UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

 

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the fiscal year ended December 31, 2019

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report _______________________

 

For the transition period from _________________ to _______________________

 

Commission file number 001-36896

 

Mercurity Fintech Holding Inc. 

(Exact name of Registrant as specified in its charter)

 

N/A 

(Translation of Registrant’s name into English)

 

Cayman Islands 

(Jurisdiction of incorporation or organization)

 

Room 003, Floor 15, Building No.1 B
No. 38 Zhongguancun Avenue
Haidian District, Beijing 100086
People’s Republic of China 

(Address of principal executive offices)

 

Frank Zhigang Zhao
Chief Financial Officer
Mercurity Fintech Holding Inc.
Room 003, Floor 15, Building No.1 B
No. 38 Zhongguancun Avenue
Haidian District, Beijing 100086
People’s Republic of China
Phone: +86 5360-6428 

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
American depositary shares, each
representing 360 ordinary shares, par value
US$0.00001 per share
MFH The Nasdaq Capital Market
Ordinary Shares, par value
US$0.00001 per share*
  The Nasdaq Capital Market

 

* Not for trading, but only in connection with the listing on the Nasdaq Capital Market of American depository shares, each representing 360 ordinary shares

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

2,108,869,528 Ordinary Shares (excluding ordinary shares in the form of ADS that are reserved for issuance upon the exercise of share awards) as December 31, 2019.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨  No x

 

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ¨  No x

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x  No ¨

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 Large accelerated filer   ¨   Accelerated filer   ¨
Non-accelerated filer   x   Emerging growth company   x

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.

¨

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP x International Financial Reporting Standards
as issued by the International Accounting
Standards Board
¨
Other ¨

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

¨ Item 17   ¨ Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Yes ¨   No x

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. 

Yes ¨ No ¨

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I    2
ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 2
ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE 2
ITEM 3.  KEY INFORMATION 2
ITEM 4.  INFORMATION ON THE COMPANY 34
ITEM 4A.  UNRESOLVED STAFF COMMENTS 50
ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS 50
ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 60
ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 68
ITEM 8.  FINANCIAL INFORMATION 70
ITEM 9.  THE OFFER AND LISTING 71
ITEM 10.  ADDITIONAL INFORMATION 72
ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 87
ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 87
PART II    88
ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 88
ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 88
ITEM 14E.  USE OF PROCEEDS 89
ITEM 15.  CONTROLS AND PROCEDURES 89
ITEM 16.    90
ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT 90
ITEM 16B.  CODE OF ETHICS 90
ITEM 17C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES 90
ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 91
ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 91
ITEM 16F.  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 91
ITEM 16G.  CORPORATE GOVERNANCE 92
ITEM 16H.  MINE SAFETY DISCLOSURE 93
PART III    93
ITEM 17.  FINANCIAL STATEMENTS 93
ITEM 18.  FINANCIAL STATEMENTS 93
ITEM 19.  EXHIBITS 93

 

i

 

 

INTRODUCTION

 

Conventions Used in this Annual Report

 

In this annual report, unless otherwise indicated or the context otherwise requires, references to:

 

·“we,” “us,” “our company,” or “our” refers to Mercurity Fintech Holding Inc., which was formerly known as JMU Limited and Wowo Limited, its subsidiaries and its consolidated affiliated entities;

 

·“ordinary shares” refer to our ordinary shares, par value US$0.00001 per share;

 

·“ADS” refers to our American depositary shares, each of which represents 360 ordinary shares;

 

·“ADR” refers to American depositary receipt;

 

·“Our VIEs” refers to (i) Beijing Kuali Yitong Technology Co., Ltd., or Kuali Yitong, and (ii) Beijing Lianji Technology Co., Ltd., or Lianji, which, together with Kuali Yitong, are consolidated by us as variable interest entities;

 

·“Our WFOE” or “Lianji Future” refers to Beijing Lianji Future Technology Co., Ltd., our subsidiary in China that is a wholly foreign-owned enterprise and entered into contractual arrangements that give it effective control over Our VIEs;

 

·“China” or the “PRC” refers to the People’s Republic of China excluding, for the purpose of this annual report only, Hong Kong, Macau and Taiwan;

 

·“Renminbi” or “RMB” refers to the legal currency of China; and

 

·“$,” “US$,” “dollar” or “U.S. dollar” refers to the legal currency of the United States.

 

Our reporting and functional currency is U.S. dollar. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. This annual report contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at the rate of RMB6.9618 to US$1.00, the exchange rate as set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System in effect as of December 31, 2019.

 

FORWARD-LOOKING STATEMENTS

 

Special Note Regarding Forward-Looking Statements

 

This annual report contains forward-looking statements that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about us and our industry. In some cases, these forward-looking statements can be identified by words or phrases such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “going forward,” “intend,” “ought to,” “plan,” “project,” “potential,” “seek,” “may,” “might,” “can,” “could,” “will,” “would,” “shall,” “should,” “is likely to” and the negative form of these words and other similar expressions. The forward-looking statements included in this annual report relate to, among others:

 

·our goals and strategies;

 

·our prospects, our business development, the growth of our operations, and our financial condition and results of operations;

 

 

 

·our plans to enhance customer experience, upgrade our blockchain technologies and increase our service offerings;

 

·our expectations regarding demand for and market acceptance of our blockchain-based services;

 

·global competition in our industry; and

 

·fluctuations in general economic and business conditions.

 

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations could later be found to be incorrect. Our actual results could be materially different from our expectations. You should thoroughly read this annual report and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

This annual report contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. Our industry might not grow at the rate projected by market data, or at all. Failure of our industry to grow at the projected rate may have a material adverse effect on our business and the market price of our ADSs. Furthermore, if any one or more of the assumptions underlying the market data is later found to be incorrect, actual results could differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A.           Selected Financial Data

 

The following selected consolidated statements of operations data for the years ended December 31, 2017, 2018 and 2019, and selected consolidated balance sheet data as of December 31, 2017, 2018 and 2019, have been derived from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statements of operations data for the years ended December 31, 2015 and 2016, and consolidated balance sheet data as of December 31, 2015 and 2016 are derived from our consolidated financial statements not included in this annual report, which have been restated due to the divestment of the discontinued operations in 2019. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this selected financial data section together with our consolidated financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.

 

2

 

 

Selected Consolidated Financial Data

 

    For the years ended December 31,  
    2015
(Note)
    2016
(Note)
    2017
(Note)
    2018
(Note)
    2019  
    (US$ in thousands, except share and share related data)  
Selected consolidated statements of operations data:                              
Revenues                              
Third parties     -       -       -       -       1,738  
Total revenues     -       -       -       -       1,738  
Cost of revenues     -       -       -       -       (257 )
Gross (loss)/profit     -       -       -       -       1,481  
Operating expenses:                                        
Selling and marketing     (33 )     -       -       -       -  
General and administrative     (4,975 )     (1,513 )     (1,440 )     (1,809 )     (1,025 )
Impairment of goodwill     -       -       -       -       -  
Total operating expenses     (5,008 )     (1,513 )     (1,440 )     (1,809 )     (1,025 )
(Loss)/income from operations     (5,008 )     (1,513 )     (1,440 )     (1,809 )     456  
Interest income, net     -       -       -       -       -  
Other income, net     45       -       -       -       27  
(Loss)/income before provision for income taxes     (4,963 )     (1,513 )     (1,440 )     (1,809 )     483  
Provision for income tax benefits     -       -       -       -       -  
(Loss)/Income from continuing operations     (4,963 )     (1,513 )     (1,440 )     (1,809 )     483  
Discontinued operations:                                        
Loss from discontinued operations     (88,607 )     (23,780 )     (160,459 )     (121,431 )     (1,708 )
Net loss     (93,570 )     (25,293 )     (161,899 )     (123,240 )     (1,225 )
Net loss attributable to holders of ordinary shares     (95,935 )     (25,293 )     (161,899 )     (123,240 )     (1,225 )

 

 

 

Note:Due to the divestment of our B2B business in July 2019, the results of operations from the B2B business is reclassified as discontinued operations and the consolidated statements of operations for the year ended December 31, 2015, 2016, 2017 and 2018 have been restated to reflect such reclassification.

 

   As of December 31, 
    2015    2016    2017(1)   2018    2019 
    (in US$ thousands) 
Selected consolidated balance sheet data:                         
Total current assets   41,083    13,428    12,087    4,619    2,134 
Total assets   342,774    274,045    134,173    5,025    8,871 
Total current liabilities   24,950    15,227    20,837    20,289    837 
Total liabilities   38,093    25,648    30,623    27,211    837 
Total shareholders’ equity/(deficit)   304,681    248,397    103,550    (22,186)   8,035 
Total liabilities and shareholders’ equity   342,774    274,045    134,173    5,025    8,871 

 

 

(1)We reclassified one transaction occurred in 2017 from online direct sales to online platform services, thus assets and liabilities in relation to this transaction were netted off according to the terms in the online platform services contract. Such adjustment had no impact on our net liabilities.

 

B.            Capitalization and Indebtedness

 

Not applicable.

 

3

 

 

C.           Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.           Risk Factors

 

Risks Relating to Our Business and Industry

 

We have a limited operating history of blockchain-based digital asset infrastructure solutions services and our business model is subject to uncertainties, which makes it difficult to evaluate our business.

 

We disposed of our business of providing integrated B2B services to food service suppliers and customers in July 2019. We started to provide blockchain-based digital asset infrastructure solutions services in May 2019. The limited history of our current operations makes it difficult for you to evaluate our business, financial performance and prospects, and our historical growth rate might not be indicative of our future performance. We cannot assure you that our current digital asset infrastructure solutions business will grow as rapidly as we expect or achieve the critical mass needed for long-term success. We design and develop digital asset transaction platforms based on blockchain technologies for customers to facilitate asset trading, asset digitalization and cross-border payments and provide supplemental services for such platforms, such as customized software development services, maintenance services and compliance support services, which is still a new business model, and we face consistent challenges to innovate our business and service model to serve our customers. Given the limited history of our business model and the fast and iterative developments in the blockchain technology sector, it is difficult to predict if we can achieve our expected business growth in the future, and the market might evolve in ways that are difficult to anticipate. You should consider our prospects in light of the risks and uncertainties that companies in a rapidly evolving market might encounter. These risks and difficulties include, but are not limited to:

 

·a new and relatively unproven business model;

 

·our ability to anticipate and adapt to a developing market and industry;

 

·market acceptance of our platform-based products and services;

 

·high expenditures associated with our technology upgrading, brand promotion and marketing activities;

 

·our ability to attract sufficient customers and business partners in the blockchain and digital asset industry and generate sufficient cash flow;

 

·difficulties in managing rapid growth in personnel and operations; and

 

·our ability to compete in the market.

 

We cannot be certain that our business strategy will be successful or that we will successfully address these risks. Failure to address any of the risks described above could have an adverse effect on our business, financial condition and results of operations.

 

We have a history of losses, have spent substantial amounts in operating expenses and could require additional funding in the future.

 

We have incurred net losses since our inception. We incurred operating loss of US$160.5 million, US$121.4 million and US$1.7 million in 2017, 2018 and 2019, respectively, from our B2B business which was disposed of in July 2019 and treated as discontinued operations. We incurred net income of US$0.5 million in connection with our current digital asset infrastructure solutions business for the year ended December 31, 2019.

 

4

 

 

We historically spent, and expect to continue to spend, significant amounts in operating expenses in developing our business. We received net proceeds of US$37.3 million from our initial public offering on April 8, 2015 and the underwriters’ exercise of the over-allotment option, after deducting underwriting discounts and commissions and offering expenses payable by us. Additionally, we received US$15.0 million in a private placement transaction with Mr. Maodong Xu in September 2015. In May 2017, we received a loan of RMB35.0 million (US$5.4 million) from one of our principal shareholders. In April 2018, we received additional loans of RMB70.0 million (US$11.1 million) from Ms. Xiaoxia Zhu and Ms. Huimin Wang. In May 2020, we received US$0.3 million upon the first closing of a private placement with Universal Hunter (BVI) Limited and, pursuant to the share purchase agreement with Universal Hunter (BVI) Limited, we expect to receive additional US$0.7 million when this private placement transaction is fully closed. We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs in the next twelve months. However, we may require additional cash due to changing business conditions or other future developments, including any investments we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to obtain a credit facility or sell additional equity or debt securities. The sale of additional equity securities could result in dilution of our existing shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot be certain that additional funding will be available to us on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us when needed, we may have to significantly delay, scale back or discontinue a certain portion of our operations. Any of these events could significantly harm our business, financial condition and prospects.

 

We may need to recognize significant impairment losses in connection with past and future acquisitions, which may have a material and adverse effect on our results of operations.

 

We acquired Mercurity Limited (previously known as Unicorn Investment Limited), in May 2019 to establish our blockchain-based infrastructure solutions digital asset business. In March 2020, we acquired NBpay Investment Limited, or NBpay, to further strengthen our capabilities in the blockchain-enabled payment solutions. We may acquire other companies that are complementary to our business in the future.

 

We record goodwill if the purchase price paid in an acquisition exceeds the amount assigned to the fair value of the assets acquired and liabilities assumed, and we have intangible assets without determinable useful lives obtained from the acquisition of Mercurity Limited. We are required to test goodwill and intangible assets without determinable useful lives for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired in accordance with ASC 350, “Intangibles – Goodwill and Other.” As of December 31, 2019, the carrying amount of goodwill amounted to approximately US$5.5 million and the intangible assets amounted to approximately US$1.2 million after the annual impairment test in 2019. We did not recognize any impairment loss in relation to these assets. If the carrying amount of goodwill or intangible assets without determinable useful lives in connection with past or future acquisitions is determined to be further impaired, we will be required to recognize additional impairment losses and our results of operations will be adversely and materially affected.

 

We have a limited customer base. If we lose any of our customer, or if the volume of business with such customers decline, our revenues may be significantly affected.

 

As of the date of this annual report, we have service agreements with one customer for our current blockchain-based digital asset infrastructure solutions business. Due to our very limited customer base, any of the following events may cause a material decline in our revenue and have a material adverse effect on our results of operations:

 

·reductions, delays or cessation of purchases from the existing customer;

 

·loss of the existing customer and our inability to find new customers that can generate the same volume of business; and

 

·the existing customer’s failure to make timely payment for our services.

 

5

 

 

We cannot assure you that our relationships with these major customers will continue to develop or these significant customers will continue to generate significant revenue for us in the future.

 

Blockchain technology and digital assets are subject to a number of inherent risks that may impact our ability to provide the services we are developing and adversely affect an investment in us.

 

Blockchain technology and digital assets are subject to a number of inherent risks, including reliability risks, security risks, and risks associated with human error, that may impact our ability to provide the services we are developing. For example, a blockchain-based platform’s functionality depends on the internet, and a significant disruption in internet connectivity could disrupt a platform’s operations until the disruption is resolved; such disruption may have an adverse effect on the value of the digital assets traded on a platform. In addition, a hacking or service attack on a platform may cause temporary delays in block creation on the blockchain and in the transfer of digital assets recorded on the chain. Any disruptions, attacks or other security breaches, or the perception that our blockchain technology is unreliable for any reason, may have a material adverse effect on the value of the digital assets, investment in the digital assets and the operations and success of our business operations and financial results.

 

In addition, digital assets based on blockchain technology can only be transferred with the private key associated with a platform’s address in which the digital assets are held. To the extent a private key is lost, destroyed, or otherwise compromised and no backup of the private key is accessible, we will be unable to transfer the digital assets held in a platform’s addresses associated with that private key. Consequently, the digital assets associated with such address will effectively be lost, which would adversely affect an investment in digital assets.

 

We and our customers may be subject to the risks encountered by the digital asset exchanges we partner with, including a malicious hacking, sale of a digital asset exchange, loss of the digital assets by the exchange, and other risks. Many digital asset exchanges do not provide insurance and may lack the resources to protect against hacking and theft. If a material amount of our digital assets or the digital assets of our customers are held by exchanges, we and our customers may be materially and adversely affected if an exchange suffers a cyberattack or incurs financial problems.

 

Furthermore, the recording of digital asset transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the transaction or, in theory, control or consent of a majority of the processing power on a certain blockchain platform. Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer of digital assets or a theft of such digital assets generally will not be reversible. We, our customers and our partners may not be capable of seeking compensation for any such transfer or theft. It is possible that, through computer or human error, or through theft or criminal action, digital assets could be transferred in incorrect amounts or to unauthorized third parties. To the extent that we, our customers or our partners are unable to seek a corrective transaction with such third party or are incapable of identifying the third party that has received the digital assets through error or theft, we, our customers or our partners will be unable to revert or otherwise recover incorrectly transferred digital assets. To the extent that we, our customers and our partners are unable to seek redress for such error or theft, such loss could adversely affect our reputation and our business.

 

The growth of the blockchain industry in general, as well as the blockchain networks, is subject to a high degree of uncertainty.

 

The factors affecting the further development of the blockchain and digital asset industry include uncertainties regarding:

 

·worldwide growth in the adoption and use of digital assets, and other blockchain technologies;

 

·government and quasi-government regulations of digital assets and other blockchain assets and their use, or restrictions on or regulation of access to and operation of blockchain networks or similar systems;

 

·the maintenance and development of the open-source software protocol of the blockchain networks;

 

·changes in consumer demographics and public tastes and preferences;

 

6

 

 

·the availability and popularity of other forms or methods of buying and selling goods and services, or trading assets including new means of using traditional currencies or existing networks;

 

·general economic conditions and the regulatory environment relating to digital assets; and

 

·the popularity or acceptance of blockchain-enabled transaction services.

 

Blockchain networks are based on software protocols that govern peer-to-peer interactions between computers connected to these networks. The suitability of the networks for our business, depends upon a variety of factors, including, but not limited to:

 

·the effectiveness of the informal groups of developers contributing to the protocols that underlie the networks;

 

·the effectiveness of the network validators (sometimes called “miners”) and the network’s consensus mechanisms to effectively secure the networks against confirmation of invalid transactions;

 

·disputes among the developers or validators of the networks;

 

·changes in the consensus or validation schemes that underlie the networks, including, without limitation, shifts between so-called “proof of work” and “proof of stake” schemes;

 

·the failure of cybersecurity controls or security breaches of the networks;

 

·the existence of other competing and operational versions of the networks, including, without limitation, so-called “forked” networks;

 

·the existence of undiscovered technical flaws in the networks;

 

·the development of new or existing hardware, software tools, or mechanisms that could negatively impact the functionality of the systems;

 

·the price of blockchain-based digital assets associated with the networks;

 

·intellectual property rights-based claims or other claims against the networks’ participants; and

 

·the maturity of the computer software programming languages used in connection with the networks.

 

The digital assets industry as a whole has been characterized by rapid changes and innovations and are continually evolving. Although blockchain networks and blockchain-based digital assets have experienced significant growth in recent years, the slowing or stopping of the development, general acceptance and adoption and usage of these networks and assets may materially adversely affect our business plans and results of operations.

 

As we acquire, dispose of or restructure our businesses, product lines, and technologies, we may encounter unforeseen costs and difficulties that could impair our financial performance

 

We launched our Mercury Plan in April 2020, which focuses on acquisitions of global digital asset service providers in the sectors of payments, digitalization and transaction. Under the “Mercury Plan,” we actively explore acquisition prospects that would complement our existing services, augment our market coverage and distribution ability, or enhance our capabilities. As a result, we may seek to make acquisitions of companies, products, or technologies, or we may reduce or dispose of certain product lines or technologies that no longer fit our business strategies. For regulatory or other reasons, we may not be successful in our attempts to acquire or dispose of businesses, products, or technologies, resulting in significant financial costs, reduced or lost opportunities, and diversion of management’s attention. Managing an acquired business, disposing of product technologies, or reducing personnel entails numerous operational and financial risks, including, among other things:

 

7

 

 

·difficulties in assimilating acquired operations and new personnel or separating existing business or product groups;

 

·diversion of management’s attention away from other business concerns;

 

·amortization of acquired intangible assets;

 

·adverse customer reaction to our decision to cease support for a product; and

 

·potential loss of key employees or customers of acquired or disposed operations.

 

There can be no assurance that we will be able to achieve and manage successfully any such integration of potential acquisitions, disposition of product lines or technologies, or reduction in personnel or that our management, personnel, or systems will be adequate to support continued operations. Any such inabilities or inadequacies could have a material adverse effect on our business, operating results, or financial condition.

 

Domestic and international regulatory regimes governing blockchain technologies, digital assets, distribution and utilization of digital assets is uncertain, and new regulations or policies may materially adversely affect the development and the value of certain digital assets.

 

Blockchain and distributed ledger platforms are recent technological innovations, and the regulatory schemes to which digital assets may be subject have not been fully explored or developed. Regulation of digital assets varies from country to country as well as within countries. In some cases, existing laws have been interpreted to apply to blockchain-based technologies and digital assets, and in other cases, jurisdictions have adopted laws, regulations or directives that specifically affect digital assets, and some jurisdictions have not taken any regulatory stance on digital assets and or have explicitly declined to apply regulation. Accordingly, there is no clear regulatory framework applicable to blockchain platforms or digital asset products, and laws that do apply at times may overlap or change. Regulation in these areas is likely to rapidly evolve as government agencies take regulatory actions to monitor companies and their activities with respect to these areas.

 

China has promulgated laws and restrictions against illegal activities conducted through blockchain technologies. The blockchain-based technologies may be used in illegal ways and Chinese government may regulate, control or ban the blockchain-based activities. In addition, if China prohibits or restricts blockchain-based technologies and digital assets in laws and regulations it will promulgate in the future, we may be subject to legal and other liabilities, which may have a material adverse effect on our business. We cannot assure you that the blockchain-based technologies and digital assets will not be used in illegal activities by third parties and not be prohibited or restricted in China in the future.

 

The further development and acceptance of blockchain platforms, which represent a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain platforms and blockchain assets would have a material adverse effect on our business plans and could have a material adverse effect on us.

 

8

 

 

Blockchain technologies are subject to unfavorable regulatory action in one or more jurisdictions.

 

Blockchain technologies and digital assets have been the subject of scrutiny by various regulatory bodies around the world. We could be impacted by one or more regulatory inquiries or actions, including but not limited to restrictions on the use of blockchain technology, which could impede or limit the development of our anticipated blockchain-based digital asset infrastructure solutions and adversely affect our results of operations.

 

Any harm to our Mercurity brand or reputation may materially and adversely affect our business and results of operations.

 

We believe that the recognition and reputation of our Mercurity brand among is critical to our business and competitiveness. Many factors, some of which are beyond our control, are important to maintaining and enhancing our brand. These factors include our ability to: 

 

·enhance the quality and safety of our blockchain-based digital asset infrastructure solutions for our customers;

 

·maintain or improve customers’ satisfaction with our platform products and related services;

 

·increase brand awareness through marketing and brand promotion activities; and

 

·preserve our reputation and goodwill in the event of any negative publicity on our platform products, internet security, data privacy, price, or other issues affecting us or the blockchain technology sector.

 

A public perception that we do not provide reliable digital asset infrastructure solutions or satisfactory services, even if factually incorrect or based on isolated incidents, could damage our reputation, diminish the value of our brand, undermine the trust and credibility we have established and have a negative impact on our ability to attract new customers or retain our current customers. If we are unable to maintain our reputation, enhance our brand recognition or increase positive awareness of our website, products and services, it may be difficult to maintain and grow our customer base, and our business and growth prospects may be materially and adversely affected.

 

If we are unable to offer products or services that attract new customers and new purchases from existing customers, our business, financial condition and results of operations may be materially and adversely affected.

 

The blockchain and digital asset industry is characterized by constant changes, including rapid technological evolution, continual shifts in customer demands, frequent introductions of new products and solutions and constant emergence of new industry standards and practices. Thus, our ability to maintain current customers and attract new customers will depend, in part, on our ability to respond to these changes in a cost-effective and timely manner. We need to anticipate the emergence of new technologies and assess their market acceptance. However, research and development activities are inherently uncertain, and we might encounter practical difficulties in commercializing our research and development results, which could result in excessive research and development expenses or delays. Given the fast pace with which blockchain technologies have been and will continue to be developed, we may not be able to timely upgrade our technologies in an efficient and cost-effective manner, or at all.

 

9

 

 

We also need to invest significant resources in selling and marketing efforts. We take targeted business development approaches to reach out to our potential customers and provide them with our company profile through various means, such as emails and social network media. We also attended offline marketing activities to promote our presence and brand recognition in the blockchain and digital asset industry. To continue to reach potential customers and grow our current business, we must identify and devote more of our marketing expenditures to new and evolving marketing channels, which may include mobile and virtual channels. The opportunities in and sophistication of newer marketing channels generally are relatively undeveloped and unproven, making it difficult to assess returns on investment associated with such channels, and there can be no assurance that we will be able to continue to appropriately manage and fine-tune our marketing efforts in response to these and other trends in the industry. Any failure to do so could have a material adverse effect on our business, reputation, results of operations and financial condition.

 

We face intense competition.

 

As we transition to our blockchain-enabled digital asset infrastructure solutions business, we will continue to face intense competition globally. New blockchain-based technologies are constantly evolving, and our competitors may introduce new platforms and solutions that are superior to ours. In addition, our competitors may be able to adapt more quickly to new technologies or may be able to devote greater resources to the development, marketing and sale of their products than we can. We may never establish and maintain a competitive position in the hybrid financing and logistics management businesses.

 

Some of our current or future competitors have or may have longer operating histories, stronger research and development capabilities, greater brand recognition, larger customer bases or greater financial, technical or marketing resources than we do. Smaller companies or new entrants may be acquired by, receive investment from or enter into strategic relationships with well-established and well-financed companies or investors which would help enhance their competitive positions. We cannot assure you that we will be able to compete successfully against current or future competitors, and competitive pressures may have a material and adverse effect on our business, financial condition and results of operations.

 

If we fail to adopt new technologies or adapt our digital asset platforms and systems to changing customer requirements or emerging industry standards, our business may be materially and adversely affected.

 

To remain competitive, we must be able to develop new products or enhance the capabilities related to blockchain technology that is being developed by us to keep pace with our industry’s rapidly changing technology and customer requirements.. However, the industry for blockchain technology is characterized by rapid technological changes, new product introductions, enhancements, and evolving industry standards. Our business prospects depend on our ability to develop new products and applications for our technology in new markets that develop as a result of technological and scientific advances, while improving performance and cost-effectiveness. New technologies, techniques or products could emerge that might offer better combinations of price and performance than the blockchain technology solutions that are being developed by us. It is important that we anticipate changes in technology and market demand. If we do not successfully innovate and introduce new technology into our anticipated technology solutions or effectively manage the transitions of our technology to new product and service offerings, our business, financial condition and results of operations could be adversely affected.

 

The successful operation of our business depends upon the performance and reliability of the internet and mobile telecommunications infrastructures in China.

 

Our business depends on the performance and reliability of the internet and mobile telecommunications infrastructures in China. Almost all access to the internet is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology of China. In addition, the national networks in China are connected to the internet through state-owned international gateways, which are the only channels through which a domestic user can connect to the internet outside of China. We might not have access to alternative networks in the event of disruptions, failures or other problems with China’s internet infrastructure. In addition, the internet infrastructure in China might not support the demands associated with continued growth in internet usage.

 

10

 

 

The failure of telecommunications network operators to provide us with the requisite bandwidth could also interfere with the speed and availability of our online platforms. We have no control over the costs of the services provided by the national telecommunications operators. If the prices that we pay for telecommunications and internet services rise significantly, or if the telecommunication network in China is disrupted or failed, our gross margins could be adversely affected. Technical limitations on internet use could also be developed or implemented. For example, restrictions could be implemented on personal internet use in the workplace in general or access to our website in particular. This could lead to a reduction of customers’ activities or a loss of customers altogether, which in turn could have an adverse effect on our financial position and results of operations. In addition, if internet access fees or other charges to internet users increase, our user traffic might decrease, which in turn could significantly decrease our revenues.

 

The proper functioning of our platform is essential to our business. Any failure to maintain the satisfactory performance of our platforms and systems could materially and adversely affect our business and reputation.

 

The satisfactory performance, reliability and availability of the blockchain-based digital asset platform designed and developed by us are critical to our ability to attract and retain customers and provide quality customer service. Any system interruptions caused by telecommunications failures, computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our platforms or reduced transaction processing performance could reduce the attractiveness of product and service offerings. Our servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to system interruptions, website slowdown or unavailability, delays or errors in transaction processing, loss of data or the inability to accept and fulfill customer orders. Security breaches, computer viruses and hacking attacks have become more prevalent in our industry. We have experienced in the past, and may experience in the future, such attacks and unexpected interruptions. We can provide no assurance that our current security mechanisms will be sufficient to protect our IT systems from any third-party intrusions, viruses or hacker attacks, information or data theft or other similar activities. Any such future occurrences could reduce customer satisfaction, damage our reputation and result in a material decrease in our revenue.

 

Additionally, we must continue to upgrade and improve our blockchain-based digital asset platform to meet evolving demand of our customers, and failure to do so could impede our growth. However, we cannot assure you that we will be successful in executing these technology upgrades and improvement strategies. In particular, our systems may experience interruptions during upgrades, and the new technologies or infrastructures may not be fully integrated with the existing systems on a timely basis, or at all. If our existing or future technology platform does not function properly, it could cause system disruptions and slow response times, affecting data transmission, which in turn could materially and adversely affect our business, financial condition and results of operations.

 

If we are unable to conduct our marketing activities cost-effectively, our results of operations and financial condition may be materially and adversely affected.

 

We historically incurred a great amount of expenses on a variety of different marketing and brand promotion efforts to enhance our brand recognition and increase sales of our services and products for our previous B2B business. We have very limited operating history of our current business and may need to make significant investments in sales and marketing to promote our brand recognition. Our brand promotion and marketing activities may not be well received by customers and may not result in the levels of sales that we anticipate. Marketing of blockchain-based solutions services to customers is evolving. This further requires us to enhance our marketing approaches and experiment with new marketing methods to keep pace with customer preferences. Failure to refine our existing marketing approaches or to introduce new marketing approaches in a cost-effective manner could reduce our market share, cause our revenues to decline and negatively impact our profitability.

 

Failure to protect confidential information of our customers and network against security breaches could damage our reputation and brand and substantially harm our business and results of operations.

 

A significant challenge to the blockchain and digital asset industry is the secure storage of confidential information and its secure transmission over public networks. A significant amount of transaction data is stored on the platform designed and developed by us. In addition, some digital asset transactions are settled through third-party online payment services. Maintaining complete security for the storage and transmission of confidential information on our technology platform, such as customer names, personal information and billing addresses, is essential to maintaining customer confidence.

