Item 3. Key Information
A. Selected Financial Data
The following table presents the selected consolidated
financial information for our company. The selected consolidated statements of operations and comprehensive income (loss) data for the
three years ended December 31, 2021, 2020 and 2019, and the selected consolidated balance sheets data as of December 31, 2021 and 2020
have been derived from our audited consolidated financial statements, which are included in this annual report beginning on page F-1.
Our historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data should
be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related
notes and “Item 5. Operating and Financial Review and Prospects” below. Our audited consolidated financial statements
are prepared and presented in accordance with US GAAP.
(All amounts in U.S. dollars, except Dividend per share in Renminbi
and Shares outstanding)
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For the Years Ended December 31, | |
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2021 | | |
2020 | | |
2019 | |
Statement of operation data: | |
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Revenues, net | |
$ | 36,709,931 | | |
$ | 53,305 | | |
$ | 330,000 | |
Gross profit | |
$ | 6,597,568 | | |
$ | 14,771 | | |
$ | 286,944 | |
Operating expenses | |
$ | 1,643,710 | | |
$ | 1,027,920 | | |
$ | 1,496,818 | |
Income (loss) from operations | |
$ | 4,953,858 | | |
$ | (1,013,149 | ) | |
$ | (1,209,874 | ) |
Other non-operating income/(expense), net | |
$ | 3,996 | | |
$ | (7,656 | ) | |
$ | (211,422 | ) |
Provision for income taxes expenses | |
$ | (1,406,159 | ) | |
$ | (76,343 | ) | |
$ | (64,615 | ) |
Net income/(loss) from continued operations | |
$ | 3,551,695 | | |
$ | (1,097,148 | ) | |
$ | (1,485,911 | ) |
Net gain (loss) from discontinued operations | |
$ | - | | |
$ | 25,500 | | |
$ | (76,944 | ) |
Continued income/(loss) per share, basic | |
$ | 0.17 | | |
$ | (0.05 | ) | |
$ | (0.07 | ) |
Continued income/(loss) per share, diluted | |
| 0.17 | | |
| (0.05 | ) | |
| (0.07 | ) |
Discontinued income/(loss) per share, basic | |
$ | - | | |
$ | 0.00 | | |
$ | (0.00 | ) |
Discontinued income/(loss) per share, diluted | |
| - | | |
| 0.00 | | |
| (0.00 | ) |
Weighted average Class A ordinary shares outstanding, basic | |
$ | 21,491,291 | | |
$ | 21,787,892 | | |
$ | 21,298,540 | |
Weighted average Class A ordinary shares outstanding, diluted | |
| 21,511,469 | | |
| 21,787,892 | | |
| 21,298,540 | |
| |
| | | |
| | | |
| | |
Balance sheet data: | |
| | | |
| | | |
| | |
Current assets | |
$ | 87,319,271 | | |
$ | 6,202,131 | | |
$ | 7,305,317 | |
Total assets | |
$ | 88,020,889 | | |
$ | 6,231,564 | | |
$ | 14,514,013 | |
Current liabilities | |
$ | 62,819,301 | | |
$ | 2,538,955 | | |
$ | 2,662,888 | |
Total liabilities | |
$ | 62,967,113 | | |
$ | 2,538,955 | | |
$ | 2,662,888 | |
Total equity | |
$ | 25,053,776 | | |
$ | 3,692,610 | | |
$ | 11,851,125 | |
B. Capitalization and Indebtedness
Not applicable for annual reports on Form 20-F.
C. Reasons for the Offer and Use of Proceeds
Not applicable for annual reports on Form 20-F.
D. Risk Factors
Risks Related to Our Business and Industry
We have a limited operating history in a
new and evolving market, which makes it difficult to evaluate our future prospects.
The software industry is developing rapidly. The
regulatory framework for this market is also evolving and may remain uncertain for the foreseeable future. Potential users may have difficulty
distinguishing our services from those of our competitors. Convincing potential new users of the value of our services is critical to
the success of our business.
Our company was incorporated on April 27, 2015
and have a limited operating history. As our business develops or in response to competition, we may continue to introduce new features
or make adjustments to our existing services and our business model. Any significant change to our business model may not achieve expected
results and may have a material and adverse impact on our financial conditions and results of operations. It is therefore difficult to
effectively assess our future prospects. You should consider our business and prospects in light of the risks and challenges we encounter
or may encounter in this developing and rapidly evolving market. These risks and challenges include our ability to, among other things:
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navigate an evolving regulatory environment; |
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expand the user base; |
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broaden our services; |
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increase awareness of our brand and continue to develop customer loyalty; |
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enhance our risk management capabilities; |
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raise sufficient capital to sustain and expand our business; |
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attract, retain and motivate qualified personnel; |
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upgrade our technology to support additional research and development of new services; |
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improve our operational efficiency; |
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cultivate a vibrant online social trading system; |
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maintain the security of our platform and the confidentiality of the information provided and utilized across our platform; |
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attract, retain and motivate talented employees; and |
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defend ourselves against litigation, regulatory, intellectual property, privacy or other claims. |
If we fail to educate potential users about the
value of our software, if the software market does not develop as we expect, or if we fail to address the needs of our target market,
or other risks and challenges, our business and results of operations will be harmed.
Significant contributors to the bitcoin
network could propose amendments to its protocols and software which, if accepted and authorized, could negatively impact our business
and operations.
A small group of individuals contribute to the
Bitcoin Core Project on GitHub.com, which is a leading source of quasi-governance that works to ensure that the bitcoin blockchain remains
decentralized and governed by consensus. According to its website, “Bitcoin Core is an open source project which maintains and releases
Bitcoin client software called ‘Bitcoin Core.’ It is a direct descendant of the original Bitcoin software client released
by Satoshi Nakamoto after he published the famous Bitcoin whitepaper.” Bitcoin Core is powered by an open-source development community,
but it is maintained by a small group of maintainers and leading contributors.
This group of contributors is currently headed
by Wladimir J. van der Laan, the current lead maintainer. These individuals can propose refinements or improvements to the bitcoin network’s
source code through one or more software upgrades that alter the protocols and software that govern the bitcoin network and the properties
of bitcoin, including the irreversibility of transactions and limitations on the mining of new bitcoin. Proposals for upgrades and discussions
relating thereto take place on online forums. For example, there is an ongoing debate regarding altering the blockchain by increasing
the size of blocks to accommodate a larger volume of transactions.
The open-source structure of the bitcoin
network protocol may result in inconsistent and perhaps even ineffective changes to the bitcoin protocol. Failed upgrades or maintenance
to the protocol could damage the bitcoin network, which could adversely affect our business and the results of our operations.
The bitcoin network operates based on an open-source
protocol maintained by contributors, largely on the Bitcoin Core project on GitHub. As an open source project, bitcoin is not represented
by an official organization or authority. As the bitcoin network protocol is not sold and its use does not generate revenues for contributors,
contributors are generally not compensated for maintaining and updating the bitcoin network protocol. Although the MIT Media Lab’s
Digital Currency Initiative funds the current maintainer Wladimir J. van der Laan, among others, this type of financial incentive is not
typical. The lack of guaranteed financial incentive for contributors to maintain or develop the bitcoin network and the lack of guaranteed
resources to adequately address emerging issues with the bitcoin network may reduce incentives to address the issues adequately or in
a timely manner. Changes to a digital asset network which we sell mining machine on may adversely affect an investment in us.
If demand for bitcoin declines, or if another
cryptocurrency replaces bitcoin as the most prominent cryptocurrency, our business and the results of our operations could suffer materially.
Although bitcoin is presently the most prominent
cryptocurrency, it is possible that another cryptocurrency could supplant it as the most prominent cryptocurrency, which could have a
materially negative effect of the demand for bitcoin and, therefore, on its conversion spot price. Alternatively, the demand for bitcoin
may fall for other reasons unknown to the Company.
Our ability to adopt technology in response
to changing security needs or trends poses a challenge to the safekeeping of our digital assets.
The history of digital asset exchanges has shown
that exchanges and large holders of digital assets must adapt to technological change in order to secure and safeguard their digital assets.
We rely on third party storage solutions and “cold storage” of our digital wallets to safeguard our digital assets from theft,
loss, destruction or other issues relating to hackers and technological attack; however, malicious actors may be able to intercept our
digital assets in the process of selling them. Further, we may move our digital assets to various exchanges to exchange them for fiat
currency, which will require us to rely on the security protocols of these exchanges to safeguard our digital assets. While these exchanges
purport to be secure, and while we believe them to be so, no security system is perfect and malicious actors may be able to intercept
our digital assets while we are in the process of selling them via such exchanges. Given the growth in their size and their relatively
unregulated nature, we believe these exchanges will become a more appealing target for malicious actors. To the extent we are unable to
identify and mitigate or stop new security threats, our machines may be subject to theft, loss, destruction or other attack, which could
adversely affect an investment in us.
We have an evolving business model which
is subject to various uncertainties.
As bitcoin assets may become more widely available,
we expect the services and products associated with them to evolve. In order to stay current with the industry, our business model may
need to evolve as well. From time to time, we may modify aspects of our business model relating to our strategy. We cannot offer any assurance
that these or any other modifications will be successful or will not result in harm to our business. We may not be able to manage growth
effectively, which could damage our reputation, limit our growth and negatively affect our operating results. Further, we cannot provide
any assurance that we will successfully identify all emerging trends and growth opportunities in this business sector, and we may lose
out on those opportunities. Such circumstances could have a material adverse effect on our business, prospects or operations.
The development and acceptance of cryptographic
and algorithmic protocols governing the issuance of and transactions in cryptocurrencies is subject to a variety of factors that are difficult
to evaluate.
The use of cryptocurrencies to, among other things,
buy and sell goods and services and complete transactions, is part of a new and rapidly evolving industry that employs bitcoin assets
based upon a computer-generated mathematical and/or cryptographic protocol. Large-scale acceptance of cryptocurrencies as a means of payment
has not, and may never, occur. The growth of this industry in general, and the use of bitcoin, in particular, is subject to a high degree
of uncertainty, and the slowing or stopping of the development or acceptance of developing protocols may occur unpredictably. The factors
include, but are not limited to:
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continued worldwide growth in the adoption and use of cryptocurrencies as a medium to exchange; |
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governmental and quasi-governmental regulation of cryptocurrencies and their use, or restrictions on or regulation of access to and operation of the network or similar bitcoin systems; |
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changes in consumer demographics and public tastes and preferences; |
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the maintenance and development of the open-source software protocol of the network; |
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the increased consolidation of contributors to the bitcoin blockchain through mining pools; |
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the availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies; |
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the use of the networks supporting cryptocurrencies for developing smart contracts and distributed applications; |
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general economic conditions and the regulatory environment relating to cryptocurrencies; and |
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negative consumer sentiment and perception of bitcoin specifically and cryptocurrencies generally. |
The outcome of these factors could have negative
effects on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect
on our business, prospects or operations as well as potentially negative effect on the value of any bitcoin or other cryptocurrencies
we mine or otherwise acquire or hold for our own account, which would harm investors in our securities.
Banks and financial institutions may not
provide banking services, or may cut off services, to businesses that engage in bitcoin-related activities or that accept cryptocurrencies
as payment, including financial institutions of investors in our securities.
A number of companies that engage in bitcoin and/or
other bitcoin-related activities have been unable to find banks or financial institutions that are willing to provide them with bank accounts
and other services. Similarly, a number of companies and individuals or businesses associated with cryptocurrencies may have had and may
continue to have their existing bank accounts closed or services discontinued with financial institutions in response to government action,
particularly in China, where regulatory response to cryptocurrencies has been to exclude their use for ordinary consumer transactions
within its jurisdiction.
Subject to such restrictions, we also may be unable
to obtain or maintain these services for our business. The difficulty that many businesses that provide bitcoin and/or derivatives on
other bitcoin-related activities have and may continue to have in finding banks and financial institutions willing to provide them services
may be decreasing the usefulness of cryptocurrencies as a payment system and harming public perception of cryptocurrencies and could decrease
their usefulness and harm their public perception in the future.
If any person, institution or a pool of
them acting in concert obtains control of more than 50% of the processing power active on the Bitcoin network, such person, institution
or a pool of them could prevent new transactions from gaining confirmations, halt payments between users, and reverse previously completed
transactions, which would erode user confidence in Bitcoin.
If the award of Bitcoins for solving blocks and
transaction fees for recording transactions are not sufficiently high to incentivize miners, miners may cease expending processing power
to solve blocks. Miners ceasing operations would reduce the collective processing power on the Bitcoin network, which would adversely
affect the confirmation process for transactions and make the Bitcoin network more vulnerable to any person, institution or a pool of
them which has obtained over 50% control over the computing power on the Bitcoin network. In such event, such person, institution or a
pool of them could prevent new transactions from gaining confirmation, halt payments between users, and reverse previously completed transactions.
Such changes or any reduction in confidence in the confirmation process or processing power of the Bitcoin network may erode user confidence
in Bitcoin, which would decrease the demand for our mining machines.
The administrators of the Bitcoin network’s
source code could propose amendments to the Bitcoin network’s protocols and software that, if accepted and authorized by the Bitcoin
network’s community, could adversely affect our business, results of operations and financial condition.
The Bitcoin network is based on a cryptographic,
algorithmic protocol that governs the end-user-to-end-user interactions between computers connected to the Bitcoin network. A loosely
organized group can propose amendments to the Bitcoin network’s source code through one or more software upgrades that alter the
protocols and software that govern the Bitcoin network and the properties of Bitcoins, including the irreversibility of transactions and
limitations on the mining of new Bitcoins. To the extent that a significant majority of the users and miners on the Bitcoin network install
such software upgrade(s), the Bitcoin network would be subject to new protocols and software that may render our products less desirable,
which in turn may adversely affect our business, results of operations and financial condition. If less than a significant majority of
the users and miners on the Bitcoin network install such software upgrade(s), the Bitcoin network could “fork.”
The acceptance of Bitcoin network software
patches or upgrades by a significant, but not overwhelming, percentage of the users and miners in the Bitcoin network could result in
a “fork” in the blockchain, resulting in the operation of two separate networks that cannot be merged. The existence of forked
blockchains could erode user confidence in Bitcoin and could adversely impact our business, results of operations and financial condition.
Bitcoin is based on open-source software and has
no official developer or group of developers that formally controls the Bitcoin network. Any individual can download the Bitcoin network
software and make any desired modifications, which are proposed to users and miners on the Bitcoin network through software downloads
and upgrades. However, miners and users must consent to those software modifications by downloading the altered software or upgrade implementing
the changes; otherwise, the changes do not become part of the Bitcoin network. Since the Bitcoin network’s inception, changes to
the Bitcoin network have been accepted by the vast majority of users and miners, ensuring that the Bitcoin network remains a coherent
economic system. However, a developer or group of developers could potentially propose a modification to the Bitcoin network that is not
accepted by a vast majority of miners and users, but that is nonetheless accepted by a substantial population of participants in the Bitcoin
network. In such a case, a fork in the blockchain could develop and two separate Bitcoin networks could result, one running the pre-modification
software program and the other running the modified version. An example is the introduction of a cryptocurrency known as “Bitcoin
cash” in mid-2017. This kind of split in the Bitcoin network could erode user confidence in the stability of the Bitcoin network,
which could negatively affect the demand for our products. Our marketing efforts to help grow our business may not be effective.
If our marketing efforts are not successful in
promoting awareness of our clients, or if we are not able to cost-effectively manage our marketing expenses, our results of operations
could be adversely affected. If our marketing efforts are successful in increasing awareness of our business, this could also lead to
increased public scrutiny of our business and increase the likelihood of third parties bringing legal proceedings against us. Any of the
foregoing risks could harm our business, financial condition and results of operations.
Acceptance and/or widespread use of bitcoin
is uncertain.
Currently, there is a relatively limited use of
any bitcoin in the retail and commercial marketplace, thus contributing to price volatility that could adversely affect an investment
in our securities. Banks and other established financial institutions may refuse to process funds for bitcoin transactions, process wire
transfers to or from bitcoin exchanges, bitcoin-related companies or service providers, or maintain accounts for persons or entities transacting
in bitcoin. Conversely, a significant portion of bitcoin demand is generated by investors seeking a long-term store of value or speculators
seeking to profit from the short- or long-term holding of the asset. Price volatility undermines any bitcoin’s role as a medium
of exchange, as retailers are much less likely to accept it as a form of payment. Market capitalization for a bitcoin as a medium of exchange
and payment method may always be low.
The relative lack of acceptance of bitcoins in
the retail and commercial marketplace, or a reduction of such use, limits the ability of end users to use them to pay for goods and services.
Such lack of acceptance or decline in acceptances could have a material adverse effect on our ability to continue as a going concern or
to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations.
The development and acceptance of competing
blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or other alternatives.
The development and acceptance of competing blockchain
platforms or technologies may cause consumers to use alternative distributed ledgers or an alternative to distributed ledgers altogether.
Our business utilizes presently existent digital ledgers and blockchains and we could face difficulty adapting to emergent digital ledgers,
blockchains, or alternatives thereto. This may adversely affect us and our exposure to various blockchain technologies and prevent us
from realizing the anticipated profits from our investments. Such circumstances could have a material adverse effect on our ability to
continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects
or operations.
We may not adequately respond to price fluctuations
and rapidly changing technology, which may negatively affect our business.
Competitive conditions within the bitcoin industry
require that we use sophisticated technology in the operation of our business. The industry for blockchain technology is characterized
by rapid technological changes, new product introductions, enhancements and evolving industry standards. New technologies, techniques
or products could emerge that might offer better performance than the software and other technologies we currently utilize, and we may
have to manage transitions to these new technologies to remain competitive. We may not be successful, generally or relative to our competitors
in the bitcoin industry, in timely implementing new technology into our systems, or doing so in a cost-effective manner. During the course
of implementing any such new technology into our operations, we may experience system interruptions and failures during such implementation.
Furthermore, there can be no assurances that we will recognize, in a timely manner or at all, the benefits that we may expect as a result
of our implementing new technology into our operations. As a result, our business and operations may suffer, and there may be adverse
effects on the price of our common stock.
We are dependent on our major customers
for the majority of our revenues. The loss of one or more significant customers could adversely affect our financial condition, prospects
and results of operations.
For the year ended December 31, 2021, we had seven
major customers, which accounted for an aggregate of 88.98% of total revenue. For the year ended December 31, 2020, we had one major customer
that accounted for all of the total revenues. If we were to lose any key alliances over a relatively short period of time or if one of
our largest customers fails to pay or delays in paying a significant amount of our outstanding receivables, we could experience an adverse
impact on our business, financial condition, results of operations, cash flows and prospects. Additionally, changes in ownership of our
customers may result in the loss of, or reduction in, business from those customers, which could materially and adversely affect our business,
financial condition, results of operations and prospects.
We are dependent on a limited number of suppliers,
and delays in deliveries or increases in the cost could harm our business, results of operations and financial condition.
Our ability to meet our customers’ demand
for our service depends upon obtaining adequate supplies on a timely basis. We have established relationships with a limited number of
suppliers. For the year ended December 31, 2021, we had three major suppliers, which accounted for an aggregate of 98.49% of total cost
of revenue. For the year ended December 31, 2020, we only had one supplier, which accounted for all of our cost of revenue. Should any
of our current suppliers be unable to deliver their service or otherwise fail to deliver in a timely manner and at acceptable prices and
quality, we would have to identify and quality replacements from alternative sources of supply. However, the process of qualifying new
suppliers for complex components is also lengthy and could have a material adverse effect on our business, financial condition and results
of operations. Additionally, increase in costs may adversely impact demand for our services or the results of our business operations.
Any failure to offer high-quality product
support may adversely affect our relationships with our customers and our financial results.
In deploying and using our solutions, our customers
depend on our support services team to resolve complex technical and operational issues. We may be unable to respond quickly enough to
accommodate short-term increases in customer demand for product support. We also may be unable to modify the nature, scope and delivery
of our product support to compete with changes in product support services provided by our competitors. Increased customer demand for
product support, without corresponding revenue, could increase costs and adversely affect our operating results. Our sales are highly
dependent on our business reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality
product support, or a market perception that we do not maintain high-quality product support, could adversely affect our reputation, our
ability to sell our solutions to existing and prospective customers, our business, operating results, and financial position.
We might require additional capital to support
business growth, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support
our business growth and may require additional funds to respond to business challenges, including the need to develop new features or
enhance our existing solutions, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly,
we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances
of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we
issue could have rights, preferences and privileges superior to those of holders of our Class A ordinary shares. Any debt financing secured
by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational
matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential
acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, or at all. If we are unable to
obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business
growth and to respond to business challenges could be significantly impaired.
Our
financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes.
Our business
could be materially and adversely affected by the outbreak of epidemics including but not limited to the novel coronavirus (COVID-19),
swine influenza, avian influenza, middle east respiratory syndrome (MERS-CoV) and severe acute respiratory syndrome (SARS-CoV). Our financial
and operating performance may be adversely affected by epidemics such as the on-going COVID-19, natural disasters and other catastrophes.
Our business could be materially and adversely affected in the event that the slowdown or suspension carries for a long period of time.
The restrictive measures against the on-going COVID-19 outbreak adversely affected and slowed down the national economic development.
Any prolonged restrictive measures in order to control the contagious disease or other adverse public health developments in China or
our targeted markets may have a material and adverse effect on our business operations.
Similarly,
natural disasters, wars (including the potential of war), terrorist activity (including threats of terrorist activity), social unrest
and heightened travel security measures instituted in response, and travel-related accidents, as well as geopolitical uncertainty and
international conflict, will affect travel volume and may in turn have a material adverse effect on our business and results of operations.
In addition, we may not be adequately prepared in contingency planning or recovery capability in relation to a major incident or crisis,
and as a result, our operational continuity may be adversely and materially affected, which in turn may harm our reputation.
The COVID-19 pandemic
has adversely impacted, and poses risks to, our business, the nature and extent of which are highly uncertain and unpredictable.
In recent months, the
continued, global spread of COVID-19 has led to disruption and volatility in the global capital markets, which has increased
the cost of, and adversely impacted access to, capital (including the commercial paper markets) and increased economic uncertainty. It
is likely that the pandemic will cause an economic slowdown of potentially extended duration, and it is possible that it could cause a
global recession.
COVID-19 is adversely
affecting, and is expected to continue to adversely affect, certain elements of our business, including as a result of impacts associated
with preventive and precautionary measures that we, other businesses, our communities and governments are taking. Due to these impacts
and measures, we have experienced and expect to continue to experience delays in our internal product development and unpredictable reductions
in demand for certain of our products and services. Our employees have been required to work from home or not go into their offices. Such
restrictions are slowly being lifted. If the pandemic continues and conditions worsen, we expect to experience additional adverse impacts
on our operational and commercial activities and customer orders, which adverse impacts may be material, and it remains uncertain what
impact these adverse impacts would have on future sales and customer orders even if conditions begin to improve. In addition to existing
travel restrictions, jurisdictions may continue to close borders, impose prolonged quarantines and further restrict travel and business
activity, which could significantly impact our ability to support our operations and customers. Further, such travel restrictions and
slowed-down business activities may affect the operation of our customer and result in decrease of our products and services, which could
adversely affect our financial results. Due to the speed with which the COVID-19 situation is developing, the global breadth
of its spread and the range of governmental and community reactions thereto, there is uncertainty around its duration and ultimate impact;
therefore, any negative impact on our overall financial and operating results (including without limitation our liquidity) cannot be reasonably
estimated at this time, but the pandemic could lead to extended disruption of economic activity and the impact on our financial and operating
results could be material.
