ITEM
3. KEY INFORMATION
See
“Introduction” and “Forward-Looking Statements and Risk Factors Summary” above.
A.
[Reserved]
B.
Capitalization and Indebtedness
Not
applicable.
C.
Reasons for the Offer and Use of Proceeds
Not
applicable.
D.
Risk Factors
Risks
Related to Our Business and Industry
We
have a limited operating history. There is no assurance that our future operations will be profitable. If we cannot generate sufficient
revenues to operate profitably, we may suspend or cease operations.
Given
the limited operating history of Infobird Cayman, there can be no assurance that we can maintain our business such that we can continuously
earn a significant profit or any profit at all. The future of our business will depend upon our ability to obtain and retain customers
and when needed, obtain sufficient financing and support from creditors, while we strive to achieve and maintain profitable operations.
The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays encountered in
connection with the operations that we undertake. There is no history upon which to base any assumption that our business will prove
to be successful, and there is significant risk that we will not be able to generate the sales volumes and revenues necessary to achieve
profitable operations. To the extent that we cannot achieve our plans and generate revenues which exceed expenses on a consistent basis,
our business, results of operations, financial condition and prospects will be materially adversely affected.
Our
management team has limited public company experience. We have not previously operated as a public company in the United States and several
of our senior management positions are currently held by employees who have been with us for a short period of time. Our entire management
team, as well as other company personnel, will need to devote substantial time to compliance, and may not effectively or efficiently
manage our transition into a public company. If we are unable to effectively comply with the regulations applicable to public companies
or if we are unable to produce accurate and timely financial statements, which may result in material misstatements in our consolidated
financial statements or possible restatement of financial results, our stock price may be materially and adversely affected, and we may
be unable to maintain compliance with the listing requirements of Nasdaq. Any such failures could also result in litigation or regulatory
actions by the Securities and Exchange Commission, or the SEC, or other regulatory authorities, loss of investor confidence, delisting
of our securities, harm to our reputation and diversion of financial and management resources from the operation of our business, any
of which could materially and adversely affect our business, financial condition, results of operations and growth prospects. Additionally,
the failure of a key employee to perform in his or her current position could result in our inability to continue to grow our business
or to implement our business strategy.
The
growth and success of our business depends on our ability to develop new services and enhance existing services in order to keep pace
with rapid changes in technology.
The
market for our services is characterized by rapid technological change, evolving industry standards, changing customer preferences and
new product and service introductions. Our future growth and success depends significantly on our ability to anticipate developments
in technologies, and develop and offer new services to meet our customers’ evolving needs. We may not be successful in anticipating
or responding to these developments in a timely manner, or if we do respond, the services or technologies we develop may not be successful
in the marketplace. The development of some of the services and technologies may involve significant upfront investments and the failure
of these services and technologies may result in our being unable to recover these investments, in part or in full. Further, services
or technologies that are developed by our competitors may render our services uncompetitive or obsolete. In addition, new technologies
may be developed that allow our customers to more cost-effectively perform the services that we provide, thereby reducing demand for
our services. Should we fail to adapt to the rapidly changing technologies or if we fail to develop suitable services to meet the evolving
and increasingly sophisticated requirements of our customers in a timely manner, our business and results of operations may be materially
and adversely affected.
We
may be forced to reduce the prices of our services due to increased competition and reduced bargaining power with our customers, which
could lead to reduced revenues and profitability.
The
customer engagement industry in China is developing rapidly and related technology trends are constantly evolving. This results in the
frequent introduction of new services and significant price competition from our competitors. We may be unable to offset the effect of
declining average sales prices through increased sales volumes and or reductions in our costs. Furthermore, we may be forced to reduce
the prices of our services in response to offerings made by our competitors. Finally, we may not have the same level of bargaining power
we have enjoyed in the past when it comes to negotiating for the prices of our services, all of which may lead to reduced revenues and
profitability.
We
generate a significant portion of our revenues primarily from a few major customers, and loss of business from such customers could reduce
our revenues and significantly harm our business.