 

11

 

 

We have adopted security policies and measures, including encryption technology, to protect our proprietary data and customer information. However, advances in technology, the expertise of hackers, new discoveries in the field of cryptography or other events or developments could result in a compromise or breach of the technology that we use to protect confidential information. We may not be able to prevent third parties, especially hackers or other individuals or entities engaging in similar activities, from illegally obtaining such confidential or private information stored on the platforms developed and maintained by us. Such individuals or entities obtaining our customers’ confidential or private information may further engage in various other illegal activities using such information. Any negative publicity on our platforms’ safety or privacy protection mechanisms and policies, and any claims asserted against us or fines imposed upon us as a result of actual or perceived failures, could have a material and adverse effect on our public image and reputation. If we give third parties greater access to our blockchain-based platform in the future as part of our business operation, it may become more challenging for us to ensure the security of our systems.

 

Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the internet and mobile platforms have recently come under increased public scrutiny. As blockchain and digital asset industry continues to evolve, we believe that increased regulation by the PRC government of data privacy on the internet is likely. We may become subject to new laws and regulations applying to the solicitation, collection, processing or use of personal or customer information that could affect how we store, process and share data with our customers. We generally comply with industry standards and are subject to the terms of our own privacy policies. Compliance with any additional laws could be expensive, and may place restrictions on the conduct of our business and the manner in which we interact with our customers. Any failure to comply with applicable regulations could also result in regulatory enforcement actions against us.

 

If our senior management is unable to work together effectively or efficiently or if we lose their services, our business may be severely disrupted.

 

Our success heavily depends upon the continued services of our management. In particular, we rely on the expertise and experience of Ms. Hua Zhou, our chairperson and chief executive officer, and our other executive officers. If our senior management cannot work together effectively or efficiently, our business may be severely disrupted. If one or more of our senior management were unable or unwilling to continue in their present positions, we might not be able to replace them easily or at all, and our business, financial condition and results of operations may be materially and adversely affected. If any of our senior management joins a competitor or forms a competing business, we may lose customers, know-how and key professionals and staff members. Our senior management has entered into employment agreements and confidentiality and non-competition agreements with us. However, if any dispute arises between our officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.

 

Substantial future sales of our shares in the public market, or the perception that these sales could occur, could cause our share price to decline.

 

Additional sales of our shares in the public market, or the perception that these sales could occur, could cause the market price of our shares to decline. As of March 31, 2020, we had 2,870,659,129 ordinary shares issued and outstanding (excluding 36,249,120 ordinary shares in the form of ADSs that are reserved for issuance upon the exercise of share awards), of which 896,477,774 ordinary shares or approximately 31.2% were held by Mr. Haohan Xu, our director. Pursuant to the Registration Rights Agreements we entered into with Mr. Haohan Xu on May 21, 2019, we agreed to provide Mr. Haohan Xu with certain registration rights in respect of our ordinary shares held by him, subject to certain limitations. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.” Registration of these shares under the Securities Act of 1933, or the Securities Act, would result in these shares becoming freely tradable without restrictions immediately upon the effectiveness of the registration statement. If part or all of these shares are sold in the public market or if any other existing shareholders sell a substantial amount of their shares, the prevailing market price for our shares could be adversely affected. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

 

12

 

 

We have limited insurance coverage and could incur losses resulting from liability claims or business interruptions.

 

As the insurance industry in China is still developing, insurance companies in China currently offer limited business insurance products. We do not have any product liability insurance or business interruption insurance. As we continue to expand our business, we could be increasingly exposed to various liability claims related to our products and services. Any liability claims, business disruption, or natural disaster could result in substantial costs and the diversion of resources, which would have an adverse effect on our business and results of operations.

 

We might not be able to adequately protect our intellectual property rights.

 

We believe our domain names, trademarks, technology know-how and other intellectual properties are important to our business and our future prospects. We have been investing resources to develop our own intellectual properties and we take prudent steps to protect our intellectual properties and know-how. But we cannot assure you such steps would be sufficient to prevent the infringement of our intellectual properties. If we fail to adequately protect our intellectual property rights, including our rights in know-how or our trademark, it could have an adverse effect on our operations.

 

The validity, enforceability and scope of protection available under intellectual property laws with respect to the internet industry in China are uncertain and still evolving. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective. Accordingly, protection of intellectual property rights in China might not be as effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation to enforce or defend our intellectual property rights or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and the diversion of resources and management’s attention.

 

Companies in the internet and technology industries are frequently involved in litigation based on allegations of infringement of intellectual property rights, unfair competition and other violations of third parties’ rights. From time to time, we could face allegations of trademark, copyright, patent and other intellectual property rights infringement of third parties. Such allegations of intellectual property rights infringements could come from our competitors and there could also be allegations that we are involved in unfair trade practices.

 

We may face intellectual property infringement claims or other related disputes, which could be time-consuming, costly to defend or settle and result in the loss of significant rights.

 

We may be subject to infringement claims from time to time or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties that may cover some of our technologies, products and services. The blockchain and digital asset industry is characterized by companies that hold large numbers of patents and other intellectual property rights and that vigorously pursue, protect and enforce these rights. Patent litigation has increased in recent years owing to increased assertions made by intellectual property licensing entities and increasing competition and overlap of product functionality in our markets. Additionally, we may in the future to enter into licensing agreements with third parties for the use of their proprietary technologies, primarily software development tools, in developing our platform products. As with any business relationship, we may face disputes and lawsuits related to those intellectual property licensing agreements. As our operations grow, the likelihood of us becoming involved in intellectual property related lawsuits and disputes to protect or defend our intellectual property rights and the use of third-party intellectual property rights may increase.

 

In addition, it is extremely difficult for us to monitor all of the patent applications that have been filed in the PRC or in other countries or regions and whether, if such pending patents are granted, such patents would have a material and adverse effect on our business if our product and service offering were to infringe upon them.

 

13

 

 

Other third parties may file claims against us or our customers alleging that our products, processes, or technologies infringe third-party intellectual property rights. Regardless of their merits or resolutions, such claims could be costly to defend or settle and could divert the efforts and attention of our management and technical personnel. We do not know whether we could prevail in any such proceeding given the complex technical issues and inherent uncertainties involved in intellectual property litigations. Any unfavorable results we may receive in such proceedings could have a material adverse effect on our business, financial condition and results of operations.

 

We depend on regulatory approvals and licenses to operate in our existing markets and to gain access to new markets.

 

The internet and telecommunication industries in China are highly regulated by the PRC government and numerous regulatory authorities of the central PRC government are empowered to issue and implement regulations governing various aspects of the internet industries including foreign ownership of and licensing and permit requirements pertaining to companies in the internet industries.

 

The relevant laws and regulations are relatively new or evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain circumstances, it could be difficult to determine what actions or omissions could be deemed to be in violation of applicable laws and regulations. Our VIEs may be required to obtain and maintain the applicable Internet Information Service license, or ICP license, for value-added internet services if they operate any website in China and engage in providing commercial internet information services through such websites. Furthermore, Our VIEs could be required to obtain additional licenses. If Our VIEs fail to obtain or maintain any of the required licenses or approvals, their continued business operations could subject them to various penalties, such as confiscation of illegal net sales, fines and the discontinuation or restriction of its operations. Any such disruption in the business operations of Our VIEs will materially and adversely affect our business, financial condition and results of operations.

 

We are subject to changing laws and regulations regarding regulatory matters, corporate governance and public disclosure that have increased both our costs and the risk of non-compliance.

 

We are subject to rules and regulations by various governing bodies, including, among others, the U.S. Securities and Exchange Commission, which is charged with the protection of investors and the oversight of companies whose securities are publicly traded, and the various regulatory authorities in China and the Cayman Islands, and subject to new and evolving regulatory measures under applicable law. Our efforts to comply with new and changing laws and regulations have resulted in and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

 

Moreover, because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these regulations and any subsequent changes, we may be subject to penalty and our business may be harmed.

 

Certain audit reports included in this annual report are prepared by auditors who are not inspected by the Public Company Accounting Oversight Board, and consequently you are deprived of the benefits of such inspection.

 

Our independent registered public accounting firm that issues the audit report included in this annual report, as an auditor of companies that are traded publicly in the United States and firms registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditors are not inspected by the PCAOB.

 

In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or CSRC, and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC, and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.

 

14

 

 

On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a heightened interest in an issue that has vexed U.S. regulators in recent years. On April 21, 2020, the SEC and the PCAOB issued another joint statement reiterating the greater risk that disclosures will be insufficient in many emerging markets, including China, compared to those made by U.S. domestic companies. In discussing the specific issues related to the greater risk, the statement again highlights the PCAOB’s inability to inspect audit work paper and practices of accounting firms in China, with respect to their audit work of U.S. reporting companies.

 

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors are deprived of the benefits of PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditors’ audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our consolidated financial statements.

 

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, which if passed, would require the SEC to maintain a list of issuers for which the PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as the Nasdaq Global Select Market of issuers included on the SEC’s list for three consecutive years. On May 20, 2020, the U.S. Senate passed S. 945, the Holding Foreign Companies Accountable Act, or the Kennedy Bill. If passed by the U.S. House of Representatives and signed by the U.S. President, the Kennedy Bill would amend the Sarbanes-Oxley Act of 2002 to direct the SEC to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded “over-the-counter” if the auditor of the registrant’s financial statements is not subject to the PCAOB inspection for three consecutive years after the law becomes effective. Enactment of any of such legislations or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of the ADSs could be adversely affected, and we could be delisted if we are unable to cure the situation to meet the PCAOB inspection requirement in time. It is unclear if and when any of such proposed legislations will be enacted. Furthermore, there have been recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such deliberations were to materialize, the resulting legislation may have material and adverse impact on the stock performance of China-based issuers listed in the United States.

 

The COVID-19 outbreak could significantly disrupt our operations and adversely affect our results of operations.

 

Since December 2019, China has experienced an outbreak of COVID-19, a disease caused by a novel and highly contagious form of coronavirus. The severity of the outbreak in certain provinces resulted in travel restrictions, quarantine and social distancing measures imposed by the local governments across China and materially affected general commercial activities in China. The COVID-19 outbreak made it difficult to carry out our marketing activities to promote our products and services to potential customers and gave rise to sudden significant changes in regional and global economic conditions that could interfere with purchases of products or services. We currently are unable to predict the duration and severity of the spread of the COVID-19, and responses thereto, and the impact on our business, results of operations, financial condition, cash flows and liquidity, as these depend on rapidly evolving developments, which are highly uncertain and will be a function of factors beyond our control, such as the continued spread or recurrence of contagion, the implementation of effective preventative and containment measures, the development of effective medical solutions, financial and other market reactions to the foregoing, and reactions and responses of communities and societies.

 

15

 

 

Any similar future outbreak of a contagious disease, other adverse public health developments in China and around the world, or the measures taken by the governments of China or other countries in response to a future outbreak of a contagious disease may restrict economic activities in affected regions, resulting in reduced business volume, temporary closure of our facilities and offices or otherwise disrupt our business operations and adversely affect our results of operations.

 

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

 

Our business could be materially and adversely affected by natural disasters or the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, influenza A (H1N1), Ebola or another epidemic. Any such occurrences could cause severe disruption to our daily operations, including our fulfillment infrastructure and our customer service center, and may even require a temporary closure of our facilities. Earthquakes or other similar disasters affecting cities where we have major operations in China could materially and adversely affect our operations due to loss of personnel and damages to property, including our inventory and our technology systems. Our operation could also be severely disrupted if our suppliers, customers or business partners were affected by health epidemics or other natural disasters.

 

Risks Related to Our Corporate Structure and Dependence on our Contractual Arrangements with our Affiliates

 

If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in internet business, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in internet businesses, including the provision of internet content distribution services. Foreign investors are limited to services sections opened up in China's WTO commitments and are not allowed to own more than 50% of the equity interests in any entity conducting internet content distribution business or other value-added telecom businesses, except e-commerce business, for which there is no upper limit to the shareholding percentage for foreign investors. Additionally, any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Special Administrative Measures (Negative List) for Admission of Foreign Investment promulgated in 2019, as amended, and other applicable laws and regulations. After the divestment of our previous wholly-owned PRC subsidiary and VIE that are associated with the operations of our B2B services in July 2019, we currently conduct our operations in China principally through contractual arrangements between our wholly-owned PRC subsidiary, Lianji Future, and our consolidated affiliated entities in China, Lianji and Kuali Yitong, or Our VIEs, and their respective shareholders. Our contractual arrangements with Our VIEs and their respective shareholders enable us to exercise effective control over them and hence treat them as our consolidated affiliated entities and consolidate their results. For a detailed discussion of these contractual arrangements, see “Item 4. Information on the Company—A. History and Development of the Company.”

 

In the opinion of our PRC counsel, Beijing Dacheng Law Offices, LLP (Shanghai), our current ownership structure, the ownership structure of Our WFOE and Our VIEs, and the contractual arrangements between Our WFOE, Our VIEs, and their respective shareholders are in compliance with existing PRC laws, rules and regulations. There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Thus, we cannot assure you, however, that we will be able to enforce these contracts. Although we believe we are in compliance with current PRC regulations, we cannot assure you that the PRC government would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that might be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. If the PRC government determines that we are not in compliance with applicable laws and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, restrict or prohibit us to finance our business and operations in China, shut down our servers or block our website, require us to restructure our operations, impose additional conditions or requirements with which we might not be able to comply, levy fines, confiscate our income or the income of our PRC subsidiary or affiliated PRC entities, or take other regulatory or enforcement actions against us that could be harmful to our business. The imposition of any of these penalties would result in an adverse effect on our ability to conduct our business.

 

16

 

 

Substantial uncertainties exist with respect to the PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

 

Foreign Investment Law of the PRC was promulgated in March 2019 and took effect in January 2020, which replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments.

 

Among other things, the Foreign Investment Law expands the definition of foreign investment and introduces the principle for determining whether a company is considered a foreign-invested enterprise, or an FIE. The Foreign Investment Law specifically provides that an FIE refers to an enterprise all or part of whose capital is invested by foreign investor(s) and duly registered and established within China in accordance with Chinese law. “Foreign investment” in the Foreign Investment Law refers to investment activities directly or indirectly conducted by one or more natural persons, business entities, or otherwise organizations of a foreign country, or the Foreign Investor, within China, with the investment activities including the following situations: (i) a Foreign Investor, individually or collectively with other investors, establishes an FIE within China; (ii) a Foreign Investor acquires stock shares, equity shares, interests in assets, or other similar rights to and interests in an enterprise within China; (iii) a Foreign Investor, individually or collectively with other investors, invests in a new project within China; and (iv) foreign investments in other forms as provided by law, administrative regulations, or by the State Council.

 

Once an entity is determined to be an FIE, it shall be subject to the foreign investment restrictions or prohibitions set forth in a “negative list,” which was separately issued by the National Development and Reform Commission and the Ministry of Commerce. If the underlying business of the FIE falls within the negative list, the relevant market entry clearance, prior approval from the government authorities as mandated by the existing foreign investment legal regime would be required for establishment of the FIE.

 

The provision of value-added telecommunication services, which we conduct through Our VIEs, is currently subject to foreign investment restrictions set forth in the Catalogue of Industries for Guiding Foreign Investment, or the Catalogue, issued by the National Development and Reform Commission and the Ministry of Commerce, partially amended by Special Administrative Measures (Negative List) for Foreign Investment Access in June 2019.

 

Currently, the Foreign Investment Law divides foreign investments into direct investments and indirect investments, but there are no further provisions in indirect investments. Whether China will implement penetration supervision, to which level it will penetrate, whether it will use “control” as the judgement standard, whether it will be limited to the areas in the negative list and other issues such as the way to supervise, all remain uncertain. Considering the possibility that any future law, administrative regulations or provisions of the State Council may subject foreign companies with contractual arrangements with a PRC entity to the supervision of the Foreign Investment Law, It is unclear whether Our VIEs would be determined to be FIEs. The Foreign Investment Law provides that China may establish a foreign investment security review system to conduct security reviews on foreign investment that affect or may affect national security. Therefore, it is also unclear whether the market entry clearance shall be completed by companies with existing VIE structures like us and whether the security reviews shall be conducted on us. If such clearance or review is required, we will face uncertainties as to whether it can be timely obtained, or at all.

 

In addition, the Foreign Investment Law stipulates a five-year transition period, during which enterprises could retain original organization form. It remains uncertain as to whether the requirement of the five-year transition mean that FIEs need to modify existing contracts and other documents within five years and go through the relevant approval, filing and industrial and commercial registration procedures and as to the consequence of the failure to go through such approval and filing procedures. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and business operations.

17

 

 

 

 

We rely on contractual arrangements with Our VIEs in China and their respective shareholders for our operations, which might not be as effective as direct ownership in providing operational control.

 

Since PRC laws restrict foreign equity ownership in companies engaged in certain internet businesses in China, we rely on contractual arrangements with our consolidated affiliated entity, in which we do not hold shares, and its shareholder to operate our business in China. If we held the shares of Our VIEs, we would be able to exercise our rights as a shareholder to effect changes in their respective board of directors, which in turn could effectuate changes at the management level, subject to any applicable fiduciary obligations. However, under the current contractual arrangements, we rely on Our VIEs and their shareholders’ performance of their contractual obligations to exercise effective control. Our contractual arrangements are generally effective for the complete period Our VIEs exists. In general, neither Our VIEs nor their respective shareholders could terminate the contracts prior to the expiration date. However, the shareholders of Our VIEs might not act in the best interests of our company or might not perform its obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with our consolidated affiliated entity. We can replace the shareholder of Our VIEs at any time pursuant to our contractual arrangements with it and its shareholders. However, if any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operation of PRC law and courts and therefore will be subject to uncertainties in the PRC legal system. See “—Any failure by Our VIEs or their shareholder to perform their obligations under our contractual arrangements with them could have an adverse effect on our business.” Therefore, these contractual arrangements might not be as effective as the direct holding of shares.

 

Any failure by Our VIEs or their shareholders to perform their obligations under our contractual arrangements with them could have an adverse effect on our business.

 

Our VIEs and their shareholders could fail to take certain actions required for our business or follow our instructions despite their contractual obligations to do so. If they fail to perform their obligations under their respective agreements with us, we might have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, which might not be effective.

 

All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in certain other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements, which could make it difficult to exert effective control over our consolidated affiliated entity, and our ability to conduct our business could be adversely affected. Additionally, under PRC law, rulings by arbitrators are final. Parties cannot appeal the arbitration results in courts. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may enforce the arbitration awards only in PRC courts through arbitration award recognition proceedings, which could require additional expenses and delay.

 

Contractual arrangements with Our VIEs might result in adverse tax consequences to us.

 

Under applicable PRC tax laws and regulations, arrangements and transactions among related parties could be subject to audit or scrutiny by the PRC tax authorities within ten years after the taxable year when the arrangements or transactions are conducted. We could face adverse tax consequences if the PRC tax authorities were to determine that the contractual arrangements between Our WFOE, Our VIEs and their respective shareholders were not entered into on an arms-length basis and therefore constituted unfavorable transfer pricing arrangements. Unfavorable transfer pricing arrangements could, among other things, result in an upward adjustment on taxation. In addition, the PRC tax authorities could impose late payment fees and other penalties on our consolidated affiliated entity for the adjusted but unpaid taxes. Our results of operations could be adversely affected if our consolidated affiliated entity’s tax liabilities increase significantly or if it is required to pay late payment fees or other penalties.

 

18

 

 

The shareholders of Our VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

The shareholders of Our VIEs include Mr. Kaiming Hu, Mr. Longming Wu, a director of our company, and Ms. Hong Zhou. Mr. Hu and Mr. Wu are also beneficial owners of our company. Conflicts of interest may arise from them in their roles as directors and beneficial owners of our company and as shareholders of Our VIEs. These shareholders may breach, or cause Our VIEs to breach, or refuse to renew, the existing contractual arrangements we have with them and Our VIEs, which would have a material and adverse effect on our ability to effectively control Our VIEs and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with Our VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.

 

Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the option agreements with these shareholders to request them to transfer all of their equity interests in Our VIEs to a PRC entity or individual designated by us, to the extent permitted by PRC laws. For the shareholders who are also our directors, we rely on them to abide by the laws of the Cayman Islands and China, which provide that directors owe a fiduciary duty to the company that requires them to act in good faith and in what they believe to be the best interests of the company and not to use their position for personal gain. There is currently no specific and clear guidance under PRC laws that addresses any conflict between PRC laws and laws of Cayman Islands in respect of any conflict relating to corporate governance. The shareholders of Our VIEs have executed powers of attorney to appoint our WFOE to vote on their behalf and exercise voting rights as shareholders of Our VIEs. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of Our VIEs, we would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.

 

We rely principally on dividends and other distributions on equity paid by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we might have. Any limitation on the ability of our PRC and Hong Kong subsidiaries to pay dividends to us could have an adverse effect on our ability to conduct our business.

 

We are a holding company, and we rely principally on dividends and other distributions on equity paid by Our WFOE, and our wholly-owned Hong Kong subsidiary, Ucon Capital (HK) Limited, or Ucon HK, which is the direct holding company of Our WFOE, for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we might incur. If Our WFOE or Ucon HK, as the case may be, incurs debt on their own behalf in the future, the instruments governing the debt could restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities could require us to adjust our taxable income under the contractual arrangements Our WFOE currently has in place with our consolidated affiliated entities in a manner that would adversely affect its ability to pay dividends and other distributions to us.

 

Under PRC laws and regulations, Our WFOE, as a wholly foreign-owned enterprise in China, can pay dividends only out of its accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise such as Our WFOE is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. At its discretion, it may allocate a portion of its after-tax profits based on PRC accounting standards to other funds. These statutory reserve funds and other funds are not distributable as cash dividends. As of December 31, 2019, the paid-in registered capital of Our WFOE was nil. Our WFOE obtained the business license on April 3, 2019. According to its articles of association, our WFOE’s registered capital is US$1.5 million. The registered capital will be paid one-time within 20 years from the date of issuance of the business license. Under the subscription system of the registered capital in PRC Company Law, we only need to contribute capital before that date. Since our obligations have not expired yet, the current unpaid capital contribution is not an act of non-performance of the investment obligations and it will not affect the shareholders’ rights such as dividend rights and equity transfer rights. According to the Minutes of the National Court Work Conference for Civil and Commercial Trials promulgated by the Supreme People's Court in November 2019, the shareholder's capital contribution dates expire expeditiously in the following situations: (i) where the company is subject to execution in a case in which the people's court has taken all execution measures but there is no property available for execution and the company meets the conditions for bankruptcy but fails to apply for bankruptcy; or (ii) the period for capital contribution by the shareholders is extended by resolutions made by company's shareholders' (general) meeting or by other means after the incurrence of the company's debts. In both cases, we have the risk of contributing the capital to our WFOE before expected date. Any limitation on the ability of Our WFOE or Ucon HK to pay dividends or make other distributions to us could adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

 

19

 

 

We could lose the ability to use and enjoy assets held by Our VIEs that are important to the operation of our business if such entities go bankrupt or become subject to dissolution or liquidation proceedings.

 

As part of our contractual arrangements with Our VIEs, such entities hold certain assets that are important to the operation of our business. If Our VIEs go bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we might not be able to continue some or all of our business activities, which could adversely affect our business, financial condition and results of operations. If Our VIEs undergo voluntary or involuntary liquidation proceedings, the unrelated third-party creditors could claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could adversely affect our business, financial condition and results of operations.

 

Risks Relating to Doing Business in China

 

We could be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet businesses and companies.

 

The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it could be difficult to determine what actions or omissions could be deemed to be in violation of applicable laws and regulations. Issues, risks and uncertainties relating to PRC regulation of internet businesses include, but are not limited to, the following:

 

·new laws and regulations could be promulgated that will regulate internet activities. If these new laws and regulations are promulgated, additional licenses could be required for our operations. If our operations do not comply with these new regulations after they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties; and

 

·we operate in the blockchain and digital asset industry that is characterized by constant changes, including rapid technological evolution, continual shifts in customer demands, frequent introductions of new technologies and new industry standards and practices, which could result in new laws and regulations. Currently, the laws and regulations relating to blockchain technologies are not established and detailed enough in China and other jurisdictions. As a result, we are subject to legal and regulatory uncertainties.

 

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain any new licenses required under any new laws or regulations. There are also risks that we could be found to violate the existing or future laws and regulations given the uncertainty and complexity of China’s regulation of internet businesses.

 

20

 

 

On July 13, 2006, the Ministry of Industry and Information Technology, or the MIIT, the successor of the Ministry of Information Industry, issued the Notice of the Ministry of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecom Services. This notice prohibits domestic telecom services providers from leasing, transferring or selling telecom business operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecom business in China. According to this notice, either the holder of a value-added telecom business operating license or its shareholders must directly own the domain names and trademarks used by such license holders in their provision of value-added telecom services. The notice also requires each license holder to have the necessary facilities, including servers, for its approved business operations and to maintain such facilities in the regions covered by its license. Pursuant to the Administrative Measures on Internet Information Services effective since January 2011, as amended, commercial internet information services are subject to the licensing system. In case the operator provides commercial internet information services without obtaining an operation license or the services provided by the operator exceed the scope of the services as permitted by the operation license, the relevant telecom administrative agency could order to have such act corrected within a specified period. Where there is illegal income, the illegal income could be confiscated and a fine of no less than three times but no more than five times the value of the illegal income would be imposed; where there is no illegal income or the illegal income does not exceed RMB50,000, a fine of no less than RMB100,000 but no more than RMB1,000,000 could be imposed; in the event of a serious case, the operator shall be ordered to close down its website.

 

Uncertainties with respect to the PRC legal system could have an adverse effect on us.

 

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions in a civil law system may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always consistent, and enforcement of these laws, regulations and rules involves uncertainties, which could limit the available legal protections.

 

In addition, the PRC administrative and court authorities have significant discretion in interpreting and implementing or enforcing statutory rules and contractual terms, and it could be more difficult to predict the outcome of administrative and court proceedings and the level of legal protection we could enjoy in the PRC than under some more developed legal systems. These uncertainties could affect our judgment on the relevance of legal requirements and our decisions on the measures and actions to be taken to fully comply therewith, and could affect our ability to enforce our contractual or tort rights. Such uncertainties could therefore increase our operating costs and expenses as well as adversely affect our business and results of operations.

 

Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and could have a retroactive effect. As a result, we might not be aware of our violation of any of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment in China could adversely affect our business and impede our ability to continue our operations.

 

Regulation and censorship of information distribution over the internet in China could adversely affect our business, and we could be liable for information displayed on, retrieved from or linked to our website.

 

China has enacted laws and regulations governing internet access and the distribution of products, services, news, information and other content through the internet. In the past, the PRC government has prohibited the distribution of information through the internet that it deems to be in violation of PRC laws and regulations. If any of our internet content was deemed by the PRC government to violate any content restrictions, we would not be able to continue to display such content and could become subject to penalties, including confiscation of income, fines, suspension of business and revocation of required licenses, which could adversely affect our business, financial condition and results of operations. We could also be subject to potential liability for any unlawful actions of users of our website or for content we distribute that is deemed inappropriate. It could be difficult to determine the type of content that could result in liability to us, and if we are found to be liable, we could be prevented from operating our website in China.

 

21

 

 

Governmental control of currency conversion could affect the value of your investment.

 

The PRC government imposes controls on the convertibility between the Renminbi and foreign currencies despite the significant reduction over the years by the PRC government of control over routine foreign exchange transactions under current accounts. Substantially all of our revenues are denominated in Renminbi. Under our current holding company corporate structure, our income is primarily derived from dividend payments from our PRC subsidiary. Shortages in the availability of foreign currency or other restrictions could restrict the ability of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency- denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from SAFE or its local branch is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we might not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

 

Fluctuations in exchange rates of the Renminbi could affect our reported results of operations.

 

Substantially all of our revenues and expenses are denominated in RMB. The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

 

As we rely on dividends and other fees paid to us by our subsidiary and affiliated consolidated entities in China, any significant revaluation of the Renminbi could adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars we received from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. In addition, since our functional and reporting currency is the U.S. dollar while the functional currency of our subsidiary and consolidated affiliated entities in China is Renminbi, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would have a positive or negative effect on our reported financial results, which might not reflect any underlying change in our business, financial condition or results of operations.

 

Our operations could be adversely affected by changes in China’s political, economic and social conditions.

 

Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects could be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

 

The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

 

22

 

 

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures might benefit the overall Chinese economy, but could have a negative effect on us. For example, our financial condition and results of operations could be adversely affected by government control over capital investments or changes in tax regulations. In the past the PRC government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures could cause decreased economic activity in China, which could adversely affect our business and operating results. Any significant increase in China’s inflation rate could increase our costs and have an adverse effect on our operating margins. In addition, any sudden changes to China’s political system or the occurrence of widespread social unrest could have negative effects on our business and results of operations.

 

Under the PRC enterprise income tax law, we could be classified as a “resident enterprise” of China. Such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.

 

Under the PRC Enterprise Income Tax Law and its implementation rules, or the Enterprise Income Tax Rules, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and is subject to PRC enterprise income tax at the rate of 25% on its global income. The Enterprise Income Tax Rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The only detailed guidance currently available regarding the definition of “de facto management body” as well as the determination of the tax residence of offshore incorporated enterprises whose primary controlling shareholder is a PRC company or a PRC corporate group, and such enterprises’ tax administrations are set forth in two notices, the Notice On Issues Relating to Determination of Chinese-Controlled Offshore Enterprise as PRC Resident Enterprises by applying the “De Facto Management Body,” or Circular 82, and the Administrative Measures of Enterprise Income of Chinese Controlled Offshore Incorporated Resident Enterprise (Trial), or Circular 45, issued by the PRC State Administration of Taxation, or the Circulars. The Circulars provide that a foreign enterprise controlled by a PRC enterprise or a PRC enterprise group would be classified as a “resident enterprise” with its “de facto management body” located within China if all of the following requirements are satisfied: (i) the enterprise’s day-to-day operations management is primarily exercised in China, (ii) decisions relating to the enterprise’s financial and human resource matters are made or subject to approval by organizations or personnel in China, (iii) the enterprise’s primary assets, accounting books and records, company seals, board and shareholders’ meeting minutes are located or maintained in China, and (iv) 50% or more of voting board members or senior executives of the enterprise habitually reside in China. If all of these criteria are met, the relevant offshore enterprise controlled by PRC enterprises or PRC enterprise groups would be deemed to have its “de facto management body” in China and therefore be deemed a PRC resident enterprise. The Circulars made a clarification in the areas of resident status determination, post-determination administration, as well as the exercise of competent tax authorities’ procedures. The Circulars also specify that when provided with a copy of PRC tax resident determination certificate from a resident Chinese controlled offshore incorporated enterprise, a payer of PRC-sourced dividends, interest, royalties, etc. should not withhold 10% income tax on such payments to such Chinese controlled offshore incorporated enterprise. Although the Circulars apply only to offshore enterprises controlled by PRC enterprises and not those controlled by PRC individuals such as us, the determination criteria and administration clarification made in the Circulars reflect the PRC State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax residency status of offshore enterprises and how the administration measures should be implemented. There is no assurance that the PRC State Administration of Taxation will not apply the same or similar criteria as stated in the Circulars to determine whether the “de facto management body” of an offshore incorporated enterprise controlled by PRC individuals (like us) is located within the PRC in the future. If the PRC authorities were to determine that we should be treated as a PRC resident enterprise for the purpose of PRC enterprise income tax, a 25% enterprise income tax on our global income could significantly increase our tax burden and adversely affect our financial condition and results of operations.

