PART
I
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
A.
Directors and Senior Management
Not
applicable.
B.
Advisors
Not
applicable.
C.
Auditors
Not
applicable.
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
A.
Offer Statistics
Not
applicable.
B.
Method and Expected Timetable
Not
applicable.
ITEM
3. KEY INFORMATION
A.
Selected Financial Data
The
following table presents selected financial data regarding our business. It should be read in conjunction with our consolidated
financial statements and related notes contained elsewhere in this annual report and the information under Item 5 “Operating
and Financial Review and Prospects.” The selected consolidated statement of income (loss) data for the fiscal years ended
December 31, 2020, 2019, and 2018, and the selected consolidated balance sheet data as of December 31, 2020 and 2019 have been
derived from our audited consolidated financial statements that are included in this annual report beginning on page F-1. The
selected consolidated statement of income (loss) data for the fiscal years ended December 31, 2017 and 2016, and the selected
consolidated balance sheet data as of December 31, 2018, 2017 and 2016 have been derived from our audited consolidated financial
statements that are not included in this annual report.
Our
consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the
United States, or U.S. GAAP. The selected financial data information is only a summary and should be read in conjunction with
the historical consolidated financial statements and related notes contained elsewhere herein. The financial statements contained
elsewhere fully represent our financial condition and operations; however, they are not indicative of our future performance.
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|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
11,062,775
|
|
|
$
|
13,791,303
|
|
|
$
|
20,578,340
|
|
|
$
|
18,189,274
|
|
|
$
|
10,193,590
|
|
Total cost of revenue
|
|
$
|
7,119,125
|
|
|
$
|
7,189,092
|
|
|
$
|
10,924,246
|
|
|
$
|
9,867,508
|
|
|
$
|
7,607,190
|
|
Gross profit
|
|
$
|
3,943,650
|
|
|
$
|
6,602,211
|
|
|
$
|
9,654,094
|
|
|
$
|
8,321,766
|
|
|
$
|
2,586,400
|
|
(Loss) income from operations
|
|
$
|
(17,366,729
|
)
|
|
$
|
(4,172,161
|
)
|
|
$
|
168,824
|
|
|
$
|
(450,703
|
)
|
|
$
|
(14,577,928
|
)
|
Net (loss) income attributable to TAOP-continuing operations
|
|
$
|
(17,694,775
|
)
|
|
$
|
(3,582,332
|
)
|
|
$
|
1,691,983
|
|
|
$
|
858,605
|
|
|
$
|
(18,170,601
|
)
|
Net (loss) income per share-continuing operations - basic
|
|
$
|
(2.40
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
0.24
|
|
|
$
|
0.12
|
|
|
$
|
(2.70
|
)
|
Net (loss) income per share-continuing operations - diluted
|
|
$
|
(2.40
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
0.24
|
|
|
$
|
0.12
|
|
|
$
|
(2.70
|
)
|
|
|
As of December 31,
|
|
Balance Sheet Data
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Cash and cash equivalents
|
|
$
|
882,770
|
|
|
$
|
1,519,666
|
|
|
$
|
1,653,260
|
|
|
$
|
3,260,808
|
|
|
$
|
3,752,375
|
|
Working (deficiency) capital
|
|
$
|
(17,370,717
|
)
|
|
$
|
(6,975,325
|
)
|
|
$
|
4,865,813
|
|
|
$
|
(1,494,326
|
)
|
|
$
|
(5,739,129
|
)
|
Total assets
|
|
$
|
30,776,651
|
|
|
$
|
40,615,546
|
|
|
$
|
41,615,814
|
|
|
$
|
37,530,503
|
|
|
$
|
34,286,999
|
|
Total liabilities
|
|
$
|
29,800,451
|
|
|
$
|
26,007,161
|
|
|
$
|
24,011,887
|
|
|
$
|
23,013,011
|
|
|
$
|
21,484,751
|
|
Temporary equity
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total equity
|
|
$
|
976,200
|
|
|
$
|
14,608,385
|
|
|
$
|
17,603,927
|
|
|
$
|
14,517,492
|
|
|
$
|
12,802,248
|
|
B.
Capitalization and Indebtedness
Not
applicable.
C.
Reasons for the Offer and Use of Proceeds
Not
applicable.
D.
Risk Factors
An
investment in our capital stock involves a high degree of risk. You should carefully consider the risks described below, together
with all of the other information included in this annual report, before making an investment decision. If any of the following
risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price
of our ordinary shares could decline, and you may lose all or part of your investment.
Risks
Relating to our Business
If
the COVID-19 pandemic is not effectively controlled in a short period of time, our business operation and financial condition
in the long-term may be materially and adversely affected as a result of any slowdown in economic growth, operation disruptions
or other factors that we cannot predict.
The
spread of the novel coronavirus (“COVID-19”), which was declared a pandemic by the World Health Organization in March
2020, has caused different countries and cities to mandate curfews, including “shelter-in-place” and closures of most
non-essential businesses as well as other measures to mitigate the spread of the virus. All of our operating subsidiaries and
affiliated entities are located in China. All of our employees and substantially all of our customers and suppliers are also located
in China. For most of the first quarter of 2020, we scaled back operations, as our employees worked remotely or at premises in
shifts for limited periods of time in response to nationwide lockdowns and quarantines. The pandemic has also depressed customers’
demand for our products and services, since businesses across China largely suspended or reduced operations during the first quarter
of 2020. Our business and operations resumed during the second quarter of 2020. However, the extent of the long-term adverse
impact of COVID-19 on our business and operations is highly uncertain and depends on several factors, such as the duration, severity,
and geographic spread of the pandemic, development of the testing and treatment and stimulus measures of the government, all of
which are out of our control.
Given
the uncertainty of the outbreak, the spread of COVID-19 may be prolonged and worsened, and we may be forced to scale back or even
suspend our operations. As COVID-19 spreads outside China, the global economy is suffering a noticeable slowdown. As this outbreak
persists, commercial activities throughout the world have been curtailed with decreased consumer spending, business operation
disruptions, interrupted supply chain, difficulties in travel and reduced workforces. The duration and intensity of disruptions
resulting from the COVID-19 outbreak is uncertain. It is unclear as to when the outbreak will be contained, and we also cannot
predict if the impact will be short-lived or long-lasting. The extent to which outbreak impacts our long-term financial results
will depend on its future developments. If the COVID-19 pandemic is not effectively controlled in a short period of time, our
long-term business operation and financial condition may be materially and adversely affected as a result of any slowdown in economic
growth, operation disruptions or other factors that we cannot predict.
We
have a limited operating history of selling cloud-based products and services and may be unable to achieve or sustain profitability
or reasonably predict our future results.
In
early 2013, we made a strategic decision to transform our business from servicing the public sector to focusing on the private
sector. Leveraging our experience and expertise in handling large-scale IT projects for the public sector, we started investing
in research and development to develop software products for the private sector. In 2014, continuing our business transition from
the public sector to the private sector, we identified and provided cloud-based ecosystem solutions to four core markets including
new media, healthcare, education, and residential community management. Underpinning our ecosystems are our industry-specific
integrated technology platform, resource exchange, and big data services. In 2014, we predominately sold our cloud-based solutions
to the Chinese new media industry. Starting from 2015, we further expanded the customer base of cloud-based solutions to education,
government, and residential community management. In 2016, we expanded our business from the industry-specific integrated technology
platform, resource exchange, and big data services into the elevator IoT sectors. From May 2017, we have focused our business
to provide products and services on Cloud-App-Terminal (CAT) and IoT technology based digital advertising distribution networks
and new media resource sharing platforms in the out-of-home adverting market in China. As such, we have a limited operating history
of selling our cloud-based products and professional services to the private sector, which makes it difficult to evaluate our
current business and future prospects and may increase the risk of your investment. In 2020 and 2019, we generated approximately
$10.7 million and $13.7 million in revenue respectively, from our cloud-based technology (CBT) segment for customers in the
new media, and out-of-home advertising market sectors. We expect to have significant operating expenses in the future to further
support and grow our business, including expanding the scope of our customer base, expanding our direct and indirect selling capabilities,
pursuing acquisitions of complementary businesses, investing in our data storage and analysis infrastructure, and research and
development, and increasing our international presence.
Our
independent registered auditors have expressed substantial doubt about our ability to continue as a going concern.
Our
independent auditors have added an explanatory paragraph to their audit opinion issued in connection with our financial statements
included in this report which states that the financial statements were prepared assuming that we would continue as a going concern.
As
discussed elsewhere in this report, we reported net income as well as positive cash flows from operating activities in 2018 and
2017. However, due to the unfavorable macro-economic environment and the slowdown of the out-of-home advertising market in China,
we incurred net loss of approximately $3.6 million in 2019 and $18.3 million in 2020. As disclosed under Item 5, “Operating
and Financial Review and Prospects” and notes to the consolidated financial statements, we will continue to execute the
existing business strategies with focuses on selection of quality customers, collection of accounts receivable, maintaining proper
inventory level, and managing accounts payable to enhance operating cash flows. In addition, the Company will aggressively develop
domestic and international markets to develop new customers. There can be no assurance that we will be successful in achieving
the goals set forth in our new business strategy and business model.
Unfavorable
economic conditions may affect the level of the out-of-home advertising and information technology spending by our customers which
could cause the demand for our products and services to decline.
The
revenue growth and profitability of our business rely on the overall demand by our customers for out-of-home digital advertising,
display technology products, and internet related services. Our business is sensitive to the overall economy in China and the
economic and business conditions within our respective product and service sectors. If there is an economic downturn, our existing
and prospective customers may reassess their decisions to purchase our products and services. China’s economic slowdown
or a reduction in out-of-home advertising and information technology spending by our customers could harm our business in many
ways, including longer sales cycles and lower prices for our products and services. These events could have a material effect
on our future revenues and earnings.
Our
periodic operating results are difficult to predict and could fall below investors’ expectations or estimates by securities
research analysts, which may cause the trading price of our ordinary shares to decline.
Our
revenues and operating results can vary significantly from a filing period to the next due to a number of factors, many of which
are beyond our control, such as public health pandemic, fluctuations in the volume of purchase by our customers as a result of
changes in their operations, their decisions to purchase our products and services, as well as currency fluctuations. Our revenues
and operating results could also be affected by delays or difficulties in expanding our geographical presence and infrastructure,
changes to our pricing strategies due to a competitive business environment and underestimates of resources and time required
to complete ongoing projects. Our first-quarter revenues may be relatively low compared to that of the other quarters due to the
Chinese New Year holiday. Moreover, our operating and financial results may fluctuate as a result of our dependency on our customers’
budgets and spending patterns. Therefore, we may not be able to accurately forecast the demand for our products and services beyond
the current calendar year, which could adversely affect our business, operating results, and financial condition. In addition,
sales volumes from specific customers are likely to vary from year to year, and a major customer in one year may not remain as
a major customer in the subsequent years.
These
fluctuations are likely to continue in the future and operating results for any period may not be indicative of our performance
in any future period. If our operating results for any filing period fall below investors’ expectations or estimates by
securities research analysts, the trading price of our ordinary shares may decline.
We
face risks associated with new businesses or assets acquired through mergers or acquisitions, and the acquired companies may not
perform to our expectations, which may adversely affect our results of operations.
We
face risks when we acquire other businesses. These risks include:
|
●
|
difficulties
in the integration of acquired operations and retention of personnel,
|
|
●
|
unforeseen
or hidden liabilities,
|
|
●
|
relevant
tax, regulatory and accounting matters, and
|
|
●
|
inability
to generate sufficient revenues to offset acquisition costs.
|
Acquired
companies may not perform to our expectations for various reasons, including the departure of key personnel and loss of customers.
Therefore, we may not realize the benefits we have previously anticipated. If we fail to integrate acquired businesses or realize
expected benefits, we may not gain anticipated economic returns on investments in these mergers and acquisitions and incur substantial
transaction costs, causing our operating results to be materially and adversely affected.
If
we are unable to secure additional financing or identify suitable merger or acquisition targets, we may be unable to implement
our long-term business plan, develop or enhance our products and services, take advantage of future opportunities, or respond
to competitive pressures on a timely manner.
Our
long-term business plan includes the identification of suitable targets for horizontal or vertical mergers or acquisitions, so
as to enhance overall productivity and to benefit from economies of scale. Due to the recent uncertainties in the global economic
outlook and financial market stability, we may not be able to secure an adequate level of additional financing, whether through
equity financing, debt financing or other sources. To raise additional capital, we may need to issue new securities, which could
result in further dilution to our shareholders and significant dilution to our earnings per share. Issuance of new securities
with registration rights or covenants through additional financings may be superior to the current ones that would restrict our
operations and strategies. If we are unable to raise additional financing, we may be unable to implement our long-term business
plan, develop or enhance our products and services, take advantage of future opportunities, or respond to competitive pressures
on a timely basis, if at all. In addition, lack of additional capital could force us to substantially curtail or even cease operations.
We
also may not be able to identify merger or acquisition targets. We may not be able to successfully integrate the targeted business
or operations with ours after a merger or acquisition. Such failure to execute our long-term business plan likely will negatively
impact results of our operations.
We
generally do not have exclusive agreements with our customers and we may lose their contracts if they are not satisfied with our
products and services or for other reasons.
We
generally do not have exclusive agreements with our customers. As a result, we must rely on the quality of our products and services,
our reputation in the industry, and favorable pricing terms to attract and retain customers. There is no assurance that we will
be able to maintain and retain our relationships with current and or future customers. Our customers may choose to terminate their
relationships with us if they are not satisfied with our services or the prices of our competitors’ offerings are lower.
If a substantial number of our customers choose not to continue to purchase products and services from us, it would materially
and adversely affect on our business and results of operations.
If
we are unable to develop and offer competitive new products and services, our future operations could be adversely affected.
Our
future revenue stream, to a large degree, depends on our ability to capitalize on our technology strength and capabilities to
offer new software applications and services to a broader client base. We must make investments in research and development to
continue developing and offering new software applications and internet related products and services, and to enhance our existing
software applications and internet related services to maintain market acceptance of our products and services. We may encounter
challenges in innovation and introduction of new products and services. Our software applications under development may not be
successfully completed or, if developed, may not achieve significant customer acceptance. If we are unable to successfully define,
develop, introduce competitive new software applications, and enhance the existing ones, our future operating results would be
adversely affected. The timeline for software developments is difficult to predict. Timely launch of new applications and their
acceptance by customers are important to our future success. A delay in the development or introduction of new applications could
have a significantly adverse impact on our results of operations.
If
we are unable to keep abreast with the rapid technological changes in our industry, demand for our products and services could
decline and adversely affect our revenue and growth.
Our
industry is known for rapid changes in technology, frequent introductions of new applications, quick evolution of industry standards,
and changes in customer demands. These conditions require continuous investments in product research and development to enhance
existing products, innovate new products, and keep up with the leading-edge technologies. We believe that the timely development
of new products and continuous enhancements to the existing products are essential to maintain our competitive position in the
marketplace. Our future success depends in part upon customer and market acceptance of our products and innovations. Failure to
achieve market acceptance of our existing products and services or to launch new products could materially and adversely affect
our business and results of operations.
Our
software applications may contain defects or errors, which could decrease sales, damage our reputation, or delay deliveries of
our products.
Our
software products are complex and must meet the stringent technical requirements requested by our customers. In order to keep
pace with the current technologies and the rapid changes in the industry standards, we must accelerate new product developments
and enhancements for our existing products. Because of the complex designs and the expeditious development cycles, we cannot assure
that our software products are free of errors, especially for the newly released software applications and the updates for the
existing software products. If our software is not free of errors, this could potentially result in litigation, declining sales,
increasing product returns, product warranty costs, and damage to our reputation, which would adversely affect our business.
Our
technology may become obsolete, which could materially adversely affect our ability to sell our products and services.
If
our technology, products and services become obsolete, our business operations would be materially and adversely affected. The
market in which we compete is known for rapid changes in technologies, quick evolution of industry standards, fast introductions
of new products, and changes in customer demands. These market characteristics can cause the existing products to be obsolete
and unmarketable. Our future success depends upon our ability to timely address the increasingly sophisticated requests from our
customers to support the existing and new hardware, software, database, and networking platforms. We have to invest in research
and development in order to succeed in this competitive industry and timely satisfy market demands. Our research and development
expenses from continuing operations were approximately $3.9 million, $3.6 million, and $4.8 million for the years ended December
31, 2020, 2019, and 2018, respectively.
We
face the risk of systems interruptions and capacity constraints, possibly resulting in adverse publicity, revenue loss and erosion
of customer trust.
The
satisfactory performance, reliability, and availability of our network infrastructure are critical to our reputation and our ability
to attract and retain customers and to maintain adequate customer service levels. We may experience temporary service interruptions
for a variety of reasons, including telecommunications or power failures, fire, water damage, vandalism, computer bugs, or viruses
or hardware failures. We may not be able to correct a problem in a timely manner. Any service interruption that results in the
unavailability of our system or reduces its capacity could result in real or perceived public safety issues that may affect customer
confidence in our services and afflict negative publicity that could cause us to lose customer accounts or fail to obtain new
accounts. Any inability to scale our systems may cause unanticipated system disruptions, slower response times, degradation in
quality of customer service, or impaired performance and speed of transaction processing. We are not certain that we will be able
to project the rate or timing of increases, if any, in the use of our services to permit us to upgrade and expand our systems
effectively or to efficiently integrate any newly developed or purchased modules with our existing systems.
We
have a limited history with our pricing models for our CBT products and services and, as a result, we may be forced to change
the prices we charge for our applications or the pricing models upon which they are based.
We
have limited experience with respect to determining the optimal prices and pricing models for certain of our CBT products and
services and certain geographic markets. As the markets for our applications mature, or as competitors introduce products or services
that compete with ours, including bundling competing offerings with additional products or services, we may be unable to attract
new customers at the same price or based on the same pricing models as we have used historically. As a result, in the future we
may be required to reduce our prices, which could adversely affect our financial performance. In addition, we may offer volume
price discounts based on the number of products or services purchased by a customer or the number of our applications purchased
by a customer, which would effectively reduce the prices we charge for our products and services. Also, we may be unable to renew
existing customer agreements or enter into new customer agreements at the same prices or upon the same terms that we have historically,
which could have a material and adverse effect on our financial position.
Security
breaches may harm our business.
Our
cloud-based applications involve the storage and transmission of our customers’ proprietary and confidential information,
including personal or identification information regarding their employees and customers. Any security breaches, unauthorized
access, unauthorized usage, virus or similar breach or disruption could result in loss of confidential information, damage to
our reputation, early termination of our contracts, litigation, regulatory investigations, indemnity obligations, or other liabilities.
If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result,
someone obtains unauthorized access to customer data, our reputation will be damaged, our business may suffer and we could incur
significant liability. Because the techniques used to obtain unauthorized access or sabotage computer systems change frequently,
and generally are not identified until they are launched against a target, we may be unable to anticipate these hacking techniques
or implement adequate preventative measures. Any or all of these concerns could negatively affect our ability to attract new customers
and cause existing customers to elect not to renew or upgrade their subscriptions, or subject us to third-party lawsuits, regulatory
fines, or other action or liability, which could adversely affect our operating results.
If
we are not able to adequately secure and protect our patents, trademarks and other proprietary rights, our business may be materially
affected.
Under
our Amended and Restated Management Services Agreement, or the MSA, among our subsidiary IST, our variable interest entity, iASPEC,
and Mr. Jianghuai Lin, our Chairman and Chief Executive Officer, we have licensed 71 copyrighted software applications from iASPEC
on an exclusive basis. To protect the intellectual property underlying these applications and our other intellectual property,
we rely on a combination of copyright, trademark, and trade secret laws. We also rely on non-disclosure agreements and other confidentiality
procedures and contractual provisions to protect our intellectual property rights. Some of these technologies, other than the
iASPEC copyrighted software applications, are critical to our business but are not protected by copyrights or patents. It may
be possible for unauthorized third parties to copy or reverse engineer our products, or otherwise obtain and use information that
we regard as proprietary. Further, third parties could challenge the scope or enforceability of our copyrights. In certain foreign
jurisdictions, including China where we operate, the laws do not protect our proprietary rights to the same extent as the laws
of the United States. Any misappropriation of our intellectual property could have a material and adverse effect on our business
and results of operations. We cannot assure you that the measures we take to protect our proprietary rights are adequate.
Claims
that we infringe the proprietary rights of third parties could result in significant expenses or restrictions on our ability to
sell our products and services.
Third
parties may claim that our products or services infringe their proprietary rights. Any infringement claim, with or without merit,
would be time-consuming and expensive to litigate or settle and could divert our management’s attention from our core business.
In the event of a successful infringement claim against us, we may have to pay significant damages, incur substantial legal fees,
develop costly non-infringing technology, or enter into license agreements that require us to pay substantial royalties that may
not be available on terms acceptable to us, if at all.
A
significant portion of our sales are derived from a limited number of customers or related parties, and results from operations
could be adversely affected and shareholder value harmed if we lose any of these customers.
Historically,
a significant portion of our revenues have been derived from a limited number of customers or related parties, whom we have identified
as Taoping New Media Co., Ltd. and its affiliates. Taoping New Media Co., Ltd. is controlled by Mr. Lin, our Chairman and Chief
Executive Officer. For the year ended December 31, 2020, 2019 and 2018 we generated about $0.5 million, $7.5 million
and $9.5 million of revenue from related parties. For each of the years ended December 31, 2020, 2019 and 2018, approximately
25%, 24%, and 23%, respectively, of our revenues of continuing operations were derived from our five largest customers, including
related parties. The loss of any of these significant customers and related parties would adversely affect our revenues and shareholder
value.
The
markets for out-of-home digital advertising and digital security systems in China are highly competitive. We may fail to compete
successfully, thereby resulting in loss of customers and decline in our revenues.
The
markets for out-of-home digital advertising and digital security information systems in China are intensely competitive and are
characterized by frequent technological changes, evolving industry standards, and changing in customer demands. We face competition
from multiple domestic competitors in each segment. Increased competition may result in price reductions, reduced margins, and
inability to gain or hold market share.
New
lines of business or new products and services may subject us to additional risks.
In 2021, we have formed strategic partnerships
with well-known education institutions to launch on-line educational programs to enhance business opportunities with our strength
in cloud-based technology. In addition, we are positioning ourselves in the cloud-based applications, blockchain, digital assets,
and cryptocurrency mining operations. There can be no assurance that the introduction and development of new lines of business
or new products and services would not encounter significant difficulties or delay or would achieve the profitability as we expect.
Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services
could have a material adverse effect on our business, results of operations and prospects. For example, with respect to our plan
to develop our cryptocurrency mining business, we may not be able to acquire cryptocurrency mining machines at a reasonable cost,
or at all. Due to our limited experience with cryptocurrency and its mining activities, we also face challenges and uncertainties
relating to the possibility of success of our new business. We cannot assure you that our efforts in entry into new business sectors
will succeed.
We
have limited insurance coverage for our operations in China.
The
insurance industry in China is still in the early stage of development. Insurance companies in China offer limited insurance products.
We have determined that the risks of disruption or liability from our business, the loss or damage to our property, including
our facilities, equipment and office furniture, the cost of insuring these risks, and the difficulties associated with acquiring
such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result, we do not have
any business liability, disruption, litigation or property insurance coverage for our operations in China, except for insurance
on some company owned vehicles. Any occurrence of uninsured loss or damage to property, or litigation, or business disruption
may result in substantial costs and diversion of resources, which could have an adverse effect on our operating results.
We
do not have insurance coverage against damages or losses of our products. Defects in our products could result in a loss of customers
and decrease in revenue, unexpected expenses and a loss of market share.
We
have not purchased product liability insurance to provide against any claims against us based on our product quality. As a result,
defects in our products could result in a loss of customers and decrease in revenue, unexpected expenses and a loss of market
share, and any of our products are found to have reliability, quality or compatibility problems, we will be required to accept
returns, provide replacements, provide refunds, or pay damages. We may be required to incur substantial amounts to indemnify our
customers in respect of their product quality claims against us, which would materially and adversely affect the results of our
operations and severely damage our reputation.
We
depend heavily on key personnel, and turnover of key employees and senior management could harm our business.
Our
future business and results of operations significantly depend upon continuous contributions by key technical and senior management
personnel, including Jianghuai Lin, Chairman and Chief Executive Officer, Zhiqiang Zhao, President and Interim Chief Financial
Officer, Zhixiong Huang, Chief Operating Officer and Guangzeng Chen, Chief Technology Officer. The success of our business also
depends in significant part upon our ability to attract and retain additional qualified management, technical, marketing, sales,
and support personnel for our operations. If we lose a key employee, or if we are not able to attract and retain skilled employees
as needed, our business could suffer. Significant turnover in our senior management could largely deplete our institutional knowledge
held by our existing senior management team. We depend on the skills and abilities of these key employees in managing technical,
marketing, and sales aspects of our business, any part of which could be harmed by future turnover.
We
may be exposed to potential risks relating to our internal controls over financial reporting.
Companies
that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002,
or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting, and annual
reports on Form 10-K or Form 20-F filed under the Exchange Act are required to contain a report by management assessing the effectiveness
of a company’s internal control over financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010, public companies that are large accelerated or accelerated filers, other than emerging
growth companies or smaller reporting companies, must include in their annual reports on Form 10-K or Form 20-F an attestation
report of their auditors’ attesting to and reporting on the management’s assessment of internal control over financial
reporting. Non-accelerated filers and emerging growth companies are not required to include an attestation report of their auditors
in the annual reports.
A
report of our management is included under Item 15 “Controls and Procedures” of this report. We are a non-accelerated
filer and not required to include an attestation report of our auditor in this annual report. Management believes that our internal
control over financial reporting has continued to improve in 2020 to minimize material weaknesses identified in Item 15 of this
report. Although we have made improvements to overcome such concern, we can provide no assurance that these material weaknesses
will be entirely remediated in a timely manner. As a result, investors and others may lose confidence in the reliability of our
financial statements.
Our
holding company structure may limit the payment of dividends.
We
have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying
dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations
depends upon the receipts of dividends or other payments from our operating subsidiaries, other holdings, and investments. In
addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions
to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into
U.S. dollars or other hard currency, and other regulatory restrictions as discussed below. If future dividends are paid in RMB,
fluctuations in the exchange rate for conversion of RMB into U.S. dollars may reduce the amount received by the U.S. stockholders
upon conversion of dividend payments into U.S. dollars.
Chinese
regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese
accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after-tax profits
to fund certain reserve funds according to the Chinese accounting standards and regulations. Currently, our subsidiaries in China
are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits
under Chinese accounting standards and regulations to satisfy certain reserve funds as required by the Chinese accounting standards,
we will be unable to pay any dividends.
After-tax
profits/losses with respect to the payment of dividends from accumulated profits and the annual appropriation of after-tax profits
as calculated pursuant to the Chinese accounting standards and regulations do not result in significant differences as compared
to after-tax earnings as presented in our financial statements. However, there are certain differences between PRC accounting
standards and regulations and U.S. GAAP, arising from different treatment of certain items such as amortization of intangible
assets and change in fair value of contingent consideration arising from business combinations.
Risks
Relating to our Contractual Relationship with iASPEC
Mr.
Lin’s association with iASPEC could pose a conflict of interest which may result in iASPEC decisions that are adverse to
our business.
Mr.
Jianghuai Lin, our Chairman and Chief Executive Officer and the beneficial owner of 24.6% of our outstanding ordinary shares,
owns 100% of the equity interests in iASPEC, from which we derived 38.3%, 81.1%, and 77.4% of our revenues in the fiscal
years ended December 31, 2020, 2019 and 2018, respectively, pursuant to the existing commercial arrangements. As a result, conflicts
of interest may arise from time to time and may result in management decisions that could negatively affect our operations and
potentially result in the loss of opportunities.
PRC
laws and regulations governing our businesses and the validity of our contractual relationships with iASPEC are uncertain. If
we are found to be in violation of such PRC laws and regulations, our business may be negatively affected and we may be forced
to relinquish our interests in those operations.
PRC
laws and regulations prohibit or restrict foreign ownership of companies that operate Internet information and content. Consequently,
we conduct certain of our operations and businesses in the PRC through our variable interest entity (VIE), iASPEC and its subsidiaries.
The contractual relationships with iASPEC give us effective control over iASPEC and its wholly owned subsidiaries, enable us to
obtain substantially all of the economic benefits arising from it, and consolidate their financial results in our results of operations.
Although the structure we have adopted is consistent with longstanding industry practice, and is commonly adopted by comparable
companies in China, the PRC government may not agree that these arrangements comply with PRC licensing, registration or other
regulatory requirements, existing policies, or requirements or policies that may be adopted in the future.
On
January 1, 2020, China’s new Foreign Investment Law came into effect, replacing the previous laws regulating foreign investment
in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise
Law and the Wholly Foreign-invested Enterprise Law, as well as their implementation rules and ancillary regulations. However,
the new Foreign Investment Law remains vague in respect of the legality of the VIE structures. For instance, the Foreign Investment
Law has a catch-all provision under the definition of “foreign investment” which includes investments made by foreign
investors in China through means stipulated in laws or administrative regulations or other methods prescribed by the State Council.
Though the Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment, there
is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment
activities in the future. The State Council may in the future promulgate laws and regulations that deem investments made by foreign
investors through contractual arrangements as “foreign investment,” and our VIE contractual arrangements may be subject
to and be deemed to violate the market entry requirements in China. Furthermore, if future laws, administrative regulations or
provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing VIE contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, if 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.
If
iASPEC or its shareholders violate the contractual arrangements with us, our business could be disrupted and we may have to resort
to litigation to enforce our rights which may be time-consuming and costly.
Our
operations are currently dependent upon our contractual relationship with iASPEC. During the recent years, we derived substantial
revenues from the provision of services to iASPEC customers. A significant portion of these revenues has not yet been collected.
Amounts owed by iASPEC under the amended Management Services Agreement (MSA) for each quarter will be due and payable no later
than the last day of the month following the end of each such quarter. Our contractual arrangements may not be as effective as
direct ownership. If iASPEC or its shareholders are unwilling or unable to perform their obligations under our commercial arrangements,
including payment of revenues under the MSA as they become due each quarter, we will not be able to conduct our operations in
the manner currently planned. In addition, iASPEC may seek to renew these agreements on terms that are disadvantageous to us.
Although we have entered into a series of agreements that provide us with substantial ability to control iASPEC, we may not succeed
in enforcing our legal rights. If we are unable to renew these agreements on favorable terms, or to enter into similar agreements
with other parties, our business may not be able to operate or expand, and our operating expenses may significantly increase.
Uncertainties
in the PRC legal system may impede our ability to enforce the commercial agreements that we have entered into with iASPEC or any
arbitral award thereunder and any inability to enforce these agreements could materially and adversely affect our business and
operation.
While
disputes arising out of the amended MSA and the option agreement with iASPEC are subject to binding arbitration before the Shenzhen
Branch of the China International Economic and Trade Arbitration Commission, or CIETAC, in accordance with CIETAC Arbitration
Rules, the agreements are governed by PRC laws and an arbitration award may be challenged in accordance with PRC laws. For example,
a claim that the enforcement of an award in our favor will be detrimental to the public interest, or that an issue does not fall
within the scope of the arbitration would require us to engage in administrative and judicial proceedings to defend an award.
China’s legal system is a civil law system based on written statutes, in which, unlike common law systems, decided legal
cases are not binding precedents. As a result, China’s administrative and judicial authorities have significant discretion
in interpreting and implementing statutory and contractual terms, and thus, it is more difficult to evaluate the outcome of administrative
and judicial proceedings and the level of legal protection available in China than that in more developed legal systems. These
uncertainties may impede our ability to enforce the terms of the MSA, the option agreement, and other contracts that we may enter
into with iASPEC. Any inability to enforce the MSA and option agreement or arbitral awards thereunder could materially and adversely
affect our business and operating results.
All
of the share capital of iASPEC is held by our major shareholder, who may cause these agreements to be amended in a manner that
is adverse to us.
Our
major shareholder, Mr. Jianghuai Lin, owns and controls iASPEC. As a result, Mr. Lin may be able to cause our commercial arrangements
with iASPEC to be amended in a manner that is adverse to our company, or may be able to cause these agreements not to be renewed,
even if their renewal would be beneficial for us. Although we have entered into an agreement that prevents the amendment of these
agreements without the approval of the members of our Board other than Mr. Lin, we can provide no assurance that these agreements
will not be amended in the future to contain terms that might differ from the terms that are currently in place. These differences
may be adverse to our interests.
Our
arrangements with iASPEC and its shareholders may be subject to scrutiny by the PRC tax authorities. Any adjustment of related
party transaction pricing could lead to additional taxes, which could have an adverse effect on our income and expenses.
The
tax regime in China is rapidly evolving and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted
in significantly different ways. The PRC tax authorities may find that we, our subsidiaries, variable interest entities or their
equity holders owe and/or are required to pay additional taxes on previous or future revenue or income. In particular, under applicable
PRC laws, rules and regulations, arrangements and transactions among related parties, such as our contractual arrangements with
the variable interest entities, 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 our agreements with the variable interest entities and their shareholders
were not entered into on arm’s length terms. As a result, they may adjust our income and expenses for PRC tax purposes in
the form of a transfer pricing adjustment. Such an adjustment may require that we pay additional PRC taxes plus applicable penalties
and interest, if any.
The
exercise of our option to purchase part or all of the equity interests in or assets of iASPEC under the option agreement might
be subject to approval by the PRC government. Our failure to obtain this approval may impair our ability to substantially control
iASPEC and could result in actions by iASPEC that conflict with our interests.
Our
option agreement with iASPEC gives our Chinese subsidiary, IST, the option to purchase all or part of the equity interests in
or assets of iASPEC. However, the option may not be exercised by IST, if exercise of the option would violate any applicable laws
and regulations in China or cause any license or permit held by IST that is necessary for the operation of iASPEC to be cancelled
or invalidated. Under Chinese laws, if a foreign entity, in which a foreign investment company has invested, acquires a domestic
company that are under common control, Chinese regulations governing mergers and acquisitions would technically apply to the transaction.
Application of these regulations requires an examination and approval of the transaction by the Chinese Ministry of Commerce,
or MOFCOM, or its local counterparts. Also, an appraisal of the equity or assets to be acquired is mandatory. However, Guangdong
Jin Di Law Firm Sichuan Office, our local PRC counsel, has advised us that Shenzhen and other local counterparts of MOFCOM advised
that such a transaction would not require their approval.
Therefore,
we do not believe at this time that an approval and an appraisal are required for IST to exercise its option to acquire iASPEC
in Shenzhen. In light of the different views on this issue, however, it is possible that, in the future, the central MOFCOM office
in Beijing will issue a standardized opinion imposing the requirements for approval and appraisal in cases like ours. If we are
not able to purchase the equity or assets of iASPEC when necessary, then we will lose a substantial portion of our ability to
control iASPEC and our ability to ensure that iASPEC will act in our interests.
