in the income of the U.S. Holder, the U.S. Holder generally should not be required to recognize gain or loss arising from exchange rate
fluctuations. If a U.S. Holder subsequently converts the non-U.S. currency, any subsequent gain or loss in respect of such non-U.S. currency
arising from exchange rate fluctuations will be U.S.-source ordinary income or loss.
Dividends we pay with respect
to our ordinary shares to non-corporate U.S. Holders may be “qualified dividend income,” which is currently taxable at
a reduced rate; provided that (i) our ordinary shares are readily tradable on an established securities market in
the United States, (ii) we are not a passive foreign investment company (as discussed below) with respect to the U.S. Holder for
either our taxable year in which the dividend was paid or the preceding taxable year, (iii) the U.S. Holder has held our ordinary
shares for at least 61 days of the 121-day period beginning on the date which is 60 days before the ex-dividend date, and (v) the
U.S. Holder is not under an obligation to make related payments on substantially similar or related property. We believe our ordinary
shares, which are expected to be listed on the NASDAQ, will be considered to be readily tradable on an established securities market in
the United States, although there can be no assurance that this will continue to be the case in the future. Any days during which a U.S.
Holder has diminished its risk of loss on our ordinary shares are not counted towards meeting the 61-day holding period. U.S. Holders
should consult their own tax advisors on their eligibility for reduced rates of taxation with respect to any dividends paid by us.
Distributions paid on ordinary
shares generally will be foreign-source passive category income for U.S. foreign tax credit purposes and will not qualify for the
dividends received deduction generally available to corporations. Subject to certain conditions and limitations, non-U.S. taxes, if any,
withheld from a distribution may be eligible for credit against a U.S. Holder’s U.S. federal income tax liability. In addition,
if 50 percent or more of the voting power or value of our shares is owned, or is treated as owned, by U.S. persons (whether or not we
are a “controlled foreign corporation” for U.S. federal income tax purposes), the portion of our dividends attributable to
income which we derive from sources within the United States (whether or not in connection with a trade or business) would generally be
U.S.-source income. U.S. Holders would not be able directly to utilize foreign tax credits arising from non U.S. taxes considered
to be imposed upon U.S.-source income.
Taxation of the Sale or Other Disposition of
Ordinary Shares
Subject to the passive foreign
investment company rules discussed below, a U.S. Holder generally will recognize a capital gain or loss on the taxable sale or other disposition
of our ordinary shares in an amount equal to the difference between the U.S. Dollar amount realized on such sale or other disposition
(determined in the case of consideration in currencies other than the U.S. Dollar by reference to the spot exchange rate in effect
on the date of the sale or other disposition or, if the ordinary shares are treated as traded on an established securities market and
the U.S. Holder is a cash basis taxpayer or an electing accrual basis taxpayer, the spot exchange rate in effect on the settlement date)
and the U.S. Holder’s adjusted tax basis in such ordinary shares determined in U.S. Dollars. The initial tax basis of ordinary shares
to a U.S. Holder will be the U.S. Holder’s U.S. Dollar cost for ordinary shares (determined in the case of consideration in
currencies other than the U.S. Dollar by reference to the spot exchange rate in effect on the date of the purchase or, if the ordinary
shares are treated as traded on an established securities market and the U.S. Holder is a cash basis taxpayer or an electing accrual basis
taxpayer, the spot exchange rate in effect on the settlement date).
Capital gain from the sale,
exchange or other disposition of ordinary shares held more than one year generally will be treated as long-term capital gain and
is eligible for a reduced rate of taxation for non-corporate holders. Gain or loss recognized by a U.S. Holder on a sale or other
disposition of ordinary shares generally will be treated as U.S.-source income or loss for U.S. foreign tax credit purposes. The
deductibility of a capital loss recognized on the sale or exchange of ordinary shares is subject to limitations. A U.S. Holder that receives
currencies other than U.S. Dollars upon disposition of the ordinary shares and converts such currencies into U.S. Dollars subsequent to
receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of such currencies against the
U.S. Dollar, which generally will be U.S.-source ordinary income or loss.
Passive Foreign Investment Company
In general, a non-U.S. corporation
will be classified as a passive foreign investment company (a “PFIC”) for any taxable year if at least (i) 75% of its
gross income is classified as “passive income” or (ii) 50% of its assets (determined on the basis of a quarterly average)
produce or are held for the production of passive income. For these purposes, cash is generally considered a passive asset. In making
this determination, the non-U.S. corporation is treated as earning its proportionate share of any income and owning its proportionate
share of any assets of any corporation in which it holds 25% or more (by value) of the stock. Although the law in this regard is unclear,
we treat our consolidated affiliated entities as being owned by us for United States federal income tax purposes, not only because we
exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic
benefits.
Based on our current composition
of assets and income, we believe that we are not currently a PFIC for U.S. federal income tax purposes. However, the determination of
whether we are a PFIC is made annually, after the close of the relevant taxable year. Therefore, it is possible that we could be classified
as a PFIC for the current taxable year or in future years due to changes in the composition of our assets (including as a result of the
cash we raise in our initial public offering) or income, as well as changes to our market capitalization. The market value of our assets
may be determined in large part by reference to the market price of our ordinary shares, which may fluctuate.
Under the PFIC rules, if we
were considered a PFIC at any time that a U.S. Holder holds our shares, we would continue to be treated as a PFIC with respect to such
holder’s investment unless (i) we cease to be a PFIC and (ii) the U.S. Holder has made a “deemed sale” election
under the PFIC rules.
If we are considered a PFIC
at any time that a U.S. Holder holds our shares, and unless such U.S. Holder makes a valid and timely “mark to market” election
as described below, any gain recognized by the U.S. Holder on a sale or other disposition of the shares, as well as the amount of an “excess
distribution” (defined below) received by such holder, would be allocated ratably over the U.S. Holder’s holding period for
the shares. The amounts allocated to the taxable year of the sale or other 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. For purposes of these rules, an excess
distribution is the amount by which any distribution received by a U.S. Holder on its shares exceeds 125% of the average of the annual
distributions on the shares received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter.
If we are treated as a PFIC
with respect to a U.S. Holder for any taxable year, the U.S. Holder will be deemed to own shares in any of our subsidiaries that are also
PFICs. However, an election for mark-to-market treatment would likely not be available with respect to any such subsidiaries. If
we are considered a PFIC, a U.S. Holder will also be subject to information reporting requirements on an annual basis. U.S. Holders should
consult their own tax advisors about the potential application of the PFIC rules to an investment in our shares.