We
generate a significant portion of our revenues primarily from a few major customers, and loss of business from such customers could reduce
our revenues and significantly harm our business. One or a few customers have in the past, and may in the future, represent a substantial
portion of our total revenues in any one year or over a period of several years. We believe that in the foreseeable future we will continue
to derive a significant portion of our revenues from a small number of major customers.
For
the year ended December 31, 2021, four customers accounted for 20.9%, 11.8%, 10.6% and 10.4% of our total revenues, respectively,
and four customers accounted for 34.7%, 22.7%, 17.1% and 14.7% of the total balance of our accounts receivable, respectively. For
the year ended December 31, 2020, two customers, one of which was China Guangfa Bank, accounted for 34.8% and 13.2% of our total revenues,
respectively, and three customers accounted for 50.8%, 19.9%, and 10.9% of the total balance of our accounts receivable, respectively.
For the year ended December 31, 2019, one customer, China Guangfa Bank, accounted for 77.3% of our total revenues and the same one customer,
China Guangfa Bank, accounted for 77.6% and another customer accounted for 10.4%, respectively, of the total balance of our accounts
receivable. China Guangfa Bank accounted for 0% of our total revenues for the year ended December 31, 2021.
Our
ability to maintain close relationships with major customers is essential to the growth and profitability
of our business. However, the volume of work performed for a specific customer is likely to vary from year to year, in particular since
we are generally not our customers’ exclusive technology services provider and we do not have long-term commitments from
any of our customers to purchase our services. A major customer in one year may not provide the same level of revenues for us in any
subsequent year. The services we provide to our customers, and the revenues and income from those services, may decline or vary as the
type and quantity of services we provide changes over time. In addition, our reliance on any individual customer for a significant portion
of our revenues may give that customer a certain degree of pricing leverage against us when negotiating contracts and terms of service.
In addition, a number of factors other than our performance could cause the loss of or reduction in business or revenues from a customer,
and these factors are not predictable. These factors may include organization restructuring, pricing pressure, changes to its technology
strategy, switching to another services provider or returning work in-house. The loss of any of our major customers could adversely affect
our financial condition and results of operations.
We
primarily rely on a limited number of vendors, and the loss of any such vendor could harm our business.
For
the year ended December 31, 2021, three vendors accounted for 38.4%, 15.0% and 11.9% of our total purchases, and two vendors accounted
for 73.4% and 23.1% of the total balance of our accounts payable, respectively. For the year ended December 31, 2020, two vendors accounted
for 19.1% and 10.9% of our total purchases, and three vendors accounted for 38.7%, 22.1% and 14.7% of the total balance of our accounts
payable, respectively. For the year ended December 31, 2019, three vendors accounted for 16.0%, 13.1% and 10.3%, respectively, of our
total purchases, and also accounted for 18.6%, 12.9% and 12.3%, respectively, of the total balance of our accounts payable. For 2019
and 2020, our vendors were mainly telecommunications carriers and our purchases from such vendors were value-added telecommunications
services, such as voice lines and research services. For 2021, our vendors were mainly system hardware and information software
suppliers for our business integration solution business. We enter into agreements with vendors in the ordinary course of our business.
Such agreements generally have initial terms ranging from two to three years and typically contain automatic renewal provisions. Any
difficulty in replacing such vendors could negatively affect our performance. If we are prevented or delayed in obtaining services, products,
or components for products, due to political, civil, labor or other factors beyond our control that affect our vendors, including natural
disasters or pandemics, our operations may be substantially disrupted, potentially for a significant period of time. Such delays may
significantly reduce our revenues and profitability and harm our business while alternative sources of supply are secured.
We
operate in highly competitive markets and the size and resources of many of our competitors may allow them to compete more effectively
than we can, preventing us from achieving profitability.
The
markets we compete in are highly competitive. Competition may result in pricing pressures, reduced profit margins or lost market share,
or a failure to grow our market share, any of which could substantially harm our business and results of operations. We compete for customers
primarily on the basis of our brand name, price and the range of products and services that we offer. Across our business, we face competitors
who are constantly seeking ideas which will appeal to customers and introducing new products that compete with our products. Many of
our competitors have significant competitive advantages, including longer operating histories, larger and broader customer bases, less-costly
production, more established relationships with a broader set of suppliers and customers, greater brand recognition and greater financial,
research and development, marketing, distribution and other resources than we do. We cannot assure that we will be able to successfully
compete against new or existing competitors. If we fail to maintain our reputation and competitiveness, customers demand for our products
may decline.