 

Pursuant to the Enterprise Income Tax Law and the Enterprise Income Tax Rules, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign enterprise investors will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced withholding arrangement. We are a Cayman Islands holding company and substantially all of our income comes from dividends from our PRC subsidiary through our Hong Kong holding company. To the extent these dividends are subject to withholding tax, the amount of funds available to us to meet our cash requirements, including the payment of dividends to our shareholders and ADS holders, will be reduced.

 

23

 

 

The Enterprise Income Tax Rules provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC, or (ii) if gains are realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are treated as PRC-sourced income. It is not clear how “domicile” might be interpreted under the Enterprise Income Tax Law, and it could be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered to be a PRC resident enterprise for tax purposes, any dividends we pay to our overseas corporate shareholders or ADS holders as well as gains realized by such shareholders or ADS holders from the transfer of our shares or ADSs could be regarded as PRC-sourced income and as a result subject to PRC withholding tax at a rate of up to 10%, subject to the provisions of any applicable tax treaty. If dividends we pay to our overseas individual shareholders or ADS holders, or gains realized by such holders from the transfer of our shares or ADSs, are treated as China-sourced income, the withholding rate would be 20%, subject to the provisions of any applicable tax treaty.

 

If we are required under the Enterprise Income Tax Law to withhold PRC income tax on any dividends paid to our non-PRC shareholders and ADS holders or if gains from dispositions of our shares or ADSs are subject to PRC tax, your investment in our ADSs or ordinary shares could be adversely affected.

 

Furthermore, the State Administration of Taxation promulgated the Announcement of the State Administration of Taxation on Issues concerning the Beneficial Owners in Tax Treaties in April 2018, or Circular 9, which provides guidance for determining whether a resident of a contracting state is the “beneficial owner” of an item of income under China’s tax treaties and tax arrangements. According to Circular 9, there exist many factors to exclude a resident of a contracting state from being treated as a beneficial owner, including but not limited to the following situations: (i) such resident of a contracting state is obliged to pay more than 50% of the income to the resident(s) of a third state (region) within 12 months of receipt of the income; and (ii) the business activities undertaken by such resident do not constitute substantive business activities. We cannot assure you that any dividends distributed by us to our non-PRC shareholders and ADS holders whose jurisdiction of incorporation has a tax treaty with China providing for the avoidance of double taxation will be entitled to the benefits under the relevant withholding arrangement.

 

A failure by our shareholders or beneficial owners who are PRC citizens or residents in China to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws, which could adversely affect our business and financial condition.

 

The State Administration of Foreign Exchange, or SAFE, issued the Circular Relating to Foreign Exchange Administration of Offshore Investment, Financing and Return Investment by Domestic Residents Utilizing Special Purpose Vehicles, or SAFE Circular 37, that was promulgated and become effective on July 14, 2014. It requires a PRC natural person or a PRC company, or a PRC Resident, to file a “Registration Form of Overseas Investments Contributed by PRC Resident” and register with the local SAFE branch before it contributes assets or equity interests in an overseas special purpose vehicle, or SPV, that is directly established and controlled by PRC Resident for the purpose of conducting investment or financing. Following the initial registration, the PRC resident is also required to register with the local SAFE branch timely for any major change in respect of SPV, including, among other things, any major change of SPV’s PRC Resident shareholder, name of the SPV, term of operation or any increase or reduction of the SPV’s registered capital, share transfer or swap, and merger or division. Failure to comply with the registration procedures of Circular 37 could result in the penalties including the imposition of restrictions on the ability of SPV’s PRC subsidiaries to dividends to its overseas parent company.

 

It remains unclear how this regulation and any future related legislation will be interpreted, amended and implemented by the relevant PRC government authorities. As of December 31, 2019, to the best of our knowledge, most of our PRC Resident shareholders with offshore investments had not registered their offshore investments with SAFE according to the predecessor regulation of Circular 37, namely the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75, which was replaced by the SAFE Circular 37 but still effective when the relevant PRC shareholders made their investments. If PRC government determined that our PRC Resident shareholders are required to make the registration regarding their offshore investment under Circular 37, both they and us may be subject to fines by PRC government.

 

24

 

 

We are committed to complying, and to ensuring that our shareholders and beneficial owners who are PRC citizens or residents comply with SAFE Circular 37 requirements. The rest of our PRC citizen or resident beneficial owners are also applying for registrations under SAFE Circular 37 with the relevant local counterpart of SAFE. However, we might not be fully informed of the identities of all our beneficial owners who are PRC citizens or residents, and we cannot compel our beneficial owners to comply with SAFE Circular 37 requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC citizens or residents have complied with, or will in the future make or obtain the necessary any applicable registrations or approvals as required by, SAFE Circular 37 or other related regulations. Failure by such shareholders or beneficial owners to comply with SAFE Circular 37, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects. Failure by us to amend the foreign exchange registrations in compliance with SAFE Circular 37 could subject us to fines or legal sanctions restrict our overseas or cross-border ownership structure, which could adversely affect our business and prospects. See “—We rely principally on dividends and other distributions on equity paid by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we might have. Any limitation on the ability of our PRC and Hong Kong subsidiaries to pay dividends to us could have an adverse effect on our ability to conduct our business.”

 

A failure to comply with PRC regulations regarding the registration of shares and share options held by our employees who are PRC citizens could subject such employees or us to fines and legal or administrative sanctions.

 

Pursuant to the Implementation Rules of the Administrative Measures on Individual Foreign Exchange, or the Individual Foreign Exchange Rules, promulgated by SAFE on January 5, 2007 and amended on May 2016, a relevant guidance issued by SAFE in March 2007 and Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, or the Stock Option Rules, on February 15, 2012 that replaces the guidance issued in March 2007, PRC citizens who are granted shares or share options by an overseas-listed company according to its employee share option or share incentive plan are required, through the PRC subsidiary of such overseas-listed company or other qualified PRC agents selected by such PRC subsidiary, to register with SAFE and complete certain other procedures related to the share option or other share incentive plan. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. For participants who had already participated in an employee share option or share incentive plan before the date of the guidance, the guidance requires their PRC employers or PRC agents to complete the relevant formalities within three months of the date of the guidance. We and our PRC citizen employees who have been granted share options, or PRC option holders, are subject to these rules. If we or our PRC option holders fail to comply with these rules, we or our PRC option holders could be subject to fines and legal or administrative sanctions.

 

The heightened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on our business operations, our acquisition or restructuring strategy or the value of your investment in us.

 

The State Administration of Taxation has issued several rules and notices to tighten the scrutiny over acquisition transactions in recent years, including the Notice on Certain Corporate Income Tax Matters Related to Indirect Transfer of Properties by Non-PRC Resident Enterprises issued in February 2015, or SAT Circular 7. Pursuant to SAT Circular 7, except for a few circumstances falling into the scope of the safe harbor provided by SAT Circular 7, such as open market trading of stocks in public companies listed overseas, if a non-PRC resident enterprise indirectly transfers PRC taxable properties (i.e. properties of an establishment or a place in the PRC, real estate properties in the PRC or equity investments in a PRC tax resident enterprise) by disposing of equity interest or other similar rights in an overseas holding company, without a reasonable commercial purpose and resulting in the avoidance of PRC enterprise income tax, such indirect transfer should be deemed as a direct transfer of PRC taxable properties and gains derived from such indirect transfer may be subject to the PRC withholding tax at a rate of up to 10%. SAT Circular 7 sets out several factors to be taken into consideration by tax authorities in determining whether an indirect transfer has a reasonable commercial purpose, such as whether the main value of equity interest in an overseas holding company is derived directly or indirectly from PRC taxable properties. An indirect transfer satisfying all the following criteria will be deemed to lack reasonable commercial purpose and be taxable under PRC law without considering other factors set out by SAT Circular 7: (i) 75% or more of the equity value of the intermediary enterprise being transferred is derived directly or indirectly from the PRC taxable properties; (ii) at any time during the one-year period before the indirect transfer, 90% or more of the asset value of the intermediary enterprise (excluding cash) is comprised directly or indirectly of investments in the PRC, or 90% or more of its income is derived directly or indirectly from the PRC; (iii) the functions performed and risks assumed by the intermediary enterprise and any of its subsidiaries that directly or indirectly hold the PRC taxable properties are limited and are insufficient to prove their economic substance; and (iv) the foreign tax payable on the gain derived from the indirect transfer of the PRC taxable properties is lower than the potential PRC income tax on the direct transfer of such assets. Further, SAT Circular 7 embodies a voluntary reporting regime, and both the foreign transferor and the transferee, and the PRC tax resident enterprise whose equity interests are being transferred may voluntarily report the transfer by submitting the documents required in SAT Circular 7.

 

25

 

 

Although SAT Circular 7 provides clarity in many important areas, such as reasonable commercial purpose, there are still uncertainties on the tax reporting and payment obligations with respect to future private equity financing transactions, share exchange or other transactions involving the transfer of shares in non-PRC resident companies. Our company and other non-resident enterprises in our group may be subject to filing obligations or being taxed if our company and other non-resident enterprises in our group are transferors in such transactions, and may be subject to withholding obligations if our company and other non-resident enterprises in our group are transferees in such transactions. For the transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under the rules and notices. As a result, we may be required to expend valuable resources to comply with these rules and notices or to request the relevant transferors from whom we purchase taxable assets to comply, or to establish that our company and other non-resident enterprises in our group should not be taxed under these rules and notices, which may have a material adverse effect on our financial condition and results of operations.

 

We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing obligations on us or require us to provide assistance for the investigation of PRC tax authorities with respect thereto. We acquired Join Me Group (HK) Investment Company Limited, or JMU HK, in June 2015 and divested our B2C business in September 2015, and we may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of these transactions under SAT Circular 7, our income tax expenses associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.

 

PRC laws and regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

 

PRC laws and regulations, such as the 2006 M&A Rules, the Anti-Monopoly Law promulgated by the PRC National People’s Congress in 2007 and the Notice on the Establishment of the Security Review System in Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the State Council, or the Security Review Rule, establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors and companies more time-consuming and complex, including requirements in some instances that various governmental authorities be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. For example, on February 3, 2011, the State Council promulgated the Security Review Rule, which provides, among other things, that merger and acquisition transactions by foreign investors of PRC enterprises in sensitive sectors or industries, such as internet information service industry, which our operations fall within, could be subject to security review. Consequently, any such transaction could be blocked due to their effect on the national defense security, national economic stability, basic social life order, or capacity of indigenous research and development of key technologies. On August 25, 2011, the Ministry of Commerce promulgated the Regulations on Implementing the Security Review System in Mergers and Acquisition of Domestic Enterprises by Foreign Investors, which, among other things, set forth detailed provisions on how the security review of relevant transactions would be conducted, and provide for that foreign investors could not for any reason evade the security review process through entrustment, phased-in investment, leasing, loans and control agreement, and overseas transactions. We could expand our business in part by acquiring complementary businesses. Complying with the requirements of the relevant PRC laws and regulations to complete such transactions could be time-consuming, and any required approval processes could delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

26

 

 

Increases in labor costs in the PRC may adversely affect our business and results of operations.

 

The economy of China has been experiencing increases in inflation and labor costs in recent years. As a result, the average wages in the PRC are expected to continue to grow. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee benefits, and those employers who fail to make adequate payments could be subject to late payment fees, fines and/or other penalties. If the relevant PRC authorities determine that we should make supplemental social insurance and housing fund contributions and that we are subject to fines and legal sanctions, our business, financial condition and results of operations could be adversely affected. We expect that our labor costs, including wages and employee benefits, would continue to increase. Unless we are able to pass on these increased labor costs to our customers by increasing the prices of our products and services, our financial condition and results of operations could be adversely affected.

 

Risks Relating to Our ADSs

 

The trading price of our ADSs could be volatile, which would result in substantial losses to investors.

 

The trading price of our ADSs could be volatile and could fluctuate widely in response to factors relating to our business as well as external factors beyond our control. Factors such as variations in our financial results, announcements of new business initiatives by us or by our competitors, recruitment or departure of key personnel, changes in the estimates of our financial results or changes in the recommendations of any securities analysts electing to follow our securities or the securities of our competitors could cause the market price for our ADSs to change substantially. At the same time, securities markets could from time to time experience significant price and volume fluctuations that are not related to the operating performance of particular companies, as they did for example in late 2008 and early 2009. These market fluctuations could also have an adverse effect on the market price of our ordinary shares.

 

The performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States could affect the volatility in the price of and trading volumes for our ADSs. In recent years, a number of PRC companies have listed their securities, or are in the process of preparing for listing their securities, on U.S. stock markets. Some of these companies have experienced significant volatility, including significant price declines in connection with their initial public offerings. The trading performances of these PRC companies’ securities at the time of or after their offerings could affect the overall investor sentiment towards PRC companies listed in the United States and consequently could affect the trading performance of our ADSs. These broad market and industry factors could significantly affect the market price and volatility of our ADSs, regardless of our actual operating performance. Any of these factors could result in large and sudden changes in the trading volume and price for our ADSs.

 

If we fail to maintain Nasdaq minimum market value of publicly held shares, minimum bid requirements or minimum stockholder equity standard, our ADSs could be delisted.

 

According to the Nasdaq listing standards, if the market value of publicly held shares falls below US$1 million for 30 consecutive business days, such company’s securities may be subject to delisting from Nasdaq Capital Market, unless such failure is cured within the grace period the company is eligible to, from the date on which Nasdaq notifies to the listed company of such failure. Prior to the transfer of the listing of our ADSs from the Nasdaq Global Market to the Nasdaq Capital Market in January 2020, we received letters from Nasdaq advising us that the market value of our publicly held shares no longer met the continued listing requirement of the Nasdaq Global Market. We cannot assure you that we will not fail to meet the continued listing requirement of the Nasdaq Capital Market in the future. In the event that we are not in compliance with such requirement and fail to regain compliance, we may delist our ADSs.

 

Furthermore, according to the Nasdaq listing standards, if the trading price of a listed company’s listed securities falls below US$1.00 per share for a period of 10 consecutive business days, such company’s securities may be subject to delisting unless such failure is cured within the grace period the company is eligible to, from the date on which Nasdaq notifies to the listed company of such failure. On January 4, 2019 and March 2, 2020, respectively, we received two letters from Nasdaq advising us that our ADS had been trading at a price that would subject our ADSs to delisting if we fail to regain compliance with the Nasdaq minimum bid price requirements. We were granted a grace period of 180 calendar days, expiring on August 31, 2020, in which to regain compliance. We have regained compliance since June 5, 2020 as the closing bid price of our ADSs was at least US$1.00 for a minimum of ten consecutive business days during this 180-day period.

 

27

 

 

In addition, according to the Nasdaq listing standards, if the stockholders’ equity falls below US$2.5 million, such company’s securities may be subject to delisting from Nasdaq Capital Market, unless such failure is cured within the grace period the company is eligible to, from the date on which Nasdaq notifies to the listed company of such failure. Prior to the transfer of the listing of our ADSs from the Nasdaq Global Market to the Nasdaq Capital Market in January 2020, we received a letter from Nasdaq advising us that our stockholders’ equity no longer met the continued listing requirement of the Nasdaq Global Market. We cannot assure you that we will not fail to meet the continued listing requirement of the Nasdaq Capital Market in the future. In the event that we are not in compliance with such requirement and fail to regain compliance, we may delist our ADSs.

 

We have not regained compliance with the minimum bid requirement as of the date of annual report. We intend to continue to monitor the closing bid price of our ADSs between now and August 31, 2020, and consider available options to cure the deficiency and regain compliance within the prescribed grace period. If we fail to regain compliance, our ADSs could be subject to delisting. There can be no assurance that we will meet the requirements for continued listing.

 

We are an emerging growth company and cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our ADSs less attractive to investors.

 

We are an “emerging growth company” under the JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards.

 

We have not yet opted out of these exemptions available to the emerging growth companies. This decision would allow us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies or otherwise become applicable to us. As a result, our consolidated financial statements might not be comparable to public companies or other emerging growth companies that have opted out of this provision. We cannot predict if investors will find our ADSs less attractive because we will rely on these exemptions. If some investors find our ADSs less attractive as a result, our stock price could be lower than it otherwise would be, there could be a less active trading market for our ADSs and our stock price could be more volatile.

 

We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year during which we have total annual gross revenues of at least $1.07 billion; (ii) the last day of our fiscal year ending after the fifth anniversary of the completion of our initial public offering; (iii) the date on which we have, during the previous three-year period, issued more than $1.07 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act.

 

28

 

 

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.

 

Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

·the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

 

·the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

 

·the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

·the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

 

We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

 

As a foreign private issuer, we are permitted to, and we plan to, rely on exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. This might afford less protection to holders of our ordinary shares and ADSs.

 

Section 5605(b)(1) of the Nasdaq Listing Rules requires listed companies to have, among other things, a majority of its board members to be independent, and Section 5605(d) and 5605(e) require listed companies to have independent director oversight of executive compensation and nomination of directors. As a foreign private issuer, however, we are permitted to, and we plan to follow home country practice in lieu of the above requirements. The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors or the implementation of a nominating and corporate governance committee. We have informed Nasdaq that we will follow home country practice in place of all of the requirements of Rule 5600 other than those rules which we are required to follow pursuant to the provisions of Rule 5615(a)(3).

 

·Rule 5605(b), pursuant to which (i) a majority of the board of directors must be comprised of Independent Directors, and (ii) the Independent Directors must have regularly scheduled meetings at which only Independent Directors are present.

 

·Rule 5605(c) (other than those parts as to which the home country exemption is not applicable), pursuant to which each company must have, and certify that it has and will continue to have, an audit committee of at least three members, each of whom must meet criteria set forth in Rule 5605(c)(2)(A).

 

·Rule 5605(d), pursuant to which each company must (i) certify that it has adopted a formal written compensation committee charter and that the compensation committee will review and reassess the adequacy of the formal written charter on an annual basis, and (ii) have a compensation committee of at least two members, each of whom must be an Independent Director.

 

·Rule 5605(e), pursuant to which director nominees must be selected, or recommended for the Board’s selection, either by Independent Directors constituting a majority of the Board’s Independent Directors in a vote in which only Independent Directors participate, or a nominations committee comprised solely of Independent Directors.

 

·Rule 5610, pursuant to which each company shall adopt a code of conduct applicable to all directors, officers and employees.

 

29

 

 

·Rule 5620(a), pursuant to which each company listing common stock or voting preferred stock, or their equivalents, shall hold an annual meeting of shareholders no later than one year after the end of the issuer’s fiscal year-end.

 

·Rule 5620(b), pursuant to which each company shall solicit proxies and provide proxy statements for all meetings of shareholders and shall provide copies of such proxy solicitation to Nasdaq.

 

·Rule 5620(c), pursuant to which each company that is not a limited partnership shall provide for a quorum as specified in its by-laws for any meeting of the holders of common stock; provided, however, that in no case shall such quorum be less than 331/3% of the outstanding shares of the company’s common voting stock.

 

·Rule 5630, pursuant to which each company that is not a limited partnership shall conduct an appropriate review and oversight of all related party transactions for potential conflict of interest situations on an ongoing basis by the company’s audit committee or another independent body of the board of directors.

 

·Rule 5635(a), pursuant to which shareholder approval is required in certain circumstances prior to an issuance of securities in connection with the acquisition of the stock or assets of another company.

 

·Rule 5635(b), pursuant to which shareholder approval is required prior to the issuance of securities when the issuance or potential issuance will result in a change of control of the company.

 

·Rule 5635(c), pursuant to which shareholder approval is required prior to the issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees, or consultants, subject to certain exceptions.

 

·Rule 5635(d), pursuant to which shareholder approval is required prior to the issuance of securities in connection with a transaction other than a public offering involving:

 

othe sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable for common stock) at a price less than the greater of book or market value which together with sales by officers, directors or Substantial Shareholders of the company equals 20% or more of common stock or 20% or more of the voting power outstanding before the issuance; or

 

othe sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.

 

Anti-takeover provisions in our charter documents could discourage a third-party from acquiring us, which could limit our shareholders’ opportunities to sell their shares at a premium.

 

Our fourth amended and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change-of-control transactions. For example, our board of directors will have the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix the designations, powers, preferences and relative, participating, optional and other rights, if any, and the qualifications, limitations and restrictions thereof, if any, including, without limitation, the number of shares constituting each such class or series, dividend rights, conversion rights, redemption privileges, voting powers, full or limited or no voting powers, and liquidation preferences, any or all of which could be greater than the rights associated with our ordinary shares. Preferred shares could thus be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if our board of directors issues preferred shares, the market price of our ordinary shares could fall and the voting and other rights of the holders of our ordinary shares could be adversely affected. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a tender offer or similar transaction.

 

30

 

 

You might not receive certain distributions we make on our ordinary shares or other deposited securities if the depositary decides not to make such distributions to you.

 

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is not lawful or reasonably practicable to make a distribution available to any holders of ADSs. For example, the depositary could determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions could be less than the cost of mailing them. In these cases, the depositary could decide not to distribute such property and you will not receive such distribution.

 

We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you could have less protection of your shareholder rights than you would under U.S. law.

 

Our corporate affairs are governed by our fourth amended and restated memorandum and articles of association, the Cayman Islands Companies Law (2020 Revision), as amended, and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by noncontrolling shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.

 

There is uncertainty with regard to Cayman Islands law related to whether a judgment obtained from the U.S. courts under civil liability provisions of U.S. securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as our company. As the courts of the Cayman Islands have yet to rule on making such a determination in relation to judgments obtained from U.S. courts under civil liability provisions of U.S. securities laws, it is uncertain whether such judgments would be enforceable in the Cayman Islands. Maples and Calder (Hong Kong) LLP has advised us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States, a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment:

 

·is given by a foreign court of competent jurisdiction;

 

·imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given;

 

·is final and conclusive;

 

·is not in respect of taxes, a fine or a penalty; and

 

·was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

 

31

 

 

You should also read “Item 10. Additional Information—A. Share Capital—Ordinary Shares—Differences in Corporate Law” for some of the differences between the corporate and securities laws in the Cayman Islands and the United States.

 

Your ability to protect your rights as shareholders through the U.S. federal courts could be limited because we are incorporated under Cayman Islands law.

 

Cayman Islands companies might not have the standing to initiate a derivative action in a federal court of the United States. As a result, your ability to protect your interests if you are harmed in a manner that would otherwise enable you to sue in a United States federal court could be limited to direct shareholder lawsuits.

 

You will have limited ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, because we are incorporated in the Cayman Islands, because we conduct a majority of our operations in China and because a majority of our directors and officers reside outside the United States.

 

We are incorporated in the Cayman Islands and conduct our operations exclusively in China. All of our assets are located outside the United States. A majority of our officers and directors reside outside the United States and a substantial portion of the assets of those persons are located outside of the United States. As a result, it could be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the applicable securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China could render you unable to enforce a judgment against our assets or the assets of our directors and officers. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state, and it is uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or China against us or such persons predicated upon the securities laws of the United States or any state.

 

Shareholders of Cayman Islands exempted companies such as ourselves have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders of these companies (apart from our memorandum and articles of association and the register of mortgages and charges). Our directors have discretion under Cayman Islands law to determine whether or not, and under what conditions, our corporate records could be inspected by our shareholders, but are not obliged to make them available to our shareholders. This could make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

As a result of all of the above, public shareholders might have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company.

 

The voting rights of holders of ADSs are limited in several significant ways by the terms of the deposit agreement.

 

Holders of our ADSs will only be able to exercise their voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of voting instructions from a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying ordinary shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying ordinary shares unless you cancel your ADSs and withdraw the underlying ordinary shares and follow the requisite steps to be recognized as a holder of ordinary shares entitled to vote such shares. Under our fourth amended and restated memorandum and articles of association and Cayman Islands law, the minimum notice period required for convening a general meeting is 10 clear days. When a general meeting is convened, you might not receive sufficient notice of a shareholders’ meeting to permit you to withdraw the underlying ordinary shares represented by your ADs to allow you to cast your vote directly with respect to any specific matter at the meeting. In addition, the depositary might not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the shares representing your ADSs. Furthermore, the depositary will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you might not be able to exercise your right to vote and you could lack recourse if your ordinary shares are not voted as you requested.

 

32

 

 

Except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the ordinary shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the ordinary shares represented by the ADSs. You might not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. The deposit agreement provides that if the depositary does not timely receive valid voting instructions from the ADS holders, then the depositary must, with certain limited exceptions, give a discretionary proxy to a person designated by us to vote such shares. Furthermore, as a party to the deposit agreement, you waive your right to trial by jury in any legal proceedings arising out of the deposit agreement or the ADRs against us and/or the depositary.

 

You might not receive distributions on our ordinary shares or any value for them if it is unlawful or impractical for us to make them available to you.

 

The depositary of our ADSs has agreed to pay you the cash dividends or other distributions it or the custodian for our ADSs receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent. However, the depositary is not responsible if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs, if any government approval or registration is required for such distribution. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that you might not receive the distributions we make on our ordinary shares or any value for them if it is unlawful or impractical for us to make them available to you. These restrictions could have an adverse effect on the value of your ADSs.

 

You might be subject to limitations on the transfer of your ADSs.

 

Your ADSs are transferable on the books of the depositary. However, the depositary could close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary could close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary could also close its books in emergencies, and on weekends and public holidays. The depositary could refuse to deliver, transfer or register transfers of our ADSs generally when our books or the books of the depositary are closed, or at any time if we think or the depositary thinks it is necessary or advisable to do so in connection with the performance of its duty under the deposit agreement, including due to any requirement of law or any government or governmental body, or under any provision of the deposit agreement.

 

Compliance with rules and requirements applicable to public companies could cause us to incur increased costs, which could negatively affect our results of operations.

 

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and Nasdaq Capital Market, has required changes in corporate governance practices of public companies. We expect these rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. Complying with these rules and requirements could be especially difficult and costly for us because we might have difficulty locating sufficient personnel in China with experience and expertise relating to U.S. GAAP and U.S. public company reporting requirements, and such personnel could command higher salaries relative to what similarly experienced personnel would command in the United States. If we cannot employ sufficient personnel to ensure compliance with these rules and regulations, we might need to rely more on outside legal, accounting and financial experts, which could be very costly. In addition, we will incur additional costs associated with our public company reporting requirements. We are evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we might incur or the timing of such costs.

 

33

 

 

We could be a passive foreign investment company, or PFIC, which would result in adverse United States tax consequences to United States investors.

 

We will be classified as a “passive foreign investment company,” or “PFIC” if, in the case of any particular taxable year, either (a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the average quarterly value of our assets (as determined on the basis of fair market value) during such year produce or are held for the production of passive income (including cash). Passive income generally includes dividends, interest, royalties, rents, annuities, net gains from the sale or exchange of passive assets (including property producing passive income) and net foreign currency gains. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, more than 25% (by value) of the stock.

 

Based on our current income and assets and the value of our ADSs and issued and outstanding ordinary shares, we do not believe that we were a PFIC for our taxable year ended December 31, 2019 and we do not expect to be classified as a PFIC for our taxable year ending December 31, 2020 or in the foreseeable future.

 

With respect to our 2020 taxable year and foreseeable future taxable years, we presently do not anticipate that we will be a PFIC based upon the expected value of our assets, including goodwill (determined, in part, based on the price of our ADSs), and the expected future composition of our income and assets. However, we might be a PFIC for our 2020 taxable year or any future taxable years due to changes in our asset or income composition, or the value of our assets, including if our market capitalization is less than anticipated or subsequently declines.

 

Although the law in this regard is not entirely clear, we treat Our VIEs as being owned by us for United States federal income tax purposes because we control its management decisions and we are entitled to substantially all of its economic benefits and, as a result, we consolidate its results of operations in our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of Our VIEs for United States federal income tax purposes, we could be treated as a PFIC for our taxable year ended December 31, 2019 and for subsequent taxable years.

 

If we were or are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, we generally will continue to be treated as a PFIC as to you for all succeeding taxable years during which you hold our ADSs or ordinary shares, except if you have made a mark-to-market election. Because there are uncertainties in the application of the relevant rules and PFIC status is a fact-intensive determination made on an annual basis, no assurance can be given that we will not be or have not been a PFIC for any year. If we were or are a PFIC, U.S. holders of our ADSs or ordinary shares could be subject to increased tax liabilities under United States federal income tax laws and could be subject to burdensome reporting requirements. See “Item 10. Additional Information—E. Taxation—Material United States Federal Income Tax Considerations—Passive Foreign Investment Company.”

 

ITEM 4. INFORMATION ON THE COMPANY

 

A.History and Development of the Company

 

We started to operate a group buying and B2C e-commerce platform in China through Beijing Wowo Tuan Information Technology Co., Ltd. in March 2010. In order to facilitate investment in our company, we incorporated Wowo Limited in Cayman Islands as a holding company in July 2011.

 

In April 2015, Wowo Limited completed the initial public offering and listed our ADSs on the Nasdaq Capital Market under the symbol “WOWO.” We raised approximately US$37.3 million in net proceeds from our initial public offering after deducting underwriting commissions and the offering expenses payable by us.

 

34

 

 

In June 2015, we acquired Join Me Group (HK) Investment Company Limited to establish our food services industry B2B business. We issued 741,422,780 ordinary shares and paid US$30.0 million as consideration for the acquisition.

 

In September 2015, we divested our group buying and B2C e-commerce businesses to focus our efforts on our food services industry B2B business.

 

In September 2015, we raised US$15.0 million in a private placement transaction with Mr. Maodong Xu.

 

In June 2016, we changed the trading symbol for our ADSs listed on the Nasdaq Global Market to “JMU.” In December 2016, we also changed our company name to JMU Limited.