If we were classified as a
PFIC, a U.S. Holder may be able to make a “mark-to-market” election with respect to our ordinary shares (but not with respect
to the shares of any lower-tier PFICs) if the ordinary shares are “regularly traded” on a “qualified exchange”.
In general, our ordinary shares will be treated as “regularly traded” in any calendar year in which more than a de minimis
quantity of ordinary shares are traded on a qualified exchange on at least 15 days during each calendar quarter. However, the Company
can make no assurance that the ordinary shares will be listed on a “qualified exchange” or that there will be sufficient trading
activity for the ordinary shares to be treated as “regularly traded”. Accordingly, U.S. Holders should consult their own tax
advisers as to whether their ordinary shares would qualify for the mark-to-market election.
If a U.S. Holder makes a valid
mark-to-market election for the first taxable year that such U.S. Holder holds our ordinary shares and as to which the Company is
classified as a PFIC, the holder will generally include as ordinary income the excess, if any, of the fair market value of the ordinary
shares at the end of the taxable year over their adjusted tax basis, and will be permitted an ordinary loss in respect of the excess,
if any, of the adjusted tax basis of the ordinary shares over their fair market value at the end of the taxable year (but only to the
extent of the net amount of previously included income as a result of the mark-to-market election). If a U.S. Holder makes the election,
the holder’s tax basis in our ordinary shares will be adjusted to reflect any such income or loss amounts. Any gain recognized on
the sale or other disposition of our ordinary shares will be treated as ordinary income, and any loss will be treated as an ordinary loss
to the extent of any prior mark-to-market gains.
If a U.S. Holder makes the
mark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years
unless the ordinary shares are no longer regularly traded on a qualified exchange or the IRS consents to the revocation of the election.
If we were classified as a
PFIC, U.S. Holders would not be eligible to make an election to treat us as a “qualified electing fund,” or a QEF election,
because we do not anticipate providing U.S. Holders with the information required to permit a QEF election to be made.
U.S. Information Reporting and Backup Withholding
A U.S. Holder is generally
subject to information reporting requirements with respect to dividends paid in the United States on ordinary shares and proceeds paid
from the sale, exchange, redemption or other disposition of ordinary shares. A U.S. Holder is subject to backup withholding (currently
at 24%) on dividends paid in the United States on ordinary shares and proceeds paid from the sale, exchange, redemption or other
disposition of our ordinary shares unless the U.S. Holder is a corporation, provides an IRS Form W-9 or otherwise establishes a basis
for exemption.
Backup withholding is not
an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S. federal income
tax liability, and a U.S. Holder may obtain a refund from the IRS of any excess amount withheld under the backup withholding rules, provided
that certain information is timely furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application
of backup withholding and the availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.
Certain Reporting Obligations
If a U.S. Holder (together
with persons considered to be related to the U.S. Holder) subscribes for ordinary shares for a total initial public offering price in
excess of $100,000 (or the equivalent in a foreign currency), such holder may be required to file IRS Form 926 for the holder’s
taxable year in which the initial public offering price is paid. U.S. Holders should consult their own tax advisors to determine whether
they are subject to any Form 926 filing requirements.
Individuals that own “specified
foreign financial assets” may be required to file an information report with respect to such assets with their tax returns. Subject
to certain exceptions, “specified foreign financial assets” include any financial accounts maintained by foreign financial
institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks
and securities issued by non U.S. persons, (ii) financial instruments and contracts held for investment that have non U.S. issuers
or counterparties, and (iii) interests in foreign entities. The ordinary shares may be subject to these rules. Persons required to
file U.S. tax returns that are individuals are urged to consult their tax advisers regarding the application of this legislation to their
ownership of the ordinary shares.
10.F. Dividends and Paying Agents
Not Applicable.
10.G. Statement by Experts
Not Applicable.
10.H. Documents on Display
The Company is subject to
the informational requirements of the Securities Exchange Act of 1934, as amended, and will file reports, registration statements and
other information with the SEC. The Company’s reports, registration statements and other information can be inspected on the SEC’s
website at www.sec.gov. You may also visit us on website at www.utimemobile.com. However, information contained on our website does not
constitute a part of this annual report.
10.I. Subsidiary Information
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Foreign exchange risk
We transact business globally
in multiple currencies. Our international revenue, as well as costs and expenses denominated in foreign currencies, expose us to the risk
of fluctuations in foreign currency exchange rates against the U.S. dollar. We have foreign currency risks related to our revenue and
operating expenses denominated in currencies of the U.S. dollar and Renminbi. Accordingly, changes in exchange rates in the future may
negatively affect our future revenue and other operating results as expressed in U.S. dollars. Our foreign currency risk is partially
mitigated as our revenue recognized in currencies other than the U.S. dollar is diversified across geographic regions and we incur expenses
in the same currencies in these regions. We have not used any derivative financial instruments to hedge exposure to such risk.
The value of U.S. dollar against
Renminbi may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy
adopted by the PRC government. The Renminbi is not freely convertible into foreign currencies. Remittances of foreign currencies into
the PRC or remittances of Renminbi out of the PRC as well as exchange between Renminbi and foreign currencies require approval by foreign
exchange administrative authorities and certain supporting documentation. The State Administration for Foreign Exchange, under the authority
of the People’s Bank of China, controls the conversion of Renminbi into other currencies. To the extent that we need to convert
U.S. dollars into Renminbi for our operations, appreciation of Renminbi against the U.S. dollar would reduce the Renminbi amount we receive
from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on
our ordinary shares or ADSs, servicing our outstanding debt, or for other business purposes, appreciation of the U.S. dollar against the
Renminbi would reduce the U.S. dollar amounts available to us.
Interest rate risk
Our exposure to interest rate
risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. Interest-earning
instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates, and we
have not used any derivative financial instruments to manage our interest risk exposure.
We may invest the net proceeds
we received from our initial public offering in interest-earning instruments. Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due
to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES
12.A. Debt Securities
Not applicable.
12.B. Warrants and Rights
Not applicable.
12.C. Other Securities
Not applicable.
12.D. American Depositary Shares
Not applicable.
UTime Limited was incorporated as an exempted company
with limited liability under the laws of the Cayman Islands on October 9, 2018. UTime Limited does not conduct any substantive operations
on its own but instead conducts its business operations through its subsidiaries, variable interest entity (“VIE”) and subsidiaries
of the VIE. UTime Limited, its subsidiaries, VIE and subsidiaries of the VIE (together, the “Company”) is primarily engaged
in the operation of designing, manufacturing and marketing mobile communication devices, and selling a variety of related accessories.