In
addition to existing competitors, new participants with a popular product or service idea could gain access to customers and become a
significant source of competition in a short period of time. These existing and new competitors may be able to respond more rapidly than
us to changes in customer preferences. Our competitors’ products may achieve greater market acceptance than our products and potentially
reduce demand for our products, lower our revenues and lower our profitability.
Our
future growth depends in part on new products and new technology innovation, and failure to invent and innovate could materially and
adversely impact our business prospects.
Our
future growth depends in part on maintaining our current products in new and existing markets, as well as our ability to develop new
products and technologies to serve such markets. To the extent that competitors develop competitive products and technologies, or new
products or technologies that achieve higher customer satisfaction, our business prospects may be materially and adversely impacted.
In addition, regulatory approvals for new products or technologies may be required, these approvals may not be obtained in a timely or
cost effective manner, which may also materially and adversely impact our business prospects.
If
we fail to increase our brand recognition, we may face difficulty in obtaining new customers.
Although
we believe our brand is reputable in the PRC customer engagement industry, we still believe that maintaining and enhancing our brand
recognition in a cost-effective manner outside of that market is critical to achieving widespread acceptance of our current and future
products and services and is an important element in our effort to increase our customer base. Successful promotion of our brand will
depend largely on our ability to maintain a sizeable and active customer base, our marketing efforts and ability to provide reliable
and useful products and services at competitive prices. Brand promotion activities may not yield increased revenue, and even if they
do, any increased revenue may not offset the expenses we will incur in building our brand. If we fail to successfully promote and maintain
our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough
new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts,
in which case our business, operating results and financial condition, would be materially and adversely affected.
Any
failure to offer high-quality customer support may materially and adversely affect our relationships with our customers.
Our
ability to retain existing customers and attract new customers depends on our ability to maintain a consistently high level of customer
service and technical support. Our customers depend on our service support team to assist them in utilizing our services effectively
and to help them to resolve issues quickly and to provide ongoing support. If we are unable to hire and train sufficient support resources
or are otherwise unsuccessful in assisting our customers effectively, it may materially and adversely affect our ability to retain existing
customers and could prevent prospective customers from adopting to our services. We may be unable to respond quickly enough to accommodate
short-term increases in demand for customer support. We also may be unable to modify the nature, scope and delivery of our customer support
to compete with changes in the support services provided by our competitors. Increased demand for customer support, without corresponding
revenue, could increase our costs and adversely affect our business, results of operations and financial condition. Our sales are highly
dependent on our business reputation and on positive recommendations from customers. Any failure to maintain high-quality customer support,
or a market perception that we do not maintain high-quality customer support, may materially and adversely affect our reputation, business,
results of operations and financial condition.
Incorrect
or improper implementation or use of our services could result in customer dissatisfaction and negatively affect our business, results
of operations, financial condition, and growth prospects.
Our
services are deployed in a wide variety of increasingly complex technology environments, including on premises, in the cloud or in hybrid
environments. We believe our future success will depend on our ability to increase sales of our services for use in such deployments.
We must often assist our customers in achieving successful implementations of our services, which we do through our professional consulting
and technical support services. If our customers are unable to implement our services successfully, or unable to do so in a timely manner,
customer perceptions of our services may be harmed, our reputation and brand may suffer, and customers may choose to cease usage of our
services or not to expand their use of our services. Our customers may need training in the proper use of and the variety of benefits
that can be derived from our services to maximize their benefits. If our services are not effectively implemented or used correctly or
as intended, or if we fail to adequately train customers on how to efficiently and effectively use our services, our customers may not
be able to achieve satisfactory outcomes. This could result in negative publicity and legal claims against us, which may cause us to
generate fewer sales to new customers and reductions in renewals or expansions of the use of our services with existing customers, any
of which would harm our business and results of operations.