 

In August 2016, TANSH Global Food Group Co., Ltd, which was formerly known as Xiao Nan Guo Restaurants Holdings Limited, a Hong Kong Stock Exchange listed company (Stock Code: 3666), through its wholly-owned subsidiary, acquired a 9.82% stake in our company via secondary transfers for a total consideration of HK$368 million (approximately US$47.5 million).

 

In July 2018, we changed the ratio of our ADSs to ordinary shares from one ADS representing 18 ordinary shares to one ADS representing 180 ordinary shares.

 

In May 2019, we acquired Mercurity Limited (previously known as Unicorn Investment Limited) to establish our blockchain-based digital asset infrastructure solutions business. We issued 632,660,858 new ordinary shares as consideration for the acquisition.

 

In July 2019, we divested our B2B services to food-industry suppliers and customers by selling all the issued and outstanding shares of New Admiral Limited, or New Admiral, our former wholly-owned subsidiary, to Marvel Billion Development Limited, or Marvel Billion, in exchange for US$1.0 million in cash. In addition, the buyer and the divested entities agreed to waive all the rights and claims with respect to the liabilities owed by us to the divested entities.

 

In January 2020, we transferred the listing of our ADSs from the Nasdaq Global Market to the Nasdaq Capital Market.

 

In February 2020, we changed the trading symbol for our ADSs listed on the Nasdaq Capital Market to “MFH.”

 

In March 2020, we acquired the entire ownership of NBpay Investment Limited, or NBpay, to further strengthen our capabilities in the blockchain-enabled payment solutions. We issued 761,789,601 new ordinary shares to Mr. Kaiming Hu, our principal shareholder and the sole shareholder of Kuali Yitong, as consideration for the acquisition.

 

In April 2020, we changed our company name to “Mercurity Fintech Holding Inc.” to align the company name with our new blockchain-based digital asset infrastructure solutions business.

 

In May 2020, we changed the ratio of our ADSs to ordinary shares from one ADS representing 180 ordinary shares to one ADS representing 360 ordinary shares.

 

We currently conduct our operations in China through contractual arrangements among (i) our wholly-owned PRC subsidiary, Lianji Future, and (ii) Kuali Yitong Technology Co., Ltd. and Beijing Lianji Technology Co., Ltd. and their respective shareholders.

 

Our principal executive offices are located at Room 003, Floor 15, Building No.1 B, No. 38 Zhongguancun Avenue, Haidian District, Beijing 100086, People’s Republic of China. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.

 

35

 

 

SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC on www.sec.gov. You can also find information on our investor relationship website ir.ccjmu.com. The information on our website should not be deemed a part of this annual report.

 

B.Business Overview

 

Our Principal Business

 

Prior to July 2019, we provided integrated B2B services to food service suppliers and customers in China. In May 2019, we acquired Mercurity Limited and its subsidiaries and variable interest entity to start developing digital asset transaction platform and solutions based on blockchain technologies. On July 22, 2019, we divested our B2B services to food service suppliers and customers by selling all the issued and outstanding shares of New Admiral Limited, or New Admiral, our former wholly-owned subsidiary operating the B2B business, to Marvel Billion Development Limited, or Marvel Billion. After this divestment, we are no longer engaged in B2B services and our current principal business is focused on providing digital asset infrastructure solutions services based on blockchain technologies. We design and develop digital asset transaction platforms based on blockchain technologies for customers to facilitate asset trading, asset digitalization and cross-border payments and provide supplemental services for such platforms, such as customized software development services, maintenance services and compliance support services.

 

Asset Trading

 

We provide digital asset trading infrastructure solutions based on internet and blockchain technologies to our customers. These services include, among others, (i) comprehensive solutions in connection with digital asset transactions, (ii) platform-based products, such as transaction facilitation system, trading system, account management system, operation management system and mobile applications, and (iii) a variety of supplemental services, such as customized software development services, maintenance services and compliance support services. We launched Version 2.0 of our asset trading platform in 2019 which has included enhancements to the functionality of Version 1.0 as well as new offerings of services and products for our customer on this platform. We are currently developing Version 3.0 of our asset trading platform.

 

Our target customers for the asset trading platform are mainly institutional customers, such as digital asset exchanges, trading platforms, foreign exchange companies, brokers, funds and asset management companies. In 2019, we generated substantially all of our revenues from selling our asset trading platform and providing supplemental services to a customer who purchased this platform.

 

Asset Digitalization

 

We have developed an asset digitalization platform, which can provide blockchain-based digitalization solutions for traditional assets, such as fiat currencies, bonds and precious metals. These solutions include, among others, (i) standard process of white label asset tokenization, such onboarding, compliance certification, asset custody and token issuance and asset redemption by token holders, (ii) comprehensive and customized solutions for asset tokenization, and (iii) blockchain-enabled smart contract management system, KYC and anti-money laundering compliance management system, trust audit management system and other products that can be purchased and used separately, as well as mobile applications. We launched Version 1.0 of our asset digitalization platform in 2019 to provide institutional customers with customized services and products. We are currently developing Version 2.0 of our asset digitalization platform. The core offerings of Version 2.0 will be SaaS platform products and API services.

 

36

 

 

Our target customers for the asset digitalization platform are mainly those that intend to explore business solutions with the blockchain technologies, such as traditional asset management companies, internet companies, financial institutions and foreign exchange companies. We expect to start generating revenues from cross-border remittance business in 2020.

 

Cross-border Remittance

 

We provide cross-border remittance services through NBpay, our cross-border remittance platform. We provide blockchain-based cross-border payment solutions to global individual and institutional customers. We have launched Version 1.0 of the cross-border remittance platform since April 2020.

 

Our target customers for cross-border remittance services mainly include customers that demand for cross-border payment solutions, such as foreign trade companies, e-commerce companies, financial institutions and individuals who travel, work or study abroad. We expect to start generating revenues from cross-border remittance business in 2020.

 

We launched our Mercury Plan in April 2020 to actively explore acquisition opportunities that would complement our existing services or enhance our technology capabilities, such as high-performing global digital asset service providers in the payment, digitalization and transaction sectors. Leveraging our platform and the prospective acquisitions under our Mercury Plan, we expect to offer other services that are complementary to our core solutions services in the future and create significant value to our business partners, and ultimately benefit our business and customers.

 

Our Customer

 

As of December 31, 2019, we had one customer. We entered into two master software development agreements with this customer in May 2018 and July 2019, respectively. These two agreements are on substantially the same terms and conditions, both with an initial term of five years and the option to extend for additional five years. Pursuant to these agreements, we provide software design, development, testing, installation, configuration, integration and customized development services based on blockchain technologies and provide related supplemental services to this customer. The customer makes instalment payments of product development and service fees to us upon the occurrence of each specified event set out in these agreements.

 

Previous Business

 

In July 2019, we divested our B2B services to food-industry suppliers and customers by selling all the issued and outstanding shares of New Admiral, our former wholly-owned subsidiary, to Marvel Billion in exchange for US$1.0 million in cash. Prior to such divestment, we operated the following businesses from June 2016 to July 2019.

 

Online Direct Sales

 

In our discontinued online direct sales business, we acquired products from suppliers and sold them directly to customers. We had been expanding our offering in direct sales since the acquisition of our previous B2B business in June 2015. We focused on the sale of standard new ingredients by conducting research and developments of new products and organizing the manufacture by factories to ensure the standardized process of operation.

 

Online Marketplace

 

In our discontinued online marketplace business, third-party sellers offered products to customers over our previous online marketplace. We acquired the B2B online marketplace in June 2015, and had been bringing new products and services to the online marketplace since then. In order to attract more third-party sellers, we did not charge commission on transactions on our previous online marketplace. We provided transaction processing and billing services on all orders on our online marketplace. We required third-party sellers to meet our standards of quality.

 

Marketing

 

We engage various marketing channels to expand our business to more business partners and customers. We provide various incentives to our customers to increase their spending and loyalty, and we send e-mails to our customers periodically with product recommendations or promotions. To enhance our brand awareness, we also have engaged in brand promotion activities.

 

In addition to the online marketing activities, we also utilize offline activities to attract more users and promote our brand recognition. For example, we attended offline meetings, such as the Blockchain Technology Conference in Hainan, to enhance our brand awareness and promote our presence in the industry.

 

37

 

 

 

Competition

 

The blockchain and digital asset industry is intensely competitive and is densely populated by global competitors touting blockchain capabilities, including Huobi, Bitbank, Wanxiang Blockchain, Bit One Group and Metaps Inc., among others. Our competitors may have entered the industry much earlier than us. They may be better capitalized, may have more industry connections, and may be able to adapt more quickly to new technologies or may be able to devote greater resources to the development, marketing and sale of their products than we can.

 

We anticipate that the blockchain and digital asset market will continually evolve and will continue to experience rapid technological change, evolving industry standards, shifting customer requirements, and frequent innovation. We must continually innovate to remain competitive. We believe that the principal competitive factors in our industry are:

 

·brand recognition and reputation;

 

·product quality;

 

·pricing;

 

·ecosystem integration; and

 

·customer service.

 

We believe that we are well-positioned to effectively compete on the basis of the factors listed above. However, some of our current or future competitors have or may introduce new platforms and solutions that are superior to ours.

 

Seasonality

 

We have not experienced seasoned fluctuations in our current principal business. Due to our limited operating history in our current core business, the seasonal trends that we experienced are not necessarily indicative of the seasonal trends that we may experience in the future.

 

Intellectual Property

 

We regard our trademarks, copyrights, domain names, know-how, proprietary technologies, and similar intellectual property as critical to our success, and we rely on copyright and trademark law and confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights. As of the date of this annual report, we have three trademark applications relating to various aspects of our operations. As of the date of this annual report, we have registered three generic top-level domain names. Our registered domain names include www.mercurity.com, www.mfhi.com and www.nbpay.com.

 

Regulation

 

This section sets forth a summary of the most significant rules and regulations that affect our business activities in China.

 

38

 

 

Regulations Relating to Foreign Investment

 

Industry Catalogue Relating to Foreign Investment. Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform Commission. Industries listed in the Catalogue are divided into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalogue are generally deemed as constituting a fourth “permitted” category. The current Special Administrative Measures (Negative List) for Admission of Foreign Investment (Year 2019) was promulgated in June 2019 and Industry Guidelines on Encouraged Foreign Investment (Year 2019) was promulgated in June 2019.Establishment of wholly foreign-owned enterprises is generally allowed in encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level government approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations.

 

Through Our WFOE and Our VIEs, we are engaged in certain industries that are classified as “restricted” under the Catalogue. Pursuant to the latest Catalogue amended in June 2019, the provision of value-added telecommunications services falls in the restricted category and the percentage of foreign ownership cannot exceed 50% (excluding e-commerce, domestic multi-party communication, store-and-forward, and call center). We engage in the development of computer network technology, technical consultancy and technical services, which are in the permitted category. Under PRC law, the establishment of a wholly foreign owned enterprise is subject to the approval of, or the requirement for record filing with, the Ministry of Commerce or its local counterparts and the wholly foreign owned enterprise must register with the competent industry and commerce bureau. We have duly obtained the approvals from the Ministry of Commerce or its local counterparts for our interest in our wholly owned PRC subsidiaries and completed the registration of these PRC subsidiaries with the competent industry and commerce bureau.

 

The Ministry of Commerce issued the Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises, as amended in June 2018, which was replaced by Measures on Reporting of Foreign Investment Information promulgated in December 2019. According to Measures on Reporting of Foreign Investment Information, foreign investors carrying out investment activities in China directly shall submit investment information to the Ministry of Commerce or its local counterparts. Pursuant to the Announcement [2016] No. 22 of the National Development and Reform Commission and the Ministry of Commerce dated October 8, 2016, the special entry administration measures for foreign investment apply to restricted and prohibited categories specified in the Catalogue, and the encouraged categories are subject to certain requirements relating to equity ownership and senior management under the special entry administration measures.

 

On January 1,2020, Foreign Investment Law of the People’s Republic of China became effective. For foreign-invested enterprises established after the Foreign Investment Law, the organization form, institution and activity requirement shall be governed by the PRC Company Law and PRC Partnership Law. The established foreign-invested enterprises have a five-year transition period. During the transition period, the enterprises could retain the original organization form. Specific implementation measures will be further formulated by the State Council.

 

Foreign Investment in Value-Added Telecommunications Businesses. The Regulations for Administration of Foreign-invested Telecommunications Enterprises promulgated by the PRC State Council in December 2001 and subsequently amended in September 2008 and February 2016 set forth detailed requirements with respect to capitalization, investor qualifications and application procedures in connection with the establishment of a foreign-invested telecommunications enterprise. These regulations prohibit a foreign entity from owning more than 50% of the total equity interest in any value-added telecommunications service business in China and require the major foreign investor in any value-added telecommunications service business in China have a good and profitable record and operating experience in this industry.

 

Regulations Relating to Blockchain Technology

 

Since May 2019, we started to engage in blockchain-enabled digital asset infrastructure solutions business. China has promulgated laws and restrictions against illegal activities conducted through blockchain technologies.

 

In January 2019, the Cyberspace Administration of China promulgated the Administrative Regulation on Blockchain Information Services, which regulates the information services provided to the public through internet sites, applications, etc. based on blockchain technology or systems. It states that blockchain information services suppliers shall implement the responsibility for information content security management, establish and improve management systems such as user registration, information review, emergency response, and security protection, they shall also have the technical conditions suitable for their services, establish and disclose management rules and platform conventions, sign service agreements with blockchain information services users, etc. This is the first time China conducted compliance supervision on the blockchain.

 

39

 

 

The PRC Cryptography Law, which entered into force on January 1, 2020, is the latest normative legal document that regulates the blockchain industry. The term “cryptography” refers to products, technologies and services that use specific transformations to carry out encryption protection or security authentication for information, etc. The use of blockchain technology to encrypt and protect the information it collects is a “cryptography” under PRC law and shall be regulated by the PRC Cryptography Law.

 

Under criminal law, the illegal use of blockchain technology may involves four types of crimes: crime of refusing to perform network security management obligations, crime of helping information network criminal activities, crime of violating citizens' information and crime of endangering public safety. Among them, the crime of refusing to perform network security management obligations may cause the mass dissemination of illegal information, the leakage of user information and leads to a serious consequence, the loss of evidence in criminal cases in a serious circumstance and other serious circumstance. Refusing to make corrections after being ordered by the regulatory authority to make corrective measures is subject to imprisonment of up to three years, detention or control and a fine.

 

Regulations Relating to E-Commerce

 

Prior to July 22, 2019, our principal business was food-industry B2B services and we were subject to regulations relating to e-commerce. China’s e-commerce industry is at a relatively early stage of development and there are few PRC laws or regulations specifically regulating the e-commerce industry. In May 2010, the State Administration of Industry and Commerce adopted the Interim Measures for the Administration of Online Commodities Trading and Relevant Services, which took effect in July 2010. Under these measures, enterprises or other operators which engage in online commodities trading and other services and have been registered with the State Administration of Industry and Commerce or its local branches must make the information stated in their business license available to the public or provide a link to their business license on their website. Online distributors must adopt measures to ensure safe online transactions, protect online shoppers’ rights and prevent the sale of counterfeit goods. Information on products and transactions released by online distributors must be authentic, accurate, complete and sufficient.

 

In January 2014, the State Administration of Industry and Commerce promulgated the Administrative Measures for Online Trading, which terminated the above interim measures and became effective in March 2014. The Administrative Measures for Online Trading further strengthen the protection of consumers and impose more stringent requirements and obligations on online business operators and third-party online marketplace operators. For example, online business operators are required to issue invoices to consumers for online products and services. Consumers are generally entitled to return products purchased from online business operators within seven days upon receipt, without giving any reason. Online business operators and third-party online marketplace operators are prohibited from collecting any information on consumers and business operators, or disclosing, selling or providing any such information to any third-party, or sending commercial electronic messages to consumers, without their consent. Fictitious transactions, deletion of adverse comments and technical attacks on competitors’ websites are prohibited as well. In addition, third-party online marketplace operators are required to examine and verify the identifications of the online business operators and set up and keep relevant records for at least two years. Moreover, any third-party online marketplace operator that simultaneously engages in online trading for products and services should clearly distinguish itself from other online business operators on the marketplace platform. We are subject to these measures as a result of our online direct sales and online marketplace.

 

In addition, The PRC E-Commerce Law, which was issued on August 31, 2018 and came into effect on January 1, 2019, imposes further obligations on the e-commerce business, such as protecting consumer rights and interests, protecting the environment, protecting intellectual property rights, protecting cybersecurity and individual information, assuming responsibility for the quality of products or services, and accepting the supervision by the government and the public.

 

40

 

 

On April 30, 2019, the State Administration for Market Regulation published the Administrative Measures for Online Trading (Draft) to implement the PRC E-Commerce Law and improve the system for standardizing online trading. This draft could be regarded as a restatement and refinement of the PRC E-Commerce Law, which mainly stipulates the management of online transaction operators, the delivery of transaction information and data, the norms of transaction behavior, the protection of consumer rights and the market supervision department.

 

The Law of the People’s Republic of China Against Unfair Competition, as amended in 2019, includes the use of networks to engage in production and business activities in its scope of regulation, requiring operators not to use technical means to commit the acts through influencing user’s choice or otherwise hinder and disrupt normal operation of the cyber products or services provided legitimately by other business operators.

 

Regulations Relating to Internet Content and Information Security

 

The Administrative Measures on Internet Information Services specify that internet information services regarding news, publications, education, medical and health care, pharmacy and medical appliances, among other things, are to be examined, approved and regulated by the relevant authorities. Internet information providers are prohibited from providing services beyond those included in the scope of their ICP licenses or filings. Furthermore, these measures clearly specify a list of prohibited content. Internet information providers are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory to others or that infringes the lawful rights and interests of others. Internet information providers that violate the prohibition may face criminal charges or administrative sanctions by the PRC authorities. Internet information providers must monitor and control the information posted on their websites. If any prohibited content is found, they must remove the offending content immediately, keep a record of it and report to the relevant authorities.

 

Internet information in China is also regulated and restricted from a national security standpoint. The National People’s Congress, China’s national legislative body, has enacted the Decisions on Maintaining Internet Security, which may subject violators to criminal punishment in China for any effort to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights. The Ministry of Public Security has promulgated measures that prohibit use of the internet in ways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content.

 

In July 2019, the Cyberspace Administration of China promulgated The Measures for Credit Information Management of Internet Untrustworthy Subjects (draft) to credit construction in the field of internet information services and strengthen credit information management of internet information service untrustworthy subjects. The draft lists four specific cases of serious untrustworthy activities and stipulates the subject of the above-mentioned acts shall be included in the blacklist of serious untrustworthy of internet information service. The validity period is three years, during which the subject will be restricted to engage in internet information service. Relatively minor behaviors which committed several times but have not reached the blacklist determination criteria will be included in the focus list.

 

41

 

 

Regulations Relating to Internet Privacy

 

In recent years, PRC government authorities have enacted laws and regulations on internet use to protect personal information from any unauthorized disclosure. The Administrative Measures on Internet Information Services prohibit ICP service operators from insulting or slandering a third-party or infringing upon the lawful rights and interests of a third-party. Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT in 2011, an ICP operator may not collect any user personal information or provide any such information to third parties without the consent of a user. An ICP service operator must expressly inform the users of the method, content and purpose of the collection and processing of such user personal information and may only collect such information necessary for the provision of its services. An ICP service operator is also required to properly keep the user personal information, and in case of any leak or likely leak of the user personal information, the ICP service operator must take immediate remedial measures and, in severe circumstances, to make an immediate report to the telecommunications regulatory authority. In addition, pursuant to the Decision on Strengthening the Protection of Online Information issued by the Standing Committee of the National People’s Congress in December 2012 and the Order for the Protection of Telecommunication and Internet User Personal Information issued by the MIIT in July 2013, any collection and use of user personal information must be subject to the consent of the user, abide by the principles of legality, rationality and necessity and be within the specified purposes, methods and scopes. An ICP service operator must also keep such information strictly confidential, and is further prohibited from divulging, tampering or destroying of any such information, or selling or proving such information to other parties. Any violation of the above decision or order may subject the ICP service operator to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal liabilities. Furthermore, in June 2016, the State Internet Information Office issued the Administrative Provisions on Mobile Internet Applications Information Services, which became effective on August 1, 2016, to further strengthen the regulation of the mobile application information services. Pursuant to these provisions, owners or operators of mobile internet applications that provide information services are required to be responsible for information security management, establish and improve the protective mechanism for user information, observe the principles of legality, rightfulness and necessity, and expressly state the purpose, method and scope of, and obtain user consent to, the collection and use of users’ personal information. In addition, the new Cyber Security Law, which became effective on June 1, 2017, also requires network operators to strictly keep confidential users’ personal information that they have collected and to establish and improve user information protective mechanism. We have required our users to consent to our collecting and using their personal information, and established information security systems to protect user’s privacy.

 

On May 24, 2019, the Cyberspace Administration of China promulgated the Cybersecurity Review Measures (Exposure Draft), which, together with the Article 35 of the Cybersecurity Law, focuses on the cyber security review. It has clear and detailed provisions on the review object, review scope and review process, and provides guidance for law enforcement agencies.

 

On May 28, 2019, the Cyberspace Administration of China promulgated the Administrative Measures on Data Security, which further stipulates the network security protection obligations that network operators should perform under the PRC Cybersecurity Law, clarifies the standards for the collection, processing, using and security supervision of personal information and important data, and states that network operators shall make a filing with the local cyberspace administration when they collect important data or sensitive personal information for the purposes of business operations, any network operator that collects and uses personal information through products such as websites and applications shall develop and disclose the rules for collection and use separately.

 

In October 2019, the Information Security Technology - Personal Information Security Specification (Exposure Draft) was published to seek comments from the general public. Although the draft is a national recommended standard but not legally enforceable, from a practical point of view, existing internet companies have been inquired by the Cyberspace Administration of China for not conforming to the draft’s spirit and have been ordered to make rectification. In January 2020, National Information Security Standardization Technical Committee promulgated Information Security Technology - Basic Specification for the Collection of Personal Information by Mobile Internet Application (App) (Exposure Draft). This draft clarifies the basic requirements that mobile Internet applications should meet to collect personal information, which means that APP developers and operators who collect user’s personal information shall comply with the requirement strictly.

 

In December 2019, the Cyberspace Administration of China promulgated Provisions on the Ecological Governance of Network Information Contents, which took effect on March 1, 2020. Its goal is to meet the requirement of a network comprehensive management system and promote and create a good network ecology and network space. It specifies the obligations of network information content producers, network information content service platforms and network information content service users regarding related ecological governance.

 

Regulations Relating to Product Quality and Consumer Protection

 

In connection with our food-industry B2B services prior to July 22, 2019, we were subject to regulations relating to product quality and consumer protection. The Product Quality Law applies to all production and sale activities in China. Pursuant to this law, products offered for sale must satisfy relevant quality and safety standards. Enterprises may not produce or sell counterfeit products in any fashion, including forging brand labels or giving false information regarding a product’s manufacturer. Violations of state or industrial standards for health and safety and any other related violations may result in civil liabilities and administrative penalties, such as compensation for damages, fines, suspension or shutdown of business, as well as confiscation of products illegally produced and sold and the proceeds from such sales. Severe violations may subject the responsible individual or enterprise to criminal liabilities. Where a defective product causes physical injury to a person or damage to another person’s property, the victim may claim compensation from the manufacturer or from the seller of the product. If the seller pays compensation and it is the manufacturer that should bear the liability, the seller has a right of recourse against the manufacturer. Similarly, if the manufacturer pays compensation and it is the seller that should bear the liability, the manufacturer has a right of recourse against the seller.

 

42

 

 

The Consumer Protection Law sets out the obligations of business operators and the rights and interests of the consumers in China. Pursuant to this law, business operators must guarantee that the commodities they sell satisfy the requirements for personal or property safety, provide consumers with authentic information about the commodities, and guarantee the quality, function, usage and term of validity of the commodities. Failure to comply with the Consumer Protection Law may subject business operators to civil liabilities such as refunding purchase prices, replacement of commodities, repairing, ceasing damages, compensation, and restoring reputation, and even subject the business operators or the responsible individuals to criminal penalties when personal damages are involved or if the circumstances are severe. The Consumer Protection Law was further amended in October 2013 and became effective in March 2014. The amended Consumer Protection Law further strengthen the protection of consumers and impose more stringent requirements and obligations on business operators, especially on the business operators through the internet. For example, the consumers are entitled to return the goods (except for certain specific goods) within seven days upon receipt without any reasons when they purchase the goods from business operators on the internet. The consumers whose interests have been damaged due to their purchase of goods or acceptance of services on online marketplace platforms may claim damages from sellers or service providers. Where the providers of the online marketplace platforms are unable to provide the real names, addresses and valid contact details of the sellers or service providers, the consumers may also claim damages from the providers of the online marketplace platforms. Providers of online marketplace platforms that know or should have known that sellers or service providers use their platforms to infringe upon the legitimate rights and interests of consumers but fail to take necessary measures must bear joint and several liabilities with the sellers or service providers. Moreover, if business operators deceive consumers or knowingly sell substandard or defective products, they should not only compensate consumers for their losses, but also pay additional damages equal to three times the price of the goods or services.

 

The Provisional Measures for 7-day Unconditional Return of Online Purchased Goods came effective on May 15, 2017, which provides detailed regulations on and ensures the implementation of the rules of "7-day Unconditional Return of Purchased Goods" provided for in the Consumer Protection Law to protect the legitimate rights and interests of consumers. Pursuant to this regulation, online goods sellers shall lawfully perform their duties of "7-day Unconditional Return of Purchased Goods," and the online trading platforms shall guide and urge the online goods sellers who use the platform to perform the duties of "7-day Unconditional Return of Purchased Goods," conduct supervisions and inspections, and provide technical support. This measure also encourages online goods sellers to make a commitment of "unconditional return policy" that are more favorable to consumers than the Measures' requirements. Fresh or perishable goods are inapplicable to the return policy. The online goods sellers who refuse the returning of goods in violation of the provisions, shall, in addition to bearing the corresponding civil liability, be ordered by the administration for industry and commerce or other relevant administrative authorities to make correction, and may be subject to warning and/or confiscation of illegal income, a fine ranging from one to 10 times the amount of illegal income based on the circumstances, where there is no illegal income, a fine of not more than RMB500,000; in serious cases, the business operator shall be ordered to suspend business operation for correction and its business license shall be revoked.

 

We were subject to the Product Quality Law, the Consumer Protection Law and the Provisional Measures for 7-day Unconditional Return of Online Purchased Goods as an online supplier of commodities and a provider of online marketplace platform when we were providing food-industry B2B services and believe that we had been in compliance with these regulations in all material aspects before we ceased to provide food-industry B2B services.

 

Regulations Relating to Pricing

 

In China, the prices of a very small number of products and services are guided or fixed by the government. According to the Pricing Law, business operators must, as required by the government departments in charge of pricing, mark the prices explicitly and indicate the name, origin of production, specifications, and other related particulars clearly. Business operators may not sell products at a premium or charge any fees that are not explicitly indicated. Business operators must not commit the specified unlawful pricing activities, such as colluding with others to manipulate the market price, using false or misleading prices to deceive consumers to transact, or conducting price discrimination against other business operators. Failure to comply with the Pricing Law may subject business operators to administrative sanctions such as warning, ceasing unlawful activities, compensation, confiscating illegal gains, fines. The business operators may be ordered to suspend business for rectification, or have their business licenses revoked if the circumstances are severe. We are subject to the Pricing Law as an online retailer and believe that our pricing activities are currently in compliance with the law in all material aspects.

 

43

 

 

Regulations Relating to Intellectual Property Rights

 

The PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and domain names.

 

Copyright. Pursuant to the Copyright Law and its implementation rules, creators of protected works enjoy personal and property rights, including, among others, the right of disseminating the works through information networks. Pursuant to the relevant PRC regulations, rules and interpretations, internet service providers will be jointly liable with the infringer if they (a) participate in, assist in or abet infringing activities committed by any other person through the internet, (b) are or should be aware of the infringing activities committed by their website users through the internet, or (c) fail to remove infringing content or take other action to eliminate infringing consequences after receiving a warning with evidence of such infringing activities from the copyright holder. To comply with these laws and regulations, we have implemented internal procedures to monitor and review the content we have licensed from content providers before they are released on our website and remove any infringing content promptly after we receive notice of infringement from the legitimate rights holder.

 

Trademark. The Trademark Law and its implementation rules protect registered trademarks. The PRC Trademark Office of State Administration of Industry and Commerce is responsible for the registration and administration of trademarks throughout the PRC. The Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. As of December 31, 2018, we had approximately 23 trademark applications in China.

 

Domain Name. Domain names are protected under the Administrative Measures on the Internet Domain Names promulgated by the MIIT on November 1, 2017. The MIIT is the major regulatory body responsible for the administration of the PRC internet domain names, under supervision of which the CNNIC is responsible for the daily administration of .cn domain names and Chinese domain names. CNNIC adopts the “first to file” principle with respect to the registration of domain names. We have registered www.mercurity.com, www.nbpay.com and www.mfhi.com.

 

On November 27, 2017, the MITT issued the Notice of the Ministry of Industry and Information Technology on Regulating the Use of Domain Names in Providing Internet-based Information Services. Pursuant to this notice, internet access service providers shall, via the Record-filing System, regularly check the use of domain names by Internet-based information service providers, and shall, in the case that a domain name does not exist or is expired or has no real identity information, cease the provision of access services for the Internet-based information service provider concerned.

 

Regulations Relating to Employment

 

The Labor Contract Law and its implementation rules provide requirements concerning employment contracts between an employer and its employees. If an employer fails to enter into a written employment contract with an employee within one year from the date on which the employment relationship is established, the employer must rectify the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s salary for the period from the day following the lapse of one month from the date of establishment of the employment relationship to the day prior to the execution of the written employment contract. The Labor Contract Law and its implementation rules also require compensation to be paid upon certain terminations, which significantly affects the cost of reducing workforce for employers. In addition, if an employer intends to enforce a non-compete provision with an employee in an employment contract or non-competition agreement, it has to compensate the employee on a monthly basis during the term of the restriction period after the termination or ending of the labor contract. Employers in most cases are also required to provide a severance payment to their employees after their employment relationships are terminated.

 

44

 

 

Enterprises in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located. According to the Social Insurance Law, an employer that fails to make social insurance contributions may be ordered to pay the required contributions within a stipulated deadline and be subject to a late fee. If the employer still fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three times the amount overdue. According to the Regulations on Management of Housing Fund, an enterprise that fails to make housing fund contributions may be ordered to rectify the noncompliance and pay the required contributions within a stipulated deadline; otherwise, an application may be made to a local court for compulsory enforcement. We have not made adequate contributions to employee benefit plans, as required by applicable PRC laws and regulations.