The Company commenced its
operations in June 2008 through United Time Technology Co., Ltd. (“UTime SZ” or “VIE”), a
People’s Republic of China (the “PRC” or “China”) company established by Mr. Minfei Bao (“Mr.
Bao”), Mr. Junlin Zhou (“Mr. Zhou”) and Mr. Bo Tang (“Mr. Tang”). As of March 31, 2017, Mr. Bao, Mr.
Zhou and Mr. Tang held 52%, 28% and 20% equity interests of UTime SZ, respectively. In February 2018, Mr. Bao acquired 28% and
20% equity interests of UTime SZ from Mr. Zhou and Mr. Tang, respectively, with the total consideration of RMB9.6 million in cash
through his private fund. As of the acquisition date, such non-controlling interests amounted to RMB17.2 million and were
transferred to equity attributable to UTime Limited, of which RMB1.0 million relating to foreign currency translation was
transferred to the accumulated other comprehensive income, and remaining balance of RMB16.2 million was transferred to additional
paid-in capital. After the acquisition, Mr. Bao became the sole shareholder of UTime SZ. Prior to the reorganization, UTime
SZ’s equity interests were held by Mr. Bao.
For the purpose of an initial public offering in
the United States (“IPO”), the following transactions were undertaken to reorganize the legal structure (the “Reorganization”)
of the Company. In October 2018, UTime Limited was incorporated in the Cayman Islands. In November and December 2018, UTime
International Limited (“UTime HK”) was incorporated in Hong Kong and Shenzhen UTime Technology Consulting Co., Ltd. (“UTime
WFOE”) was incorporated in China, respectively.
In March 2019, UTime WFOE entered into a series
of contractual agreements with VIE and Mr. Bao, which were further amended and restated in August and September 2019, respectively, and
were entered into among UTime WFOE, VIE, Mr. Bao and Mr. Min He (“Mr. He”). Pursuant to these agreements as detailed in note
1(b), the Company believes that these contractual arrangements would enable the Company to (1) have power to direct the activities
that most significantly affect the economic performance of the VIE and its subsidiaries, and (2) receive the economic benefits of
the VIE and its subsidiaries that could be significant to the VIE and its subsidiaries. Accordingly, the Company is considered the primary
beneficiary of the VIE and is able to consolidate the VIE and its subsidiaries.
Do Mobile India Private Ltd. (“Do Mobile”)
was incorporated on October 24, 2016 in New Delhi, India. It is an operating entity that sells cell phone products and provides after-sale
services for the Company’s own in-house brand products in India. Prior to the reorganization, the majority of Do Mobile’s
equity interests were held by Mr. Bao through an entrust agreement with Mr. Wukai Song through a holding company, Bridgetime Limited (“Bridgetime”).
Bridgetime was incorporated on September 5, 2016 in British Virgin Island (“BVI”) under the laws of BVI, with Mr. Wukai Song
owning 70% through an entrust agreement between him and Mr. Bao, and Mr. Yunchuan Li owning 30% of equity interest.
On March 5, 2018, Bridgetime
issued 100,000 shares to Mr. Wukai Song, changing shareholders’ structure to Mr. Wukai Song owning 90% equity interest, which are
controlled by Mr. Bao through an entrust agreement between Mr. Bao and Mr. Wukai Song, and Mr. Yunchuan Li owning 10% of equity interest.
On December 5, 2018, Bridgetime approved a board resolution that appointed and registered Mr. Yihuang Chen as a new director. On March
11, 2019, Bridgetime approved a board resolution that transferred 1 share of Do Mobile to Mr. Yihuang Chen and made him nominal shareholder
of Do Mobile, removed Mr. Yunchuan Li as the director of Bridgetime and authorized representative of Do Mobile, and appointed Mr. Wukai
Song as the authorized representative of Do Mobile. On April 4, 2019, Bridgetime approved a board resolution that forfeited 15,000 shares
held by Mr. Yunchuan Li, cancelled those shares accordingly and amended Bridgetime’s
memorandum of association that changed authorized shares from 150,000 to 135,000 at a par value of US$1.00 which was accounted as a cancellation
of non-controlling interest in the consolidated statements of shareholders’ equity.
After this, Mr. WuKai Song owned 100% of equity interest of Bridgetime, which are controlled by Mr. Bao
through an entrust agreement between Mr. Bao and Mr. Wukai Song. On May 23, 2019, Bridgetime approved a board resolution that transferred
135,000 ordinary shares owning by Mr. Wukai Song to UTime Limited. Since inception, Bridgetime has only made nominal investments into
Do Mobile and no substantial business operations have occurred.
On May 20, 2019, the Company approved a board resolution
that agreed to transfer 12,000,000 ordinary shares being owned by Mr. Bao to Grandsky Phoenix Limited, a company that was established
under the laws of the BVI and 100% owned by Mr. Bao.
As all the entities involved in the process of the
Reorganization are under common control before and after the Reorganization, the Reorganization is accounted for in a manner similar to
a pooling-of-interest with the assets and liabilities of the parties to the Reorganization carried over at their historical amounts.
On June 3, 2019, the Company entered into a share
subscription agreement with HMercury Capital Limited, a company that was incorporated under the laws of the BVI and controlled by Mr.
He. HMercury Capital Limited purchased an aggregation of 377,514 ordinary shares. On the same day, the Company approved a board resolution
for issuance of 377,514 ordinary shares at par value US$0.0001 to HMercury Capital Limited based on the share subscription agreement.
As a result, Grandsky Phoenix Limited and HMercury Capital Limited own 96.95% and 3.05% of equity interest of the Company.
On April 29, 2020, the Company approved a board
resolution, which became effective immediately, that agreed to repurchase 7,620,000 and 239,721 ordinary shares, which were subsequently
cancelled, at par value (the “Repurchased Shares”) from Grandsky Phoenix Limited and HMercury Capital Limited, respectively,
in accordance with their respective share percentages based on the share repurchase agreement that the Company entered into with Grandsky
Phoenix Limited and HMercury Capital Limited on April 29, 2020. On August 13, 2020, the Company approved a board resolution and signed
capital contribution letter with Grandsky Phoenix Limited and HMercury Capital Limited, respectively. Based on the capital contribution
letter, each shareholder opted not to receive the consideration for the Repurchased Shares and made a pure capital contribution in the
sum of the purchase price in favor of the Company without the issue of additional shares of the Company. Before and after the repurchase
of ordinary shares, Mr. Bao, through Grandsky Phoenix Limited, and Mr. He, through HMercury Capital Limited, own 96.95% and 3.05% of our
issued and outstanding ordinary shares, respectively. The Company considers this repurchase of ordinary shares was part of the Company’s
recapitalization to result in 4,517,793 ordinary shares issued and outstanding prior to completion of its IPO. The Company believes it
is appropriate to reflect these nominal share repurchases to result in 4,517,793 ordinary shares being issued and outstanding or reduction
of 63.5% of total ordinary shares being issued and outstanding after the repurchase of ordinary shares similar to 0.365-for-1 reverse
stock split.