Failure
to adhere to regulations that govern our customers’ businesses could result in breaches of contracts with our customers. Failure
to adhere to the regulations that govern our business could result in our being unable to effectively perform our services.
Our
customers’ business operations are subject to certain rules and regulations in China or elsewhere. Our customers may contractually
require that we perform our services in a manner that would enable them to comply with such rules and regulations. Failure to perform
our services in such manner could result in breaches of contract with our customers and, in some limited circumstances, civil fines and
criminal penalties for us.
In
addition, the internet industry in China is highly regulated, and we are required under various Chinese laws to obtain and maintain permits
and licenses to conduct our business.
Pursuant to the PRC Regulations
on Telecommunications, in order to engage in value-added telecommunications services, or VATS, a services provider must obtain a value-added
telecommunications business operating license, or VATS License, from the MIIT or its provincial level counterparts. For example, pursuant
to the Catalogue of Telecommunications Business, the call center business refers to the provision of business consultation, information
consultation and data query services to users, with the entrustment of enterprises or institutions, based on the call center system and
database technology connected to public communication network or the internet and the information database established by information
collection, processing and storage. Therefore, a VATS License with the business scope of “Nationwide Domestic Call Center Services”
is required for the provision of call center services all over China. As of December 31, 2021, Infobird Guiyang has obtained a VATS License
with the business scope of “Domestic Call Center Services in Guizhou Province only” while a broader scope covering national
service is required. In addition, Infobird Beijing has obtained a VATS License with the business scope of “Nationwide Domestic Call
Center Services”. We are currently in the process of switching the counterparty on our relevant existing agreements with customers
from Infobird Guiyang to Infobird Beijing in order to be compliant with such restrictions. If the relevant PRC government authority decides
that we are operating without the proper license, we may be subject to penalties such as confiscation of the revenues that were generated
through the unlicensed activities, the imposition of fines and the discontinuation of our operations.
As of December 31, 2021, we have
not been subject to any material penalties from the relevant government authorities for failure to obtain any license for our business
operations in the past. We cannot assure you, however, that the government authorities will not do so in the future. If we do not obtain,
hold or maintain our licenses or other qualifications to provide our services, we may not be able to provide services to existing customers
or be able to attract new customers and could lose revenues, and we may also be subject to penalties, which could have a material and
adverse effect on our business and results of operations.
Failure
to disclose the outsourcing of our BPO services to customers or reach an agreement on the outsourcing with customers could result in
breaches and terminations of contracts with our customers, and may substantially harm our business and results of operations.
We
provide BPO services partially through outsourced service providers, in which event the BPO services are actually provided by the outsourced
service providers to our customers. However, we do not disclose the outsourcing to our customers, nor do we reach an agreement with our
customers on the outsourcing in the BPO services contracts signed between our customers and us. Such failure could result in breaches
and terminations of BPO services contracts, and we may also be subject to liabilities for breach of contracts, which may have a material
adverse effect on our business and results of operations.
If
our new enhancements to our services do not achieve sufficient market acceptance, our financial results and competitive position will
suffer.
We
spend substantial amounts of time and money to research and develop new enhancements of our services to incorporate additional features,
improve functionality or other enhancements in order to meet our customers’ rapidly evolving demands. When we develop an enhancement
to our services, we typically incur expenses and expend resources upfront to develop, market and promote the new enhancements. Therefore,
when we develop and introduce new enhancements to our services, they must achieve high levels of market acceptance in order to justify
the amount of our investment in developing and bringing them to market. If our new enhancements to our services do not garner widespread
market adoption and implementations, our business, business prospects, future financial results and competitive position may be materially
and adversely affected.
If
we cause disruptions to our customers’ businesses or provide inadequate service, our customers may have claims for substantial
damages against us, and as a result our profits may be substantially reduced.
If
we make errors in the course of delivering services to our customers or fail to consistently meet service requirements of a customer,
these errors or failures could disrupt the customer’s business, which could result in a reduction in our net revenues or a claim
for substantial damages against us. In addition, a failure or inability to meet a contractual requirement could seriously damage our
reputation and affect our ability to attract new business.