Risks
Relating to Doing Business in China
Changes
in the economic and political policies of the PRC government could have a material and adverse effect on our business and operations.
We
conduct substantially all our business operations in China. Accordingly, our results of operations, financial condition, and prospects
are significantly dependent on economic and political developments in China. Chinese economy differs from the economies of developed
countries in many aspects, including the level of development, growth rate, degree of government control over foreign exchange,
and allocation of resources. While Chinese economy has experienced significant growth in the past decades, the growth has been
uneven across different regions and periods and among various economic sectors in China. We cannot assure you that Chinese economy
will continue to grow, or that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such
slowdown will not have a negative effect on our business and results of operations.
The
PRC government exercises significant controls over China’s economy. Accordingly, our results of operations, financial condition,
and prospects are significantly dependent on economic and political developments in China. Certain measures adopted by the PRC
government may restrict loans to certain industries, such as changes in the statutory deposit reserve ratio and lending guidelines
for commercial banks by the People’s Bank of China, or PBOC. These current and future government actions could materially
affect our liquidity, access to capital, and ability to operate our business.
The
global financial markets experienced significant disruptions in 2008 that caused the United States, Europe, and other economies
going into recession. Since 2012, growth of the Chinese economy has slowed down. The PRC government has implemented various measures
to encourage economic growth and allocate resources. Some of these measures may benefit the overall PRC economy, but may have
a negative effect on certain sectors, including the segments we operate. Our financial condition and results of operation could
be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable
to us. In addition, stimulus measures designed to boost the Chinese economy may contribute to higher inflation, which could adversely
affect our results of operations and financial condition. See “Risks Relating to Doing Business in China – Future
inflation in China may inhibit our ability to conduct business in China.”
Uncertainties
with respect to the PRC legal system could limit the legal protections available to you and us.
We
conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally
subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign invested
entities established in the PRC, or FIEs. The PRC legal system is based on written statutes, and prior court decisions may be
cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly
enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues
to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws,
regulations, and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation
in China may be protracted and result in substantial costs and diversion of resources and management attention. In addition, all
of our executive officers and most of our directors are residents of China and not of the United States, and substantially all
the assets of these persons are located outside the United States. As a result, it could be difficult for investors to effect
service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations
and subsidiaries.
You
may have difficulty enforcing judgments against us.
Most
of our assets are located outside of the United States and most of our current operations are conducted in the PRC. In addition,
most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion
of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service
of process within the United States upon these persons. It may also be difficult for you to enforce U.S. courts’ judgments
entered pursuant to the civil liability provisions of the U.S. federal securities laws against us, or our officers and directors
most of whom are not residents of the United States and the substantial majority of whose assets are located outside of the United
States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts.
Our counsel as to PRC law advised us that the recognition and enforcement of foreign judgments are provided for under the PRC
Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC
Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions.
China does not have any treaties or other arrangements with the United States that provide for the reciprocal recognition and
enforcement of judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign
judgment, if they decide that the judgment violates basic principles of PRC law, sovereignty, national security, or public interest.
So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States against us or our officers
and directors.
The
PRC government exerts substantial influence over the manner in which business activities are conducted.
The
PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy
through regulations and state ownership. Our ability to operate in China may be harmed by changes in Chinese laws and regulations,
including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other
matters. We believe that our operations in China comply with, in material aspects, with all applicable legal and regulatory requirements.
However, the central or local governments of China may impose new, stricter regulations or interpretations of existing regulations
that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to support recent economic reforms and to return to a
more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof and could require us to divest any interest we then hold
in Chinese properties or joint ventures.
Future
inflation in China may inhibit our ability to conduct business in China.
According
to the National Bureau of Statistics of China, the annual average percent changes in the consumer price index in China for 2018,
2019 and 2020 were 2.1%, 2.9% and 2.5%, respectively. Although we have not been materially affected by inflation in the past,
we can provide no assurance that we will not be affected in the future by higher rates of inflation in China. For example, certain
operating costs and expenses, such as employee salaries and office operating expenses may increase as a result of higher inflation.
Additionally, since a substantial portion of our assets consists of cash and cash equivalents, high inflation could significantly
reduce the value and purchasing power of these assets.
Restrictions
on currency exchange may limit our ability to receive and use our income effectively.
The
majority of our sales will be settled in RMB, and any future restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside of China or to make dividend or other payments in U.S. dollars.
Although the conversion of RMB into foreign currency for current account transactions, such as interest payments, profit distributions,
and trade or service related transactions, can be made without prior governmental approval, significant restrictions still remain,
including primarily the restriction that FIEs may only buy, sell, or remit foreign currencies after providing valid commercial
documents to certain banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital
account items, including direct investment and loans, are subject to governmental approval in China, and requires companies to
open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory
authorities will not impose more stringent restrictions on the convertibility of the RMB.
Fluctuations
in exchange rates could adversely affect our business and the value of our securities.
The
value of our ordinary shares will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB, and between
the two currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of RMB
relative to the U.S. dollar would affect our financial results reported in U.S. dollar without giving effect to any underlying
change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any
dividend we issue that will be exchanged into U.S. dollars, as well as earnings from any U.S. dollar-denominated investments we
make in the future.
Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes
in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, RMB may appreciate or depreciate
significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities
may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very
limited hedging transactions are available in China to reduce our exposure to the exchange rate fluctuations. To date, we have
not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness
of these transactions may be limited. We may not be able to successfully hedge our exposure at all. In addition, our foreign currency
exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Restrictions
under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely
affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise
fund and conduct our business.
Substantially
all of our revenues are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries
to make dividends and other payments to their offshore parent companies. PRC legal restrictions permit payments of dividends by
our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards
and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual
after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said reserve
fund reach 50% of the company’s registered capital. Allocations to these statutory reserve funds can only be used for specific
purposes and are not transferable to us in the form of loans, advances, or cash dividends. Any limitations on the ability of our
PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions
that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
PRC
regulations relating to investments in offshore 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 or limit our PRC subsidiary’s
ability to increase their registered capital or distribute profits.
The
State Administration of Foreign Exchange (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, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated
by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of the SAFE in connection
with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing,
with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests,
referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the
registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease
of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event
that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC
subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from
carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability
to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements
described above could result in liability under PRC law for evasion of foreign exchange controls. According to the Notice on Further
Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment released on February 13, 2015
by SAFE, local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial
foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.
According
to SAFE Circular 37, our shareholders or beneficial owners, who are PRC residents, are subject to SAFE Circular 37 or other foreign
exchange administrative regulations in respect of their investment in our company. We have notified substantial beneficial owners
of ordinary shares who we know are PRC residents of their filing obligations. Nevertheless, we may not be aware of the identities
of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners and there can be no assurance
that all of our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules, and there
is no assurance that the registration under SAFE Circular 37 and any amendment will be completed in a timely manner, or will be
completed at all. The failure of our beneficial owners who are PRC residents to register or amend their foreign exchange registrations
in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners
of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation
rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Such failure to register or comply
with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC
subsidiaries’ ability to distribute dividends to us. These risks may have a material adverse effect on our business, financial
condition and results of operations.
Furthermore,
it is uncertain how SAFE Circular 37, and any future regulation concerning offshore or cross-border transactions, will be interpreted,
amended and implemented by the relevant PRC government authorities, and we cannot predict how these regulations will affect our
business operations or future strategy. Failure to register or comply with relevant requirements may also limit our ability to
contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to
us. These risks could in the future have a material adverse effect on our business, financial condition and results of operations.
We
may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition
regulations which became effective on September 8, 2006.
On
August 9, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, promulgated the Regulation
on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006, and was subsequently
amended in 2009. This regulation, among other regulations and rules, governs the approval process of a PRC company’s participation
in an acquisition of assets or equity interests. Depending on the structure of the transaction, the regulation requires the PRC
parties to make a series of applications and supplemental applications to the government agencies for approval of acquisition
of assets or equity interests of another entity. In some instances, the application process may require a presentation of economic
data concerning the transaction, including appraisals of the target business and evaluations of the acquirer, which are designed
to allow the government to assess viability of the transaction. Government approvals will have expiration dates, by which a transaction
must be completed and reported to the government agencies. Compliance with the regulation is likely to be more time consuming
and expensive than it was in the past, and provides the government more controls over business combination of two enterprises.
As a result, conducting business combination transactions has become significantly more complicated, time consuming, and expensive.
We may not be able to negotiate a transaction that is acceptable to our stockholders or would sufficiently protect their interests
in a transaction.
The
regulation allows PRC governmental agencies to assess the economic terms of a business combination transaction. Parties to a business
combination transaction may have to submit to MOFCOM and other relevant government agencies an appraisal report, an evaluation
report, and the acquisition agreement, all of which will be a part of the application for approval, depending on the structure
of the transaction. The regulation also prohibits a transaction with an acquisition price obviously lower than the appraised value
of the PRC business or assets and in certain transaction structures, and requires consideration be paid within a defined period,
generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including
the initial consideration, contingent consideration, holdback provisions, indemnification provisions, and provisions related to
the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities
are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction
on financial terms that satisfy our investors and protect our stockholders’ economic interests.
Our
existing contractual arrangements with iASPEC and its shareholders may be subject to national security review by MOFCOM, and the
failure to receive clearance of the national security review could have a material adverse effect on our business and operating
results.
In
August 2011, MOFCOM promulgated the Rules of Ministry of Commerce on Implementation of Security Review System for Merger and Acquisition
of Domestic Enterprises by Foreign Investors, or the Security Review Rules, to implement the Notice of the General Office of the
State Council on Establishing the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors
promulgated on February 3, 2011, or Circular 6. The Security Review Rules became effective on September 1, 2011. Under the Security
Review Rules, a national security review is required for certain mergers and acquisitions by foreign investors that raise concerns
regarding national defense and security. Foreign investors are prohibited from circumventing the national security review requirements
by structuring transactions through proxies, trusts, indirect investments, leases, loans, controls through contractual arrangements
or offshore transactions. The application and interpretation of the Security Review Rules are still evolving. Based on our understanding
of the Security Review Rules, we do not need to submit our existing contractual arrangements with iASPEC and its shareholders
to MOFCOM for national security review because, among other reasons, (i) we gained de facto control over iASPEC in 2007 prior
to the effectiveness of Circular 6 and the Security Review Rules; and (ii) there are currently no explicit provisions or official
interpretations indicating that our current businesses fall within the scope of national security review. Although we have no
plan to submit our existing contractual arrangements with iASPEC and its shareholders to MOFCOM for national security review,
the relevant PRC governmental agencies, such as MOFCOM, may reach a different conclusion, had we submitted our existing contractual
arrangements with iASPEC and its shareholders for security review. If MOFCOM or another PRC regulatory agency subsequently determines
that we need to submit our existing contractual arrangements with iASPEC and its shareholders for national security review by
interpretation, clarification or amendment of the Security Review Rules or by any new rules, regulations, or directives promulgated,
we may face sanctions by MOFCOM or another PRC regulatory agency. These sanctions may include revoking the business or operating
licenses of our PRC subsidiary, IST, or iASPEC and its subsidiaries, discontinuing or restricting our operations in China, confiscating
our income or the income from iASPEC, levying fines, and other regulatory or enforcement actions that are harmful to our business.
Any of these sanctions could cause significant disruption to our business operations.
PRC
regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency
conversion may restrict or prevent us from using the proceeds of our future financings to make loans to our PRC subsidiary and
our consolidated VIEs, or to make additional capital contributions to our PRC subsidiary.
We,
as an offshore holding company, are permitted under PRC laws and regulations to provide funding to our PRC subsidiary, which are
treated as foreign-invested enterprises under PRC laws, through loans or capital contributions. However, loans by us to our PRC
subsidiary to finance its activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE
and capital contributions to our PRC subsidiary are subject to the requirement of making necessary filings in the Foreign Investment
Comprehensive Management Information System, and registration with other governmental authorities in China.
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 Circular 19, effective on June 1, 2015, in replacement of 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 Circular 142, the Notice from the State Administration of Foreign Exchange on Relevant Issues
Concerning Strengthening the Administration of Foreign Exchange Businesses, or Circular 59, and the Circular on Further Clarification
and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular
45. According to Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital
of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the
repayment of inter-enterprise loans or the repayment of bank loans that have been transferred to a third party. Although Circular
19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign invested enterprise to be used
for equity investments within the PRC, it also reiterates the principle that RMB converted from the foreign currency-denominated
capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it
is unclear whether SAFE will permit such capital to be used for equity investments in the PRC in actual practice. SAFE promulgated
the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management
Policy of Capital Account, or Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in Circular
19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a
foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to grant loans to non-associated
enterprises. Violations of SAFE Circular 19 and Circular 16 could result in administrative penalties. Circular 19 and Circular
16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from our future financings,
to our PRC subsidiary, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.
Due
to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such
loans to any of our consolidated VIEs and their subsidiaries, each a PRC domestic company. Meanwhile, we are not likely to finance
the activities of our consolidated VIEs and their subsidiaries by means of capital contributions given the restrictions on foreign
investment in the businesses that are currently conducted by our consolidated VIEs and their subsidiaries.
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 any consolidated variable
interest entity or future capital contributions by us to our PRC subsidiary. As a result, uncertainties exist as to our ability
to provide prompt financial support to our PRC subsidiary or consolidated VIEs and their subsidiaries when needed. If we fail
to complete such registrations or obtain such approvals, our ability to use foreign currency, including the proceeds we received
from our future financings, 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.
Any
failure to comply with PRC regulations regarding employee share incentive plans may subject the PRC plan participants or us to
fines and other legal or administrative sanctions.
Pursuant
to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit
applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies.
In the meantime, directors, executive officers and other employees who are PRC citizens or who are non-PRC residents residing
in the PRC for a continuous period of not less than one year, subject to limited exceptions, and who have been granted restricted
shares, options or restricted share units, or RSUs may follow 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 in February
2012, to apply for the foreign exchange registration. According to those regulations, employees, directors and other management
members 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 limited exceptions, are required to register
with SAFE through a domestic qualified agent, which may be a PRC subsidiary of the 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
their ability to make payment under the relevant equity incentive plans or receive dividends or sales proceeds related thereto
in foreign currencies, or our ability to contribute additional capital into our subsidiaries in China and limit our PRC subsidiaries’
ability to distribute dividends to us. We also face regulatory uncertainties under PRC law that could restrict our ability to
adopt additional equity incentive plans for our directors, officers and employees who are PRC citizens or who are non-PRC residents
residing in the PRC for a continuous period of not less than one year, subject to limited exceptions.
In
addition, the State Administration of Taxation has issued circulars concerning employee share options, restricted shares or RSUs.
Under these circulars, employees working in the PRC who exercise share options, or whose restricted shares or RSUs vest, will
be subject to PRC individual income tax. The PRC subsidiaries of an overseas listed company have obligations to file documents
related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of
those employees related to their share options, restricted shares or RSUs. Although we currently withhold income tax from our
PRC employees in connection with their exercise of options and the vesting of their restricted shares and RSUs, if the employees
fail to pay, or the PRC subsidiaries fail to withhold, their income taxes according to relevant laws, rules and regulations, the
PRC subsidiaries may face sanctions imposed by the tax authorities.
The
Security Review Rules may make it more difficult for us to make future acquisitions or dispositions of our business operations
or assets in China.
The
Security Review Rules, effective as of September 1, 2011, provides that when deciding whether a specific merger or acquisition
of a domestic enterprise by foreign investors is subject to the national security review by MOFCOM, the principle of substance-over-form
should be applied and foreign investors are prohibited from circumventing the national security review requirement by structuring
transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore
transactions. If the business of any target company that we plan to acquire falls within the scope subject to national security
review, we may not be able to successfully acquire such company by equity or asset acquisition, capital increase or even through
any contractual arrangement.
Under
the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will
likely result in unfavorable tax consequences to us and our non-PRC shareholders.
On
March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax Law, or the EIT Law. On November
28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an
enterprise established outside of China with “de facto management bodies” within China is considered a “resident
enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes.
The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over
the production and operations, personnel, accounting, and properties” of the enterprise.
On
April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese
Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises, or the Notice, also referred to as SAT Circular
82. The Notice further interprets the application of the EIT Law and its implementation rules to non-Chinese enterprise or group
controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by
a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its
senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel
decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate
chops, board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management
habitually reside in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income
and must pay a withholding tax at a rate of 10%, when paying dividends to its non-PRC shareholders. However, it remains unclear
as to whether the Notice is applicable to an offshore enterprise controlled by Chinese natural persons. It is unclear how tax
authorities will determine tax residency based on the facts of each case.
We
may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident
enterprise” for the PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First,
we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income
tax reporting obligations, which would materially reduce our net income. Second, although, under the EIT Law and its implementing
rules, dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that
such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the
withholding tax, have not yet issued a guidance with respect to the processing of outbound remittances to entities that are treated
as resident enterprises for the PRC enterprise income tax purposes. It is possible that future guidance issued with respect to
the new “resident enterprise” classification could result in a situation, where a 10% withholding tax is imposed on
dividends we pay to our shareholders that are non-resident enterprises and with respect to gains derived by said shareholders
from transferring our shares. Finally, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders
and any gain realized on the transfer of our shares by such shareholders may be subject to PRC tax at a rate of 20%, if such income
is deemed to be from PRC sources.
If
we were treated as a “resident enterprise” by the PRC tax authorities, we would be subject to taxation in both the
U.S. and China, and we may not be able to claim our PRC tax as a credit to reduce our U.S. tax.
We
and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or
other assets attributed to a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by
non-Chinese companies.
In
October 2017, the State Administration of Taxation issued the Bulletin on Issues Concerning the Withholding of Non-PRC Resident
Enterprise Income Tax at Source, or Bulletin 37, which replaced the Notice on Strengthening Administration of Enterprise Income
Tax for Share Transfers by Non-PRC Resident Enterprises issued by the State Administration of Taxation on December 10, 2009, and
partially replaced and supplemented rules under the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets
by Non-PRC Resident Enterprises, or Bulletin 7, issued by the State Administration of Taxation on February 3, 2015. Pursuant to
Bulletin 7, an “indirect transfer” of PRC assets, including a transfer of equity interests in an unlisted non-PRC
holding company of a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct
transfer of the underlying PRC assets, if such arrangement does not have a reasonable commercial purpose and was established for
the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject
to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment
in China, immoveable properties located in China, and equity investments in PRC resident enterprises and any gains from the transfer
of such asset by a direct holder, who is a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When
determining whether there is a “reasonable commercial purpose” of the transaction arrangement, factors to be taken
into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC
taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China
or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding
PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of
existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable
assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In the case of an
indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax
filing of the PRC establishment or place of business being transferred, and may consequently be subject to PRC enterprise income
tax at a rate of 25%. Where the underlying transfer relates to immoveable properties located in China or to equity investments
in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a
PRC enterprise income tax of 10% would apply, subject to available preferential tax treatment under applicable tax treaties or
similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Pursuant to
Bulletin 37, the withholding agent shall declare and pay the withheld tax to the competent tax authority in the place where such
withholding agent is located within 7 days from the date of occurrence of the withholding obligation, while the transferor is
required to declare and pay such tax to the competent tax authority within the statutory time limit according to Bulletin 7. Late
payment of applicable tax will subject the transferor to default interest charges. Both Bulletin 37 and Bulletin 7 do not apply
to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction
through a public stock exchange.
There
is uncertainty as to the application of Bulletin 37 or previous rules under Bulletin 7. We face uncertainties as to the reporting
and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring,
sale of the shares in our offshore subsidiaries or investments. Our company may be subject to filing obligations or taxes if our
company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such
transactions, under Bulletin 37 and Bulletin 7. For transfer of shares in our company by investors that are non-PRC resident enterprises,
our PRC subsidiary may be requested to assist in the filing under Bulletin 37 and Bulletin 7. As a result, we may be required
to expend valuable resources to comply with Bulletin 37 and Bulletin 7 or to request the relevant transferors from whom we purchase
taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which
may have a material adverse effect on our financial condition and results of operations.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination
that we violated these laws could have a material adverse effect on our business.
We
are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments
to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the
purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China.
The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments
or offers of payments by the employees, consultants, sales agents, or distributors of our Company to government officials or political
parties, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these
practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective,
and the employees, consultants, sales agents, or distributors of our Company may engage in conduct for which we might be held
responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may
be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition,
the U.S. government may seek to hold our Company liable for FCPA violations committed by companies in which we invest or that
we acquire.
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. It could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved
favorably.
In
the past few years, U.S. publicly traded companies that have substantially all of their operations in China, particularly companies
like us 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 around financial and
accounting irregularities and mistakes, lack of effective internal controls over financial accounting, inadequate corporate governance
policies or lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism, and negative
publicity, the publicly traded stocks of many U.S. listed Chinese companies have sharply decreased in value and, in some cases,
have 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 the effect of this sector-wide scrutiny,
criticism, and negative publicity will have on our Company, our business, and our stock price. 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 defending our Company. This situation will be costly, time consuming, and distract our management
from growing our company.
The
disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny
of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental
agency that is located in China where substantially all of our operations and business are located has conducted any due diligence
on our operations, or reviewed or passed upon the accuracy and completeness of any of our disclosures.
Since
we are regulated by the SEC, our reports and other filings with the SEC are subject to SEC’s review in accordance with the
rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike publicly traded companies whose
operations are located primarily in the United States, substantially all of our operations are located in China. Since substantially
all of our operations and business take place in China, it may be more difficult for the SEC staff to overcome the geographic
and cultural obstacles, when they review our disclosures. Such obstacles are not present for similar companies whose operations
and business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosures and public
announcements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosures in our SEC
reports and other filings are not subject to the review of the China Securities Regulatory Commission, a PRC regulator that is
tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings, and other public
announcements with the understanding that no local regulator has done any due diligence on our company and that none of our SEC
reports, other filings, or any of our other public announcements has been reviewed or otherwise been scrutinized by any local
regulator.
Risks
Relating to our Shares
If
we fail to comply with the continued listing requirements of NASDAQ, we would face possible delisting, which would result in a
limited public market for our shares and make obtaining future debt or equity financing more difficult for us.
Our
ordinary shares are traded and listed on the Nasdaq Capital Market under the symbol of “TAOP.” We received a notification
from Nasdaq Listing Qualifications on June 18, 2019, as announced in a report with the SEC on a 6-K Form filed on June 19, 2019,
that we were not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued
listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed securities
to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the
minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. Based on the closing
bid price of the Company’s ordinary shares for the 30 consecutive business days prior to the date of the notification letter
from Nasdaq, the Company no longer satisfied the minimum bid price requirement. The notification letter provided that the Company
had 180 calendar days, or until December 16, 2019, to regain compliance with Nasdaq Listing Rule 5550(a)(2). To regain compliance,
the Company’s ordinary shares must have a closing bid price of at least $1.00 per share for a minimum of 10 consecutive
business days (Nasdaq may monitor the price for as long as 20 consecutive business days prior to making a final compliance determination).
On
December 17, 2019, we received a second notice from the Nasdaq Listing Qualifications, in which Nasdaq granted us an additional
180 days, or until June 15, 2020, to regain compliance, because the Company met the continued listing requirement for public float
and other applicable requirements, except the bid price requirement, and the Company had indicated its intention of curing the
deficiency by effecting a reverse stock split, if necessary. The compliance deadline was thereafter extended from June 15, 2020
to August 28, 2020 according to SR-NASDAQ-2020-021.
On July 30, 2020, we effectuated a share combination of our ordinary shares at a ratio of one-for-six in order to increase the
per share trading price of our ordinary shares to satisfy the $1.00 minimum bid price requirement. We regained compliance with
the minimum bid price rule on August 20, 2020.
However,
there is no assurance that we will be able to continue to maintain our compliance with the NASDAQ continued listing requirements.
If we fail to do so, our ordinary shares may lose their status on NASDAQ Capital Market and they would likely be traded on the
over-the-counter markets, including the Pink Sheets market. As a result, selling our ordinary shares could be more difficult because
smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage
of us may be reduced. In addition, in the event our ordinary shares are delisted, broker dealers would bear certain regulatory
burdens which may discourage broker dealers from effecting transactions in our ordinary shares and further limit the liquidity
of our shares. These factors could result in lower prices and larger spreads in the bid and ask prices for our ordinary shares.
Such delisting from NASDAQ and continued or further declines in our ordinary share price could also greatly impair our ability
to raise additional necessary capital through equity or debt financing and could significantly increase the ownership dilution
to shareholders caused by our issuing equity in financing or other transactions.
If
we were delisted from NASDAQ, we may become subject to the trading complications experienced by “Penny Stocks” in
the over-the-counter market.
Delisting
from NASDAQ may cause our shares to become subject to the SEC’s “penny stock” rules. The SEC generally defines
a penny stock as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exemptions. One such exemption is to be listed on NASDAQ. Therefore, were we to be delisted from
NASDAQ, our ordinary shares may become subject to the SEC’s “penny stock” rules. These rules require, among
other things, that any broker engaging in a purchase or sale of our securities provide its customers with: (i) a risk disclosure
document, (ii) disclosure of market quotations, if any, (iii) disclosure of the compensation of the broker and its salespersons
in the transaction, and (iv) monthly account statements showing the market values of our securities held in the customer’s
accounts. A broker would be required to provide the bid and offer quotations and compensation information before effecting the
transaction. This information must be contained on the customer’s confirmation. Generally, brokers are less willing to effect
transactions in penny stocks due to these additional delivery requirements. These requirements may make it more difficult for
shareholders to purchase or sell our ordinary shares. Since the broker, not us, prepares this information, we would not be able
to assure that such information is accurate, complete or current.
We
have issued convertible note that contains variable conversion prices which could result in substantial dilution to our existing
shareholders.
On
September 10, 2020, we and an individual investor entered into a securities purchase agreement, pursuant to which we sold to the
investor 222,222 ordinary shares at a purchase price of $2.70 per share, in a registered direct offering. In a concurrent private
placement, for a purchase price of $1,400,000, we sold and issued to the investor a convertible promissory note in a principal
amount of $1,480,000 and a warrant to purchase 53,333 ordinary shares at $9.00 per share within three years following the issue
date. The note carries an original issue discount of $80,000 matures in 12 months from the issue date, bearing interest at a rate
of 5.0% per annum. At any time prior to the maturity, the note, at the investor’s option, may be convertible into fully
paid ordinary shares at a conversion price of $9.00 per share. At any time after the occurrence of an event of default (as defined
in the note), the investor may convert all of the outstanding balance of the note into ordinary shares in an aggregate amount
not exceeding 1.0 million shares. At the maturity, the investors may also covert all of the outstanding balance of the note into
ordinary shares at a price no less than $2.40 per share. In addition, if the note remains outstanding and due in each of the months
of March and June 2021, the investor has a one-time option during the first three weeks in each of March and June 2021, respectively,
to convert no more than one half of the then outstanding balance of the note into ordinary shares at a price no less than $2.40
per share.
Therefore,
if the investor elects to convert the then-outstanding
balance of the note into the Company ordinary shares at or prior to maturity, such conversion may be made at a significant discount
to the then market price of our shares. In the event that the investor converts any or all of the above note, our existing shareholders
will experience immediate dilution in their ownership of our shares, as a result of the discounted price at which the note may
be converted.
The
trading price of our ordinary shares is highly volatile, leading to the possibility of its value being depressed at a time when
you want to sell your holdings.
The
market price of our ordinary shares is volatile, and this volatility may continue. Numerous factors, many of which are beyond
our control, may cause the market price of our ordinary shares to fluctuate significantly. These factors include:
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our
earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to
meet the expectations of financial market analysts and investors;
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changes
in financial estimates by us or by any securities analysts who might cover our shares;
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speculations
about our business in the press or the investment community;
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significant
developments relating to our relationships with our customers or suppliers;
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stock
market price and volume fluctuations of other publicly traded companies and, in particular, those that are in our industries;
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customer
demand for our products;
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investor
perceptions of our industry in general and our company in particular;
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the
operating and stock performance of comparable companies;
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general
economic conditions and trends;
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major
catastrophic events;
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announcements
by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
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changes
in accounting standards, policies, guidance, interpretation or principles;
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loss
of external funding sources;
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sales
of our ordinary shares, including sales by our directors, officers or significant shareholders; and
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additions
or departures of key personnel.
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Securities
class action litigation is often instituted against companies following periods of volatility in their share price. This type
of litigation could result in substantial costs to us and divert our management’s attention and resources. Moreover, securities
markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance
of particular companies. For example, from January 1, 2021 through April 28, 2021 the closing price of our ordinary shares on
the NASDAQ Capital Market has ranged from a high of $14.06 to a low of $2.81. These market fluctuations may adversely
affect the price of our shares and other interests in our company at a time when you want to sell your interest in us.
Our
outstanding warrants may adversely affect the market price of our ordinary shares.
As
of the date of this report, there are warrants outstanding to purchase 2,048,334 ordinary shares of the Company. These
warrants consist of warrants exercisable for 133,334 ordinary shares at an exercise price of $9.0 per share, warrants
exercisable for 1,000,000 ordinary shares at an exercise price of $3.5 per share, warrants exercisable for 915,000
ordinary shares at an exercise price of $6.3 per share. Most of the warrants could be exercised
on a cashless basis. The sale or possibility of sale of the shares underlying the warrants could have an adverse effect on the
market price of our ordinary shares or our ability to obtain future financing. If and to the extent these warrants are exercised,
you may experience dilution to your holdings.
Techniques
employed by short sellers may drive down the market price of our ordinary shares.
Short
selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the
intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a
decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares,
as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest
for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding
the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves
after selling a security short. These short attacks have, in the past, led to selling of shares in the market.
Public
companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny
and negative publicity has centered on allegations of a lack of effective internal control over financial reporting resulting
in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto
and, in many cases, allegations of fraud. As a result, a number of targets of such efforts are now conducting internal and external
investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.
If
we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could
have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would vigorously
defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant
short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation
could be costly and time-consuming, and could distract our management from growing our business. Even if such allegations are
ultimately proven to be groundless, allegations against us could severely impact our business operations, and any investment in
our common stock could be greatly reduced or even rendered worthless.
If
securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the
market price and trading volume for our shares could decline.
The
trading market for our ordinary shares will depend in part on the research and reports that securities or industry analysts publish
about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the
analysts who covers us downgrades our ordinary shares or publishes inaccurate or unfavorable research about our business, the
market price for our ordinary shares would likely decline. If one or more of these analysts cease coverage of our company or fail
to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market
price or trading volume for our ordinary shares to decline.
We
do not intend to pay dividends for the foreseeable future.
For
the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and do not
anticipate paying any cash dividends on our shares. Accordingly, investors must be prepared to rely on sales of their shares after
price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our
shares. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors, and will depend
on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable laws, and other
factors our board deems relevant.
Our
outstanding voting securities are concentrated in a few shareholders.
Mr.
Jianghuai Lin, our Chairman and Chief Executive Officer, is the beneficial owner of approximately 24.6% of our outstanding voting
securities. His ownership may have the effect of delaying or preventing
a future change in control, impeding a merger, consolidation, takeover, or other business combination, or discourage a potential
acquirer from making a tender offer.
We
are a “foreign private issuer” and have disclosure obligations that are different than those of U.S. domestic reporting
companies. Therefore, you should not expect to receive the same information about us as a U.S. domestic reporting company may
provide. Furthermore, if we lose our status as a foreign private issuer, we would be required to fully comply with the reporting
requirements of the Exchange Act applicable to U.S. domestic issuers and incur significant operational, administrative, legal,
and accounting costs that we would not incur as a foreign private issuer.
We
are a foreign private issuer. As a result, we are not subject to certain of the requirements imposed upon U.S. domestic issuers
by the SEC. For example, we are not required by the SEC or the federal securities laws to issue quarterly reports or file proxy
statements with the SEC. We are also allowed to file our annual report with the SEC within four months of our fiscal year end.
We are also not required to disclose certain detailed information regarding executive compensation that is required from U.S.
domestic issuers. Further, our directors and executive officers are not required to report equity holdings under Section 16 of
the Securities Act. As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which,
generally, aim to ensure that select groups of investors are not privy to specific information about an issuer before other investors.
We are, however, still subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5. Since many of the
disclosure obligations required of us as a foreign private issuer are different than those required by U.S. domestic reporting
companies, our shareholders should not expect to receive all of the same types of information about us and at the same time as
information is received from, or provided by, U.S. domestic reporting companies. We are liable for violations of the rules and
regulations of the SEC, which do apply to us as a foreign private issuer. Violations of these rules could affect our business,
results of operations, and financial condition.
As
a foreign private issuer, we are permitted to rely on exemptions from certain NASDAQ corporate governance standards applicable
to domestic U.S. issuers. This may afford less protection to holders of our securities.
We
are exempted from certain corporate governance requirements of the Nasdaq Stock Market by virtue of being a foreign private issuer.
As a foreign private issuer, we are permitted to follow the governance practices of our home country, the BVI in lieu of certain
corporate governance requirements of NASDAQ. As a result, the standards applicable to us are considerably different than the standards
applied to domestic U.S. issuers. For instance, we are not required to:
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have
a majority of the board be independent (although all of the members of the audit committee must be independent under the U.S.
Securities Exchange Act of 1934, as amended, or the Exchange Act);
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have
a compensation committee and a nominating committee to be comprised solely of “independent directors”; and
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hold
an annual meeting of shareholders no later than one year after the end of the Company’s fiscal year-end.
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As
a result, you may not have the same protections afforded to shareholders of companies that are subject to all of the Nasdaq corporate
governance requirements.
You
may have difficulty enforcing judgments obtained against us.
We
are a BVI company and substantially all of our assets are located outside of the United States. Virtually all of our assets and
a substantial portion of our current business operations are conducted in the PRC. In addition, almost all of our directors and
officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons
is located outside the United States. As a result, it may be difficult for you to effect service of process within the United
States upon these persons. It may also be difficult for you to enforce the U.S. courts judgments obtained in U.S. courts including
judgments based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors,
many of whom are not residents in the United States, and whose significant part of assets are located outside of the United States.
The courts of the BVI would recognize as a valid judgment, a final and conclusive judgment obtained in the federal or state courts
in the United States against the Company, under which a sum of money is payable (other than a sum of money payable in respect
of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment
based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment, (b) such courts
did not contravene the rules of natural justice of the BVI, (c) such judgment was not obtained by fraud, (d) the enforcement of
the judgment would not be contrary to the public policy of the BVI, (e) no new admissible evidence relevant to the action is submitted
prior to the rendering of the judgment by the courts of the BVI, and (f) there is due compliance with the correct procedures under
the laws of the BVI. In addition, there is uncertainty as to whether the courts of the BVI or the PRC, respectively, 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. In addition, it is uncertain whether such BVI or PRC courts would entertain original actions
brought in the courts of the BVI or the PRC, against us or such persons predicated upon the securities laws of the United States
or any state.