As of March 31, 2022, details of the subsidiaries
and VIE of the Company are set out below:
The Company conducts
substantial majority of business in the PRC through a series of contractual arrangements with the VIE and its subsidiaries. The VIE
and subsidiaries of the VIE hold the requisite licenses and permits necessary to conduct the Company’s business. In addition,
the VIE and subsidiaries of the VIE hold the assets necessary to operate the Company’s business and generate substantial
majority of the Company’s revenues.
Our contractual
arrangements with the VIE and its respective shareholders allow us to (i) determine the most significant economic activities of the VIE; (ii) receive substantially all of the economic benefits of the VIE; and (iii) have an exclusive option to
purchase all or part of the equity interest in and/or assets of the VIE when and to the extent permitted by PRC laws. As a result of
our direct ownership in UTime WFOE and the contractual arrangements with the VIE, we are regarded as the primary beneficiary of the
VIE, and we treat the VIE and its subsidiaries as our consolidated affiliated entities under generally accepted accounting
principles in the United States of America (“US GAAP”). We have consolidated the financial results of the VIE and
its subsidiaries in our consolidated financial statements in accordance with US GAAP.
The following is a summary
of the contractual arrangements by and among UTime WFOE, the VIE and the shareholders of the VIE and their spouses, as applicable.
The Company believes
that the contractual arrangements with its VIEs and their respective shareholders are in compliance with PRC laws and regulations
and are legally enforceable. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce the
contractual arrangements. If we or the VIE are found to be in violation of any existing or future PRC laws or regulations, or fail
to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion
to take action in dealing with such violations or failures, including:
The Company’s ability
to conduct its business may be negatively affected if the PRC government were to carry out any of the aforementioned actions. As a result,
the Company may not be able to consolidate its VIE in its consolidated financial statements as it may lose the ability to determine the
most significant economic activities of the VIE and it may lose the ability to receive economic benefits from the VIE. The Company, however,
does not believe such actions would result in the liquidation or dissolution of the Company, its PRC subsidiary or VIE.
Mr. Bao and Mr. He hold 96.95%
and 3.05% equity interest in the VIE, respectively. The shareholders of the VIE may have potential conflicts of interest with us. The
shareholders may breach, or cause the VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and the
VIE, which would have a material and adverse effect on our ability to determine the most significant economic activities of the VIE and
receive economic benefits from it. For example, the shareholders may be able to cause our agreements with the VIE 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 the 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 the shareholders
and our company. If we cannot resolve any conflict of interest or dispute between us and the 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.
The Company has aggregated
the financial information of the VIE and subsidiaries of the VIE in the table below. The aggregate carrying value of assets and liabilities
of VIE and its subsidiaries (after elimination of intercompany transactions and balances) in the Company’s consolidated balance
sheets as of March 31, 2021 and 2022 are as follows:
The table sets forth the revenue, net income and
cash flows of the VIE and subsidiaries of VIE in the table below.
On April 8, 2021, the
Company completed its IPO on Nasdaq Capital Market. In the offering, 3,750,000 of the Company’s ordinary shares were issued
and sold to the public at a price of US$4 per share for gross proceeds of US$15 million. The Company recorded net proceeds (after deducting
underwriting discounts and commissions and other offering fees and expenses) of approximately $13.9 million (approximately RMB88.2
million) from the offering.
On December 17, 2021, the Company,
through UTime Trading, acquired a 51% of the controlling equity interest of Gesoper. Subsequently, on January 17, 2022, Gesoper acquired
85% economic equity interest in Firts, which were determined to be variable interest entities of which the Company is considered the primary
beneficiary.
The consolidated financial statements of the Company
have been prepared in accordance with US GAAP.
In December 2019, a novel strain of coronavirus
was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. The COVID-19 outbreak is
causing lockdowns, travel restrictions, and closures of businesses and schools worldwide. The potential impact which may be caused by
the outbreak is uncertain; however, it may result in a material adverse impact on our financial position, operations and cash flows.
On March 24, 2020, the Indian government ordered
a 21-day nationwide lockdown, followed by another order on April 14, 2020 and was extended until May 31, 2020 with numerous relaxations
which inter alia permitted opening of businesses and offices with certain restrictions. The Indian government, on May 30, 2020 further
extended the lockdown in certain areas identified as ‘containment zones’ until June 30, 2020 and permitted re-opening of the
economy in a phased manner in areas outside the containment zones. Ministry of Home Affairs (MHA) announced that from July 1, 2020 to
July 30, 2020, lockdown measures were only imposed in containment zones. In all other areas, most activities were permitted. From August
1, 2020, night curfews were removed and all inter-and intra-state travel and transportation is permitted. Further, the respective state/union
territory governments have been empowered to prohibit activities in areas outside containment zones or impose such restrictions as deemed
necessary to contain the spread of COVID-19 which has slowed down the rate of resumption of business activities. Due to the lockdown,
our operations in India were halted for several weeks. We resumed our sales operations in various parts of India (except those falling
under containment zones) with effect from May 11, 2020. From March 2020 to the date of the financial statements, revenue generated from
Do Mobile decreased compared to the same period in 2019. The Indian government has now lifted nationwide lockdown and taking requisite
steps to bring back the Indian economy on track. Indian government has also initiated COVID-19 vaccination throughout India to eradicate
its further spread. In the event the Indian government decides to re-impose the lockdown or additional restrictions if situation worsens
due to any reason on continuation of business activities, it may have a detrimental impact on the resumption of our business operations
in India.
The Company’s
operating results from April 1, 2020 through the date of the financial statements have been significantly affected by the outbreak
of COVID-19. Total revenue is lower than previously expected. From January 2020 to May 2020, UTime SZ borrowed an aggregate of
RMB4.6 million from Mr. Bao for additional working capital demand arisen in connection with the COVID-19 outbreak and repaid an
aggregate of RMB3.2 million. Since March 2020, the Company has participated in efforts to stem the spread of the epidemic, namely, by
serving as a temporary distributor of face masks to an existing overseas client in Brazil. All the face masks distributed by the
Company were sold to such customer with delivery terms entered into on a Free On Board basis at Shenzhen port. These completed
purchase orders, which aggregated approximately US$6.7 million have helped the Company to maintain revenue and cash flow to a
certain extent. However, the Company does not intend for this revenue stream to become part of its long-term business strategy.