The
services we provide are often critical to our customers’ businesses. We generally provide customer support after our customized
application is delivered. Certain of our customer contracts require us to comply with security obligations including maintaining system
security, ensuring our system is virus-free, maintaining business continuity procedures, and verifying the integrity of employees that
work with our customers by conducting background checks. Any failure in a customer’s system or breach of security relating to the
services we provide to the customer could damage our reputation or result in a claim for substantial damages against us. Any significant
failure of our systems could impede our ability to provide services to our customers, have a negative impact on our reputation, which
may materially and adversely affect our business, financial conditional and results of operations.
Interruptions
or performance problems associated with our technology and infrastructure may materially and adversely affect our business, results of
operations, and financial condition.
Our
continued growth depends in part on the ability of our existing customers and new customers to access our SaaS services, at any time
and within an acceptable amount of time. We may in the future experience, service disruptions, outages and other performance problems
due to a variety of factors, including infrastructure changes, human or software errors or capacity constraints. In some instances, we
may not be able to identify the cause or causes of these performance problems within an acceptable period of time. It may become increasingly
difficult to maintain and improve our performance as our SaaS services become more complex. If our services are unavailable or if our
customers are unable to access features of our services within a reasonable amount of time or at all, our business, results of operations,
and financial condition may be materially and adversely affected would be negatively affected.
We
currently provide our SaaS services via designated data centers. We expect that in the future we may experience interruptions, delays
and outages in service and availability from time to time due to a variety of factors, including infrastructure changes, human or software
errors, website hosting disruptions and capacity constraints. Capacity constraints could be due to a number of potential causes including
technical failures, natural disasters, fraud or security attacks. In addition, if our security, or that of our data center providers,
is compromised, our services are unavailable or our customers are unable to use our services within a reasonable amount of time or at
all, then our business, results of operations and financial condition may be materially and adversely affected. In some instances, we
expect that we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our
customers. It may become increasingly difficult to maintain and improve our service performance, in particular during peak usage times,
as the features of our services become more complex and the usage of our services increases. Any of the above circumstances or events
may harm our reputation, cause customers to stop using our services, or impair our ability to increase revenue from existing customers,
impair our ability to grow our customer base, our business, results of operations, and financial condition may be materially and adversely
affected.
Unauthorized
disclosure, destruction or modification of data, through cybersecurity breaches, computer viruses or otherwise or disruption of our services
could expose us to liability, protracted and costly litigation and damage our reputation.
Our
business involves the collection, storage, processing and transmission of customers’ business data. An increasing number of organizations,
including large merchants and businesses, other large technology companies, financial institutions and government institutions, have
disclosed breaches of their information technology, or IT, systems, some of which have involved sophisticated and highly targeted cybersecurity
attacks, including on portions of their websites or infrastructure. We may also be subjected to breaches of cybersecurity by hackers.
Threats may derive from human error, fraud or malice on the part of employees or third parties, or may result from accidental technological
failure. Concerns about cybersecurity are increased when we transmit information. Electronic transmissions can also be subjected to cybersecurity
attacks, interception or loss. Also, computer viruses and malware can be distributed and spread rapidly over the internet and could infiltrate
our systems or those of our associated participants, which can impact the confidentiality, integrity and availability of information,
and the integrity and availability of our products, services and systems, among other effects. Denial of service or other cybersecurity
attacks could be targeted against us for a variety of purposes, including interfering with our products and services or creating a diversion
for other malicious activities. These types of actions and attacks could disrupt our delivery of products and services or make them unavailable,
which could damage our reputation, force us to incur significant expenses in remediating the resulting impacts, expose us to uninsured
liabilities, subject us to lawsuits, fines or sanctions, distract our management or increase our costs of doing business.