If we are not able to continue to innovate
or if we fail to adapt to changes in our industry, our business, financial condition and results of operations would be materially and
adversely affected.
The software industry is characterized by rapidly
changing technology, evolving industry standards, new service introductions and changing customer demands. Furthermore, our competitors
are constantly developing innovations in online marketing, communications, social networking and other services to enhance users’
online experience. We continue to invest significant resources in our infrastructure, research and development and other areas in order
to introduce more content and enhance our existing services that will attract more users to our software. The changes and developments
taking place in our industry may also require us to re-evaluate our business model and adopt significant changes to our long-term strategies
and business plan. Our failure to innovate and adapt to these changes would have a material adverse effect on our business, financial
condition and results of operations.
If we are unable to maintain existing clients,
attract new clients or broaden our market, our business and results of operations will be adversely affected.
We intend to continue to dedicate significant
resources to our user acquisition efforts, including establishing new acquisition channels, particularly as we continue to grow and introduce
new services. The overall number of users may be affected by several factors, including our brand recognition and reputation, the effectiveness
of our risk control, the efficiency of our platform, the macroeconomic environment and other factors. Currently, we promote our brand
through direct communications with schools and learning centers. However, we do we have sufficient human resource to market our services,
which will result in an increase in operation cost. If we are unable to broaden our market or attract new users, or if the existing users
do not continue to use our software, we might be unable to increase our revenues as we expect, and our business and results of operations
may be adversely affected.
If we do not compete effectively, our results
of operations could be harmed.
The market of software is in rapid growth due
to rapid growth of actual and predicted demand. The market, thus, has become more competitive. For our commodity trading platform, we
compete with traditional financial institutions and other online trading platforms. For our education software, we compete with schools
and learning centers and online education programs. Our competitors operate with different business models, have different cost structures
or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to new regulatory,
technological and other developments. Some of our current and potential competitors have significantly more financial, technical, marketing
and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their platforms.
Our competitors may also have longer operating histories, more extensive customer bases, greater brand recognition and brand loyalty and
broader partner relationships than us. Additionally, a current or potential competitor may acquire one or more of our existing competitors
or form a strategic alliance with one or more of our competitors. Our competitors may be better at developing new services, offering more
attractive investment returns or lower fees, responding faster to new technologies and undertaking more extensive and effective marketing
campaigns. In response to competition and in order to grow or maintain the client base, we may have to offer more content and features
in the software or charge lower fees, which could materially and adversely affect our business and results of operations. If we are unable
to compete with such companies and meet the need for innovation in our industry, the demand for our service could stagnate or substantially
decline, we could experience reduced revenues or our services could fail to achieve or maintain more widespread market acceptance, any
of which could harm our business and results of operations.
If we fail to promote and maintain our brand
in an effective and cost-efficient way, our business and results of operations may be harmed.
We believe that developing and maintaining awareness
of our brand effectively is critical to attracting new and retaining existing clients. Successful promotion of our brand and our ability
to attract clients depend largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our
services. It is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts may not
result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses
incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses, our results of operations and
financial condition would be adversely affected, which may impair our ability to grow our business.
Unauthorized disclosure of sensitive or
confidential customer information or our failure or the perception by our customers that we failed to comply with privacy laws or properly
address privacy concerns could harm our business and standing with our customers.
We collect, store, process, and use certain personal
information and other user data in our business. A significant risk associated with our business is the secure transmission of confidential
information over public networks. The perception of privacy concerns, whether or not valid, may adversely affect our business and results
of operations. We must ensure that any processing, collection, use, storage, dissemination, transfer and disposal of data for which we
are responsible complies with relevant data protection and privacy laws. The protection of our customer, employee and company data is
critical to us. We rely on commercially available systems, software, tools and monitoring to provide secure processing, transmission and
storage of confidential customer information. Despite the security measures we have in place, our facilities and systems, and those of
our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data,
programming or human errors, or other similar events. Any security breach, or any perceived failure involving the misappropriation, loss
or other unauthorized disclosure of confidential information, as well as any failure or perceived failure to comply with laws, policies,
legal obligations or industry standards regarding data privacy and protection, whether by us or our vendors, could damage our reputation,
expose us to litigation risk and liability, subject us to negative publicity, disrupt our operations and harm our business. We cannot
assure you that our security measures will prevent security breaches or that failure to prevent them will not have a material adverse
effect on our business. Further, we do not carry cybersecurity insurance to compensate for any losses that may result from any breach
of security. Therefore, our results of operations or financial condition may be materially adversely affected if our existing general
liability policies did not cover a security breach.
New lines of business or new services may
subject us to additional risks.
From time to time, we may implement new lines
of business or offer new services within existing lines of business. There are substantial risks and uncertainties associated with these
efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or
new services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business
and/or new services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance
with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line
of business or a new service. Furthermore, any new line of business and/or new service could have a significant impact on the effectiveness
of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business
or new services could have a material adverse effect on our business, results of operations and financial condition.
We may not be able to prevent others from
unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks, copyrights, domain names,
know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on a combination of intellectual
property laws and contractual arrangements, including confidentiality, invention assignment and non-compete agreements with our employees
and others to protect our proprietary rights. We have purchased and registered with the National Copyright Administration of PRC certain
copyrights. See “Item 4. Information on the Company – Intellectual Property.” Despite these measures, any of our intellectual
property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient
to provide us with competitive advantages. In addition, because of the rapid pace of technological change in our industry, parts of our
business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses
and technologies from these third parties on reasonable terms, or at all.
It is often difficult to register, maintain and
enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and
may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and
non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach.
Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China.
Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent
the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights,
such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance
that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently
discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work
for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual
property rights could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to intellectual property
infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain that our operations or any
aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual
property rights held by third parties. We may be from time to time in the future subject to legal proceedings and claims relating to the
intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual
property rights that are infringed by our services or other aspects of our business without our awareness. Holders of such intellectual
property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions. If
any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from
our business and operations to defend against these claims, regardless of their merits.
Additionally, the application and interpretation
of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights, know-how
or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory
authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject
to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees
or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.
From time to time, we may evaluate and potentially
consummate strategic investments or acquisitions, which could require significant management attention, disrupt our business and adversely
affect our financial results.
We may evaluate and consider strategic investments,
combinations, acquisitions or alliances to further increase the value of our services and better serve our clients. These transactions
could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business
opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we may be
unable to obtain the benefits or avoid the difficulties and risks of such transaction.
Strategic investments or acquisitions will involve
risks commonly encountered in business relationships, including:
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difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business; |
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inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits; |
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difficulties in retaining, training, motivating and integrating key personnel; |
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diversion of management’s time and resources from our normal daily operations; |
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difficulties in successfully incorporating licensed or acquired technology and rights into our services; |
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difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations; |
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difficulties in retaining relationships with clients, employees and suppliers of the acquired business; |
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risks of entering markets in which we have limited or no prior experience; |
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regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business; |
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assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability; |
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failure to successfully further develop the acquired technology; |
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liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; |
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potential disruptions to our ongoing businesses; and |
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We may not make any investments or acquisitions,
or any future investments or acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenues
to offset the associated acquisition costs or may not otherwise result in the intended benefits. In addition, we cannot assure you that
any future investment in or acquisition of new businesses or technology will lead to the successful development of new or enhanced services
or that any new or enhanced services, if developed, will achieve market acceptance or prove to be profitable.
Our business depends on the continued efforts
of our senior management. If one or more of our key executives were unable or unwilling to continue in their present positions, our business
may be severely disrupted.
Our business operations depend on the continued
services of our senior management, particularly the executive officers named in this annual report. While we have provided different incentives
to our management, we cannot assure you that we can continue to retain their services. If one or more of our key executives were unable
or unwilling to continue in their present positions, we may not be able to replace them easily or at all, our future growth may be constrained,
our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected,
and we may incur additional expenses to recruit, train and retain qualified personnel. In addition, although we have entered into confidentiality
and non-competition agreements with our management, there is no assurance that any member of our management team will not join our competitors
or form a competing business. If any dispute arises between our current or former 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.
Competition for employees is intense, and
we may not be able to attract and retain the qualified and skilled employees needed to support our business.
We believe our success depends on the efforts
and talent of our employees, including software engineering, financial and marketing personnel. Our future success depends on our continued
ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled technical, and financial
personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing
compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we
have and may be able to offer more attractive terms of employment.
A lack of insurance could expose us to significant
costs and business disruption.
We have not yet purchased insurance to cover our
assets and property of our business, which could leave our business inadequately protected from loss. If we were to incur substantial
losses or liabilities due to fire, explosions, floods, other natural disasters or accidents or business interruption, our results of operations
could be materially and adversely affected. Furthermore, Insurance companies in China currently do not offer as extensive an array of
insurance products as insurance companies in more developed economies. Currently, we do not have any business liability or disruption
insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with
acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions
may result in our incurring substantial costs.
We have identified material weaknesses in
our internal control over financial reporting. If we fail to implement and maintain an effective system of internal control,
we may be unable to accurately report our operating results, meet our reporting obligations or prevent fraud.
As required by Form 20-F, our management is required
to assess the effectiveness of our internal control over financial reporting and include a report in our annual report on Form 20-F. In
preparing our consolidated financial statements for the years ended December 31, 2021 and 2020, our management identified material weaknesses
in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight
Board of the United States, and other significant deficiencies. A “material weakness” is a deficiency, or a combination of
deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement
of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses
identified are as follows: (i) no sufficient personnel with appropriate levels of accounting knowledge and experience to address complex
U.S. GAAP accounting issues and to prepare and review financial statements and related disclosures under U.S. GAAP; (ii) ineffective oversight
of our financial reporting and internal control by those charged with governance; and (iii) inadequate design of internal
control over the preparation of the financial statements being audited. These material weaknesses remained as of December 31, 2021.
As a result of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements,
errors or omissions.
In addition, once we cease to be an “emerging
growth company” as such term is defined under the Jumpstart Our Business Startups Act, or JOBS Act, Section 404 of the Sarbanes-Oxley
Act of 2002 and related rules promulgated by the SEC, we will be subject to Section 404 of the Sarbanes-Oxley Act of 2002, pursuant to
which our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over
financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover,
even if our management concludes that our internal control over financial reporting is effective, our independent registered
public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with
our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant
requirements differently from us. In addition, our reporting obligations may place a significant strain on our management, operational
and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required
remediation.
During the course of documenting and testing our internal
control procedures, in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we may identify other
weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy
of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time,
we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance
with Section 404 of the Sarbanes-Oxley Act of 2002. Generally, if we fail to achieve and maintain an effective internal control environment,
we could suffer material misstatements, errors or omissions in our financial statements and fail to meet our reporting obligations, which
would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital
markets, and harm our results of operations. Additionally, ineffective internal control over financial reporting could expose us to increased
risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory
investigations and civil or criminal sanctions.
Risks Related to Doing Business in China
We are a holding company, and will rely
on dividends paid by our subsidiaries for our cash needs. Any limitation on the ability of our subsidiaries to make dividend payments
to us, or any tax implications of making dividend payments to us, could limit our ability to pay our parent company expenses or pay dividends
to holders of our Class A ordinary shares.
We are a BVI holding company and conduct substantially
all of our business through our subsidiaries in China. Although neither the holding company nor any of the Company’s Chinese subsidiaries
conduct any operations through contractual arrangements with a variable interest entity based in China, we may rely on dividends to be
paid by our PRC subsidiaries to fund our cash and financing requirements, including the funds necessary to pay dividends and other cash
distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. If our PRC subsidiaries incur debt
on their own behalf in the future, the instruments governing the debt may restrict our PRC subsidiaries’ ability to pay dividends
or make other distributions to us.
Under PRC laws and regulations, our PRC subsidiaries
may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In
addition, wholly foreign-owned enterprises are required to set aside at least 10% of their accumulated after-tax profits each year, if
any, to fund a certain statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered capital.
Our PRC subsidiaries generate primarily all of
their revenue in Renminbi, which is not freely convertible into other currencies. As a result, any restriction on currency exchange may
limit the ability of any one of our PRC subsidiaries to use its Renminbi revenues to pay dividends to us. The PRC government may continue
to strengthen its capital controls, and more restrictions and substantial vetting process may be put forward by SAFE for cross-border
transactions falling under both the current account and the capital account. Any limitation on the ability of our PRC subsidiary to pay
dividends or make other kinds of payments to us could materially and adversely limit our ability to grow, make investments or acquisitions
that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
In addition, the Enterprise Income Tax Law, or
EIT, and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese
companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central
government and governments of other countries or regions where the non-PRC resident enterprises are incorporated. Any limitation on the
ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability to grow,
make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
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, or the Double Tax Avoidance
Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC entity.
However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including, without limitation,
that (a) the Hong Kong entity must be the beneficial owner of the relevant dividends; and (b) the Hong Kong entity must directly hold
no less than 25% share ownership in the PRC entity during the 12 consecutive months preceding its receipt of the dividends. In current
practice, a Hong Kong entity must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding
tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that
we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding
tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiaries to their immediate holding
companies, AGM Defi Tech Limited and AGM Technology Limited. As of the date hereof, Beijing Keen Sense Technology Service Co., Ltd., AGM
Tianjing Construction Development Co., Ltd. and Nanjing Lucun Semiconductor Co. Ltd. currently do not have plans to declare and pay dividends
to AGM Defi Tech Limited and AGM Technology Limited and we have not applied for the tax resident certificate from the relevant Hong Kong
tax authority. AGM Defi Tech Limited and AGM Technology Limited intend to apply for the tax resident certificate when Beijing Keen Sense
Technology Service Co., Ltd., AGM Tianjing Construction Development Co., Ltd. and Nanjing Lucun Semiconductor Co. Ltd. plan to declare
and pay dividends to them. When Beijing Keen Sense Technology Service Co., Ltd., AGM Tianjing Construction Development Co., Ltd. and Nanjing
Lucun Semiconductor Co. Ltd. plan to declare and pay dividends to AGM Defi Tech Limited and AGM Technology Limited and when we intend
to apply for the tax resident certificate from the relevant Hong Kong tax authority, we plan to inform the investors through SEC filings,
such as a current report on Form 6-K, prior to such actions.
The Chinese government exerts substantial
influence over the manner in which we must conduct our business activities. We are currently not required to obtain approval from
Chinese authorities to list on U.S exchanges, however, if our holding company or subsidiaries were required to obtain approval in the
future and were denied permission from Chinese authorities to list on U.S. exchanges, we will not be able to continue listing on U.S.
exchange, which would materially affect the interest of the investors.
The Chinese government has exercised and can continue
to exercise substantial control to intervene on virtually every sector of the Chinese economy through regulation and state ownership,
and as a result, it can influence the manner in which we must conduct our business activities and effect material changes in our operations
or the value of the Class A ordinary shares we are registering in this resale. Under the current government leadership, the government
of the PRC has been pursuing reform policies which have adversely affected China-based operating companies whose securities are listed
in the United States, with significant policies changes being made from time to time without notice. There are substantial uncertainties
regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing
our business, or the enforcement and performance of our contractual arrangements with borrowers in the event of the imposition of statutory
liens, death, bankruptcy or criminal proceedings. Our ability to operate in China may be harmed by changes in its laws and regulations,
including those relating to taxation, environmental regulations, land use rights, property and other matters. The central or local governments
of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures
and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future,
including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional
or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular
regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
Given recent statements by the Chinese government
indicating an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based
issuers, any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors
and cause the value of such securities to significantly decline or become worthless.
Recently, the General Office of the Central Committee
of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Severely Cracking Down on Illegal
Securities Activities According to Law, or the Opinions, which was made available to the public on July 6, 2021. The Opinions emphasized
the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas
listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems, will be taken to
deal with the risks and incidents of China-concept overseas listed companies. As of the date hereof, we have not received any inquiry,
notice, warning, or sanctions from PRC government authorities in connection with the Opinions.
On June 10, 2021, the Standing Committee of the
National People’s Congress of China, or the SCNPC, promulgated the PRC Data Security Law, which took effect in September 2021. The
PRC Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data activities, and introduces
a data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree
of harm it will cause to national security, public interests, or legitimate rights and interests of individuals or organizations when
such data is tampered with, destroyed, leaked, illegally acquired or used. The PRC Data Security Law also provides for a national security
review procedure for data activities that may affect national security and imposes export restrictions on certain data an information.
In early July 2021, regulatory authorities in
China launched cybersecurity investigations with regard to several China-based companies that are listed in the United States. The Chinese
cybersecurity regulator announced on July 2 that it had begun an investigation of Didi Global Inc. (NYSE: DIDI) and two days later ordered
that the company’s app be removed from smartphone app stores. On July 5, 2021, the Chinese cybersecurity regulator launched the
same investigation on two other Internet platforms, China’s Full Truck Alliance of Full Truck Alliance Co. Ltd. (NYSE: YMM) and
Boss of KANZHUN LIMITED (Nasdaq: BZ). On July 24, 2021, the General Office of the Communist Party of China Central Committee and the General
Office of the State Council jointly released the Guidelines for Further Easing the Burden of Excessive Homework and Off-campus Tutoring
for Students at the Stage of Compulsory Education, pursuant to which foreign investment in such firms via mergers and acquisitions, franchise
development, and variable interest entities are banned from this sector.
On August 17, 2021, the State Council promulgated
the Regulations on the Protection of the Security of Critical Information Infrastructure, or the Regulations, which took effect on September
1, 2021. The Regulations supplement and specify the provisions on the security of critical information infrastructure as stated in the
Cybersecurity Review Measures. The Regulations provide, among others, that protection department of certain industry or sector shall notify
the operator of the critical information infrastructure in time after the identification of certain critical information infrastructure.
On August 20, 2021, the SCNPC promulgated the
Personal Information Protection Law of the PRC, or the Personal Information Protection Law, which took effect in November 2021. As the
first systematic and comprehensive law specifically for the protection of personal information in the PRC, the Personal Information Protection
Law provides, among others, that (i) an individual’s consent shall be obtained to use sensitive personal information, such as biometric
characteristics and individual location tracking, (ii) personal information operators using sensitive personal information shall notify
individuals of the necessity of such use and impact on the individual’s rights, and (iii) where personal information operators reject
an individual’s request to exercise his or her rights, the individual may file a lawsuit with a People’s Court.
As such, the Company’s business segments
may be subject to various government and regulatory interference in the provinces in which they operate. The Company could be subject
to regulation by various political and regulatory entities, including various local and municipal agencies and government sub-divisions.
The Company may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure
to comply. Additionally, the governmental and regulatory interference could significantly limit or completely hinder our ability to offer
or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
Furthermore, it is uncertain when and whether
the Company will be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and even when such
permission is obtained, whether it will be denied or rescinded. Although the Company is currently not required to obtain permission from
any of the PRC federal or local government to obtain such permission and has not received any denial to list on the U.S. exchange, our
operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or
industry.
On December 24, 2021, the CSRC, together with
other relevant government authorities in China issued the Provisions of the State Council on the Administration of Overseas Securities
Offering and Listing by Domestic Companies (Draft for Comments), and the Measures for the Filing of Overseas Securities Offering and Listing
by Domestic Companies (Draft for Comments) (“Draft Overseas Listing Regulations”). The Draft Overseas Listing Regulations
requires that a PRC domestic enterprise seeking to issue and list its shares overseas (“Overseas Issuance and Listing”) shall
complete the filing procedures of and submit the relevant information to CSRC. The Overseas Issuance and Listing includes direct and indirect
issuance and listing. Where an enterprise whose principal business activities are conducted in PRC seeks to issue and list its shares
in the name of an overseas enterprise (“Overseas Issuer”) on the basis of the equity, assets, income or other similar rights
and interests of the relevant PRC domestic enterprise, such activities shall be deemed an indirect overseas issuance and listing (“Indirect
Overseas Issuance and Listing”) under the Draft Overseas Listing Regulations. Therefore, the proposed listing would be deemed an
Indirect Overseas Issuance and Listing under the Draft Overseas Listing Regulations. As such, the Company would be required to complete
the filing procedures of and submit the relevant information to CSRC after the Draft Overseas Listing Regulations become effective.
In addition, on December 28, 2021, the CAC, the
National Development and Reform Commission (“NDRC”), and several other administrations jointly issued the revised Measures
for Cybersecurity Review, or the Revised Review Measures, which became effective and has replaced the existing Measures for Cybersecurity
Review on February 15, 2022. According to the Revised Review Measures, if an “online platform operator” that is in possession
of personal data of more than one million users intends to list in a foreign country, it must apply for a cybersecurity review. Based
on a set of Q&A published on the official website of the State Cipher Code Administration in connection with the issuance of the Revised
Review Measures, an official of the said administration indicated that an online platform operator should apply for a cybersecurity review
prior to the submission of its listing application with non-PRC securities regulators. Given the recency of the issuance of the Revised
Review Measures and their pending effectiveness, there is a general lack of guidance and substantial uncertainties exist with respect
to their interpretation and implementation. For example, it is unclear whether the requirement of cybersecurity review applies to follow-on
offerings by an “online platform operator” that is in possession of personal data of more than one million users where the
offshore holding company of such operator is already listed overseas. Furthermore, the CAC released the draft of the Regulations on Network
Data Security Management in November 2021 for public consultation, which among other things, stipulates that a data processor listed overseas
must conduct an annual data security review by itself or by engaging a data security service provider and submit the annual data security
review report for a given year to the municipal cybersecurity department before January 31 of the following year. If the draft
Regulations on Network Data Security Management are enacted in the current form, we, as an overseas listed company, will be required to
carry out an annual data security review and comply with the relevant reporting obligations.
We have been closely monitoring the development
in the regulatory landscape in China, particularly regarding the requirement of approvals, including on a retrospective basis, from the
CSRC, the CAC or other PRC authorities with respect to future offerings, as well as regarding any annual data security review or other
procedures that may be imposed on us. If any approval, review or other procedure is in fact required, we are not able to guarantee that
we will obtain such approval or complete such review or other procedure timely or at all. For any approval that we may be able to obtain,
it could nevertheless be revoked and the terms of its issuance may impose restrictions on our operations and future offerings relating
to our securities.
The
M&A Rules and certain other PRC 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.
The Regulations on Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, and
some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make
merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that
the anti-monopoly law enforcement agency be notified in advance of any change-of-control transaction in which a foreign investor
takes control of a PRC domestic enterprise.
For example, the M&A Rules require that MOFCOM
be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise,
if (i) any important industry is concerned, (ii) such transaction involves factors that impact or may impact national economic
security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC
time-honored brand. Moreover, the PRC Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress
effective 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds (i.e.,
during the previous fiscal year, (i) the total global turnover of all operators participating in the transaction exceeds RMB10 billion
and at least two of these operators each had a turnover of more than RMB400 million within China, or (ii) the total turnover
within China of all the operators participating in the concentration exceeded RMB2 billion, and at least two of these operators each
had a turnover of more than RMB400 million within China) must be cleared by the anti-monopoly enforcement authority before they can
be completed. In addition, in 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System
for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, also known as Circular 6, which officially established a security
review system for mergers and acquisitions of domestic enterprises by foreign investors. Further, MOFCOM promulgated the Regulations on
Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, effective 2011,
to implement Circular 6. Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having “national
defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control”
of domestic enterprises with “national security” concerns. Under the foregoing MOFCOM regulations, MOFCOM will focus on the
substance and actual impact of the transaction when deciding whether a specific merger or acquisition is subject to security review. If
MOFCOM decides that a specific merger or acquisition is subject to a security review, it will submit it to the Inter-Ministerial Panel,
an authority established under Circular 6 led by the National Development and Reform Commission, and MOFCOM under the leadership of the
State Council, to carry out security review. The regulations prohibit foreign investors from bypassing the security review by structuring
transactions through trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. There
is no explicit provision or official interpretation stating that the merging or acquisition of a company engaged in the internet content
business requires security review, and there is no requirement that acquisitions completed prior to the promulgation of the Security Review
Circular are subject to MOFCOM review.