During the year ended March 31, 2022, the Company did not generate revenue from this revenue stream.
Extended periods of interruption to our corporate,
development or manufacturing facilities due to the COVID-19 pandemic could cause the Company to lose revenue and market share, which would
depress its financial performance and could be difficult to recapture. The Company’s business may also be harmed if travel to or
from the PRC continues to be restricted or inadvisable or if members of management and other employees are absent because they contract
the coronavirus, they elect not to come to work due to the illness affecting others in the Company’s office or manufacturing facilities,
or they are subject to quarantines or other governmentally imposed restrictions.
The consolidated financial statements include the
financial statements of the Company and its subsidiaries, VIE and VIE’s subsidiaries for which the Company is the primary beneficiary.
All significant inter-company balances and transactions between the Company, its subsidiaries, VIE and VIE’s subsidiaries are eliminated.
The preparation of the consolidated financial statements
in conformity with US GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the period. Management evaluates these estimates and assumptions on a regular
basis. Significant accounting estimates reflected in the Company’s consolidated financial statements include but are not limited
to estimates and judgments applied in the allowance for receivables, write down of other assets, estimated useful lives of property and
equipment, impairment on inventory, sales return, product warranties, the valuation allowance for deferred tax assets and income tax,
provision for employee benefits, and going concern. Actual results could differ from those estimates and judgments.
Cash and cash equivalents consist of cash on hand,
bank deposits and short-term, highly liquid investments with original maturities of three months or less at the date of purchase, that
are readily convertible to known amounts of cash and have insignificant risk of changes in value related to changes in interest rates.
Restricted cash consisted of collateral representing
cash deposits for long-term borrowings.
Accounts receivable and other
receivables are reflected in the Company’s consolidated balance sheets at their estimated collectible amounts. A substantial majority
of its accounts receivable are derived from sales to well-known technological clients. The Company follows the allowance method of recognizing
uncollectible accounts receivable and other receivables, pursuant to which the Company regularly assesses its ability to collect outstanding
customer invoices and make estimates of the collectability of accounts receivable and other receivables. The Company provides an allowance
for doubtful accounts when it determines that the collection of an outstanding customer receivable is not probable. The allowance for
doubtful accounts is reviewed on a timely basis to assess the adequacy of the allowance. The Company takes into consideration (a) historical
bad debts experience, (b) any circumstances of which it is aware of a customer’s or debtor’s inability to meet its financial
obligations, (c) changes in its customer or debtor payment history, and (d) its judgments as to prevailing economic conditions
in the industry and the impact of those conditions on its customers and debtors. If circumstances change, such that the financial conditions
of its customers or debtors are adversely affected and they are unable to meet their financial obligations to the Company, it may need
to record additional allowances, which would result in a reduction of its net income.
Notes receivable represent banks’ acceptances
that have been arranged with third-party financial institutions by certain customers to settle their purchases from the Company. These
banks’ acceptances are non-interest bearing and are collectible within six months. Its balance is combined under accounts receivable,
if any.
Assets that potentially subject the Company to significant
concentration of credit risk primarily consist of cash and cash equivalents, restricted cash, accounts receivable and other current assets.
The maximum exposure of such assets to credit risk is their carrying amounts as at the balance sheet dates. As of March 31, 2021 and 2022,
the aggregate amount of cash and cash equivalents, and restricted cash of RMB9.47 million and RMB67.2 million respectively.
To limit exposure to credit risk relating to deposits,
the Company primarily place cash deposits with large financial institutions in PRC. The Company conducts credit evaluations of its customers,
and generally does not require collateral or other security from them. The Company establishes an accounting policy for allowance for
doubtful accounts on the individual customer’s financial condition, credit history, and the current economic conditions. As of March
31, 2021 and 2022, the Company recorded RMB0.9 million and RMB0.1 million of allowances for accounts receivable, respectively.
Major suppliers — During the year
ended March 31, 2020, the Company had two suppliers accounted over 10% of total purchases and processing fees, and purchase and
processing fees from these suppliers amounted to a total of RMB35.7 million. During the year ended March 31, 2021, the Company had no
supplier accounted over 10% of total purchases and processing fees. During the year ended March 31, 2022, the Company had one
supplier accounted over 10% of total purchases and processing fees from the supplier amounted to RMB39.5 million.
Inventories of the Company consist of raw materials,
finished goods and work in process. Inventories are stated at lower of cost or net realizable value with cost being determined on the
weighted average method. Elements of cost in inventories include raw materials, direct labor costs, other direct costs, consignment manufacturing
cost and manufacturing overhead. The Company assesses the valuation of inventory and periodically writes down the value for estimated
excess and obsolete inventory based upon the product life-cycle.
Property and equipment are stated at cost less accumulated
depreciation and impairment, if any. Cost represents the purchase price of the asset and other costs incurred to bring the asset into
its existing use. Maintenance and repairs are charged to expenses as incurred. Depreciation of property and equipment are provided using
the straight-line method over their estimated useful lives as follows:
Upon retirement or sale of an asset, the cost of
the asset and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is credited or charged
to other (income) expenses, net.
Intangible asset results
from the acquisition of the licensed software and customer relationships. Identifiable intangible assets are carried at acquisition
cost less accumulated amortization and impairment loss, if any. The Company accounts for such licensed software with definite lives
and amortized using the straight-line method over its estimated useful life of 3 years.
The Company reviews the carrying
value of long-lived assets to be held and used when events and circumstances warrants such a review. The carrying value of a long-lived
asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its
carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the
risk involved. Losses on long-lived assets to be disposed are determined in a similar manner, except that fair market values are reduced
for the cost to dispose. No impairment charge was recognized for all periods presented.
The Company’s long-term
investments consist of equity method investment. Investment in entities in which the Company can exercise significant influence and holds
an investment in voting common stock or in-substance common stock (or both) of the investee but does not own a majority equity interest
or control are accounted for using the equity method of accounting in accordance with ASC topic 323 (“ASC 323”), Investments-Equity
Method and Joint Ventures. Under the equity method, the Company initially records its investment at cost. The Company subsequently adjusts
the carrying amount of the investments to recognize the Company’s proportionate share of each equity investee’s net income
or loss into earnings after the date of investment. The Company evaluates the equity method investment for impairment under ASC 323. An
impairment loss on the equity method investment is recognized in earnings when the decline in value is determined to be other-than-temporary.