 

Regulations Relating to Dividend Withholding Tax

 

Pursuant to the Enterprise Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in the PRC, or has set up an organization or establishment but the income derived has no actual connection with such organization or establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced withholding tax: (i) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (ii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties (For Trial Implementation), which became effective in October 2009, require that non-resident enterprises must obtain approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. In November 2015, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties became effective and repealed the Trial Implementation, which was later replaced by the Administrative Measures on Non-resident Taxpayers Enjoying Treaty Benefits promulgated by State Taxation Administration in October 2019. Pursuant to the new Measures, non-resident taxpayers claiming treaty benefits shall be handled in accordance with the principles of “self-assessment, claiming benefits, retention of the relevant materials for future inspection.” Non-resident taxpayers who satisfy the criteria for entitlement to tax treaty benefits may, at the time of tax declaration or withholding declaration through a withholding agent, enjoy the tax treaty benefits, instead of being subject to approvals, simultaneously gather and retain the relevant materials pursuant to the provisions of these measures for future inspection and be subject to follow-up administration by the tax authorities.

 

Pursuant to the Notice of the Ministry of Finance, the State Administration of Taxation, the National Development and Reform Commission, and the Ministry of Commerce on the Applicable Scope of the Policy of Temporary Exemption of Withholding Taxes on the Direct Investment Made by Overseas Investors with Distributed Profits, or Circular 102, which became effective in January 2018, where an overseas investor uses profits distributed by a resident enterprise in China for direct investment in an encouraged investment project, deferred tax payment policy shall apply if the stipulated criteria is satisfied, and withholding of income tax shall be waived in the interim.

 

Regulations Relating to Foreign Exchange

 

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans.

 

45

 

 

In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular No. 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular No. 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. SAFE also strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. In March 2015, SAFE issued SAFE Circular No.19, which took effect and replaced SAFE Circular No. 142 from June 1, 2015. Although SAFE Circular No.19 allows for the use of RMB converted from the foreign currency-denominated capital for equity investments in the PRC, the restrictions continue to apply as to foreign-invested enterprises’ use of the converted RMB for purposes beyond the business scope, for entrusted loans or for inter-company RMB loans. The sixth article of SAFE Circular No.19 relating to the administration of the exchange settlement and use of the capital in the foreign exchange account under other direct investments has been abolished by SAFE Circular No.39 in 2019.

 

In November 2012, SAFE promulgated the Circular on Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, and amended it in May 2015, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts (e.g. pre-establishment expenses account, foreign exchange capital account, guarantee account), the reinvestment of lawful incomes derived by foreign investors in the PRC (e.g. profit, proceeds of equity transfer, capital reduction, liquidation and early repatriation of investment), and purchase and remittance of foreign exchange as a result of capital reduction, liquidation, early repatriation or share transfer in a foreign-invested enterprise no longer require SAFE approval, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible before. The Appendix 1 and 2 have been abolished by SAFE Circular No.39 in 2019. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches. The Appendix 3 and Article 11 in the Appendix 1 which stipulates that the foreign exchange bureaus shall implement annual inspection on foreign investment enterprises pursuant to the relevant provisions of the State have been abolished by SAFE Circular No.39 in 2019.

 

In February 2015, SAFE promulgated the Circular on Further Simplifying and Improving the Policies Concerning Foreign Exchange Control on Direct Investment, or SAFE Circular No. 13, which took effect on June 1, 2015. SAFE Circular No. 13 delegates the authority to enforce the foreign exchange registration in connection with the inbound and outbound direct investment under relevant SAFE rules to certain banks and therefore further simplifies the foreign exchange registration procedures for inbound and outbound direct investment. SAFE Circular No.13 has been partially abolished by SAFE Circular No.39 in 2019.

 

46

 

 

C.          Organizational Structure

 

The following diagram illustrates our corporate structure as of the date of this annual report.

 

 

 

 

 

(1)Previously known as Unicorn Investment Limited.

 

(2)The sole shareholder of Kuali Yitong is Mr. Kaiming Hu.

 

(3)The shareholders of Lianji are Ms. Hong Zhou and Mr. Longming Wu, holding 1.0% and 99.0% equity interests of Lianji, respectively.

 

Contractual Arrangements with Lianji and Its Shareholders

 

Following our acquisition of Mercurity Limited in May 2019, we gained effective control over and received substantially all the economic benefits from Lianji through a series of contractual arrangements among our wholly-owned subsidiary Lianji Future, Lianji and its shareholders.

 

Agreements that Transfers Economic Benefits and Risks to Us

 

Exclusive Business Operation Agreement. Lianji Future and Lianji have entered into an exclusive business operation agreement, pursuant to which Lianji Future has the exclusive right to provide Lianji with technology development and application services. Without Lianji Future’s written consent, Lianji shall not accept any technology development and application services covered by this agreement from any third party. Lianji agrees to pay comprehensive service charges on an annual basis and up to the full balance of Lianji’s total income after deduction of its costs and expenses. In addition, Lianji undertakes that without Lianji Future’s prior written consent, Lianji shall not enter into any transactions that may have material effect on Lianji’s assets, obligations, rights or business operations. Unless otherwise agreed by the parties, this agreement will remain effective until Lianji Future ceases business operations.

 

47

 

 

Agreements that Provide Us with Effective Control over Lianji

 

Powers of Attorney. Each shareholder of Lianji has issued a power of attorney, irrevocably appointing Lianji Future, as such shareholder’s attorney-in-fact to exercise all shareholder rights, including, but not limited to, the right to call shareholders’ meeting, the right to vote on all matters of Lianji that require shareholder approval, and the right to dispose of all or part of the shareholder’s equity interest in Lianji, on behalf of such shareholder. Other than the foregoing circumstances, the power of attorney will remain in force until the termination of the business operation agreement and during its effective term, shall not be amended or terminated without the consent of Lianji Future.

 

Exclusive Option Agreement. Lianji Future, Lianji and each of Lianji’s shareholders have entered into an option agreement, pursuant to which Lianji’s shareholder has irrevocably granted Lianji Future an exclusive option, to the extent permitted by PRC law, to purchase, or have its designated person or persons to purchase, at its discretion all or part of the shareholder’s equity interests in Lianji or all or part of Lianji’s assets. The purchase price shall be a nominal price unless where PRC laws and regulations require valuation of the equity interests or the assets, or promulgates other restrictions on the purchase price, or otherwise prohibits purchasing the equity interests or the assets at a nominal price. If the PRC laws and regulations prohibit purchasing the equity interests or the assets at a nominal price, the purchase price shall be equal to the original investment of the equity interests made by such shareholders or the book value of the assets. Where PRC laws and regulations require valuation of the equity interests or the assets or promulgates other restrictions on the purchase price, the purchase price shall be the minimum price permitted under PRC laws and regulations. However, if the minimum price permitted under PRC laws and regulations exceed the original investment of the equity interests or the book value of the assets, Lianji shall reimburse Lianji Future the exceeding amount after deducting all taxes and fees paid under PRC laws and regulations. The shareholders of Lianji undertake, among other things, that without Lianji Future’s prior written consent, they shall not take any actions that may have material effect on Lianji’s assets, businesses and liabilities, nor shall they appoint or replace any directors, supervisors and officers of Lianji. These agreements have terms of ten years, which may be extended upon Lianji Future’s written confirmation prior to the expiry.

 

Equity Interest Pledge Agreement. Each shareholder of Lianji has entered into an equity interest pledge agreement with Lianji Future and Lianji, pursuant to which, the shareholder has pledged all of his or her equity interest in Lianji to Lianji Future to guarantee the performance by Lianji and its shareholders of their obligations under the master agreements, which include the business operation agreement the power of attorney and the exclusive option agreement. Each shareholder of Lianji agrees that, during the term of the equity interest pledge agreement, he or she will not dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests without the prior written consent of Lianji Future. The equity interest pledge agreement remain effective until Lianji and its shareholders discharge all of their obligations under the master agreements.

 

Contractual Arrangements with Kuali Yitong and Its Shareholder

 

Following our acquisition of NBpay in March 2020, we gained effective control over and received substantially all the economic benefits from Kuali Yitong through a series of contractual arrangements among our wholly-owned subsidiary Lianji Future, Kuali Yitong and its shareholder.

  

Agreements that Transfers Economic Benefits and Risks to Us

 

Business Operation Agreement. Lianji Future and Kuali Yitong have entered into a business operation agreement, pursuant to which Lianji Future has the exclusive right to provide Kuali Yitong with technology development and application services. Without Lianji Future’s written consent, Kuali Yitong shall not accept any technology development and application services covered by this agreement from any third party. Kuali Yitong agrees to pay comprehensive service charges on an annual basis and up to the full balance of Kuali Yitong’s total income after deduction of its costs and expenses. In addition, Kuali Yitong undertakes that without Lianji Future’s prior written consent, Kuali Yitong shall not enter into any transactions that may have material effect on Kuali Yitong’s assets, obligations, rights or business operations. Unless otherwise agreed by the parties, this agreement will remain effective until Lianji Future ceases business operations.

 

48

 

 

Agreements that Provide Us with Effective Control over Lianji

 

Powers of Attorney. The shareholder of Kuali Yitong has issued a power of attorney, irrevocably appointing Lianji Future, as such shareholder’s attorney-in-fact to exercise all shareholder rights, including, but not limited to, the right to call shareholders’ meeting, the right to vote on all matters of Kuali Yitong that require shareholder approval, and the right to dispose of all or part of the shareholder’s equity interest in Kuali Yitong, on behalf of such shareholder. Other than the foregoing circumstances, the power of attorney will remain in force until the termination of the business operation agreement and during its effective term, shall not be amended or terminated without the consent of Lianji Future.

 

Option Agreement. Lianji Future, Kuali Yitong and Kuali Yitong’s shareholder have entered into an option agreement, pursuant to which Kuali Yitong’s shareholder has irrevocably granted Lianji Future an exclusive option, to the extent permitted by PRC law, to purchase, or have its designated person or persons to purchase, at its discretion all or part of the shareholder’s equity interests in Kuali Yitong or all or part of Kuali Yitong’s assets. The purchase price shall be a nominal price unless where PRC laws and regulations require valuation of the equity interests or the assets, or promulgates other restrictions on the purchase price, or otherwise prohibits purchasing the equity interests or the assets at a nominal price. If the PRC laws and regulations prohibit purchasing the equity interests or the assets at a nominal price, the purchase price shall be equal to the original investment of the equity interests made by such shareholder or the book value of the assets. Where PRC laws and regulations require valuation of the equity interests or the assets or promulgates other restrictions on the purchase price, the purchase price shall be the minimum price permitted under PRC laws and regulations. However, if the minimum price permitted under PRC laws and regulations exceed the original investment of the equity interests or the book value of the assets, Kuali Yitong shall reimburse Lianji Future the exceeding amount after deducting all taxes and fees paid under PRC laws and regulations. The shareholder of Kuali Yitong undertakes, among other things, that without Lianji Future’s prior written consent, it shall not take any actions that may have material effect on Kuali Yitong’s assets, businesses and liabilities, nor shall he appoint or replace any directors, supervisors and officers of Kuali Yitong. These agreements have terms of ten years, which may be extended upon Lianji Future’s written confirmation prior to the expiry.

 

Equity Pledge Agreement. The shareholder of Kuali Yitong has entered into an equity pledge agreement with Lianji Future and Kuali Yitong, pursuant to which, the shareholder has pledged all of his equity interest in Kuali Yitong to Lianji Future to guarantee the performance by Kuali Yitong and its shareholder of their obligations under the master agreements, which include the business operation agreement the power of attorney and the exclusive option agreement. The shareholder of Kuali Yitong agrees that, during the term of the equity interest pledge agreement, he will not dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests without the prior written consent of Lianji Future. The equity interest pledge agreement remain effective until Kuali Yitong and its shareholder discharge all of their obligations under the master agreements.

 

We have been advised by our PRC legal counsel, Beijing Dacheng Law Offices, LLP, that the ownership structure and the contractual arrangements among Our WFOE, Our VIEs and their respective shareholders will not result in any violation of PRC laws or regulations currently in effect. However, we have been further advised by our PRC legal counsel that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations. Accordingly, there can be no assurance that the PRC regulatory authorities will not take a view that is contrary to or otherwise different from the above opinion of our PRC legal counsel. Our PRC legal counsel has further advised that if the PRC government authority finds that our corporate structure, the contractual arrangements or the reorganization to establish our current corporate structure do not comply with any applicable PRC laws, rules or regulations, the contractual arrangements will become invalid or unenforceable, and we could be subject to severe penalties including being prohibited from continuing operations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure and Dependence on our Contractual Arrangements with our Affiliates—If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in internet business, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations” and “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—Uncertainties with respect to the PRC legal system could have an adverse effect on us.”

 

49

 

 

D.           Property, Plants and Equipment

 

Our executive offices are located at Room 003, Floor 15, Building No.1 B, No. 38 Zhongguancun Avenue, Haidian District, Beijing 100086, People's Republic of China and occupy a total of 108 square meters. The lease of our headquarter office has a term of two years.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report on Form 20-F.

 

A.           Operating Results

 

Overview

 

Our current principal business is to design and develop digital asset transaction platforms based on blockchain technologies for customers to facilitate asset trading, asset digitalization and cross-border payments and provide supplemental services for such platforms, such as customized software development services, maintenance services and compliance support services. We started this new business since our acquisition of Mercurity Limited (previously known as Unicorn Investment Limited) in May 2019. We incurred net income of US$0.5 million for the year ended December 31, 2019.

 

We incurred loss from operations of US$1.4 million and US$1.8 million for the years ended December 31, 2017 and 2018, respectively, and had income from operations of US$0.5 million for the year ended December 31, 2019. As we only acquired our current continuing operations in 2019, our loss from operations for the years ended December 31, 2017 and 2018 were primarily due to the general and administrative expenses incurred during those years.

 

Acquisition of Mercurity Limited

 

In May 2019, we acquired Mercurity Limited and its subsidiaries and variable interest entity to start developing digital asset transaction platform products based on blockchain technologies and providing related services. Pursuant to the share purchase agreement among our company, Mercurity Limited and Mr. Haohan Xu, who was the sole shareholder of Mercurity Limited prior to the completion of this transaction, we acquired all the issued and outstanding shares of Mercurity Limited from Mr. Haohan Xu for the consideration of 632,660,858 newly issued ordinary shares of our company. Upon the completion of this acquisition, Mercurity Limited and its subsidiaries became our wholly-owned subsidiaries and we gained effective control over Lianji through the contractual arrangements among Lianji Future, Lianji and its shareholders.

 

Divestment of B2B Business

 

On July 22, 2019, we divested our B2B services to food service suppliers and customers by selling all the issued and outstanding shares of New Admiral Limited, or New Admiral, our former wholly-owned subsidiary operating the B2B business, to Marvel Billion Development Limited, or Marvel Billion, an entity associated with Ms. Xiaoxia Zhu, in exchange for US$1.0 million in cash. Marvel Billion and the divested entities agreed to waive all the rights and claims with respect to the liabilities owed by us to the divested entities. Upon the completion of this transaction, Marvel Billion assumed all the outstanding liabilities of the divested entities.

 

50

 

 

The above-mentioned divestment was a strategic shift of our business and has had a major effect on our results of operations. As a result, assets and liabilities, revenues and expenses and cash flows related to the previous B2B business have been reclassified as discontinued operations in accordance with U.S. GAAP in our consolidated financial statements for all the periods presented in this annual report. Our consolidated statements of operations and the consolidated statements of cash flows for the years ended December 31, 2017 and 2018 are adjusted retrospectively to reflect the change. For more information of our discontinued operations, see Note 5 to our consolidated financial statements included elsewhere in this annual report.

 

Key Components of Results of Operations

 

Revenues

 

We have been deriving revenues from providing digital asset infrastructure solutions based on blockchain technologies since our acquisition of Mercurity Limited in May 2019. We currently generate our revenues from software design, development and related, testing, installation, configuration, integration and customized development services based on blockchain technologies and provide related supplemental services to one customer. Our revenues were US$1.7 million for the year ended December 31, 2019.

 

Cost of Revenues

 

Our cost of revenues currently consists of payroll of technical personnel. Our cost of revenues was US$0.3 million for the year ended December 31, 2019.

 

Operating Expenses

 

Our operating expenses consist of general and administrative expenses. Our total operating expenses were US$1.0 million for the year ended December 31, 2019.

 

Our general and administrative expenses consist primarily of (i) salaries and benefits for employees, which are the salaries and benefits for our management, merchant service representatives and general administrative staff, (ii) office expenses, which consist primarily of office rental, maintenance and utilities expenses, depreciation of office equipment and other office expenses, and (iii) professional expenses, which consist primarily of legal expense and audit fees.

 

Interest Income

 

Our interest income consists primarily of the interest income from our cash and short-term deposits with banks.

 

Other Income

 

Other income consists primarily of the gain generated from our disposal of one cryptocurrency in exchange for another type of cryptocurrency.

  

Critical Accounting Policies

 

The preparation of our consolidated financial statements and related notes requires our management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our management has discussed the development, selection and disclosure of these estimates with our board of directors. Actual results may differ from these estimates under different assumptions or conditions. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.

 

51

 

 

We believe that the following critical accounting policies are the most sensitive and require more significant estimates and assumptions used in the preparation of our consolidated financial statements.

 

You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included in this annual report.

 

Revenue Recognition

 

We generate revenues primarily from fixed-price short-term contracts involving the design, development, creation, testing, installation, configuration, integration and customization of making fully operational software and from providing related services.

 

On January 1, 2019, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition (“ASC 605”), using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with historic accounting under ASC 605. The impact of adopting the new revenue standard was not material to our consolidated financial statements and there was no adjustment to beginning retained earnings on January 1, 2019.

 

Under ASC 606, we recognize revenue when we satisfy a performance obligation when the customer obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services we transfer to the customer.

 

Once a contract is determined to be within the scope of ASC 606 at contract inception, we review the contract to determine which performance obligations it must deliver and which of these performance obligations are distinct. We recognize revenue based on the amount of the transaction price that is allocated to each performance obligation when that performance obligation is satisfied or as it is satisfied.

 

For software development services, we recognize revenue over time as our performance creates or enhances an asset that the customer controls as the asset is created or enhanced. We generally recognize revenue using an input method with revenue amounts being recognized proportionately as costs are incurred relative to the total expected costs to satisfy the performance obligation. We believe that costs incurred as a portion of total estimated costs is an appropriate measure of progress towards satisfaction of the performance obligation since this measure reasonably depicts the progress of the work effort.

 

The services other than those associated with the software development services may be a service performance obligation, which is distinct from performance obligation for software development. Our services are provided to customers for a fixed amount over the contract service period and revenue is recognized on a straight-line basis over the term of the contract.

 

Intangible Assets

 

Intangible assets with indefinite useful life are not amortized and are tested for impairment annually or more frequently, if events or changes in circumstances indicate that they might be impaired in accordance with ASC Subtopic 350-30, Intangibles-Goodwill and Other: General Intangibles Other than Goodwill (“ASC 350-30”). Our intangible assets are cryptocurrencies which are measured at cost. We estimated the fair values of the intangible assets with the assistance from an independent third-party appraiser and no impairment loss was recognized for the year ended December 31, 2019. We are ultimately responsible for the determination of all amounts related to the intangible assets recorded in the financial statements.

 

52

 

 

Impairment of Goodwill

 

Goodwill represents the cost of an acquired business in excess of the fair value of tangible and identifiable intangible net assets purchased. We assign all the assets and liabilities of an acquired business, including goodwill, to reporting units.

 

Specifically, goodwill impairment is determined using a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit’s goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow.

 

We estimated the fair value of the goodwill with the assistance from an independent third-party appraiser and no impairment loss was recognized for the year ended December 31, 2019. We are ultimately responsible for the determination of all amounts related to the goodwill recorded in the financial statements.

 

Goodwill is tested for impairment at least once annually or more frequently if we believe indications of impairment exist. Impairment is tested using a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill.

 

If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating the fair value of reporting unit is performed by the DCF method.

 

Since the divestiture of the B2B business and B2B business in July 2019, we have one reporting unit, our blockchain-based digital asset infrastructure solutions business. We measure goodwill at fair value on a non-recurring basis when it is annually evaluated or whenever events or changes in circumstances indicate that carrying amount of a reporting unit exceeds its fair value. The fair value was determined using models with significant unobservable input (Level 3 inputs) and the cash flow projections were based on past experience, actual results of operations and management best estimates about future developments as well as certain market assumptions. We did not recognize any impairment loss for the year ended December 31, 2019.

 

53

 

 

Income Taxes

 

We follow the liability method in accounting for income taxes in accordance with ASC topic 740 (“ASC 740”), Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. We record a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized.

 

We apply the provision of ASC 740 to account for uncertainty in income taxes. ASC 740 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements.

 

We have elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of income tax expense in the consolidated statements of operations.

 

Share-based Payments

 

Share-based payment awards with employees are measured based on the grant date fair value of the equity instrument issued, and recognized as compensation costs using the straight-line method over the requisite service period, which is generally the vesting period of the options, with a corresponding impact reflected in additional paid-in capital. For share-based payment awards with market conditions, such market conditions are included in the determination of the estimated grant-date fair value. In the second quarter of 2017, we elected to early adopt ASU No. 2016-09, Compensation Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting, to account for forfeitures as they occur. The cumulative-effect adjustment to accumulated deficits was nil as a result of the adoption of ASU 2016-09.

 

A change in any of the terms or conditions of share-based payment awards is accounted for as a modification of awards. The Company measures the incremental compensation cost of a modification as the excess of the fair value of the modified awards over the fair value of the original awards immediately before its terms are modified, based on the share price and other pertinent factors at the modification date. For vested awards, the Company recognizes incremental compensation cost in the period the modification occurred. For unvested awards, we recognize, over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date.

 

Since our initial public offering in April 2015, the determination of the fair value of the ordinary shares has been based on the market price of our ADSs traded on the Nasdaq Global Market.

 

In determining the value of share options to employees, we have used the binomial option-pricing model, with assistance from the independent third-party appraiser. Under this option pricing model, certain assumptions, including risk-free interest rate, the contractual life of the options, the expected dividends on the underlying ordinary shares, the expected volatility of the price of the underlying shares for the contractual life of the options, the post-vesting forfeiture rate and the expected exercise multiple are required in order to determine the fair value of our options. Changes in these assumptions could significantly affect the fair value of share options and hence the amount of compensation expense we recognize in our consolidated financial statements.

 

In determining the value of ordinary shares to directors and executives, we have considered the fair value of the ordinary share and the expected dividend paid-out ratio. Because we have no plan to pay dividend, the fair value of the share granted to directors and executives is the fair value of the ordinary share.

 

54

 

 

The key assumptions used in the valuation of the employee share options are summarized in the following table:

 

   Modification on
September 1,
   Grants on
July 1,
   Modification on
June 20,
 
   2015   2016   2017 
Risk-free rate of return(1)   0.47% - 0.88%   1.46%   1.25%
Contractual life of the options(2)   5.0 years    10.0 years    5.0 years 
Volatility(3)   60.3% - 65.1%   54.8%   41.0%
Post-vesting forfeiture rate(4)   nil    nil    nil 
Post-vesting forfeiture rate(5)   N/A    36.1%   N/A 
Exercise multiple(6)   3x / 2x    3x / 2x    3x / 2x 

 

 

 

(1)The risk-free rate of return is based on the yield curve of U.S. dollar China sovereign bonds as of the valuation dates as extracted from Bloomberg.
(2)The contractual life of the options is based on the option grant letter.
(3)The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of listed guideline companies over a period comparable to the contractual life of the options.
(4)We estimate the dividend yield based on our expected dividend policy over the expected term of the options.
(5)The post-vesting forfeiture rate applied to options granted to general staff was based on our historical statistical data. 0% was applied to options granted to executive management with expectation that the executive management will not quit from the company over the contractual life of the options.
(6)Exercise multiple is the ratio of the fair value of a share over the exercise price at the time which the option will be exercised, estimated based on a consideration of research study regarding exercise pattern from historical statistical data. A multiple of three was used for the executive management and a multiple of two was used for general staff.

 

Recent Accounting Pronouncements

 

See Note 2 to our consolidated financial statements included elsewhere in this annual report.

 

Results of Operations

 

The following table presents selected financial data from our consolidated statements of operations for the periods indicated. Because we had a significant restructuring and a strategic shift in principal business during 2019, the historical operation of our B2B food supply chain business was categorized as a discontinued operation. In addition, we only acquired our current continuing asset transaction platform business in 2019. As a result, the period-to-period comparisons of our results of operations can only provide very limited insight into the development of our operation and thus should not be relied upon as indicative of our future performance.

 

   For the years ended December 31, 
   2017   2018   2019 
Revenues               
Third parties   -    -    1,738,000 
Total revenues   -    -    1,738,000 
Cost of revenues   -    -    (257,023)
Gross profit   -    -    1,480,977 
Operating expenses:               
General and administrative   (1,440,476)   (1,808,776)   (1,025,145)
Total operating expenses   (1,440,476)   (1,808,776)   (1,025,145)
(Loss)/income from operations   (1,440,476)   (1,808,776)   455,832 
Interest income, net   -    29    279 
Other income, net   -    -    26,859 
(Loss)/income before provision for income taxes   (1,440,476)   (1,808,747)   482,970 
Income tax benefits   -    -    - 
(Loss)/Income from continuing operations   (1,440,476)   (1,808,747)   482,970 
Discontinued operations:               
Loss from discontinued operations   (160,458,503)   (121,431,038)   (1,708,270)
Net loss   (161,898,979)   (123,239,785)   (1,225,300)

 

55

 

 

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

 

Revenues

 

Our revenues for the year ended December 31, 2019 were US$1.7 million from our blockchain-based digital asset infrastructure solutions business. We did not record any revenue for the year ended December 31, 2018 as we did not acquire our current continuing business until 2019.

 

Cost of revenues

 

Our cost of revenues for the year ended December 31, 2019 were US$0.3 million, which consisted of payroll of technical personnel. We did not incur any cost of revenues for the year ended December 31, 2018 as we did not acquire our current continuing business until 2019.

 

Operating expenses

 

Our operating expenses, consisting of general and administrative expenses, decreased by 43.3% from US$1.8 million for the year ended December 31, 2018 to US$1.0 million for the year ended December 31, 2019. This change was primarily due to a decrease in fees for professional services.

 

Net Loss

 

As a result of the foregoing, our net loss decreased by 99.0% from US$123.2 million for the year ended December 31, 2018 to US$1.2 million for the year ended December 31, 2019.

 

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

 

Revenues

 

Our revenues were nil and nil for the years ended December 31, 2017 and 2018, as we did not acquire our current continuing new business until 2019.

 

Cost of revenues

 

Our cost of revenues was nil and nil for the years ended December 31, 2017 and 2018, as we did not acquire our current continuing new business until 2019.

 

Operating expenses

 

Our operating expenses, consisting of general and administrative expenses, increased by 25.6% from US$1.4 million for the year ended December 31, 2017 to US$1.8 million for the year ended December 31, 2018. This change was primarily because of the increase in audit fees.

 

Net Loss

 

As a result of the foregoing, our net loss decreased by 23.9% from US$161.9 million for the year ended December 31, 2017 to US$123.2 million for the year ended December 31, 2018.

 

56

 

 

B.          Liquidity and Capital Resources

 

We had US$19,740, US$1,191 and US$435,211 in cash and cash equivalents as of December 31, 2017, 2018 and 2019, respectively.

 

We have incurred net losses since our inception. Our net losses were US$161.9 million, US$123.2 million and US$1.2 million for the year ended December 31, 2017, 2018 and 2019, respectively, and our net cash used in operating activities were US$9.9 million, US$4.3 million and US$0.6 million in 2017, 2018 and 2019, respectively. In May 2020, we entered into a share purchase agreement regarding a private placement of US$1 million to Universal Hunter (BVI) Limited. We have received US$300,000 upon the first closing of this private placement and, pursuant to the share purchase agreement with Universal Hunter (BVI) Limited, we expect to receive additional US$700,000 no later than November 18, 2020. We believe that our current cash balance and anticipated cash flows from operations will be sufficient to meet our anticipated capital needs in the next twelve months.

 

If there is any change in business conditions or other future developments, including any investments we may decide to pursue, we may also seek to sell additional equity securities or debt securities or borrow from lending institutions. Financing may be unavailable in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible debt securities, would dilute our earnings per share. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

 

In the future, we may rely on dividends and other distributions on equity paid by our wholly-owned PRC subsidiary for our cash and financing requirements. There are potential restrictions on the dividends and other distributions by our PRC subsidiary. For instance, if our wholly-owned PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt could restrict its ability to pay dividends or make other distributions to us. The PRC tax authorities may require us to adjust our taxable income under the contractual arrangements that Our WFOE currently has in place with Our VIEs in a way that could adversely affect the latter’s ability to pay dividends and other distributions to us. In addition, under PRC laws and regulations, our wholly-owned PRC subsidiary, as a wholly foreign-owned enterprise in the PRC, may only pay dividends out of its accumulated profits. Wholly foreign-owned enterprises such as our wholly-owned PRC subsidiary are required to set aside at least 10% of their accumulated after-tax profits each year, if any, to fund a statutory reserve fund, until the aggregate amount of such fund reaches 50% of their respective registered capital. At their discretion, wholly foreign-owned enterprises may allocate a portion of their after-tax profits to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. See “Item 3. Key Information—D. Risk factors—Risks Related to Our Corporate Structure and Dependence on our Contractual Arrangements with our Affiliates—We rely principally on dividends and other distributions on equity paid by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we might have. Any limitation on the ability of our PRC and Hong Kong subsidiaries to pay dividends to us could have an adverse effect on our ability to conduct our business.” In addition, our investment made as registered capital and additional paid-in capital of Our WFOE and Our VIEs are also subject to restrictions in their distribution and transfer according to the laws and regulations in China. Owing to the above, Our WFOE and Our VIEs in China are restricted in their ability to transfer their net assets to us in terms of cash dividends, loans or advances. As of December 31, 2019, the restricted net assets of Lianji, which represents registered capital and additional paid-in capital, was US$0.7 million. Any limitation on the ability of Lianji Future or our Hong Kong subsidiary, Ucon HK, to pay dividends or make other distributions to us could adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

 

57

 

 

 

We are an offshore holding company conducting our operations in China through Our WFOE and Our VIEs. The functional and reporting currency of our company is U.S. dollars. The financial records of Our WFOE and Our VIEs located in the PRC are maintained in Renminbi. Fluctuation in the exchange rate between the Renminbi and other foreign currency may affect our ability to inject capital in Our WFOE and Our VIEs. We could lend to Our WFOE and Our VIEs, or we could make additional capital contributions to Our WFOE, or we could establish new PRC subsidiary and make capital contributions to these new PRC subsidiary, or we could acquire offshore entities with business operations in China in an offshore transaction. Most of these uses are subject to PRC regulations and approvals. For example, loans by us to Our WFOE to finance its activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE. If we decide to finance Our WFOE by means of capital contributions, these capital contributions must be approved by the Ministry of Commerce or its local counterpart. Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are unlikely to lend money to Our VIEs and its subsidiaries which are PRC domestic companies. See “Item 3. Key Information—D. Risk factors—Risks Related to Our Corporate Structure and Dependence on our Contractual Arrangements with our Affiliates—PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion could limit our use of the proceeds we receive from our initial public offering to fund our expansion or operations.” The following table sets forth a summary of our cash flows for the periods indicated:

 

   For the Year Ended December 31, 
   2017   2018   2019 
   (in US$ thousands) 
Net cash used in operating activities   (9,874)   (4,331)   (645)
Net cash (used in)/ provided by investing activities   (741)   (13)   588 
Net cash provided by financing activities   12,643    1,686    - 
Effect of exchange rate changes   280    (1,897)   135 
Increase/(decrease) in cash and cash equivalents   2,307    (4,555)   78 
Cash at the beginning of the period   2,605    4,912    357 
Cash at the end of the period   4,912    357    435 

 

Net cash used in operating activities

 

Net cash used in operating activities was US$0.6 million for the year ended December 31, 2019, reflecting a combination of net cash used in continuing operations of US$0.9 million and net cash provided by discontinued operations of US$0.3 million. The net cash used in continuing operations was primarily due to an increase in accounts receivable of US$1.6 million and an decrease in prepaid expenses and other current assets of US$0.2 million, which were partially offset by net income from continuing operations of US$0.5 million and an increase in accrued expenses and other current liabilities and other non-current liabilities of US$0.2 million.