As
we were incorporated under the laws of the BVI, it may be more difficult for our shareholders to protect their rights than it
would be for a shareholder of a corporation incorporated in another jurisdiction.
Our
corporate affairs are governed by our Memorandum and Articles of Association, by the BVI Business Companies Act (as amended),
or the BVI Act, and by the common law of the BVI Principles of law relating to such matters as the validity of corporate procedures,
the fiduciary duties of management, and the rights of our shareholders. Such matters differ from those that would apply, had we
been incorporated in the United States or another jurisdiction. The rights of shareholders under BVI law may not be as clearly
established as the rights of shareholders are in the United States or other jurisdictions. Under the laws of most jurisdictions
in the United States, majority and controlling shareholders generally have certain fiduciary responsibilities to the minority
shareholders. Shareholders’ actions must be taken in good faith. Obviously unreasonable actions by controlling shareholders
may be declared null and void. BVI law protecting the interests of minority shareholders may not be as vigorous in all circumstances
as the law protecting minority shareholders in United States or other jurisdictions. Although a shareholder of a BVI company may
sue the company derivatively, the procedures and defenses available to the company may result in the rights of shareholders of
a BVI company being more limited than those of shareholders of a company organized in the United States. Furthermore, our directors
have the power to take certain actions without shareholders’ approval, which would require shareholders’ approval
under the laws of most United States or other jurisdictions. The directors of a BVI corporation, subject in certain cases to the
court’s approval but without shareholders’ approval, may implement a reorganization, merger or consolidation, or sale
of assets, property, business or securities of the corporation which sale is subject to a limit of up to 50% of such assets. The
ability of our board of directors to create new classes or series of shares and the rights attached by amending our Memorandum
and Articles of Association without shareholders’ approval could have the effect of delaying, deterring or preventing a
change in our control without any further action by the shareholders, including a tender offer to purchase our ordinary shares
at a premium over then market prices. Thus, our shareholders may have more difficulty protecting their interests in the face of
actions by our board of directors or our controlling shareholders than they would have as shareholders of a corporation incorporated
in another jurisdiction.
ITEM
4. INFORMATION ON THE COMPANY
A.
History and Development of the Company
General
Information
The
current legal and commercial name of the Company is Taoping Inc. The Company was incorporated in the BVI under the BVI Act on
June 18, 2012. The address of our principal place of business is 21st Floor, Everbright Bank Building, Zhuzilin, Futian District,
Shenzhen, Guangdong Province 518040, People’s Republic of China. Our telephone number is (+86) 755-8831-9888. Our registered
agent in the British Virgin Islands is Maples Corporate Services (BVI) Limited of Kingston Chambers, PO Box 173, Road Town, Tortola,
British Virgin Islands.
Corporate
History
Our
predecessor company, CITN, was originally organized under the laws of the State of Florida on September 19, 1979 under the name
Mark Thomas Publishing Inc. On April 29, 2003, we changed our name to Irish Mag, Inc. From our inception through October 8, 2006,
we provided consulting services in the offset printing industry, targeting individual retail consumers as well as small to medium
sized companies.
On
April 7, 2008, we re-incorporated in the State of Nevada by merging into China Information Security Technology, Inc., a subsidiary
that we established in Nevada to effect the re-incorporation. As a result, our name was changed to China Information Security
Technology, Inc. and we became a Nevada corporation.
On
August 26, 2010, we changed our name to China Information Technology, Inc.
On
October 31, 2012, we completed a corporate reorganization, whereby the Company, which was established as a subsidiary of CITN
under the laws of the BVI to effect the reorganization, became the parent company of a publicly held entity. Consequently, CITN
became a wholly-owned subsidiary of the Company. In connection with the reorganization, each outstanding share of the common stock
of CITN was converted into the right to receive one ordinary share of the Company. The ordinary shares of the Company were listed
on the NASDAQ Global Select Market under the trading symbol of “CNIT,” the same symbol under which the common stock
of CITN were listed. Prior to the reorganization, shares of CITN’s common stock were registered pursuant to Section 12(b)
of the Exchange Act. On October 31, 2012, the Company filed a Form 8-K12B under cover of a Form 6-K to establish the Company as
the successor issuer to CITN pursuant to Rule 12g-3 under the Exchange Act. Pursuant to Rule 12g-3(a) under the Exchange Act,
the ordinary shares of the Company, as successor issuer, were deemed registered under Section 12(b) of the Exchange Act. On November
13, 2012, CITN filed a Form 15 with the SEC to terminate the registration of the shares of its common stock and suspend its reporting
obligations under Sections 13 and 15(d) of the Exchange Act. On November 19, 2012, we changed the name of CITN to China Information
Technology (Nevada), Inc., which was liquidated and dissolved in July 2014.
At
the Company’s 2017 Annual Meeting of Members, which was held on September 19, 2017, the shareholders of the Company approved
an amendment to the Company’s Memorandum and Articles of Association to remove the par value of the Company’s ordinary
shares. On October 12, 2017, the Company filed an amended and restated Memorandum and Articles of Association with the Registrar
of Corporate Affairs in the British Virgin Islands, pursuant to which the par value per share of the Company’s ordinary
shares has been removed.
On
May 25, 2018, we held our 2018 Annual Meeting of Members and our shareholders approved the change of our company name to “Taoping
Inc.” and an amendment and restatement of the Company’s Memorandum and Articles of Association to reflect such change
of name. In connection with the name change, the trading symbol of our ordinary shares was changed to “TAOP,” effective
on June 1, 2018.
On
July 30, 2020, we completed a share combination of our ordinary shares at a ratio of one-for-six, which decreased our outstanding
ordinary shares to approximately 7,332,434 shares. This share combination did not change our authorized amount of shares or the
par value of our ordinary shares. Accordingly, except as otherwise indicated, all share and per share information contained in
this annual report has been restated to retroactively show the effect of the share combination.
Management
Services Agreement
On
July 1, 2007, our subsidiary IST entered into a management services agreement, or MSA, with iASPEC and its shareholders. Pursuant
to the MSA, iASPEC granted IST an exclusive, royalty-free, transferable, worldwide license to use and install certain iASPEC software,
along with copies of source and object codes relating to such software in any manner permitted by applicable laws for ten years.
Also, IST licensed iASPEC a royalty-free, limited, non-exclusive license to the software without right of sub-license for the
sole purpose of permitting iASPEC to carry out its business as presently conducted. IST was also granted the right to designate
two Chinese citizens to serve as senior managers of iASPEC, to serve on iASPEC’s Board of Directors and assist in managing
the business and operations of iASPEC. In addition, both iASPEC and IST agreed to require the affirmative vote of the majority
of our Board of Directors, as well as at least one non-insider director, for certain material actions with respect to iASPEC.
Furthermore, under the MSA, IST was entitled to receive 100% of the modified net profit of iASPEC, and would reimburse iASPEC
for all net losses incurred. IST was also obligated to pay iASPEC $180,000 per year. If iASPEC or any of the iASPEC shareholders
materially breaches the MSA and fails to remedy the breach within 60 days after receipt of notice from IST of such breach, iASPEC
and its shareholders will be jointly and severally obligated to pay IST liquidated damages in an amount equal to the higher of
(a) eight times the annualized revenues of IST for the last completed fiscal quarter, or (b) $50 million.
In
connection with the MSA, IST also entered into a purchase option agreement, or Option Agreement, with iASPEC and its shareholders,
effective as of July 1, 2007. Pursuant to the Option Agreement, the iASPEC shareholders granted IST, or its designee(s), an exclusive,
irrevocable option to purchase from the iASPEC shareholders, from time to time, all or part of iASPEC’s shares, according
to an equity transfer agreement, or to purchase all or part of iASPEC’s assets, according to an asset purchase and transfer
agreement. However, according to the Option Agreement, the option may not be exercised by IST, if the exercise would violate any
applicable laws and regulations in China or cause any license or permit held by, and necessary for the operation of iASPEC, to
be cancelled or invalidated. Under the terms of the Option Agreement, the option is immediately exercisable at an exercise price
of $1,800,000, in the aggregate, which is subject to regulatory approval. In addition, iASPEC and the iASPEC shareholders agreed
to use their best efforts to acquire all necessary government approvals and other consents to complete a share purchase under
the Option Agreement. The Option Agreement may be rescinded by IST upon 30 days’ notice, and will be terminated on the date,
when we have purchased all remaining shares or assets of iASPEC, pursuant to the terms of the Option Agreement. If any of the
parties breaches the Option Agreement and fails to remedy the breach, the breaching party will pay a penalty of RMB5,000,000 (approximately
$683,600) to the non-breaching party or parties, and compensate the non-breaching party or parties for any losses caused by the
breach.
As
a result of the relationship with iASPEC, iASPEC became a variable interest entity of our Company. A variable interest represents
a contractual or ownership interest in another entity that causes the holder to absorb the changes in fair value of the other
entity’s net assets. Potential variable interests include holding economic interests; voting rights; or obligations to an
entity; issuing guarantees on behalf of an entity; transferring assets to an entity; managing the assets of an entity; leasing
assets from an entity; and providing financing to an entity. Consolidation of the variable interest entity is required by the
enterprise that controls the economic risks and rewards of the entity, regardless of ownership. While we have held an economic
interest in iASPEC since October 9, 2006, the MSA and the Option Agreement gave us controls over the business and operations of
iASPEC. As a result, iASPEC’s financial data is subject to consolidation with our financial data, commencing July 1, 2007.
On
July 1, 2008, our Chairman and Chief Executive Officer, Mr. Jianghuai Lin, entered into an Equity Transfer Agreement with Mr.
Jin Zhu Cai, the owner of a 24% minority interest in iASPEC. Pursuant to the Agreement, Mr. Lin purchased Mr. Cai’s minority
interest for a total consideration of RMB 60 million (approximately $8.7 million). As a result of the Equity Transfer Agreement,
Mr. Lin holds 100% of the equity interests of iASPEC.
On
December 13, 2009, IST, iASPEC and Mr. Lin, as the sole shareholder of iASPEC, amended and restated the MSA, pursuant to which
IST would continue to provide management and consulting services to iASPEC, subject to the following changes:
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iASPEC
agreed that IST will be entitled to receive ninety five percent (95%) of the modified net profit of iASPEC during the term
of the agreement, to be calculated as follows: accrued accounts receivable plus net turnover (revenue), minus cost of sales,
minus operating expenses, and minus accrued but not collected accounts receivable, but only if the result is a positive number.
iASPEC is obligated to calculate and pay the modified net profit due to IST no later than the last day of the first month
following the end of each fiscal quarter;
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Mr.
Lin agreed to enter into a pledge agreement with IST to pledge all his equity interests in iASPEC as security for his and
iASPEC’s fulfillment of their respective obligations under the MSA, and to register the pledge agreement with the local
Administration for Industry and Commerce;
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Mr.
Lin confirmed his status as the sole shareholder of iASPEC and his assumption of all the obligations of the iASPEC under the
agreement, including a confirmation of his continuing obligation under a written guaranty, dated August 1, 2007, executed
by the iASPEC shareholder in connection with the MSA;
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Based
on iASPEC’s needs for its development and operation, IST has the right, from time to time and at its sole discretion,
to provide iASPEC with capital support either as an entrustment of funds to iASPEC, or as an advance to Mr. Lin, as iASPEC’s
shareholder, for the sole purpose of making a capital contribution to iASPEC for use in the business of iASPEC. Any advance
for capital contribution will be evidenced by an “advance agreement” in the form attached to the amended and restated
MSA; and
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IST
agreed that it will not interfere in any business of iASPEC covered by iASPEC’s State Secret related Computer Information
System Integration Certificate, including but not limited to, seeking access to relevant documents regarding such business.
Nevertheless, iASPEC agreed to cooperate with the requests of the Company as necessary to comply with the Company’s
reporting obligations to the SEC.
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In
addition, during the term of the amended MSA, certain material actions with respect to iASPEC will require the affirmative vote
of the majority of the Board of Directors of the Company, including the affirmative vote of at least one member who is not employed
by IST, iASPEC, or any affiliate of either of them. Such material actions include: (a) the nomination, appointment, election or
replacement of any members of any Board of Directors of iASPEC (who must be a citizen of the PRC); (b) the approval of any profit
distribution plan and loss compensation plan; (c) any merger, division, change of corporate form, dissolution or liquidation of
iASPEC; (d) any loan or advance or other payments or transfers of funds from IST to iASPEC; (e) any declaration of any dividend
or any distribution of profits by iASPEC; (f) the formation or disposition of any subsidiary by iASPEC, or acquisition or disposition
of any equity interest or other interest in any other entity by iASPEC; (g) any corporate borrowing or lending by iASPEC, except
for routine extension of terms to trade creditors; (h) the encumbrance of any assets of iASPEC under any lien, except in the ordinary
course of business; (i) any change in the methods of accounting or accounting practices of iASPEC; (j) any change in the scope
of business of iASPEC, or any decision to engage in any type of business other than those engaged in by iASPEC as of the date
of the agreement or (k) any agreement to do any of the foregoing.
After
the amended MSA was executed, based on the advice of the Company’s PRC legal counsel, in January 2010, all the parties to
the MSA decided not to enter into a pledge agreement.
The
amended MSA has a term of 30 years unless otherwise earlier terminated by the parties by one of the following means:
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Either
iASPEC or IST may terminate the amended MSA immediately (a) upon a material breach by a party of its obligations and the failure
of such party to cure such breach within 30 business days after written notice from the non-breaching party; or (b) upon the
filing of a voluntary or involuntary petition of bankruptcy by the party or to which the party is the subject, or insolvency
of the party, or the commencement of any proceedings placing the party in receivership, or of any assignment by the party
for the benefit of creditors; or
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The
amended MSA may be terminated at any time by IST upon 90 calendar days’ written notice delivered to all other parties.
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Upon
effective date of termination of the amended MSA: (a) IST will cease providing management services to iASPEC; (ii) IST will deliver
to iASPEC all chops and seals of iASPEC; (iii) IST will deliver to iASPEC all of the financial and other books and records of
iASPEC, including any and all permits, licenses, certificates, and other proprietary and operational documents and instruments;
(iv) the senior managers who are recommended by IST and elected as directors of iASPEC will resign from the Board of Directors
of iASPEC in a lawful way; and (v) the software license that iASPEC granted to IST according to the amended MSA will terminate
unless otherwise agreed by the parties. In addition, any amounts owing from one party to the other, on the effective date of termination
under the terms of the amended MSA, will continue to be liable and payable despite such termination.
The
amended MSA does not have renewal provisions. We expect that the parties to the amended MSA will negotiate to extend the term
of the agreement before its expiration.
Purchase
Option Agreement
On
July 1, 2007, in connection with the execution of the original MSA, IST entered into a purchase option agreement, or the Option
Agreement, with iASPEC and the then shareholders of iASPEC. The Option Agreement will terminate on the date IST acquires all the
shares or assets of iASPEC pursuant to the terms of the Option Agreement. The Option Agreement may be rescinded by IST upon 30
days’ notice without costs to terminate. The Option Agreement does not have renewal provisions.
Corporate
Structure
The
following diagram illustrates our corporate structure as of the date of this report.
The
Securities and Exchange Commission, or SEC, maintains an Internet site that contains reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Our
web site address is http://www.taop.com. Information contained on, or that can be accessed through, our website does not constitute
a part of this Annual Report.
Principal
Capital Expenditures and Divestitures
For
the year ended December 31, 2020, our total capital expenditures and divestitures were $1.7 million and $0 million, respectively.
For the year ended December 31, 2019, our total capital expenditures and divestitures were $1.6 million and $0 million, respectively.
For the year ended December 31, 2018, our total capital expenditures and divestitures were $4.2 million and $0 million, respectively.
Such expenditures and divestitures were primarily related to the purchase and sale of long-lived assets and business acquisitions.
These capital expenditures were mainly funded by our operating cash flow.
B.
Business Overview
General
We
were founded in 1993. Headquarter of the Company is located in Shenzhen, China. As of December 31, 2020, we had approximately
58 full-time employees.
We
are a leading provider of cloud-app technologies for Smart City IoT platforms, digital advertising delivery, and other internet-based
information distribution systems in China. Our Internet ecosystem enables all participants of the new media community to efficiently
promote branding, disseminate information, and exchange resources. In addition, we provide a broad portfolio of software and hardware
with fully integrated solutions, including Information Technology infrastructure, Internet-enabled display technologies, and IoT
platforms to customers in government, education, residential community management, media, transportation, and other private sectors.
Prior
to 2014, we generated the majority of our revenues through selling our products and services mostly to the public service entities
to help them improve their operational efficiency and service quality. Our representative customers included the China Ministry
of Public Security, provincial bureaus of public security, fire departments, traffic bureaus, police stations, human resource
departments, urban planning boards, civic administrations, land resource administrations, mapping and surveying bureaus, and the
Shenzhen General Station of Immigration Frontier Inspection.
Since
2014, we have expanded and diversified our customer base into the private sector as well. Our customers in the private sector
include, among others, elevator maintenance companies, residential community management, advertising agencies, auto dealerships,
and educational institutes. Our new corporate mission is to make publicity accessible and affordable for businesses of all sizes.
We
generated revenues from sales of hardware products, software products, system integration services, and related maintenance and
support services. In 2015, with the introduction of our cloud-based software as a service (SaaS) offering, we expected to generate
additional recurring monthly revenues from SaaS fees. In 2019 and 2020, only a very small portion of our revenue was generated
from SaaS, which is expected to increase in the coming years with the nationwide roll-out of our cloud-based ad display terminal
network.
In
May 2017, we completed our transformation to a provider of CAT and IoT technology based digital advertising distribution network
and new media resource sharing platform, and offered an end-to-end digital advertising solution enabling customers to efficiently
and cost-effectively direct advertisements to specific interactive ad display terminals in the out-of-home advertising market
across China. In 2017, we became profitable as a result of a successful transition of our business model. We continued to improve
our financial position in 2018. However, due to the unfavorable macro-economic environment and the slowdown of the out-of-home
advertising market in China, we had net loss of approximately $18.3 million and $3.6 million respectively in 2020 and 2019.
For years going forward, we will continue to execute our business plan and build a nationwide cloud-based ad terminal network
by penetrating into more cities throughout China, which is expected to generate substantial recurring service revenue for the
Company, in addition to equipment sales.
Starting
from January 2020, the coronavirus outbreak, also known as COVID-19, has caused the Chinese government to take quarantine measures,
such as nationwide lockdowns, transportation restrictions, public gathering prohibitions and temporary closures of non-essential
businesses, which had put economic activities in a suspension mode until late March, in addition to the regular Chinese New Year
Holiday. Although the COVID-19 pandemic has largely been contained in China since the third quarter of 2020 and
businesses have gradually resumed to operations, China’s economic recovery still faces great challenges.
We
report financial and operational information in the following two segments:
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(1)
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Cloud-based
Technology (CBT) segment — The CBT segment is our current and future focus of corporate development. It includes the
Company’s cloud-based products, high-end data storage servers, and related services sold to private sectors including
new media, healthcare, education, and residential community management, and among other industries and applications. In this
segment, we generate revenues from the sales of hardware, and the provision of total solutions of interactive advertisement
display terminals integrated with proprietary software, out-of-home digital advertising distribution, and advertising time
slot programmed trading transactions. We also generate revenue from monthly software subscription and Software-as-a Service
(SaaS) fees. As a result of COVID-19 pandemic, city lockdowns, travel restrictions, and other preventive measures had negatively
impacted on the China out-of-home advertising business and significantly dampened customers’ demand for ads display
terminals. Nevertheless, mandatory home stays and work from remote locations triggered a steep surge in on-line gaming, on-line
shopping, on-line entertainment, and electronic communication, and created a great demand for high-end data storage servers
to accommodate internet information transmission. The Company has stabilized supply chains for the high-end data storage server
to meet market demands supplementing the declining revenue from ads display terminals and included the revenue and cost of
revenue of high-end data storage servers in the CBT segment.
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(2)
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Traditional
Information Technology (TIT) segment — The TIT segment includes our project-based technology products and services, including Digital Public Security Technology (DPST) and Multi-screen Digital Display Systems (MDDS).
In this segment, we generate revenues from the sales of software and systems integration services.
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Starting
from 2021, we also expanded to digital assets and blockchain businesses, through purchase of Antminers, general-purpose servers,
establishment or lease of data centers in various locations, and potential acquisition of company in this market.
Industry
Overview
General
Urbanization
is the primary driver for the demand of our Cloud-based solutions for advertising placement and public information dissemination.
China’s urbanization rate has accelerated in the past 30 years. The Chinese urban population has grown by over 170 million
in the past five years to more than 1 billion in 2020. According to Chinese Social Development Research, approximately 70% of
the Chinese population is expected to live in urban areas by 2035. Urban lifestyle revolves around consumption of information,
goods, and services that necessitates advertising and public information dissemination. At the same time, urbanization has imposed
considerable pressure on land use, environment protection, and municipal infrastructure. Urbanization has also led to increasing
demands for equitable treatment for all dwellers in the cities.
In
the first quarter of 2014, China’s State Council unveiled a new urbanization plan for the period from 2014 to 2020 in an
effort to steer the country onto a more humanistic and environmentally friendly urbanization path. The plan increases the country’s
investment in urban infrastructure, public service facilities, and affordable housing constructions. It also calls for closer
coordination between urban and rural developments, optimization of city planning, and tighter integration of environmental protection
measures into urbanization efforts. The plan also projects new construction of 20,000 to 50,000 skyscrapers around the country,
as well as implementation of mass transit systems in more than 170 cities by 2025. In addition, it requires construction of regular
railways to connect all medium sized cities of over 200,000 in population and high-speed railways to connect large cities of over
500,000 in population by 2020. Also, it plans to expand the nation’s civil aviation network to cover 90 percent of its total
population.
Out-of-Home
Digital Advertising Market in China
Rising
urbanization has resulted in prevalent traffic congestions throughout China. In medium to large sized cities, people on an average
spend 39 minutes of commuting time to work. According to China New-type Urbanization Report (2014-2018), in densely populated
tier one cities including Beijing, Guangzhou, and Shanghai, it costs commuters 14, 12, and 11 minutes every day in traffic jams,
respectively. In Beijing, a megacity of over 21 million residents, the daily commute takes 45 minutes, the worst of all Chinese
cities.
While
traffic jams are a headache for urban commuters and city planners, they present revenue generating opportunities for out-of-home
advertisers, who seek attentive audience in high traffic areas. According to China Industry Information Net, the estimated total
market size of China’s out-of-home advertising is expected to reach RMB 227 billion in 2021, with a CAGR of 14%. Cosmetics,
beverage, and financial service companies are ranked as top spenders consistently. Internet and real estate companies also increased
their advertisement spending significantly.
The
growth, starting in 2013, can be attributed to three factors: 1) macroeconomic recovery in China has encouraged businesses to
increase their advertising spending; 2) industry leaders have led consolidation in the out-of-home advertising market and grown
their market share in tier one cities like Beijing, Guangzhou, Shanghai, and Shenzhen; 3) rapid advancement in Internet and mobile
technologies has resulted in new O2O (offline-to-online) advertising opportunities.
Over
50% of the advertisers rated commercial buildings and public transportation hubs as the top two prime locations for advertisement
placement. There are over 200 million people riding elevators every day in China. The number of advertisers opting for residential
buildings also increased considerably. Precision advertisement uses digital technologies, such as internet-based ads management
and distribution and big data analysis, to target its audience, and continues to be the advertisers’ focal point, which
resulted in the increasing demands for digital advertising.
Market
Trends
In
addition to urbanization, two technological developments further accelerate the demand for our CBT products and services: 1) offline-to-online
migration of display terminals and 2) adoption of Quick Response (QR) codes.
Currently,
most of the advertising display terminals in China are not connected to any network. Consequently, updating their media contents
requires onsite manual operation through flash drives or other means. They also tend to have low asset utilization rates. Based
on our own primary research, we have estimated that offline terminals have an average asset utilization rate of 40% in tier-one
cities, 30% in tier-two cities, and 20% in tier-three and smaller cities. In comparison, content on cloud-based terminals can
be remotely uploaded, updated, and managed resulting in substantial labor cost savings for terminal operators, i.e. advertising
agencies. In addition, cloud-based terminals offer advertising agencies the flexibility of fine-tuning advertisement schedules
on the fly and customizing advertisement content at each location as specific as one single office building. More importantly,
idle time slots on cloud-based terminals can be discovered and sold on Taoping, an online resource exchange platform of ours that
was released in the fourth quarter of 2015 as a module of our Yunfa Net (www.pubds.com), an information distribution and advertising
delivery system. Therefore, asset utilization rate of advertising agencies can be greatly improved. As a result, there is a growing
demand to convert offline terminals into networked terminals using our CBT products and services. In January 2018, we separated
Taoping module from Yunfa Net and officially launched the Taoping Net (www.taoping.cn) and Taoping App. Taoping Net provides an
advertising-resources trading service platform which connects screen owners, advertisers and consumers. Taoping Net integrates
nationwide high-quality screen resources of Taoping Alliance, a new media operating organization founded by us and Taoping New
Media Co., Ltd. (“Taoping New Media”), a company controlled by Mr. Jianghuai Lin. Taoping App, which enables customers
to distribute and manage ads from mobile terminals, effectively satisfies the need to distribute fragmented ads. Using Taoping
App, anyone can buy and distribute real-time ads to designated terminals.
Furthermore,
the wide adoption of QR codes is also positively impacting the demand for our cloud-based products and services. A QR code is
a digital barcode that contains merchants’ information. By incentivizing consumers to scan the QR code embedded in advertisement,
advertising agencies can analyze the effectiveness of their advertisements and adjust their sales and marketing tactics on a real-time
basis. In China, the application of QR codes is permeating from tier-one cities to the rest of the country. Although QR codes
have frequently appeared in print ads as well as in digital ads displayed on offline terminals, the codes can be changed only
as frequently as the advertisement itself. The data brought in to advertising agencies by the QR codes cannot be segmented by
precise locations or time slots, and thus can generate only limited insight into viewer behavior. In contrast, individualized
QR codes embedded in advertisement displayed on networked terminals can vary by location and time slot, and offer advertising
agencies deeper insights at a much higher precision than offline terminals or print ads. Consequently, the adoption of QR codes
is further driving the demand for our cloud-based ad display terminals.
Our
Products and Services
In
the CBT segment, we provide cloud-based ecosystem solutions mainly to the new media in out-of-home digital advertising customers.
Underpinning our ecosystems are our industry-specific integrated advertisement display terminal product, digital advertising distribution
technology platform, resource exchange and sharing, and big data analysis services. In 2014, we sold our cloud-based solutions
predominately to the Chinese new media industry. Starting from 2016, we have also focused our efforts in selling IoT ads display
terminal hardware and providing digital ads distribution and resource sharing services for out-of-home advertising market. As
a result of COVID-19 pandemic in 2020, city lockdowns, travel restrictions, and other preventive measures had negatively impacted
on the China out-of-home advertising business and significantly dampened customers’ demand for ads display terminals. Nevertheless,
mandatory home stays and work from remote locations triggered a steep surge in on-line gaming, on-line shopping, on-line entertainment,
and electronic communication that created a great demand for high-end data storage servers to accommodate internet information
transmission. We have stabilized supply chains for the high-end data storage server to meet market demands supplementing the declining
revenue from ads display terminals and included the revenue and cost of revenue of high-end data storage servers in the CBT segment.
For
the out-of-home new media industry, we provide our software as a service to automate the entire interactive workflows between
advertising agencies and their customers, including, among others, establishing new advertising projects, submitting advertisement
proposals, revising and approving advertising proposals, processing payment online, remotely uploading advertisement content,
and tracking and analyzing performance data.
Our
Technology Platform
The
foundation of our product offerings is our proprietary technology platform called Cloud-Application-Terminal (CAT). Its trademark
has been registered in PRC. Our CAT platform includes three layers of technology: 1) cloud infrastructure, 2) software application,
and 3) high-definition digital display terminals ranging from 18.5 to 84 inches in display size. Bundled together, three layers
of technology serve as a turnkey solution for our customers to improve their operational efficiency and maximize their revenue.
Our
CAT platform can be accessed from a variety of devices, including networked display terminals, desktop computers, and mobile devices.
It can operate in all operating systems, including Windows, Android and iOS. It unifies all access points into one unique user
account, through which a user can log onto our cloud system and enjoy all available software features and functions.
Our
Resource Exchange and Sharing
Building
on top of our CAT platform is our industry-specific resource sharing functionality. For the out-of-home new media industry, in
the fourth quarter of 2015, we released a resource exchange called “Taoping” as a module of our proprietary cloud-based
information distribution and ad delivery platform - Yunfa Net (www.pubds.com). Taoping in Chinese means “search and select
display terminals.” Taoping pairs those who seek, with those who own out-of-home advertisement resources of interactive
display terminals, and facilitates their transactions online.
For
example, a local advertising agency based in Shenzhen City may need to place advertisement in Guangzhou City, but does not own
any display terminals in Guangzhou. Through Taoping, the advertising agency can search available display terminals by location,
venue, and time slots, find suitable resources, negotiate rental prices with terminal owners, and process payments online. Then
through Taoping, the advertising agency can upload advertisement content onto remote terminals, monitor advertisement performances,
make necessary editing to the advertisement, and update advertisement content.
Taoping
enables advertising terminal resource owners to improve their asset utilization rates and returns on investments. At the same
time, Taoping allows advertisement promoters to leverage available advertising resources in other geographic regions, and cost
effectively expand into new business territories.
Our
Big Data Services
Building
on top of our resource sharing capability is our big data analysis service. After releasing our resource sharing feature, we have
been compiling and analyzing data related to buyer/seller behavioral preferences, so that we can provide value-added services
to our customers.
For
example, through big data analyses, we are able to make insightful suggestions to advertising resource owners on which specific
types of venues being displayed at specific time slots likely garner high rental fees as well as the optimal range of rental fees
they could charge for each type of resources they own. For advertising promoters, we are able to provide advice such as the optimal
combinations of terminals to rent in order to reach the biggest possible audience they desire, and attain the greatest impact
while staying within their advertising budget.
Our
Industry-Specific Ecosystems
In
combining our proprietary CAT technology platform, resource sharing functionality, and big data services with our industry expertise,
we provide integrated ecosystem solutions to the industries of out-of-home digital advertising new media, healthcare, education,
and residential community management. As described above, starting from the out-of-home digital advertising new media industry,
we have been in the process of rolling out product offerings to all of those four industries.
|
●
|
New
Media Elevator Management – Our New Media Elevator Management solution integrates advertisement placement with safety
supervision into one single technology unit. The built-in LED screen of the unit delivers high definition digital advertisement,
while its safety sensors and data collectors transmit operational and technical data of the elevator to the appropriate property
managers, safety supervisors, and maintenance crew, so that such staff can efficiently maintain operational safety of the
elevator, and instantaneously respond to emergencies. Since our New Media Elevator Management solution combines public safety
with media display, property managers view our products as of strategic importance to their daily operations, and they welcome
our products better than the ones that are pure advertisement display terminals without safety devices. As a result, we are
able to help advertising agencies that purchase our products to attain customers more easily and enter into new markets more
cost effectively. In addition, the Elevator Management platform could be sold as a separate product depending on customer
needs to facilitate digital elevator maintenance, big data solution for elevator maintenance company, residential management,
and government authorities.
|
|
|
|
|
●
|
New
Media Transportation Management – Our New Media Transportation Management solution remotely uploads advertisement content
together with critical transportation information — such as arrival and departure schedules, delay or cancellation notifications,
gate assignments, and station announcements – into our cloud infrastructure and displays the content on our large-screen
terminals strategically placed at high-traffic transportation hubs, including high-speed railway stations, subway stations,
airports, and onboard public buses. Because our Transportation New Media Application combines advertisement display with transportation
information crucial to commuters, we enable advertising agencies that purchase our products to attain large and attentive
audiences at prime locations, which in turn help them achieve good advertisement placement rates and generate high revenue
amounts.
|
|
|
|
|
●
|
New
Media Community Management – Our New Media Community Management solution combines advertisement display with dissemination
of community information. Placed within various high-rise residential communities, our large screen display terminals serve
as a window of information into various resources available to community residents, including community maps, news updates,
emergency announcements, safety precautions, health tips, recreational activities, and local commercial promotions.
|
Product
Warranty
For
our TIT segment, we usually offer a one-year or three-year warranty for our system integration services depending on the project.
Our warranty includes support services, minimal updates and system maintenance. No rights of return are allowed except for non-conforming
products, which have been insignificant based on historical experiences. If nonconforming products are returned due to software
issues, we will provide upgrades or additional customization to suit the customers’ needs, which is infrequent with immaterial
costs. The original vendors of hardware are ultimately liable for replacement of defective or non-conforming hardware products.
In cases where non-conformity is due to the integrated hardware, we return the hardware to the original vendor for replacement.
Based on our past experience, the cost of our warranty provision has been immaterial.
For
our CBT segment, we provide a one-year warranty for our digital displays. The actual warranty service is carried out by our OEM
partners, with whom we have obtained a contractual guarantee that they will repair or replace any defective hardware products
that we have purchased on behalf of our customers. Our OEM partners ultimately bear and are liable for the costs of product warranty.
Consequently, our own cost of warranty for this segment has been minimal.
Sales
and Marketing
We
develop new businesses by identifying and contacting potential new customers and through referrals, or by direct contacts from
new customers as a result of our strong brand recognition and reputation in the industry. We solidify our market presence through
various types of marketing campaigns, such as participating in exhibitions, trade shows, and seminars, developing distributors
and dealers, and presenting solutions to prospective customers. With strategic partnership with Taoping New Media, we founded
and played a key role in the Taoping Alliance, a new media operating organization that includes numerous advertising agencies
throughout China, which greatly improved our market expansion capability and industry reputation.
Customers
and Related Parties
In
fiscal year 2020, 2019 and 2018, no single customer represented 10% or more of our total revenue. The following tables provide
revenue by our major customers for the years ended December 31, 2020, 2019 and 2018.