Under the FASB’s authoritative
guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. In determining the fair value, the Company uses various
methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that
market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs
to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company
uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on observability
of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value
hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.
Financial assets and liabilities
carried at fair value are classified and disclosed in one of the following three categories:
All transfers between fair
value hierarchy levels are recognized by the Company at the end of each reporting period. In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value
hierarchy is based on the lowest level of input that is significant to the fair value measurement in its entirety requires judgment, and
considers factors specific to the investment. The inputs or methodology used for valuing financial instruments are not necessarily an
indication of the risks associated with investment in those instruments.
Borrowings — Interest
rates under the borrowing agreements with the lending parties were determined based on the prevailing interest rates in the market. The
Company classifies the valuation techniques that use these inputs as Level 2 fair value measurement. The carrying value of the Company’s
borrowings approximates fair value as the borrowing bears interest rates that are similar to existing market rates.
Other financial items for disclosure
purpose — The fair value of other financial items of the Company for disclosure purpose, including cash and cash equivalents,
restricted cash, accounts receivable, other receivables, other current assets, accounts payable, other payables and accrued liabilities,
approximate their carrying value due to their short-term nature.
Government grants are
recognized in the balance sheet initially when there is reasonable assurance that they will be received and that the enterprise will
comply with the conditions attached to them. When the Company received the government grants but the conditions attached to the
grants have not been fulfilled, such government grants are deferred and recorded as deferred revenue. As of March 31, 2021 and 2022,
the deferred revenue were RMB1 million, which was recorded as deferred revenue within other payables and accrued liabilities in current
liabilities, and RMB nil respectively. The classification of short-term or long-term liabilities is depended on the
management’s expectation of when the conditions attached to the grant can be fulfilled. Grants that compensate the Company for
expenses incurred are recognized as other income in statement of income on a systematic basis in the same periods in which the
expenses are incurred. Government subsidies recognized as other income in the consolidated statement of comprehensive loss for the
years ended March 31, 2020, 2021 and 2022 were RMB1.5 million, RMB1.3 million and RMB2.9 million, respectively.
The Company determines
if an arrangement is a lease at inception. Operating leases are included in operating lease, right-of-use (“ROU”) assets
and lease liabilities in the consolidated balance sheets.
ROU assets represent the
Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation
to make lease payments arising from the lease. Operating lease, ROU assets and lease liabilities are recognized at commencement date
based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit
rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the
present value of lease payments. It uses the implicit rate when readily determinable. The operating lease, ROU asset also includes
any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate
the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized
on a straight-line basis over the lease term. The Company have elected not to recognize ROU assets and lease liabilities for
short-term leases for all classes of underlying assets. Short-term leases are leases with terms of 12 months or less and does not
include a purchase option that is reasonably certain to exercise.
In the normal course of business,
the Company is subject to contingencies, including legal proceedings and claims arising out of the business that relate to a wide range
of matters. The Company recognizes a liability for such contingency if it determines it is probable that a loss has occurred and a reasonable
estimate of the loss can be made. The Company may consider many factors in making these assessments including historical and the specific
facts and circumstances of each matter.
The Company derives revenue
principally from the sale of mobile phones and accessories. Revenue from contracts with customers is recognized using the following five
steps:
A contract contains a promise
(or promises) to transfer goods or services to a customer. A performance obligation is a promise (or a group of promises) that is distinct.
The transaction price is the amount of consideration the Company expects to be entitled from a customer in exchange for providing the
goods or services.
The unit of account for revenue
recognition is a performance obligation (a good or service). A contract may contain one or more performance obligations. Performance obligations
are accounted for separately if they are distinct. A good or service is distinct if the customer can benefit from the good or service
either on its own or together with other resources that are readily available to the customer, and the good or service is distinct in
the context of the contract. Otherwise, performance obligations are combined with other promised goods or services until the Company identifies
a bundle of goods or services that is distinct. Promises in contracts which do not result in the transfer of a good or service are not
performance obligations, as well as those promises that are administrative in nature, or are immaterial in the context of the contract.
The Company has addressed whether various goods and services promised to the customer represent distinct performance obligations. The
Company applied the guidance of ASC Topic 606-10-25-16 through 18 in order to verify which promises should be assessed for classification
as distinct performance obligations.
The Company’s revenue
is primary derived from (i) OEM and ODM services for well-known brands; (2) its own in-house brands, positioned in the emerging
middle class consumer groups and price-sensitive consumers in emerging markets. Refer to Note 17 to the consolidated financial statements
for disaggregation of the Company’s revenue by type of product and geography information for the years ended March 31, 2020, 2021
and 2022.
For the year ended March 31,
2021, the Company participated in efforts to stem the spread of the COVID-19 epidemic, namely, by serving as a temporary distributor of
face masks to an existing overseas client in Brazil. The Company recognizes revenue from sales of face masks upon transfer of control
of its products to the customer, which typically occurs upon delivery. The Company’s main performance obligation to its customers
is the delivery of products in accordance with purchase orders. Each purchase order defines the transaction price for the products purchased
under the arrangement. Delivery of these products occurs at that point of time when the control of the products is transferred to the
customer. All the face masks sold with delivery terms entered into on a Free On Board basis at Shenzhen port.
The following table disaggregates the Company’s
revenue by type of contract for the years ended March 31, 2020, 2021 and 2022:
Revenue is measured
based on the consideration to which the Company expects to be entitled in a contract with a customer and excludes amounts collected
on behalf of third parties. The Company generates its revenue through product sales, and shipping terms generally indicate when it
has fulfilled its performance obligations and passed control of products to its customer, when the goods have been shipped to the
customer’s specific location (delivery). Following delivery, the customer has full discretion over the manner of distribution
and price to sell the goods, has the primary responsibility when selling the goods and bears the risks of obsolescence and loss in
relation to the goods but has no right to return the products (other than for defective products). A receivable is recognized by the
Company when the goods are delivered to the customer as this represents the point in time at which the right to consideration
becomes unconditional, as only the passage of time is required before payment is due. Revenue from OEM/ODM customers does not meet
the criteria to be recognized over time since 1) it does not have the right of payment for the performance completed to date, 2) its
work neither creates or enhances an asset controlled by customers until goods are delivered to the customer, 3) customers do not
receive and consume benefits simultaneously provided by its performance.
For revenue realized in Indian
market, additional term of goods return may apply. Under Do Mobile’s policy, end users have a right of return for defective devices
within 7 days. At the point of sale, a refund liability and a corresponding adjustment to revenue is recognized for those products
expected to be returned. At the same time, Do Mobile has a right to recover the product when customers exercise their right of return
so consequently recognizes a right to returned goods asset and a corresponding adjustment to cost of sales. Do Mobile uses its accumulated
historical experience to estimate the number of returns on a portfolio level using the expected value method, taking into consideration
the type of products.