 

Net cash used in operating activities was US$4.3 million for the year ended December 31, 2018. We had a net loss of US$123.2 million. The principal items accounting for the difference between our net loss and our net cash used in operating activities were an increase in accrued expenses and other current liabilities of US$0.6 million and an increase in provision of doubtful other receivables of US$0.2 million, partially offset by a decrease in other current liabilities of US$0.1 million. Net cash used in discontinued operations in operating activities was US$3.1 million for the year ended December 31, 2018.

 

Net cash used in operating activities was US$9.9 million for the year ended December 31, 2017. We had a net loss of US$161.9 million. The principal items accounting for the difference between our net loss and our net cash used in operating activities were an increase in prepaid expenses and other current assets of US$0.5 million and an increase in accrued expenses and other current liabilities of US$0.1 million, partially offset by a decrease in other current liabilities of US$0.1 million. Net cash used in discontinued operations in operating activities was US$9.0 million for the year ended December 31, 2017.

 

Net cash (used in)/provided by investing activities

 

Net cash provided by investing activities was US$0.6 million for the year ended December 31, 2019, representing proceeds from disposal of subsidiaries, VIE and VIE’s subsidiaries, net of cash disposed, as well as cash acquired from acquisition of subsidiary and VIE.

 

Net cash used in investing activities was US$13.1 thousand for the year ended December 31, 2018, representing net cash used in our discontinued operations.

 

58

 

 

Net cash used in investing activities was US$0.7 million for the year ended December 31, 2017, representing net cash used in our discontinued operations.

 

Net cash provided by financing activities

 

We recorded no cash flow from financing activities for the year ended December 31, 2019.

 

Net cash provided by financing activities was US$1.7 million for the year ended December 31, 2018, representing net cash provided by discontinued operations.

 

Net cash provided by financing activities was US$12.6 million for the year ended December 31, 2017, representing net cash provided by discontinued operations.

 

Capital Expenditures

 

We did not have capital expenditures for the year ended December 31, 2019.

 

We made capital expenditures of US$13.1 thousand for the year ended December 31, 2018, consisting of the purchase of property and equipment.

 

We made capital expenditures of US$0.7 million for the year ended December 31, 2017, consisting of the purchase of property and equipment.

 

Going forward, as more third-party sellers utilize our online markets and more customers and third-party sellers download and utilize our app, our server demand will increase and we intend to purchase additional servers to service our expanded networking.

 

Inflation

 

Since our inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2017, 2018 and 2019 were increases of 1.6%, 1.9% and 4.5%, respectively. Although we have not been materially affected by inflation in the past, we have experienced and expect to continue to experience upward pressure on our operating expenses.

 

Withholding Tax Obligation

 

Pursuant to PRC individual income tax laws, when a corporation purchases equity interest from individuals, the individuals are obligated to pay individual income tax based on 20% of the capital gain from the transaction with the corporation as the withholding agent. We have purchased equity interests of certain entities from individual sellers. There is a possibility that if individual sellers fail to meet their income tax obligations, the tax authority may require us, as the withholding agent, to pay the taxes for the sellers. Based on the information currently available, we are unable to make a reasonable estimate of the related liability due to the uncertainty related to the outcome and amount of payment and relating penalty and interest.

 

C.            Research and Development

 

Please refer to Item 4B “Information on the Company – Business Overview –Technology” and “Intellectual Property.”

 

D.            Trend Information

 

Other than as described elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material adverse effect on our revenue, income from continuing operations, profitability, liquidity or capital resources, or that would cause our reported financial information not necessarily to be indicative of future operating results or financial condition.

 

59

 

 

E.             Off-balance Sheet Arrangements

 

Save for the contingent withholding tax obligation disclosed above and commitments disclosed below, we do not currently have any outstanding off-balance sheet arrangements or commitments. We have no plans to enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financial partnerships established for the purpose of facilitating off-balance sheet arrangements or commitments.

 

F.             Tabular Disclosure of Contractual Obligations

 

The following table sets forth our contractual obligations as of December 31, 2019:

 

   Payment Due by Period 
   Total   Less than 1 year 

1–3 years

  3–5 years   More than 5 years 
   (in US$ thousands)
Operating Lease Commitments   21    21           

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.            Directors and Senior Management

 

The following table sets forth certain information relating to our directors and executive officers as of the date of this annual report.

 

Directors and Executive Officers  Age  Position/Title
Hua Zhou  44  Chairperson of the Board of Directors, Chief Executive Officer
Haohan Xu  25  Director
Longming Wu  45  Director
Huimin Wang  64  Director
Xiaoyu Li  31  Director
Paul L. Gillis  66  Independent Director
Tony C. Luh  56  Independent Director
Min Zhou  56  Independent Director
Frank Zhigang Zhao  60  Chief Financial Officer

 

Ms. Hua Zhou has served as our chairperson and chief executive officer since July 2019 and as our director since May 2018. Ms. Zhou used to work at our company as a sales manager from 2011 to 2015. Ms. Zhou has over 10 years of experience in client and partner relationship management, M&A and marketing. Since 2017, Ms. Zhou has served as the Vice President of Strategic Partnership at Beijing Galaxy Fintech Group, a fin-tech company providing finance-related solutions to micro, small and medium enterprises. From 2015 to 2017, she worked as the Chief Executive Officer at iBeacon, a data-based marketing platform providing market targeting services to retailers. From 2009 to 2011, Ms. Zhou worked as the Director of Sales at WeLink Group. Prior to that, Ms. Zhou was Director of Clients at Focus Wireless Media, starting from 2007. Ms. Zhou holds a college degree from the China University of Petroleum.

 

Mr. Haohan Xu has served as our director since July 2019. Mr. Xu has been actively engaged in entrepreneurial activities. He currently serves as president and chief executive officer of Amazon Capital Inc. and is the founder and chief executive officer of Apifiny Group, a company developing asset network based on blockchain technologies. Prior to founding these companies, Mr. Xu worked as a private wealth management summer analyst at Morgan Stanley in the summer of 2018, where he focused on investments in the technology, media and telecommunication sector. From 2016 to 2017, Mr. Xu also accumulated experience in the fintech business through multiple positions at Galaxy Group and Haitou Capital in Beijing and New York. Mr. Xu received his bachelor of science degree from Columbia University.

 

60

 

 

Mr. Longming Wu has served as our director since July 2019. Mr. Wu has over 20 years of experience in business administration. He currently serves as chief executive officer of Beijing Galaxy Xingyuan Technology Co., Ltd. Prior to that, he served as president of Beijing Shiletao E-commerce Co., Ltd. from 2013 to 2016, where he was responsible for the development and operation of the company's online-to-offline business. From 1996 to 2013, he worked at Qingdao Real Estate Development Operation Co., Ltd., where he was a vice president. Mr. Wu received his bachelor's degree in international trade from Qingdao University in China and completed the Media Management Program at the Cheung Kong Graduate School of Business.

 

Ms. Huimin Wang has served as our director since June 2015. Ms. Wang is a co-founder of JMU HK, and she is also the founder of “Xiao Nan Guo” or the “Shanghai Min” brand. In addition to her directorship in our company, Ms. Wang is also the chairperson of Xiao Nan Guo Holdings Limited. In July 2019, Ms. Wang resigned from TANSH Global Food Group Co., Ltd. (formerly known as Xiao Nan Guo Restaurants Holdings Limited), a company listed on the Stock Exchange of Hong Kong (HKSE: 3666.HK), as its chairperson of the board of directors.

 

Ms. Xiaoyu Li has served as our director since May 2018. Ms. Li used to worked at our company’s investor relations department from 2012 to 2013. Ms. Li has extensive experience in investor relations and investment. Since 2015, she has served as the Investor Manager at Galaxy Internet, an online investment platform for entrepreneurs. Ms. Li holds a master's degree in finance from University of Illinois at Urbana-Champaign, and a bachelor's degree in economics from University of Minnesota.

 

Mr. Paul L. Gillis has served as our independent director since June 2020. Mr. Paul L. Gillis has served as a professor of accounting at Peking University Guanghua School of Management since 2007 and served as a co-director of International MBA program from 2011 to 2019. Since 2012, he has also served as a current affairs commentator at China Global Television Network, an international English-language news channel, and China Radio International, an international radio broadcaster. Mr. Paul L. Gillis is widely recognized by magazines such as The Accountant and International Financial Law Review as a leading expert in financial accounting, and has amassed substantial experience in the accounting industry. In 2004, he retired as a partner of PricewaterhouseCoopers following a 28-year career in the United States, Singapore and China. From 2011 to 2013, Mr. Paul L. Gillis served as member of Standing Advisory Group of the Public Company Accounting Oversight Board (PCAOB). From 2009 to 2012, he also served as an independent director and chairman of audit committee at Pansoft Company Limited (Nasdaq: PSOF). Mr. Paul L. Gillis received his bachelor’s degree in accounting from Western Colorado University in 1975, his master’s degree in accounting from Colorado State University in 1976 and his Ph.D. degree in accounting from Macquarie Graduate School of Management in 2011.

 

Mr. Tony C. Luh has served as our independent director since April 2015. At present, Tony is a venture partner for DFJ DragonFund and Yifang Ventures. Mr. Luh was an independent board director for Pansoft Inc. between 2008 and 2012. Mr. Luh served as a General Partner and Greater China President for the Westly Group between 2011 and 2014. Before joining the Westly Group, Mr. Luh was a Founding Partner and Managing Director at DFJ DragonFund from 2006 to 2011. Mr. Luh is also one of the Founders and Managing Director at DragonVenture, which he co-founded in 1999. Before DragonVenture, Mr. Luh was a senior executive at InfoWave Communications from 1997 to 1999. Mr. Luh possesses over 30 years of experience in capital markets, sales, strategic alliances and business development and has accumulated public investment expertise in sectors ranging from information technology to high volume manufacturing in Asia.

 

Mr. Min Zhou has served as our independent director since April 2015. At present, Mr. Zhou is the executive director and executive president of Beijing Enterprises Water Group Limited serving since 2013. Between 2008 and 2012, Mr. Zhou served as an executive director and vice president of Beijing Enterprises Water Group Limited. Mr. Zhou served as the director and chief financial officer of Beijing Zhongkecheng Environment Protection Group Limited from 2004 to 2008. Previously, Mr. Zhou served as a director and chief financial officer of Sichuan Zhongkecheng Environment Protection Stock Co., Ltd. from 2001 to 2004. Mr. Zhou served as the Chairman of Beijing Jingsheng Investment Co., Ltd. from 1989 to 2001. Prior to that, Mr. Zhou worked at Industrial and Commercial Bank of China—Zhejiang Yongkang Branch from 1985 to 1989 and worked at the People’s Bank of China—Zhejiang Yongkang Branch from 1980 to 1985. Mr. Zhou received an EMBA degree from Tsinghua University.

 

Mr. Frank Zhigang Zhao has served as our chief financial officer since February 2015. Mr. Zhao has over two decades of experience in financial and accounting management with auditing firms and public companies. Prior to joining us, Mr. Zhao was the chief financial officer of Borqs International Limited, from 2013 to 2015. Mr. Zhao worked as the chief financial officer of KingMed Medical Diagnostics from 2011 to 2013. Mr. Zhao was the chief financial officer of Simcere Pharmaceutical Group, from 2006 to 2011. From 2005 to 2006, Mr. Zhao worked as the chief financial officer of Sun New Media Inc. From 2003 to 2005, Mr. Zhao worked at FARO Technologies, Inc. as a financial controller. Mr. Zhao received his bachelor’s degree in economics from Peking University and MBA degree from University of Hartford.

 

61

 

 

B.            Compensation

 

Compensation of Directors and Executive Officers

 

In 2019, we paid an aggregate of approximately US$152,000 in cash as salaries and fees to our senior executives, officers and directors named in this annual report. Other than salaries, fees and share incentives, we do not otherwise provide pension, retirement or similar benefits to our officers and directors.

 

Share Incentive Plan

 

We adopted our share incentive plan in 2011 and amended it in 2015 to attract and retain the best available personnel, provide additional incentives to our employees, directors and consultants, and promote the success of our business. The amended and restated 2011 share incentive plan provides for the grant of options, restricted shares and other share-based awards, collectively referred to as “awards.” Our board of directors has authorized the issuance of ordinary shares of up to 15% of the issued and outstanding share capital of our company from time to time.

 

Plan Administration. Our compensation committee will administer the amended and restated 2011 share incentive plan. The committee determines the participants to receive awards, the type and number of awards to be granted, and the terms and conditions of each award grant.

 

Award Agreements. Awards granted under our amended and restated 2011 share incentive plan are evidenced by an award agreement that sets forth the terms, conditions and limitations for each grant, which may include the term of the award, the provisions applicable in the event that the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award. Unless specifically approved by our board of directors, the purchase price per share of an option shall not be less than 100% of the fair market value of the shares on the date of grant.

 

Transfer Restrictions. The right of a grantee in an award granted under our amended and restated 2011 share incentive plan may not be transferred in any manner by the grantee other than by will or the laws of descent and, with limited exceptions, may be exercised during the lifetime of the grantee only by the grantee.

 

Option Exercise. The term of options granted under the amended and restated 2011 share incentive plan may not exceed ten years from the date of grant. The consideration to be paid for our ordinary shares upon exercise of an option or purchase of ordinary shares underlying the option may include cash, check or other cash-equivalent, ordinary shares, consideration received by us in a cashless exercise, or any combination of the foregoing methods of payment.

 

Acceleration upon a Change of Control. If a change of control of our company occurs, (i) the compensation committee may determine that any outstanding unexercisable, unvested or lapsable awards shall automatically be deemed exercisable, vested and not subject to lapse immediately prior to the event triggering the change of control and (ii) the compensation committee may cancel such awards for fair value, provide for the issuance of substitute awards or provide that for a period of at least 15 days prior to the event triggering the change of control, such options shall be exercisable and that upon the occurrence of the change of control, such options shall terminate and be of no further force and effect.

 

Termination and Amendment. Unless terminated earlier, our share incentive plan will expire on February 1, 2021. Our board of directors has the authority to amend or terminate our share incentive plan subject to shareholder approval to the extent necessary to comply with applicable laws. Shareholders’ approval is required for any amendment to the amended and restated 2011 share incentive plan that increases the number of ordinary shares available under the amended and restated 2011 share incentive plan or changes the maximum number of shares for which awards may be granted to any participant. Additionally, a participant’s consent is required to diminish any of the rights of the participant under any award previously granted to such participant.

 

The following table summarizes, as of the date of this annual report, the outstanding options granted to our executive officers, directors, and other individuals as a group under our amended and restated 2011 share incentive plan.

 

62

 

 

Name  Common shares
underlying options
awarded/Restricted
Share Units
   Exercise price
(US$/share)
   Date of grant   Date of expiration
Other Individuals as a Group   36,249,120   from 0 to 0.2    from 2011/2/1
 to 2016/7/1
    from 2018/9/1
 to 2026/7/1
 
    *(1)   (1)       2016/7/1 
Total   36,249,120               

 

 

*Less than one percent of our total outstanding share capital.
(1)restricted share units

 

C.            Board Practices

 

Duties of Directors

 

Under Cayman Islands law, our directors owe certain fiduciary duties to our company, including duties of loyalty, to act honestly, and to act in what they consider in good faith to be in our best interests. Our directors also have a duty to exercise the skills they actually possess and such care and, diligence that a reasonably prudent person would exercise in comparable circumstances. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than what may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care, and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to us, our directors must ensure compliance with our fourth amended and restated memorandum and articles of association. We have the right to seek damages if a duty owed by our directors is breached.

 

The powers of our board of directors include, among others:

 

·convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;

 

·issuing authorized but unissued shares;

 

·declaring dividends and distributions;

 

·exercising the borrowing powers of our company and mortgaging the property of our company;

 

·approving the transfer of shares of our company, including the registering of such shares; and

 

·exercising any other powers conferred by the shareholders’ meetings or under our fourth amended and restated memorandum and articles of association.

 

Terms of Directors and Executive Officers

 

We have seven directors on our board of directors, two of whom are independent directors. Any director on our board may be removed by way of an ordinary resolution of shareholders. Any vacancies on our board of directors or additions to the existing board of directors can be filled by the affirmative vote of a majority of the remaining directors. The shareholders may also by ordinary resolution elect any person to be a director either to fill a casual vacancy or as an addition to the existing board of directors.

 

Any director appointed by the board of directors to fill a casual vacancy shall hold office for the remaining term of the director in whose place he is appointed and shall be eligible for re-election at the expiry of the said term.

 

63

 

 

Grounds for Vacating a Director

 

The office of a director shall be vacated if the director:

 

·resigns his office by notice in writing delivered to us or tendered at a meeting of the board of directors;

 

·becomes of unsound mind or dies;

 

·without special leave of absence from the board of directors, is absent from meetings of the board of directors for six consecutive months and the board of directors resolves that his office be vacated;

 

·becomes bankrupt or has a receiving order made against him or suspends payment or compounds with his creditors;

 

·is prohibited by law from being a director; or

 

·ceases to be a director by virtue of any provisions of Cayman Islands law or is removed from office pursuant to the fourth amended and restated articles of association.

 

All of our executive officers are appointed by and serve at the discretion of our board of directors. Our executive officers are elected by and may be removed by a majority vote of our board of directors.

 

Board Committees

 

Our board of directors has established an audit committee and a compensation committee.

 

Audit Committee

 

Our audit committee consists of Paul L. Gillis, Tony C. Luh and Min Zhou. We have determined that all the members of our audit committee satisfy the “independence” requirements of Rule 10A-3 under the Exchange Act and Nasdaq Marketplace Rule 5605(c)(2)(A) and that Paul L. Gillis is an audit committee financial expert as defined in the instructions to Item 16A of the Form 20-F. Paul L. Gillis serves as the chairperson of the audit committee.

 

The audit committee oversees our accounting and financial reporting processes and the audits of our consolidated financial statements. Our audit committee is responsible for, among other things:

 

·selecting the independent auditor;

 

·pre-approving auditing and non-auditing services permitted to be performed by the independent auditor;

 

·annually reviewing the independent auditor’s report describing the auditing firm’s internal quality control procedures, any material issues raised by the most recent internal quality control review, or peer review, of the independent auditors and all relationships between the independent auditor and our company;

 

·setting clear hiring policies for employees and former employees of the independent auditors;

 

·reviewing with the independent auditor any audit problems or difficulties and management’s response;

 

·reviewing and approving all related party transactions on an ongoing basis;

 

64

 

 

·reviewing and discussing the annual audited consolidated financial statements with management and the independent auditor;

 

·reviewing and discussing with management and the independent auditors major issues regarding accounting principles and financial statement presentations;

 

·reviewing reports prepared by management or the independent auditors relating to significant financial reporting issues and judgments;

 

·discussing earnings press releases with management, as well as financial information and earnings guidance provided to analysts and rating agencies;

 

·reviewing with management and the independent auditors the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on our consolidated financial statements;

 

·discussing policies with respect to risk assessment and risk management with management, internal auditors and the independent auditor;

 

·timely reviewing reports from the independent auditor regarding all critical accounting policies and practices to be used by our company, all alternative treatments of financial information within U.S. GAAP that have been discussed with management and all other material written communications between the independent auditor and management;

 

·establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;

 

·annually reviewing and reassessing the adequacy of our audit committee charter;

 

·such other matters that are specifically delegated to our audit committee by our board of directors from time to time;

 

·meeting separately, periodically, with management, internal auditors and the independent auditor; and

 

·reporting regularly to the full board of directors.

 

Compensation Committee

 

Our compensation committee consists of Min Zhou and Tony C. Luh. We have determined that all the members of our compensation committee satisfy the “independence” requirements of Rule 5605(a) of Nasdaq Stock Market Marketplace Rules. Min Zhou serves as the chairperson of the compensation committee.

 

Our compensation committee is responsible for, among other things:

 

·reviewing and approving our overall compensation policies;

 

·reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer, evaluating our Chief Executive Officer’s performance in light of those goals and objectives, reporting the results of such evaluation to the board of directors, and determining our Chief Executive Officer’s compensation level based on this evaluation;

 

·determining the compensation level of our other executive officers;

 

65

 

 

·making recommendations to the board of directors with respect to our incentive-compensation plan and equity-based compensation plans;

 

·administering our equity-based compensation plans in accordance with the terms thereof; and

 

·such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.

 

Corporate Governance

 

Our board of directors has adopted a code of business conduct and ethics, which is applicable to all of our directors, officers and employees. We have made our code of business conduct and ethics publicly available on our website.

 

In addition, our board of directors has adopted a set of corporate governance guidelines. The guidelines reflect certain guiding principles with respect to our board’s structure, procedures and committees. The guidelines are not intended to change or interpret any law, or our fourth amended and restated memorandum and articles of association.

 

Remuneration and Borrowing

 

The directors may determine the remuneration to be paid to the directors. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors. The directors may exercise all the powers of the company to borrow money and to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures or other securities whether outright or as security for any debt obligations of our company or of any third-party.

 

Qualification

 

There is no requirement for our directors to own any shares in our company in order for them to qualify as a director.

 

Employment Agreements

 

We have entered into employment agreements with each of our executive officers. We may terminate an executive officer’s employment for cause, at any time, without notice or remuneration, for certain acts of the officer, including, but not limited to, a conviction or plea of guilty to a felony, willful misconduct to our detriment or a failure to perform agreed duties. We may also terminate an executive officer’s employment under certain conditions, including, but not limited to, incapacity or disability of the officer, by a one-month prior written notice. An executive officer may terminate his or her employment with us for cause, at any time for certain reasons, or by a one-month prior written notice.

 

Our executive officers have also agreed not to engage in any activities that compete with us, or to directly or indirectly solicit the services of our employees, during employment or for a period of two years after termination of employment. Each executive officer has agreed to hold in strict confidence any confidential information or trade secrets of our company. Each executive officer also agrees to comply with all material applicable laws and regulations related to his or her responsibilities at our company as well as all material corporate and business policies and procedures of our company.

 

D.            Employees

 

As of December 31, 2019, we had a total of 19 employees, consisting of one staff member in sales, one staff member in marketing, eight staff members in research and development, and nine staff members in other functions. We had a total of 75 employees as of December 31, 2018 and 252 employees as of December 31, 2017 in connection with our discontinued B2B business.

 

66

 

 

The remuneration package for our employees includes salary, sales commissions and employee share option programs. In accordance with applicable regulations in China, we participate in a number of social insurance schemes, namely, a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a personal injury insurance plan, a maternity insurance and a housing reserve fund for the benefit of all of our employees. We have not experienced any material labor disputes or disputes with the labor department of the PRC government since our inception.

 

E.             Share Ownership

 

The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange Act, of our ordinary shares as of the date of this annual report (unless otherwise indicated) by:

 

·each of our directors and executive officers; and

 

·each person known to us to own beneficially more than 5% of our ordinary shares.

 

Beneficial ownership is determined in accordance with the rules of the SEC and generally. includes voting power or investment power with respect to securities. The number of ordinary shares beneficially owned including ordinary shares such person has the right to acquire within 60 days after the date of this annual report. Such shares, however, are not deemed to be outstanding and beneficially owned for the purpose of computing the percentage ownership of any other shareholder. The total number of ordinary shares issued and outstanding as of May 31, 2020 was 2,960,659,129 (excluding 36,249,120 ordinary shares in the form of ADSs that are reserved for issuance upon the exercise of share awards).

 

   Ordinary Shares Beneficially Owned 
   Number   Percentage (%) 
Directors and Executive Officers:        
Hua Zhou(1)        
Haohan Xu(2)   896,477,774    30.3 
Huimin Wang(3)   149,100,132    5.0 
Longming Wu(4)        
Xiaoyu Li(5)        
Paul L. Gillis(6)        
Tony C. Luh(7)        
Min Zhou(8)        
Frank Zhigang Zhao(9)   *    * 
Directors and executive officers as a group   1,055,950,446    35.7 
Principal Shareholders:          
Kaiming Hu(10)   761,789,601    25.7 
Amazon Capital Inc.(11)   574,131,836    19.4 
Universal Hunter (BVI) Limited(12)   150,825,600    5.1 
Extensive Power Limited(13)   149,100,132    5.0 

 

 

*Less than 1% of our total issued and outstanding shares.

 

**The address of our directors (except Ms. Hua Zhou, Ms.Xiaoyu Li, Mr. Tony C. Luh, and Mr. Min Zhou) and executive officers (except Mr. Frank Zhigang Zhao) is Room 003, Floor 15, Building No.1 B, No. 38 Zhongguancun Avenue, Haidian District, Beijing 100086, People’s Republic of China.

 

(1)the business address of Ms. Zhou is 128 Weihai Road, Room 4-3-601, Rizhao, Shandong Province, People’s Republic of China.

 

(2)representing (i) 322,345,938 ordinary Shares held by Haohan Xu, and (ii)574,131,836 ordinary Shares held by Amazon Capital Inc., a company incorporated under the laws of the State of New York, which is wholly owned by Haohan Xu. The business address of Mr. Haohan Xu is 12 East 49 Street, 17th Floor, New York, NY, 10017, United States of America.

 

(3)representing 149,100,132 ordinary shares owned by Extensive Power Limited, a Hong Kong company controlled by Huimin Wang, the principal business address of which is Suites 3201-5, Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong.

 

(4)the business address of Mr. Wu is Room 601, Building No. 4, No. 89 Jiangxi Road, Shinan District, Qingdao, Shandong Province, People’s Republic of China.

 

67

 

 

(5)the business address of Ms. Li is 6-2-301 Xi Er Qi Zhi College, Beijing, People’s Republic of China.

 

(6)the business address of Mr. Gillis is Central Park, 6 Chao Wai Da Jie, Chaoyang District, Beijing 100020, People’s Republic of China.

 

(7)the business address of Mr. Luh is c/o Dragon Venture, Inc., 55 East 3rd Avenue, San Mateo, CA 94401.

 

(8)the business address of Mr. Zhou is c/o Beijing Enterprises Water Group Limited, Tower 3 Poly International Plaza, Zone 7 Wangjing East Park, Chaoyang District, Beijing, People’s Republic of China.

 

(9)the business address of Mr. Zhao is 18-11 Bishui Garden, Beijing, China.

 

(10)representing 761,789,601 ordinary shares directly held by Mr. Kaiming Hu. The business address of Mr. Kaiming Hu is Room 3028, 3rd Floor, No. 18 Shangdi Xinxi Road, Haidian District, Beijing, People’s Republic of China.

 

(11)representing 149,100,132 ordinary shares owned by Extensive Power Limited, a Hong Kong company controlled by Huimin Wang, the principal business address of which is Suites 3201-5, Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong.

 

(12)representing 150,825,600 ordinary shares owned by Universal Hunter (BVI) Limited, a British Virgin Islands company controlled by Tuo Su, the principal business address of which is Room 505, Building No. 23, Yijuyuan, Pengjiang District, Jiangmen, Guangdong Province, People’s Republic of China. The ordinary shares owned by Universal Hunter (BVI) Limited includes 90,000,000 ordinary shares we issued to it in May 2020 in a private placement. Pursuant to the share purchase agreement of this private placement, we expect to issue additional 210,000,000 ordinary shares to Universal Hunter (BVI) Limited when this private placement transaction is fully closed.

 

(13)representing 574,131,836 ordinary shares owned by Amazon Capital Inc., a company incorporated under the laws of the State of New York, which is wholly owned by Haohan Xu. The principal business address of Amazon Capital Inc. is 12 East 49 Street, 17th Floor, New York, NY, 10017, United States of America.

 

(14)representing 141,914,880 ordinary shares owned by Moonlight Vista Limited, a British Virgin Islands company controlled by Huimin Wang, the principal business address of which is Suites 3201-5, Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong.

 

(15)representing 111,213,418 ordinary shares owned by Shanghai Zhongju Investment Management Center (Limited Partnership), a PRC limited liability partnership. The principal business address of Shanghai Zhongju Investment Management Center is Room 304-22, 3/F, Building 2, No. 38 Debao Road, China (Shanghai) Pilot Free Trade Zone, People’s Republic of China.

 

As of May 31, 2020, we had 2,960,659,129 ordinary shares issued and outstanding (excluding 36,249,120 ordinary shares in the form of ADSs that are reserved for issuance upon the exercise of share awards). To our knowledge, we had three record shareholders in the United States, including Citibank, N.A., Mr. Haohan Xu and Amazon Capital Inc., which is wholly owned by Mr. Haohan Xu. Citibank, N.A., the depositary of our ADS program, which held 620,630,442 ordinary shares as of March 31, 2020, representing 21.0% of our total issued and outstanding ordinary shares. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States.