Year
2020
|
|
Revenues
|
|
|
% of
|
|
|
|
(Thousands)
|
|
|
Revenues
|
|
Quxian Qucheng Science and Technology Development Co. Ltd
|
|
$
|
666
|
|
|
|
6
|
%
|
Shenzhen Huaqi Technology Co., Ltd
|
|
|
624
|
|
|
|
6
|
%
|
Shenzhen Bite Technology Co., Ltd
|
|
|
538
|
|
|
|
5
|
%
|
Guangzhou Lindian Intelligent Technology Co., Ltd
|
|
|
459
|
|
|
|
4
|
%
|
Hainan Zhiming Culture and Education Development Co. Ltd
|
|
|
450
|
|
|
|
4
|
%
|
TOTAL
|
|
$
|
2,737
|
|
|
|
25
|
%
|
Year
2019
|
|
Revenues
|
|
|
% of
|
|
|
|
(Thousands)
|
|
|
Revenues
|
|
Shenzhen yixiang technology co. LTD
|
|
$
|
830
|
|
|
|
6
|
%
|
Suzhou Taoping Technology Co., Ltd.
|
|
|
693
|
|
|
|
5
|
%
|
Shanghai Taoping Media Co., Ltd.
|
|
|
666
|
|
|
|
5
|
%
|
Fujian Taoping IoT Technology Co., Ltd.
|
|
|
589
|
|
|
|
4
|
%
|
Yunnan Taoping IoT Co., LTD
|
|
|
540
|
|
|
|
4
|
%
|
TOTAL
|
|
$
|
3,318
|
|
|
|
24
|
%
|
Year
2018
|
|
Revenues
|
|
|
% of
|
|
|
|
(Thousands)
|
|
|
Revenues
|
|
Wuhan Taoping Media Co., Ltd.
|
|
$
|
1,349
|
|
|
|
7
|
%
|
Qingdao Taoping IoT Co., LTD.
|
|
|
947
|
|
|
|
5
|
%
|
Fuzhou Taoping IoT Technology Co., Ltd.
|
|
|
796
|
|
|
|
4
|
%
|
Anhui Taoping Media Co., Ltd.
|
|
|
729
|
|
|
|
3
|
%
|
Xiamen Shenghuan Technology Co., Ltd.
|
|
|
678
|
|
|
|
3
|
%
|
TOTAL
|
|
$
|
4,499
|
|
|
|
23
|
%
|
Competition
In
the CBT segment, there are many small IT service companies in China providing one-off software packages to solve one aspect of
the problems, but not integrated solutions combining technology platform, resource exchange and sharing, and big data services
like ours. For example, in the new media industry, we encounter competition from 56iq.com, Fujian Star-net Communication Co.,
Ltd, Shanghai View Show Technology Co., Ltd., and Maipu Communications Technology Co., Ltd. We do not compete with advertising
agencies, such as Focus Media, Air Media, and Vision China, because we are not an advertising agency nor do we place advertisement
ourselves.
Compared
with our competitors, we believe we have the following advantages:
|
●
|
We
provide integrated ecosystem solutions that combine technology platform, resource exchange and sharing, and big data services.
Our solution not only helps our customers improve their operational efficiency and reduce their labor cost, more importantly,
help them maximize their asset utilization rate and increase their revenue. For example, by utilizing our solution, an advertising
agency can upload its advertisement content from a centralized location to geographically dispersed display terminals, saving
its maintenance staff from traveling to each terminal and updating media content manually. In addition, the advertising agency
can list its idle terminal assets on Taoping, our resource exchange platform, and lease display terminals to other agencies
by location and time slot, generating additional revenue from their existing assets.
|
|
|
|
|
●
|
Our
solution has high scalability, availability, and flexibility. Because our technology solution is architected from ground up
using the latest cloud-computing technology, our system can easily scale up to handle a rapidly increasing amount of data.
In addition, as the number of display terminals connected to our network continues to grow, our system is able to handle additional
workload and workflows to ensure high availability of each terminal. More importantly, because we own our cloud infrastructure
and platform, we have the flexibility of changing or upgrading our software anytime without any constraints.
|
|
|
|
|
●
|
Our
solution has a high level of security guarantee. Because we own the entire stack of technology infrastructure and terminals,
we have a solid security fortress to prevent hackers from breaking into our system. In addition, because we have over 10 years
of experience providing large-scale information systems to the public entities, such as police stations and public security
bureaus, we have a track record of protecting our network from security intrusions or breaches. Lastly, to protect ourselves
from national security concerns, we have an operational agreement with China’s Internet Oversight Board to inspect and
filter all of our advertisement contents before uploading them onto our display network.
|
|
|
|
|
●
|
Our
solution combines digital network with physical assets, establishing a high barrier to entry than other internet related companies.
Our proprietary Cloud-Application-Terminal platform has integrated three layers of technology: cloud storage, application
software, and display terminals. Although it is relatively easy for potential competitors to develop software application
with technology advancement nowadays, it will take them a considerable amount of time and capital to replicate our nationwide
physical network of cloud-based display terminals.
|
Business
Transformation
Prior
to 2014, we predominately sold large-scale customized IT solutions to the Chinese public service sector through various build-and-transfer
projects. Due to changes in policies and regulations in China in 2012, various local governments started postponing IT projects
they had previously contracted with us indefinitely. As a result, many of our existing receivables became uncollectable.
In
early 2013, our management team made a strategic decision to transition our business from servicing the public sector to focusing
on the private sector. We started completing our in-process IT projects and ceased taking on new customers in the public sector.
In addition, we wrote off accounts receivable that we deemed no longer collectable. At the same time, we decided to transform
our business from a build-and-transfer IT service company into a standardized IT product company. Leveraging our experience and
expertise in handling large-scale IT projects for the public sector, we started investing in research and development of our own
software products suitable for the private sector.
In
2014, continuing our transition from the public sector to the private sector, we identified new media, healthcare, education,
and residential community management as the four core end markets on which we would focus. After fortifying our own software R&D
efforts through our acquisition of Biznest in September 2014, we decided to exit the hardware manufacturing business and complete
our transformation into a software company. In November 2014, we initiated the process of closing our own manufacturing facilities
and transferring hardware production to our OEM partners. Transferring hardware production to our OEM partners was completed during
2015. As a result, we wrote off a large amount of accounts receivable and took substantial goodwill and identifiable intangible
asset impairment charges in 2015 and 2016.
As
part of transition from the traditional IT business to the cloud-based business, we sold iASPEC’s 100% equity holding in
Zhongtian and 54.89% equity holding in Geo in 2015. Proceeds from these sales totaling $19.5 million have been invested in the
development and market expansion of our new cloud-based business, as well as repayment of a portion of our short-term debts.
In
2017, we completed our business transformation to a leading products and services provider of CAT and IoT technology based digital
advertising distribution network and new media resource sharing platform in the out-of-home Advertising Market in China. In 2017,
we gained profitability as a result of the successful transition of our business model. In 2018, we continued to prove the sustainability
of the new business model and increased the net income to be approximately $1.7 million. In 2020 and 2019, due to the unfavorable
macro-economic environment and the slowdown of the out-of-home advertising market in China, we had net loss of approximately $18.3
million and $3.6 million respectively. For years going forward, we will continue to execute our business plan and build a
nationwide cloud-based ad terminal network by penetrating into more cities throughout China, which is expected to generate substantial
recurring service revenue for the Company, in addition to equipment sales.
In
2021, we have expanded our CAT based new media sharing platform into education and digital advertising sectors by forming a joint
venture with and contracting collaborative framework agreements with well-known on-line education institutions to provide
study abroad consulting, Project-Based Learning (PBL) program consulting, online education, and charitable education programs
and acquiring Taoping New Media Co., Ltd. to provide out-of-home digital advertising. Also, we have been preparing to
explore business opportunities in blockchain, digital assets, and cryptocurrency mining operations by recruiting seasoned executives,
contracting various well-known consulting firms, suppliers, and operators in these areas, We have newly formed a Blockchain Business
Division to manage blockchain development, digital assets NFT (None Fungible Token) and cryptocurrency mining operations, and
a Digital Culture Business Division to cover on-line education and digital advertising operations. We have not generated revenues
from this new business.
Intellectual
Property
Our
success depends, in part, on our ability to maintain and protect our proprietary technology and to conduct our business without
infringing on the proprietary rights of others. We rely primarily on a combination of copyrights, patents, trademarks, and trade
secrets, as well as executions of employee and third-party confidentiality agreements, to safeguard our intellectual property.
As
of December 31, 2020, through our wholly-owned subsidiaries IST and TopCloud, we had 85 registered and copyrighted software products
and held 16 patents. In addition, our variable interest entities, including iASPEC, Biznest and Bocom, hold 143 registered and
copyrighted software products and 12 patents. We also own two domain names (http://www.taop.com; www.pubds.com).
We
protect our know-how and technologies through confidentiality provisions in the employment contracts we enter into with our employees.
In addition, our engineers are generally divided into different project groups, each of which generally handles only a portion
of the project. As a result, no one engineer generally has access to the entire design process and documentation for a particular
product.
We
have funded a vendor to develop vehicular display terminal using our digital new media sharing platform to deliver advertisements.
The development of vehicular display terminal was completed in September 2020 and started earning advertising revenue.
According to modified contract, we have capitalized the funding as other non-current asset enjoying the intellectual property
of the vehicular display terminal and shared advertising revenue generated from the vehicular display terminal within the four-year
modified contract term.
Regulation
Because
all of our operating entities are located in the PRC, we are regulated by the national and local laws of the PRC. This section
summarizes the major PRC regulations relating to our business.
Permits
and Certificates
Through
our wholly-owned subsidiaries IST and our variable interest entities, we hold the following permits and certificates:
Name
|
|
Expiration
Date
|
|
Company
|
National
High-tech Enterprise
|
|
Valid
till November 1, 2021, subject to renewal every three years.
|
|
IST
|
National
High-tech Enterprise
|
|
Valid
till October 16, 2021, subject to renewal every three years.
|
|
Biznest
|
Regulations
Relating to Foreign Ownership in Value-Added Telecommunications Services
Investment
activities in the PRC by foreign investors are mainly governed by the Guidance Catalog of Industries for Foreign Investment (2017
revision), or the Catalog, which was promulgated jointly by MOFCOM and the National Development and Reform Commission, or the
NDRC, on June 28, 2017 and entered into force on July 28, 2017. The Catalog divides industries into four categories in terms of
foreign investment, which are “encouraged,” “restricted,” and “prohibited,” and all industries
that are not listed under one of these categories are deemed to be “permitted.” Establishment of wholly foreign-owned
enterprises is generally allowed in encouraged and permitted industries. Some restricted industries are limited to equity or contractual
joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition,
foreign investment in restricted category projects is subject to government approvals. Foreign investors are not allowed to invest
in industries in the prohibited category. Industries not listed in the Catalogue are generally open to foreign investment unless
specifically restricted by other PRC regulations.
In
June 2019, MOFCOM and NDRC promulgated the Special Management Measures (Negative List) for the Access of Foreign Investment, or
the Negative List, effective July 30, 2019. Foreign investment in value-added telecommunication business (excluding e-commerce
business, domestic multi-party communications services, store and forward services and call center services) falls within the
Negative List.
On
March 15, 2019, the Standing Committee of the National People’s Congress passed the Foreign Investment Law of PRC, which
took effect on January 1, 2020, replacing the Law of the People’s Republic of China on China-Foreign Equity Joint Ventures,
the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises, and the Law of the People’s Republic
of China on China-Foreign Contractual Joint Ventures. The new Foreign Investment Law of PRC, by legislation, officially adopted
the administration model of the negative list for foreign investment. A foreign investor cannot invest in a field where foreign
investment is prohibited according to the Negative List, as amended. To invest in a field restricted under the Negative List,
as amended, a foreign investor shall meet the investment conditions set forth in the Negative List, as amended.
In
light of the above restrictions and requirements, we conduct our value-added telecommunications businesses through our consolidated
VIEs.
Regulations
related to Value-Added Telecommunication Service License
Among
all of the applicable laws and regulations, the Telecommunication Regulations of the People’s Republic of China, or the
Telecom Regulations, promulgated by the PRS State Council in September 25, 2000 and amended on July 29, 2014 and February 6, 2016
respectively, is the primary governing law, and sets out the general framework for the provision of telecommunications services
by domestic PRC companies. Under the Telecom Regulations, telecommunications service providers are required to procure operating
licenses prior to their commencement of operations. The Telecom Regulations distinguish “basic telecommunications services”
from “value-added telecommunication service” or VATS. VATS are defined as telecommunications and information services
provided through public networks. The Telecom Catalogue was issued as an attachment to the Telecom Regulations to categorize telecommunications
services as either basic or value-added. In February 2003 and December 2015, the Telecom Catalogue was updated respectively, categorizing
online data and transaction processing, information services, among others, as VATS.
The
Administrative Measures on Telecommunications Business Operating License, promulgated by the MIIT in 2009 and amended in July
2017, which set forth more specific provisions regarding the types of licenses required to operate VATS, the qualifications and
procedures for obtaining such licenses and the administration and supervision of such licenses. Under these regulations, a commercial
operator of VATS must first obtain a VAST License, from the MIIT or its provincial level counterparts, or otherwise such operator
might be subject to sanctions including corrective orders and warnings from the competent administration authority, fines and
confiscation of illegal gains and, in the case of significant infringements, the websites may be ordered to close.
Pursuant
to the E-Commerce Law of the PRC, which was promulgated by the Standing Committee of the National People’s Congress on August
31, 2018 and became effective on January 1, 2019, and the Administrative Measures for Online Trading, which was promulgated by
the SAIC on January 26, 2014 and became effective on March 15, 2014, e-commerce business operators shall obtain relevant administrative
licenses required by law.
Regulations
on Mobile Internet Applications Information Services
Mobile
Internet applications and the Internet application store are especially regulated by the Administrative Provisions on Mobile Internet
Applications Information Services, or the APP Provisions, which was promulgated by the Cyberspace Administration of China, or
the CAC, on June 28, 2016 and entered into force on August 1, 2016. The APP Provisions regulate the APP information and the APP
store service providers, and the CAC and local offices of cyberspace administration are responsible for the supervision and administration
of nationwide or local APP information respectively.
The
APP information service providers shall acquire relevant qualifications in accordance with laws and regulations and fulfil the
information security management obligations as follows: (1) shall authenticate the identity information of the registered users
including their mobile telephone number and other identity information under the principle of mandatory real name registration
at the back-office end, and voluntary real name display at the front-office end; (2) shall establish and perfect the mechanism
for the protection of users’ information, and follow the principle of legality, rightfulness and necessity, indicate expressly
the purpose, method and scope of collection and use and obtain the consent of users while collecting and using users’ personal
information; (3) shall establish and perfect the mechanism for the examination and management of information content, and in terms
of any information content released that violates laws or regulations, take such measures as warning, restricting the functions,
suspending the update and closing the accounts as the case may be, keep relevant records and report the same to relevant competent
authorities; (4) shall safeguard users’ right to know and to make choices when users are installing or using such applications,
and shall neither start such functions as collecting the information of users’ positions, accessing users’ contacts,
turning on the camera and recording the sound, or any other function irrelevant to the services, nor forcefully install any other
irrelevant applications without prior consent of users when noticed expressly; (5) shall respect and protect the intellectual
properties and shall neither produce nor release any application that infringes others’ intellectual properties; and (6)
shall record the users’ log information and keep the same for 60 days.
We
have established necessary mechanisms and adopted data encryption and protection technology in our mobile application to ensure
the collection, protection and storage of user information are in compliance with the requirements of the APP Provisions in all
material aspects.
Regulations
on Internet Information Security
In
1997, the Ministry of Public Security promulgated measures that prohibit use of the internet in ways which, among other things,
result in a leakage of state secrets or a spread of socially destabilizing content. If an internet information service provider
violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut
down its websites.
Internet
information in China is regulated and restricted from a national security standpoint. The Standing Committee of the National People’s
Congress, or the SCNPC, has enacted the Decisions on Maintaining Internet Security on December 28, 2000 and further amended on
August 27, 2009, which may subject violators to criminal punishment in China for any effort to: (i) gain improper entry into a
computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv)
spread false commercial information; or (v) infringe intellectual property rights.
The
PRC Cybersecurity Law was promulgated by the SCNPC on November 7, 2016 and became effective on June 1, 2017. Under this regulation,
network operators, including online information service providers, shall comply with laws and regulations and fulfill their obligations
to safeguard security of the network when conducting business and providing services, and take all necessary measures pursuant
to laws, regulations and compulsory national requirements to safeguard the safe and stable operation of the networks, respond
to network security incidents effectively, prevent illegal and criminal activities, and maintain the integrity, confidentiality
and usability of network data.
We
have, in accordance with relevant provisions on network security of the PRC, established necessary mechanisms to protect information
security, including, among others, adopting necessary network security protection technologies such as anti-virus firewalls, intrusion
detection and data encryption, keeping record of network logs, and implementing information classification framework.
Regulations
on Privacy Protection
The
Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT in December 2011, provide
that, an internet information service provider may not collect any user personal information or provide any such information to
third parties without the consent of a user. An internet information service provider must expressly inform the users of the method,
content and purpose of the collection and processing of such user personal information and may only collect such information necessary
for the provision of its services. An internet information service provider is also required to properly maintain the user personal
information, and in case of any leak or likely leak of the user personal information, online lending service providers must take
immediate remedial measures and, in severe circumstances, make an immediate report to the telecommunications regulatory authority.
In
addition, pursuant to the Decision on Strengthening the Protection of Online Information issued by the SCNPC in December 2012
and the Order for the Protection of Telecommunication and Internet User Personal Information issued by the MIIT in July 2013,
any collection and use of user personal information must be subject to the consent of the user, abide by the principles of legality,
rationality and necessity and be within the specified purposes, methods and scopes.
The
Guidelines jointly released by ten PRC regulatory agencies in July 2015 aim, among other things, to require service providers
to improve technology security standards, and safeguard user and transaction information. The Guidelines also prohibit service
providers from illegally selling or disclosing users’ personal information. Pursuant to the Ninth Amendment to the Criminal
Law issued by the SCNPC in August 2015, which became effective in November 2015, any Internet service provider that fails to fulfill
the obligations related to Internet information security administration as required by applicable laws and refuses to rectify
upon orders is subject to criminal penalty for the result of (i) any dissemination of illegal information in large scale; (ii)
any severe effect due to the leakage of the client’s information; (iii) any serious loss of criminal evidence; or (iv) other
severe situation, and any individual or entity that (i) sells or provides personal information to others in a way violating the
applicable law, or (ii) steals or illegally obtain any personal information is subject to criminal penalty in severe situation.
We
have obtained consent from users to collect and use their personal information. While we have taken measures to protect the personal
information that we have access to, our security measures could be breached resulting in the leak of such confidential personal
information. Security breaches or unauthorized access to confidential information could also expose us to liability related to
the loss of the information, time-consuming and expensive litigation and negative publicity.
Regulations
Related to Intellectual Property
The
SCNPC and the State Council have promulgated comprehensive laws and regulations to protect trademarks. The Trademark Law of the
PRC (2019 revision, effective November 1, 2019) promulgated on August 23, 1982 and subsequently amended on February 22, 1993,
October 27, 2001, August 30, 2013 and April 23, 2019 respectively, and the Implementation Regulation of the PRC Trademark Law
(2014 revision) issued by the State Council on August 3, 2002 and amended on April 29, 2014, are the main regulations protecting
registered trademarks. The Trademark Office under the SAIC administrates the registration of trademarks on a “first-to-file”
basis, and grants a term of ten years to registered trademarks.
The
PRC Copyright Law, adopted in 1990 and revised in 2001 and 2010 respectively, with its implementation rules adopted on August
8, 2002 and revised in 2011 and 2013 respectively, and the Regulations for the Protection of Computer Software as promulgated
on December 20, 2001 and amended in 2011 and 2013 provide protection for copyright of computer software in the PRC. Under these
rules and regulations, software owners, licensees and transferees may register their rights in software with the National Copyright
Administration Center or its local branches to obtain software copyright registration certificates.
The
Patent Law of the PRC was adopted by NPCSC in 1984 and amended in 1992, 2000 and 2008, respectively. A patentable invention, utility
model or design must meet three conditions: novelty, inventiveness and practical applicability. Patents cannot be granted for
scientific discoveries, rules and methods for intellectual activities, methods used to diagnose or treat diseases, animal and
plant breeds or substances obtained by means of nuclear transformation. The Patent Office under the State Intellectual Property
Office is responsible for receiving, examining and approving patent applications. A patent is valid for a term of twenty years
for an invention and a term of ten years for a utility model or design, commencing on the application date. Subject to limited
exceptions provided by law, any third-party user must obtain consent or a proper license from the patent owner to use the patent,
or otherwise the use will constitute an infringement of the rights of the patent holder.
The
MIIT, promulgated the Administrative Measures on Internet Domain Name, or the Domain Name Measures, on August 24, 2017 to protect
domain names. According to the Domain Name Measures, domain name applicants are required to duly register their domain names with
domain name registration service institutions. The applicants will become the holder of such domain names upon the completion
of the registration procedure.
We
have adopted necessary mechanisms to register, maintain and enforce intellectual property rights in China. However, we cannot
assure you that we can prevent our intellectual property from all the unauthorized use by any third party, neither can we promise
that none of our intellectual property rights would be challenged any third party.
Regulations
Related to Employment
The
PRC Labor Law and the Labor Contract Law require that employers execute written employment contracts with full-time employees.
All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the
PRC Labor Law and the Labor Contract Law may result in the imposition of fines and other administrative sanctions, and serious
violations may constitute criminal offences.
On
December 28, 2012, the PRC Labor Contract Law was amended, effective since July 1, 2013 to impose more stringent requirements
on labor dispatch. Under such law, dispatched workers are entitled to pay equal to that of full-time employees for equal work,
but the number of dispatched workers that an employer hires may not exceed a certain percentage of its total number of employees
as determined by the Ministry of Human Resources and Social Security. Additionally, dispatched workers are only permitted to engage
in temporary, auxiliary or substitute work. According to the Interim Provisions on Labor Dispatch promulgated by the Ministry
of Human Resources and Social Security on January 24, 2014, which became effective on March 1, 2014, the number of dispatched
workers hired by an employer shall not exceed 10% of the total number of its employees (including both directly hired employees
and dispatched workers). The Interim Provisions on Labor Dispatch require employers not in compliance with the PRC Labor Contract
Law in this regard to reduce the number of its dispatched workers to below 10% of the total number of its employees prior to March
1, 2016.
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 making social insurance
registration with local social insurance agencies, and shall pay or withhold relevant social insurance premiums for and 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 laws and regulations on social insurance.
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 the 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 with 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
of such contributions are unlawful. The employer shall make the housing provident fund payment and deposit registrations with
the housing provident fund administration center. With respect to companies which violate the above regulations and fail to complete
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 time limit.
Those who fail to complete their registrations within the designated period shall be levied a fine ranging from RMB 10,000 to
RMB 50,000. When companies breach these regulations and fail to pay housing provident fund contributions in full amount that are
due, the housing provident fund administration center shall order such companies to pay up within a designated period, and may
further petition a People’s Court for mandatory enforcement against those who still fail to comply after the expiry of such
period.
Regulations
on Foreign Currency Exchange
Under
the PRC Foreign Currency Administration Rules promulgated on January 29, 1996 and last amended on August 5, 2008 and various regulations
issued by SAFE and other relevant PRC government authorities, payment of current account items in foreign currencies, such as
trade and service payments, payment of interest and dividends can be made without prior approval from SAFE by following the appropriate
procedural requirements. By contrast, the conversion of RMB into foreign currencies and remittance of the converted foreign currency
outside the PRC for the purpose of capital account items, such as direct equity investments, loans and repatriation of investment,
requires prior approval from SAFE or its local office.
On
February 13, 2015, SAFE promulgated the Circular on Simplifying and Improving the Foreign Currency Management Policy on Direct
Investment, effective from June 1, 2015, which cancels the requirement for obtaining approvals of foreign exchange registration
of inbound foreign direct investment and outbound overseas direct investment from SAFE. The application for the registration of
foreign exchange for the purpose of inbound foreign direct investment and outbound overseas direct investment may be filed with
qualified banks, which, under the supervision of SAFE, may review the application and process the registration.
The
Circular of the SAFE on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise,
or SAFE Circular 19, was promulgated on March 30, 2015 and became effective on June 1, 2015. According to SAFE Circular 19, a
foreign-invested enterprise may, according to its actual business needs, settle with a bank the portion of the foreign exchange
capital in its capital account for which the relevant foreign exchange bureau has confirmed monetary contribution rights and interests
(or for which the bank has registered the account-crediting of monetary contribution). For the time being, foreign-invested enterprises
are allowed to settle 100% of their foreign exchange capitals on a discretionary basis; a foreign-invested enterprise shall truthfully
use its capital for its own operational purposes within the scope of business; where an ordinary foreign-invested enterprise makes
domestic equity investment with the amount of foreign exchanges settled, the invested enterprise shall first go through domestic
re-investment registration and open a corresponding Account for Foreign Exchange Settlement Pending Payment with the foreign exchange
bureau (bank) at the place of registration. The Circular of the SAFE on Reforming and Regulating Policies on the Control over
Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, was promulgated and became effective on June 9, 2016. According
to SAFE Circular 16, enterprises registered in PRC may also convert their foreign debts from foreign currency into Renminbi at
the enterprise’s discretion. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital
account items (including but not limited to foreign currency capital and foreign debts) at the enterprise’s discretion,
which applies to all enterprises registered in the PRC. SAFE Circular 16 reiterates the principle that Renminbi converted from
foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope
and may not be used for investments in securities or other investment with the exception of bank financial products that can guarantee
the principal within the PRC unless otherwise specifically provided. Besides, the converted Renminbi shall not be used to make
loans for related enterprises unless it is within the business scope or to build or to purchase any real estate that is not for
the enterprise own use with the exception for the real estate enterprise.
On
January 26, 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing
Genuineness and Compliance Verification, or SAFE Circular 3, which stipulates several capital control measures with respect to
the outbound remittance of profits from domestic entities to offshore entities, including (i) banks must check whether the transaction
is genuine by reviewing board resolutions regarding profit distribution, original copies of tax filing records and audited financial
statements, and (ii) domestic entities must retain income to account for previous years’ losses before remitting any profits.
Moreover, pursuant to SAFE Circular 3, domestic entities must explain in detail the sources of capital and how the capital will
be used, and provide board resolutions, contracts and other proof as a part of the registration procedure for outbound investment.
On
October 25, 2019, SAFE promulgated the Notice on Further Facilitating Cross-Board Trade and Investment, which became effective
on the same date (except for Article 8.2 thereof). The notice removed restrictions on the capital equity investment in China by
non-investment foreign-invested enterprises. In addition, restrictions on the use of funds for foreign exchange settlement of
domestic accounts for the realization of assets have been removed and restrictions on the use and foreign exchange settlement
of foreign investors’ security deposits have been relaxed. Eligible enterprises in the pilot areas are also allowed to use
revenues under capital accounts, such as capital funds, foreign debts and overseas listing revenues for domestic payments without
providing materials to the bank in advance for authenticity verification on an item by item basis, while the use of funds should
be true, in compliance with applicable rules and conforming to the current capital revenue management regulations.
Regulations
on Foreign Exchange Registration of Overseas Investment by PRC Residents
SAFE
issued the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment
through Special Purpose Vehicles, or SAFE Circular 37, which became effective in July 2014, to replace the Circular of the State
Administration of Foreign Exchange on Issues Concerning the Regulation of Foreign Exchange in Equity Finance and Roundtrip Investments
by Domestic Residents through Offshore Special Purpose Vehicles, to regulate foreign exchange matters in relation to the use of
special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct round trip
investment in China. SAFE Circular 37 defines a SPV as an offshore entity established or controlled, directly or indirectly, by
PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore
or offshore assets or interests, while “round trip investment” is defined as direct investment in China by PRC residents
or entities through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management
rights. SAFE Circular 37 stipulates that, prior to making contributions into an SPV, PRC residents or entities be required to
complete foreign exchange registration with SAFE or its local branch. In addition, SAFE promulgated the Notice on Further Simplifying
and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which amended SAFE Circular
37 and became effective on June 1, 2015, requiring PRC residents or entities to register with qualified banks rather than SAFE
in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or
financing.
PRC
residents or entities who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration
as required before the implementation of the SAFE Circular 37 must register their ownership interests or control in the SPVs with
qualified banks. An amendment to the registration is required if there is a material change with respect to the SPV registered,
such as any change of basic information (including change of the PRC residents, name and operation term), increases or decreases
in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures
set forth in SAFE Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclose controllers of
the foreign-invested enterprise that is established through round-trip investment, may result in restrictions being imposed on
the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions,
such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital
inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange
administration regulations. See “Risk Factors—Risks Related to Doing Business in China—PRC regulations relating
to investments in offshore 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 or limit our PRC subsidiary’s ability
to increase their registered capital or distribute profits.”
Regulations
on Stock Incentive Plans
SAFE
promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock
Incentive Plan of Overseas Publicly Listed Company, or the Stock Incentive Plan Notice, in February 2012, replacing the previous
rules issued by SAFE in March 2007. Pursuant to the Stock Incentive Plan Notice and other relevant rules and regulations, PRC
residents participating in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its
local branches and follow certain other procedures. Participants of a stock incentive plan who are PRC residents must conduct
the SAFE registration and other procedures with respect to the stock incentive plan through a qualified PRC agent, which could
be a PRC subsidiary of the overseas publicly listed company or another qualified institution appointed by the PRC subsidiary.
In addition, the PRC agent is required to update the relevant SAFE registration should there be any material change to the stock
incentive plan, the PRC agent or other material changes. The PRC agent must, on behalf of the PRC residents who have the right
to exercise the employee stock 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 stock 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 opened by the PRC agents prior to distribution to such PRC residents.
We
have adopted an equity incentive plan in 2016, under which we will have the discretion to award incentives and rewards to eligible
participants. We have advised the recipients of awards under our equity incentive plan to handle relevant foreign exchange matters
in accordance with the Stock Incentive Plan Notice. However, we cannot guarantee that all employees awarded equity-based incentives
can successfully register with SAFE in full compliance with the Stock Incentive Plan Notice. See “Risk Factors—Risks
Relating to Doing Business in China—Any failure to comply with PRC regulations regarding employee share incentive plans
may subject the PRC plan participants or us to fines and other legal or administrative sanctions.”
Regulations
on Dividend Distribution
Distribution
of dividends of foreign investment enterprises are mainly governed by the Foreign Investment Enterprise Law, issued in 1986 and
amended in 2000 and 2016 respectively, and the Implementation Rules under the Foreign Investment Enterprise Law, issued in 1990
and amended in 2001 and 2014 respectively. Under these regulations, foreign investment enterprises in the PRC may distribute dividends
only out of their accumulative profits, if any, determined in accordance with PRC accounting standards and regulations. In addition,
no less than 10% of the accumulated profits of the foreign investment enterprises in the PRC are required to be allocated to fund
certain reserve funds each year unless these reserves have reached 50% of the registered capital of the enterprises. A PRC company
is not permitted to distribute any profits until any losses from previous fiscal years have been offset. Profits retained from
prior fiscal years may be distributed together with distributable profits from the current fiscal year. Under our current corporate
structure, our BVI holding company may rely on dividend payments from IST, which is a wholly foreign-owned enterprise incorporated
in China, to fund any cash and financing requirements we may have. Limitation on the ability of our consolidated VIEs to make
remittance to IST and on the ability of IST to pay dividends to us could limit our ability to access cash generated by the operations
of those entities. See “Risk Factors—Risks Relating to Doing Business in China—— Restrictions under PRC
law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our
ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and
conduct our business.”
Regulations
on Overseas Listings
On
August 8, 2006, six PRC regulatory agencies, including MOFCOM, the SASAC, the State Administration of Taxation, the SAIC, the
CSRC and SAFE, jointly issued 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 was amended on June 22, 2009. The M&A Rules, among other things,
require that (i) PRC entities or individuals obtain MOFCOM approval before they establish or control a SPV overseas, provided
that they intend to use the SPV to acquire their equity interests in a PRC company at the consideration of newly issued share
of the SPV, or Share Swap, and list their equity interests in the PRC company overseas by listing the SPV in an overseas market;
(ii) the SPV obtains MOFCOM’s approval before it acquires the equity interests held by the PRC entities or PRC individual
in the PRC company by Share Swap; and (iii) the SPV obtains CSRC approval before it lists overseas. See “Risk Factors—Risks
Relating to Doing Business in China—We may be unable to complete a business combination transaction efficiently or on favorable
terms due to complicated merger and acquisition regulations which became effective on September 8, 2006.”
Dividend
Withholding Tax
In
March 2007, the National People’s Congress enacted the Enterprise Income Tax Law which became effective on January 1, 2008
and last amended on December 29, 2018. The PRC State Council promulgated the Implementation Rules of the Enterprise Income Tax
Law on December 6, 2007, which became effective on January 1, 2008 and was partially amended on April 23, 2019. According to Enterprise
Income Tax Law and its Implementation Rules, dividends 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 preferential withholding arrangement. Pursuant to the Notice of the State Administration
of Taxation on Negotiated Reduction of Dividends and Interest Rates, issued on January 29, 2008 and supplemented and revised on
February 29, 2008, and the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance
of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income, which became effective on December 8, 2006
and applicable to income derived in any year of assessment commencing on or after April 1, 2007 in Hong Kong and in any year commencing
on or after January 1, 2007 in the PRC, such withholding tax rate may be lowered to 5% if a Hong Kong enterprise is deemed the
beneficial owner of any dividend paid by a PRC subsidiary by PRC tax authorities and holds at least 25% of the equity interest
in that particular PRC subsidiary at all times within the 12-month period immediately prior to the distribution of the dividends.
Furthermore, pursuant to the Announcement on Issues concerning “Beneficial Owners” in Tax Treaties issued on February
3, 2018 by the State Administration of Taxation, when determining the status of “beneficial owners,” a comprehensive
analysis may be conducted through materials such as articles of association, financial statements, records of capital flows, minutes
of board of directors, resolutions of board of directors, allocation of manpower and material resources, the relevant expenses,
functions and risk assumption, loan contracts, royalty contracts or transfer contracts, patent registration certificates and copyright
certificates, etc. However, even if an applicant has the status as a “beneficiary owner,” if the competent tax authority
finds necessity to apply the principal purpose test clause in the tax treaties or the general anti-tax avoidance rules stipulated
in domestic tax laws, the general anti-tax avoidance provisions shall apply.
Enterprise
Income Tax
In
December 2007, the State Council promulgated the Implementing Rules of the Enterprise Income Tax Law, or the Implementing Rules,
which became effective on January 1, 2008. The Enterprise Income Tax Law and its relevant Implementing Rules (i) impose a uniform
25% enterprise income tax rate, which is applicable to both foreign invested enterprises and domestic enterprises (ii) permits
companies to continue to enjoy their existing tax incentives, subject to certain transitional phase-out rules and (iii) introduces
new tax incentives, subject to various qualification criteria.
The
Enterprise Income Tax Law also provides that enterprises organized under the laws of jurisdictions outside China with their “de
facto management bodies” located within China may be considered PRC resident enterprises and therefore be subject to PRC
enterprise income tax at the rate of 25% on their worldwide income. The Implementing Rules further define the term “de facto
management body” as the management body that exercises substantial and overall management and control over the production
and operations, personnel, accounts and properties of an enterprise. If an enterprise organized under the laws of jurisdiction
outside China is considered a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax
consequences could follow. First, it would be subject to the PRC enterprise income tax at the rate of 25% on its worldwide income.