Contract assets, such as costs
to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process. The majority of the
Company’s cost of fulfillment as a manufacturer of products is classified as inventories and property and equipment, which are accounted
for under the respective guidance for those asset types. Other costs of contract fulfillment are immaterial due to the nature of the Company’s
products and their respective manufacturing processes.
Contract liabilities are mainly
advance from customers.
In the PRC, value added
tax (the “VAT”) of 17% (before May 1, 2018), 16% (from May 1, 2018 to April 1, 2019) and 13% (after April 1, 2019 until
now) on invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The Company reports revenue net of
VAT. VIE and its subsidiary in China that are VAT general tax payers are allowed to offset qualified VAT paid against their output
VAT liabilities.
Cost of sales consists primarily of material costs,
direct labor costs, other direct costs, consignment manufacturing cost and manufacturing overhead, which are directly attributable to
the production of products. Write-down of inventories to lower of cost or net realizable value is also recorded in cost of sales.
Selling and marketing
expenses consist primarily of (i) advertising and market promotion expenses, (ii) shipping expenses and
(iii) salaries and welfare for sales and marketing personnel. The advertising and market promotion expenses amounted to RMB0.1
million, RMB0.1 million and RMB0.1 million for the years ended March 31, 2020, 2021 and 2022, respectively. The shipping and
handling fees amounted to RMB1.6 million, RMB1.2 million and RMB1.4 million for the years ended March 31, 2020, 2021 and 2022,
respectively.
All research and
development costs, including patent application costs, are expensed as incurred. Research and development costs total RMB10.7
million, RMB7.2 million and RMB14.1 million for the years ended March 31, 2020, 2021 and 2022, respectively, and are included within general and
administrative expenses in the consolidated statements of comprehensive loss.
The employees of the
Company are entitled to social benefits in accordance with the relevant regulations of the countries in which these companies are
incorporated. The social benefits of the employees of the Company in the PRC include medical care, welfare subsidies, unemployment
insurance, employment housing fund and pension benefits. The Company’s subsidiary in India is also required to pay for
employee social benefits based upon certain percentages of employees’ salaries in accordance with the relevant local
regulation. The Company has no legal obligation for the benefits beyond the contributions made. The total amounts of such employee
benefit expenses, which were expensed as incurred, were approximately RMB1.8 million, RMB0.4 million and RMB1.1 million for the
years ended March 31, 2020, 2021 and 2022, respectively.
Borrowing costs attributable
directly to the acquisition, construction or production of qualifying assets which require a substantial period of time to be ready for
their intended use or sale, are capitalized as part of the cost of those assets. Income earned on temporary investments of specific borrowings
pending their expenditure on those assets is deducted from borrowing costs capitalized. All other borrowing costs are recognized in interest
expenses in the consolidated statement of comprehensive loss in the period in which they are incurred.
Income taxes are accounted
for using the asset and liability method as prescribed by ASC 740 “Income Taxes.” Under this method, deferred income tax assets
and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. A valuation allowance would be provided for those deferred tax assets for which if it is more likely than not that
the related benefit will not be realized.
The guidance on accounting
for uncertainties in income taxes prescribes a more likely than not threshold for financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. Guidance was also provided on the recognition of income tax assets and
liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated
with tax positions, accounting for income taxes in interim periods, and income tax disclosures. Significant judgment is required in evaluating
the Company’s uncertain tax positions and determining its provision for income taxes. The Company recognizes interests and penalties,
if any, under accrued expenses and other current liabilities on its balance sheet and under other expenses in its statement of comprehensive
income. The Company did not recognize any interest and penalties associated with uncertain tax positions for the years ended March 31,
2020, 2021 and 2022. As of March 31, 2021 and 2022, the Company did not have any significant unrecognized uncertain tax positions.
Pursuant to the laws applicable
to the PRC, domestic PRC entities must make appropriations from after-tax profit to non-distributable reserves funds. Subject to the limits
of 50% of the entity’s registered capital, the statutory surplus reserve fund requires annual appropriations of 10% of after-tax
profit (as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) at each year-end). These reserve
funds can only be used for specific purposes and are not distributable as cash dividends. Appropriation has been made to these statutory
reserve funds of RMB nil, RMB0.2 million and RMB nil for the years ended March 31, 2020, 2021 and 2022, respectively. As of March 31, 2021 and
2022, the amount set aside were RMB6.3 million.
A non-controlling interest
in a subsidiary of the Company represents the portion of the equity (net assets) in the subsidiary not directly or indirectly attributable
to the Company. Non-controlling interests are presented as a separate component of equity on the consolidated balance sheets and net loss
and other comprehensive loss are attributed to controlling and non-controlling interests.
The reporting currency of the
Company is the RMB. The Company’s subsidiaries, consolidated VIE and VIE’s subsidiaries with operations in the PRC, Hong Kong,
and other jurisdictions generally use their respective local currencies as their functional currencies, except that UTime Trading uses
United States dollar (“US$”) as functional currency. The financial statements of the Company’s subsidiaries, other
than the consolidated VIE and VIE’s subsidiary with the functional currency in RMB, are translated into RMB using the exchange rate
as of the balance sheet date for assets and liabilities, historical exchange rate for equity amounts and the average rate during the reporting
period for income and expense items. Translation gains and losses are recorded in accumulated other comprehensive income or loss as a
component of shareholders’ equity.
In the financial statements
of the Company’s subsidiaries and consolidated VIE and VIE’s subsidiary, transactions in currencies other than the functional
currency are measured and recorded in the functional currency using the exchange rate in effect at the date of the transaction. At the
balance sheet date, monetary assets and liabilities that are denominated in currencies other than the functional currency are translated
into the functional currency using the exchange rate at the balance sheet date. All gains and losses arising from foreign currency transactions
are recorded in other (income) expenses, net in the consolidated statements of comprehensive loss.
Translations of balances in the consolidated balance
sheets, consolidated statements of comprehensive loss and consolidated statements of cash flows from RMB into US$ as of and for the year
ended March 31, 2022 are solely for the convenience of the reader and has been made at the exchange rate quoted by the central parity
of RMB against the US$ by the People’s Bank of China on March 31, 2022 of US$1.00 = RMB6.3482. No representation is made that the
RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on March 31, 2022, or at any other rate.
Comprehensive loss is comprised
of the Company’s net loss and comprehensive loss. The component of comprehensive loss is consisted solely of foreign currency translation
adjustments.