In the future, we may grow our business by acquiring
complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such
transactions could be time consuming, and any required approval processes, including obtaining approval from MOFCOM or its local counterparts
may delay or inhibit our ability to complete such transactions. We believe that it is unlikely that our business would be deemed to be
in an industry that raises “national defense and security” or “national security” concerns. However, MOFCOM or
other government agencies may publish explanations in the future determining that our business is in an industry subject to the security
review, in which case our future acquisitions in China, including those by way of entering into contractual control arrangements with
target entities, may be closely scrutinized or prohibited.
You may have difficulty enforcing judgments
obtained against us.
We are an exempted company incorporated under
the laws of the British Virgin Islands, and substantially all of our assets are located outside of the United States. Virtually all of
our assets and a substantial portion of our current business operations are conducted in the PRC. In addition, almost all of our directors
and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons
is located outside the United States. As a result, it may be difficult for you to bring an action against these individuals within the
United States. It may also be difficult for you to enforce the U.S. courts judgments obtained in U.S. courts, including judgments based
on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, many of whom are not
residents in the United States, and whose significant part of assets are located outside of the United States.
In addition, there is uncertainty
as to whether the courts of the British Virgin Islands or the PRC, respectively, would recognize or enforce judgments of U.S. courts against
us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. In addition,
it is uncertain whether such British Virgin Islands or PRC courts would entertain original actions brought in the courts of the British
Virgin Islands or the PRC against us or such persons predicated upon the securities laws of the United States or any state.
The recognition and enforcement of foreign judgments
are provided for under the Chinese Civil Procedure Law. Chinese courts may recognize and enforce foreign judgments in accordance with
the requirements of the Chinese Civil Procedure Law based either on treaties between China and the country where the judgment is made
or in reciprocity between jurisdictions. China does not have any treaties or other agreements with the British Virgin Islands or the United
States that provide for the reciprocal recognition and enforcement of foreign judgments. As a result, it is uncertain whether a Chinese
court would enforce a judgment rendered by a court in either of these two jurisdictions.
The United States and the British Virgin Islands
do not have a treaty providing for reciprocal recognition and enforcement of judgments of courts of the United States in civil and commercial
matters and that a final judgment for the payment of money rendered by any general or state court in the United States based on civil
liability, whether or not predicated solely upon the U.S. federal securities laws, may not be enforceable in the British Virgin Islands.
A final and conclusive judgment obtained in U.S. federal or state courts under which a sum of money is payable as compensatory damages
(i.e., not being a sum claimed by a revenue authority for taxes or other charges of a similar nature by a governmental authority, or in
respect of a fine or penalty or multiple or punitive damages) may be the subject of an action on a debt in the court of the British Virgin
Islands.
The approval of
the China Securities Regulatory Commission may be required in connection with future offerings, and, if required, we cannot predict whether
we will be able to obtain such approval.
The Regulations on Mergers and Acquisitions of
Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies requires an overseas special purpose
vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain
the approval of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s
securities on an overseas stock exchange.
We believe that the CSRC’s approval is not
required for the trading of our Class A ordinary shares on Nasdaq in the context of future offerings, given that: (i) our PRC subsidiary
was incorporated as a wholly foreign-owned enterprise by means of direct investment rather than by merger or acquisition of equity interest
or assets of a PRC domestic company owned by PRC companies or individuals as defined under the M&A Rules that are our beneficial
owners; (ii) the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours
under our past offerings are subject to the M&A Rules; and (iii) no provision in the M&A Rules clearly classifies contractual
arrangements as a type of transaction subject to the M&A Rules.
However, there remain some uncertainties as to
how the M&A Rules will be interpreted or implemented in the context of an overseas offering and its opinions summarized above
are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A
Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do. If it
is determined that CSRC approval is required for future offerings, we may face sanctions by the CSRC or other PRC regulatory agencies
for failure to seek CSRC approval for future offerings. These sanctions may include fines and penalties on our operations in the PRC,
limitations on our operating privileges in the PRC, delays in or restrictions on the repatriation of the proceeds from future offerings
into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiary, or other actions that could
have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the
trading price of our Class A ordinary shares. Furthermore, the CSRC or other PRC regulatory agencies may also take actions requiring
us, or making it advisable for us, to halt future offerings before the settlement and delivery of the Class A ordinary shares that
we may offer in the future.
The PRC laws and regulations governing the
Company’s business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations as well as in the
PRC economic, political, and social conditions may have a material and adverse effect on the PRC economy, and in turn the Company’s
business.
There are substantial uncertainties regarding
the interpretation and application of the PRC laws and regulations, including but not limited to the laws and regulations governing the
Company’s business, or the enforcement and performance of the Company’s arrangements with customers in the event of the imposition
of statutory liens, death, bankruptcy, and criminal proceedings. The Company and any future subsidiaries are considered foreign persons
or foreign funded enterprises under the PRC laws, and as a result, the Company is required to comply with the PRC laws and regulations.
These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement
may involve substantial uncertainty.
Uncertainties with respect to the PRC legal
system could adversely affect us.
The PRC legal system is a civil law system based
on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have
limited precedential value.
In 1979, the PRC government began to promulgate
a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past
three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has
not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, the PRC legal system is based on written statutes and prior court decisions have limited value as
precedents. 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 may not be uniform and enforcement of these laws, regulations and rules involves uncertainties. These
uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort
claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts
to extract payments or benefits from us. Furthermore, the PRC legal system is based in part on government policies and internal rules,
some of which are not published on a timely basis or at all and may have a retroactive effect. As a result, we may not be aware of our
violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings
in China may be protracted, resulting in substantial costs and diversion of resources and management attention.
In particular, PRC laws and regulations concerning
the businesses that we are involved in are developing and evolving. Although we have taken measures to comply with the laws and regulations
that are applicable to our business operations and avoid conducting any non-compliant activities under the applicable laws and regulations,
the PRC governmental authorities may promulgate new laws and regulations regulating the industry in the future. We cannot assure you that
our practice would not be deemed to violate any new PRC laws or regulations relating to the industry. Moreover, developments in the industry
may lead to changes in PRC laws, regulations and policies or in the interpretation and application of existing laws, regulations and policies
that may limit or restrict online reading marketplaces like us, which could materially and adversely affect our business and operations.
Adverse changes in political and economic
policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand
for our services and materially and adversely affect our competitive position.
Substantially all of our business operations and
R&D are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are subject to economic,
political and legal developments in China. Although the Chinese economy is no longer a planned economy, the PRC government continues to
exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and
a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control
the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. These government involvements
have been instrumental in China’s significant growth in the past 30 years. In response to the recent global and Chinese economic
downturn, the PRC government has adopted policy measures aimed at stimulating the economic growth in China. We voluntarily ceased our
forex trading brokerage business and suspended all activities on AGMTrade, a trading network platform, to ensure compliance with PRC laws,
regulations and policies. While we do not foresee our business will be further restricted or affected by the PRC laws and regulations,
we may need to further revise our business model to remain compliant. If any aspect of the PRC government’s policies limits the
growth of our industry or otherwise negatively affects our business, our growth rate or strategy, our results of operations could be adversely
affected as a result.
A severe or prolonged downturn in the Chinese
or global economy could materially and adversely affect our business and financial condition.
Any prolonged slowdown in the Chinese or global
economy may have a negative impact on our business, results of operations and financial condition. In particular, general economic factors
and conditions in China or worldwide, including the general interest rate environment and unemployment rates, may affect our customer’s
participation in forex trading. Economic conditions in China are sensitive to global economic conditions. There is considerable uncertainty
over the long-term effects of the monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s
leading economies, including the United States and China. If present Chinese and global economic uncertainties persist, many of our customers
may reduce the service they require from us. Adverse economic conditions could also reduce the number of customers seeking our service,
as well as their ability to make payments. Should any of these situations occur, our net revenues will decline, and our business and financial
conditions will be negatively impacted. Additionally, continued turbulence in the international markets may adversely affect our ability
to access the capital markets to meet liquidity needs.
The recent outbreak of war in Ukraine has already
affected global economic markets, and the uncertain resolution of this conflict could result in protracted and/or severe damage to the
global economy. Russia’s recent military interventions in Ukraine have led to, and may lead to, additional sanctions being levied
by the United States, European Union and other countries against Russia. Russia’s military incursion and the resulting sanctions
could adversely affect global energy and financial markets and thus could affect our customers’ business and our business, even
though we do not have any direct exposure to Russia or the adjoining geographic regions. The extent and duration of the military action,
sanctions, and resulting market disruptions are impossible to predict, but could be substantial. Any such disruptions caused by Russian
military action or resulting sanctions may magnify the impact of other risks described in this section. We cannot predict the progress
or outcome of the situation in Ukraine, as the conflict and governmental reactions are rapidly developing and beyond their control. Prolonged
unrest, intensified military activities, or more extensive sanctions impacting the region could have a material adverse effect on the
global economy, and such effect could in turn have a material adverse effect on the operations, results of operations, financial condition,
liquidity and business outlook of our business.
In addition, continued turbulence in the international
markets may adversely affect our ability to access capital markets to meet liquidity needs.
Labor laws in the PRC may adversely affect
our business and results of operations.
On June 29, 2007, the PRC government promulgated
a new labor law, namely, the Labor Contract Law of the PRC, which became effective on January 1, 2008, which was further amended on December
28, 2012 (effective July 1, 2013). The Labor Contract Law imposes greater liabilities on employers and significantly affects the cost
of an employer’s decision to reduce its workforce. Further, it requires certain terminations be based upon seniority and not merit.
In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to
enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and
adversely affecting our financial condition and results of operations. The Labor Contract Law also mandates that employers provide social
welfare packages to all employees, increasing our labor costs. To the extent competitors from outside China are not affected by such requirements,
we could be at a comparative disadvantage.
Under the Enterprise Income Tax Law, we
may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences
to us and our non-PRC stockholders.
China passed an Enterprise Income Tax Law (the
“EIT Law”) and implementing rules, both of which became effective on January 1, 2008. Under the EIT Law, an enterprise established
outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning
that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT
Law define de facto management as “substantial and overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration of
Taxation of China issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated
Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application
of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or group. Pursuant to the Notice, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically
incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly
in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and
properties, accounting books, corporate stamps, board and stockholder minutes are kept in China; and (iv) at least half of its directors
with voting rights or senior management are often resident in China. A resident enterprise would be subject to an enterprise income tax
rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC stockholders.
However, it remains unclear as to how tax authorities will determine tax residency based on the facts of each case.
If the PRC tax authorities determine that we are
a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow.
First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income
tax reporting obligations. In our case, this would mean that income such as non-China source income would be subject to PRC enterprise
income tax at a rate of 25%. Currently, approximately 82% of our revenue is non-China source income, so could be adversely affected. Second,
under the EIT Law and its implementing rules, dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income.”
Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result
in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived
by our non-PRC stockholders from transferring our shares.
PRC regulations relating to investments
in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties,
limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered
capital or distribute profits.
The State Administration of Foreign Exchange,
or SAFE, promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment
and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former
circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents
to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the
purpose of overseas investment and financing. Moreover, failure to comply with the various SAFE registration requirement could result
in liability under PRC law for evasion of foreign exchange controls. According to the Notice on Further Simplifying and Improving Policies
for the Foreign Exchange Administration of Direct Investment (the “2015 Notice”) released on February 13, 2015 by SAFE, local
banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration
and amendment registration, under SAFE Circular 37 from June 1, 2015.
We have not filed SAFE Circular 37 reports on
behalf of our shareholders who are PRC residents before. The failure of our beneficial owners who are PRC residents to register or amend
their SAFE registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future
beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent
implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Furthermore, it is unclear
how SAFE Circular 37 and the 2015 Notice, and any future regulation concerning offshore or cross-border transactions, will be interpreted,
amended and implemented by the relevant PRC government authorities, we cannot predict how these regulations will affect our business operations
or future strategy. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital
to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to our company. These risks may have a material
adverse effect on our business, financial condition and results of operations.
A change in trading rules of the trading
exchanges could adversely affect our revenue and profitability.
We are under the supervision of various trading
exchanges such as the China Financial Futures Exchange, which provide trading platforms and set trading model and rules for all participants
on the exchanges. Those exchanges formulate their trading rules covering various aspects of trading, including but not limited to,
commission and fee rates, leverage ratio, trade settlement procedures, membership qualifications, risk control mechanism, as well as information
management. Those trading exchanges usually adjust their trading rules in response to changing market conditions and changes to these
rules may adversely affect our revenue or business. In addition, futures companies have discretion to set the fee rates and the adjustments
of the fee rates will have an impact on our income and profitability.
We may be exposed to liabilities under the
Foreign Corrupt Practices Act and Chinese anti-corruption law.
We are subject to the U.S. Foreign Corrupt Practices
Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political
parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We are also subject
to Chinese anti-corruption laws, which strictly prohibit the payment of bribes to government officials. We have operations, agreements
with third parties, and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized
payments or offers of payments by one of the employees, consultants or distributors of our company, because these parties are not always
subject to our control. We are in process of implementing an anticorruption program, which prohibits the offering or giving of anything
of value to foreign officials, directly or indirectly, for the purpose of obtaining or retaining business. The anticorruption program
also requires that clauses mandating compliance with our policy be included in all contracts with foreign sales agents, sales consultants
and distributors and that they certify their compliance with our policy annually. It further requires that all hospitality involving promotion
of sales to foreign governments and government-owned or controlled entities be in accordance with specified guidelines. In the meantime,
we believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-corruption law.
However, our existing safeguards and any future
improvements may prove to be less than effective, and the employees, consultants or distributors of our Company may engage in conduct
for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption law may result in severe criminal or civil sanctions,
and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In
addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we
invest or that we acquire.
Since our operations and assets are located
in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of our company, our directors and executive
officers.
Our operations and assets are located in the PRC.
In addition, most of our executive officers and directors are non-residents of the U.S., and substantially all the assets of such persons
are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce
a judgment obtained in the U.S. against us or any of these persons.
Regulatory bodies of the United States may
be limited in their ability to conduct investigations or inspections of our operations in China.
From time to time, we may receive requests from
certain U.S. agencies to investigate or inspect our operations, or to otherwise provide information. While we will be compliant with these
requests from these regulators, there is no guarantee that such requests will be honored by those entities who provide services to us
or with whom we associate, especially as those entities are located in China. Furthermore, an on-site inspection of our facilities by
any of these regulators may be limited or entirely prohibited. Such inspections, though permitted by us and our affiliates, are subject
to the capricious nature of Chinese enforcers, and may therefore be impossible to facilitate.
The regulation of Internet website operators
in China is subject to interpretation, and our operation of online trading platform and education programs could be harmed if we are deemed
to have violated applicable laws and regulations.
The interpretation and application of existing
Chinese laws and regulations, the stated positions of the main governing authority, the MIIT, and the possibility of adopting new laws
or regulations have created significant uncertainties regarding the legality of the businesses and activities of Chinese companies with
Internet operations. In particular, according to the Internet Information Services Administrative Measures promulgated by the State Council
on September 25, 2000, the activities of Internet content providers are regulated by various Chinese governmental authorities, including,
the MOE, the State Administration of Radio, Film and Television, the General Administration of Press and Publication, or GAPP, and the
Ministry of Culture, or MOC, depending on the specific activities conducted by the Internet content provider. In addition, MIIT promulgated
a notice titled “Notice on Strengthening Management of Foreign Investment in Operating Value-Added Telecom Services” on July
13, 2006, which prohibits PRC Internet content providers from leasing, transferring or selling their ICP licenses or providing facilities
or other resources to foreign investors. The notice states that PRC Internet content providers (or their shareholders) should directly
own the trademarks and domain names for websites operated by them, as well as servers and other infrastructure used to support these websites
and a PRC Internet content provider’s failure to comply with the notice by November 1, 2006 may result in revocation of its
ICP license.
Except for our corporate website (www.agmprime.com),
we only have contractual control over our websites, as the domains are held by our subsidiaries. Among the subsidiaries which holds domain
names, AGM Beijing is subject to the PRC laws and regulations. AGM Beijing has submitted ICP filings with the MIIT for all the domain
names it holds. However, AGM Beijing may be deemed to be providing commercial internet information services, which would require AGM Beijing
to obtain an ICP License. An ICP License is a value-added telecommunications business operating license required for provision of commercial
internet information services. Furthermore, as we are providing service through mobile applications to mobile device users, it is uncertain
if AGM Beijing will be required to obtain a separate operating license in addition to the ICP License. Although we believe that not obtaining
an ICP License or such separate license is in line with the current market practice, there can be no assurance that we will not be required
to apply for an operating license for our mobile applications in the future.
Dividends payable to our foreign investors
and gains on the sale of our Class A ordinary shares by our foreign investors may become subject to PRC tax law.
Under the Enterprise Income Tax Law and its implementation
regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends payable to investors that are non-resident
enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business
but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived
from sources within the PRC. Similarly, any gain realized on the transfer of our Class A ordinary shares by such investors is also subject
to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded
as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our Class A ordinary shares,
and any gain realized from the transfer of our Class A ordinary shares, would be treated as income derived from sources within the PRC
and would as a result be subject to PRC taxation. See “Item 4. Information on the Company – Regulation — Regulations
on Tax.” Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents
and any gain realized on the transfer of our Class A ordinary shares by such investors may be subject to PRC tax at a current rate of
20%, subject to any reduction or exemption set forth in applicable tax treaties. It is unclear whether if we or any of our subsidiaries
established outside China are considered a PRC resident enterprise, holders of our Class A ordinary shares would be able to claim the
benefit of income tax treaties or agreements entered into between China and other countries or areas. If dividends payable to our non-PRC
investors, or gains from the transfer of our Class A ordinary shares by such investors are subject to PRC tax, the value of your investment
in our Class A ordinary shares may decline significantly.
Restrictions on currency exchange may limit
PRC investors’ ability to make investment.
In response to the persistent capital outflow
in China and RMB’s depreciation against U.S. dollar in the fourth quarter of 2016, the PBOC and the State Administration of Foreign
Exchange, or SAFE, have implemented a series of capital control measures over recent months, including stricter vetting procedures for
Chinese citizens to transfer foreign currency overseas and for China-based companies to remit foreign currency for overseas acquisitions,
dividend payments and shareholder loan repayments. For instance, on January 26, 2017, SAFE issued the Notice of State Administration of
Foreign Exchange on Improving the Check of Authenticity and Compliance to Further Promote Foreign Exchange Control, or the SAFE Circular
3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore
entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution,
the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for
previous years’ losses before remitting the profits. The PRC government may continue to strengthen its capital controls, and more
restrictions and substantial vetting process may be put in place by SAFE for cross-border transactions falling under both the current
account and the capital account. Any limitation on the ability of our PRC investors to make capital contribution or make other kinds of
payments to us could materially and adversely limit our ability to grow.
The recent joint statement by the SEC and
PCAOB, proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more
stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S.
auditors who are not inspected by the PCAOB. These developments could add uncertainties to the trading of our Class A ordinary shares.
On April 21, 2020, SEC Chairman Jay Clayton
and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated
with investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized
the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in
emerging markets.
On May 18, 2020, Nasdaq filed three proposals
with the SEC to (i) apply minimum offering size requirement for companies primarily operating in “Restrictive Market”,
(ii) adopt a new requirement relating to the qualification of management or board of director for Restrictive Market companies, and
(iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s
auditors.
On May 20, 2020, the U.S. Senate passed the
Holding Foreign Companies Accountable Act requiring a foreign company to certify it is not owned or controlled by a foreign government
if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB
is unable to inspect the Company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on
a U.S. stock exchange. On December 2, 2020, the U.S. House of Representatives approved the Holding Foreign Companies Accountable
Act. On December 18, 2020, the Holding Foreign Companies Accountable Act was signed into law.
On March 24, 2021, the SEC announced that
it had adopted interim final amendments to implement congressionally mandated submission and disclosure requirements of the Act. The
interim final amendments will apply to registrants that the SEC identifies as having filed an annual report on Forms 10-K, 20-F, 40-F
or N-CSR with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB
has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. The
SEC will implement a process for identifying such a registrant and any such identified registrant will be required to submit documentation
to the SEC establishing that it is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require
disclosure in the registrant’s annual report regarding the audit arrangements of, and governmental influence on, such a registrant.
On June 22, 2021, the U.S. Senate passed
a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection
years required for triggering the prohibitions under the Holding Foreign Companies Accountable Act from three years to two.
On September 22, 2021, the PCAOB adopted a final
rule implementing the HFCAA, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCAA, whether
the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because
of a position taken by one or more authorities in that jurisdiction.
On December 2, 2021, the SEC issued amendments
to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC
identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign
jurisdiction and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions.
On December 16, 2021, the PCAOB issued a Determination
Report which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in:
(1) mainland China of the People’s Republic of China, because of a position taken by one or more authorities in mainland China;
and (2) Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in
Hong Kong.
The lack of access to the PCAOB inspection in
China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, the
investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in
China makes it more difficult to evaluate the effectiveness of these accounting firms’ audit procedures or quality control procedures
as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause existing and potential investors
in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.
Each of JLKZ CPA LLP, the independent registered
public accounting firm that issues the audit report for the fiscal years ended December 31, 2020 and 2019 included elsewhere in this annual
report, and TPS Thayer LLC, the independent registered public account firm that issued the audit report for the fiscal year ended December
31, 2021 included elsewhere in this annual report. as an auditor of companies that are traded publicly in the United States and a firm
registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess
such auditor’s compliance with the applicable professional standards. JLKZ CPA LLP is headquartered in Flushing, New York, and is
subject to inspection by the PCAOB on a regular basis. TPS Thayer LLC is headquartered in Sugar Land, Texas, and is subject to inspection
by the PCAOB on a regular basis. Therefore, we believe JLKZ CPA LLP and TPS Thayer LLC are not subject to the determinations as to the
inability to inspect or investigate registered firms completely announced by the PCAOB on December 16, 2021
However, recent developments with respect to audits
of China-based companies create uncertainty about the ability of each of JLKZ CPA LLP and TPS Thayer LLC to fully cooperate with the PCAOB’s
request for audit workpapers without the approval of the Chinese authorities. We cannot assure you whether Nasdaq or regulatory authorities
would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and
quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates
to the audit of our financial statements. In the event it is later determined that the PCAOB is unable to inspect or investigate completely
the Company’s auditor because of a position taken by an authority in a foreign jurisdiction, then such lack of inspection could
cause trading in the Company’s securities to be prohibited under the HFCAA ultimately result in a determination by a securities
exchange to delist the Company’s securities. It remains unclear what the SEC’s implementation process related to the above
rules will entail or what further actions the SEC, the PCAOB or Nasdaq will take to address these issues and what impact those actions
will have on U.S. companies that have significant operations in the PRC and have securities listed on a U.S. stock exchange. In addition,
the above amendments and any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory
access to audit information could create some uncertainty for investors, the market price of our Class A ordinary shares could be adversely
affected, and we could be delisted if we and our auditor are unable to meet the PCAOB inspection requirement or being required to engage
a new audit firm, which would require significant expense and management time.