Our
encryption of data and other protective measures may not prevent unauthorized access or use of sensitive data. A breach of our system
or that of one of our associated participants may subject us to material losses or liability. A misuse of such data or a cybersecurity
breach could harm our reputation and deter customers from using our products and services, thus reducing our revenue. In addition, any
such misuse or breach could cause us to incur costs to correct the breaches or failures, expose us to uninsured liabilities, increase
our risk of regulatory scrutiny, subject us to lawsuits, result in the imposition of material penalties and fines under applying laws
or regulations.
We
cannot assure that there are written agreements in place with every associated participant or that such written agreements will prevent
the unauthorized use, modification, destruction or disclosure of data or enable us or our customers to obtain reimbursement in the event
we should suffer incidents resulting in unauthorized use, modification, destruction or disclosure of data. Any unauthorized use, modification,
destruction or disclosure of data could result in protracted and costly litigation, which could have a material and adverse effect on
our business, financial condition and results of operations.
Cybersecurity
attack incidents are increasing in frequency and evolving in nature and include, but are not limited to, installation of malicious software,
unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of
confidential or otherwise protected information and the corruption of data. Given the unpredictability of the timing, nature and scope
of information technology disruptions, there can be no assurance that the procedures and controls we employ will be sufficient to prevent
security breaches from occurring and we could be subject to manipulation or improper use of our systems and networks or financial losses
from remedial actions, any of which could have a material and adverse effect on our business, financial condition and results of operations.
The
PRC Cyber Security Law, effective on June 1, 2017, stipulates that a network operator must adopt technical measures and other necessary
measures in accordance with applicable laws and regulations as well as compulsory national and industrial standards to safeguard the
safety and stability of network operations, effectively respond to network security incidents, prevent illegal and criminal activities,
maintain the integrity, confidentiality and availability of network data. We are making efforts to comply with the applicable laws, regulations
and standards, but there can be no assurance that our measures will be effective and sufficient under the PRC Cyber Security Law. If
we were found by the regulatory authorities to have failed to comply with the PRC Cyber Security Law, we would be subject to warning,
fines, confiscation of illegal revenue, revocation of licenses, cancellation of filings, shutdown of our platform or even criminal liability
and our business, results of operations and financial condition would also be adversely affected. In addition, in light of the evolving
regulatory framework of China for the protection of information in cyberspace, we may be subject to uncertainties of and adjustments
to our business practices, which may incur additional operating expenses and adversely affect our results of operations and financial
condition.
We
face intense competition from onshore and offshore customer engagement service providers, and, if we are unable to compete effectively,
we may lose customers and our revenues may decline.
The
market for customer engagement services is highly competitive and we expect competition to persist and intensify. We believe that the
principal competitive factors in our markets are industry expertise, breadth and depth of service offerings, quality of the services
offered, reputation and track record, marketing and selling skills, scalability of technology infrastructure and price. In the customer
engagement market, customers tend to engage multiple service providers instead of using an exclusive service provider, which could reduce
our revenues to the extent that customers obtain similar or substituted services from other competing providers. Our ability to compete
also depends in part on a number of factors beyond our control, including the ability of our competitors to recruit, train, develop and
retain highly skilled employees, in particular research and development employees, the price at which our competitors offer comparable
services and our competitors’ responsiveness to customer needs and market trends. Therefore, we cannot assure you that we will
be able to retain our customers while competing against such competitors. Increased competition, our inability to compete successfully
against competitors, pricing pressures or loss of market share may materially and adversely affect our business, financial condition
and results of operations.
We
have engaged in transactions with related parties, and such transactions present possible conflicts of interest that could have a material
and adverse effect on our business, financial condition and results of operations.
We
have entered into a number of transactions with related parties. See “Item 7.B. Major Shareholders and Related Party Transactions”
for further details on related party transactions. We may in the future enter into additional transactions with entities in which members
of our board of directors and other related parties hold ownership interests.
Transactions
with related parties present potential for conflicts of interest, as the interests of related parties may not align with the interests
of our shareholders. Although we believe that these transactions were in our best interests, we cannot assure you that these transactions
were entered into on terms as favorable to us as those that could have been obtained in an arms-length transaction. We may also engage
in transactions with related parties in the future. Conflicts of interests may arise when we transact business with related parties.
These transactions, individually or in the aggregate, may have a material and adverse effect on our business, financial condition and
results of operations or may result in litigation.