Second, a 10% withholding tax would be imposed on dividends it pays to its non-PRC enterprise shareholders and with respect to
gains derived by its non-PRC enterprise shareholders from transfer of its shares. Dividends paid to non-PRC individual shareholders
and any gain realized on the transfer of equity by such shareholders may be subject to PRC tax at a rate of 20%, if such income
is deemed to be from PRC sources. See “Risk Factors—Risks Relating to Doing Business in China—Under the Enterprise
Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in
unfavorable tax consequences to us and our non-PRC shareholders.”
On
October 17, 2017, the State Administration of Taxation issued the Bulletin on Issues Concerning the Withholding of Non-PRC Resident
Enterprise Income Tax at Source, or Bulletin 37, which replaced the Notice on Strengthening Administration of Enterprise Income
Tax for Share Transfers by Non-PRC Resident Enterprises issued by the State Administration of Taxation on December 10, 2009, and
partially replaced and supplemented rules under the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets
by Non-PRC Resident Enterprises, or Bulletin 7, issued by the State Administration of Taxation on February 3, 2015. Under Bulletin
7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident
enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have
a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result,
gains derived from such indirect transfer may be subject to PRC enterprise income tax. In respect of an indirect offshore transfer
of assets of a PRC establishment, the relevant gain is to be regarded as effectively connected with the PRC establishment and
therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate
of 25%. Where the underlying transfer relates to the immoveable properties in China or to equity investments in a PRC resident
enterprise, which is not effectively connected to a PRC establishment of a non-resident enterprise, a PRC enterprise income tax
at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and
the party who is obligated to make the transfer payments has the withholding obligation. Pursuant to Bulletin 37, the withholding
party shall declare and pay the withheld tax to the competent tax authority in the place where such withholding party is located
within 7 days from the date of occurrence of the withholding obligation. Both Bulletin 37 and Bulletin 7 do not apply to transactions
of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public
stock exchange. See “Risk Factors—Risks Relating to Doing Business in China—We and our shareholders face uncertainties
with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a Chinese establishment
of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies.”
Value-Added
Tax
Pursuant
to the Provisional Regulations on Value-Added Tax of the PRC, or the VAT Regulations, which were promulgated by the State Council
on December 13, 1993, and took effect on January 1, 1994, and were amended on November 10, 2008, February 6, 2016, and November
19, 2017, respectively, and the Rules for the Implementation of the Provisional Regulations on Value Added Tax of the PRC, which
were promulgated by the Ministry of Finance, on December 25, 1993, and were amended on December 15, 2008, and October 28, 2011,
respectively, entities and individuals that sell goods or labor services of processing, repair or replacement, sell services,
intangible assets, or immovables, or import goods within the territory of the People’s Republic of China are taxpayers of
value-added tax. The VAT rate is 17% for taxpayers selling goods, labor services, or tangible movable property leasing services
or importing goods, except otherwise specified; 11% for taxpayers selling goods, labor services, or tangible movable property
leasing services or importing goods, except otherwise specified; 6% for taxpayers selling services or intangible assets.
According
to Provisions in the Notice on Adjusting the Value added Tax Rates, or the Notice, issued by the State Administration of Taxation
and the Ministry of Finance, where taxpayers make VAT taxable sales or import goods, the applicable tax rates shall be adjusted
from 17% to 16% and from 11% to 10%, respectively. The Notice took effect on May 1, 2018, and the adjusted VAT rates took effect
at the same time. Pursuant to the Notice of the Ministry of Finance, the State Administration of Taxation and the General Administration
of Customs of the PRC on Relevant Policies for Deepening the Value-Added Tax Reform, which was promulgated on March 20, 2019 and
became effective 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%, and the tax rate of 10% applicable thereto shall be adjusted to 9%.
In
November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added
Tax to Replace Business Tax, or the Pilot Plan. The Notice of the Ministry of Finance and the State Administration of Taxation
on Implementing the Pilot Plan of Replacing Business Tax with Value-Added Tax in an All-round Manner, issued on March 23, 2016,
took effect on May 1, 2016. Pursuant to the Pilot Plan and the subsequent Notice, VAT at a rate of 6% is applied nationwide to
revenue generated from the provision of certain modern services in lieu of the prior Business Tax.
PRC
Policies and Regulations relating to the Bitcoin Industry
According to the Circular of the People’s Bank of China, Ministry of Industry and Information Technology,
China Banking Regulatory Commission, China Securities Regulatory Commission, and China Insurance Regulatory Commission on the
Prevention of Risks from Bitcoin jointly promulgated by People’s Bank of China, Ministry of Industry and Information Technology,
China Banking Regulatory Commission, China Securities Regulatory Commission, or CSRC, and China Insurance Regulatory Commission
on December 3, 2013, or the Circular, Bitcoin shall be a kind of virtual commodity in nature, which shall not be in the same legal
status with currencies and shall not be circulated as currencies and used in markets as currencies. The Circular also provides
that financial institutions and payment institutions shall not engage in business in connection with Bitcoin. According to Announcement
of the People’s Bank of China, the Cyberspace Administration of China, the Ministry of Industry and Information Technology,
the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission
and the China Insurance Regulatory Commission on Preventing Initial Coin Offerings (ICO) Risks promulgated by seven PRC governmental
authorities including the People’s Bank of China on September 4, 2017, or the Announcement, activities of offering and financing
of tokens, including initial coin offerings, have been forbidden in the PRC since they may be suspected to be considered as illegal
offering of securities or illegal fundraising. All so-called token trading platform should not (i) engage in the exchange between
any statutory currency with tokens and “virtual currencies,” (ii) trade or trade the tokens or “virtual currencies”
as central counterparties, or (iii) provide pricing, information agency or other services for tokens or “virtual currencies.”
The Announcement further provides that financial institutions and payment institutions shall not engage in business in connection
with transactions of offering and financing of tokens.
Seasonality
The
first quarter of the calendar year is typically the slowest season of the year due to the Chinese New Year holiday. During this
period, accounts receivable collection is very slow and we also need to prepare for upcoming busier seasons by making payments
for inventory. With the implementation of our cloud-based business, seasonality has been mitigated to some extent.
C.
Organizational Structure
See
“A. History and Development of the Company—Corporate Structure” above for details of our current organizational
structure.
D.
Property, Plant and Equipment
All
land in China is owned by the state or local governments. Individuals and companies are permitted to acquire rights to use land
or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for
a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms according to the relevant
Chinese laws. Granted land use rights are transferable and may be used as collateral for borrowings and other obligations.
Our
executive offices are located at 21st Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, China, for which IST
currently has property use rights. Our executive offices consist of approximately 1,200 square meters, all of which are dedicated
to administrative office spaces. Our other properties primarily consist of computer equipment, servers, licensed software, furniture
and fixtures. We currently do not have any intention to make large scale improvements or developments with respect to these properties.
This office facility property is currently collateralized for our certain short-term bank loans.
We
believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate
for our business.
ITEM
4A. UNRESOLVED STAFF COMMENTS
None.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You
should read the following discussion and analysis of our financial condition and results of operations in conjunction with our
consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion
may contain forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking
statements because of various factors, including those set forth under Item 3 “Key Information—D. Risk Factors”
or in other parts of this annual report on Form 20-F. See also “Introductory Notes—Forward-looking Information.”
A.
Operating Results
Overview
We
are a leading provider of integrated cloud-based platform, resource sharing functionality, and big data solutions to the Chinese
new media, education residential community management, and elevator IoT industries. Our Internet ecosystem enables all participants
of the new media community to efficiently promote brands, disseminate information, and share resources. In addition, we provide
a broad portfolio of software, hardware and fully integrated solutions, including information technology infrastructure and Internet-enabled
display technologies to customers in government, education, healthcare, media, transportation, and other private sectors.
We
were founded in 1993 and are headquartered in Shenzhen, China. As of December 31, 2020, we had approximately 58 full-time employees.
Prior
to 2014, we generated majority of our revenues through selling our products to public service entities to help improve their operational
efficiency and service quality. Our representative customers included China Ministry of Public Security, provincial bureaus of
public security, fire departments, traffic bureaus, police stations, human resource departments, urban planning boards, civic
administrations, land resource administrations, mapping and surveying bureaus, and the Shenzhen General Station of Exit and Entry
Frontier Inspection.
In
2014, we generated revenues from sales of hardware products, software products, system integration services, and related maintenance
and supporting services. Starting in 2015, with the introduction of our cloud-based software as a service (SaaS) offering, we
generated additional recurring monthly revenues from SaaS fees. The revenue from SaaS was still small in 2018 and 2019, which
is expected to pick up in future years along with the large-scale roll-out of our cloud-based new media terminals.
In
May 2017, we completed the business transformation and rolled out CAT and IoT technology based digital ads distribution network
and new media resource sharing platform in the out-of-home advertising market. In 2017, 2018 and 2019, we generated most revenue
from selling fully integrated ads display terminals. In 2020, we have a portion of revenue generated from the sale of cloud severs
as part of our CBT business. The revenue generated from SaaS and other software products and services remained small.
Recent
Developments
In
March and September 2020, the Company completed two financing transactions comprising of ordinary shares, convertible notes, and
warrants with aggregate proceeds net of issuance cost and debt discount of $3.8 million.
During
the first quarter of 2021, the Company entered into several securities purchase agreements with certain investors to sell an aggregate
of 3,140,740 ordinary shares, no par value, with total proceeds of approximately $13.1 million before deducting offering expenses.
The Company intends to use the net proceeds from the financing for working capital and general corporate purposes.
On
January 26, 2021, the Company entered into a strategic partnership agreement with Ivy International Education Technology Co.,
Ltd. (“Ivy International Education”) to develop and market new learning programs for quality education. Ivy International
Education is a professional organization engaged in study abroad consulting, Project-Based Learning (PBL) program consulting,
online education, and charitable education programs. Ivy International Education is the only authorized representative of interactive
K-12 Online Learning program provider MommyDaddyMe in the Chinese mainland market. In February, Biznest and Ivy International
Education formed a joint venture company, Shenzhen Taoping Education Technology Co., Ltd., 51% equity interests of which owned
by Biznest.
On
March 17, 2021, we entered into a share purchase agreement to acquire 100% equity interest in Taoping New Media Co., Ltd. Pursuant
to the share purchase agreement, as consideration we have agreed to issue to the shareholders of Taoping New Media a total of
1,213,630 ordinary shares of TAOP, calculated by dividing $10.24 million by 90% of the average closing price of TAOP ordinary
shares over the 20 trading days prior to the execution of the share purchase agreement. The parties intend to close the transaction
no later than May 10, 2021.
On
March 22, 2021, the Company entered into a strategic cooperation agreement with BitFuFu.com (“BitFuFu”). Pursuant
to the strategic collaboration agreement, both parties will leverage their respective advantages to focus on blockchain based
cloud computing field to carry out all-round and multi-level cooperation on a global scale. TAOP will purchase blockchain cloud
computing service with a total value of $10 million from BitFuFu within three years. The first batch of $1 million service subscription
agreement was signed simultaneously with the strategic cooperation agreement. The first batch service period is from March 18,
2021 to March 13, 2022. Antminer, a cryptocurrency mining machine brand by Bitmain Technologies Ltd. (“Bitmain”) with
the world’s largest market share, is a strategic partner of Bitfufu, and holds patents in mainland China. Bitmain is a company
headquartered in Beijing, China that designs application-specific integrated circuit (ASIC) chips for bitcoin mining. By purchasing
the blockchain cloud computing service, TAOP will be able to start Bitcoin mining through Antminer, which is expected to bring
direct revenues for the Company.
On
March 29, 2021, we entered into a share purchase agreement with Genie Global Limited. (“Genie Global”) to acquire
51% equity interest in Genie Global’s wholly owned subsidiary, Render Lake Tech Ltd. (“Render Lake”). Pursuant
to the share purchase agreement, as consideration we have agreed to issue to Genie Global a total of 144,204 ordinary shares of
TAOP, calculated as $1.53 million being divided by the average closing price of TAOP ordinary shares over the 5 trading days prior
to the execution of the share purchase agreement. The parties intend to close the transaction no later than May 15, 2021.
On
March 29, 2021, the Company entered into a strategic cooperation framework agreement with Shanghai Guanghua Education Investment
Management Co., Ltd. (“Shanghai Guanghua Education”) and Wuhu Sasan Education Management Co., Ltd. (“Wuhu Sasan”),
a majority-owned subsidiary of Shanghai Guanghua Education for a term of three years. Its main customers are the private schools
under the Guanghua brand located in Wuxi city, Hefei city, Ningbo city, and Kunming city. As part of the agreement, TAOP and Wuhu
Sasan formed a joint venture company Wuhu Taoping Education Technology Co., Ltd. in March, 2021. Biznest and Wuhu Sasan owns 51
percent and 49 percent equity interests in the joint venture, respectively. The business of the joint venture company is expected
to be part of TAOP’s newly created Digital Culture Business Division.
On
April 13, 2021, we signed a Bitcoin mining machine purchase agreement with Bitmain Technologies Limited. Pursuant to the
purchase agreement, we will purchase Antminer S19j Pro Bitcoin mining machines with a total order value of about $24 million.
The purchase will be funded by a line of credit backed by the personal real estate of Mr. Jianghuai Lin, the Company’s
Chairman and CEO. The miners are scheduled to deliver starting from August 2021. Upon the completion of deliveries under the
Purchase Agreement, TAOP is expected to own an additional hash rate of approximately 300,000 TH/s.
On
April 19, 2021, we launched “Taoping G Cloud Data Center” located in Dong-guan City, Guangdong Province, and planned
to deploy a total of 3,000 of general-purpose servers suitable for Ethereum and cloud desktops in the data center in 2021.
Principal
Factors Affecting Our Financial Performance
Demand
for Software Products and Services
The
revenue growth and profitability of our business depend on the overall market demand for software products and related services.
The demand for our CBT products is attributable to rapid urbanization and rising living standards in China. As a result of migration
to the cities, individuals’ disposable income and, consumptions of information to assist their purchases of goods and services
increase as well. Consequently, our CBT products become increasingly receptive to advertisements displayed at public locations.
Meanwhile, rising competition has driven merchants and service providers to seek advertisements as a way to make their brands
visible and memorable that drives up the demand for innovative advertising technology like our cloud-based software and services.
The
demand for our TIT products is attributable to digitization of public services in China. Over the past two decades, the Chinese
government has encouraged the development and use of information technology in various spheres of governmental functions, private
industries, education, and cultural affairs. The term “Informatization” or “Xin Xi Hua” in Chinese has
been coined in China to describe the overall process of software application in China, and has become a linchpin of state and
local economic development strategies in the recent years.
Taxation
TAOP
and THL were incorporated in the BVI, and not subject to taxation in that jurisdiction. Under the “anti-inversion”
rules of Section 7874 of the U.S. Internal Revenue Code, TAOP is treated for U.S. federal taxation purpose as a U.S. corporation
and, accordingly, is subject to U.S. federal income tax on its worldwide income with a maximum income tax rate of 21%.
No
provision for income tax in the United States has been made as TAOP has no taxable income in the United States.
IST
HK, and our former subsidiary, HPC Electronics (China) Co., Limited (“HPC”) were incorporated in Hong Kong and subject
to a Hong Kong Profits Tax of 16.5% according to the current Hong Kong tax laws.
Under
the Chinese EIT Law, IST is approved as High Technology Enterprises and respective income tax rates were reduced to 15%. Biznest
is approved as software enterprises and enjoys EIT at the tax rate of 12.5%. TopCloud, ISIOT, iASPEC and Bocom are subject to
regular EIT at 25%.
Business
Segment Information
Segment
information is consistent with how management reviews business health, makes investment, allocates resources and assesses operating
performances. Transfers and sales between reportable segments, if any, are recorded at cost.
We
report financial and operational information in the following two segments:
|
(1)
|
Cloud-based
Technology (CBT) segment — The CBT segment is the Company’s current and future focus for corporate development.
It includes the Company’s cloud-based products, high-end data storage servers. and related services sold to private
sectors including new media, healthcare, education, and residential community management, and among other industries and applications.
In this segment, the Company generates revenues from the sales of hardware and software total solutions with proprietary software
and content as well as from designing and developing software products specifically customized for private sector customers’
needs for a fixed price. As a result of COVID-19 pandemic, city lockdowns, travel restrictions, and other preventive measures
had negatively impacted on the China out-of-home advertising business and significantly dampened customers’ demand for
ads display terminals. Nevertheless, mandatory home stays and work from remote locations triggered a steep surge in on-line
gaming, on-line shopping, on-line entertainment, and electronic communication, and created a great demand for high-end data
storage servers to accommodate internet information transmission. The Company has stabilized supply chains for the high-end
data storage server to meet market demands supplementing the declining revenue from ads display terminals and included the
revenue and cost of revenue of high-end data storage servers in the CBT segment.
|
|
(2)
|
Traditional
Information Technology (“TIT”) segment — The TIT segment includes our project-based technology products
and services sold to the public sector, including Digital Public Security Technology (DPST) and Multi- screen Digital Display
System (MDDS). In this segment, we generate revenues from sales of software and systems integration services.
|
For
more information regarding our operating segments, see Note 18 (Consolidated Segment Data) to our audited consolidated financial
statements included elsewhere in this report.
Results
of Operations
Comparison
of Years Ended December 31, 2020 and 2019
The
following table sets forth key components of our results of operations for fiscal years ended December 31, 2020 and 2019, both
in dollars and as a percentage of our revenue.
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Amount
|
|
|
% of Revenue
|
|
|
Amount
|
|
|
% of Revenue
|
|
Revenue
|
|
$
|
11,062,775
|
|
|
|
100.00
|
%
|
|
$
|
13,791,303
|
|
|
|
100.00
|
%
|
Costs of revenue
|
|
|
7,119,125
|
|
|
|
64.35
|
%
|
|
|
7,189,092
|
|
|
|
52.13
|
%
|
Gross profit
|
|
|
3,943,650
|
|
|
|
35.65
|
%
|
|
|
6,602,211
|
|
|
|
47.87
|
%
|
Administrative expenses
|
|
|
(16,707,106
|
)
|
|
|
(151.02
|
)%
|
|
|
(6,657,972
|
)
|
|
|
(48.28
|
)%
|
Research and development expenses
|
|
|
(3,889,126
|
)
|
|
|
(35.16
|
)%
|
|
|
(3,592,843
|
)
|
|
|
(26.05
|
)%
|
Selling expenses
|
|
|
(714,147
|
)
|
|
|
(6.46
|
)%
|
|
|
(523,557
|
)
|
|
|
(3.80
|
)%
|
(Loss) from operations
|
|
|
(17,366,729
|
)
|
|
|
(156.98
|
)%
|
|
|
(4,172,161
|
)
|
|
|
(30.25
|
)%
|
Subsidy income
|
|
|
556,186
|
|
|
|
5.03
|
%
|
|
|
431,555
|
|
|
|
3.13
|
%
|
Other (loss) income, net
|
|
|
(578,766
|
)
|
|
|
(5.23
|
)%
|
|
|
238,200
|
|
|
|
1.73
|
%
|
Interest income
|
|
|
4,798
|
|
|
|
0.04
|
%
|
|
|
133,517
|
|
|
|
0.97
|
%
|
Interest expense
|
|
|
(1,018,013
|
)
|
|
|
(9.20
|
)%
|
|
|
(499,852
|
)
|
|
|
(3.62
|
)%
|
(Loss) before income taxes
|
|
|
(18,402,524
|
)
|
|
|
(166.35
|
)%
|
|
|
(3,868,741
|
)
|
|
|
(28.05
|
)%
|
Income tax benefit
|
|
|
71,316
|
|
|
|
0.64
|
%
|
|
|
274,480
|
|
|
|
1.99
|
%
|
Net (loss)
|
|
|
(18,331,208
|
)
|
|
|
(165.70
|
)%
|
|
|
(3,594,261
|
)
|
|
|
(26.06
|
)%
|
Less: Net loss attributable to non- controlling interest
|
|
|
636,433
|
|
|
|
5.75
|
%
|
|
|
11,929
|
|
|
|
0.09
|
%
|
Net (loss) attributable to Company
|
|
$
|
(17,694,775
|
)
|
|
|
(159.95
|
)%
|
|
$
|
(3,582,332
|
)
|
|
|
(25.98
|
)%
|
Revenue.
We generate revenues from selling hardware, software, system integration, software as a service, and other technology-related
services to customers including Taoping New Media Co., Ltd. and its affiliates. Taoping New Media Co., Ltd is controlled by our
CEO, Mr. Lin. We have identified Taoping New Media Co., Ltd. and its affiliates as related parties. For the year ended December
31, 2020, our total revenue was $11.0 million, of which approximately $0.5 million was from related parties, compared to total
revenue of $13.8 million for the year ended December 31, 2019, a decrease of $2.8 million, or 20%. The decrease was primarily
due to the impact of the Covid-19 pandemic and the unfavorable macro environment and the slowdown of the out-of-home advertising
market in China in 2020.
In
2020, COVID-19 adversely affected our business expansion in the out-of-home advertising market, which resulted in the decrease
of ad-terminal sales to Taoping affiliates. In the meantime, we input more efforts in the sales of customized software development
and super computer with low margin, for the purpose of expanding more revenue-stream under the adverse environment of 2020. Revenue
generated from sales of customized software development and high-end data storage server in 2020 was $3.1 million and $4.6 million,
respectively. With our well-established sales channel and business expansion in the blockchain related business, we will continue
to sell high-end data storage server and cryptocurrency mining machine in 2021.
Starting
from January 2020, the coronavirus outbreak, also known as COVID-19, has caused the Chinese government to take quarantine measures,
such as nationwide lockdowns, transportation restrictions, public gathering prohibitions and temporary closures of non-essential
businesses, which had put economic activities in a suspension mode until late March, in addition to the regular Chinese New Year
Holiday. Although the COVID-19 pandemic has largely been contained in China since the third quarter of 2020 and businesses
have gradually resumed to operations, China’s economic recovery still faces great challenges.
The
COVID-19 pandemic has been contained in China with sporadic imported infection cases since the third quarter of 2020, overall
business activities have resumed normal including the out-of-home digital advertising industry. Upon completion of acquisition
of Taoping New Media Co., Ltd in mid-year of 2021, we will become a fully integrated new media advertising enterprise with technical
expertise in cloud based new media sharing platform, smart ads display terminal, and mobile applications extended to the end customers
who pay for the advertising slots to promote their businesses or special events. Additional advertising revenue will strengthen
our profitability, cash flows, liquidity, and capital resources. The COVID-19 pandemic has changed many business landscapes to
internet based on-line operations, educational learning programs in particular. In 2021, we have formed strategic partnerships
with well-known education institutions to launch on-line educational programs to enhance business opportunities with our strength
in cloud-based technology. In addition, we are positioning ourselves in the cloud-based applications, blockchain, digital assets,
and cryptocurrency mining operations, which are the future of FinTech. We believe that it will be a robust year for 2021.
The
following table shows our revenue, percentage of revenue, cost of revenue and gross margin, by revenue categories:
|
|
Year Ended December 31, 2020
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
% of
|
|
|
Cost of
|
|
|
Gross
|
|
|
|
|
|
% of
|
|
|
Cost of
|
|
|
Gross
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Margin
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Margin
|
|
Products
|
|
$
|
6,966,868
|
|
|
|
62.98
|
%
|
|
|
6,211,647
|
|
|
|
10.84
|
%
|
|
$
|
10,468,382
|
|
|
|
75.91
|
%
|
|
|
6,448,965
|
|
|
|
38.40
|
%
|
Software
|
|
|
3,080,152
|
|
|
|
27.84
|
%
|
|
|
572,054
|
|
|
|
81.43
|
%
|
|
|
2,246,497
|
|
|
|
16.29
|
%
|
|
|
525,473
|
|
|
|
76.61
|
%
|
System Integration
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
%
|
|
|
74,494
|
|
|
|
-
|
|
Others
|
|
|
1,015,755
|
|
|
|
9.18
|
%
|
|
|
335,424
|
|
|
|
66.98
|
%
|
|
|
1,076,424
|
|
|
|
7.80
|
%
|
|
|
140,160
|
|
|
|
86.98
|
%
|
Total
|
|
$
|
11,062,775
|
|
|
|
100.00
|
%
|
|
|
7,119,125
|
|
|
|
35.65
|
%
|
|
$
|
13,791,303
|
|
|
|
100.00
|
%
|
|
|
7,189,092
|
|
|
|
47.87
|
%
|
A
breakdown of revenue, percentage of revenue, cost of revenue and gross margin by segments is as follows:
|
|
Year Ended December 31, 2020
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
% of
|
|
|
Cost of
|
|
|
Gross
|
|
|
|
|
|
% of
|
|
|
Cost of
|
|
|
Gross
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Margin
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Margin
|
|
TIT Segment
|
|
$
|
377,499
|
|
|
|
3.41
|
%
|
|
|
319,921
|
|
|
|
15.25
|
%
|
|
$
|
241,132
|
|
|
|
1.75
|
%
|
|
|
337,261
|
|
|
|
(39.87
|
)%
|
CBT Segment
|
|
|
10,685,276
|
|
|
|
96.59
|
%
|
|
|
6,799,204
|
|
|
|
36.37
|
%
|
|
|
13,550,171
|
|
|
|
98.25
|
%
|
|
|
6,851,831
|
|
|
|
49.43
|
%
|
Total
|
|
$
|
11,062,775
|
|
|
|
100.00
|
%
|
|
|
7,119,125
|
|
|
|
35.65
|
%
|
|
$
|
13,791,303
|
|
|
|
100.00
|
%
|
|
|
7,189,092
|
|
|
|
47.87
|
%
|
Cost
of revenue and gross profit. As indicated in the tables above, our cost of revenue decreased by $0.1 million, or 1.0%, to
$7.1 million, for the year ended December 31, 2020, from $7.2 million for the year ended December 31, 2019. As a percentage of
revenue, our cost of revenue increased to 64.4% during the year ended December 31, 2020, from 52.1% during the year ended December
31, 2019. As a result, gross profit as a percentage of revenue decreased to 35.7% for the year ended December 31, 2020 from 47.9%
for the year ended December 31, 2019. The decrease in the overall gross margin primarily resulted from the increase in sales revenues
of cloud server which usually demand lower margin. We expect the gross margin of 2021 will increase as result of the new additions
of cloud-based education business and blockchain related revenue.
Administrative
expenses. Our administrative expenses consist primarily of compensation and benefits for our general management, finance and
administrative staff, professional advisor consulting fees, audit fees, and other expenses incurred in connection with general
operations. Our administrative expenses increased by $10.0 million, or 150.9%, to $16.7 million for the year ended December
31, 2020, from $6.6 million for the year ended December 31, 2019. As a percentage of revenue, administrative expenses increased
to 151.0% for 2020, from 48.3% for 2019. Such increase was primarily due to an increase of $12.8 million in allowance for credit
losses of receivable, as a result of the slowdown of the out-of-home advertising industry in China and the deterioration of certain
customers’ financial conditions as negatively impacted by the Covid-19 pandemic. Given the unfavorable outlooks of overall
economy and the out-of-home advertising market, we will continue to control our administrative expenses, by investing more efforts
in the collection of accounts receivable and expenses and fees control. We expect that the administrative expenses in 2021 will
decrease as a result of the decrease of allowance of credit loss with the recovery of out-of-home advertising market and overall
economy of China. As a percentage of revenue, administrative expenses will decrease as a result of the foregoing and
the expected additions of new revenue streams.
Research
and development expenses. Our research and development expenses consist primarily of personnel related expenses, as well as
costs associated with new software and hardware development and enhancement. Our research and development expenses increased by
$0.3 million, or 8.3%, to $3.9 million for the year ended December 31, 2020, from $3.6 million for the year ended December 31,
2019. Such increase was primarily due to the increase of depreciation of R&D related hardware equipment and software. As a
percentage of revenue, research and development expenses increased to 35.2% for 2020, from 26.1% in 2019. We expect that the R&D
expenses in 2021 will increase as a result of our business expansion in the cloud-based education program and the blockchain related
applications, while as a percentage of revenue, R&D expenses will slightly decrease.
Selling
expenses. Our selling expenses consist primarily of the compensation and benefits to our sales and marketing staff, traveling
costs, and other selling activities related costs. Our selling expenses increased by $0.2 million, or 36.4%, to $0.7 million for
the year ended December 31, 2020, from $0.5 million for the year ended December 31, 2019. This increase was due to the increase
of the marketing expense in support of our nationwide Taoping network. We expect that the selling expenses in 2021 will increase
as a result of the acquisition of Taoping New Media and the business expansion in the cloud-based education program, while as
a percentage of revenue, selling expenses will slightly decrease.
Subsidy
income. Because we have developed a number of new products that are promoted and designated by the Chinese government as highly
innovative technology, we received governmental subsidies of $0.6 million and $0.4 million in years ended December 31, 2020 and
2019, respectively.
Other
(loss) income. Other loss for the year ended December 31, 2020 was approximately $0.6 million, compared to other income of
approximately $0.2 million in 2019. Other loss in 2020 was mainly the loss of arbitration of $0.2 million due to dispute of certain
sales contracts entered in prior years, accrued possible loss of $0.1 million for a legal proceeding regarding a customer’s
bankruptcy claim, a loss of $0.2 million on return of prior year government conditional funding and inventory write-off of $0.1million.
Interest
expense. Interest expense for the year ended December 31, 2020 was approximately $1.0 million, compared to interest expense
of approximately $0.5 million in 2019. The increase of interest expense in 2020 was mainly due to the interest accrual and the
amortization of debt discount from issuance of convertible notes in 2020.
Income
tax expense. We recorded income tax benefit of $0.07 million for the year ended December 31, 2020, as compared to $0.3 million
of income tax benefit in 2019, primarily as a result of reversal of income tax payable in the prior years.
Net
(loss) income attributable to Company. As a result of the cumulative effect of the foregoing factors, we had a net loss attributable
to the Company of $17.7 million for the year ended December 31, 2020, as compared to net loss of $3.6 million for the year ended
December 31, 2019.
Comparison
of Years Ended December 31, 2019 and 2018
The
following table sets forth key components of our results of operations for fiscal years ended December 31, 2019 and 2018, both
in dollars and as a percentage of our revenue.
|
|
For the Year Ended
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Amount
|
|
|
% of Revenue
|
|
|
Amount
|
|
|
% of Revenue
|
|
Revenue
|
|
$
|
13,791,303
|
|
|
|
100.00
|
%
|
|
$
|
20,578,340
|
|
|
|
100.00
|
%
|
Costs of revenue
|
|
|
7,189,092
|
|
|
|
52.13
|
%
|
|
|
10,924,246
|
|
|
|
53.09
|
%
|
Gross profit
|
|
|
6,602,211
|
|
|
|
47.87
|
%
|
|
|
9,654,094
|
|
|
|
46.91
|
%
|
Administrative expenses
|
|
|
(6,657,972
|
)
|
|
|
(48.28
|
)%
|
|
|
(4,299,820
|
)
|
|
|
(20.89
|
)%
|
Research and development expenses
|
|
|
(3,592,843
|
)
|
|
|
(26.05
|
)%
|
|
|
(4,756,088
|
)
|
|
|
(23.11
|
)%
|
Selling expenses
|
|
|
(523,557
|
)
|
|
|
(3.80
|
)%
|
|
|
(429,362
|
)
|
|
|
(2.09
|
)%
|
(Loss) income from operations
|
|
|
(4,172,161
|
)
|
|
|
(30.25
|
)%
|
|
|
168,824
|
|
|
|
0.82
|
%
|
Subsidy income
|
|
|
431,555
|
|
|
|
3.13
|
%
|
|
|
556,187
|
|
|
|
2.70
|
%
|
Other income (loss), net
|
|
|
238,200
|
|
|
|
1.73
|
%
|
|
|
400,566
|
|
|
|
1.95
|
%
|
Interest income
|
|
|
133,517
|
|
|
|
0.97
|
%
|
|
|
36,381
|
|
|
|
0.18
|
%
|
Interest expense
|
|
|
(499,852
|
)
|
|
|
(3.62
|
)%
|
|
|
(484,403
|
)
|
|
|
(2.35
|
)%
|
(Loss) income before income taxes
|
|
|
(3,868,741
|
)
|
|
|
(28.05
|
)%
|
|
|
677,555
|
|
|
|
3.29
|
%
|
Income tax benefit
|
|
|
274,480
|
|
|
|
1.99
|
%
|
|
|
1,201,231
|
|
|
|
5.84
|
%
|
Net (Loss) income
|
|
|
(3,594,261
|
)
|
|
|
(26.06
|
)%
|
|
|
1,878,786
|
|
|
|
9.13
|
%
|
Less: net loss (income) attributable to non-controlling interest
|
|
|
11,929
|
|
|
|
0.09
|
%
|
|
|
(186,803
|
)
|
|
|
(0.91
|
)%
|
Net loss (income) attributable to Company
|
|
$
|
(3,582,332
|
)
|
|
|
(25.98
|
)%
|
|
$
|
1,691,983
|
|
|
|
8.22
|
%
|
Revenue.
We generate revenues from selling hardware, software, system integration, software as a service, and other technology-related
services to customers including Taoping New Media Co., Ltd. and its affiliates. Taoping New Media Co., Ltd is
controlled by our CEO, Mr. Lin. We have identified Taoping New Media Co., Ltd. and its affiliates as related parties.
For the year ended December 31, 2019, our total revenue was $13.8 million, of which approximately $7.5 million was from related
parties, compared to total revenue of $20.6 million for the year ended December 31, 2018, a decrease of $6.8 million, or 33%.
The decrease was primarily due to the unfavorable macro environment and the slowdown of the out-of-home advertising market in
China in 2019.
Starting
from January 2020, the coronavirus outbreak, also known as COVID-19, has caused the Chinese government to take quarantine measures,
such as nationwide lockdowns, transportation restrictions, public gathering prohibitions and temporary closures of non-essential
businesses, which had put economic activities in a suspension mode until late March, in addition to the regular Chinese New Year
Holiday. Although the COVID-19 pandemic has largely been contained in China since then and businesses have gradually resumed
to operations, China’s economic recovery still faces great challenges. Against this background, we believe that China’s
out-of-home advertising market and our revenue in 2020 so far have been negatively affected.
The
COVID-19 has had a material adverse impact on our operating results for the first quarter of 2020. We had a year-over-year decrease
of approximately 26% in revenue in the first quarter of 2020, according to unaudited financial information, and a potential slowdown
in collection of accounts receivable in 2020. We have seen sales starting to increase in the second quarter compared with the
first quarter in 2020. However, we do not expect a significant impact on our operations and financial results in the long run
unless the COVID-19 pandemic is not contained in the year of 2020. The pandemic in China is currently under control.