Uncertainties in the interpretation and
enforcement of Chinese laws and regulations could limit the legal protections available to us.
The PRC legal system is based on written statutes
and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the PRC legal system
continues to rapidly evolve, the legal system in China, including risks and uncertainties regarding the enforcement of laws and that rules
and regulations in China can change quickly with little advance notice, and the interpretations of many laws, regulations and rules are
not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
Therefore, these risks may result in a material
change in business operations, significant depreciation of the value of our Class A ordinary shares, or a complete hinderance of our ability
to offer or continue to offer our securities to investors. Recently, the Chinese government initiated a series of regulatory actions and
statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities
market, enhancing supervision over China-based companies listed overseas using a VIE structure, adopting new measures to extend the scope
of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. Since these statements and regulatory actions are new,
it is highly uncertain how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations
or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new
laws and regulations will have on our daily business operation, the ability to accept foreign investments and list on an U.S. or other
foreign exchange.
Although we have taken measures to comply with
the laws and regulations that are applicable to our business operations, including the regulatory principles raised by the CBRC, and avoiding
conducting any activities that may be deemed as illegal fund-raising, forming capital pool or providing guarantee to investors under the
current applicable laws and regulations, the PRC government authority may promulgate new laws and regulations regulating the direct lending
service industry in the future. We cannot assure you that our practices would not be deemed to violate any PRC laws or regulations relating
to illegal fund-raising, forming capital pools or the provision of credit enhancement services. Moreover, we cannot rule out the possibility
that the PRC government will institute a license requirement covering our industry at some point in the future. If such a licensing regime
were introduced, we cannot assure you that we would be able to obtain any newly required license in a timely manner, or at all, which
could materially and adversely affect our business and impede our ability to continue our operations.
From time to time, we may have to resort to administrative
and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion
in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and
court proceedings and the level of legal protection we enjoy, than in more developed legal systems. Furthermore, the PRC legal system
is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have
a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation.
Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and
procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.
The Opinions recently issued by the General
Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject us to additional
compliance requirement in the future.
Recently, the General Office of the Central Committee
of the Communist Party of China and the General Office of the State Council jointly issued the Opinions, which were made available to
the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities and the
supervision on overseas listings by China-based companies. These opinions proposed to take effective measures, such as promoting the construction
of relevant regulatory systems, to deal with the risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity
and data privacy protection. The aforementioned policies and any related implementation rules to be enacted may subject us to additional
compliance requirement in the future. As the Opinions were recently issued, official guidance and interpretation of the Opinions remain
unclear in several respects at this time. Therefore, we cannot assure you that we will remain fully compliant with all new regulatory
requirements of the Opinions or any future implementation rules on a timely basis, or at all.
Risks Related to Our Capital Structure and
Class A Ordinary Shares
The dual-class structure of our ordinary
shares has the effect of concentrating voting control with certain shareholders, including our executive officers, employees and directors
and their affiliates, which will limit your ability to influence the outcome of important transactions, including a change in control.
Under our memorandum and articles of association,
we are authorized to issue 200,000,000 Class A ordinary shares of $0.001 par value per share and 200,000,000 Class B ordinary shares of
$0.001 par value per share. As of the date of this report, there are 24,254,842 Class A ordinary shares and 2,100,000 Class B ordinary
shares issued and outstanding. Each of our Class B ordinary shares has five (5) votes per share, and each of our Class A ordinary
shares has one (1) vote per share. Because of the five-to-one voting ratio between our Class B ordinary shares and Class A ordinary shares,
the holders of our Class B ordinary shares collectively control a majority of the combined voting power of our ordinary shares and therefore
are able to control all matters submitted to our shareholders for approval even when the shares of Class B ordinary shares represent a
minority of all outstanding shares of our Class A ordinary shares and Class B ordinary shares. These holders of our Class B ordinary shares
may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests.
The directors and executive officers beneficially own a majority of the outstanding Class A ordinary shares and all of the outstanding
Class B ordinary shares as of the date hereof. As of the date hereof, our directors and executive officers directly and indirectly hold
an aggregate of approximately 74.93% of the combined voting power of Class A and Class B ordinary shares. Our directors and executive
officers have voting and dispositive power of all the outstanding Class B ordinary shares. Mr. Wenjie Tang, our CEO, holds approximately
68.59% of the combined voting power of Class A and Class B ordinary shares. This concentrated control may have the effect of delaying,
preventing or deterring a change in control of our company, could deprive our shareholders of an opportunity to receive a premium for
their ordinary shares as part of a sales of our company and might ultimately affect the market price of our Class A Ordinary Shares.
British Virgin Islands companies may not
be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.
British Virgin Islands companies may not have
standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action
may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders
of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly,
shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin
Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability
provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based
on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin
Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce
the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders
were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.
The laws of the British Virgin Islands provide
little protection for minority shareholders, so minority shareholders will have little or no recourse if they are dissatisfied with the
conduct of our affairs.
Under the law of the British Virgin Islands, there
is little statutory law for the protection of minority shareholders other than the provisions of the BVI Business Companies Act (the “BVI
Act”) dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to
enforce the company’s memorandum and articles of association. Shareholders are entitled to have the affairs of the company conducted
in accordance with the general law and the company’s memorandum and articles of association.
There are common law rights for the protection
of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands for
business companies is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court
will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction
with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have
the affairs of the company conducted properly according to law and the constituent documents of the corporation. As such, if those who
control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum
and articles of association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following:
(1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority;
(2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights
of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval of a special
or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many
states in the United States.
The trading price of our Class A Ordinary
Shares has been, and is likely to continue to be, volatile; you might not be able to sell your shares at or above the price that you paid
for them and we may not be able to stop the decline of our stock price.
The trading price of our Class A ordinary shares
has been, and is likely to continue to be, volatile, and may be influenced by numerous factors, some of which are beyond our control;
you might not be able to sell your shares at or above the price that you paid for them. Factors that could cause volatility in the
market price of our common stock include, but are not limited to:
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; |
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actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; |
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announcements by us or our competitors of significant services or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments; |
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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; |
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other events or factors, including those resulting from war or incidents of terrorism, or responses to these events |
In addition, the stock markets have experienced
extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies.
Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies.
In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved
in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business,
and adversely affect our business.
We are a “foreign private issuer,”
and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information
as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate
our performance.
We are a foreign private issuer and, as a result,
we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations
that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be
required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation
information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the
Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.
As a foreign private issuer, we will also be exempt
from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not
privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation
rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private
issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us
and at the same time as the information provided by U.S. domestic reporting companies.
Additionally, as a company listed on the Nasdaq
Capital Market, we are subject to the Nasdaq corporate governance listing standards. However, Nasdaq rules permit a foreign private
issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the British
Virgin Islands, which is our home country, may differ significantly from the Nasdaq corporate governance listing standards. We have followed
and intend to follow British Virgin Islands corporate governance practices in lieu of the corporate governance requirements of the Nasdaq
Capital Market that listed companies must obtain its shareholders’ approval of certain transactions other than public offerings
(Nasdaq rule 5635(d)). As a result of our reliance on the “foreign private issuer” exemptions, our shareholders may be afforded
less protection than they otherwise would enjoy under the Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.
We are an “emerging growth company,”
and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Class A Ordinary
Shares less attractive to investors.
We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we
may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging
growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from
the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments
not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our
revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three-year period, or if the market value of
our Class A ordinary shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no
longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our Class A ordinary shares
less attractive because we may rely on these exemptions. If some investors find our Class A ordinary shares less attractive as a result,
there may be a less active trading market for our Class A ordinary shares and our stock price may be more volatile.
Under the JOBS Act, emerging growth companies
can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably
elected not to avail our company of this exemption from new or revised accounting standards and, therefore, will be subject to the same
new or revised accounting standards as other public companies that are not emerging growth companies.
We do not intend to pay dividends for the
foreseeable future.
We currently intend to retain any future earnings
to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future.
As a result, you may only receive a return on your investment in our Class A ordinary shares if the market price of our Class A ordinary
shares increases.
The requirements of being a public company
may strain our resources and divert management’s attention.
As a public company, we are subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the
listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent
reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance
costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after
we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly,
and current reports with respect to our business and operating results.
As a result of disclosure of information in this
annual report and in filings required of a public company, our business and financial condition will become more visible, which we believe
may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business
and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims,
and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business,
brand and reputation and results of operations.
We also expect that being a public company and
these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required
to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for
us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee and compensation committee,
and qualified executive officers.
The obligation to disclose information publicly
may put us at a disadvantage to competitors that are private companies.
As a publicly listed company, we are required
to file periodic reports with the SEC upon the occurrence of matters that are material to our company and shareholders. In some cases,
we will need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a
private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them advantages
in competing with our company. Similarly, as a U.S.-listed public company, we will be governed by U.S. laws that our competitors, which
are mostly private Chinese companies, are not required to follow. To the extent compliance with U.S. laws increases our expenses or decreases
our competitiveness against such companies, our public listing could affect our results of operations.
The exercise of the Warrants issued on December
14, 2021 may further dilute the Class A ordinary shares and adversely impact the price of our Class A ordinary shares.
As of the date of this annual report, we had 24,254,842
Class A ordinary shares outstanding. Up to an additional 1,652,175 Class A ordinary shares (approximately 6.81% of our issued and
outstanding shares) may be issued pursuant to the exercise of the warrants issued on December 14, 2021. Such issuance will cause a reduction
in the proportionate ownership and voting power of all other shareholders. Additionally, we cannot assure you that the holders of such
warrants will be able to sell the Class A ordinary shares at a price per shares that is equal to or greater than the exercise price paid
by such holders.
Securities analysts may not cover our Class
A ordinary shares and this may have a negative impact on the market price of our Class A ordinary shares.
The trading market for our Class A ordinary shares
will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have
any control over independent analysts (provided that we have engaged various non-independent analysts). We do not currently have and may
never obtain research coverage by independent securities and industry analysts. If no independent securities or industry analysts commence
coverage of us, the trading price for our Class A ordinary shares would be negatively impacted. If we obtain independent securities or
industry analyst coverage and if one or more of the analysts who covers us downgrades our Class A ordinary shares, changes their opinion
of our Class A ordinary shares or publishes inaccurate or unfavorable research about our business, our share price would likely decline.
If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our Class A ordinary shares
could decrease and we could lose visibility in the financial markets, which could cause the price and trading volume of our Class A ordinary
shares to decline.
Item 4. Information on the Company
A. History and Development of the Company
AGM Group Holdings Inc. (“AGM Holdings”)
was incorporated on April 27, 2015 under the laws of the British Virgin Islands (“BVI”).
AGM Technology Limited (“AGM HK”)
was incorporated on May 21, 2015 under the law of Hong Kong. AGM HK is a wholly-owned subsidiary of AGM Holdings and its principal activity
is providing our core service to customers.
AGM Tianjin Construction Development Co., Ltd.
(“AGM Tianjin”) was incorporated on October 13, 2015 in Shenzhen under the laws of the People’s Republic of China. AGM
Tianjing a wholly-owned subsidiary of AGM HK. AGM Tianjin was incorporated for the purpose of being a holding company for the equity interests
in PRC. AGM Tianjin did not conduct any operations or own any material assets or liabilities except for cash, insignificant expense and
the 100% of the equity interests in AGM Beijing.
Beijing AnGaoMeng Technology Service Co., Ltd.
(“AGM Beijing”) was incorporated on November 13, 2015 in Beijing under the laws of the People’s Republic of China. AGM
Beijing is a wholly-owned subsidiary of AGM Tianjin and its principal activities include software design, technology transfer, technology
consulting, technology promotion and data processing AGM Beijing holds an ICP filing for our online trading platform and education programs.
AGM Beijing was incorporated in Beijing because almost all of our employees were and still are located in Beijing. In order to comply
with the PRC law regarding employee’s social benefits, which are regulated separately in each city or province, it is more practical
for us to locate our office in Beijing so that we can pay for the employees’ social benefits with the local government agency.
AGM Software Service LTD (“AGM Software”)
was incorporated on June 14, 2017 under the laws of BVI. AGM Software is a wholly-owned subsidiary of AGM Holdings and its principal activity
will be assisting AGM HK in providing our core technology services to customers.
On July 26, 2019, AGM Holdings acquired 100% of
the equity interest in Anyi Network, Inc. (“Anyi Network”), and in consideration therefor, AGM Holdings paid $400,000 in cash
and issued an aggregate of 475,000 Class A ordinary shares of AGM Holdings to the shareholders of Anyi Network.
On April 16, 2019, AGMTrade UK LTD (“AGM
UK”), a wholly owned subsidiary incorporated on July 18, 2017, was dissolved under the law of England and Wales. On November 20,
2019, AGM Trade Global PTY LTD (“AGM Australia”), a wholly owned subsidiary incorporated on July 25, 2017, was dissolved under
the law of Australia. On October 8, 2019, AGM Holdings transferred its 100% ownership of AGMClub Service Limited (“AGMClub”),
a Hong Kong company incorporated on August 14, 2017. On August 15, 2019, AGM Global Asset Management Limited (“AGM Global”),
a wholly owned subsidiary acquired on May 24, 2018, was dissolved under the law of Cayman Islands. AGM UK, AGM Australia, AGMClub and
AGM Global were for business development purposes. They are holding companies and have not engaged any substantial businesses. As the
business strategies developed, AGM Holdings wound up AGM UK, AGM Australia, AGMClub and AGM Global.
On May 19, 2020, Nanjing XinGaoMeng Software Technology
Co., Ltd. (“AGM Nanjing”), an indirectly wholly owned subsidiary incorporated on September 28, 2016, was dissolved under the
law of PRC. AGM Nanjing was a holding company and did not have any substantial assets or liabilities
On December 14, 2020, AGM Holdings sold all the
equity interest of Anyi Network by entering into a share purchase agreement with certain buyers, pursuant to which the Company sold to
the buyers 100% equity interest in Anyi Network in exchange for a total consideration of $8,000,000, payable in the form of canceling
475,000 Class A ordinary shares of AGM Holdings held by the buyers, valued at $16.00 per share, and payment of $400,000 in cash. The disposition
of Anyi Network includes the disposition of the subsidiaries of Anyi Network.
On October 19, 2020, AGM Tianjin International
Financial Leasing Co. Ltd. (“AGM Leasing”) was incorporated in the People’s Republic of China under the laws of the
People’s Republic of China. AGM Leasing is a wholly-owned subsidiary of AGM HK and a wholly foreign-owned entity under the PRC laws.
AGM Leasing was incorporated for the purpose of conducting financial leasing services for the Company. AGM Leasing did not conduct any
operations or own any material assets or liabilities. AGM Leasing was dissolved in July 2021.
On August 8, 2021, AGM Defi Lab Pte Limited (“AGM
Defi Lab”) was incorporated under the law of Singapore. AGM Defi Lab is a wholly-owned subsidiary of AGM Holdings and its principal
activity is to provide software development and consulting services in Asian areas.
On July 30, 2021, AGM Defi Tech Limited (“AGM
Defi Tech”) was incorporated under the law of Hong Kong. AGM Defi Tech is a wholly-owned subsidiary of AGM Holdings and its principal
activity is to provide software development and consulting services in Asian areas.
On October 21, 2021, Beijing Keen Sense Technology
Service Co., Ltd. (“Beijing Keen Sense”) was incorporated in the People’s Republic of China under the laws of the People’s
Republic of China. Beijing Keen Sense is a wholly-owned subsidiary of AGM Defi Tech and a wholly foreign-owned entity under the PRC laws.
Beijing Keen Sense was incorporated for the purpose of hiring personnel and talents in fintech and blockchain areas and provide related
development and research services.
On June 17, 2021, Nanjing Lucun Semiconductor
Co., Ltd. (“Nanjing Lucun”) was incorporated in the People’s Republic of China under the laws of the People’s
Republic of China. Nanjing Lucun is a wholly-owned subsidiary of AGM HK and a wholly foreign-owned entity under the PRC laws. Nanjing
Lucun was incorporated for the purpose of producing high-performance hardware and computing equipment.
B. Business Overview
We are a technology company. Our products and
services include: 1) a futures trading solution catering to clients using MetaTrader 5; 2) FXSC, a retail-orientated online trading education
website; 3) a foreign exchange (“Forex”) trading system that provides services to financial institutions outside of China;
and 4) technology hardware research and development, manufacture, and sales. Our mission is to become one of the key participants and
contributors in the global technology hardware supply chain and fintech blockchain ecosystem.
Futures trading system
In September 2019, we completed our development
of a futures trading software which integrates future trading API with MetaTrader 5, a well-known and advanced trading software. However,
during the third quarter of 2020, most futures brokers started to accept a new third-party software API connection method in order
to comply with newly enacted futures regulations and policies in China about the trading terminal API pass-through regulation, which requires
“pass through monitoring”. Brokers will need to know exactly who to use API from what third-party software since, traditionally,
brokers did not need to collect such information. All other software products on the market are required to comply with the new rule.
Accordingly, we were obligated to upgrade and transform the system to enable this new API connection method. We completed the upgrading
and transformation of the system at the end of first quarter of 2021. We plan to conduct new trials and improve the solutions based
on feedbacks. This service is currently managed through AGM Defi Tech.
FXSC, a retail-orientated online trading education
website
In July 2020, we launched FXSC a subscription-based
online trading education and social trading network platform for Forex traders. FXSC provides trading education to users through interactive
trading simulation and trading contests, which enable users to choose and participate in available contests and compete for prizes in
a real-time streamed, interactive demo trading environment. FXSC also provides demo trading, also referred to as virtual trading, paper
trading, or trading simulation, which is designed to give users, especially the ones with limited knowledge and skills, a risk-free trading
environment to get familiar with the markets and trading tools. We plan to charge subscription fees directly to end-users for using the
social and educational features of the platform. In addition, through partnership with brokers that integrate its accounts management
system with FXSC, we plan to charge brokers a per client monthly service fee for their clients using FXSC. The launch of FXSC is expected
to build our brand. This service is currently managed through AGM Defi Tech.
Forex trading system
Prior to September 2018,
we provided Forex trading services, including computer program technical support and solution services and trading platform application
services, through a combination of in-house developed systems and applications, and the licensed trading platform MetaTrader. In
addition, we were engaged in Forex trading brokerage business and generated revenue from gains and losses from trades and Forex brokerage
fees and commissions. At the time, our clients were retail clients and brokerage firms located in China. We voluntarily discontinued
the Forex trading system due to a policy position by the PRC government that would no longer support the Forex trading related business
and would restrain certain accounts holding the deposits payable. In December 2021, we commenced the sale of our trading system software
to our brokerage clients and partners that are not located in P.RC region. This service is currently managed through AGM Defi Tech.
Technology hardware
research and development, manufacture, and sales
In third quarter of 2021,
we formed the company’s new growth strategy and the decision to enter into the ASIC chip research and development to be conducted
through AGM HK. In August 2021, we announced the launch of our first ASIC crypto Miner - KOI MINER C16 (“C16”). C16 is equipped
with the C3012 chip made by Semiconductor Manufacturing International Corp.’s N+1 process. C16 has a hash rate up to 113 TH/s
and a power efficiency ratio of 30 J/T, supporting the mining of Bitcoin, Bitcoin Cash (BCH) and other cryptocurrencies.
The competition of cryptocurrencies
mining equipment has grown intense in recent years. Our main competitors are Bitmain, a multinational semiconductor company, Canaan, a
supercomputing solutions provider, and MicroBT, a technology company based on block chain and artificial intelligence, all
of which are located in China and have both ASIC research and development capacities and deep supply chain connections in China.
C16’s parameters
have surpassed our competitors’ models, including: Antminer S19 pro of Bitmain, which has a power consumption of 3250W and hash
rate of 104TH/S, and AvalonMiner1246 of Canaan, which has an A1246 hash rate of 90TH/S, power consumption of 3420W
and power efficiency of 38J/T, and Whatminer M30S ++ of MicroBT, which has a hash rate of 112TH/S, power consumption
of 3472 W and power efficiency of 31 J/T. Since the launch of C16, we have received orders from buyers in the United States, Canada
and Europe.
Recent Development
Termination of Equity Transfer Agreement
with Yushu Kingo City Real Estate Development Co., Ltd.
On January 16, 2020, AGM Tianjin entered into
an equity transfer agreement (the “Equity Transfer Agreement”) with all the shareholders of Yushu Kingo City Real Estate Development
Co., Ltd. (“Yushu Kingo”), who collectively owns 100% of the equity interest in Yushu Kingo, pursuant to which agreement,
in exchange for 100% of the equity interest in Yushu Kingo, AGM Tianjin agreed to pay $20,000,000 in cash and cause AGM Holdings
to issue 2,000,000 Class A ordinary shares, valued at $15 per share, subject to the terms and conditions of the Agreement. AGM Tianjin
made advance payments in the amount of $4,937,663.72 (the “Advance Payment”).
On April 6, 2021, AGM Tianjin, Yushu Kingo and
its shareholders entered into a supplement agreement (“Supplement Agreement”) to the Equity Transfer Agreement. Pursuant to
the Supplement Agreement, if AGM Tianjin decided not to proceed with the acquisition contemplated by the Equity Transfer Agreement and
terminate such agreement on or before October 31, 2021, Yushu Kingo’s shareholders shall return the Advance Payment and pay an additional
10% interest to AGM Tianjin. If Yushu Kingo’s shareholders are unable to make such payment, Yushu Kingo’s shareholders agreed
to transfer the titles of real properties of Yushu Kingo to AGM Tianjin, valued with a 20% discount to market price. The parties further
agreed to conduct a new evaluation of Yushu Kingo’s assets and to enter into supplement agreement based on such evaluation.
Because of the COVID-19 pandemic, the quarantine
and travel restrictions in China, and the massive economic disruption as a result, Yushu Kingo was not able to complete its construction
projects and the audit and due diligence of Yushu Kingo was not completed on time. On October 4, 2021, AGM Tianjin terminated the Equity
Transfer Agreement and Supplement Agreement with the Yushu Kingo and its shareholders. On October 20, 2021, AGM Tianjin entered into an
agreement on transfer of creditor rights with a non-affiliated third party (the “Buyer”). Pursuant to the Transfer Agreement,
AGM Tianjin agrees to sell to the Buyer all of its rights and obligations under the Equity Transfer Agreement and the Supplement Agreement,
namely, the right to receive the Advance Payment plus interest, for a total purchase price of $5,000,000 (the “Purchase Price”),
$2,500,000 of which will be payable on or before December 31, 2021 and the remaining $2,500,000 will be payable on or before June 30,
2022. The Buyer agrees, in the event it fails to pay the Purchase Price on time, to pay as damages for breach of contract an amount equal
to four times China’s loan prime rate (LPR) of the Purchase Price due.
Memorandum of Understanding with GMTK Global
Pty Ltd.