Changes
in demand for our products and business relationships with key customers and vendors may materially and adversely affect operating results.
To
achieve our objectives, we must develop and sell products that are subject to the demands of our customers. This is dependent on several
factors, including managing and maintaining relationships with key customers, responding to the rapid pace of technological change and
obsolescence, which may require increased investment by us or result in greater pressure to commercialize developments rapidly or at
prices that may not fully recover the associated investment, and the effect on demand resulting from customers’ research and development,
capital expenditure plans and capacity utilization. If we are unable to keep up with our customers’ demands, our sales, earnings
and operating results may be materially and adversely affected.
Our
future success depends in part on our ability to retain key executives and to attract, retain and motivate qualified personnel.
We
are highly dependent on the principal members of our executive team listed in “Item 6. Directors, Senior Management and Employees”
located elsewhere in this annual report, the loss of whose services may materially and adversely impact the achievement of our objectives.
Recruiting and retaining other qualified employees for our business, including technical personnel, will also be critical to our success.
Competition for skilled personnel is intense and the turnover rate can be high. We may not be able to attract and retain personnel on
acceptable terms given the competition among numerous companies for individuals with similar skill sets. The inability to recruit or
loss of the services of any executive or key employee may materially and adversely affect our business.
We
may need to expand our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.
As
of December 31, 2021, we had 391 employees, all of whom were full-time employees and were located in China. As our company continues
to grow, we also expect to expand our employee base. In addition, we intend to grow by expanding our business, increasing market penetration
of our existing products and developing new products. Future growth would impose significant additional responsibilities on our management,
including the need to develop and improve our existing administrative and operational systems and our financial and management controls
and to identify, recruit, maintain, motivate, train, manage and integrate additional employees, consultants and contractors. Also, our
management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial
amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may
result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and
reduced productivity among remaining employees. Future growth could require significant capital expenditures and may divert financial
resources from other projects, such as the development of our existing or future product candidates. If our management is unable to effectively
manage our growth, our expenses may increase more than expected, our ability to generate and grow revenue could be reduced, and we may
not be able to implement our business strategy. Our future financial performance and our ability to compete effectively will depend,
in part, on our ability to effectively manage any future growth.
Failure
of beneficial owners of our shares who are PRC residents to comply with certain PRC foreign exchange regulations could restrict our ability
to distribute profits, restrict our overseas and cross-border investment activities and subject us to liability under PRC law.
The
State Administration of Foreign Exchange, or SAFE, has promulgated regulations, including the Notice on Relevant Issues Relating to Foreign
Exchange Control on Domestic Residents’ Investment and Financing and Round-Trip Investment through Special Purpose Vehicles, or
SAFE Circular 37, and its appendices. These regulations require PRC residents, including PRC institutions and individuals, 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”, or SPV. The term “control”
under SAFE Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC residents
in the offshore SPVs by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements.
SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the SPV, 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 SPV fails to fulfill the required SAFE registration, the PRC subsidiaries
of that SPV may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign
exchange activities, and the SPV may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Further,
failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for foreign
exchange evasion.
These regulations apply
to our direct and indirect shareholders who are PRC residents and may apply to any offshore acquisitions or share transfers that
we make in the future if our shares are issued to PRC residents. However, in practice, different local SAFE branches may have different
views and procedures on the application and implementation of SAFE regulations, and there remains uncertainty with respect to its
implementation. We cannot assure you that these direct or indirect shareholders of our company who are PRC residents will be able
to successfully update the registration of their direct and indirect equity interest as required in the future. If they fail to
update the registration, our PRC subsidiaries could be subject to fines and legal penalties, and SAFE could restrict our cross-border
investment activities and our foreign exchange activities, including restricting our PRC subsidiaries’ ability to distribute
dividends to, or obtain loans denominated in foreign currencies from, our company, or prevent us from contributing additional capital
into our PRC subsidiaries. As a result, our business operations and our ability to make distributions to you could be materially
and adversely affected. In addition, non-U.S. shareholders may experience unfavorable tax consequences if such non-U.S. shareholders
are determined to be a resident enterprise for PRC tax purposes. See “Item 4. Information on the Company - B. Business Overview
- Regulations - Regulations on Tax in the PRC” and “Item 10.E. Taxation - PRC Taxation” for further information.