Businesses around China have largely returned to normal since April 2020. The operations of our customers and our supply chain
have been back to normal since most cities in China have lifted the lockdown restrictions.
The
following table shows our revenue, percentage of revenue, cost of revenue and gross margin, by revenue categories:
|
|
Year Ended December 31, 2019
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
% of
|
|
|
Cost of
|
|
|
Gross
|
|
|
|
|
|
% of
|
|
|
Cost of
|
|
|
Gross
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Margin
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Margin
|
|
Products
|
|
$
|
10,468,382
|
|
|
|
75.91
|
%
|
|
|
6,448,965
|
|
|
|
38.40
|
%
|
|
$
|
15,919,288
|
|
|
|
77.36
|
%
|
|
|
9,808,837
|
|
|
|
38.38
|
%
|
Software
|
|
|
2,246,497
|
|
|
|
16.29
|
%
|
|
|
525,473
|
|
|
|
76.61
|
%
|
|
|
3,083,312
|
|
|
|
14.98
|
%
|
|
|
783,702
|
|
|
|
74.58
|
%
|
System Integration
|
|
|
-
|
|
|
|
-
|
%
|
|
|
74,494
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
227,677
|
|
|
|
-
|
%
|
Others
|
|
|
1,076,424
|
|
|
|
7.80
|
%
|
|
|
140,160
|
|
|
|
86.98
|
%
|
|
|
1,575,740
|
|
|
|
7.66
|
%
|
|
|
104,030
|
|
|
|
93.40
|
%
|
Total
|
|
$
|
13,791,303
|
|
|
|
100.00
|
%
|
|
|
7,189,092
|
|
|
|
47.87
|
%
|
|
$
|
20,578,340
|
|
|
|
100.00
|
%
|
|
|
10,924,246
|
|
|
|
46.91
|
%
|
A
breakdown of revenue, percentage of revenue, cost of revenue and gross margin by segments is as follows:
|
|
Year Ended December 31, 2019
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
% of
|
|
|
Cost of
|
|
|
Gross
|
|
|
|
|
|
% of
|
|
|
Cost of
|
|
|
Gross
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Margin
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Margin
|
|
TIT Segment
|
|
$
|
241,132
|
|
|
|
1.75
|
%
|
|
|
337,261
|
|
|
|
(39.87
|
)%
|
|
$
|
383,419
|
|
|
|
1.86
|
%
|
|
|
726,572
|
|
|
|
(89.50
|
)%
|
CBT Segment
|
|
|
13,550,171
|
|
|
|
98.25
|
%
|
|
|
6,851,831
|
|
|
|
49.43
|
%
|
|
|
20,194,921
|
|
|
|
98.14
|
%
|
|
|
10,197,674
|
|
|
|
49.50
|
%
|
Total
|
|
$
|
13,791,303
|
|
|
|
100.00
|
%
|
|
|
7,189,092
|
|
|
|
47.87
|
%
|
|
$
|
20,578,340
|
|
|
|
100.00
|
%
|
|
|
10,924,246
|
|
|
|
46.91
|
%
|
Cost
of revenue and gross profit. As indicated in the tables above, our cost of revenue decreased by $3.8 million, or 34.2%, to
$7.2 million, for the year ended December 31, 2019, from $11.0 million for the year ended December 31, 2018. As a percentage of
revenue, our cost of revenue decreased to 52.1% during the year ended December 31, 2019, from 53.1% during the year ended December
31, 2018. As a result, gross profit as a percentage of revenue was 47.9% for the year ended December 31, 2019 and was 46.9% for
the year ended December 31, 2018. The increase in the overall gross margin primarily resulted from the cost advantages in our
new products and services offered to customers in the private sector. Our new products and services mainly consist of the CAT
and IoT based interactive ads display terminals, digital ads distribution platform, and digital ads distribution service replacing
standalone floor-mounted display terminals mostly for community management or catalog advertising and IoT elevator management
devices offered in 2016. We have also generated revenue from sales of software related products and services, which have resulted
in a high gross margin. Although we currently are unable to estimate the negative business impact caused by COVID-19, we expect
that our product and service mix would vary little from the prior year. As a result, gross margin in fiscal 2020 is expected to
be consistent with that of fiscal 2019.
Administrative
expenses. Our administrative expenses consist primarily of compensation and benefits for our general management, finance and
administrative staff, professional advisor consulting fees, audit fees, and other expenses incurred in connection with general
operations. Our administrative expenses increased by $2.3million, or 54.8%, to $6.6 million for the year ended December 31, 2019,
from $4.3 million for the year ended December 31, 2018. As a percentage of revenue, administrative expenses increased to 48.3%
for 2019, from 20.9% for 2018. Such increase was primarily due to an increase of $2.8 million in provision of doubtful account
receivable, as a result of the slowdown of the out-of-home advertising industry in China. Given the unfavorable outlooks of overall
economy and the out-of-home advertising market, we will continue to control our administrative expenses, by investing more efforts
in the collection of accounts receivable and expenses and fees control.
Research
and development expenses. Our research and development expenses consist primarily of personnel related expenses, as well as
costs associated with new software and hardware development and enhancement. Our research and development expenses decreased by
$1.2 million, or 24.5%, to $3.6 million for the year ended December 31, 2019, from $4.8 million for the year ended December 31,
2018. Such decrease was primarily due to the decrease of depreciation of R&D related hardware equipment and software. As a
percentage of revenue, research and development expenses increased to 26.1% for 2019, from 23.1% in 2018.
Selling
expenses. Our selling expenses consist primarily of the compensation and benefits to our sales and marketing staff, traveling
costs, and other selling activities related costs. Our selling expenses increased by $0.1 million, or 21.9%, to $0.5 million for
the year ended December 31, 2019, from $0.4 million for the year ended December 31, 2018. This increase was due to the headcount
increase of the sales and marketing staff for expansion of our nationwide Taoping network. Selling expenses in 2020 is expected
to remain stable compared with 2019.
Subsidy
income. Because we have developed a number of new products that are promoted and designated by the Chinese government as highly
innovative technology, we received governmental subsidies of $0.4 million and $0.6 million in years ended December 31, 2019 and
2018, respectively.
Other
(loss) income. Other income for the year ended December 31, 2019 was approximately $0.2 million, compared to other loss of
approximately $0.4 million in 2018. Other income in 2019 was mainly attributed to the write-off of long-aged tax payable. Other
loss in 2018 was mainly attributed to the write-off of long-aged payables offset by other loss derived from discarding of certain
obsolete office equipment.
Interest
expense. Interest expense for the year ended December 31, 2019 was approximately $0.5 million, compared to interest expense
of approximately $0.5 million in 2018, consistent with outstanding short-term bank loans for both years.
Income
tax expense. We recorded income tax benefit of $0.3 million for the year ended December 31, 2019, as compared to $1.2 million
of income tax benefit in 2018, primarily as a result of reclaims of excess accrual of income tax payable in the prior years.
Net
(loss) income attributable to Company. As a result of the cumulative effect of the foregoing factors, we had a net loss attributable
to the Company of $3.6 million for the year ended December 31, 2019, as compared to net income of $1.7 million for the year ended
December 31, 2018.
Inflation
Inflation
does not materially affect our business or the results of our operations.
Foreign
Currency Fluctuations
See
Item 11 “Quantitative and Qualitative Disclosures about Market Risk—Foreign Exchange Risk.”
Critical
Accounting Policies
The
preparation of financial statements in conformity with U.S. GAAP requires our management to make assumptions, estimates and judgments
that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments
and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments
and estimates in the preparation of financial statements, including the following:
Revenue
Recognition
Beginning
January 1, 2018, the Company has adopted the ASU 2014-09, Topic 606, “Revenue from Contracts with Customers” and its
related amendments (collectively referred to as “ASC 606”) for its new revenue recognition accounting policy that
depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company
expects to be entitled in exchange for those goods or services. The adoption of the new revenue recognition standard has no material
impact on the Company’s consolidated financial statements for any periods prior to 2018. Therefore prior period amounts
are not adjusted.
The
Company generates its revenues primarily from three sources: (1) product sales, (2) software sales, and (3) other sales. Revenue
is recognized when obligations under the terms of a contract with our customers are satisfied; and generally occurs upon delivery
of the goods and services.
Revenue
- Products
Product
revenues are generated primarily from the sale of Cloud-Application-Terminal based digital ads display terminals with integrated
software essential to the functionality of the hardware to our customers (inclusive of related parties) and high-end data storage
servers. Although manufacturing of the hardware has been outsourced to the Company’s Original Equipment Manufacturer (OEM)
suppliers, the Company has acted as the principal of the contract. The Company recognized the product sales at the point of delivery.
The Company has indicated that it may from time to time provide future unspecified software upgrades to the hardware products’
essential software, which is expected to be infrequent and, free of charge. Non-software service is mainly the one-time training
session provided to the customer to familiarize them with the software operation upon the customer’s initial introduction
to the software platform. The costs of providing infrequent software upgrade and training provided to the customer for familiarizing
the software operations are de minimis. As a result, the Company does not allocate transaction price to software upgrade and customer
training. Hardware sales are classified as “Revenue-Products” on the Company’s consolidated statements of operations.
Revenue
- Software
Customers
in the private sector contract the Company to design and develop software products specifically customized for their needs for
a fixed price. Software development projects usually include developing software, integrating various isolated software systems
into one, and testing the system. The design and build services, together with the integration of the various elements, are generally
determined to be essential to the functionality of the delivered software. The contracted price is usually paid in installments
based on progression of the project or at the delivery of the software. The Company usually provides non-software services including
after-sale support, technical training. The technical training only occurs at the introduction of the software. The software is
highly specialized and stable, after-sale support and subsequent upgrade or enhancement are infrequent. The Company has estimated
the costs associated with the non-software performance obligations and concludes that these obligations are de minimis to the
overall contract. Therefore, the Company does not further allocate transaction price.
The
Company usually completes the customized software contracts less than 12 months and recognizes the revenue at the point of delivery
because the Company does not have an enforceable right to payment for performance completed to date. Revenues from software development
contracts are classified as “Revenue-Software” on the Company’s consolidated statements of operations.
Revenue
- Other
The
Company also reports other revenue which comprises revenue generates from System upgrade and technical support services, platform
service fee, advertising revenue, and rental income.
System
upgrade and technical support revenue is recognized when performance obligations are satisfied upon completion of the services.
Platform service fee is charged based on number of the display terminals used by the customers or a percentage of advertising
revenue generated by the display terminals. Platform service revenue is recognized on a monthly basis over the contract period.
The
Company recognizes new media advertising revenue upon transferring services for delivering the advertisements as contracted with
customers, who rents advertising slots on vehicular display terminals for an agreed upon transaction price. New media advertising
revenue is recognized over period of time.
Accounts
Receivable, Accounts Receivable –related parties
In
January 2020, the Company adopted ASU 2016-13, Topics 326-Credit Loss, Measurement of Credit Losses on Financial Instruments,
which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit
loss (CECL) methodology, as its accounting standard for its trade accounts receivable.
The
adoption of the credit loss accounting standard has no material impact on the Company’s consolidated financial statements
as of January 1,2020. Accounts receivable are recognized and carried at carrying amount less an allowance for credit loss, if
any. The Company maintains an allowance for credit losses resulting from the inability of its customers to make required payments
based on contractual terms. The Company reviews the collectability of its receivables on a regular and ongoing basis. The Company
has also included in calculation of allowance for credit losses, the potential impact of the COVID-19 pandemic on our customers
businesses and their ability to pay their accounts receivable. After all attempts to collect a receivable have failed, the receivable
is written off against the allowance. The Company also considers external factors to the specific customer, including current
conditions and forecasts of economic conditions, including the potential impact of the COVID-19 pandemic. In the event the Company
recovers amounts previously reserved for, the Company will reduce the specific allowance for credit losses.
The
Company evaluates the creditworthiness of all of its customers individually before accepting them and continuously monitors the
recoverability of accounts receivable. If there are any indicators that a customer may not make payment, the Company may consider
making provision for non-collectability for that particular customer. At the same time, the Company may cease further sales or
services to such customer.
Inventories
We
value inventories at the lower of cost (First-in-First-out “FIFO”) or net realizable value. Net realizable value is
the expected selling price in the ordinary course of business minus any costs of completion, disposal, and transportation to make
the sale. We perform analyses of slow-moving or obsolete inventory periodically and any necessary valuation reserves, which could
potentially be significant, are included in the period in which the evaluations are completed. Inventory impairments result in
a new cost basis for accounting purposes.
Long-Lived
Assets
The
Company’s long-term investment consists of equity investments without readily determinable fair value. The Company adopted
ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), codified
in ASC Topic 321, Investments—Equity Securities (“ASC 321”), from January 1, 2018. Pursuant to ASC 321, equity
investments, except for those accounted for under the equity method, those that result in consolidation of the investee and certain
other investments, are measured at fair value, and any changes in fair value are recognized in earnings. For equity securities
without readily determinable fair value and do not qualify for the existing practical expedient in ASC Topic 820, Fair Value Measurements
and Disclosures (“ASC 820”) to estimate fair value using the net asset value per share (or its equivalent) of the
investment, the Company elected to use the measurement alternative to measure those investments at cost, less any impairment,
plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of
the same issuer, if any. Significant judgments are required to determine (i) whether observable price changes are orderly transactions
and identical or similar to an investment held by the Company; and (ii) the selection of appropriate valuation methodologies and
underlying assumptions, including expected volatility and the probability of exit events as it relates to liquidation and redemption
features used to measure the price adjustments for the difference in rights and obligations between instruments.
For
equity investments that the Company elects to use the measurement alternative, the Company makes a qualitative assessment considering
impairment indicators to evaluate whether investments are impaired at each reporting date. Impairment indicators considered include,
but are not limited to, a significant deterioration in the earnings performance or business prospects of the investee, including
factors that raise significant concerns about the investee’s ability to continue as a going concern, a significant adverse
change in the regulatory, economic, or technologic environment of the investee and a significant adverse change in the general
market condition of either the geographical area or the industry in which the investee operates. If a qualitative assessment indicates
that the investment is impaired, the entity has to estimate the investment’s fair value in accordance with the principles
of ASC 820. If the fair value is less than the investment’s carrying value, the Company recognizes an impairment loss in
net income equal to the difference between the carrying value and fair value.
Convertible
Promissory Note
The
Company determines the appropriate accounting treatment of its convertible debts in accordance with the terms in relation to conversion
features. After considering the impact of such features, the Company may account for such instrument as a liability in its entirety,
or separate the instrument into debt and equity components following the guidance described under ASC 815 Derivatives and Hedging
and ASC 470 Debt. The debt discount, if any, together with related issuance cost are subsequently amortized as interest expense
over the period from the issuance date to the earliest conversion date or stated redemption date. The Company presented the issuance
cost of debt in the balance sheet as a direct deduction from the related debt.
Income
Taxes
Deferred
income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Deferred
income taxes are recognized for all significant temporary differences at enacted rates and classified as non-current based upon
the classification of the related asset or liability in the financial statements. A valuation allowance is provided to reduce
the amount of deferred tax assets, if it is considered more likely than not that some portion, or all of the deferred tax asset
will not be realized. The Company classifies interest and/or penalties related to unrecognized tax benefits, if any, as a component
of income tax provisions.
Recent
Accounting Pronouncements
Please
refer to Note 2 to our audited consolidated financial statements for a discussion of relevant pronouncements.
B.
Liquidity and Capital Resources
As
of December 31, 2020, we had cash and cash equivalents of $0.9 million.
In
January 2020, the Company adopted ASU 2016-13, Topics 326-Credit Losses, Measurement of Credit Losses on Financial Instruments,
which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit
loss (CECL) methodology, as its accounting standard for its trade accounts receivable.
The
Company considers the following factors when determining whether to permit a longer payment period or provide other concessions
to customers:
●
|
the
customer’s past payment history;
|
●
|
the
customer’s general risk profile, including factors such as the customer’s size, age, and public or private status;
|
●
|
macroeconomic
conditions that may affect a customer’s ability to pay; and
|
●
|
the
relative importance of the customer relationship to the Company’s business.
|
The
normal credit term is ranging from 1 month to 3 months after the customers’ acceptance of hardware or software, and completion
of services. However, because of various factors of business cycle, the actual collection of outstanding accounts receivable may
be beyond the normal credit terms.
In
accordance with ASC 210-10-45, the non-current accounts receivable and non-current accounts receivable-related parties represent
the amounts that the Company does not reasonably expect to be realized during the normal operating cycle of the Company. Considering
the limited operating history with the customers and Taoping Alliance members, in accordance with ASC 210-10-45, the operating
cycle of the Company is not identifiable. Therefore, the Company uses one-year time period as the basis for the separation of
current and non-current assets.
The
allowance for credit losses at December 31, 2020 and 2019, totaled approximately $21.2 million and $7.2 million, respectively,
representing management’s best estimate. The following table describes the movement for allowance for credit losses during
the year ended December 31, 2020.
Balance at January 1, 2020
|
|
$
|
7,212,644
|
|
Increase in allowance for credit losses
|
|
|
13,528,638
|
|
Foreign exchange difference
|
|
|
476,124
|
|
Balance at December 31, 2020
|
|
$
|
21,217,406
|
|
The
COVID-19 has had a material adverse impact on our operating results for the year of 2020. The epidemic in China is currently under
control. Businesses around China have largely returned to normal. With the additional injection of the approximately $13.1 million
net proceeds raised in the first quarter of 2021, we believe that we will have sufficient capital to maintain our operations for
the next 12 months. With the deployment of Antminers and general-purpose servers in 2021 and beyond, we expect to obtain
additional capital through equity or debt financings.
The
following table summarizes the key cash flow components from our consolidated statements of cash flows for the periods indicated.
Cash
Flows
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net cash (used in) provided by operating activities
|
|
|
(1,782,893
|
)
|
|
|
(1,682,104
|
)
|
|
|
2,473,802
|
|
Net cash (used in) provided by investing activities
|
|
|
(1,733,643
|
)
|
|
|
151,855
|
|
|
|
(4,066,939
|
)
|
Net cash provided by financing activities
|
|
|
3,072,948
|
|
|
|
1,586,347
|
|
|
|
176,786
|
|
Effects of exchange rate changes on cash and cash equivalents
|
|
|
20,782
|
|
|
|
(189,692
|
)
|
|
|
(191,197
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(422,752
|
)
|
|
|
(133,594
|
)
|
|
|
(1,607,548
|
)
|
Cash, cash equivalents, and restricted cash at beginning of the year
|
|
|
1,519,666
|
|
|
|
1,653,260
|
|
|
|
3,260,808
|
|
Cash, cash equivalents, and restricted cash at end of the year
|
|
|
1,096,914
|
|
|
|
1,519,666
|
|
|
|
1,653,260
|
|
Operating
Activities
Net
cash used in operating activities was $1.8 million for the year ended December 31, 2020 and net cash used in operating activities
was $1.7 million for the year ended December 31, 2019. Net cash provided by operating activities was $2.5 million for the year
ended December 31, 2018. As a result of the unfavorable macro environment and the slow-down of the out-of-home advertising industry
in China, we had a net loss of $18.3 million in 2020, comparing to a net loss of $ 3.6 million in 2019 and a net income of $1.9
million 2018, respectively.
Investing
Activities
Net
cash used in investing activities was $1.7 million for the year ended December 31, 2020, and net cash provided by investing activities
was $0.2 million for the year ended December 31, 2019. Net cash used in investing activities was $4.1 million for the year ended
December 31, 2018. Net cash used in investing activities in 2020 was mainly due to the purchase of software and hardware equipment.
Financing
Activities
Net
cash provided by financing activities was $3.1 million for the year ended December 31, 2020, mainly attributable to short-term
bank borrowings receipts of $6.3 million and the receipts of $2.7 million of net proceeds from a convertible note financing,
and $1.2 million of net proceeds from private placement offset by $7.1 million in repayment of short-term loans. Net cash
provided by financing activities was $1.6 million for the year ended December 31, 2019, mainly attributable to short-term bank
borrowings receipts of $7.8 million and the receipts of $1.0 million net proceed from a convertible note financing, offset by
$7.2 million in repayment of short-term loans. Net cash provided in financing activities was $0.2 million for the year ended December
31, 2018, mainly attributable to short-term bank borrowings receipts of $6.8 million and equity financing of $1.5 million, offset
by $8.2 million in repayment of short-term loans.
Loan
Facilities
As
of December 31, 2020 and 2019, our loan facilities were as follows:
Short-term
bank loans
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Secured short-term loans
|
|
$
|
6,210,176
|
|
|
$
|
6,584,664
|
|
Total short-term bank loans
|
|
$
|
6,210,176
|
|
|
$
|
6,584,664
|
|
Management’s
Plans
In
the first 6 months of 2020, various levels of city lock-downs resulted in confining individual’s mobility, ceasing private
and public transportations, halting vast majority of business transactions, depleting businesses’ cash flows due to outbreak
of the COVID-19 pandemic. As a result of negative impact to overall economy and businesses from the COVID-19 pandemic, the Company
was unable to deliver products and services and collect outstanding trade accounts receivable as planned causing significant decline
in revenue and increase in allowance for credit losses.
Due
to the unfavorable macro environment and the slowdown of the out-of-home advertising industry in China, the Company suffered a
net loss of approximately $18.3 million for the year ended December 31, 2020, compared to a net loss of approximately $3.6 million
for the year ended December 31, 2019. The Company reported cash outflows from operations of approximately $1.8 million for the
year ended December 31, 2020, compared to cash outflows from operations of $1.7 million for the year ended December 31, 2019.
As of December 31, 2020, the Company had a working capital deficit of approximately $17.4 million, compared to a working capital
deficit of approximately $7.0 million as of December 31 2019.The Company had significant accumulated deficit approximately $192.2
million and $174.5 million as of December 31, 2020 and 2019, respectively.
In
March 2020, the Company completed a financing transaction comprising of ordinary shares, convertible notes, and warrants with
aggregate proceeds net of issuance cost and debt discount of $1.9 million. In September 2020, the Company consummated a financing
transaction comprising of ordinary shares, convertible notes, and warrants with aggregate proceeds net of issuance cost and debt
discount of $1.9 million. Both financing activities were to increase the Company’s working capital. In July and September
2020, the Company also successfully secured three one-year short term bank loans totaling approximately $2.0
million to further better liquidly. In the first quarter of 2021, the Company consummated a series of financing transactions for
new issuance of ordinary shares, with net proceeds of approximately $13.1 million to enrich the Company’s working capital.
In
2018, the Company completed transformation of its business model from providing IT software, hardware, and system integration
services to the public sectors to offering cloud-based ecosystem solutions to the private sectors. In 2020, the management continued
to execute the existing business strategies with focuses on selection of quality customers, collection of accounts receivable,
maintaining proper inventory level, and managing accounts payable to enhance operating cash flows. In addition, the Company will
aggressively develop domestic and international markets to attract new customers. The Company has also advanced into international
arena by forming a joint venture in Singapore, establishing a business relationship in Canada, and exploring opportunities in
other geographical regions. Starting from the first quarter of 2021, the Company has also sought to explore more market opportunities
with the acquisition of 100% shares of Taoping New Media Co., Ltd. and 51% stake of Render Lake Tech Limited. Taoping New Media
is a leading media operator in China’s out-of-home digital advertising industry. It has built up its digital advertising
network based on TAOP’s cloud platform. Mr. Jianghuai Lin, the Chairman and CEO of TAOP, currently owns approximately 51%
of Taoping New Media. Render Lake is a company that provides comprehensive cloud solutions and develops cloud desktop, cloud rendering,
cloud computing, NFT (Non-Fungible Token), and cloud gaming businesses. The Company is to issue new ordinary common shares to
pay for these two acquisitions. The acquisitions of Taoping New Media Co., Ltd and Render Lake Tech Limited are expected
to close in mid-year of 2021.
In
addition, management believes that the Company has the ability, if needed, to obtain additional credit lines from local banks
to provide for capital needs for market expansions by using the title of its office facility as collateral. Management believes
that the Company’s current cash and cash equivalents, anticipated cash flows from operations will sustain our operations
and business expansion.
If
the Company’s business strategies are not successful in addressing its current financial concerns, additional capital raise
from issuing equity security or debt instrument or additional loan facility may occur to support required cash flows. However,
the Company can make no assurances that financing will be available for the amounts we need, or on terms commercially acceptable
to us, if at all. If one or all of these events do not occur or subsequent capital raise was insufficient to bridge financial
and liquidity shortfall, substantial doubt exists about the Company’s ability to continue as a going concern. The consolidated
financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include
any adjustments that might result from the outcome of this uncertainty.
Intercompany
Transfers
Our
subsidiaries organized in the PRC may pay dividends only out of their accumulated profits. Our PRC subsidiaries are required to
set aside at least 10% of their after-tax profit to their general reserves until such reserves cumulatively reach 50% of their
respective registered capital. General reserves of our PRC subsidiaries are not distributable as cash dividends. Restrictions
on our net assets also include the conversion of local currency into foreign currencies, tax withholding obligations on dividend
distributions, the need to obtain approval from SAFE for loans to a non-PRC consolidated entity, and the covenants or financial
restrictions related to outstanding debt obligations. We are not aware of other restrictions on our net assets or the transferability
of assets via loans or advances to our non-PRC consolidated entities. As our operations are principally based in China, our non-PRC
consolidated entities do not have material cash obligations.
The
following table provides the amount of our statutory general reserve, the amount of restricted net assets, consolidated net assets,
and the amount of restricted net assets as a percentage of consolidated net assets, as of December 31, 2020 and 2019:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
PRC general reserve - restricted net assets
|
|
$
|
14,044,269
|
|
|
$
|
14,044,269
|
|
Consolidated net assets
|
|
$
|
(7,664,671
|
)
|
|
$
|
5,267,834
|
|
Restricted net assets as percentage of consolidated net assets
|
|
|
(183.23
|
)%
|
|
|
266.60
|
%
|
An
offshore holding company, as a shareholder of a Foreign Investment Entity (FIE), can make loans to the FIE, provided the parties
being in compliance with the PRC regulations governing such loans. Our parent company can make a shareholder loan to a PRC subsidiary
provided that (i) the amount of the loan does not exceed the difference between the total investment and registered capital as
approved by the local Administration for Industry and Commerce that issued the business license of the subsidiary; and (ii) before
the loan can be converted into RMB, the subsidiary reports to SAFE the intended use of proceeds (which cannot be to purchase domestic
assets). The subsidiary can finance the operations of iASPEC in accordance with the terms of the MSA with iASPEC.
As
of December 31, 2020 and 2019, the breakdown of our cash and cash equivalents (including restricted cash) was as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash located outside of the PRC
|
|
$
|
41,792
|
|
|
$
|
28,333
|
|
Cash held by VIE and its subsidiaries
|
|
|
506,139
|
|
|
|
568,838
|
|
Cash held by other entities located in the PRC (except VIEs noted above)
|
|
|
548,983
|
|
|
|
922,495
|
|
|
|
$
|
1,096,914
|
|
|
$
|
1,519,666
|
|
We
do not believe that there would be any material costs to transfer cash outside the PRC. In addition, as our operations are principally
based in China, our non-PRC consolidated entities do not incur material cash obligations. If nature of the businesses for our
non-PRC consolidated entities have changed in the future and require material amounts of cash being transferred to them, we will
assess the feasibility and plan cash transfers in accordance with foreign exchange regulations, taking into account of tax consequences.
A company registered in mainland China must apply for and receive an approval from the State Administration of Foreign Exchange
to remit foreign currency to any foreign country, and must comply with PRC statutory reserve requirement as disclosed in Item
3 Key Information – D. Risk Factor of this annual report. As we conduct all of our operations in China, our inability to
convert cash and short-term investments held in RMB to other currencies will materially affect our liquidity.
C.
Research and Development, Patents and Licenses, Etc.
Our
industry is characterized by extremely rapid technological change, evolving industry standards, and changing customer demands.
These conditions require continuous expenditures on product research and development to enhance existing products, create new
products, and avoid product obsolescence. See Item 3 “Key Information—D. Risk Factors—If we are unable to develop
and offer competitive new products and services, our future operations could be adversely affected,” —“If we
are unable to keep abreast with the rapid technological changes in our industry, demand for our products and services could decline
and adversely affect our revenue and growth,” and —“Our technology may become obsolete, which could materially
adversely affect our ability to sell our products and services.” For a detailed analysis of research and development costs,
see Item 5.A. “Operating Results—Results of Operations—Research and development expenses”.
D.
Trend Information
Other
than as disclosed elsewhere in this annual report, we are not aware of any trend, uncertainty, demand, commitment or event that
is reasonably likely to have a material effect on our net revenues and income from continuing operations, profitability, liquidity,
capital resources, or would cause reported financial information not necessarily to be indicative of future operation results
or financial condition.
E.
Off-Balance Sheet Arrangements
We
do not have off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial position, revenues or expenses, results of operations, liquidity, capital expenditures, or capital
resources that are material to an investment in our securities.
F.
Tabular Disclosure of Contractual Obligations
The
table below shows our material contractual obligations as of December 31, 2020.
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
Short-term bank loans
|
|
|
6,210,176
|
|
|
|
6,210,176
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
6,210,176
|
|
|
|
6,210,176
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
G.
Safe Harbor
See
“Introductory Notes—Forward-Looking Information.”
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
The
following table sets forth certain information regarding our directors and senior management, as well as employees upon whose
work we are dependent, as of the date of this annual report.
NAME
|
|
AGE
|
|
POSITION
|
Jianghuai
Lin
|
|
52
|
|
Chairman
of the Board, Chief Executive Officer
|
Zhiqiang
Zhao
|
|
50
|
|
Director,
President and Interim Chief Financial Officer
|
Zhixiong
Huang
|
|
52
|
|
Chief
Operating Officer
|
Guangzeng
Chen
|
|
42
|
|
Chief
Technology Officer and Chief Product Officer
|
Dongfeng
Wang
|
|
45
|
|
Chief
Strategy Officer
|
Qian
Wang
|
|
34
|
|
Chief
Investment Officer
|
Yunsen
Huang
|
|
75
|
|
Director
|
Yong
Jiang
|
|
47
|
|
Director
|
Remington
C.H. Hu
|
|
55
|
|
Director
|
Mr.
Jianghuai Lin. Mr. Lin has been the Chairman of Board of Directors and the Chief Executive Officer of the Company since 2006.
Mr. Lin has also served as the Chairman and Chief Executive Officer of our subsidiary, IST, since its incorporation in January
2006. During the period from September 2000 to June 2004, Mr. Lin served as the President and Chief Executive Officer of Hong
Kong United Development Group, a consolidated enterprise engaging in investment, high technology, and education. Before that,
during the period from February 1995 through August 2000, Mr. Lin was a Director and the General Manager of Fujian Wild Wolf Electronics
Limited, a company engaged in the business of manufacturing electrical consumer products. Mr. Lin holds a Master’s Degree
in Software Engineering from Wuhan University and a Bachelor’s Degree in Industrial Accounting from Xiamen University.
Mr.
Zhiqiang Zhao. Mr. Zhao has been the President of the Company since August 2015, Interim Chief Financial Officer since October
2015, and a member of Board of Directors since June 19, 2012. Mr. Zhao has extensive experience in corporate operations and integrations,
strategic planning, and human resource management. From March 2003 to March 2005, Mr. Zhao served as Supervisor of Human Resources
for the Foxconn Technology Group. From April 2005 to July 2006, Mr. Zhao served as Administrative and Human Resource Director
of iASPEC; and as Deputy General Manager of iASPEC from July 2006 to August 2010. From November 2010, Mr. Zhao began serving as
the Chief Operating Officer and Vice President of TAOP. From August 2010, he was vice chairman of iASPEC. From July 2011, Mr.
Zhao served as General Manager of ISIOT (former HPC Electronics (Shenzhen) Ltd.). Mr. Zhao holds a Bachelor’s Degree in
Mechanical & Electrical Engineering from Inner Mongolia University.
Mr.
Zhixiong Huang. Mr. Huang has been Chief Operating Officer of the Company since August 2015. Between July 2001 and March 2002,
Mr. Huang served as the General Manager of product development of Shenzhen Runsheng Information Systems Company Ltd., and was
responsible for overseeing general operations. From September 2002 and October 2006, Mr. Huang served as the deputy general manager
of iASPEC, where he supervised iASPEC’s research and development activities and consulted on various sophisticated technical
issues. From January 2006 to September 2013, he served as TAOP’s Vice President, and was Chief Technology Officer from December
2008 and September 2013. Mr. Huang holds a Bachelor’s Degree in computer science from Hehai University in China, and has
over twenty years of’ experience in information systems. Mr. Huang is currently a Director of the Shenzhen Computer Association,
and an expert with the Shenzhen Expert Association and the Shenzhen Science and Technology Innovation Association.
Mr.
Guangzeng Chen. Mr. Chen has served as Chief Technology Officer of the Company since December 1, 2015 and was Chief Product
Officer since June 26, 2015. Mr. Chen joined the Company as Vice President of the Research & Development Division in March
2014. Prior to joining TAOP, Mr. Chen was a project manager at CoolPad Group Limited, a Shenzhen-based telecommunications equipment
company that was one of the top ten smartphone manufacturing companies in China, from May 2011 to February 2014. Previously, Mr.
Chen was the head of research and development at VideoHome, a Taiwanese multimedia appliance manufacturer and exporter, from June
2004 to May 2011. Mr. Chen graduated from Zhengzhou University with a Bachelor’s Degree in Computer Science.
Mr.
Dongfeng Wang. Mr. Wang has 22 years of work experience in the Internet industry. He has gone through the era of PC Internet
and mobile Internet, and deeply participated in the growing blockchain Internet. His rich entrepreneurship experience put him
in the forefront of development trends in digital revolution, and enabled him to accumulate great management expertise in enterprise
positioning and corporate innovation. In 2004, Mr. Wang founded Zcom Digital Magazine, one of the earliest e-magazine platforms
in China. In 2009, Mr. Wang co-founded Forgame Group, a company engaged in the business of game and fintech in China, and successfully
listed the company on the Main Board of The Stock Exchange of Hong Kong Limited in 2013. In 2017, Mr. Wang started investments
in blockchain technology and digital assets mining operations as a venture partner of Longling Capital Co. Ltd, a Chinese venture
capital firm specializing in seed stage, early stage and angel investments. Mr. Wang graduated from Beijing Construction University
with a bachelor’s degree in International Trade.
Mr.
Qian Wang. Mr. Wang has extensive industry experience in cloud computing services, blockchain applications and operations,
and overseas capital market operations. Before joining TAOP, he served as co-Chief Executive Officer of Grand Shores Technology
(1647.HK), the major business of which focuses on design, construction, and operation of crypto cloud computing centers and development
of blockchain innovation. Mr. Wang got CFA charter and received both a Postgraduate Diploma in Financial Markets and Portfolio
Management and Bachelor’s degree in Accounting and Finance from the University of Hong Kong.