On July 15, 2020, AGM HK entered into a Memorandum
of Understanding with GMTK Global Pty Ltd., an Australia-based brokerage firm, to jointly promote the Company’s newly launched online
trading education and social trading network platform FXSC in the Australia market.
By the end
of March 2021, the Company has completed three rounds of tests with GMTK Global Pty Ltd. The purpose of test was to confirm the integration
of GMTK Global Pty Ltd’s account management system with our FXSC user center and live contest data synchronization. The final partnership
contract was delayed due to two reasons: (1) more tests will need to be conducted; and (2) GMTK needs additional time to update its account
management system per Australian newly imposed CFD trading rules; the upgrade was near completion and we expect the execute the final
partnership contract in 2022.
Letter of Intent with
the shareholders of Safe Gold Financial Holdings Limited
On August 7, 2020, AGM
HK entered into a letter of intent with the shareholders of Safe Gold Financial Holdings Limited ("Safe Gold") to acquire 100
percent equity interest in Safe Gold and its wholly owned subsidiary Safe Gold Securities and Futures Limited ("Safe Gold SF"),
for a proposed total consideration of all-cash transaction that equals the combined net asset value for Safe Gold and Safe Gold SF as
of June 30, 2020, plus a premium of HK$8.5 million, deducting a due from shareholders of HK$14 million, subject to certain adjustments
and definitive agreements at the closing.
Safe Gold is a Hong Kong-based
financial services company which, through its wholly-owned subsidiary Safe Gold SF, holds Hong Kong Financial Services Licenses Type 1
(Dealing of Securities), Type 2 (Dealing in Futures Contracts), Type 4 (Advertising on Securities), Type 5 (Advertising on Futures Contracts),
and Type 9 (Asset Management). Safe Gold is also a participant and trading right holder of both HKEX and HKFE.
Private Placement
In July 2020, we consummated
a private placement offering whereby the Company entered into private placement subscription agreements with certain investors. Pursuant
to the Subscription Agreements, in which we issued an aggregate of 40,235 Class A ordinary shares to the investors, at a purchase price
of $16.6 per share, for an aggregate amount of $667,901. All of the Shares were issued to non U.S. persons (as that term is defined in
Regulation S of the Securities Act of 1933, as amended) in an offshore transaction relying on Regulation S and/or Section 4(a)(2) of the
Securities Act of 1933, as amended.
Disposition of Anyi Network, Inc.
On December 14, 2020, we disposed of Anyi Network
by entering into a share purchase agreement with Haiyan Huang, Feng Zhi and Yinglu Gao (the “Buyers”), pursuant to which the
Company agreed to sell to the Buyers 100% equity interest in Anyi Network, including its subsidiaries, in exchange for a total consideration
of $8,000,000, payable in the form of canceling 475,000 Class A ordinary shares of AGM Holdings held by the Buyers, valued at $16.00 per
share, and payment of $400,000 in cash.
Strategic Partnership
with HighSharp (Shenzhen Gaorui) Electronic Technology Co., Ltd
As part of our plan to expand into the hardware
production business, in September 2021, we entered into a strategic partnership agreement with HighSharp (Shenzhen Gaorui) Electronic
Technology Co., Ltd (“HighSharp”), a fabless integrated circuit designer that provides advanced semiconductor solutions for
supercomputing hardware, pursuant to which, for a six-month period until March 25, 2022, HighSharp will provide the latest ASIC chip technology
and manufacturing services to us and we will be responsible for client development on a global basis, with a target to generate orders
of at least US$100 million during the six-month term until March 25, 2022. If we and HighSharp achieve the respective targets, we and
HighSharp plan to form a joint venture, joined by HighSharp’s key R&D team members, with the goal to integrate next generation
product research and development into fabless integrated circuit design capabilities that provide advanced semiconductor solutions for
supercomputing hardware. AGM Group Holdings, Inc. will own 60% of the equity and HighSharp will own 40% of the equity in the joint venture.
Change of Board of Directors
On April 30, 2021, Tingfu Xie tendered his resignation
as director, the chairman of the Nominating Committee, and a member of the Audit Committee and the Compensation Committee of the Company,
effective April 30, 2021. On the same day, at the recommendation of the Nominating Committee and the Compensation Committee, the
Board of Directors approved and confirmed the appointment of Jing Shi as the succeeding director, the chairwoman of the Nominating Committee
and a member of the Audit Committee and the Compensation Committee of the Company, effective April 30, 2021.
On May 7, 2021, the Board of Directors appointed
Dr. Bo Zhu as the Chief Strategy Officer.
On July 12, 2021, the Board of Directors and the
Compensation Committee of approved and confirmed the appointment of Chenjun Li as the Co-Chief Executive Officer, effective July 12, 2021.
On September 15, 2021, the Board of Directors also approved the appointment of Chenjun Li as the director and the Chairman of the Board
to replace Bin Cao, whose employment agreement with the Company expired on May 19, 2021.
On September
23, 2021, Zhihe Yang tendered his resignation as the Chief Financial Officer of the Company, effective September 23, 2021. On
September 24, 2021, the Board of Directors appointed Mr. Steven Yuan Ning Sim as the succeeding Chief Financial Officer
of the Company, effective September 24, 2021.
Registered Direct Offering and Concurrent Private
Placement
On December 14, 2021, pursuant to a securities
purchase agreement (the “Purchase Agreement”) with certain institutional investors (the “Purchasers”) dated December
10, 2021, the Company closed (a) a registered direct offering for the sale of 2,898,552 of its Class A ordinary shares, par value US$0.001
per share, and (b) a concurrent private placement, for the sale of unregistered warrants to purchase up to 1,449,276 Class A ordinary
shares (the “Investor Warrants”), for gross proceeds of approximately US$20 million. The purchase price for each Share and
the corresponding half of one Investor Warrant is US$6.90. The Investor Warrants will be exercisable immediately from the date of issuance
and have an exercise price of US$8.30 per share. The Investor Warrants will expire 3.5 years from the date of issuance. Each Investor
Warrant contains anti-dilution provisions to reflect share dividends and splits or other similar transactions, as described in the Investor
Warrants.
Pursuant to the Purchase Agreement, the Class
A ordinary shares were issued to the Purchasers in a registered direct offering and registered under the Securities Act of 1933, as amended
(the “Securities Act”), pursuant to a prospectus supplement to the Company’s currently effective registration statement
on Form F-3 (File No. 333-236897), which was initially filed with the SEC on March 5, 2020 and declared effective by the SEC on May 28,
2020. The Company filed the prospectus supplement for the Registered Direct Offering on December 13, 2021.
The Company issued the Investor Warrants to the
Purchasers in a concurrent private placement pursuant to an exemption from the registration requirements of the Securities Act contained
in Section 4(a)(2) thereof and/or Regulation D thereunder (the “Private Placement,” and together with the Registered Direct
Offering, the “Offering”).
FT Global Capital, Inc. (the “Placement
Agent”) acted as the exclusive placement agent in connection with the Offering under the terms of the Placement Agency Agreement,
dated December 10, 2021 between it and the Company (the “Placement Agency Agreement”) and, at closing of the Offering, received
a cash fee equal to 7.5% of the aggregate gross proceeds raised in the Offering as well as reimbursement of certain costs and expenses
of up to US$80,000. Additionally, the Company issued to the Placement Agent or its designees warrants (the “Placement Agent Warrants,”
and together with the Investor Warrants, the “Warrants”) for the purchase of 202,899 Class A ordinary shares with an exercise
price of US$8.30 per share, and with a term expiring 3.5 years from the date of issuance. The Placement Agent Warrants shall have the
same registration rights as the Investor Warrants issued to the Purchasers in the Offering. The Placement Agent is also entitled to additional
tail compensation for any financings consummated by the Company within the 12-month period following the termination of the Placement
Agency Agreement, to the extent such financing is provided to the Company by investors that the Placement Agent had “wall-crossed”
on behalf of the Company in connection with the Offering.
The Company has agreed to file and maintain with
the SEC a registration statement (the “Registration Statement”) to register the Warrants and the Class A ordinary shares underlying
the Warrants (the “Warrant Shares”) within 30 calendar days from the closing of the Offering and to use its best efforts to
cause such registration statement to become effective within 60 calendar days following the closing of the Offering (or, in the event
of a review by the SEC, within 120 calendar days).
The Company agreed in the Purchase Agreement that
it would not issue any Class A ordinary shares or Class A ordinary share equivalents for sixty (60) days following the closing of the
Offering subject to certain exceptions. The Company agreed in the Placement Agency Agreement that it would not issue any Class A ordinary
shares or Class A ordinary share equivalents for one hundred twenty (120) days following the closing of the Offering without the consent
of the Placement Agent, subject to certain exceptions.
The Company agreed in the Purchase Agreement that
it will not issue any Class A ordinary shares or Class A ordinary share equivalents involve in a Variable Rate Transaction (as defined
in the Purchase Agreement) until the earlier of (x) the date the initial Registration Statement is declared effective by the SEC and (y)
the date as of which all of the holders of Investor Warrants may sell all of the Investor Warrant Shares without restriction pursuant
to Rule 144 (including, without limitation, volume restrictions) and without the need for current public information required by Rule
144(c)(1) (or Rule 144(i)(2), if applicable). The Company further agreed that until the first anniversary of the earlier of (x) or (y)
above, it would not issue or enter into any agreement to issue any Class A ordinary shares or Class A ordinary share equivalents unless
the Purchasers are offered a participation right, subject to certain terms and conditions as set forth in the Purchase Agreement, to subscribe,
on a pro rata basis, for up to 50% of the securities offered in such offering.
Concurrently with the execution of the Purchase
Agreement, the officers and directors of the Company and shareholders of the Company holding 5% or more of the Company’s Class A
ordinary shares entered into lock-up agreements (the “Lock-Up Agreements”) pursuant to which they have agreed, among other
things, not to sell or dispose of any Class A ordinary shares which are or will be beneficially owned by them for one hundred twenty (120)
days following the closing of the Offering, as well as similar lock-up agreements pursuant to the Placement Agency Agreement restricting
sales of Class A ordinary shares for ninety (90) days after the closing of the Offering.
Change of Independent Registered Public Accounting
Firm
On April 5, 2022, the Company notified its independent
registered public accounting firm, JLKZ CPA LLP its decision to dismiss JLKZ CPA LLP as the Company’s auditor. The Audit Committee
and the Board of Directors of the Company ratified the appointment of TPS Thayer LLC as its new independent registered public accounting
firm to audit the Company’s financial statements.
The COVID-19 Pandemic
We are monitoring the
global outbreak and spread of the novel strain of coronavirus (COVID-19) and taking steps in an effort to identify and mitigate
the adverse impacts on, and risks to, our business (including but not limited to our employees, customers, other business partners, our
manufacturing capabilities and capacity and our distribution channels) posed by its spread and the governmental and community reactions
thereto. We continue to assess and update our business continuity plans in the context of this pandemic, including taking steps in an
effort to help keep our workforces healthy and safe. The spread of COVID-19 has caused us to modify our business practices (including
employee travel, employee work locations in certain cases, and cancellation of physical participation in certain meetings, events and
conferences), and we expect to take further actions as may be required or recommended by government authorities or as we determine are
in the best interests of our employees, customers and other business partners. We are also working with our suppliers to understand the
existing and future negative impacts to our supply chain and take actions in an effort to mitigate such impacts. Due to the speed with
which the COVID-19 situation is developing, the global breadth of its spread and the range of governmental and community reactions
thereto, there is uncertainty around its duration and ultimate impact; therefore, any negative impact on our overall financial and operating
results (including without limitation our liquidity) cannot be reasonably estimated at this time, but the pandemic could lead to extended
disruption of economic activity and the impact on our financial and operating results could be material. See “Risk Factors—Risks
Related to our Business—The COVID-19 pandemic has adversely impacted, and poses risks to, our business, the nature and extent of
which are highly uncertain and unpredictable.”
Sales Channels and Long-Term Opportunities
Due to our limited operating history, we have
not developed a comprehensive marketing strategy. For fintech software, currently we are marketing our services through direct communication
with potential broker or institutional clients. As for retail trading education, retail trading software and website service, we plan
to acquire seed clients from partnership with brokers that integrating accounts system with FXSC. Furthermore, we plan to use search engine
marketing, search engine optimization, inherent virus marketing features developed within our products and social network marketing to
targeted users. We believe the brand value will develop rapidly as our product inherently bring more educational value to retail clients
as comparing to competitors’ product.
Customers and Suppliers
Customers
Our main clients are institutional clients. We
consider our major customers to be those customers that accounted for more than 10% of sales revenue. We had seven major customers during
the fiscal year ended December 31, 2021, which accounted for an aggregate of 88.98% of our sales revenue. We only had one customer during
the fiscal year ended December 31, 2020, which accounted for all of our sales revenue.
Suppliers
We consider our major supplier to be those suppliers
that accounted for more than 10% of our cost of revenue. We had three major suppliers during the fiscal year ended December 31, 2021,
which accounted for an aggregate of 98.49% of our cost of revenue. We only had one supplier during the fiscal year ended December 31,
2020, which accounted for all of our cost of revenue.
Employees
As of December 31, 2021, we have a total of 22
full-time employees. Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We believe
that we maintain a good working relationship with our employees, and we have not experienced any significant labor disputes. We are required
under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances
of our employees, up to a maximum amount specified by the local government from time to time. As required by regulations in China, we
participate in various employee social security plans that are organized by local governments.
Legal Proceedings
As of the date hereof, there is no legal proceeding
pending or threatened against to which we are a party of. However, from time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in
these or other matters may arise.
Regulations
Regulation of Internet Information Services
Internet information services are regulated by
the Administrative Measures on Internet Information Services, or the ICP Measures, promulgated on September 25, 2000 by the State Council
and amended on January 8, 2011. “Internet information services” are defined as services that provide information to online
users through the internet. Internet information services providers, also called Internet content providers, or ICPs, that provide commercial
services are required to obtain an operating license from the MIIT or its provincial counterpart.
To the extent the internet information services
provided relate to certain matters, including news, publication, education or medical and health care (including pharmaceutical products
and medical equipment), approvals must also be obtained from the relevant industry regulators in accordance with the laws, rules and regulations
governing those industries.
Regulation of Internet Content
The PRC government has promulgated measures relating
to Internet content through various ministries and agencies, including the MIIT, the News Office of the State Council, the Ministry of
Culture and the General Administration of Press and Publication. In addition to various approval and license requirements, these measures
specifically prohibit internet activities that result in the dissemination of any content which is found to contain pornography, promote
gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC or compromise State security or
secrets. ICPs must monitor and control the information posted on their websites. If any prohibited content is found, they must remove
such content immediately, keep a record of it and report to the relevant authorities. If an ICP violates these measures, the PRC government
may impose fines and revoke any relevant business operation licenses.
Regulation of Internet Security
The Decision in Relation to Protection of the
Internet Security enacted by the SCNPC on December 28, 2000 provides that the following activities conducted through the Internet are
subject to criminal punishment:
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gaining improper entry into a computer or system of strategic importance; |
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disseminating politically disruptive information or obscenities; |
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leaking State secrets; |
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spreading false commercial information; or |
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infringing intellectual property rights. |
The Administrative Measures
on the Security Protection of Computer Information Network with International Connections, issued by the Ministry of Public Security on
December 16, 1997 and amended on January 8, 2011, prohibit the use of the Internet in a manner that would result in the leakage of State
secrets or the spread of socially destabilizing content. If an ICP violates these measures, the Ministry of Public Security and the local
security bureaus may revoke its operating license and shut down its websites.
Regulation Relating to Privacy Protection
Under the ICP Measures, ICPs are prohibited from
producing, copying, publishing or distributing information that is humiliating or defamatory to others or that infringes upon the lawful
rights and interests of others. Depending on the nature of the violation, ICPs may face criminal charges or sanctions by PRC security
authorities for such acts, and may be ordered to suspend temporarily their services or have their licenses revoked.
Under the Several Provisions on Regulating the
Market Order of Internet Information Services, issued by the MIIT on December 29, 2011, ICPs are also prohibited from collecting any user
personal information or providing any such information to third parties without the consent of a user. ICPs 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 its services. ICPs are also required to properly maintain the user personal information, and in case of any
leak or likely leak of the user personal information, ICPs must take remedial measures immediately and report any material leak to the
telecommunications regulatory authority.
In addition, the Decision on Strengthening Network
Information Protection promulgated by the Standing Committee of the National People’s Congress on December 28, 2012 emphasizes the
need to protect electronic information that contains individual identification information and other private data. The decision requires
ICPs to establish and publish policies regarding the collection and use of personal electronic information and to take necessary measures
to ensure the security of the information and to prevent leakage, damage or loss. Furthermore, MIIT’s Rules on Protection of Personal
Information of Telecommunications and Internet Users promulgated on July 16, 2013 contain detailed requirements on the use and collection
of personal information as well as the security measures to be taken by ICPs.
The PRC government retains the power and authority
to order ICPs to provide an Internet user’s personal information if such user posts any prohibited content or engages in any illegal
activities through the Internet.
Regulations on Intellectual Property Rights
Patent. Patents in the PRC are
principally protected under the Patent Law of the PRC. The duration of a patent right is either 10 years or 20 years from the date
of application, depending on the type of patent right.
Copyright. Copyright in the PRC,
including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and regulations. Under
the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark. Registered trademarks are
protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with the Trademark Office of
the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark which has already been registered
or given preliminary examination and approval for use in the same or similar category of commodities or services, the application for
registration of such trademark may be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise
revoked. We are in the process of having our trademark registered in PRC, and we have registered some trademarks in Hong Kong.
Domain Names. Domain name
registrations are handled through domain name service agencies established under the relevant regulations, and applicants become
domain name holders upon successful registration.
Regulations on Dividend Distributions
One of our PRC subsidiaries, AGM Tianjin, is a
wholly foreign-owned enterprise under the PRC law. The principal regulations governing the distribution of dividends paid by wholly foreign-owned
enterprises include:
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Corporate Law (1993) as amended in 2005 and 2013; |
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The Wholly Foreign-Owned Enterprise Law Implementation Regulations (1990), as amended in 2001; and |
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Under these regulations, wholly foreign-owned
enterprises in China may pay dividends only out of their accumulated profits, if any, as determined in accordance with PRC accounting
standards and regulations. In addition, an enterprise in China is required to set aside at least 10% of its after-tax profit based on
PRC accounting standards each year to its general reserves until its cumulative total reserve funds reaches 50% of its registered capital.
Our Company’s reserve fund has not yet reached this level. The board of directors of a wholly foreign-owned enterprise has the discretion
to allocate a portion of its after-tax profits to its employee welfare and bonus funds. These reserve funds, however, may not be distributed
as cash dividends.
On March 16, 2007, the National People’s
Congress enacted the Enterprise Income Tax Law, and on December 6, 2007, the State Council issued the Implementation Regulations on the
Enterprise Income Tax Law, both of which became effective on January 1, 2008. Under this law and its implementation regulations, dividends
payable by a foreign-invested enterprise in the PRC to its foreign investor who is a non-resident enterprise will be subject to a 10%
withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with the PRC that provides for
a lower withholding tax rate.
Nevertheless, AGM Tianjin currently do not have
assets or operation of business, and we have no present plans to declare dividends and plan to retain our earnings to continue to grow
our business.
Regulations on Tax
PRC Enterprise Income Tax
The PRC enterprise income tax, or EIT, is calculated
based on the taxable income determined under the applicable EIT Law and its implementation rules, which became effective on January 1,
2008. The EIT Law imposes a uniform enterprise income tax rate of 25% on all resident enterprises in China, including foreign-invested
enterprises.
Uncertainties exist with respect to how the EIT
Law applies to our tax residence status and our offshore subsidiaries. Under the EIT Law, an enterprise established outside of China with
a “de facto management body” within China is considered a “resident enterprise,” which means that it is treated
in a manner similar to a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the EIT Law define
“de facto management body” as a managing body that exercises substantive and overall management and control over the production
and business, personnel, accounting books and assets of an enterprise, the only official guidance for this definition currently available
is set forth in Circular 82 issued by the State Administration of Taxation, which provides guidance on the determination of the tax residence
status of a Chinese-controlled offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign
country or territory and that has a PRC enterprise or enterprise group as its primary controlling shareholder.
According to Circular 82, a Chinese-controlled
offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in
China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met:
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the primary location of the day-to-day operational management is in the PRC; |
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decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; |
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the enterprise’s primary assets, accounting books and records, company seals, and board and shareholders meeting minutes are located or maintained in the PRC; and |
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We believe that we meet the conditions outlined
in the immediately preceding paragraph and should be treated as a “resident enterprise” for PRC tax purposes if the criteria
for “de facto management body” as set forth in Circular 82 were deemed applicable to us. However, as the tax residency status
of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of
the term “de facto management body” as applicable to our offshore entities, we will continue to monitor our tax status. See
“Risk Factors — Risks Related to Doing Business in China — Under the Enterprise Income Tax Law, we may be classified
as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our
non-PRC stockholders.”
In the event that we or any of our offshore subsidiaries
is considered to be a PRC resident enterprise: (1) we or our offshore subsidiaries, as the case may be, may be subject to the PRC enterprise
income tax at the rate of 25% on our worldwide taxable income; (2) dividend income that we or our offshore subsidiaries, as the case may
be, receive from our PRC subsidiaries may be exempt from the PRC withholding tax; and (3) dividends paid to our overseas shareholders
who are non-PRC resident enterprises as well as gains realized by such shareholders from the transfer of our shares may be regarded as
PRC-sourced income and as a result be subject to PRC withholding tax at a rate of up to 10%, and similarly, dividends paid to our overseas
shareholders who are non-PRC resident individuals, as well as gains realized by such shareholders from the transfer of our shares, may
be regarded as PRC-sourced income and as a result be subject to PRC withholding tax at a rate of 20%, subject to the provision of any
applicable agreement for the avoidance of double taxation.
Under SAT Circular 698 and Bulletin 7, if a non-resident
enterprise transfers “PRC taxable assets” of a PRC resident enterprise indirectly by disposition of the equity interests of
an overseas non-public holding company without reasonable commercial purpose, the parties involved in the indirect transfer of the PRC
taxable assets and the PRC resident enterprise whose equity is transferred indirectly, may report such equity transfer matter to the PRC
competent tax authority of the PRC resident enterprise. The PRC tax authority may disregard the existence of the overseas holding company
if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding, or deferring PRC tax. As a result,
gains derived from such disposition may be subject to a PRC withholding tax rate of up to 10%. Circular 698 also provides that, where
a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price which is not
on an arm’s length basis and results in reducing the taxable income, the relevant tax authority has the power to make a reasonable
adjustment as to the taxable income of the transaction. Circular 698 was retroactively effective on January 1, 2008. On February 3, 2015,
the State Administration of Taxation released SAT Bulletin 7 to amend and clarify several issues related to Circular 698. According to
SAT Bulletin 7, the term “PRC taxable assets” includes assets attributed to an establishment in China, immoveable properties
located in China, and equity investments in PRC resident enterprises; and when determining whether there is a “reasonable commercial
purpose” of the transaction arrangement, factors to be taken into consideration include: whether the main value of the equity interest
of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists
of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries
directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure;
the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer
of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. If Circular
698 and Bulletin 7 were determined by the tax authorities to be applicable to us, our offshore subsidiaries and our non-resident enterprise
investors, we, our offshore subsidiaries and our non-resident enterprise investors might be required to expend valuable resources to comply
with this circular, which may materially and adversely affect us or our non-resident enterprise investors. See “Risk Factors —
Risks Related to Doing Business in China — We and our shareholders face uncertainties with respect to indirect transfers of equity
interests in PRC resident enterprises or other assets attributed to a PRC establishment of a non-PRC company, or other assets attributable
to a PRC establishment of a non-PRC company.”