Parties are considered to be
related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other
party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or
significant influence, such as a family member or relative, shareholder, or a related corporation.
FASB ASC Topic 280, “Segment
Reporting” establishes standards for reporting information about reportable segments. Operating segments are defined as components
of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker,
or decision-making group in deciding how to allocate resources and in assessing performance.
Management views the business
as consisting of revenue streams; however they do not produce reports for, assess the performance of, or allocate resources to these revenue
streams based upon any asset-based metrics, or based upon income or expenses, operating income or net income. Therefore, the Company believes
that it operates in one business segment. Substantively all of the Company’s long-lived assets are located in the PRC.
Basic net loss per share is
the amount of net loss available to each share of ordinary shares outstanding during the reporting period. Diluted net loss per share
is the amount of net loss available to each share of ordinary shares outstanding during the reporting period adjusted to include the effect
of potentially dilutive ordinary shares, if any. Basic and diluted loss per share for each of the periods presented are calculated as
follows:
The Company accounts for acquisitions
of an asset or group of similar identifiable assets that do not meet the definition of a business as an asset acquisition using the cost
accumulated method, whereby the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the
basis of their relative fair values. No goodwill is recognized in an asset acquisition. Intangible assets acquired in an asset acquisition
for use in research and development activities which have no alternative future use are expensed as in-process research and development
on the acquisition date. Intangible assets acquired for use in research and development activities which have an alternative future use
are capitalized as in-process research and development. Future costs to develop these assets are recorded to research and development
expense as they are incurred.
In June 2016, the FASB
issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU
2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses
and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13
requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU
2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. In October 2019, the FASB
issued ASU No. 2019-10, “Financial Instruments-Credit Losses (Topic 326): Effective Dates”, to finalize the effective
date delays for private companies, not-for-profits, and smaller reporting companies applying the current expected credit loss (CECL)
standards. In March 31, 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt
Restructurings and Vintage Disclosures, which eliminates the TDR accounting model for creditors that have already adopted Topic 326,
which is commonly referred to as the CECL model. These ASUs are effective for reporting periods
beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. The Company has not
early adopted this update and it will become effective on April 1, 2023 assuming the Company will remain an emerging growth company.
The Company is currently assessing the impact of adopting this standard on its consolidated financial statements.
In October 2021, the FASB issued
ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
(ASU 2021-08), which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in
a business combination in accordance with Topic 606, Revenue from Contracts with Customers. The new amendments are effective for fiscal
years beginning after December 15, 2023, including interim periods within those fiscal years. The amendments should be applied prospectively
to business combinations occurring on or after the effective date of the amendments, with early adoption permitted. The Company is currently
evaluating the impact of the new guidance on the consolidated financial statements.
The Company analyzed the collectability of accounts
receivable based on historical collection and the customers’ intention of payment. As a result of such analysis, the allowance for
doubtful accounts was as follows:
As of March 31, 2021 and
2022, the allowance for doubtful accounts amounted to RMB0.9 million and RMB0.1 million, respectively. The Company determined that
the collection of these customers’ receivable is not probable due to financial difficulties experienced by related
customers.
As of March 31, 2021 and
2022, other receivables consisted of deposits for leased equipment and factory building and utility amounted to RMB5 million and
RMB8 million for which the lease will expire before February 28, 2023.
The Company analyzed the collectability of other
current assets based on historical collection. As a result of such analysis, the movement of allowance for doubtful accounts was as follows:
As of March 31, 2021 and 2022, the allowance for doubtful accounts
on advance to suppliers of RMB0.7 million and RMB1.7 million were primarily consist of unrecoverable prepayment related to cancellation of abundant
purchase orders caused by termination of cooperation with certain OEM/ODM customers, significant decline in operating activities in India
and VAT recoverable from certain supply chain companies.
Net loss before taxes of RMB21.5
million, RMB17.0 million and RMB39.4 million were attributed by non-U.S. entities for the years ended March 31, 2020, 2021 and 2022, respectively.
Gesoper and Firts, which were
incorporated in Mexico, are subject to federal corporate income tax rate of 30% on the assessable profits.
As of March 31, 2021, the
Company’s total net operating loss carry forwards was RMB82.8 million out of which, RMB55.2 million would expire from 2021 through
2030, RMB27.6 million can be carried forward indefinitely. As of March 31, 2022, the Company’s total net operating loss carry forwards
of RMB116.2 million, out of which, RMB83.2 million would expire from 2022 through 2031, RMB33.9 million can be carried forward indefinitely.
The Company is subject to
taxation in China, Hong Kong and India. According to the PRC Tax Administration and Collection Law, the statute of limitations is three
years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations
is extended to five years under special circumstances, where the underpayment of taxes is more than RMB0.1 million. In the case of transfer
pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion.
On December 17, 2021, the Company,
through UTime Trading, acquired a 51% of the controlling equity interest of Gesoper. Subsequently, on January 17, 2022, Gesoper acquired
85% economic equity interest in Firts, which were determined to be variable interest entities of which the Company is considered the primary
beneficiary.
According to ASC 805, a primary
beneficiary’s initial consolidation of a VIE whose assets and liabilities do not constitute a business is excluded from the scope
of business combination. Accordingly, the Company applied ASC 810, Consolidation, for initial measurement and recognition of the net assets
of acquired entities upon initial consolidation.
At of the date of acquisition,
the fair value of net assets of Gesoper and Firts based on a third-party appraisal both was RMB0.02 million, of which RMB0.7 million and
RMB0.5 million are the customer-related intangible assets, RMB0.7 million and RMB0.5 million are liabilities of amount due to potential
investors and shareholders, respectively. The remaining assets and liabilities of both entities mainly consist of bank balances, other
receivables, other payables and deferred tax liabilities. No gain or loss was generated as a result of the fair value of the consideration
paid since it approximated the fair value of net assets acquired.
U.S. GAAP
0.75
3.68
4.76
4.81
4507223
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8164771
4507223
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P1Y
On April 19, 2019, UTime SZ approved a board resolution and also approved a shareholder resolution in August 2019, both of which agreed Mr. He, the controlling shareholder of HMercury Capital Limited, to invest in UTime SZ’s equity interest of RMB21.4 million of which RMB15 million was received during the year ended March 31, 2020. As of March 31, 2021, the amount due from Mr. He was RMB6.4 million. On July 19, 2021, Mr. He fully repaid the RMB6.4 million.
For the year ended March 31, 2022, UTime HK received the IPO proceeds of RMB88.2 million and made down payment for financing services of RMB19 million on behalf of UTime Limited.
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