 

None of our existing shareholders has voting rights that will differ from the voting rights of other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

 

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A.            Major Shareholders

 

Please refer to “Item 6. Directors, Senior Management and Employees—E. Directors, Senior Management and Employees—Share Ownership.”

 

B.            Related Party Transactions

 

Contractual Arrangements with Our VIEs and Their Respective Shareholders

 

Due to certain restrictions under PRC law on foreign ownership of businesses engaged in internet businesses, we conduct our operations in China principally through contractual arrangements among (i) our wholly-owned PRC subsidiary, Lianji Future, and (ii) Kuali Yitong and Lianji, and their respective subsidiaries and shareholders. For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.”

 

68

 

 

Related Party Transactions

 

As of December 31, 2019, we had US$42,857 due from Marvel Billion Development Limited, which was the amount due from Marvel Billion Development Limited in relation to our sales of all equity interests in New Admiral Limited, together with all of its subsidiaries and consolidated VIEs and their respective subsidiaries, to Marvel Billion Development Limited. This amount was paid off by Marvel Billion Development Limited on April 15, 2020.

 

Employment Agreements

 

See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Employment Agreements.”

 

Share Options

 

See “Item 6. Directors, Senior Management and Employees—B. Compensation—Compensation of Directors and Executive Officers—Share Incentive Plan.”

 

Registration Rights Agreement with Former JMU HK Shareholders

 

On June 8, 2015, in connection with our acquisition of Join Me Group (HK) Investment Company Limited, or JMU HK, we entered into a registration rights agreement with (i) former shareholders of JMU HK, which are beneficially owned by Ms. Xiaoxia Zhu, our former chairperson and chief executive officer, and (ii) entities beneficially owned by Mr. Maodong Xu, an affiliate of our company, pursuant to which we agreed to provide these former shareholders and Mr. Maodong Xu with certain registration rights in respect of our ordinary shares held by them.

 

Upon receipt of a written request from the holders of 10% of the registrable securities then outstanding requesting us effect a registration under the Securities Act covering all of part of the shares held by them, we shall, as soon as is practicable, but in no event not later than ninety days after receipt of such written request, file with the SEC, and use our reasonable best efforts to cause to be declared effective, a registration statement, or a shelf registration statement. However, that we shall not be obligated to effect any such registration if the aggregate price (net of any underwriters’ discounts or commissions) of the sale of shares relating to such registration is less than US$10,000,000.

 

If, at any time, we file a registration statement with the SEC, holders of registration rights under this agreement will be entitled, subject to certain exceptions, to exercise “piggyback” registration rights requiring us to include in any such registration that number of shares held by them, subject to certain prescribed limitations provided in the registration rights agreement.

 

We may, on a limited number of occasions, and in certain prescribed circumstances, delay the filing or effectiveness of any registration statement required to be filed pursuant to the registration rights agreement.

 

Related Party Transactions with Mr. Haohan Xu

 

Acquisition of Mercurity Limited

 

On May 21, 2019, we entered into a share purchase agreement with Mercurity Limited (formerly known as Unicorn Investment Limited) and Mr. Haohan Xu, one of our shareholders, pursuant to which we acquired all the issued and outstanding shares of Mercurity Limited held by Mr. Haohan Xu, in consideration for the issuance of 632,660,858 new ordinary shares.

 

69

 

 

Registration Rights Agreement with Mr. Haohan Xu

 

On May 21, 2019, in connection with our acquisition of Mercurity Limited in consideration for the issuance of 632,660,858 new ordinary shares to the former shareholder of Mercurity Limited, Mr. Haohan Xu, we entered into a registration rights agreement with Mr. Haohan Xu, pursuant to which we agreed to provide Mr. Haohan Xu with certain registration rights in respect of our ordinary shares held by him.

 

Upon receipt of a written request from the holder of 10% of the registrable securities then outstanding requesting us effect a registration under the Securities Act covering all of part of the shares held by them, we shall, as soon as it is practicable, but in no event later than ninety days after receipt of such written request, file with the SEC, and use our reasonable best efforts to cause to be declared effective, a registration statement, or a shelf registration statement. However, we shall not be obligated to effect any such registration if the aggregate price (net of any underwriters’ discounts or commissions) of the sale of shares relating to such registration is less than US$5,000,000.

 

If, at any time, we file a registration statement with the SEC, the holder of registration rights under this agreement will be entitled, subject to certain exceptions, to exercise “piggyback” registration rights requiring us to include in any such registration that number of shares held by him, subject to certain prescribed limitations provided in the registration rights agreement.

 

We may, on a limited number of occasions, and in certain prescribed circumstances, delay the filing or effectiveness of any registration statement required to be filed pursuant to the registration rights agreement.

 

C.            Interests of Experts and Counsel

 

Not applicable.

 

ITEM 8. FINANCIAL INFORMATION

 

A.            Consolidated Statements and Other Financial Information

 

Please refer to Item 18 “Financial Statements” for our audited consolidated financial statements filed as part of this annual report.

 

Legal Proceedings

 

On January 11, 2019, Shanghai MIN Hongshi Trading Co., Ltd, or Shanghai Hongshi, filed a claim with the Shanghai Yangpu People’s Court, or the Shanghai Yangpu Court, against Shanghai Zhongmin Investment and Development Group Co., Ltd., or Zhongmin, our previous VIE deconsolidated from us in July 2019, alleging that Zhongmin had failed to repay a loan of RMB10 million due to Shanghai Hongshi. On January 14, 2019, the Shanghai Yangpu Court issued a civil ruling paper of property preservation, which ordered the freezing of RMB10 million deposit of Zhongmin or the attachment of the equivalent property. A civil summon was also issued by the Shanghai Yang Pu Court on January 1, 2019, requesting the summoned appear before the court on February 13, 2019. On April 26, 2019, the Shanghai Yangpu Court issued a judgment unfavorable to Zhongmin. Zhongmin appealed on June 26, 2019 and then withdrew its appeal.

 

On February 1, 2019, WM Ming Hotel Co., Ltd., or WM Ming, filed a claim with the Shanghai Yangpu Court against Zhongmin, alleging that Zhongmin had failed to repay a loan of RMB6 million due to WM Ming. On April 24, 2019, the Shanghai Yangpu Court issued a judgment unfavorable to Zhongmin.

 

In May 2019, Shanghai Yangpu Keji Venture Center Co. Ltd. filed a claim with the Shanghai Yangpu Court against Zhongmin, alleging that Zhongmin should pay the rent, overdue fine, property management fee and liquidated damages according to the house-leasing contract between the two parties. On October 14, 2019, the Shanghai Yangpu Court issued a judgment holding that Zhongmin was liable for breaching the contract and needs to pay rents in two installments, RMB339,125.88 and RMB222,986.88, overdue fine in two installments, and property management fee of RMB1.2 million, liquidated damages of RMB795,762.06. Due to overdue non-performance, Shanghai Yangpu Keji Venture Center Co. Ltd. applied for compulsory execution. Since Zhongmin had no property for execution, the Shanghai Yangpu Court terminated the execution on March 26, 2020.

 

We deconsolidated Zhongmin in July 2019 as a result of our divestment of B2B business. The buyer in the divestment transaction and the divested entities agreed to waive all the rights and claims with respect to the liabilities owed by us to the divested entities. Consequently, we are no longer involved in the legal proceedings described above and we have no obligations to undertake any liabilities arising from the execution of the court judgments described above.

  

Other than as set forth above, we are not currently a party to, nor are we aware of, any legal proceeding, investigation or claim which, in the opinion of our management, is likely to have a material adverse effect on our business, financial condition or results of operations.

 

70

 

 

Dividend Policy

 

Since our inception, we have not declared or paid any dividends on our ordinary shares. We have no present plan to pay any dividends on our ordinary shares in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

 

Any future determination to pay dividends will be made at the discretion of our board of directors subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. In addition, our shareholders may declare a dividend at a general meeting of our company. Our board of directors’ decision to declare and pay dividends may be based on a number of factors, including our future operations and earnings, capital requirements and surplus, the amount of distributions, if any, received by us from our PRC subsidiary, our general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

We are a holding company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS holders, we will rely on dividends distributed by Our WFOE. Certain payments from our PRC subsidiary to us are subject to PRC taxes, such as withholding income tax. In addition, regulations in China currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China. Our PRC subsidiary is required to set aside at least 10% of its after-tax profit based on PRC accounting standards every year to a statutory common reserve fund until the aggregate amount of such reserve fund reaches 50% of the registered capital of such subsidiary. Such statutory reserves are not distributable as loans, advances or cash dividends. Our PRC subsidiary may set aside a certain amount of its after-tax profits to other funds at its discretion. These reserve funds can only be used for specific purposes and are not transferable to the company’s parent in the form of loans, advances or dividends. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure and Dependence on our Contractual Arrangements with our Affiliates—We rely principally on dividends and other distributions on equity paid by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we might have. Any limitation on the ability of our PRC and Hong Kong subsidiaries to pay dividends to us could have an adverse effect on our ability to conduct our business.”

 

B.Significant Changes

 

We are headquartered in Beijing, China, which has been seriously impacted by the COVID-19 epidemic. The severity of the current COVID-19 pandemic resulted in lock-downs, travel restrictions and quarantines imposed by the PRC government. We have been adversely affected by the foregoing measures and experienced disruption to our business operations, such as closure of office facilities and shortage of human resources.

 

Except as disclosed in this Item 8B or elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

 

ITEM 9. THE OFFER AND LISTING.

 

A.Offer and Listing Details

 

See “C. Markets.”

 

B.Plan of Distribution

 

Not applicable.

 

71

 

 

C.Markets

 

Our ADSs are listed on The Nasdaq Capital Market under the symbol “MFH.” Each ADS represents 360 ordinary shares.

 

D.Selling Shareholders

 

Not applicable.

 

E.Dilution

 

Not applicable.

 

F.Expenses of the Issue

 

Not applicable.

 

ITEM 10. ADDITIONAL INFORMATION

 

A.Share Capital

 

Not applicable.

 

B.Memorandum and Articles of Association

 

We are a Cayman Islands exempted company with limited liability and our affairs are governed by our memorandum and articles of association, and the Companies Law (2020 Revision), as amended, of the Cayman Islands, which is referred to as the Companies Law below. The following are summaries of material provisions of our fourth amended and restated memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our ordinary shares.

 

Registered Office and Objects

 

Our registered office in the Cayman Islands is at Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman KY1-1104, Cayman Islands. The objects for which our company is established are unrestricted and we have full power and authority to carry out any object not prohibited by the Companies Law, as amended from time to time, or any other law of the Cayman Islands.

 

Board of Directors

 

A director is not required to hold any shares in our company by way of qualification. A director who to his knowledge is in any way, whether directly or indirectly, interested in a contract or arrangement or proposed contract or arrangement with us shall declare the nature of his interest at the meeting of the board of directors at which the question of entering into the contract or arrangement is first considered, if he knows his interest then exists, or in any other case at the first meeting of the board of directors after he knows that he is or has become so interested. Subject to any separate requirement for the approval of the audit committee of the board of directors under applicable law or the listing rules of Nasdaq, and unless disqualified by the chairman of the relevant board meeting, such director may vote with respect to any contract, proposed contract or arrangement in which he is so interested. A director may exercise all the powers of our company to raise or borrow money, and to mortgage or charge all or any part of its undertaking, property and assets (present and future) and uncalled capital, and issue debentures, bonds or other securities, whether outright or as collateral security for any debt, liability or obligation of our company or of any third-party. The directors may receive such remuneration as our board may from time to time determine. There is no age limit requirement with respect to the retirement or non-retirement of a director. See also “Item 6. Directors, Senior Management and Employees — C. Board Practices.”

 

72

 

 

Ordinary Shares

 

General

 

All of our issued and outstanding ordinary shares are fully paid and non-assessable. Our ordinary shares are issued in registered form and are issued when registered in our register of members. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their ordinary shares. Our fourth amended and restated memorandum and articles of association do not permit us to issue bearer shares.

 

Dividends

 

The holders of our ordinary shares are entitled to such dividends as may be declared by our shareholders or board of directors subject to the Companies Law and to the fourth amended and restated articles of association. Under Cayman Islands law, dividends may be declared and paid only out of funds legally available therefor, namely out of either profit or our share premium account, and provided further that a dividend may not be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business.

 

Voting Rights

 

Each ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any one shareholder present in person or by proxy.

 

An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of votes attached to the ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of at least two-thirds of votes cast attached to the ordinary shares in a meeting. A special resolution will be required for important matters such as a change of name or making changes to our memorandum and articles of association.

 

General Meetings of Shareholders

 

Shareholders’ meetings may be convened by our board of directors. Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our fourth amended and restated articles of association allow our shareholders holding shares representing in aggregate not less than 30% of our voting share capital in issue, to requisition an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting; however, our fourth amended and restated articles of association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders. Advance notice in writing of at least ten clear days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists of at least two shareholders present or by proxy, representing not less than one-third in nominal value of the total issued voting shares in our company.

 

Transfer of Ordinary Shares

 

Subject to the restrictions contained in our fourth amended and restated articles of association, as applicable, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors.

 

Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up to a person of whom it does not approve, or any share issued under any share incentive scheme for employees upon which a restriction on transfer imposed thereby still subsists. Our board of directors may also decline to register any transfer of any ordinary share unless (a) the instrument of transfer is lodged with us or such other place at which the register of members is kept in accordance with Cayman Islands law, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; (b) the instrument of transfer is in respect of only one class of shares; (c) the instrument of transfer is properly stamped, if required and; (e) a fee of such maximum sum as the Nasdaq Capital Market may determine to be payable or such lesser sum as the board may from time to time require is paid to us in respect thereof.

 

73

 

 

If our directors refuse to register a transfer they are required, within three months after the date on which the instrument of transfer was lodged, to send to each of the transferor and the transferee notice of such refusal.

 

The registration of transfers may, after compliance with any notice requirement of the Nasdaq Global Market, be suspended and the register closed at such times and for such periods as our directors may from time to time determine; provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year as our directors may determine.

 

Liquidation

 

On a return of capital on winding up or otherwise (other than on redemption or purchase of ordinary shares), assets available for distribution among the holders of ordinary shares will be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately.

 

Calls on Ordinary Shares and Forfeiture of Ordinary Shares

 

Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14 clear days prior to the specified time of payment. The ordinary shares that have been called upon and remain unpaid are subject to forfeiture.

 

Share Repurchases

 

We are empowered under our fourth amended and restated memorandum of association to purchase our shares subject to the Companies Law and our fourth amended and restated articles of association. Our fourth amended and restated articles of association provide that this power is exercisable by our board of directors in such manner, upon such terms and subject to such conditions as it in its absolute discretion thinks fit subject to the Companies Law and, where applicable, the rules of the Nasdaq Capital Market and the applicable regulatory authority.

 

Variations of Rights of Shares

 

If at any time our share capital is divided into different classes of shares, all or any of the special rights attached to any class of shares may, subject to the provisions of the Companies Law, be varied, modified or abrogated with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. Consequently, the rights of any class of shares cannot be detrimentally altered without a majority of two-thirds of the vote of all of the shares in that class. The special rights conferred upon the holders of the shares of any class issued with preferred or other rights will not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied, modified or abrogated by the creation or issue of further shares ranking pari passu with such existing class of shares.

 

Inspection of Books and Records

 

Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records (except for our memorandum and articles of association and our register of mortgages and charges). However, our fourth amended and restated articles of association provide our shareholders with the right to inspect our list of shareholders (on such days as our board of directors shall determine) and to receive annual audited financial statements.

 

74

 

 

Changes in Capital

 

We may from time to time by ordinary resolution: (a) increase the share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe; (b) consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares; (c) without prejudice to the powers of the board of directors under our articles of association, divide our shares into several classes and without prejudice to any special rights previously conferred on the holders of existing shares attach thereto respectively and preferential, deferred, qualified or special rights, privileges, conditions or such restrictions which in the absence of any such determination by the Company in general meeting, as the board of directors may determine (d) sub-divide our existing shares, or any of them into shares of a smaller amount; or (e) cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of our share capital by the amount of the shares so cancelled. We may by special resolution reduce our share capital or any capital redemption reserve in any manner permitted by law.

 

Register of Members

 

Under Cayman Islands law, we must keep a register of members and there should be entered therein: (a) the names and addresses of the members, together with a statement of the shares held by each member, and such statement shall confirm (i) the amount paid or agreed to be considered as paid, on the shares of each member; (ii) the number and category of shares held by each member, and (iii) whether each relevant category of shares held by a member carries voting rights under the articles of association of the company, and if so, whether such voting rights are conditional; (b) the date on which the name of any person was entered on the register as a member; and (c) the date on which any person ceased to be a member.

 

Under Cayman Islands law, the register of members of our company is prima facie evidence of the matters set out therein (i.e. the register of members will raise a presumption of fact on the matters referred to above unless rebutted) and a member registered in the register of members should be deemed as a matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members. Once our register of members has been updated, the shareholders recorded in the register of members will be deemed to have legal title to the shares set against their name.

 

If the name of any person is incorrectly entered in or omitted from our register of members, or if there is any default or unnecessary delay in entering on the register the fact of any person having ceased to be a member of our company, the person or member aggrieved (or any member of our company or our company itself) may apply to the Cayman Islands Grand Court for an order that the register be rectified, and the Court may either refuse such application or it may, if satisfied of the justice of the case, make an order for the rectification of the register.

 

Differences in Corporate Law

 

The Companies Law is derived, to a large extent, from the older Companies Acts of England but does not follow recent statutory enactments in England. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States.

 

Mergers and Similar Arrangements

 

The Companies Law permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company and (b) a “consolidation” means the combination of two or more constituent companies into a combined company and the vesting of the undertaking, property and liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation, which must then be authorized by (a) a special resolution of the shareholders of each constituent company, and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association.

 

75

 

 

The written plan of merger or consolidation must be filed with the Registrar of Companies together with a declaration as to the solvency of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company and that notification of the merger or consolidation will be published in the Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) if they follow the required procedures, subject to certain exceptions. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures.

 

In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must, in addition, represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the Grand Court of the Cayman Islands can be expected to approve the arrangement if it determines that (a) the statutory provisions as to the required majority vote have been met; (b) the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class; (c) the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and (d) the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.

 

If an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.

 

When a takeover offer is made and accepted by holders of 90% of the shares affected within four months, the offeror may, within a two-month period commencing on the expiration of such four month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.

 

Shareholders’ Suits

 

In principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, there are exceptions to the foregoing principle, including when (a) a company acts or proposes to act illegally or ultra vires; (b) the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and (c) those who control the company are perpetrating a “fraud on the minority.”

 

Indemnification of Directors and Executive Officers and Limitation of Liability

 

Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our fourth amended and restated memorandum and articles of association permit indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages arise from dishonesty or fraud which may attach to such directors or officers. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we intend to enter into indemnification agreements with our directors and senior executive officers that will provide such persons with additional indemnification beyond that provided in our fourth amended and restated memorandum and articles of association.

 

76

 

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

Anti-Takeover Provisions in the Memorandum and Articles of Association

 

Some provisions of our fourth amended and restated memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our shareholders.

 

However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our memorandum and articles of association, as amended and restated from time to time, for what they believe in good faith to be in the best interests of our company.

 

Directors’ Fiduciary Duties

 

As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he owes the following duties to the company—a duty to act bona fide in the best interests of the company, a duty not to make a profit based on his or her position as director (unless the company permits him to do so) and a duty not to put himself in a position where the interests of the company conflict with his or her personal interest or his or her duty to a third-party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.

 

In addition, directors of a Cayman Islands company must not place themselves in a position in which there is a conflict between their duty to the company and their personal interests. However, this obligation may be varied by the company’s articles of association, which may permit a director to vote on a matter in which he has a personal interest provided that he has disclosed that nature of his interest to the board. Our fourth amended and restated memorandum and articles of association provides that a director with an interest (direct or indirect) in a contract or arrangement or proposed contract or arrangement with the company must declare the nature of his interest at the meeting of the board of directors at which the question of entering into the contract or arrangement is first considered, if he knows his interest then exists, or in any other case at the first meeting of the board of directors after he is or has become so interested.

 

A general notice may be given at a meeting of the board of directors to the effect that (i) the director is a member/officer of a specified company or firm and is to be regarded as interested in any contract or arrangement which may after the date of the notice in writing be made with that company or firm; or (ii) he is to be regarded as interested in any contract or arrangement which may after the date of the notice in writing to the board of directors be made with a specified person who is connected with him, will be deemed sufficient declaration of interest. Following the disclosure being made pursuant to our fourth amended and restated memorandum and articles of association and subject to any separate requirement for audit committee approval under applicable law or the listing rules of Nasdaq, and unless disqualified by the chairman of the relevant board meeting, a director may vote in respect of any contract or arrangement in which such director is interested and may be counted in the quorum at such meeting. However, even if a director discloses his interest and is therefore permitted to vote, he must still comply with his duty to act bona fide in the best interest of our company.

 

77

 

 

 

 

In comparison, under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he or she reasonably believes to be in the best interests of the corporation. He or she must not use his or her corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.

 

Shareholder Proposals

 

Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. The Delaware General Corporation Law does not provide shareholders an express right to put any proposal before the annual meeting of shareholders, but in keeping with common law, Delaware corporations generally afford shareholders an opportunity to make proposals and nominations provided that they comply with the notice provisions in the certificate of incorporation or bylaws. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.

 

There are no statutory requirements under Cayman Islands law allowing our shareholders to requisition a shareholders’ meeting. However, under our fourth amended and restated articles of association, on the requisition of shareholders representing not less than 30% of the voting rights entitled to vote at general meetings, the board shall convene an extraordinary general meeting. As an exempted Cayman Islands company, we are not obliged by law to call shareholders’ annual general meetings. Our fourth amended and restated articles of association provides that we may (but shall not be obliged to) in each calendar year hold a general meeting as our annual general meeting.

 

Cumulative Voting

 

Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. As permitted under Cayman Islands law, our fourth amended and restated articles of association do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.

 

Removal of Directors

 

Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our fourth amended and restated articles of association, directors may be removed by an ordinary resolution of shareholders.

 

78

 

 

Transactions with Interested Shareholders

 

The Delaware General Corporation Law contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation or bylaws that is approved by its shareholders, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting stock or who or which is an affiliate or associate of the corporation and owned 15% or more of the corporation’s outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.

 

Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and for a proper corporate purpose and not with the effect of constituting a fraud on the minority shareholders.

 

Dissolution; Winding Up

 

Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so.

 

Under the Companies Law of the Cayman Islands and our fourth amended and restated articles of association, our company may be dissolved, liquidated or wound up by a special resolution of our shareholders. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so.

 

Variation of Rights of Shares

 

Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our fourth amended and restated articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class only with the sanction of a special resolution passed at a separate meeting of the holders of the shares of that class.

 

Amendment of Governing Documents

 

Under the Delaware General Corporation Law, a corporation’s certificate of incorporation may be amended only if adopted and declared advisable by the board of directors and approved by a majority of the outstanding shares entitled to vote, and the bylaws may be amended with the approval of a majority of the outstanding shares entitled to vote and may, if so provided in the certificate of incorporation, also be amended by the board of directors. Under Cayman Islands law, our fourth amended and restated memorandum and articles of association may only be amended by a special resolution of our shareholders.

 

79

 

 

Rights of Non-Resident or Foreign Shareholders

 

There are no limitations imposed by our fourth amended and restated memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our fourth amended and restated memorandum and articles of association that require our company to disclose shareholder ownership above any particular ownership threshold.

 

Directors’ Power to Issue Shares

 

Subject to applicable law, our board of directors is empowered to issue or allot shares or grant options and warrants with or without preferred, deferred, qualified or other special rights or restrictions.

 

C.            Material Contracts

 

We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4 “Information on the Company,” elsewhere in this annual report or below.

 

D.            Exchange Controls

 

The Cayman Islands currently has no exchange control regulations or currency restrictions. See “Item 4. Information of the Company—B. Business Overview—Regulation—PRC Laws and Regulations Relating to Foreign Exchange.”

 

E.             Taxation

 

The following is a general summary of the material Cayman Islands, People’s Republic of China and U.S. federal income tax consequences relevant to an investment in our ADSs and ordinary shares. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective purchaser. The discussion is based on laws and relevant interpretations thereof as of the date of this annual report, all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion does not address U.S. state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the United States. You should consult your own tax advisors with respect to the consequences of acquisition, ownership and disposition of our ADSs and ordinary shares.

 

Cayman Islands Taxation

 

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution, brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.

 

Payments of dividends and capital in respect of the shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of the Shares, nor will gains derived from the disposal of the shares be subject to Cayman Islands income or corporation tax.

 

People’s Republic of China Taxation

 

Under the Enterprise Income Tax Law and the Regulations on the Implementation of the Enterprise Income Tax Law of the People’s Republic of China, enterprises established outside of China but whose “de facto management body” is located in China are considered “resident enterprises” for PRC tax purposes. Under the applicable implementation regulations, “de facto management body” is defined as the organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. Substantially all of our management is currently based in China, and may remain in China in the future. If we are treated as a “resident enterprise” for PRC tax purposes, foreign enterprise holders of our ADSs or ordinary shares may be subject to a 10% PRC income tax upon dividends payable by us and on gains realized on their sales or other dispositions of our ADSs or ordinary shares. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—Under the PRC enterprise income tax law, we could be classified as a ‘resident enterprise’ of China. Such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.” In addition, gains derived by our non-PRC individual shareholders from the sale of our shares and ADSs may be subject to a 20% PRC withholding tax. It is unclear whether our non-PRC individual shareholders (including our ADS holders) would be subject to any PRC tax on dividends obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to dividends realized by non-PRC individuals, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. However, it is unclear either whether our non-PRC shareholders would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise.

 

80

 

 

Material United States Federal Income Tax Considerations

 

The following summary describes the material United States federal income tax consequences to United States Holders (as defined below) of the ownership of our ordinary shares and ADSs as of the date hereof. Except where noted, this summary deals only with ordinary shares and ADSs held as capital assets. As used herein, the term “United States Holder” means a beneficial owner of an ordinary share or ADS that is for United States federal income tax purposes:

 

·an individual citizen or resident of the United States;

 

·a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

·an estate the income of which is subject to United States federal income taxation regardless of its source; or

 

·a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.

 

This summary does not represent a detailed description of all of the United States federal income tax consequences that may be applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:

 

·a dealer in securities or currencies;

 

·a financial institution;

 

·a regulated investment company;

 

·a real estate investment trust;

 

·an insurance company;

 

·a tax-exempt organization;

 

·a person holding our ordinary shares or ADSs as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle;

 

·a trader in securities that has elected the mark-to-market method of accounting for your securities;

 

·a person who owns or is deemed to own 10% or more of the voting power or value of our stock;

 

·a partnership or other pass-through entity for United States federal income tax purposes (or an investor therein);

 

·a person whose “functional currency” is not the United States dollar;

 

·a person that acquired our ordinary shares or ADSs through the exercise of an option or otherwise as compensation; or

 

·persons holding our ordinary shares or ADSs in connection with a trade or business, permanent establishment, or fixed place of business outside the United States.

 

81

 

 

In addition, this discussion does not address any state, local, alternative minimum tax, or non-United States tax considerations, or the Medicare contribution tax on net investment income. Each potential investor is urged to consult its tax advisor regarding the United States federal, state, local and non-United States income and other tax considerations of an investment in our ADSs or ordinary shares.

 

The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Code, final and proposed regulations thereunder, rulings and judicial decisions as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in United States federal income tax consequences different from those discussed below. In addition, this summary is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.

 

If a partnership holds our ordinary shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partnership or a partner of a partnership holding our ordinary shares or ADSs, you should consult your tax advisors.

 

This summary does not contain a detailed description of all the United States federal income tax consequences that may be applicable to you in light of your particular circumstances and, except as set forth below with respect to PRC tax considerations, does not address the effects of any state, local or non-United States tax laws. If you are considering the purchase, ownership or disposition of our ordinary shares or ADSs, you should consult your own tax advisors concerning the United States federal income tax consequences to you in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction.

 

ADSs

 

If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying ordinary shares that are represented by such ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax.

 

Taxation of Dividends and Other Distributions on the ADSs

 

Subject to the discussion under “—Passive Foreign Investment Company” below, the gross amount of any distributions on the ADSs or ordinary shares (including any amounts withheld to reflect PRC withholding taxes) will be taxable as dividends, to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Such income (including withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of the ordinary shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code.

 

82

 

 

Dividends paid to certain non-corporate United States Holders may be taxable at preferential rates applicable to long-term capital gain if we are treated as a “qualified foreign corporation.” A foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on ordinary shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. Our ADSs are listed on the Nasdaq Global Market, and thus, pursuant to the United States Treasury Department guidance, our ADSs are treated as readily tradable on an established securities market in the United States. Thus, we believe that dividends we pay on our ADSs will meet the conditions required for the reduced tax rate. Since we do not expect that our ordinary shares will be listed on an established securities market, we do not believe that dividends that we pay on our ordinary shares that do not back ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance that our ADSs will continue to be considered readily tradable on an established securities market in later years. A qualified foreign corporation also includes a foreign corporation that is eligible for the benefits of certain income tax treaties with the United States. In the event that we are deemed to be a PRC resident enterprise under the PRC tax law, we believe we would be eligible for the benefits of the income tax treaty between the United States and the PRC (including any protocol thereunder), or the Treaty, and if we are eligible for such benefits, dividends we pay on our ordinary shares, regardless of whether such shares are represented by ADSs or are readily tradable on an established securities market in the United States, would be eligible for the reduced rates of taxation. For discussion regarding whether we may be classified as a PRC resident enterprise, see “Item 10. Additional Information—E. Taxation—People’s Republic of China Taxation.” Even if dividends would be treated as paid by a qualified foreign corporation, non-corporate United States Holders will not be eligible for reduced rates of taxation if they do not hold our ADSs or ordinary shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date or to the extent that such United States Holders elect to treat the dividend income as “investment income” under the Code. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own tax advisors regarding the application of these rules given your particular circumstances.

 

Non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a passive foreign investment company, or PFIC, for United States federal income tax purpose for the taxable year in which such dividends are paid or for the preceding taxable year.

 

In the event that we are deemed to be a PRC resident enterprise under the PRC tax law, you may be subject to PRC withholding taxes on dividends paid to you with respect to the ADSs or ordinary shares. See “Item 10. Additional Information—E. Taxation—People’s Republic of China Taxation.” In that case, PRC withholding taxes on dividends (limited, in the case of a U.S. holder who qualifies for the benefits of the Treaty, to the extent not exceeding the applicable dividend withholding rate under the Treaty), generally will be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ADSs or ordinary shares will be treated as foreign-source income and generally will constitute passive category income. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisor regarding the availability of the foreign tax credit under your particular circumstances.