Under applicable PRC laws, payers of PRC-sourced
income to non-PRC residents are generally obligated to withhold PRC income taxes from the payment. In the event of a failure to withhold,
the non-PRC residents are required to pay such taxes on their own. Failure to comply with the tax payment obligations by the non-PRC residents
will result in penalties, including full payment of taxes owed, fines and default interest on those taxes.
PRC Value-added Tax
Pursuant to the Pilot Measure for Imposition of
Value-Added Tax to Replace Business Tax for Transport and Shipping Industry and Some of the Modern Service Industries, promulgated by
the Ministry of Finance and the State Administration of Taxation on November 16, 2011 (the “PilotMeasure”),any entity or individual
conducting business in some modern service industry, such as the service we are engaging in, is generally required to pay a value-added
tax, or VAT, at the rate of 6% on the revenues generated from providing such services. A taxpayer is allowed to offset the qualified input
VAT paid on taxable purchases against the output VAT chargeable on the modern services provided.
On March 30, 2016, the Ministry of Finance and
the State Administration of Taxation promulgated the Notice of the Ministry of Finance and the State Administration of Taxation on Overall
Implementation of the Pilot Program of Replacing Business Tax with Value-added Tax. Pursuant to this notice, from May 1, 2016, a value-added
tax will generally be imposed to replace the business tax in the construction industry, real estate industry, finance industry, consumer
service industry and other industries on a nationwide basis.
SAFE Circular 37
SAFE promulgated the Circular on Relevant Issues
Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special
Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75”
promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection
with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with
such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to
in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the
event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC
individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests
in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may
be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities,
and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore,
failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion
of foreign exchange controls.
Share Option Rules
Under the Administration Measures on Individual
Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange matters involved in employee share ownership plans
and share option plans in which PRC citizens participate require approval from SAFE or its authorized branch. Pursuant to SAFE Circular
37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or
its local branches for the foreign exchange registration with respect to offshore special purpose companies. In addition, under the Notices
on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed
Companies, or the Share Option Rules, issued by SAFE on February 15, 2012, PRC residents who are granted shares or share options by companies
listed on overseas stock exchanges under share incentive plans are required to (i) register with SAFE or its local branches, (ii) retain
a qualified PRC agent, which may be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC
subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants,
and (iii) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of shares
or interests and funds transfers.
Employment Laws
In accordance with the PRC National Labor Law,
which became effective in January 1995, and the PRC Labor Contract Law, which became effective in January 2008, as amended subsequently
in 2012, employers must execute written labor contracts with full-time employees in order to establish an employment relationship. All
employers must compensate their employees equal to at least the local minimum wage standards. All employers are required to establish
a system for labor safety and sanitation, strictly abide by state rules and standards and provide employees with appropriate workplace
safety training. In addition, employers in China are obliged to pay contributions to the social insurance plan and the housing fund plan
for employees. We have contributed to the basic and minimum social insurance plan. Due to a high employee turnover rate in our industry,
it is difficult for us to comply fully with the law. While we believe that we have made adequate provision of such outstanding amounts
of contributions to such plans in our financial statements, any failure to make sufficient payments to such plans would be in violation
of applicable PRC laws and regulations and, if we are found to be in violation of such laws and regulations, we could be required to make
up the contributions for such plans as well as to pay late fees and fines.
C. Organizational structure.
Below is a chart illustrating our corporate structure:
D. Property, Plant and Equipment
Intellectual Property
We regard our intellectual property rights as
critical to our operations. We rely on a combination of patents, copyrights, trademarks and trade secret laws to protect our intellectual
property. As of December 31, 2021, we had two registered trademarks in China and owned ten domain names.
Property and Equipment
As of December 31, 2021 and 2020, property and
equipment, net consisted of the following:
|
|
December 31,
2021 |
|
|
December 31,
2020 |
|
Electronic equipment |
|
$ |
168,308 |
|
|
$ |
163,891 |
|
Office equipment |
|
|
14,391 |
|
|
|
14,034 |
|
Leasehold improvement |
|
|
339,657 |
|
|
|
- |
|
Total property and equipment |
|
|
522,356 |
|
|
|
177,925 |
|
Less: accumulated depreciation |
|
|
(199,959 |
) |
|
|
(158,605 |
) |
Total property and equipment, net |
|
$ |
322,397 |
|
|
$ |
19,320 |
|
Depreciation expenses for the fiscal years ended
December 31, 2021, 2020 and 2019 were $36,883, $31,957 and $48,793, respectively. There was no impairment recorded for these property
and equipment for the years ended December 31, 2021, 2020 and 2019.
Lease commitments
We lease offices and residential properties for
employee’s dormitories Rent expenses for the years ended December 31, 2021, 2020 and 2019 were $51,239, $91,043 and $173,259, respectively.
The Company has future minimum lease obligations as of December 31, 2021 as follows:
| |
Commitment Amount | |
Year of 2022 | |
$ | 52,700 | |
Year of 2023 | |
| - | |
Year of 2024 | |
| - | |
Year of 2025 | |
| - | |
Thereafter | |
| - | |
Less: lease commitments on terminations | |
| - | |
Total | |
$ | 52,700 | |
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 audited 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 “Risk Factors” and elsewhere in this annual report.
A. Operating Results.
Revenue
We derive revenue from the sales of the following
three items: (1) cryptocurrency mining machine and standardized computing equipment, (2) technical support plans, (3) software customization
services, and bundle of products or services that may include a combination of these items. We enter into contracts with customers that
include promises to transfer various products and services, which are generally capable of being distinct and accounted for as separate
performance obligations. Revenue is recognized when the promised goods or services are transferred to customers, in an amount that reflects
the consideration allocated to the respective performance obligation. We record and recognize revenues from both products and services
in one account, which is presented as revenues and revenues from related parties in the accompanying consolidated statements of operations
and comprehensive income. During 2021, 2020 and 2019, we derive revenue from the sale of the following three items:
| (1) | Sales
of Cryptocurrency Mining Machine and Standardized Computing Equipment |
We recognize product revenues on a gross basis
as we are responsible to fulfill the promise to provide specified goods. Revenue is recognized at a point in time upon the transfer of
control of products to customers.
| (2) | Technical
Support Plans |
We sell technical support plans either as a package
with the sale of software products or separately on its own. Each technical support plan has a contractual period of one year. Revenue
is recognized over a period of time throughout the contract period for the technical support plan, generally is recognized over twelve
months period. However, we did not record this revenue stream on total revenue for December 31, 2021 since we discontinued business related
to these services in 2020.
| (3) | Software
Customization Services |
We deliver our software customization services
by developing customized features on software products to suit customers’ special needs. Upon receiving the purchase request from
the customers, we design, develop, test, and implement the specified features to our software products. We also include a one-year technical
support plan specifically for the developed feature(s).
Customers are able to request and purchase the
service together with a purchase of our software product, or separately if the customer has our software products in-use. Revenue is recognized
at a point in time upon customers’ acceptance of the feature(s), and revenue for the technical support plan is recognized over its
service term, which generally is for twelve months period.
Costs and Expenses
We primarily incur the following costs and expenses:
Costs of revenues. Cost of revenues primarily
consist of: (1) cost of product revenue, which includes direct costs of cryptocurrency mining machine, standardized computing equipment
and software products; labor costs and employee benefits for software development, data testing, bug fixes and hacker prevention; research
and development expenses; (2) cost of services and other revenue, which reflects direct costs associated with providing services, including
data center and support costs related to delivering online services.
Selling, general and administrative expenses.
Selling, general and administrative expenses consist primarily of compensation expense for our corporate staff and personnel supporting
our corporate staff, marketing costs, office supplies, welfare expenses, training expenses, professional fees (including consulting, audit
and legal fees), travel and business hospitality expenses. Selling, general and administrative expenses also include depreciation and
amortization expenses. We record property and equipment at cost and calculate depreciation using the straight-line method over the estimated
useful lives of our assets, which generally range from three to five years.
Research and development expenses. Research
and development costs are expensed as incurred. The costs primarily consist of the wage expenses incurred to continuously improve and
upgrade our services.
Bad debt expenses. Based on our periodic
review of accounts receivable balances, we adjusted the allowance for doubtful accounts after considering management’s evaluation
of the collectability of individual receivable balances, including the analysis of subsequent collections, the customers’ collection
history, the write-off of uncollectible receivables against the existing reserve, and recent economic events.
Results of Operations
| |
For The Years Ended
December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
| |
| | |
| | |
| |
Revenues | |
| 36,709,931 | | |
| 53,305 | | |
| 330,000 | |
Cost of Revenues | |
| (30,112,363 | ) | |
| (38,534 | ) | |
| (43,056 | ) |
Gross profit | |
| 6,597,568 | | |
| 14,771 | | |
| 286,944 | |
| |
| - | | |
| - | | |
| - | |
Operating expenses | |
| - | | |
| - | | |
| - | |
Selling, general & administrative expenses | |
| 1,607,393 | | |
| 964,470 | | |
| 1,369,701 | |
Research and development expenses | |
| 36,317 | | |
| 63,450 | | |
| 127,117 | |
Total operating expenses | |
| 1,643,710 | | |
| 1,027,920 | | |
| 1,496,818 | |
| |
| - | | |
| - | | |
| - | |
Income/(Loss) from operations | |
| 4,953,858 | | |
| (1,013,149 | ) | |
| (1,209,874 | ) |
| |
| - | | |
| - | | |
| - | |
Other income/(expenses) | |
| - | | |
| - | | |
| - | |
Other income | |
| 47,167 | | |
| 1,687 | | |
| 118,709 | |
Other expenses | |
| (43,171 | ) | |
| (9,343 | ) | |
| (363,815 | ) |
Gain on equity method investment | |
| - | | |
| - | | |
| 33,684 | |
Total other income/(expense) | |
| 3,996 | | |
| (7,656 | ) | |
| (211,422 | ) |
| |
| - | | |
| - | | |
| - | |
Income/(Loss) from continuing operations before provision of income taxes | |
| 4,957,854 | | |
| (1,020,805 | ) | |
| (1,421,296 | ) |
Provision for income taxes expenses | |
| (1,406,159 | ) | |
| (76,343 | ) | |
| (64,615 | ) |
| |
| - | | |
| - | | |
| - | |
Net income/(loss) from continuing operations | |
| 3,551,695 | | |
| (1,097,148 | ) | |
| (1,485,911 | ) |
| |
| - | | |
| - | | |
| - | |
Discontinued operations | |
| - | | |
| - | | |
| - | |
Loss from discontinued operations, net of income tax | |
| - | | |
| (322,490 | ) | |
| (76,944 | ) |
Gain from disposal | |
| - | | |
| 347,990 | | |
| - | |
Income/(loss) from discontinued operations, net of income tax | |
| - | | |
| 25,500 | | |
| (76,944 | ) |
| |
| | | |
| | | |
| | |
Net income/(loss) | |
$ | 3,551,695 | | |
$ | (1,071,648 | ) | |
$ | (1,562,855 | ) |
Revenues
Our total revenues increased by $36,656,626 or
68,768%, from $53,305 in fiscal 2020 to $36,709,931 in fiscal 2021. All of our total revenues for both fiscal 2021 and fiscal 2020 generated
from third parties and no revenues incurred from related party. The increase was primarily due to the surging sales revenues from cryptocurrency
mining machine and standardized computing equipment sales since 2021.
Our total revenues decreased by $276,695 or 84%,
from $330,000 in fiscal 2019 to $53,305 in fiscal 2020. All of our total revenues for both fiscal 2020 and fiscal 2019 generated from
third parties and no revenues incurred from related party. The decrease in revenues was primarily due to the continued business. During
2020 and 2019, we developed new products and services using technology derived from the discontinued business. These newly developed products
and services have not started to contribute to our revenue stream.
Cost of Revenues and Gross Margin
Cost of revenues increased by $30,073,829 or 78,045%,
from $38,534 in fiscal 2020 to $30,112,363 for the fiscal 2021. The increase was primarily due to the increase in procurement costs of
cryptocurrency mining machines and standardized computing equipment for fiscal 2021. Gross margin for fiscal 2021 was 18%, as compared
to 28% for fiscal 2020. The gross margin of sales cryptocurrency mining machine and standardized computing equipment was a little bit
lower than the business in 2020.
Cost of revenues decreased by $4,522 or 11%, from
$43,056 in fiscal 2019 to $38,534 for the fiscal 2020. The decrease of cost of revenue was primarily attributable to in line with decrease
of revenues. Gross margin for fiscal 2020 was 28%, as compared to 87% for fiscal 2019. The decreased in gross margin of continuing operations
was primarily due to higher cost in the wage, payroll taxes and higher overhead costs.
Selling, General and Administrative expenses
Selling, general and administrative expenses consist
primarily of sales and administrative employee-related expenses, professional fees, travel costs, research and development costs, and
other corporate expenses. Selling, general and administrative expenses were $1,607,393 for the year of 2021, an increase of $642,923,
or 67% from December 31, 2020 to December 31, 2021. The increase was primarily due to expenses related to an establishment of a new wholly
foreign-owned enterprise in fiscal 2021.
Selling, general and administrative expenses consist
primarily of sales and administrative employee-related expenses, professional fees, travel costs, research and development costs, and
other corporate expenses. Selling, general and administrative expenses were $964,470 for the year of 2020, a decrease of $405,231, or
30% from December 31, 2019 to December 31, 2020. The decrease in selling, general and administrative expenses was primarily due to decrease
in payroll expense, depreciation and amortization expenses, and advertising and marketing expenses, reflecting the down sized of our business
in fiscal 2020.
Research and Development Expenses
We incurred $36,317 and $63,450 in research and
development in fiscal 2021 and 2020, respectively. Research and development expenses decreased by $27,133, or 43%, for fiscal 2021 compared
to fiscal 2020. The decrease was primarily due to the decrease in FinTech R&D. We have not invested in cryptocurrency mining machine
R&D. Research and development expenses decreased by $63,667, or 50%, for fiscal 2020 compared to fiscal 2019.
Bad debt expense
We did not have bad debt expense in fiscal 2021,
2020 and 2019. We collected all the accounts receivables as of December 31, 2020, due to our sales arrangement usually requires advanced
payment. We did not make bad debt provision for accounts receivables as of December 31, 2021 since the customers were with good credit
and the accounts receivable were within the term of credit.
Loss from operations
As a result of the factors described above, operating
income was $4,953,858 for fiscal 2021, compared to operation loss was $1,013,149 for fiscal 2020, an increase in operation income of $5,967,007,
or 589%. Our operation loss in fiscal 2020 was $1,013,149, compared to operating loss was $1,209,874 for fiscal 2019, a decrease in operation
loss of $196,725, or 16%.
Other expenses
For fiscal 2021, other income, net of other expense,
were $3,996, compared to other expenses, net of other income, were $7,656 for fiscal 2020, a change of $11,652. The decrease of other
expenses was primarily attributable to foreign exchange income.
For fiscal 2020, other expense, net of other income,
were $7,656, compared to 211,422 for fiscal 2019, a change of $203,766. The decrease of other expense was primarily attributable to a
decrease of gain on foreign currency transactions and other non-operating income. We also incurred a non-operating expense on impairment
of disposal of $1,517.
Loss from continuing operations
As a result of the foregoing, our income from
continuing operations was $3,551,695, or $0.17 per share (basic and diluted), for the year ended December 31, 2021, as compared with loss
from continuing operations of $1,097,148, or $(0.05) per share (basic and diluted), for the year ended December 31, 2020. Our loss from
continuing operating was $1,485,911 for fiscal 2019, or $(0.07) per share (basic and diluted), for the year ended December 31, 2019.
Income Tax
For fiscal 2021, we had provision for income tax
of $1,406,159, an increase of $1,329,816, or 1,742%, as compared to expense for income tax of $76,343 for fiscal 2020. The increase is
primarily due to increase income before provision of income taxes.
For fiscal 2020, we had provision for income tax
of $76,343, an increase of $11,728, or 18%, as compared to expense for income tax of $64,615 for fiscal 2019. The increase is primarily
due to recording of tax liability of $76,343 and tax liability of $64,615 in relation to uncertain tax positions for the uncertainty surrounding
the PRC residency of our non-PRC entities for the years ended December 31, 2020 and 2019.
Gain (loss) from discontinued operation, net
of income taxes
Our gain from discontinued operations was nil,
or $0.00 per share (basic and diluted), for the year ended December 31, 2021, as compared with a income from discontinued operations of
$25,500, or $(0.00) for the year ended December 31, 2020. Our loss from discontinued operations was $76,944, or $(0.00) per
share (basic and diluted), for the year ended December 31, 2019.
The summarized operating result of discontinued
operation included our consolidated statements of operation is as follows:
| |
For The Years Ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
Revenues | |
$ | - | | |
$ | 237,431 | | |
$ | 379,630 | |
Cost of revenues | |
| - | | |
| 160,810 | | |
| 199,888 | |
Gross profit | |
| - | | |
| 76,621 | | |
| 179,742 | |
Operating expenses | |
| - | | |
| 353,219 | | |
| 196,060 | |
Other income, net | |
| - | | |
| (45,125 | ) | |
| (2,240 | ) |
Loss before income taxes | |
| - | | |
| (321,723 | ) | |
| (18,558 | ) |
Income tax expense | |
| - | | |
| 767 | | |
| 58,386 | |
Loss from discontinued operations | |
| - | | |
| (322,490 | ) | |
| (76,944 | ) |
Gain from disposal, net of taxes | |
| - | | |
| 347,990 | | |
| - | |
Total income/(loss) from discontinued operations | |
$ | - | | |
$ | 25,500 | | |
$ | (76,944 | ) |
We realized a gain of $347,990 from the disposal
of 100% equity of Anyi Network including its subsidiaries and offset by a loss of $322,490 from discontinued operation of the year ended
December 31, 2020. As the result, total gain amounted $25,500 from discontinued operation for the year ended December 31, 2020.
We reclassified Anyi Network and its subsidiaries
as discontinued operation and recorded a loss of $76,944 from discontinued operation in the year ended December 31, 2019.
Net loss
As a result of the factors described above, our
net income for fiscal 2021 was $3,551,695, compared to net loss of $1,071,648 for fiscal 2020, a decrease in net loss of $4,623,343, or
431%. Our net loss for fiscal 2019 was $1,562,855, a decrease in net loss of $491,207, or 31%.
Foreign currency translation
The accompanying consolidated financial statements
are presented in United States dollar (“$”), which is the reporting currency of us. The functional currency of AGM Group Holdings,
Inc., AGM Technology Limited, AGM Defi Tech Ltd., our subsidiaries established pursuant to the laws of Hong Kong, AGM DEFI LAB PTE. Ltd.,
our subsidiary established pursuant to the laws of Singapore, and AGM Software Services Ltd, our subsidiary established pursuant to the
laws of the British Virgin Islands are United States dollar. The functional currency of AGM Tianjin Construction Development Co, Ltd.,
Beijing AnGaoMeng Technology Service Co., Ltd., Nanjing Lucun Semiconductor Co. Ltd., our indirect subsidiaries established pursuant to
the laws of China, are Renminbi (“RMB”). For the subsidiaries whose functional currencies are RMB, results of operations and
cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the exchange rate at the
end of the period, and equity is translated at historical exchange rates.
The Consolidated Balance Sheets balances, with
the exception of equity at December 31, 2021 and 2020, were translated at RMB6.3757 and RMB6.5378 to $1.00, respectively. The equity accounts
were stated at their historical rate. The average translation rates applied to the Consolidated Statements of Operations and Comprehensive
Income and the Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 were RMB6.4514, RMB6.9003 and
RMB6.9074 to $1.00, respectively.
Net gains and losses resulting from foreign exchange
translations are included in the Comprehensive income on the consolidated statements of operations. As a result of foreign currency translations,
which are a non-cash adjustment, we reported a foreign currency translation gain/(loss) of $169,472, $(154,768) and $95,060 for the. This
non-cash loss had the effect of increasing our reported comprehensive income or loss.
B. Liquidity and Capital Resources.
Liquidity
For the years ended December 31, 2021 and 2020
Liquidity is the ability of a company to generate
funds to support our current and future operations, satisfy our obligations and otherwise operate on an ongoing basis. As of December
31, 2021 and December 31, 2020, we had working capital of $24.5 million and $3.7 million, including cash and cash equivalents of $18.4
million and $0.7 million, respectively. As a result, we believe that our current cash and cash to be generated from our operations will
be sufficient to meet our working capital needs for at least the next twelve months. We are not dependent upon the access to borrow loans
from our related parties. We plan to expand our business to implement our growth strategies to broaden our service and strengthen our
position in the marketplace.
The following table sets forth a summary of changes
in our working capital from December 31, 2020 to December 31, 2021:
| |
December 31, | | |
December 31, | | |
| | |
Percentage | |
| |
2021 | | |
2020 | | |
Change | | |
Change | |
Working capital: | |
| | |
| | |
| | |
| |
Total current assets | |
$ | 87,319,271 | | |
$ | 6,202,131 | | |
$ | 81,117,140 | | |
| 1,308 | % |
Total current liabilities | |
| 62,819,301 | | |
| 2,538,955 | | |
| 60,280,346 | | |
| 2,374 | % |
Working capital | |
$ | 24,499,970 | | |
$ | 3,663,176 | | |
$ | 20,836,794 | | |
| 569 | % |
Because the exchange
rate conversion is different for the consolidated balance sheets and the consolidated statements of cash flows, the changes in assets
and liabilities reflected on the consolidated statements of cash flows are not necessarily identical with the comparable changes
reflected on the consolidated balance sheets.
Cash Flow Summary
The following table sets forth certain items in
our consolidated statements of cash flows for 2021, 2020 and 2019.
| |
For The Years Ended December
31, | |
| |
2021 | | |
2020 | | |
2019 | |
| |
| | |
| | |
| |
Net cash used in operating activities | |
| (1,854,458 | ) | |
| (1,652,022 | ) | |
| (196,393 | ) |
Net cash used in investing activities | |
| (339,657 | ) | |
| (1,195 | ) | |
| (5,010,387 | ) |
Net cash provided by financing activities | |
| 19,558,681 | | |
| 111,878 | | |
| (526,329 | ) |
Effect of exchange rate changes on cash and cash equivalents | |
| 397,451 | | |
| 129,375 | | |
| (55,667 | ) |
Net change in cash and cash equivalents | |
| 17,762,017 | | |
| (1,411,964 | ) | |
| (5,788,776 | ) |
Cash and cash equivalents, beginning of the year | |
| 664,605 | | |
| 2,076,569 | | |
| 7,865,345 | |
Cash and cash equivalents, end of the year | |
| 18,426,622 | | |
| 664,605 | | |
| 2,076,569 | |
Less cash and cash equivalents of discontinued operations–end of year | |
| - | | |
| - | | |
| 613,979 | |
Cash and cash equivalents of continuing operations–end of year | |
$ | 18,426,622 | | |
$ | 664,605 | | |
$ | 1,462,590 | |
We have cash and cash equivalents held in financial
institutions in the following countries (regions):
| |
December 31, | | |
December 31, | |
Country (Region) | |
2021 | | |
2020 | |
China (Mainland) | |
$ | 16,566,953 | | |
$ | 148,747 | |
China (Hong Kong) | |
| 1,599,983 | | |
| 271,212 | |
Singapore | |
| 259,686 | | |
| 244,646 | |
Total cash and cash equivalents | |
$ | 18,426,622 | | |
$ | 664,605 | |
Operating Activities:
Net cash used in operating activities of continuing
operations was $1,854,458 for fiscal 2021, primarily due to a net income of $3,551,695. The adjustments for changes in assets and liabilities
primarily included (i) an increase of advances to suppliers of $40,485,521, (ii) an increase of inventories of $22,433,140, offset by
(iii) a decrease of advances from customers of $42,231,914 and (iv) a decrease of accounts payable of $14,111,595.