Mr.
Yunsen Huang. Mr. Huang has been a member of Board of Directors of the Company since June 19, 2012, and was a member of the
Board of CITN from August 10, 2007 until completion of the corporate reorganization on October 31, 2012. Mr. Huang has been a
Professor in the School of Information Engineering at Shenzhen University since September 1984. He has involved in many computer
application projects, and received many awards, including a First Grade Award of Technology Advancement from Sichuan Province,
a Second Grade Award of Technology Advancement from Guangdong Province, and a Third Grade Award of Technology Advancement from
the Chemical Ministry. Mr. Huang has published eight books in the field of Networks and Multimedia Applications. In addition,
Mr. Huang was a founder and the Chairman of International Software Development (Shenzhen) Co., Ltd, a jointing venture incorporated
by IBM, East Asia Bank, and Shenzhen SDC Company, between 2001 and 2006. Currently, Mr. Huang is a Director of the Shenzhen Computer
Academy, a Vice Director of the Guangdong Province Computer Academy, as well as Executive Director of China University Computer
Basic Education Committee. Mr. Huang holds a Bachelor’s Degree in Electronics Engineering from Tsinghua University.
Dr.
Yong Jiang. Dr. Jiang has been a member of Board of Directors of the Company since August 13, 2013. As a professor and supervisor
for Ph. D candidates, Dr. Jiang has been the Vice Director of Division of Information Science & Technology and the Director
of Network Center in the Graduate School at Shenzhen, Tsinghua University (GSST) since 2002. Dr. Jiang is a member of Association
of Computing Machinery (ACM), the world’s largest educational and scientific computing society, and a member of China Computer
Federation (CCF). He also serves as the Vice Chairman of Shenzhen Association of Chief Information Officer, and a committee member
of Shenzhen Association of Experts. Dr. Jiang was majored in the research of next generation internet and computer network architecture,
and has led more than 10 national-level scientific research programs, including programs from National Natural Science Foundation
of China (NSFC), the National 863 Program, the pilot program from China Next Generation Internet (CNGI), and National Major Projects.
Dr. Jiang graduated from the Department of Computer Science and Technology of Tsinghua University.
Mr.
Remington C.H. Hu. Mr. Hu has been a member of Board of Directors of the Company since June 19, 2012 and was a member of the
Board of CITN from October 30, 2009 until completion of the corporate reorganization on October 31, 2012. He is a seasoned executive
with more than 16 years of experience in corporate finance and investment management, and is the founder and CEO of Tomorrow Capital
Limited, a financial advisory firm. Prior to founding Tomorrow Capital Limited, Mr. Hu served, from February 2008 to July 2009,
as Chief Financial Officer of Yucheng Technologies Limited, a Nasdaq listed top IT solutions and BPO company servicing Chinese
banking industry. From August 2004 to August 2007, Mr. Hu served as China Representative for CVM Capital Partners, LLC, the largest
Taiwanese Venture Capital affiliated with the largest Taiwanese private equity investment group. Earlier in his career, Mr. Hu
founded and served, from June 1999 to June 2002, as Chief Financial Officer of eSoon Communications International Corp., a software
start-up focusing on the then fast-growing CRM/CTI market. He also served, from August 1996 to May 1999, as Vice President of
Crimson Asia Capital Holdings, Ltd., former Asia’s largest venture capital firm backed by Taiwanese China Trust Financial
Group. He began his career at Citibank, NA, as an Assistant Vice President in the Taipei and Hong Kong. Mr. Hu holds a Master’s
Degree in Business Administration from the Wharton Business School and a Bachelor’s Degree in Computer Science and Information
Engineering from the National Chiao Tung University.
There
is no arrangement or understanding with any major shareholders, customers, suppliers or others, pursuant to which any person named
above was selected as a director or member of senior management.
No
family relationship exists between any of the persons named above.
B.
Compensation
In
2020, we paid an aggregate of approximately $533,631 in cash compensation to our directors and senior management as a group. We
do not set aside or accrue any amounts for pension, retirement or other benefits for our directors and senior management. However,
we reimburse our directors for out-of-pocket expenses incurred in connection with their services in such capacity.
2016
Equity Incentive Plan
On
May 9, 2016, the Board of Directors of the Company adopted the 2016 Equity Incentive Plan, or the 2016 Plan, pursuant to which
the Company may offer up to 833,334 ordinary shares as equity incentives to its directors, employees and consultants. Such
number of shares is subject to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, stock
splits, stock dividends, or other change in the corporate structure of the Company affecting the shares issuable under the 2016
Plan. As of December 31, 2020, we have granted options to purchase an aggregate of approximately 390,714 ordinary shares
under the 2016 Plan.
The
following paragraphs summarize the terms of our 2016 Plan:
Purpose.
The purposes of the 2016 Plan are to promote the long-term growth and profitability of the Company and its Affiliates by stimulating
the efforts of Employees, Directors and Consultants of the Company and its Affiliates who are selected to be participants, aligning
the long-term interests of participants with those of shareholders, heightening the desire of participants to continue working
toward and contributing to our success, attracting and retaining the best available personnel for positions of substantial responsibility,
and generally providing additional incentive for them to promote the success of our business through the grant of Awards of or
pertaining to our Ordinary Shares. The 2016 Plan permits the grant of ISOs, NSOs, Restricted Shares, Restricted Share Units, Share
Appreciation Rights, Performance Units and Performance Shares as the Administrator may determine.
Administration.
The 2016 Plan may be administered by our Board or a committee. The 2016 Plan is currently being administered by our Compensation
Committee. The Administrator has the authority to determine the specific terms and conditions of all Awards granted under the
2016 Plan, including, without limitation, the number of Ordinary Shares subject to each Award, the price to be paid for the Ordinary
Shares and the applicable vesting criteria. The Administrator has discretion to make all other determinations necessary or advisable
for the administration of the 2016 Plan.
Eligibility.
NSOs, Restricted Shares, Restricted Share Units, Share Appreciation Rights, Performance Units and Performance Shares may be granted
to Employees, Directors or Consultants either alone or in combination with any other Awards. ISOs may be granted only to employees
of the Company, and of any Parent or Subsidiary.
Shares
Available for Issuance Under the 2016 Plan. Subject to adjustment as described below, (a) the maximum aggregate number of
Shares that may be issued under the 2016 Plan is 833,334 Ordinary Shares, (b) to the extent consistent with Section 422
of the Code, not more than an aggregate of 833,334 Ordinary Shares may be issued under ISOs, and (c) not more than 83,334
Ordinary Shares (or for Awards denominated in cash, the Fair Market Value of 83,334 Ordinary Shares on the Grant Date),
may be awarded to any individual Participant in the aggregate in any one fiscal year of the Company, such limitation to be applied
in a manner consistent with the requirements of, and only to the extent required for compliance with, the exclusion from the limitation
on deductibility of compensation under Code Section 162(m). The number and class of shares available under the 2016 Plan are subject
to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, share splits, share dividends,
or other similar events which change the number or kind of shares outstanding.
Transferability.
Unless otherwise provided in the 2016 Plan or otherwise determined by the Administrator, an Award may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Participant, only by the Participant. However, the Administrator may, at or after the grant
of an Award other than an ISO, provide that such Award may be transferred by the recipient to a “family member” (as
defined in the 2016 Plan); provided, however, that any such transfer is without payment of any consideration whatsoever and that
no transfer shall be valid unless first approved by the Administrator, acting in its sole discretion, and as required by our amended
and restated Memorandum and Articles of Association. If the Administrator makes an Award transferable, such Award will contain
such additional terms and conditions as the Administrator deems appropriate.
Termination
of, or Amendments to, the 2016 Plan. The Board may at any time amend, alter, suspend or terminate the 2016 Plan, provided
that the Company will obtain shareholder approval of any 2016 Plan amendment to the extent necessary and desirable to comply with
Applicable Laws. No amendment, alteration, suspension or termination of the 2016 Plan will impair the rights of any Participant,
unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed
by the Participant and the Company. Termination of the 2016 Plan will not affect the Administrator’s ability to exercise
the powers granted to it hereunder with respect to Awards granted prior to the date of such termination.
The
2016 Plan will terminate five years following the date it was adopted by the Board, unless sooner terminated by the Board.
On
May 27, 2016, the following directors and officers were granted options to purchase ordinary shares of the Company under the 2016
Plan:
|
●
|
Jianghuai
Lin, options to purchase 50,000 ordinary shares
|
|
|
|
|
●
|
Zhiqiang
Zhao, options to purchase 33,334 ordinary shares
|
|
|
|
|
●
|
Zhixiong
Huang, options to purchase 33,334 ordinary shares
|
|
|
|
|
●
|
Guangzeng
Chen, options to purchase 25,000 ordinary shares
|
The
options are exercisable at the fair market value of the Company’s ordinary shares on the grant date May 27, 2016 ($7.26
per share) with 40% of the options vesting 18 months after the date of grant, 30% vesting 30 months after the date of grant
and the remaining 30% vesting 42 months after the date of grant. On January 22, 2018, Messrs. Lin, Zhao, Huang and Chen exercised
their options granted on May 27, 2016 on a cashless basis, and received 11,933, 7,956, 7,956 and 5,967 ordinary shares
of the Company, respectively. On July 31, 2020, Messrs. Lin, Zhao, Huang and Chen exercised their options granted on May 27, 2016
on a cashless basis, and received 5,250, 3,500, 3,500, 2,625 ordinary shares of the Company, respectively.
On
May 17, 2017, Mr. Chen was granted options to purchase additional 40,000 ordinary shares of the Company under the 2016
Plan. The options are exercisable at the fair market value of the Company’s ordinary shares on the date of the grant ($5.94
per share) with 40% of the options vesting 12 months after the date of grant, 30% vesting 24 months after the date of grant
and the remaining 30% vesting 36 months after the date of grant. On July 31, 2020, Mr. Chen exercised his options granted on May
17, 2017 on a cashless basis, and received 13,000 ordinary shares of the Company.
On July 10, 2020, a total of 57,366 share
options were granted to certain consultants of the Company.
On
July 24, 2020, the following directors and officers were granted options to purchase ordinary shares of the Company under the
2016 Plan:
|
●
|
Jianghuai
Lin, options to purchase 42,500 ordinary shares
|
|
|
|
|
●
|
Zhiqiang
Zhao, options to purchase 33,334 ordinary shares
|
|
|
|
|
●
|
Zhixiong
Huang, options to purchase 33,334 ordinary shares
|
|
|
|
|
●
|
Guangzeng
Chen, options to purchase 30,834 ordinary shares
|
C.
Board Practices
Terms
of Directors and Executive Officers
Our
Board of Directors currently consists of five directors, who were elected to serve until they resign, are removed or otherwise
leave offices. Directors may be elected by shareholders at any general meeting by a majority of votes cast. Each director so elected
holds office for the term, if any, as may be specified in the resolution appointing him or until his earlier death, disqualification,
resignation or removal. The directors may appoint one or more directors to fill a vacancy on the Board of Directors. We do not
have any contracts with our directors providing for benefits upon termination of employment.
Our
executive officers are appointed by our Board of Directors. The executive officers shall hold office until their successors are
duly elected and qualified, but any officer elected or appointed by the directors may be removed at any time, with or without
cause, by a majority vote of the directors.
Board
Composition and Committees
The
Board has established three standing committees: Audit Committee, Compensation Committee and Governance and Nominating Committee.
Each of the Audit Committee, Compensation Committee and Governance and Nominating Committee is comprised entirely of independent
directors. From time to time, the Board may establish other committees. The Board has adopted a written charter for each of the
Committees which are available on the corporate governance page of our website at www.taop.com. Printed copies of these
charters may be obtained, without charge, by contacting the Corporate Secretary, Taoping Inc., 21st Floor, Everbright Bank Building,
Zhuzilin, Futian District, Shenzhen, Guangdong 518040, China.
Audit
Committee and Audit Committee Financial Expert
Our
Audit Committee is currently composed of three members: Messrs. Yunsen Huang, Yong Jiang, and Remington C.H. Hu. Our Board of
Directors determined that each member of the Audit Committee meets the independence criteria prescribed by applicable regulation
and the rules of the SEC for audit committee membership and is an “independent” director within the meaning of the
NASDAQ Marketplace Rules. Each Audit Committee member also meets NASDAQ’s financial literacy requirements. Mr. Hu serves
as Chair of the Audit Committee.
Our
Audit Committee oversees our accounting and financial reporting processes and the audits of our financial statements. Our Audit
Committee is responsible for, among other things:
|
●
|
selecting
our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our independent
auditors;
|
|
|
|
|
●
|
reviewing
with our independent auditors any audit problems or difficulties and management’s response;
|
|
|
|
|
●
|
reviewing
and approving all proposed related-party transactions;
|
|
|
|
|
●
|
discussing
the annual audited financial statements with management and our independent auditors;
|
|
|
|
|
●
|
reviewing
major issues as to the adequacy of our internal controls and any special audit steps adopted in light of significant internal
control deficiencies;
|
|
|
|
|
●
|
annually
reviewing and reassessing the adequacy of our Audit Committee charter;
|
|
|
|
|
●
|
meeting
separately and periodically with management and our internal and independent auditors;
|
|
|
|
|
●
|
reporting
regularly to the full Board of Directors; and
|
|
|
|
|
●
|
such
other matters that are specifically delegated to our Audit Committee by our Board of Directors from time to time.
|
Our
Board of Directors has determined that Mr. Hu is the “audit committee financial expert” as such term is defined in
Item 407(d) of Regulation S-K promulgated by the SEC and also meets NASDAQ’s financial sophistication requirements.
Compensation
Committee
Our
Compensation Committee is currently composed of three members: Messrs. Yunsen Huang, Yong Jiang, and Remington C.H. Hu, each of
whom is “independent” within the meaning of the NASDAQ Marketplace Rules. Mr. Huang serves as Chair of the Compensation
Committee.
The
purpose of our Compensation Committee discharges the responsibilities of the Company’s Board of Directors relating to compensation
of the Company’s executives, to produce an annual report on executive compensation for inclusion in the Company’s
proxy statement, if required, and to oversee and advise the Board on the adoption of policies that govern the Company’s
compensation programs, including stock and benefit plans. Our chief executive officer may not be present at any Compensation Committee
meeting during which his compensation is deliberated. The Compensation Committee is responsible for, among other things:
|
●
|
Reviewing
and approving the compensation structure for corporate officers at the level of corporate vice president and above;
|
|
|
|
|
●
|
Overseeing
an evaluation of the performance of the Company’s executive officers and approving the annual compensation, including
salary, bonus, incentive and equity compensation, for the executive officers;
|
|
|
|
|
●
|
Reviewing
and approving chief executive officer goals and objectives, evaluating chief executive officer performance in light of these
corporate objectives, and setting chief executive officer compensation consistent with Company philosophy;
|
|
|
|
|
●
|
Making
recommendations to the Board regarding the compensation of board members;
|
|
|
|
|
●
|
Reviewing
and making recommendations concerning long-term incentive compensation plans, including the use of equity-based plans. Except
as otherwise delegated by the Board of Directors, the Compensation Committee will act on behalf of the Board of Directors
as the “Committee” established to administer equity-based and employee benefit plans, and as such will discharge
any responsibilities imposed on the Compensation Committee under those plans, including making and authorizing grants, in
accordance with the terms of those plans.
|
Governance
and Nominating Committee
Our
Governance and Nominating Committee is currently composed of three members: Messrs. Yunsen Huang, Yong Jiang, and Remington C.H.
Hu, each of whom is “independent” within the meaning of the NASDAQ Marketplace Rules. Mr. Jiang serves as Chair of
the Governance and Nominating Committee.
The
Governance and Nominating Committee assists the Board in identifying individuals qualified to become our directors and in determining
the composition of the Board and its committees.
The
Governance and Nominating Committee is responsible for, among other things:
|
●
|
identifying
and recommending to the Board nominees for election or re-election of the Board, or for appointment to fill any vacancy;
|
|
|
|
|
●
|
reviewing
annually with the Board the current composition of the Board in light of the characteristics of independence, age, skills,
experience and availability of service to us;
|
|
|
|
|
●
|
identifying
and recommending to the Board the directors to serve as members of the Board’s committees; and
|
|
|
|
|
●
|
monitoring
compliance with our code of ethics.
|
The
procedures by which stockholders may recommend nominees have not changed materially since last year’s proxy statement.
D.
Employees
As
of December 31, 2020, we had approximately 58 full-time employees. The following table illustrates the allocation of these employees
among the various job functions conducted at our company.
Department
|
|
Number of
Employees
|
Software Development
|
|
16
|
Sales & Marketing
|
|
12
|
Administration & Human Resources
|
|
7
|
Operation
|
|
9
|
Finance and Accounting
|
|
9
|
Management
|
|
5
|
TOTAL
|
|
58
|
We
believe that our relationship with our employees is good. Our Chinese subsidiaries have trade unions which protect employees’
rights, aim to assist in the fulfillment of our economic objectives, encourage employee participation in management decisions
and assist in mediating disputes between us and union members. We have not experienced any significant problems or disruption
to our operations due to labor disputes, nor have we experienced any difficulties in recruitment and retention of experienced
staff. The remuneration payable to employees includes basic salaries and allowances. We also provide training for our staff from
time to time to enhance their technical knowledge.
As
required by applicable Chinese law, we have entered into employment contracts with all of our officers, managers and employees.
Our
employees in China participate in a state pension scheme organized by Chinese municipal and provincial governments. We are required
to contribute to the scheme at rates ranging from 13% to 18% of the average monthly salary. As of the date of this report, we
have complied with the regulation and have paid the state pension plan as required by law. In addition, we are required by Chinese
law to cover employees in China with various types of social insurance. We have purchased social insurance for all of our employees.
E.
Share Ownership
The
following table sets forth information regarding beneficial ownership of each class of our voting securities as of April 28, 2021
(i) by each person who is known by us to beneficially own 5% or more of each class of our voting securities; (ii) by each of our
officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise specified, the address of
each of the persons set forth below is in care of the Company, 21st Floor, Everbright Bank Building, Zhuzilin, Shenzhen
518040, China.
Name and Address of Beneficial Owner
|
|
Office, If Any
|
|
Title of Class
|
|
Amount and Nature of Beneficial Ownership(1)
|
|
|
Percent of
Class(2)
|
|
Officers and Directors
|
|
Jianghuai Lin
|
|
Chairman and CEO
|
|
Ordinary Shares
|
|
|
2,984,191
|
(3)
|
|
|
24.6
|
%
|
Zhiqiang Zhao
|
|
Director, President and Interim Chief Financial Officer
|
|
Ordinary Shares
|
|
|
83,317
|
(4)
|
|
|
*
|
|
Zhixiong Huang
|
|
Chief Operating Officer
|
|
Ordinary Shares
|
|
|
74,646
|
(5)
|
|
|
*
|
|
Guangzeng Chen
|
|
Chief Technology Officer
|
|
Ordinary Shares
|
|
|
25,417
|
(6)
|
|
|
*
|
|
Dongfeng Wang
|
|
Chief Strategy Officer
|
|
Ordinary Shares
|
|
|
500,000
|
|
|
|
4.1
|
%
|
Qian Wang
|
|
Chief Investment Officer
|
|
Ordinary Shares
|
|
|
-
|
|
|
|
*
|
|
Yunsen Huang
|
|
Director
|
|
Ordinary Shares
|
|
|
-
|
|
|
|
*
|
|
Yong Jiang
|
|
Director
|
|
Ordinary Shares
|
|
|
-
|
|
|
|
*
|
|
Remington C.H. Hu
|
|
Director
|
|
Ordinary Shares
|
|
|
-
|
|
|
|
*
|
|
All officers and directors as a group (9 persons named above)
|
|
|
|
Ordinary Shares
|
|
|
3,597,570
|
|
|
|
30.2
|
%
|
5% Security Holders
|
|
Jianghuai Lin
|
|
|
|
Ordinary Shares
|
|
|
2,984,191
|
|
|
|
24.6
|
%
|
*
Less than 1%
|
(1)
|
Beneficial
Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect
to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power
with respect to our ordinary shares.
|
|
(2)
|
As
of April 28, 2021, a total of 12,134,014 ordinary shares are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1).
For each Beneficial Owner above, any securities that are exercisable or convertible within 60 days have been included in the
denominator.
|
|
(3)
|
Includes
21,250 ordinary shares underlying options that are vested within 60 days hereof.
|
|
(4)
|
Includes
16,667 ordinary shares underlying options that are vested within 60 days hereof.
|
|
(5)
|
Includes
16,667 ordinary shares underlying options that are vested within 60 days hereof.
|
|
(6)
|
Includes
15,417 ordinary shares underlying options that are vested within 60 days hereof.
|
None
of our major shareholders have different voting rights from other shareholders. We are not aware of any arrangement that may,
at a subsequent date, result in a change of control of our Company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
Please
refer to Item 6 “Directors, Senior Management and Employees—E. Share Ownership.”
B.
Related Party Transactions
The
following includes a summary of transactions since January 1, 2018 between us and certain related persons. We believe the terms
obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable
to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
|
●
|
Since
May 2017, the Company entered into a series of contracts with Taoping New Media and its affiliates for the sale of the Company’s
Cloud-Application-Terminal based digital ads display terminals, software and technical services. Taoping New Media is a company
controlled by Mr. Lin. These transactions have been fully approved by the board of directors of the Company. For the year
ended December 31, 2020, 2019 and 2018, revenues from Taoping New Media and its affiliates for sales of products were approximately
$0.4 million, $7.4 million and $9.3 million, respectively. Accounts receivable from the foregoing related parties, net of
allowance for credit losses, as of December 31, 2020 and 2019 were approximately $4.2 million and $12.5 million, respectively.
Advances received from the foregoing related parties were $161,063 and $140,938 as of December 31, 2020 and 2019, respectively.
|
|
|
|
|
●
|
On
July 1, 2017, the Company entered into a lease agreement with Taoping New Media and leased to Taoping New Media the office
space located at 18th Floor, Education and Technology Building, Zhuzilin, Futian District, Shenzhen City. The lease agreement
has been renewed on July 1, 2019 and expires on June 30, 2022. For the years ended December 31, 2020, 2019 and 2018, the Company’s
rental income from Taoping New Media was approximately $61,000, $61,000 and $63,000, respectively. Other revenue generated
from related parties also includes system maintenance service provided to Taoping affiliate customers, which was $85,289,
$44,621 and $22,416, for the years ended December 31, 2020, 2019 and 2018, respectively.
|
|
|
|
|
●
|
iASPEC
and Bocom have a total of $69,585 and $65,276 payable to Taoping New Media, as of December 31 2020 and 2019, respectively,
for certain consultation services provided by Taoping New Media during 2018. The payables to Taoping New Media are expected
to be repaid in 2021. No consultation service was provided in 2020 and 2019.
|
|
|
|
|
●
|
On
September 7, 2018, the Company entered into a securities purchase agreement with certain investors, pursuant to which the
inventors agreed to purchase an aggregate of 333,333 ordinary shares of the Company at a price of $9 per share for
an aggregate of $3 million. Mr. Lin is one of the investors and purchased 83,333 shares in this transaction.
|
|
●
|
As
of December 31, 2020 and 2019, the Company recorded a total of $0.5 million and $0.4 million loan due from Taoping
New Media, without interest.
|
|
|
|
|
●
|
As
of December 31, 2020 and 2019, the Company recorded a total of $0.14 million and $0.13 million borrowings due to Taoping
New Media, respectively, which were payable on demand without interest.
|
|
|
|
|
●
|
On
March 19, 2021, the Company entered into a share purchase agreement to acquire 100% equity interest in Taoping New Media.
After the closing of the transaction, Taoping New Media will become a wholly owned subsidiary of Biznest. Mr. Jianghuai Lin
currently owns approximately 51% of Taoping New Media., TAOP has agreed to issue to the shareholders of Taoping New Media
a total of 1,213,630 ordinary shares of TAOP. Mr. Lin, as the majority shareholder of Taoping New Media, will receive 614,369
ordinary shares. The closing of the transaction is subject to a number of conditions, including, without limitation, completion
of all respective internal approval procedures of the parties, no material adverse impact on the assets, operation and management
team of Taoping New Media prior to closing, and the satisfaction or waiver of other customary closing conditions. The parties
intend to close the transaction no later than May 10, 2021. Both the board of directors of TAOP and the audit committee of
board approved the transaction based on a written opinion rendered by Albeck Financial Services, the independent financial
advisor to the board, to the effect that, as of the date of such opinion, the consideration in the transaction is fair to
TAOP and TAOP’s shareholders, from a financial point of view.
|
See
also Item 6 “Directors, Senior Management and Employees—B. Compensation.”
C.
Interests of Experts and Counsel
Not
applicable.
ITEM 8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
Financial
Statements
We
have appended consolidated financial statements filed as part of this annual report. See Item 18 “Financial Statements.”
Legal
Proceedings
We
may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time.
Dividend
Policy
To
date, we have not paid any cash dividends on our shares. As a BVI company, we may only declare and pay dividends if our directors
are satisfied, on reasonable grounds, that immediately after the distribution (i) the value of our assets will exceed our liabilities
and (ii) we will be able to pay our debts as they fall due. We currently anticipate that we will retain any available funds to
finance the growth and operation of our business and we do not anticipate paying any cash dividends in the foreseeable future.
Additionally, our cash held in foreign countries may be subject to certain control limitations or repatriation requirements, limiting
our ability to use this cash to pay dividends.
B.
Significant Changes
No
significant change has occurred since the date of our consolidated financial statements filed as part of this annual report.
ITEM 9. THE OFFER AND LISTING
A.
Offer and Listing Details
Our
ordinary shares have been listed on the NASDAQ Capital Market under the trading symbol “TAOP” since June 1, 2018.
Prior to that, our ordinary shares were listed on the NASDAQ Capital Market under the symbol “CNIT.”
B.
Plan of Distribution
Not
applicable.
C.
Markets
See
our disclosures above under “A. Offer and Listing Details.”
D.
Selling Shareholders
Not
applicable.
E.
Dilution
Not
applicable.
F.
Expenses of the Issue
Not
applicable.
ITEM 10. ADDITIONAL INFORMATION
A.
Share Capital
Not
applicable.
B.
Memorandum and Articles of Association
The
following represents a summary of certain key provisions of our memorandum and articles of association. The summary does not purport
to be a summary of all of the provisions of our memorandum and articles of association and of all relevant provisions of BVI law
governing the management and regulation of BVI companies.
Register
We
were incorporated in the BVI on June 18, 2012 under the BVI Act. Our memorandum of association authorizes the issuance of up to
100,000,000 ordinary shares without par value, which may be issued from time to time at the discretion of the Board of Directors
without shareholder approval. Our Board of Directors is authorized to issue these shares in different classes and series and,
with respect to each class or series, to determine the designations, powers, preferences, privileges and other rights, including
dividend rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the
powers and rights associated with the ordinary shares, at such times and on such other terms as they think proper.
On
July 30, 2020, we completed a share combination of our ordinary shares at a ratio of one-for-six, which decreased our outstanding
ordinary shares to approximately 7,332,434 shares. This share combination did not change our authorized amount of shares or the
par value of our ordinary shares. Accordingly, except as otherwise indicated, all share and per share information contained in
this annual report has been restated to retroactively show the effect of the share combination.
Objects
and Purposes
Our
memorandum of association grants us full power and capacity to carry on or undertake any business or activity and do any act or
enter into any transaction not prohibited by the BVI Act or any other BVI legislation.
Directors
Directors
have the powers necessary for managing, and for directing and supervising our business and affairs, including general powers to
borrow on behalf of the Company.
Our
articles of association provide that a director who is interested in a transaction entered into or to be entered into by us may:
(i) vote on a matter relating to the transaction; (ii) attend a meeting of directors at which a matter relating to the transaction
arises and be included among the directors present at the meeting for the purposes of a quorum; and (iii) sign a document on our
behalf, or do any other thing in his capacity as a director, that relates to the transaction. Additionally, our articles of association
provide that no director shall be disqualified by his office from contracting with us either as a buyer, seller or otherwise,
nor shall any such contract or arrangement entered into by or on our behalf in which any director shall be in any way interested
be voided, nor shall any director so contracting or being so interested be liable to account to us for any profit realized by
any such contract or arrangement, by reason of such director holding that office or by reason of the fiduciary relationship thereby
established, provided such director shall, immediately after becoming aware of the fact that he is interested in a transaction
entered into or to be entered into by us, disclose such interest to our Board of Directors. A director is not required to make
such a disclosure if: (i) the transaction or proposed transaction is between us and the director, and (ii) the transaction or
proposed transaction is or is to be entered into in the ordinary course of our business and on usual terms and conditions. A disclosure
to our Board to the effect that a director is a member, director, officer or trustee of another named company or other person
and is to be regarded as interested in any transaction which may, after the date of the entry or disclosure, be entered into with
that company or person, is a sufficient disclosure of interest in relation to that transaction. Such a disclosure is not made
to our Board of directors unless it is made or brought to the attention of every director on the Board. Subject to Section 125(1)
of the BVI Act, the failure by a director to comply with this provision does not affect the validity of a transaction entered
into by the director or the Company.
Pursuant
to our articles of association, a director shall not require a share qualification, but nevertheless shall be entitled to attend
and speak at any meeting of the directors and meeting of the shareholders and at any separate meeting of the holders of any class
of our shares. In addition, the remuneration of directors (whether by way of salary, commission, participation in profits or otherwise)
in respect of services rendered or to be rendered in any capacity to us (including to any company in which we may be interested)
shall be fixed by resolution of directors or shareholders. The directors may also be paid such travelling, hotel and other expenses
properly incurred by them in attending and returning from meetings of the directors, or any committee of the directors or meetings
of the shareholders, or in connection with our business as shall be approved by resolution of directors or of shareholders.
Rights
and Obligations of Shareholders
Dividends.
Subject to the BVI Act, the directors may, by resolution of directors, authorize a distribution (including a dividend) by us to
shareholders at such time and of such an amount as they think fit if they are satisfied, on reasonable grounds, that immediately
after the distribution, the value of our assets exceeds our liabilities and we are able to pay our debts as they fall due. Any
distribution payable in respect of a share which has remained unclaimed for three years from the date when it became due for payment
shall, if the board of the directors so resolves, be forfeited and cease to remain owing by us. The directors may, before authorizing
any distribution, set aside out of our profits such sum as they think proper as a reserve fund, and may invest the sum so set
apart as a reserve fund upon such securities as they may select. The holder of each ordinary share has the right to an equal share
in any distribution paid by us.
Voting
Rights. Each ordinary share confers on the shareholder the right to one vote at a meeting of the shareholders or on any resolution
of shareholders on all matters before our shareholders.
Winding
Up. The holder of each ordinary share is entitled to an equal share in the distribution of the surplus assets of us on a winding
up.
Redemption.
The directors may, on behalf of the Company, purchase, redeem or otherwise acquire any of our own shares for such consideration
as the directors consider fit, and either cancel or hold such shares as treasury shares. Shares may be purchased or otherwise
acquired in exchange for newly issued shares. The directors shall not, unless permitted pursuant to the BVI Act, purchase, redeem
or otherwise acquire any of our own shares unless immediately after such purchase, redemption or other acquisition, the value
of our assets exceeds our liabilities and we are able to pay our debts as they fall due.
Changes
in Rights of Shareholders
Under
our memorandum and articles of association, if at any time the shares which we are authorized to issue are divided into different
classes of shares, the rights attaching to any class may only be changed by a consent in writing of the holders of a majority
of the issued shares of that class or with the sanction of a resolution passed by the holders of at least a majority of the shares
of the class present in person or by proxy at a separate general meeting of the holders of the shares of the class. At such a
separate general meeting, the quorum shall be at least one person holding or representing by proxy a majority of the issued shares
of the class.
Meetings
Under
the BVI Act, there is no requirement for an annual meeting of shareholders. Under our articles of association, we are not required
to hold an annual meeting of shareholders. Our shareholders’ meetings may be held at such times and in such place within
or outside the BVI as our Board of Directors considers appropriate.
Our
Board of Directors shall call a shareholders’ meeting if requested in writing to do so by shareholders entitled to exercise
at least 10% of the voting rights in respect of the matter for which the meeting is being requested. Our Board of Directors shall
give not less than 10 days and not more than 60 days prior written notice of a shareholders’ meeting to those persons whose
names on, either (a) the date the notice is given or (b) on a date fixed by the directors as the record date (which must be a
date that is not less than 10 days nor more than 60 days prior to the meeting), appear as shareholders in our register and are
entitled to vote at the meeting. The inadvertent failure of the directors to give notice of a meeting to a shareholder, or the
fact that a shareholder has not received notice, does not invalidate the meeting.
Our
articles of association provide that a meeting of shareholders is duly constituted if, at the commencement of the meeting, there
are shareholders present in person or by proxy representing not less than a majority of the votes of the shares or class or series
of shares entitled to vote on resolutions of shareholders to be considered at the meeting. A shareholder may be represented at
a meeting of shareholders by a proxy (who need not be a shareholder) who may speak and vote on behalf of the shareholder. A written
instrument giving the proxy such authority must be produced at the place appointed for such purpose. A shareholder shall be deemed
to be present at the meeting if he participates by telephone or other electronic means and all shareholders participating in the
meeting are able to hear each other.
Holders
of our ordinary shares are entitled to one vote for each share held of record on all matters at all meetings of shareholders,
except at a meeting where holders of a particular class or series of shares are entitled to vote separately. Our shareholders
have no cumulative voting rights. Our shareholders take action by a majority of votes cast, unless otherwise provided by the BVI
Act or our memorandum and articles of association.
Limitations
on Ownership of Securities
There
are no limitations on the right of non-residents or foreign persons to own our securities imposed by BVI law or by our memorandum
and articles of association.
Change
in Control of Company
Our
Board of Directors is authorized to issue our ordinary shares in different classes and series and, with respect to each class
or series, to determine the designations, powers, preferences, privileges and other rights, including dividend rights, conversion
rights, terms of redemption and liquidation preferences, any or all of which may be greater than the powers and rights associated
with the ordinary shares, at such times and on such other terms as they think proper. Such power could be used in a manner that
would delay, defer or prevent a change of control of our Company.
Ownership
Threshold
There
are no provisions governing the ownership threshold above which shareholder ownership must be disclosed imposed by BVI law or
by our memorandum and articles of association.
Changes
in Capital
Subject
to the provisions of our amended and restated memorandum and articles of association, the BVI Act and the rules of NASDAQ, our
unissued shares shall be at the disposal of the directors who may, without prejudice to any rights previously conferred on the
holders of any existing shares or class or series of shares, offer, allot, grant options over or otherwise dispose of the shares
to such persons, at such times and upon such terms and conditions as we may by resolution of directors determine.