 

To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the ADSs or ordinary shares (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you on a subsequent disposition of the ADSs or ordinary shares), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. However, we do not expect to calculate our earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution generally will be treated as a dividend (as discussed above).

 

Passive Foreign Investment Company

 

In general, we will be a PFIC for any taxable year in which:

 

·at least 75% of our gross income is passive income, or

 

·at least 50% of the average value (determined on a quarterly basis) of our assets produce or are held for the production of passive income.

 

For this purpose, passive income generally includes dividends, interest, royalties and rents. Furthermore, cash is categorized as a passive asset and our unbooked intangibles associated with active business activities (including goodwill) may generally be taken into account and classified as active assets. In estimating the value of our goodwill, we generally take into account our market capitalization. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income.

 

83

 

 

Based on our current income and assets and the value of our ADSs and ordinary shares, we do not believe that we were a PFIC for our taxable year ended December 31, 2019. However, because our PFIC status is subject to a number of uncertainties, neither we nor our tax advisors can provide any assurances that we will not be considered a PFIC in the prior, current, or any future taxable year, and PFIC status may change from year to year. The value of our assets may be determined by reference to our market capitalization, and because the market price of our ADSs and ordinary shares may be volatile, a decrease in the price of our ADSs may also result in our becoming a PFIC. In addition, although the law in this regard is not entirely clear, we treat Our VIEs as being owned by us for United States federal income tax purposes because we control its management decisions and we are entitled to substantially all of its economic benefits and, as a result, we consolidate its results of operations in our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of Our VIE for United States federal income tax purposes, we could be treated as a PFIC for taxable years ending after the date of our initial public offering. Accordingly, our U.S. counsel expresses no opinion regarding our conclusions or our expectations regarding our PFIC status for any prior, current, or future taxable year.

 

If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, we generally will continue to be treated as a PFIC as to you for all succeeding taxable years during which you hold our ADSs or ordinary shares, and you will be subject to the special tax rules discussed below, except if you have made a mark-to-market election as discussed below. However, if we are a PFIC for any taxable year and subsequently cease to be a PFIC, you can avoid the continuing impact of the PFIC rules by making a special election, or a Purging Election, to recognize gain (but not loss) in the manner described below as if your ADSs or ordinary shares had been sold on the last day of the last taxable year during which we were a PFIC. After the Purging Election, your ADSs or ordinary shares will not be treated as shares in a PFIC unless we subsequently become a PFIC. You are urged to consult your own tax advisors about the availability of this election, and whether making the election would be advisable in your particular circumstances.

 

If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, you will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition, including a Purging Election or pledge, of ADSs or ordinary shares. Distributions received in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as excess distributions. Under these special tax rules:

 

·the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares,

 

·the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC with respect to you, will be treated as ordinary income, and

 

·the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

 

If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares and any of our non-United States subsidiaries is also a PFIC, a United States Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. A disposition of shares in, or a distribution by, any of our subsidiaries that is a PFIC will trigger the excess distributions rules described above. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.

 

In lieu of being subject to the excess distribution rules discussed above, you may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method, provided that such stock is regularly traded on a qualified exchange. Under current law, the mark-to-market election will be available to holders of ADSs as long as the ADSs are listed on the Nasdaq Global Market, which constitutes a qualified exchange, and are “regularly traded” for purposes of the mark-to-market election (for which no assurance can be given). It should also be noted that only the ADSs and not the ordinary shares, are listed on the Nasdaq Global Market. Consequently, if you are a holder of ordinary shares that are not represented by ADSs, you generally will not be eligible to make a mark-to-market election if we are or were to become a PFIC.

 

84

 

 

If you make an effective mark-to-market election, you will include in each year that we are a PFIC as ordinary income the excess of the fair market value of your ADSs at the end of the year over your adjusted tax basis in the ADSs. You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the ADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election, any gain you recognize upon the sale or other disposition of your ADSs will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market election.

 

Your adjusted tax basis in the ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If you make a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in your particular circumstances.

 

A U.S. investor in a PFIC generally can mitigate the adverse consequences of the excess distribution rules described above by electing to treat the PFIC as a “qualified electing fund” under the Code. However, this option is not available to you because we do not intend to provide the information necessary to permit you to make this election.

  

We expect to file annual reports on Form 20-F with the U.S. Securities and Exchange Commission in which we will indicate whether or not we believe we were a PFIC for the relevant taxable year. We do not intend to make any other annual determination or otherwise notify you regarding our status as a PFIC for any taxable year. You are urged to consult your tax advisors concerning the United States federal income tax consequences of holding ADSs or ordinary shares if we are considered a PFIC in any taxable year.

 

A United States Holder that owns (or is deemed to own) ordinary shares in a PFIC during any taxable year of the United States Holder may have to file an IRS Form 8621 (whether or not a mark-to-market election is or has been made) with such United States Holder’s U.S. federal income tax return and provide such other information as may be required by the U.S. Treasury Department.

 

The rules dealing with PFICs and the mark-to-market election are complex and are affected by various factors in addition to those described above. Accordingly, United States Holders of our ordinary shares and ADSs should consult their own tax advisors concerning the application of the PFIC rules to our ordinary shares and ADSs under their particular circumstances.

 

Taxation of Capital Gains

 

For United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of ADSs or ordinary shares in an amount equal to the difference between the amount realized for the ADSs or ordinary shares and your tax basis in the ADSs or ordinary shares. Subject to the discussion under “—Passive Foreign Investment Company” above, such gain or loss will generally be capital gain or loss. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.

 

85

 

 

Any gain or loss recognized by you generally will be treated as United States source gain or loss. However, if we are treated as a PRC resident enterprise for PRC tax purposes and PRC tax were imposed on any gain, and if you are eligible for the benefits of the Treaty, you may elect to treat such gain as PRC source gain under the Treaty and, accordingly, you may be able to credit the PRC tax against your United States federal income tax liability. If you are not eligible for the benefits of the Treaty or you fail to make the election to treat any gain as PRC source, then you generally would not be able to use the foreign tax credit arising from any PRC tax imposed on the disposition of our ADSs or ordinary shares unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources. You will be eligible for the benefits of the Treaty if, for purposes of the Treaty, you are a resident of the United States, and you meet other factual requirements specified in the Treaty. Because qualification for the benefits of the Treaty is a fact-intensive inquiry which depends upon the particular circumstances of each investor, you are specifically urged to consult your tax advisors regarding your eligibility for the benefits of the Treaty. You are also urged to consult your tax advisor regarding the tax consequences if PRC tax is imposed on the gain on a disposition of our ordinary shares or ADSs, including the availability of the foreign tax credit and the election to treat any gain as PRC source under your particular circumstances.

 

Information Reporting and Backup Withholding

 

Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (i) the U.S. Holder is a corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.

 

Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the IRS.

 

Foreign Asset Reporting

 

Certain United States Holders who are individuals (and under proposed regulations, certain entities) may be required to report information relating to an interest in our ordinary shares or ADSs, subject to certain exceptions (including an exception for shares held in accounts maintained by U.S. financial institutions) on IRS Form 8938. United States Holders are urged to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition of our ordinary shares or ADSs.

 

F.Dividends and Paying Agents

 

Not applicable.

 

G.Statement by Experts

 

Not applicable.

 

H.Documents on Display

 

We are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we are required to file reports, including annual reports on Form 20-F, and other information with the SEC. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of proxy statements to shareholders, and our executive officers, directors and principal shareholders are not subject to the insider short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act.

 

All information that we have filed with the SEC can be accessed through the SEC’s website at www.sec.gov. This information can also be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms.

 

We intend to furnish the depositary with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meeting and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our written request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.

 

In accordance with Nasdaq Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at ir.ccjmu.com. In addition, we will provide hard copies of our annual report free of charge to shareholders and ADS holders upon request.

 

86

 

 

I.Subsidiary Information

 

Not applicable.

 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Foreign Exchange Risk

 

Pursuant to the agreements with our current customer, the service fees we receive from our customer are denominated in U.S. dollars. Substantially all of our costs and operating expenses are paid in RMB. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge our exposure to such risk.

 

From July 21, 2005, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. For RMB against U.S. dollar, there was appreciation of approximately 6.3% in the year ended December 31, 2017 and depreciation of approximately 5.7% and 1.3% in the years ended December 31, 2018 and 2019 respectively. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

 

To the extent that we need to convert U.S. dollar into RMB for capital expenditures and working capital and other business purposes, appreciation of RMB against U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollar for the purpose of making payments for dividends on ordinary shares, strategic acquisitions or investments or other business purposes, appreciation of U.S. dollar against RMB would have a negative effect on the U.S. dollar amount available to us. In addition, a significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings or losses.

 

Interest Rate Risk

 

Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We had net interest income of US$279 for the year ended December 31, 2019. We had cash and cash equivalents of US$0.4 million as of December 31, 2019. Assuming such amount of cash and cash equivalents are held entirely in interest-bearing bank deposits, a hypothetical one percentage point (100 basis-point) decrease in interest rates would decrease our interest income from these interest-bearing bank deposits for one year by approximately US$4.4 thousand. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in market interest rates. However, our future interest income may fall short of expectations due to changes in market interest rates.

 

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

A.Debt Securities

 

Not applicable.

 

B.Warrants and Rights

 

Not applicable.

 

C.Other Securities

 

Not applicable.

 

87

 

 

D.American Depositary Shares

 

Fees and Charges Our ADS Holders May Have to Pay

 

Citibank, N.A. is our depositary. The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing ordinary shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.

 

An ADS holder will be required to pay the following fees under the terms of the deposit agreement:

 

Services:

 

Fees:

·         Issuance of ADSs upon deposit of shares (excluding issuances as a result of distributions of shares)   Up to US$0.05 per ADS issued
     
·         Cancellation of ADSs   Up to US$0.05 per ADS cancelled
     
·         Distribution of cash dividends or other cash distributions (i.e., sale of rights and other entitlements)   Up to US$0.05 per ADS held
     
·         Distribution of ADSs pursuant to (i) stock dividends or other fee stock distributions, or (ii) exercise of rights to purchase additional ADSs   Up to US$0.05 per ADS held
     
·         Distribution of securities other than ADSs or rights to purchase additional ADSs (i.e., spin-off shares)   Up to US$0.05 per ADS held
     
·         ADS Services   Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary

 

Fees and Other Payments Made by the Depositary to Us

 

The depositary has agreed to reimburse us for expenses we incur that are related to the establishment and maintenance of the ADR program, including investor relations expenses. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not linked to the amounts of fees the depositary collects from investors. We have received US$0.09 million from the depositary until the date of this annual report.

 

PART II

 

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

None.

 

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

None.

 

88

 

 

ITEM 14E. USE OF PROCEEDS

 

The following “Use of Proceeds” information relates to the registration statement on Form F-1 (File No. 333-201413) for our initial public offering of 4,000,000 ADSs, which became effective on March 31, 2015. We received net proceeds of approximately US$37.3 million from our initial public offering, which we have already all applied to our operations thereafter.

 

ITEM 15. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act.

 

Based upon that evaluation, our management has concluded that, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file and furnish under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with the U.S. generally accepted accounting principles.

 

After our acquisition of Mercurity Limited and NBpay, the scope of our internal controls over financial reporting didn’t incur any significant change. We also performed a related assessment based on this new control environment and change in scope.

 

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, management used the framework set forth in the report Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication and (v) monitoring.

 

Based on that evaluation, our management concluded that these controls were effective on December 31, 2019.

 

Attestation Report of the Registered Public Accounting Firm

 

This annual report does not include an attestation report of our registered public accounting firm pursuant to the transition periods established by rules of the SEC for an emerging growth company.

 

Changes in Internal Control over Financial Reporting

 

There was one material weakness in internal control over financial reporting during our preparation of the financial statements. The material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified related to the lack of accounting personnel with appropriate knowledge of accounting principles generally accepted in the United States of America, or U.S. GAAP.

 

89

 

 

In 2019, we implemented measures designed to improve our internal control over financial reporting to remediate this material weakness, including the following:

 

·increasing the number of qualified financial reporting personnel;

 

·improving the capabilities of existing financial reporting personnel through training and education in accounting and reporting requirements under GAAP and SEC rules and regulations;

 

·involving professional personnel to review the period-end closing process;

 

·developing, communicating and implementing an accounting policy manual for our financial reporting personnel for recurring transactions and period-end closing processes; and

 

·establishing effective monitoring and oversight controls for non-recurring and complex transactions to ensure the accuracy and completeness of our condensed consolidated financial statements and related disclosures.

 

We believe that the measures taken above enhanced our internal control over financial reporting and were sufficient to remediate the material weakness identified. However, there is no guarantee that our remediation efforts will result in the attestation from our independent registered public accounting firm, if required, that our internal control over financial reporting is effective as of December 31, 2019.

 

ITEM 16.

 

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

 

Our board of directors has determined that Mr. Paul L. Gillis, chairman of our audit committee, meets the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC and meets the criteria for independence set forth in Rule 10A-3 under the Exchange Act.

 

ITEM 16B. CODE OF ETHICS

 

Our board of directors has adopted a code of business conduct and ethics which is applicable to our directors, officers and employees. Our code of business conduct and ethics has been filed as an exhibit to our registration statement on Form F-1 (File No. 333-201413) initially filed with the SEC on January 9, 2015.

 

ITEM 17C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by our principal external accounting firms.

 

   For the Year Ended December 31, 
   2018   2019 
   (in US$ thousands) 
Audit fees (1)   703    153 
Total   703    153 

 

 

(1)“Audit fees” means the aggregate fees billed in each of the fiscal years for professional services rendered by our principal external auditors for the audit of our annual consolidated financial statements and assistance with review of documents filed with the SEC and other statutory and regulatory filings.

 

The policy of our audit committee is to pre-approve all auditing and non-auditing services permitted to be performed by our independent registered public accounting firm.

 

90

 

 

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

Not applicable.

 

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

None.

 

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

On March 19, 2020, we dismissed Michael T Studer CPA P.C. (the Studer Group), or Michael T Studer, as our independent registered public accounting firm. The decision was not made due to any disagreements with Michael T Studer. Effective from March 19, 2020, we appointed Shanghai Perfect C.P.A Partnership, or Shanghai Perfect, as our new independent registered public accounting firm. The change of our independent registered public accounting firm was approved by the audit committee of our board.

 

Michael T Studer’s audit reports on our consolidated financial statements as of December 31, 2018 did not contain an adverse opinion or a disclaimer of opinion and were not qualified.

 

During each of the years ended December 31, 2018 and 2019 and the subsequent interim period through March 19, 2020, there were (i) no disagreements between us and Michael T Studer on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, any of which, if not resolved to Michael T Studer's satisfaction, would have caused Michael T Studer to make reference thereto in their reports, and (ii) no “reportable events” requiring disclosure pursuant to Item 16F(a)(1)(v) of the instructions to Form 20-F in connection with our annual report on Form 20-F.

 

We provided Michael T Studer with a copy of the disclosures from the first paragraph to the third paragraph under this Item 16F and requested from Michael T Studer a letter addressed to the Securities and Exchange Commission indicating whether it agrees with such disclosures. A copy of Michael T Studer’s letter dated June 5, 2020 is attached as Exhibit 15.1.

 

During each of the years ended December 31, 2017, 2018 and 2019 and the subsequent interim period through March 19, 2020, neither we nor anyone on behalf of us has consulted with Shanghai Perfect regarding (i) the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, and neither a written report nor oral advice was provided to us that Shanghai Perfect concluded was an important factor considered by us in reaching a decision as to any accounting, auditing, or financial reporting issue, (ii) any matter that was the subject of a disagreement pursuant to Item 16F(a)(1)(iv) of the instructions to Form 20-F, or (iii) any reportable event pursuant to Item 16F(a)(1)(v) of the instructions to Form 20-F.

 

After considering all the facts and circumstances, our audit committee determined that Shanghai Perfect would be capable of exercising objective and impartial judgment in connection with the audits of our financial statements.

 

Therefore, with respect to the independence matter described above, we concluded that a reasonable investor with knowledge of all relevant facts and circumstances would conclude that Shanghai Perfect was and would be capable of exercising objective and impartial judgment in connection with the audits of our financial statement for the fiscal year ended December 31, 2019 and future periods.

 

91

 

 

ITEM 16G. CORPORATE GOVERNANCE

 

We are incorporated in the Cayman Islands and our corporate governance practices are governed by applicable Cayman Islands law. In addition, because our ADSs are listed on The Nasdaq Capital Market, we are subject to Nasdaq’s corporate governance requirements. Nasdaq Stock Market Rule 5615(a)(3) permits a foreign private issuer like us to follow home country practices in lieu of certain requirements of Rule 5600, provided that such foreign private issuer discloses in its annual report filed with the SEC each requirement of Rule 5600 that it does not follow and describes the home country practice followed in lieu of such requirement.

 

Nasdaq Marketplace Rule 5615(a)(3) permits a foreign private issuer like us to follow home country practices in lieu of certain requirements of Rule 5600, provided that such foreign private issuer discloses in its annual report filed with the SEC each requirement of Rule 5600 that it does not follow and describes the home country practice followed in lieu of such requirement.

 

We have informed Nasdaq that we will follow home country practice in place of all of the requirements of Rule 5600 other than those rules which we are required to follow pursuant to the provisions of Rule 5615(a)(3).

 

·Rule 5605(b), pursuant to which (i) a majority of the board of directors must be comprised of Independent Directors, and (ii) the Independent Directors must have regularly scheduled meetings at which only Independent Directors are present.

 

·Rule 5605(c) (other than those parts as to which the home country exemption is not applicable), pursuant to which each company must have, and certify that it has and will continue to have, an audit committee of at least three members, each of whom must meet criteria set forth in Rule 5605(c)(2) (A).

 

·Rule 5605(d), pursuant to which each company must (i) certify that it has adopted a formal written compensation committee charter and that the compensation committee will review and reassess the adequacy of the formal written charter on an annual basis, and (ii) have a compensation committee of at least two members, each of whom must be an Independent Director.

 

·Rule 5605(e), pursuant to which director nominees must be selected, or recommended for the Board’s selection, either by Independent Directors constituting a majority of the Board’s Independent Directors in a vote in which only Independent Directors participate, or a nominations committee comprised solely of Independent Directors.

 

·Rule 5610, pursuant to which each company shall adopt a code of conduct applicable to all directors, officers and employees.

 

·Rule 5620(a), pursuant to which each company listing common stock or voting preferred stock, or their equivalents, shall hold an annual meeting of shareholders no later than one year after the end of the issuer’s fiscal year-end.

 

·Rule 5620(b), pursuant to which each company shall solicit proxies and provide proxy statements for all meetings of shareholders and shall provide copies of such proxy solicitation to Nasdaq.

 

·Rule 5620(c), pursuant to which each company that is not a limited partnership shall provide for a quorum as specified in its by-laws for any meeting of the holders of common stock; provided, however, that in no case shall such quorum be less than 331/3% of the outstanding shares of the company’s common voting stock.

 

·Rule 5630, pursuant to which each company that is not a limited partnership shall conduct an appropriate review and oversight of all related party transactions for potential conflict of interest situations on an ongoing basis by the company’s audit committee or another independent body of the board of directors.

 

92

 

 

·Rule 5635(a), pursuant to which shareholder approval is required in certain circumstances prior to an issuance of securities in connection with the acquisition of the stock or assets of another company.

 

·Rule 5635(b), pursuant to which shareholder approval is required prior to the issuance of securities when the issuance or potential issuance will result in a change of control of the company.

 

·Rule 5635(c), pursuant to which shareholder approval is required prior to the issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees, or consultants, subject to certain exceptions.

 

·Rule 5635(d), pursuant to which shareholder approval is required prior to the issuance of securities in connection with a transaction other than a public offering involving:

 

othe sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable for common stock) at a price less than the greater of book or market value which together with sales by officers, directors or Substantial Shareholders of the company equals 20% or more of common stock or 20% or more of the voting power outstanding before the issuance; or

 

othe sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.

 

ITEM 16H. MINE SAFETY DISCLOSURE

 

Not applicable.

 

PART III

 

ITEM 17. FINANCIAL STATEMENTS

 

We have elected to provide financial statements pursuant to Item 18.

 

ITEM 18. FINANCIAL STATEMENTS

 

Our consolidated financial statements are included at the end of this annual report.

 

ITEM 19. EXHIBITS.

 

Exhibit No.

Description of Exhibit

1.1* Fourth Amended and Restated Memorandum and Articles of Association of the Registrant
2.1 Deposit Agreement by and among the Registrant and Citibank, N.A., as Depositary, and the Holders and Beneficial Owners of the American Depositary Shares issued thereunder, dated as of April 13, 2015 (incorporated by reference to exhibit 4.3 to our S-8 registration statement (File No. 333-206466) filed with the SEC on August 19, 2015)
2.2 Specimen American Depositary Receipt (included in Exhibit 2.1)
2.3* Description of Securities
3.3 Specimen Certificate for Ordinary Shares (incorporated by reference to exhibit 4.2 to our F-1 registration statement (File No. 333-201413) initially filed with the SEC on January 9, 2015)
4.1 Amended and Restated 2011 Share Incentive Plan (incorporated by reference to exhibit 10.1 to our S-8 registration statement (File No. 333-206466) filed with the SEC on August 19, 2015)

 

93

 

 

4.2 Exclusive Business Operation Agreement, dated as of May 17, 2019, by and among Beijing Lianji Future Technology Co., Ltd., Beijing Lianji Technology Co., Ltd. and the shareholders of Beijing Lianji Technology Co., Ltd. (incorporated by reference to exhibit 4.14 of our annual report on Form 20-F filed with the SEC on June 28, 2019)
4.3 Exclusive Option Agreement, dated as of May 17, 2019, by and among Beijing Lianji Future Technolocy Co., Ltd., Beijing Lianji Technology Co., Ltd. and the shareholders of Beijing Lianji Technology Co., Ltd. (incorporated by reference to exhibit 4.15 of our annual report on Form 20-F filed with the SEC on June 28, 2019)
4.4 Equity Interest Pledge Agreement, dated as of May 17, 2019, by and among Beijing Lianji Future Technology Ltd., Beijing Lianji Technology Co., Ltd. and the shareholders of Beijing Lianji Technology Co., Ltd. (incorporated by reference to exhibit 4.16 of our annual report on Form 20-F filed with the SEC on June 28, 2019)
4.5 Power of Attorney, dated as of May 17, 2019, by each shareholder of Beijing Lianji Technology Co., Ltd. (incorporated by reference to exhibit 4.17 of our annual report on Form 20-F filed with the SEC on June 28, 2019)
4.6 Share Purchase Agreement, dated as of May 21, 2019, by and among the Registrant, Mr. Haohan Xu and Unicorn Investment Limited (incorporated by reference to exhibit 4.18 of our annual report on Form 20-F filed with the SEC on June 28, 2019)
4.7 Registration Rights Agreement, dated as of May 21, 2019, by and between the Registrant and Mr. Haohan Xu (incorporated by reference to exhibit 4.19 of our annual report on Form 20-F filed with the SEC on June 28, 2019)
4.8* Sale and Purchase Agreement, dated as of July 22, 2019, by and between the Registrant and Marvel Billion Development Limited
4.9* Waiver Letter, dated as of July 22, 2019, from Marvel Billion Development Limited to the Registrant
4.10* Waiver Letter, dated as of July 22, 2019, from Join Me Group (HK) Investment Company Limited to the Registrant
4.11* Waiver Letter, dated as of July 22, 2019, from Join Me Group Supply Chain Management Company Limited to the Registrant
4.12* Waiver Letter, dated as of July 22, 2019, from Shanghai Zhongmin Supply Chain Management Co., Ltd. to the Registrant
4.13* Business Operation Agreement, dated as of March 2, 2020, by and between Beijing Lianji Future Technology Ltd. and Beijing Kuali Yitong Technology Co., Ltd.
4.14* Equity Pledge Agreement, dated as of March 2, 2020, by and among Beijing Lianji Future Technology Ltd., Beijing Kuali Yitong Technology Co., Ltd. and the shareholder of Beijing Kuali Yitong Technology Co., Ltd.
4.15* Option Agreement, dated as of March 2, 2020, by and among Beijing Lianji Future Technology Ltd., Beijing Kuali Yitong Technology Co., Ltd. and the shareholder of Beijing Kuali Yitong Technology Co., Ltd.
4.16* Power of Attorney, dated as of March 2, 2020, by the shareholder of Beijing Kuali Yitong Technology Co., Ltd.
4.17* Share Purchase Agreement, dated as of March 2, 2020, by and among the Registrant, Mr. Kaiming Hu, NBpay Investment Limited and Beijing Kuali Yitong Technology Co., Ltd.
4.18* Share Purchase Agreement, dated as of May 19, 2020, by and between the Registrant and Universal Hunter (BVI) Limited
4.19* Master Software Development Agreement, dated as of May 28, 2018, by and between Unicorn Investment Limited and BGA FOUNDATION LTD
4.20* Master Software Development Agreement, dated as of July 1, 2019, by and between Unicorn Investment Limited and BGA FOUNDATION LTD
8.1* List of Subsidiaries of the Registrant  
11.1 Code of Business Conduct and Ethics of the Registrant (incorporated by reference to exhibit 99.1 to our F-1 registration statement (File No. 333-201413) initially filed with the SEC on January 9, 2015)
12.1* Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
12.2* Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
13.1** Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
13.2** Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
15.1* Letter from Michael T Studer CPA P.C. to the SEC

 

94

 

 

15.2* Consent of Shanghai Perfect C.P.A Partnership
15.3* Consent of Beijing Dacheng Law Offices, LLP (Shanghai)
15.4* Consent of Maples and Calder (Hong Kong) LLP
101.INS* XBRL Instance Document.
101.SCH* XBRL Taxonomy Extension Schema Document.
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB* XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

*Filed herewith
**Furnished herewith

 

95

 

 

SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

  Mercurity Fintech Holding Inc.
   
  By: /s/ Hua Zhou
    Name: Hua Zhou
    Title: Chief Executive Officer

 

Date: June 12, 2020

 

96

 

 

 

 

 

 

 

MERCURITY FINTECH HOLDING INC. 

FORMERLY KNOWN AS JMU LIMITED

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019

 

 

 

 

 

 

 

 

 

 

MERCURITY FINTECH HOLDING INC.

 

FORMERLY KNOWN AS JMU LIMITED

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Consolidated Financial Statements   PAGE(S)
     
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2017, 2018 AND 2019   F-3 – F-4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019   F-5 – F-6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019   F-7
CONSOLIDATED STATEMETNS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019   F-8 – F-10
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019   F-11 – F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019   F-13 – F-48

 

 

 F-1 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Mercurity Fintech Holding Inc. (formerly known as JMU Limited):

 

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Mercurity Fintech Holding Inc. (formerly known as JMU Limited) (the "Company") as of December 31, 2017, 2018 and 2019, the related consolidated statements of operations, comprehensive loss, changes in shareholders' equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017, 2018 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

  

 

 

 

 

/s/ Shanghai Perfect C.P.A Partnership

Shanghai Perfect C.P.A Partnership

 

Shanghai, the People’s Republic of China

 

June 12, 2020

 

We have served as the Company’s auditor since 2020.

 

 F-2 

 

 

MERCURITY FINTECH HOLDING INC.

FORMERLY KNOWN AS JMU LIMITED

CONSOLIDATED BALANCE SHEETS

(In U.S. dollars, except for number of shares and per share (or ADS) data)

 

       As of December 31, 
   Note   2017   2018   2019 
ASSETS:                
Current assets:                    
Cash and cash equivalents        19,740    1,191    435,211 
Accounts receivable, no allowance provided for the years ended December 31, 2017, 2018 and 2019   6    -    -    1,648,000 
Prepaid expenses and other current assets, net   7    164,455    -    7,707 
Amounts due from related parties   16    -    -    42,857 
Current assets of discontinued operations   5    11,902,357    4,617,566    - 
Total current assets        12,086,552    4,618,757    2,133,775 
                     
Non-current assets:                    
Intangible assets, net   8    -    -    1,208,340 
Goodwill   9    -    -    5,529,178 
Deferred tax assets   11    -    -    - 
Non-current assets of discontinued operations   5    122,086,598    406,021    - 
Total non-current assets        122,086,598    406,021    6,737,518 
                     
TOTAL ASSETS        134,173,150    5,024,778    8,871,293 
                     
LIABILITIES AND SHAREHOLDER’S EQUITY :                    
Current liabilities:                    
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of VIE without recourse to the Company of $nil, $nil and $70,781 as of December 31, 2017, 2018 and 2019, respectively)   10    326,535    897,098    836,552 
Current liabilities of discontinued operations   5    20,510,351    19,392,101    - 
Total current liabilities        20,836,886    20,289,199    836,552 

 

 

 F-3 

 

 

MERCURITY FINTECH HOLDING INC.

FORMERLY KNOWN AS JMU LIMITED

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In U.S. dollars, except for number of shares and per share (or ADS) data) 

 

       As of December 31, 
   Note   2017   2018   2019 
LIABILITIES AND SHAREHOLDER’S EQUITY (CONTINUED):                    
                     
Non-current liabilities:                    
Other non-current liabilities (including other non-current liabilities of VIE without recourse to the Company of $nil, $nil and $nil as of December 31, 2017, 2018 and 2019, respectively)        147,700    29,540    - 
Deferred tax liabilities (including deferred tax liabilities of the VIE without recourse to the Company of $nil, $nil and $nil as of December 31, 2017, 2018 and 2019, respectively)   11    -    -    - 
Non-current liabilities of discontinued operations   5    9,638,705    6,892,316    - 
Total non-current liabilities        9,786,405    6,921,856    - 
                     

 

TOTAL LIABILITIES

        30,623,291    27,211,055    836,552 
                     
Commitments and contingencies   17                
                     
Shareholders’ equity:                    
Ordinary shares ($0.00001 par value; 5,000,000,000 shares authorized as of December 31, 2017, 2018 and 2019, and 1,476,208,670, 1,476,208,670 and 2,108,869,528 shares issued and outstanding as of December 31, 2017 and 2018 and 2019)   12    14,766    14,768    21,096 
Additional paid-in capital        634,070,842    634,016,215    645,330,800 
Accumulated deficit        (513,903,256)   (637,143,041)   (638,368,341)
Accumulated other comprehensive (loss)/income        (16,632,493)   (19,074,219)   1,051,186 
Total shareholders’ (deficit)/equity        103,549,859    (22,186,277)   8,034,741 
                     

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

        134,173,150    5,024,778    8,871,293