Net cash used in operating activities of continuing
operations was $1,355,330 (total of $1,652,022 including discontinued operations of $296,692), for fiscal 2020, primarily due to a net
loss of $1,071,648 adjusted by a gain on discontinued operations of $25,500, adjusted by non-cash gain from disposal of subsidiary of
$347,990 and working capital primarily included depreciation and amortization expenses of $33,437. The adjustments for changes in assets
and liabilities primarily included (i) prepaid expenses and other current assets of $103,145, (ii) accounts payable of $1,763, and (iii)
accrued expenses and other current liabilities of $48,537.
Net cash used in operating activities of continuing
operations was $160,926 (total of $196,393 including discontinued operations of $35,467), for fiscal 2019, primarily due to a net loss
from continuing operations of $1,485,911 and adjusted by non-cash working capital primarily included depreciation and amortization expenses
of $50,273 and a gain on equity method investment of $33,684. The adjustments for changes in assets and liabilities primarily included
(i) prepaid expenses and other current assets of $347,763, (ii) accounts payable of $76,441, and (iv) accrued expenses and other current
liabilities of $1,042,072.
Net cash used in operating activities of discontinued
operations was nil, $296,692 and $35,467 in fiscal 2021, 2020 and 2019, respectively.
Investing Activities:
Net cash used in investing activities of continuing
operations was $339,657 for the leasehold improvement in fiscal 2021.
Net cash used in investing activities of continuing
operations was $810 for the purchase of office equipment in fiscal 2020.
Net cash used in investing activities of continuing
operations was $4,976,431 for fiscal 2019. It was attributable to the purchase of office equipment for $700, an acquisition of subsidiaries
in cash of $400,000, an advance deposit for intent acquisition of $4,937,664 and offset by the proceeds from sales of equity investment
of $361,933.
Net cash used in investing activities from discontinued
operations was $385 and $33,956 for fiscal 2020 and 2019, respectively. There was no net cash provided or used by investing activities
of discontinued operations for fiscal 2021.
Financing Activities:
Net cash provided by financing activities was
of continuing operations $19,558,681 for fiscal 2021. It was mainly attributable to proceeds from issuance of Class A ordinary shares
of $17,639,999 and proceeds from short-term borrowings of $1,568,455.
Net cash provided by financing activities was
of continuing operations $198,226 for fiscal 2020. It was attributable to proceeds from issuance of Class A ordinary shares of $667,901
and borrowings from related parties of $125,212, offset by repayment of related party loans and advances of $594,887.
Net cash used in financing activities was of continuing
operations $580,297 for fiscal 2019. It was attributable to repayment of related party loans and advances of $587,120 and offset by borrowings
from related parties of $6,823.
Net cash used by financing activities of discontinued
operations was $86,348 for fiscal 2020. Net cash provided by financing activities of discontinued operations of $53,968 for fiscal
2019. There was no net cash provided by or used in financing activities of discontinued operations for fiscal 2021.
We expect to incur additional costs associated
with becoming a public company in the United States, primarily due to increased expenses related to accounting and tax services, legal
expenses and investor and stockholder-related expenses. These additional long-term expenses may require us to seek other sources of financing,
such as additional borrowings or public or private equity or debt capital. The availability of these other sources of financing will depend
upon our financial condition and results of operations as well as prevailing market conditions and may not be available on terms reasonably
acceptable to us or at all.
Regulatory Restrictions on Capital Injections
If we conduct offerings in the future, we plan
to use proceeds from such offerings to fund our business from time to time. In order to do so, we will be required to comply with the
following Chinese regulations regarding capital injections to foreign-invested enterprises.
Chinese regulations relating to investments in
offshore companies by Chinese residents. SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic
Residents’ Financing and Round trip Investment through Offshore Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014.
SAFE Circular 37 requires Chinese residents to register and update certain investments in companies incorporated outside of China with
their local SAFE branch. SAFE also subsequently issued various guidance and rules regarding the implementation of SAFE Circular 37, which
imposed obligations on Chinese subsidiaries of offshore companies to coordinate with and supervise any Chinese-resident beneficial owners
of offshore entities in relation to the SAFE registration process.
We may not be aware of the identities of all of
our beneficial owners who are Chinese residents. We do not have control over our beneficial owners and cannot assure you that all of our
Chinese -resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules. The failure of our beneficial
owners who are Chinese residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 and subsequent
implementation rules, or the failure of future beneficial owners of our Company who are Chinese residents to comply with the registration
procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our Chinese subsidiaries
to fines and legal sanctions, which may be substantial. Failure to register may also limit our ability to contribute additional capital
to our Chinese subsidiaries and limit our Chinese subsidiaries’ ability to distribute dividends to our Company. These risks may
have a material adverse effect on our business, financial condition and results of operations.
China regulates loans to and direct investment
in Chinese entities by offshore holding companies and there is governmental control of currency conversion. We are an offshore holding
company conducting our operations in China through our wholly owned subsidiaries. As an offshore holding company, we may make loans and
additional contributions to subsidiaries subject to certain government authorities’ registration and/or approvals, including MOFCOM,
SAIC and SAFE, or their local counterparts.
Any loan to subsidiaries, which is treated as
a foreign-invested enterprise under Chinese law, is subject to Chinese regulations and foreign exchange loan registrations. In January
2003, the China State Development and Reform Commission, SAFE and Ministry of Finance jointly promulgated the Circular on The Interim
Provisions on the Management of Foreign Debts, or the Circular 28, limiting the total amount of foreign debt a foreign-invested enterprise
may incur to the difference between the amount of total investment approved by the Ministry of Commerce or its local counterpart for such
enterprise and the amount of registered capital of such enterprise, and requiring registration of any such loans with SAFE. On January
11, 2017, the People’s Bank of China (the “PBOC”), promulgated the Circular on Matters concerning the Macro-Prudential
Management of Full-Covered Cross-Border Financing, or the PBOC Circular 9. Pursuant to PBOC Circular 9, the foreign debt upper limit for
both foreign-invested companies and domestic-invested companies is calculated as twice the net asset of such companies. As to net assets,
the companies shall take the net assets value stated in their latest audited financial statement. The PBOC Circular 9 does not supersede
the Circular 28. It provides a one-year transitional period from its promulgation date for foreign-invested companies, during which foreign-invested
companies, such as our WFOE, could choose their calculation method of foreign debt upper limit based on either the Foreign Debts Provisions
or the PBOC Circular 9. The transitional period ended on January 11, 2018. Upon its expiry, pursuant to the PBOC Circular 9, the PBOC
and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the
overall implementation of the PBOC Circular 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further
rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future
and what statutory limits will be imposed on us when providing loans to our PRC subsidiaries.
We may choose to finance subsidiaries by means
of capital contributions. These capital contributions must be registered with the Ministry of Commerce or its local counterpart. In March
2015, SAFE issued the Circular Concerning the Reform of the Administration of the Settlement of Foreign Currency Capital of Foreign-Invested
Enterprises, or SAFE Circular No.19, which became effective in June 2015. SAFE Circular No.19 regulates the conversion by a foreign-invested
enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used. Furthermore, SAFE promulgated
a circular in June 2016, SAFE Circular No.16, which further revises some clauses in the SAFE Circular No.19. SAFE Circular No. 19 and
No.16 provide that the capital-account foreign exchange incomes of a domestic enterprise shall not be used for expenditures that are forbidden
by relevant laws and regulations, for purposes that are not included in the business scope approved by the applicable government authority,
shall not be used for direct or indirect equity investments within China or for any other kind of investment except principal-guaranteed
wealth-management products, unless otherwise prescribed by other laws and regulations, shall not be used for issuing RMB entrusted loans
(except included in the business scope approved by the applicable government authority or issuing RMB entrusted loans to affiliated enterprises),
repaying inter-enterprise loans, repaying bank loans which has been refinanced to third parties, issuing RMB loans to non-affiliated enterprises
unless expressly permitted in the business scope and shall not be used to purchase real estate that is not for personal use except if
we are a real estate enterprise. In addition, SAFE supervises the flow and use of the RMB capital converted from foreign currency registered
capital of a foreign-invested company by further focusing on ex post facto supervision and violations. Previously, for FIEs the increase
of capital contribution shall be approved by MOFCOM. In 2016, the approval was changed to registration. Currently, China is holding more
open and tolerate attitude toward FIEs. Even with more and more open policy toward FDI and FIEs, Circulars mentioned above may still have
some limit on our ability to use the net proceeds from future offerings to invest in or acquire any other Chinese companies in China,
which may adversely affect our liquidity and our ability to fund and expand our business in China.
On January 30, 2020, the World Health Organization
declared the coronavirus outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it
to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines
in certain areas, and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate
it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including
the geographical area in which we operate. While it is unknown how long these conditions will last and what the complete financial effect
will be to us, to date, we are not expecting to experience any adverse effects other than:
1. Difficulty in communicating with potential
acquisition targets.
2. Fund-raising events may be limited.
Additionally, it is possible that estimates made
in the financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions,
including the ability to raise additional funding.
Capital Resources
As of December 31, 2021 and 2020
The following table provides certain selected
balance sheets comparisons as of December 31, 2021 and December 31, 2020:
| |
December 31, | | |
December 31, | | |
Increase | | |
| |
| |
2021 | | |
2020 | | |
(Decrease) | | |
% | |
Cash and cash equivalents | |
$ | 18,426,622 | | |
$ | 664,605 | | |
$ | 17,762,017 | | |
| >100 | % |
Accounts receivable | |
| 2,608,325 | | |
| - | | |
| 2,608,325 | | |
| >100 | % |
Inventories | |
| 22,433,140 | | |
| - | | |
| 22,433,140 | | |
| >100 | % |
Advances to suppliers | |
| 40,485,521 | | |
| - | | |
| 40,485,521 | | |
| >100 | % |
Prepayment and other current assets | |
| 3,326,425 | | |
| 5,420,916 | | |
| (2,094,491 | ) | |
| (39 | )% |
Due from related parties | |
| 39,238 | | |
| 116,610 | | |
| (77,372 | ) | |
| >100 | % |
Total current assets | |
| 87,319,271 | | |
| 6,202,131 | | |
| 81,194,512 | | |
| >100 | % |
Property and equipment, net | |
| 322,397 | | |
| 19,320 | | |
| 303,077 | | |
| >100 | % |
Intangible assets, net | |
| 8,633 | | |
| 10,113 | | |
| (1,480 | ) | |
| (15 | )% |
Operating lease right-of-use assets | |
| 241,554 | | |
| - | | |
| 241,554 | | |
| >100 | % |
Deferred tax asset | |
| 129,034 | | |
| - | | |
| 129,034 | | |
| >100 | % |
Total non-current assets | |
| 701,618 | | |
| 29,433 | | |
| 672,185 | | |
| >100 | % |
Total assets | |
$ | 88,020,889 | | |
$ | 6,231,564 | | |
$ | 81,789,325 | | |
| >100 | % |
| |
| | | |
| | | |
| | | |
| | |
Short-term borrowings | |
$ | 1,568,455 | | |
$ | - | | |
$ | 1,568,455 | | |
| >100 | % |
Accounts payable | |
| 14,116,569 | | |
| 4,974 | | |
| 14,111,595 | | |
| >100 | % |
Accrued expenses and other payables | |
| 3,597,440 | | |
| 1,819,545 | | |
| 1,777,895 | | |
| 98 | % |
Advance from customers | |
| 42,231,914 | | |
| - | | |
| 42,231,914 | | |
| >100 | % |
Due to related parties | |
| 1,215,573 | | |
| 714,436 | | |
| 501,137 | | |
| 70 | % |
Deferred revenue - current | |
| 38,111 | | |
| - | | |
| - | | |
| >100 | % |
Operating lease liabilities, current | |
| 51,239 | | |
| - | | |
| 51,239 | | |
| >100 | % |
Total current liabilities | |
| 62,819,301 | | |
| 2,538,955 | | |
| 60,280,346 | | |
| >100 | % |
Operating lease liabilities, non-current | |
| 147,812 | | |
| - | | |
| 147,812 | | |
| >100 | % |
Total liabilities | |
$ | 62,967,113 | | |
$ | 2,538,955 | | |
$ | 60,428,158 | | |
| >100 | % |
Cash
As of December 31, 2021, we have a total of $18,426,622 in cash and
cash equivalents, among which $16,566,953 was held inside China (Mainland), and $1,859,669 was held outside of China (Mainland). As of
December 31, 2020, we have a total of $664,605 in cash and cash equivalents, among which $148,747 was held inside China (Mainland), and
$515,858 was held outside of China (Mainland). We have not transferred and do not plan to transfer our cash in RMB outside of China (Mainland)
in order to avoid unnecessary currency exchange cost. Our subsidiaries in China (Mainland) incur expenses from time to time, and we have
spent and plan to spend our cash in RMB to cover those expenses.
Prepaid expenses and other current assets, net
As of December 31, 2021, balances of prepayment and other current assets
were $3,326,425, a decrease of $2,094,491, compared to $5,420,916 as of December 31, 2020. The decrease was primarily due to fund returned
from intent acquisition, partially offset by increase of prepaid input VAT of 2,848,547, as shown in the following table.
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
Prepaid expenses | |
$ | 51,301 | | |
$ | 54,466 | |
Note receivable | |
| - | | |
| 400,000 | |
Advance deposit for intent acquisition | |
| - | | |
| 4,937,664 | |
Short-term borrowing | |
| 400,000 | | |
| - | |
Prepaid input VAT | |
| 2,848,547 | | |
| - | |
Deposits and others | |
| 26,577 | | |
| 28,786 | |
Total prepayment and other current assets | |
$ | 3,326,425 | | |
$ | 5,420,916 | |
Current assets
Current assets as of December 31, 2021 totaled
$87,319,271, an increase of $81,194,512 from our December 31, 2020 balance. The increase was primarily resulted from a $40,485,521 increase
in advance to suppliers, a $22,433,140 increase in inventories and a $17,762,017 increase in cash and cash equivalents.
Accrued liabilities and other payables
Accrued liabilities and other payables mainly
included wages payable, VAT payable, income tax payable, deposit payables and other payables. Accrued liabilities and other payables as
of December 31, 2021 were $3,597,440, an increase of $1,777,895, compared to $1,819,545 as of December 31, 2020.
Credit Facility
We mainly finance our operations through proceeds
borrowed from related parties. As of December 31, 2021, due to related parties were $1,215,573, an increase of $501,137, compared to $714,436
as of December 31, 2020. Due to related parties as of December 31, 2020 and 2019 include:
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
Zhentao Jiang | |
$ | 1,119,465 | | |
$ | 712,485 | |
Yufeng Mi | |
| 2,000 | | |
| 1,951 | |
Yang Cao | |
| 94,108 | | |
| - | |
Total due to related parties | |
$ | 1,215,573 | | |
$ | 714,436 | |
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
Wenjie Tang | |
| 39,238 | | |
| 116,610 | |
Total due from related parties | |
$ | 39,238 | | |
$ | 116,610 | |
The balance of due to related parties represents
expenses incurred by related parties in the ordinary course of business and expenses related parties paid on behalf of us. These loans
are interest free, unsecured and repayable on demand.
From time to time, we borrowed $907,135 from related
parties and repaid $517,670 to related parties in the year ended December 31, 2021. We borrowed $241,822 from related parties and repaid
$594,887 to related parties in the year ended December 31, 2020. We borrowed $6,823 from related parties and repaid $587,120 to related
parties in the year ended December 31, 2019.
Critical Accounting Policies
The discussion and analysis of our financial condition
and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these audited consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our estimates
on an ongoing basis, including those related to revenue recognition and income taxes. We base our estimates on our historical experience
and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making
the judgments we make about the carrying values of our assets and liabilities that are not readily apparent from other sources. Because
these estimates can vary depending on the situation, actual results may differ from the estimates.
The critical accounting policies summarized in
this section are discussed in further detail in the notes to the audited consolidated financial statements appearing elsewhere in this
annual report. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable
financial information about our operating results and financial condition.
Revenue Recognition
We adopted Accounting
Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) for all years presented.
The core principle of this new revenue standard is that a company should recognize revenue when control of the promised goods or services
is transferred to the customers, in an amount that reflects the consideration to which We expect to be entitled in exchange for those
goods or services. The following five steps are applied to achieve that core principle by us in determination of revenue recognition:
|
● |
Step 1: Identify the contract(s) with the customer; |
|
|
|
|
● |
Step 2: Identify the performance obligations in the contract; |
|
|
|
|
● |
Step 3: Determine the transaction price; |
|
|
|
|
● |
Step 4: Allocate the transaction price to the performance obligations in the contract; and |
|
|
|
|
● |
Step 5: Recognize revenue when or as we satisfie a performance obligation. |
We are a blockchain hardware
machine and software developer, engaging in research, development and sales of cryptocurrency mining machine and standardized computing
equipment.
The transaction price
is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance
obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
We derive revenue from the sale of cryptocurrency
mining machine and standardized computing equipment, technical support plans and software customization services for the years ended December
31, 2021, 2020 and 2019. We began the business transformation to became a blockchain hardware machine and software developer in 2021.
We enter into contracts with customers that include promises to transfer various products and services, which are generally capable of
being distinct and accounted for as separate performance obligations. Revenue is recognized when the promised goods or services are transferred
to customers, in an amount that reflects the consideration allocated to the respective performance obligation. We recorded and recognized
revenues from both products and services in one account, which we present as revenues and revenues from related parties in the accompanying
consolidated statements of operations and comprehensive income.
Estimates
The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. We base our estimates and judgments on historical experience and on various other assumptions and information that
are believed to be reasonable under the circumstances. Estimates and assumptions of future events and their effects cannot be perceived
with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information
is obtained and as our operating environment changes. Significant estimates and assumptions by management include, among others, useful
lives and impairment of long-lived assets, allowance for doubtful accounts, income taxes including the valuation allowance for deferred
tax assets. While we believe that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual
results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected
in the financial statements in the period they are determined to be necessary.
Fair Value of Financial Instruments
We follow the provisions of Accounting Standards
Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”). It clarifies the definition of
fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring
fair value as follows:
Level 1-Inputs are unadjusted quoted prices in
active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices for
similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not
active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which reflect
the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based
on the best available information.
The carrying amounts reported in the accompanying
consolidated balance sheets for cash and cash equivalents, accounts receivable, advance to suppliers, prepayment and other current assets,
short-term borrowings, accounts payable, accrued expenses and other payables and due to related parties approximate their fair value based
on the short-term maturity of these instruments.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13,
“Financial Instruments – Credit Losses”, which will require the measurement of all expected credit losses for financial
assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Subsequently,
the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that receivables arising from operating leases are
within the scope of lease accounting standards. Further, the FASB issued ASU No. 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and ASU
2020-02 to provide additional guidance on the credit losses standard. The ASU is effective for public company for fiscal years, and interim
periods within those fiscal years beginning after December 15, 2019. For all other entities including emerging growth companies, the ASU
is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15,
2021. Early application is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
We have adopted ASU 2016-13 since January 1, 2021, the impact of which on our consolidated financial statements was immaterial.
Recently issued ASUs by the FASB, except for the
ones mentioned above, are not expected to have a significant impact on our consolidated results of operations or financial position. Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have
a material impact on the consolidated financial statements upon adoption. We do not discuss recent pronouncements that are not anticipated
to have an impact on or are unrelated to our consolidated financial condition, results of operations, cash flows, or disclosures.
C. Research and Development, Patent and
Licenses, etc.
Please refer to “Item 4. Information on
the Company – D. Property, Plant and Equipment – Intellectual Property.”
D. Trend Information.
Other than as disclosed 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 effect
on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial
information not necessarily to be indicative of future operating results or financial condition or results of operations.
E. Off-Balance Sheet Arrangements.
There were no off-balance sheet arrangements for
the fiscal years ended December 31, 2021, 2020 and 2019, or that in the opinion of management are likely to have, a current or future
material effect on our financial condition or results of operations.
Item
10. Additional Information
A. Share capital
Not applicable for annual reports on Form 20-F.
B. Memorandum and articles of association
AGM Holdings was incorporated on April 27, 2015
under the BVI Companies Act, 2004 as a company limited by shares. As of the date of hereof, the Company is authorized to issue 200,000,000
Class A ordinary shares of $0.001 par value per share and 200,000,000 Class B ordinary shares of $0.001 par value per share. As of the
date of this report, there are 24,254,842 Class A ordinary shares and 2,100,000 Class B ordinary shares issued and outstanding.
Our memorandum and articles of association do
not permit a director to decide what compensation he or she will receive. All decisions about the compensation of directors will be recommended
by the compensation committee, upon its formation, and approved by the Board of Directors as a whole, both acting only when a quorum of
members is present.
The following are summaries of the material provisions
of our memorandum and articles of association and the BVI Act, insofar as they relate to the material terms of our Class A ordinary shares.
As a convenience to potential investors, we provide the below description of BVI law and our memorandum and articles of association together
with a comparison to similar features under Delaware law.
Class A Ordinary Shares
General
Each Class A ordinary share in the Company confers
upon the shareholder the right to one vote per share at a meeting of the shareholders of the Company or on any resolution of shareholders.
Holders of our Class A Ordinary Share will vote together with holders of our Class B ordinary shares as a single class on all matters
presented to our shareholders for their vote approval.
Each Class A ordinary share in the Company confers
upon the shareholder the right to an equal share in any dividend paid by the Company.
Each Class A ordinary share in the Company confers
upon the shareholder the right to an equal share in the distribution of the surplus assets of the Company on its liquidation.
All of our issued Class A ordinary shares are
fully paid and non-assessable. Certificates representing the Class A ordinary shares are issued in registered form. Our shareholders who
are non-residents of the British Virgin Islands may freely hold and vote their Class A ordinary shares.
Class B Ordinary Shares
General
Each Class B ordinary share in the Company confers
upon the shareholder the right to five votes at a meeting of the shareholders of the Company or on any resolution of shareholders. Holders
of our Class B ordinary share will vote together with holders of our Class A ordinary share as a single class on all matters presented
to our shareholders for their vote approval.
No Class B ordinary share may be sold, assigned,
transferred, alienated, commuted, anticipated, or otherwise disposed of (including by will or the laws of descent and distribution), or
pledged or hypothecated as collateral for a loan or as security for the performance of any obligation, or be otherwise encumbered, and
are not subject to attachment, garnishment, execution or other legal or equitable process, and any attempt to do so shall be null and
void.
Each Class B ordinary share shall only be issued
to the Company’s or its subsidiaries’ employees or those entities of which its principal shareholder is an employee of the
Company or its subsidiaries. Shareholder’s termination of employment with the Company or its subsidiaries shall immediately result
in the cancellation of any and all issued and outstanding shares of Class B ordinary shares held by such shareholder on the date of termination.