Subject
to the provisions of the amended and restated memorandum of association relating to changes in the rights of shareholders and
the powers of directors in relation to shareholders, we may, by a resolution of members, amend our memorandum of association to
increase or decrease the number of ordinary shares authorized to be issued.
Differences
in Corporate Law
BVI
law differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant
differences between the provisions of BVI law applicable to us and the laws applicable to companies incorporated in the United
States and their shareholders.
Protection
for Minority Shareholders
Under
the laws of most U.S. jurisdictions, majority and controlling shareholders of a company generally have certain “fiduciary”
responsibilities to the minority shareholders. Corporate actions taken by majority and controlling shareholders which are unreasonable
and materially detrimental to the interests of minority shareholders may be declared null and void. Minority shareholders may
have less protection for their rights under BVI law than they would have under U.S. law.
Powers
of Directors
Unlike
most U.S. jurisdictions, the directors of a BVI company, subject in certain cases to court approval but without shareholders’
approval, may implement the sale, transfer, exchange or disposition of any Company asset, property, part of the business, or securities,
with the exception that shareholder approval is required for the disposition of over 50% in the value of our total assets.
Conflict
of Interests
Similar
to the laws of most U.S. jurisdictions, when a director becomes aware of the fact that he has an interest in a transaction which
we are to enter into, he must disclose it to our Board. However, with sufficient disclosure of interest in relation to that transaction,
the director who is interested in a transaction entered into or to be entered into by us may (i) vote on a matter relating to
the transaction; (ii) attend a meeting of directors at which a matter relating to the transaction arises and be included in the
quorum; and (iii) sign a document on behalf of us, or do any other thing in his capacity as a director, that relates to the transaction.
Written
Consent and Cumulative Voting
Similar
to the laws of most U.S. jurisdictions, under BVI law, shareholders are permitted to approve matters by way of written resolution
in place of a formal meeting. BVI law does not make a specific reference to cumulative voting, and our current articles of association
have no provisions authorizing cumulative voting.
Takeover
Provisions
Some
provisions of our memorandum and articles of association may discourage, delay or prevent a change in control of our company or
management that shareholders may consider favorable. For instance, our Board of Directors is authorized to issue ordinary shares
in different classes and series and, with respect to each class or series, to determine the designations, powers, preferences,
privileges and other rights, including dividend rights, conversion rights, terms of redemption and liquidation preferences, any
or all of which may be greater than the powers and rights associated with the ordinary shares previously issued, at such times
and on such other terms as they think proper.
Shareholder’s
Access to Corporate Records
Under
the BVI Act, a member of a business company may, on giving written notice to a company, inspect the company’s memorandum
and articles, the register of shareholders, the register of directors and the minutes of meetings and resolutions of shareholders
and of those classes of shareholders of which he is a member.
In
addition, our articles of association allow any shareholder of record who owns at least 15% of our outstanding shares, upon at
least five days’ written demand, to inspect, during usual business hours, the books of account and all financial records,
to make copies of records, and to conduct an audit of such records at their own cost.
Indemnification
BVI
law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and
directors, except to the extent any such provision may be held by the BVI courts to be contrary to public policy, such as to provide
indemnification against civil fraud or the consequences of committing a crime.
Under
our articles of association, subject to the BVI Act, we shall indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that such person is or was a director or officer (excluding the auditors), or who is or was serving at our
request as a director or officer of another company, partnership, joint venture, trust or other enterprise. Each such indemnified
person shall be indemnified out of our assets against any liability, action, proceeding, claim, demand, judgments, fines, costs,
damages or expenses, including legal expenses, whatsoever which they or any of them may reasonably incur as a result of any act
or failure to act in carrying out their functions other than such liability that they may incur by reason of their own actual
fraud or willful default. In addition, to be entitled to indemnification, an indemnified person must not have acted in such a
manner as to have incurred the liability by virtue of having committed actual fraud or willful default but no person shall be
found to have committed actual fraud or willful default unless or until a court of competent jurisdiction shall have made a finding
to that effect.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling
us under the foregoing provisions, 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.
Mergers
and Similar Arrangements
Under
the laws of the BVI, two or more companies may merge or consolidate in accordance with Section 170 of the BVI Act. A merger means
the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the uniting
of two or more constituent companies into a new company. In order to merge or consolidate, the directors of each constituent company
must approve a written plan of merger or consolidation which must be authorized by a resolution of shareholders.
While
a director may vote on the plan even if he has a financial interest in the plan, in order for the resolution to be valid, the
material facts of the interest and the director’s relationship to any party to the transaction must be disclosed and the
resolution approved (1)without counting the vote or consent of any interested director, or (2)by the unanimous vote or consent
of all disinterested directors if the votes or consents of all disinterested directors is insufficient to approve a resolution
of directors.
Shareholders
not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation
contains any provision which, if proposed as an amendment to the memorandum or articles of association, would entitle them to
vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger
or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve
the plan of merger or consolidation.
The
shareholders of the constituent companies are not required to receive shares of the surviving or consolidated company but may
receive debt obligations or other securities of the surviving or consolidated company, or other assets, or a combination thereof.
Further, some or all of the shares of a class or series may be converted into a kind of asset while the other shares of the same
class or series may receive a different kind of asset. As such, not all the shares of a class or series must receive the same
kind of consideration.
After
the plan of merger or consolidation has been approved by the directors and authorized by a resolution of the shareholders, articles
of merger or consolidation are executed by each company and filed with the Registrar of Corporate Affairs in the BVI.
Dissenter
Rights
A
shareholder may dissent from a mandatory redemption of his shares, an arrangement (if permitted by the court), a merger (unless
the shareholder was a shareholder of the surviving company prior to the merger and continues to hold the same or similar shares
after the merger) and a consolidation. A shareholder properly exercising his dissent rights is entitled to payment in cash of
the fair value of his shares.
A
shareholder dissenting from a merger or consolidation must object in writing to the merger or consolidation before the vote by
the shareholders on the merger or consolidation, unless notice of the meeting was not given to the shareholder. If the merger
or consolidation is approved by the shareholders, the company must within 20 days give notice of this fact to each shareholder
who gave written objection, and to each shareholder who did not receive notice of the meeting. Such shareholders then have 20
days to give their written election in the form specified by the BVI Act to dissent from the merger or consolidation, provided
that in the case of a merger, the 20 days starts when the plan of merger is delivered to the shareholder.
Upon
giving notice of his election to dissent, a shareholder ceases to have any rights of a shareholder except the right to be paid
the fair value of his shares. As such, the merger or consolidation may proceed in the ordinary course notwithstanding the dissent.
Within
seven days of the later of the delivery of the notice of election to dissent and the effective date of the merger or consolidation,
the company must make a written offer to each dissenting shareholder to purchase his shares at a specified price that the company
determines to be their fair value. The company and the shareholder then have 30 days to agree upon the price. If the company and
a shareholder fail to agree on the price within the 30 days, then the company and the shareholder shall each designate an appraiser
and these two appraisers shall designate a third appraiser. These three appraisers shall fix the fair value of the shares as of
the close of business on the day before the shareholders approved the transaction without taking into account any change in value
as a result of the transaction.
Under
BVI law, shareholders are not entitled to dissenters’ rights in relation to liquidation.
Shareholders’
Suits
Similar
to the laws of most U.S. jurisdictions, BVI law permits derivative actions against its directors. However, the circumstances under
which such actions may be brought, and the procedures and defenses available may result in the rights of shareholders of a BVI
company being more limited than those of shareholders of a company incorporated and/or existing in the United States.
The
courts of the BVI may, on the application of a shareholder of a company, grant leave to that shareholder to bring proceedings
in the name and on behalf of that company, or intervene in proceedings to which the company is a party for the purpose of continuing,
defending or discontinuing the proceedings on behalf of the company. In determining whether to grant leave, the courts must take
into account (1) whether the shareholder is acting in good faith; (2) whether the derivative action is in the interests of the
company taking account of the views of the company’s directors on commercial matters; (3) whether the proceedings are likely
to succeed; (4) the costs of the proceedings in relation to the relief likely to be obtained; and (5) whether an alternative remedy
to the derivative claim is available.
Leave
to bring or intervene in proceedings may be granted only if the court is satisfied that (1) the company does not intend to bring,
diligently continue or defend, or discontinue the proceedings, as the case may be; or (2) it is in the interests of the company
that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
C.
Material Contracts
We
have not entered into any material contracts other than in the ordinary course of business and other than those described in Item
4 “Information on the Company,” Item 5 “Operating and Financial Review and Prospects—F. Tabular Disclosure
of Contractual Obligations,” Item 7 “Major Shareholders and Related Party Transactions,” or filed (or incorporated
by reference) as exhibits to this annual report or otherwise described or referenced in this annual report.
D.
Exchange Controls
BVI
Exchange Controls
There
are no material exchange controls restrictions on payment of dividends, interest or other payments to the holders of our ordinary
shares or on the conduct of our operations in the BVI, where we were incorporated. There are no material BVI laws that impose
any material exchange controls on us or that affect the payment of dividends, interest or other payments to nonresident holders
of our ordinary shares. BVI law and our memorandum and articles of association do not impose any material limitations on the right
of non-residents or foreign owners to hold or vote our ordinary shares.
PRC
Exchange Controls
Regulations
on Foreign Currency Exchange
Under
the PRC Foreign Currency Administration Rules promulgated on January 29, 1996 and last amended on August 5, 2008 and various
regulations issued by SAFE and other relevant PRC government authorities, payment of current account items in foreign currencies,
such as trade and service payments, payment of interest and dividends can be made without prior approval from SAFE by following
the appropriate procedural requirements. By contrast, the conversion of RMB into foreign currencies and remittance of the converted
foreign currency outside the PRC for the purpose of capital account items, such as direct equity investments, loans and repatriation
of investment, requires prior approval from SAFE or its local office.
On
February 13, 2015, SAFE promulgated the Circular on Simplifying and Improving the Foreign Currency Management Policy on Direct
Investment, effective from June 1, 2015, which cancels the requirement for obtaining approvals of foreign exchange registration
of foreign direct investment and overseas direct investment from SAFE. The application for the registration of foreign exchange
for the purpose of foreign direct investment and overseas direct investment may be filed with qualified banks, which, under the
supervision of SAFE, may review the application and process the registration.
The
Circular of the SAFE on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise,
or SAFE Circular 19, was promulgated on March 30, 2015 and became effective on June 1, 2015. According to SAFE Circular 19,
a foreign-invested enterprise may, according to its actual business needs, settle with a bank the portion of the foreign exchange
capital in its capital account for which the relevant foreign exchange bureau has confirmed monetary contribution rights and interests
(or for which the bank has registered the account-crediting of monetary contribution). For the time being, foreign-invested enterprises
are allowed to settle 100% of their foreign exchange capitals on a discretionary basis; a foreign-invested enterprise shall truthfully
use its capital for its own operational purposes within the scope of business; where an ordinary foreign-invested enterprise makes
domestic equity investment with the amount of foreign exchanges settled, the invested enterprise shall first go through domestic
re-investment registration and open a corresponding Account for Foreign Exchange Settlement Pending Payment with the foreign exchange
bureau (bank) at the place of registration. The Circular of the SAFE on Reforming and Regulating Policies on the Control over
Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, was promulgated and became effective on June 9, 2016.
According to SAFE Circular 16, enterprises registered in PRC may also convert their foreign debts from foreign currency into Renminbi
at the enterprise’s discretion. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under
capital account items (including but not limited to foreign currency capital and foreign debts) on self—discretionary basis,
which applies to all enterprises registered in the PRC. SAFE Circular 16 reiterates the principle that Renminbi converted from
foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope
and may not be used for investments in securities or other investment with the exception of bank financial products that can guarantee
the principal in the PRC unless otherwise specifically provided. Besides, the converted Renminbi shall not be used to make loans
for related enterprises unless it is within the business scope or to build or to purchase any real estate that is not for the
enterprise own use with the exception for the real estate enterprise.
On
January 26, 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing
Genuineness and Compliance Verification, or SAFE Circular 3, which stipulates several capital control measures with respect
to the outbound remittance of profits from domestic entities to offshore entities, including (i) banks must check whether the
transaction is genuine by reviewing board resolutions regarding profit distribution, original copies of tax filing records and
audited financial statements, and (ii) domestic entities must retain income to account for previous years’ losses before
remitting any profits. Moreover, pursuant to SAFE Circular 3, domestic entities must explain in detail the sources of capital
and how the capital will be used, and provide board resolutions, contracts and other proof as a part of the registration procedure
for outbound investment.
On
October 25, 2019, SAFE promulgated the Notice on Further Facilitating Cross-Board Trade and Investment, which became effective
on the same date (except for Article 8.2 thereof). The notice removed restrictions on the capital equity investment in China by
non-investment foreign-invested enterprises. In addition, restrictions on the use of funds for foreign exchange settlement of
domestic accounts for the realization of assets have been removed and restrictions on the use and foreign exchange settlement
of foreign investors’ security deposits have been relaxed. Eligible enterprises in the pilot areas are also allowed to use
revenues under capital accounts, such as capital funds, foreign debts and overseas listing revenues for domestic payments without
providing materials to the bank in advance for authenticity verification on an item by item basis, while the use of funds should
be true, in compliance with applicable rules and conforming to the current capital revenue management regulations.
Regulations
on Foreign Exchange Registration of Overseas Investment by PRC Residents
SAFE
issued the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment
through Special Purpose Vehicles, or SAFE Circular 37, which became effective in July 2014, to replace the Circular of
the State Administration of Foreign Exchange on Issues Concerning the Regulation of Foreign Exchange in Equity Finance and Roundtrip
Investments by Domestic Residents through Offshore Special Purpose Vehicles, to regulate foreign exchange matters in relation
to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct
round trip investment in China. SAFE Circular 37 defines a SPV as an offshore entity established or controlled, directly or indirectly,
by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore
or offshore assets or interests, while “round trip investment” is defined as direct investment in China by PRC residents
or entities through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management
rights. SAFE Circular 37 stipulates that, prior to making contributions into an SPV, PRC residents or entities be required to
complete foreign exchange registration with SAFE or its local branch. In addition, SAFE promulgated the Notice on Further Simplifying
and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which amended SAFE
Circular 37 and became effective on June 1, 2015, requiring PRC residents or entities to register with qualified banks rather
than SAFE in connection with their establishment or control of an offshore entity established for the purpose of overseas investment
or financing.
PRC
residents or entities who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration
as required before the implementation of the SAFE Circular 37 must register their ownership interests or control in the SPVs with
qualified banks. An amendment to the registration is required if there is a material change with respect to the SPV registered,
such as any change of basic information (including change of the PRC residents, name and operation term), increases or decreases
in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures
set forth in SAFE Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclose controllers of
the foreign-invested enterprise that is established through round-trip investment, may result in restrictions being imposed on
the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions,
such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital
inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange
administration regulations. See “Risk Factors—Risks Relating to Doing Business in China—PRC regulations relating
to investments in offshore 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 or limit our PRC subsidiary’s ability
to increase their registered capital or distribute profits.”
Regulations
on Stock Incentive Plans
SAFE
promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock
Incentive Plan of Overseas Publicly Listed Company, or the Stock Incentive Plan Notice, in February 2012, replacing the previous
rules issued by SAFE in March 2007. Pursuant to the Stock Incentive Plan Notice and other relevant rules and regulations, PRC
residents participating in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its
local branches and follow certain other procedures. Participants of a stock incentive plan who are PRC residents must conduct
the SAFE registration and other procedures with respect to the stock incentive plan through a qualified PRC agent, which could
be a PRC subsidiary of the overseas publicly listed company or another qualified institution appointed by the PRC subsidiary.
In addition, the PRC agent is required to update the relevant SAFE registration should there be any material change to the stock
incentive plan, the PRC agent or other material changes. The PRC agent must, on behalf of the PRC residents who have the right
to exercise the employee stock 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 stock 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 opened by the PRC agents prior to distribution to such PRC residents.
We
adopted an equity incentive plan in 2016, under which we have the discretion to award incentives and rewards to eligible participants.
We have advised the recipients of awards under our equity incentive plan to handle relevant foreign exchange matters in accordance
with the Stock Incentive Plan Notice. However, we cannot guarantee that all employee awarded equity-based incentives can successfully
register with SAFE in full compliance with the Stock Incentive Plan Notice. See “Risk Factors—Risks Relating to Doing
Business in China—Any failure to comply with PRC regulations regarding employee share incentive plans may subject the PRC
plan participants or us to fines and other legal or administrative sanctions.”
Regulations
on Dividend Distribution
Distribution
of dividends of foreign investment enterprises are mainly governed by the Foreign Investment Enterprise Law, issued in
1986 and amended in 2000 and 2016 respectively, and the Implementation Rules under the Foreign Investment Enterprise
Law, issued in 1990 and amended in 2001 and 2014 respectively. Under these regulations, foreign investment enterprises in
the PRC may distribute dividends only out of their accumulative profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, no less than 10% of the accumulated profits of the foreign investment enterprises in the
PRC are required to be allocated to fund certain reserve funds each year unless these reserves have reached 50% of the registered
capital of the enterprises. A PRC company is not permitted to distribute any profits until any losses from previous fiscal years
have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current
fiscal year. Under our current corporate structure, our BVI holding company may rely on dividend payments from IST, which is a
wholly foreign-owned enterprise incorporated in China, to fund any cash and financing requirements we may have. Limitation on
the ability of our consolidated VIEs to make remittance to IST and on the ability of IST to pay dividends to us could limit our
ability to access cash generated by the operations of those entities. See “Risk Factors—Risks Relating to Doing Business
in China—Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could
materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends
to you, and otherwise fund and conduct our business.”
E.
Taxation
The
following is a general summary of certain material BVI, PRC and U.S. federal income tax considerations. The discussion is not
intended to be, nor should it be construed as, legal or tax advice to any particular shareholder or prospective shareholder. The
discussion is based on laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to
change or different interpretations, possibly with retroactive effect.
BVI
Taxation
The
BVI does not impose a withholding tax on dividends paid to holders of our ordinary shares, nor does the BVI levy any capital gains
or income taxes on us. Further, a holder of our ordinary shares who is not a resident of the BVI is exempt from the BVI income
tax on dividends paid with respect to the ordinary shares. Holders of ordinary shares are not subject to the BVI income tax on
gains realized on the sale or disposition of the ordinary shares.
Our
ordinary shares are not subject to transfer taxes, stamp duties or similar charges in the BVI. However, as a company incorporated
under the BVI Act, we are required to pay the BVI government an annual license fee based on the number of shares we are authorized
to issue.
There
is no income tax treaty or convention currently in effect between the United States and the BVI.
PRC
Taxation
We
are a holding company incorporated in the BVI, which indirectly holds our equity interests in our PRC operating subsidiaries.
The EIT Law and its implementation rules, both of which became effective as of January 1, 2008, as amended on February 24, 2017,
provide that a PRC enterprise is subject to a standard income tax rate of 25% and China-sourced income of foreign enterprises,
such as dividends paid by a PRC subsidiary to its overseas parent, will normally be subject to PRC withholding tax at a rate of
10%, unless there are applicable treaties between the overseas parent’s jurisdiction of incorporation and China to reduce
such rate.
The
EIT Law also provides that enterprises organized under the laws of jurisdictions outside China with their “de facto management
bodies” located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax
at the rate of 25% on their worldwide income. It implementation rules further define the term “de facto management body”
as the management body that exercises substantial and overall management and control over the business, personnel, accounts and
properties of an enterprise. While we do not currently consider our company or any of our overseas subsidiaries to be a PRC resident
enterprise, there is a risk that the PRC tax authorities may deem our company or any of our overseas subsidiaries as a PRC resident
enterprise since a substantial majority of the members of our management team as well as the management team of our overseas subsidiaries
are located in China, in which case we or the overseas subsidiaries, as the case may be, would be subject to the PRC enterprise
income tax at the rate of 25% on worldwide income. If the PRC tax authorities determine that our BVI holding company is a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. Under the
EIT Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends paid
to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have
such establishment or place of business but the dividends are not effectively connected with such establishment or place of business,
to the extent such dividends are derived from sources within the PRC. In addition, any gain realized on the transfer of shares
by such investors is also subject to PRC tax at a rate of 10%, if such gain is regarded as income derived from sources within
the PRC. If we are deemed a PRC resident enterprise, dividends paid on our ordinary shares, and any gain realized from the transfer
of our ordinary shares, may be treated as income derived from sources within the PRC and may as a result be subject to PRC taxation.
Furthermore, if we are deemed a PRC resident enterprise, dividends paid to individual investors who are non-PRC residents and
any gain realized on the transfer of ordinary shares by such investors may be subject to PRC tax at a current rate of 20% (which
in the case of dividends may be withheld at source). Any PRC tax liability may be reduce under applicable tax treaties or tax
arrangements between China and other jurisdictions. If we or any of our subsidiaries established outside China are considered
a PRC resident enterprise, it is unclear whether holders of our ordinary shares would be able to claim the benefit of income tax
treaties or agreements entered into between China and other countries or areas.
U.S.
Federal Income Taxation
The
following is a discussion of certain material U.S. federal income tax consequences of the acquisition, ownership and disposition
of our ordinary shares. It does not purport to be a comprehensive description of all of the tax considerations that may be relevant
to a particular person’s situation. The discussion applies only to holders that hold their ordinary shares as capital assets
(generally property held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended,
or the Code. This discussion is based on the Code, income tax regulations promulgated thereunder, judicial positions, published
positions of the Internal Revenue Service, or the IRS, and other applicable authorities, all as in effect as of the date hereof
and all of which are subject to change, possibly with retroactive effect. This discussion is general in nature and is not exhaustive
of all possible tax considerations, nor does the discussion address any state, local or foreign tax considerations or any U.S.
tax considerations (e.g., estate or gift tax) other than U.S. federal income tax considerations, that may be applicable to particular
holders.
This
discussion does not address all aspects of U.S. federal income taxation that may be relevant in light of particular circumstances,
nor does it address the U.S. federal income tax consequences to persons who are subject to special rules under U.S. federal income
tax law, including:
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(a)
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banks,
insurance companies or other financial institutions;
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(b)
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persons
subject to the alternative minimum tax;
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(c)
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tax-exempt
organizations;
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(d)
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controlled
foreign corporations, passive foreign investment companies and corporations that accumulate earnings to avoid United States
federal income tax;
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(e)
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certain
former citizens or long-term residents of the United States;
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(f)
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dealers
in securities or currencies;
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(g)
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traders
in securities that elect to use a mark-to-market method of accounting for their securities holdings;
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persons
that own, or are deemed to own, more than five percent of our capital stock;
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holders
who acquired our stock as compensation or pursuant to the exercise of a stock option; or
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persons
who hold our shares as a position in a hedging transaction, “straddle,” or other risk reduction transaction.
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For
purposes of this discussion, a U.S. holder is (i) an individual who is a citizen or resident of the United States for U.S. federal
income tax purposes; (ii) 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 treated as such under applicable U.S. tax laws), any state thereof,
or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source;
or (iv) a trust if (a) a U.S. court 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 (b) it has a valid election in effect under
applicable law and regulations to be treated as a U.S. person for U.S. federal income tax purposes. A non-U.S. holder is a holder
that is neither a U.S. holder nor a partnership or other entity classified as a partnership for U.S. federal income tax purposes.
In
the case of a partnership or entity classified as a partnership for U.S. federal income tax purposes, the U.S. federal income
tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. Partners
of partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them of the merger or
of the ownership and disposition of our ordinary shares.
Because
of the redomestication transaction in 2012 by which TAOP, a British Virgin Islands company, became the parent of our group, under
Section 7874 of the Code, TAOP is treated for U.S. federal tax purposes as a U.S. corporation and, among other consequences, is
subject to U.S. federal income tax on its worldwide income. This discussion assumes that Section 7874 of the Code continues to
apply to treat TAOP as a U.S. corporation for all purposes under the Code. If, for some reason (e.g., future repeal of Section
7874 of the Code), TAOP were no longer treated as a U.S. corporation under the Code, the U.S. federal income tax consequences
described herein could be materially and adversely affected.
U.S.
Federal Income Tax Consequences for U.S. Holders
Distributions
We
do not currently anticipate paying distributions on our ordinary shares. In the event that distributions are paid, however, the
gross amount of such distributions will be included in the gross income of the U.S. holder as dividend income on the date of receipt
to the extent that the distribution is paid out of current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. Such dividends will be eligible for the dividends-received deduction allowed to corporations in respect
of dividends received from other U.S. corporations. Dividends received by non-corporate U.S. holders, including individuals, may
be subject to reduced rates of taxation under current law. A U.S. holder may be eligible to claim a foreign tax credit with respect
to any PRC withholding tax imposed on dividends paid by us. However, the foreign tax credit rules are complex, and their application
in connection with Section 7874 of the Code and the Agreement Between the Government of the United States of America and the Government
of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to
Taxes on Income, or the U.S.-PRC Tax Treaty, is not entirely clear at this time. U.S. holders should consult their own tax advisors
with respect to any benefits they may be entitled to under the foreign tax credit rules and the U.S.-PRC Tax Treaty.
To
the extent that dividends paid on our ordinary shares exceed current and accumulated earnings and profits, the distributions will
be treated first as a tax-free return of tax basis on our ordinary shares, and to the extent that the amount of the distribution
exceeds tax basis, the excess will be treated as gain from the disposition of those ordinary shares. Because Section 7874 of the
Code has applied to treat TAOP as a U.S. corporation only since our redomestication in 2012, we may not be able to demonstrate
to the IRS the extent to which a distribution on our ordinary shares exceeds our current and accumulated earnings and profits
(as determined under U.S. federal income tax principles), in which case all of such distribution will be treated as a dividend
for U.S. federal income tax purposes.
Sale
or Other Disposition
U.S.
holders of our ordinary shares will recognize taxable gain or loss on any sale, exchange, or other taxable disposition of ordinary
shares equal to the difference between the amounts realized for the ordinary shares and the U.S. holder’s tax basis in the
ordinary shares. This gain or loss generally will be capital gain or loss. Under current law, non-corporate U.S. holders, including
individuals, are eligible for reduced tax rates if the ordinary shares have been held for more than one year. The deductibility
of capital losses is subject to limitations. A U.S. holder may be eligible to claim a foreign tax credit with respect to any PRC
withholding tax imposed on gain from the sale or other disposition of ordinary shares. However, the foreign tax credit rules are
complex, and their application in connection with Section 7874 of the Code and the U.S.-PRC Tax Treaty is not entirely clear at
this time. U.S. holders should consult their own tax advisors with respect to any benefits they may be entitled to under the foreign
tax credit rules and the U.S.-PRC Tax Treaty.
Unearned
Income Medicare Contribution
Certain
U.S. holders who are individuals, trusts or estates are required to pay an additional 3.8% Medicare tax on, among other things,
dividends on and capital gains from the sale or other disposition of shares of stock. U.S. holders should consult their own advisors
regarding the effect, if any, of this rule on their ownership and disposition of our ordinary shares.
U.S.
Federal Income Tax Consequences for Non-U.S. Holders
Distributions
The
rules applicable to non-U.S. holders for determining the extent to which distributions on our ordinary shares, if any, constitute
dividends for U.S. federal income tax purposes are the same as for U.S. holders. See “–U.S. Federal Income Tax Consequences
for U.S. Holders– Distributions.”
Any
dividends paid to a non-U.S. holder by us are treated as income derived from sources within the United States and generally will
be subject to U.S. federal income tax withholding at a rate of 30% of the gross amount of the dividends, or at a lower rate provided
by an applicable income tax treaty if non-U.S. holders provide proper certification of eligibility for the lower rate (usually
on IRS Form W-8BEN or Form W-8BEN-E). Dividends received by a non-U.S. holder that are effectively connected with such holder’s
conduct of a U.S. trade or business (and, if an income tax treaty applies, are attributable to a permanent establishment maintained
by the non-U.S. holder in the U.S.) are exempt from such withholding tax, provided that applicable certification requirements
are satisfied. In such case, however, non-U.S. holders will be subject to U.S. federal income tax on such dividends, net of certain
deductions, at the rates applicable to U.S. persons. In addition, corporate non-U.S. holders may be subject to an additional branch
profits tax equal to 30% or such lower rate as may be specified by an applicable tax treaty on dividends received that are effectively
connected with the conduct of a trade or business in the United States.
If
non-U.S. holders are eligible for a reduced rate of U.S. withholding tax pursuant to an applicable income tax treaty, such non-U.S.
holders may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.
Sale
or Other Disposition
Except
as described below for a reduced rate of U.S. withholding tax pursuant to an applicable income tax treaty, any gain realized by
a non-U.S. holder upon the sale or other disposition of our ordinary shares generally will not be subject to U.S. federal income
tax unless:
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the
gain is effectively connected with the conduct of a trade or business in the United States by such non- U.S. holder, and,
if an income tax treaty applies, is attributable to a permanent establishment maintained by such non- U.S. holder in the U.S.;
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the
non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the disposition,
and certain other conditions are met; or
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TAOP
is or has been a “U.S. real property holding corporation,” or USRPHC, for U.S. federal income tax purposes at
any time during the shorter of the five-year period ending on the date of disposition or the period during which the holder
has held our ordinary shares.
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Non-U.S.
holders whose gain is described in the first bullet point above will be subject to U.S. federal income tax on the gain derived
from the sale, net of certain deductions, at the rates applicable to U.S. persons. Corporate non-U.S. holders whose gain is described
in the first bullet point above may also be subject to the branch profits tax described above at a 30% rate or lower rate provided
by an applicable income tax treaty. Individual non-U.S. holders described in the second bullet point above will be subject to
a flat 30% U.S. federal income tax rate on the gain derived from the sale, which may be offset by U.S.-source capital losses,
even though such non-U.S. holders are not considered to be residents of the United States.
A
corporation will be a USRPHC if the fair market value of its U.S. real property interests equals or exceeds 50 percent of the
aggregate of its real property interests (U.S. and non-U.S.) and its assets used or held for use in a trade or business. Because
we do not currently own significant U.S. real property, we believe that we are not currently and will not become a USRPHC. However,
because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property relative to the
fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even
if we become a USRPHC, however, as long as our ordinary shares are regularly traded on an established securities market, such
ordinary shares will be treated as U.S. real property interests only if a non-U.S. holder actually or constructively holds more
than 5% of such regularly traded ordinary shares at any time during the applicable period that is specified in the Code.
Foreign
Account Tax Compliance
The
Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act (generally referred to as “FATCA”),
when applicable, will impose a U.S. federal withholding tax of 30% on payments of dividends on, and gross proceeds from dispositions
of, our ordinary shares that are held through “foreign financial institutions” (which is broadly defined for this
purpose and in general includes investment vehicles) and certain other non-U.S. entities unless various U.S. information reporting
and due diligence requirements (generally relating to ownership by U.S. persons of certain interests in or accounts with those
entities) have been satisfied or an exemption applies. An intergovernmental agreement between the United States and an applicable
foreign country may modify these requirements. U.S. Holders should consult their tax advisers regarding the effect, if any, of
the FATCA provisions on their particular circumstances.
Information
Reporting and Backup Withholding
Payments
of dividends or of proceeds on the disposition of stock made to a holder of our ordinary shares may be subject to information
reporting and backup withholding at a current rate of 24% unless such holder provides a correct taxpayer identification number
on IRS Form W-9 (or other appropriate withholding form) or establishes an exemption from backup withholding, for example by properly
certifying the holder’s non-U.S. status on a Form W-8BEN, Form W-8BEN-E or another appropriate version of IRS Form W-8.
Payments of dividends to holders must generally be reported annually to the IRS, along with the name and address of the holder
and the amount of tax withheld, if any. A similar report is sent to the holder. Pursuant to applicable income tax treaties or
other agreements, the IRS may make these reports available to tax authorities in the holder’s country of residence.
Backup
withholding is not an additional tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced
by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained
from the IRS, provided that the required information is furnished to the IRS in a timely manner.
F.
Dividends and Paying Agents
Not
applicable.
G.
Statement by Experts
Not
applicable.
H.
Documents on Display
We
have filed this annual report on Form 20-F with the SEC under the Exchange Act. Statements made in this report as to the contents
of any document referred to are not necessarily complete. With respect to each such document filed as an exhibit to this report,
reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
We
are subject to the informational requirements of the Exchange Act as a foreign private issuer and file reports and other information
with the SEC. Reports and other information filed by us with the SEC, including this report, may be inspected and copied at the
public reference room of the SEC at 100 F Street, N.E., Washington D.C. 20549. You can also obtain copies of this report by mail
from the Public Reference Section of the SEC, 100 F. Street, N.E., Washington D.C. 20549, at prescribed rates. Additionally, copies
of this material may be obtained from the SEC’s Internet site at http://www.sec.gov. The SEC’s telephone number
is 1-800-SEC-0330. In accordance with NASDAQ Stock Market Rule 5250(d), we will also post this annual report on Form 20-F on our
website at www.taop.com. In addition, we will provide hardcopies of our annual report free of charge to shareholders upon
request.
As
a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly
reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing
profit recovery provisions contained in Section 16 of the Exchange Act.
I.
Subsidiary Information
Not
applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
We
deposit surplus funds with Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. Most
of our outstanding debt instruments carry fixed rates of interest. Our operations generally are not directly sensitive to fluctuations
in interest rates. There was no long-term debt outstanding as of December 31, 2020 and 2019. A hypothetical 1.0% increase in the
annual interest rates for all of our credit facilities under which we had outstanding borrowings at December 31, 2020 would increase
net loss before income taxes by approximately $62,100 or less than 1% for the year ended December 31, 2020. Management monitors
the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative
to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate
risk.
Foreign
Exchange Risk
While
our reporting currency is the U.S. dollar, substantially all of our consolidated revenues and consolidated costs and expenses
are denominated in RMB. Substantially all of our assets are denominated in RMB except for cash. As a result, we are exposed to
foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between the
U.S. dollar and the RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as
expressed in our U.S. dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the
balance sheet dates and revenue and expenses are translated at the average exchange rates and equity is translated at historical
exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining
other comprehensive income, a component of equity. An average appreciation (depreciation) of the RMB against the U.S. dollar of
5% would increase (decrease) our comprehensive income by $1.2 million based on our outstanding revenues, costs and expenses, assets
and liabilities denominated in RMB as of December 31, 2020. As of December 31, 2020, our accumulated other comprehensive income
was approximately $23 million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign
exchange risk.
The
value of RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political
and economic conditions. Since July 2005, RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China
regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, RMB may
appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that
in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign
exchange market.
Inflation
Inflationary
factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we
do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate
of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general
and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased
costs.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A.
Debt Securities
Not
applicable.
B.
Warrants and Rights
Not
applicable.
C.
Other Securities
Not
applicable.
D.
American Depositary Shares
We
do not have any American Depositary Shares.