Sale, assignment, transfer, alienation, or otherwise
disposition of any Class A ordinary share by common shareholder of Class B ordinary shares shall immediately result in the cancellation
of equal number of shares of Class B ordinary share on the date of such disposition.
Shareholder(s) of Class B ordinary share in the
Company shall not:
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receive the right to any dividend paid by the Company; |
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receive the right to any distribution of the surplus assets of the Company on its liquidation. |
Transfer Agent and Registrar
The transfer agent and registrar for the Class
A ordinary shares and Class B ordinary shares is VStock Transfer, LLC, 18 Lafayette Pace, Woodmere, NY 11598.
Distributions
The holders of our Class A ordinary shares are
entitled to such dividends or other distributions as may be authorized by our Board of Directors, subject to the BVI Act and our
memorandum and articles of association.
Shareholders’ voting rights
Any action required or permitted to be taken by
the shareholders must be taken at a duly called meeting of the shareholders entitled to vote on such action. At each meeting of shareholders,
each shareholder who is present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative)
will have one vote for each Class A ordinary share or five votes for each Class B ordinary share. Holders of our Class A ordinary shares
will vote together with holders of our Class B ordinary shares as a single class on all matters presented to our shareholders for their
vote approval. An action that may be taken by the shareholders at a meeting may also be taken by a resolution of shareholders consented
to in writing.
Election of directors
Delaware law permits cumulative voting for the
election of directors only if expressly authorized in the certificate of incorporation. The laws of the British Virgin Islands do not
specifically prohibit or restrict the creation of cumulative voting rights for the election of our directors. Cumulative voting is not
a concept that is accepted as a common practice in the British Virgin Islands, and we have made no provisions in our memorandum and articles
of association to allow cumulative voting for elections of directors.
Meetings of shareholders
Any of our directors may convene a meeting of
shareholders at any time and in any manner and place the director considers necessary or desirable. The director convening a meeting must
not give less than seven days’ notice of the meeting to those shareholders whose names appear as shareholders in the register of
shareholders on the date of the notice and are entitled to vote at the meeting, and the other directors. Our Board of Directors must convene
a meeting of shareholders upon the written request of shareholders entitled to exercise 30% or more of the voting rights in respect of
the matter for which the meeting is requested within 28 days of receiving the written request. A meeting of shareholders held in contravention
of the requirement to give notice is valid if shareholders holding at least 90% of the total voting rights on all the matters to be considered
at the meeting have waived notice of the meeting and, for this purpose, the presence of a shareholder at the meeting shall constitute
waiver in relation to all the shares which that shareholder holds.
The quorum for a meeting of shareholders is duly
constituted if, at the beginning of the meeting, there are present in person or by proxy not less than 50% of the votes of the shares
(or class or series of shares) entitled to vote on the resolutions to be considered at the meeting. A quorum may comprise a single shareholder
or proxy. If within two hours from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition
of the shareholders, will be dissolved. In any other case, it will stand adjourned to the next business day in the jurisdiction in
which the meeting was to have been held at the same time and place or to such other time and place as the directors may determine, and
if at the adjourned meeting there are present within one hour from the time appointed for the meeting in person or by proxy not less than
one third of the votes of the shares or each class or series of shares entitle to vote on the matter to be considered by the meeting,
those present will constitute a quorum but otherwise the meeting will be dissolved.
Meetings of directors
Our business and affairs are managed by our Board
of Directors, who will make decisions by voting on resolutions of directors. Our directors are free to meet at such times and in such
manner and places within or outside the BVI as the directors determine to be necessary or desirable A director must be given not less
than 3 days’ notice of a meeting of directors. At any meeting of directors, a quorum will be present if not less than one half of
the total number of directors is present, unless there are only 2 directors in which case the quorum is 2. An action that may be taken
by the directors at a meeting may also be taken by a resolution of directors consented to in writing by a majority of the directors. A
person other than an individual which is a shareholder may by a resolution of its directors or other governing body authorize any individual
it thinks fit to act as its representative at any meeting of shareholders. The duly authorized representative shall be entitled to exercise
the same powers on behalf of the person which he represents as that person could exercise if it were an individual.
Protection of minority shareholders
We would normally expect British Virgin Islands
courts to follow English case law precedents, which would permit a minority shareholder to commence a representative action, or derivative
actions in our name, to challenge (1) an act which is ultra vires or illegal, (2) an act which constitutes a fraud against the minority
by parties in control of us, (3) an infringement of individual rights of the minority shareholder (such as the right to vote and pre-emptive
rights), and (4) an irregularity in the passing of a resolution which requires a special or extraordinary majority of the shareholders.
Pre-emptive rights
There are no pre-emptive rights applicable to
the issue by us of new Class A ordinary shares under either British Virgin Islands law or our memorandum and articles of association.
Transfer of Class A Ordinary Shares
Subject to the restrictions in our memorandum
and articles of association and applicable securities laws, any of our shareholders may transfer all or any of his or her Class A ordinary
shares by written instrument of transfer signed by the transferor and containing the name and address of the transferee. Our Board of
Directors may not resolve to refuse or delay the transfer of any Class A ordinary shares or Class B ordinary shares unless the shareholder
has failed to pay an amount due in respect of it.
Liquidation
If we are wound up and the assets available for
distribution among our shareholders are more than sufficient to repay all amounts paid to us on account of the issue of shares immediately
prior to the winding up, the excess shall be distributable pari passu among those shareholders in proportion to the amount paid up immediately
prior to the winding up on the shares held by them, respectively. If we are wound up and the assets available for distribution among the
shareholders as such are insufficient to repay the whole of the amounts paid to us on account of the issue of shares, those assets shall
be distributed so that, to the greatest extent possible, the losses shall be borne by the shareholders in proportion to the amounts paid
up immediately prior to the winding up on the shares held by them, respectively. If we are wound up, the liquidator appointed by us may,
in accordance with the BVI Act, divide among our shareholders in specie or kind the whole or any part of our assets (whether they shall
consist of property of the same kind or not) and may, for such purpose, set such value as the liquidator deems fair upon any property
to be divided and may determine how such division shall be carried out as between the shareholders or different classes of shareholders.
Calls on Class A Ordinary Shares and forfeiture
of Class A Ordinary Shares
Our Board of Directors may from time to time make
calls upon shareholders for any amounts unpaid on their Class A ordinary shares in a notice served to such shareholders at least 14 days
prior to the specified date of payment. Where such a notice has been issued its requirements have not been complied with, the directors
may, at any time before the tender of payment, forfeit and cancel the Class A ordinary shares to which the notice relates.
Issuance of Class A Ordinary Shares
Subject to the provisions of the BVI Act, our
Board of Directors may authorize the issuance of shares at such times, to such persons, for such consideration and on such terms as they
may determine by a resolution of directors, subject to the BVI Act, our memorandum and articles of association and any applicable requirements
imposed from time to time by the SEC, The Nasdaq Capital Market or any recognized stock exchange on which our securities are listed.
Variation of rights
All or any of the rights attached to any class
of shares may, subject to the provisions of the BVI Act, be varied only with the consent in writing of, or pursuant to a resolution passed
at a meeting by the holders of more than 50% of the issued shares of that class.
Changes in the number of shares we are authorized
to issue and those in issue
We may from time to time by resolution of our
Board of Directors:
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amend our memorandum of association to increase or decrease the maximum number of shares we are authorized to issue; |
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subject to our memorandum of association, divide our authorized and issued shares into a larger number of shares; and |
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subject to our memorandum of association, combine our authorized and issued shares into a smaller number of shares. |
Inspection of books and records
Under the BVI Act, holders of our Class A ordinary
shares are entitled, upon giving written notice to us, to inspect (i) our memorandum and articles of association, (ii) our register of
shareholders, (iii) our register of directors and (iv) minutes of meetings and resolutions of our shareholders, and to make copies and
take extracts from these documents and records. However, our directors can refuse access if they are satisfied that to allow such access
would be contrary to our interests.
Rights of non-resident or foreign shareholders
There are no limitations imposed by our memorandum
and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In
addition, there are no provisions in our memorandum and articles of association governing the ownership threshold above which shareholder
ownership must be disclosed.
C. Material contracts
Other than those described in this annual report,
we have not entered into any material agreements other than in the ordinary course of business.
D. Exchange controls
Regulations on Foreign Currency 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, interest payments 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 account items, such as direct investments, repayment of foreign currency-denominated
loans, repatriation of investments and investments in securities outside of China.
In November 2012, SAFE promulgated the Circular
of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends and
simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange
accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB
proceeds derived by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise
to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity
may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated another circular in May 2013, which
specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC must be conducted
by way of registration and banks must process foreign exchange business relating to the direct investment in the PRC based on the registration
information provided by SAFE and its branches. On February 28, 2015, SAFE promulgated the Notice on Further Simplifying and Improving
the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Notice 13. After SAFE Notice 13 became effective on June
1, 2015, instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment
from SAFE, entities and individuals may apply for such foreign exchange registrations from qualified banks. The qualified banks, under
the supervision of SAFE, may directly review the applications and conduct the registration.
On March 30, 2015, SAFE promulgated Circular 19,
which expands a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises
nationwide. Circular 19 came into force and replaced both previous Circular 142 and Circular 36 on June 1, 2015. On June 9, 2016, SAFE
promulgated Circular 16 to further expand and strengthen such reform. Under Circular 19 and Circular 16, foreign-invested enterprises
in the PRC are allowed to use their foreign exchange funds under capital accounts and RMB funds from exchange settlement for expenditure
under current accounts within its business scope or expenditure under capital accounts permitted by laws and regulations, except that
such funds shall not be used for (i) expenditure beyond the enterprise’s business scope or expenditure prohibited by laws and regulations;
(ii) investments in securities or other investments than banks’ principal-secured products; (iii) granting of loans to non-affiliated
enterprises, except where it is expressly permitted in the business license; and (iv) construction or purchase of real estate for purposes
other than self-use (except for real estate enterprises).
In January 2017, SAFE promulgated the Circular
on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, or SAFE Circular
3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore
entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution,
the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for
previous years’ losses before remitting the profits. Further, according to SAFE Circular 3, domestic entities shall make detailed
explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing
the registration procedures in connection with an outbound investment.
Regulations on Foreign Exchange Registration
of Overseas Investment by PRC Residents
SAFE issued SAFE Circular on Relevant Issues Relating
to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37,
that became effective in July 2014, replacing the previous SAFE Circular 75. SAFE Circular 37 regulates foreign exchange matters in relation
to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct round
trip investment in China. Under SAFE Circular 37, a SPV refers to an offshore entity established or controlled, directly or indirectly,
by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore or
offshore assets or interests, while “round trip investment” refers to direct investment in China by PRC residents or entities
through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management rights. SAFE Circular
37 provides that, before making contribution into an SPV, PRC residents or entities are required to complete foreign exchange registration
with SAFE or its local branch. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange
Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC
residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or
control of an offshore entity established for the purpose of overseas investment or financing.
PRC residents or entities who had contributed
legitimate onshore or offshore interests or assets to SPVs but had not obtained registration as required before the implementation of
the SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified banks. An amendment to the registration
is required if there is a material change with respect to the SPV registered, such as any change of basic information (including change
of the PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers
or divisions. Failure to comply with the registration procedures set forth in SAFE Circular 37 and the subsequent notice, or making misrepresentation
on or failure to disclose controllers of the foreign-invested enterprise that is established through round-trip investment, may result
in restrictions being imposed on the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends
and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate,
and the capital inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign
exchange administration regulations.
We are aware that our PRC resident beneficial
owners subject to these registration requirements have registered with the Beijing SAFE branch and/or qualified banks to reflect the recent
changes to our corporate structure.
E. Taxation
The following brief description of Chinese enterprise
laws is designed to highlight the enterprise-level taxation on our earnings, which will affect the amount of dividends, if any, we are
ultimately able to pay to our shareholders.
PRC enterprise income tax is calculated based
on taxable income determined under PRC accounting principles. The Enterprise Income Tax Law (the “EIT Law”), effective as
of January 1, 2008, enterprises pay a unified income tax rate of 25% and unified tax deduction standards are applied equally to both
domestic-invested enterprises and foreign-invested enterprises. Under the EIT Law, an enterprise established outside of the PRC with “de
facto management bodies” within the PRC is considered a resident enterprise and will normally be subject to the enterprise income
tax at the rate of 25% on its global income. If the PRC tax authorities subsequently determine that AGM Holding and its subsidiaries in
PRC or any future non-PRC subsidiary should be classified as a PRC resident enterprise, then such entity’s global income will be
subject to PRC income tax at a tax rate of 25%. In addition, under the EIT Law, payments from the subsidiaries in PRC to us may be subject
to a withholding tax. The EIT Law currently provides for a withholding tax rate of 20%. If AGM Holdings or any of its subsidiaries in
PRC is deemed to be a non-resident enterprise, then it will be subject to a withholding tax at the rate of 20% on any dividends paid by
its Chinese subsidiaries to such entity. In practice, the tax authorities typically impose the withholding tax rate of 10% rate, as prescribed
in the implementation regulations; however, there can be no guarantee that this practice will continue as more guidance is provided by
relevant government authorities. We are actively monitoring the proposed withholding tax and are evaluating appropriate organizational
changes to minimize the corresponding tax impact.
According to the Sino-U.S. Tax Treaty which was
effective on January 1, 1987 and aimed to avoid double taxation disadvantage, income that is incurred in one nation should be taxed by
that nation and exempted from the other nation, but for the dividend that is generated in China and distributed to foreigner in other
nations, a rate 10% tax will be charged.
Our company will have to withhold that tax when
we are distributing dividends to our foreign investors. If we do not fulfill this duty, we will receive a fine up to five times of the
amount we are supposed to pay as tax or other administrative penalties from government. The worst case could be criminal charge of tax
evasion to responsible persons. The criminal penalty for this offense depends on the tax amount the offender evaded, and the maximum penalty
will be 3-7 years imprisonment plus fine.
PRC Value Added Tax
Pursuant to the Provisional Regulation of China
on Value Added Tax and its implementing rules, issued in December 1993, all entities and individuals that are engaged in the businesses
of sales of goods, provision of repair and placement services and importation of goods into China are generally subject to a VAT at a
rate of 17% (with the exception of certain goods which are subject to a rate of 13%) of the gross sales proceeds received, less any VAT
already paid or borne by the taxpayer on the goods or services purchased by it and utilized in the production of goods or provisions of
services that have generated the gross sales proceeds.
PRC Business Tax
Companies in China are generally subject to business
tax and related surcharges by various local tax authorities at rates ranging from 3% to 20% on revenue generated from providing services
and revenue generated from the transfer of intangibles. However, since May 1st of 2016, the Business Tax has been incorporated into Value
Added Tax in China, which means there will be no more Business Tax and accordingly some business operations previously taxed in the name
of Business Tax will be taxed in the manner of VAT thereafter. In general, this newly implemented policy is intended to relieve many companies
from heavy taxes under currently slowing down economy. In the case of AGM Holdings’ Chinese subsidiaries, even though the VAT rate
is 17%, with the deductibles the company may get in the business process, it will bear less burden than previous Business Tax.
British Virgin Islands Taxation
Under the BVI Act as currently in effect, a holder
of ordinary shares who is not a resident of the British Virgin Islands is exempt from British Virgin Islands income tax on dividends paid
with respect to the Class A ordinary shares and Class B ordinary shares and a holder of Class A ordinary shares and/or Class B ordinary
shares is not required to pay any income tax in the British Virgin Islands on gains realized during that year on sale or disposal of such
shares. The laws of the British Virgin Islands do not impose a withholding tax on dividends paid by a company incorporated or re-registered
under the BVI Act.
There are no capital gains, gift or inheritance
taxes levied by the British Virgin Islands government on companies incorporated or re-registered under the BVI Act. In addition, shares
of companies incorporated or re-registered under the BVI Act are not subject to transfer taxes, stamp duties or similar charges.
There is no income tax treaty or convention currently
in effect between the United States and the British Virgin Islands or between China and the British Virgin Islands.
United States Federal Income Taxation
The following does not address the tax consequences
to any particular investor or to persons in special tax situations such as:
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banks; |
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financial institutions; |
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insurance companies; |
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regulated investment companies; |
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real estate investment trusts; |
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broker-dealers; |
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traders that elect to mark-to-market; |
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U.S. expatriates; |
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tax-exempt entities; |
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persons liable for alternative minimum tax; |
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persons holding our Class A ordinary shares as part of a straddle, hedging, conversion or integrated transaction; |
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persons that actually or constructively own 10% or more of our voting shares; |
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persons who acquired our Class A ordinary shares pursuant to the exercise of any employee share option or otherwise as consideration; or |
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persons holding our Class A ordinary shares through partnerships or other pass-through entities. |
Prospective purchasers are urged to consult their
own tax advisors about the application of the U.S. Federal tax rules to their particular circumstances as well as the state, local, foreign
and other tax consequences to them of the purchase, ownership and disposition of our Class A ordinary shares.
Tax Treaties
As above mentioned, according to the Sino-U.S.
Tax Treaty which was effective on January 1st, 1987 and aimed to avoid double taxation disadvantage, income that is incurred in one nation
should be taxed by that nation and exempted from the other nation, but for the dividend that is generated in China and distributed to
foreigners in other nations, a rate 10% tax will be charged.
Taxation of Dividends and Other Distributions
on our Class A ordinary shares
Subject to the passive foreign investment company
rules discussed below, the gross amount of distributions made by us to you with respect to the Class A ordinary shares (including the
amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt
by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under
U.S. federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in
respect of dividends received from other U.S. corporations.
With respect to non-corporate U.S. Holders, including
individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided
that (1) the Class A ordinary shares are readily tradable on an established securities market in the United States, or we are eligible
for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program,
(2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid
or the preceding taxable year, and (3) certain holding period requirements are met. Under U.S. Internal Revenue Service authority,
the Class A ordinary shares are considered for purpose of clause (1) above to be readily tradable on an established securities market
in the United States if they are listed on The Nasdaq Capital Market. You are urged to consult your tax advisors regarding the availability
of the lower rate for dividends paid with respect to our Class A ordinary shares, including the effects of any change in law.
Dividends will constitute foreign source income
for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of
the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the
dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign
taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed
by us with respect to our Class A ordinary shares will constitute “passive category income” but could, in the case of certain
U.S. Holders, constitute “general category income.”
To the extent that the amount of the distribution
exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated
first as a tax-free return of your tax basis in your Class A ordinary shares, and to the extent the amount of the distribution exceeds
your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income
tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would
otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Class A Ordinary
Shares
Subject to the passive foreign investment company
rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a share equal to
the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the Class A ordinary
shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who
has held the Class A ordinary shares for more than one year, you will be eligible for reduced tax rates of 0% (for individuals in the
10% or 15% tax brackets), 20% (for individuals in the 39.6% tax brackets) or 15% for all other individuals. The deductibility of capital
losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States source income or
loss for foreign tax credit limitation purposes.
Passive Foreign Investment Company
Based on our current and anticipated operations
and the composition of our assets, we do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income
tax purposes for our current taxable year ending December 31, 2021. Our actual PFIC status for the current taxable year ending December
31, 2021 will not be determinable until the close of such taxable year and, accordingly, there is no guarantee that we will not be a PFIC
for the current taxable year. Because PFIC status is a factual determination for each taxable year which cannot be made until the close
of the taxable year. A non-U.S. corporation is considered a PFIC for any taxable year if either:
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at least 75% of its gross income is passive income, defined as income from interest, dividends, rents, royalties, gains on property producing foreign personal holding company income and certain other income that does not involve the active conduct of a trade or business; or |
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at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”). |
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,
at least 25% (by value) of the stock.
We must make a separate determination each year
as to whether we are a PFIC. As a result, our PFIC status may change. In particular, because the value of our assets for purposes of the
asset test will generally be determined based on the market price of our Class A ordinary shares, our PFIC status will depend in
large part on the market price of our Class A ordinary shares. Accordingly, fluctuations in the market price of the Class A ordinary shares
may cause us to become a PFIC. If we are a PFIC for any year during which you hold Class A ordinary shares, we will continue to be treated
as a PFIC for all succeeding years during which you hold Class A ordinary shares. However, if we cease to be a PFIC, you may avoid some
of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to the Class A ordinary shares.
If we are a PFIC for any taxable year during which
you hold Class A ordinary shares, you will be subject to special tax rules with respect to any “excess distribution” that
you receive and any gain you realize from a sale or other disposition (including a pledge) of the Class A ordinary shares, unless you
make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125%
of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the
Class A ordinary shares will be treated as an excess distribution. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over your holding period for the Class A ordinary shares; |
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the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and |
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the amount allocated to each other year will be subject to 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. |
The tax liability for amounts allocated to years
prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and
gains (but not losses) realized on the sale of the Class A ordinary shares cannot be treated as capital, even if you hold the Class A
ordinary shares as capital assets.
A U.S. Holder of “marketable stock”
(as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you
make a mark-to-market election for the Class A ordinary shares, you will include in income each year an amount equal to the excess, if
any, of the fair market value of the ordinary shares as of the close of your taxable year over your adjusted basis in such Class A ordinary
shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the Class A ordinary shares over their fair market
value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the
Class A ordinary shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election,
as well as gain on the actual sale or other disposition of the Class A ordinary shares, are treated as ordinary income. Ordinary loss
treatment also applies to the deductible portion of any mark-to-market loss on the Class A ordinary shares, as well as to any loss realized
on the actual sale or disposition of the Class A ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-market
gains previously included for such Class A ordinary shares. Your basis in the Class A ordinary shares will be adjusted to reflect any
such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which
are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed
above under “Taxation of Dividends and Other Distributions on our Class A ordinary shares” generally would not apply.
The mark-to-market election is available only
for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days during each
calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations),
including The Nasdaq Capital Market. If the Class A ordinary shares are regularly traded on The Nasdaq Capital Market and if you are a
holder of Class A ordinary shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC
may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed above.
A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable
year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing
fund election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as
required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable
you to make a qualified electing fund election. If you hold Class A ordinary shares in any year in which we are a PFIC, you will be required
to file U.S. Internal Revenue Service Form 8621 regarding distributions received on the Class A ordinary shares and any gain realized
on the disposition of the Class A ordinary shares.
You are urged to consult your tax advisors regarding
the application of the PFIC rules to your investment in our Class A ordinary shares and the elections discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to our Class A
ordinary shares and proceeds from the sale, exchange or redemption of our Class A ordinary shares may be subject to information reporting
to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply,
however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal
Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status
generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors
regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts
withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service
and furnishing any required information.
Under the Hiring Incentives to Restore Employment
Act of 2010, certain United States Holders are required to report information relating to Class A ordinary shares, subject to certain
exceptions (including an exception for Class A ordinary shares held in accounts maintained by certain financial institutions), by attaching
a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in
which they hold Class A ordinary shares. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information
reporting and backup withholding rules.
F. Dividends and paying agents
Not applicable for annual reports on Form 20-F.
G. Statement by experts
Not applicable for annual reports on Form 20-F.
H. Documents on display
We are subject to the information requirements
of the Exchange Act. In accordance with these requirements, the Company files reports and other information with the SEC. You may read
and copy any materials filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that
contains reports and other information regarding registrants that file electronically with the SEC.
I. Subsidiary Information
Not applicable.