As
of the date of this annual report, to our knowledge, all of our shareholders had registered according to SAFE Circular 37.
Failure
to make adequate contributions to various employee benefits plans as required by PRC regulations may subject us to penalties.
Companies operating in China are
required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and
other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including
bonuses and allowances, of employees up to a maximum amount specified by the local government from time to time at locations where they
operate their businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in
China given the different levels of economic development in different locations. As of December 31, 2021, we have not made adequate employee
benefit payments in strict compliance with the relevant PRC regulations for and on behalf of our employees. Our failure in
making contributions to various employee benefits plans in strict compliance with applicable PRC labor-related laws and regulations may
subject us to late payment penalties, and we could also be required to make up the contributions for these plans as well as to pay late
fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results
of operations may be adversely affected.
We
do not have business insurance coverage. Any future business liability, disruption or litigation we experience might divert management
focus from our business and could significantly impact our financial results.
Availability
of business insurance products and coverage in China is limited, and most such products are expensive in relation to the coverage offered.
We have determined that the risks of disruption, cost of such insurance and the difficulties associated with acquiring such insurances
on commercially reasonable terms make it impractical for us to maintain such insurance. As a result, we do not have any business liability,
disruption or litigation insurance coverage for our operations in China. Accordingly, a business disruption, litigation or natural disaster
may result in substantial costs and divert management’s attention from our business, which would have an adverse effect on our
results of operations and financial condition.
We
may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing
when needed.
In
addition to the net proceeds raised in our initial public offering, we may need to obtain additional debt or equity financing to fund
future capital expenditures. While we do not anticipate seeking additional financing in the immediate future, any additional equity financing
may result in dilution to the holders of our outstanding ordinary shares. Additional debt financing may impose affirmative and negative
covenants that restrict our freedom to operate our business. We cannot guaranty that we will be able to obtain additional financing on
terms that are acceptable to us, or any financing at all, and the failure to obtain sufficient financing could materially and adversely
affect our business operations.
We
are subject to risks relating to our leased properties, which in turn could materially and adversely affect our business, results of
operations and financial condition.
Currently, all of our offices are
located on leased premises. As of December 31, 2021, some of the lessors of our leased properties in China have not provided us with their
property ownership certificates. If our lessors are not the owners of the properties, or if they have not obtained the proper authorization
from the legal owners of the properties, our leases could be invalidated. If this occurs, we may have to renegotiate the leases with the
owners or other parties who have the right to lease the properties, and the terms of the new leases may be less favorable to us. Although
we may seek damages from such lessors, such leases may be void and we may be forced to relocate. Any relocation would require us to locate
and secure additional facilities, expenditures of additional funds in connection with the relocation and preparation of replacement facilities.
This could affect our ability to provide uninterrupted services to our customers and harm our reputation, which in turn could materially
and adversely affect our business, results of operations and financial condition.
Risks
Related to Intellectual Property
If
we are not able to adequately protect our proprietary intellectual property and information, and protect against third party claims that
we are infringing on their intellectual property rights, our results of operations could be adversely affected.
The
value of our business depends in part on our ability to protect our intellectual property and information, including our patents, copyrights,
trademarks, trade secrets, and rights under agreements with third parties, in China and around the world, as well as our customer, employee,
and customer data. Third parties may try to challenge our ownership of our intellectual property in China and around the world. In addition,
intellectual property rights and protections in China may be insufficient to protect material intellectual property rights in China.
Further, our business is subject to the risk of third parties counterfeiting our products or infringing on our intellectual property
rights. The steps we have taken may not prevent unauthorized use of our intellectual property. We may need to resort to litigation to
protect our intellectual property rights, which could result in substantial costs and diversion of resources. If we fail to protect our
proprietary intellectual property and information, including with respect to any successful challenge to our ownership of intellectual
property or material infringements of our intellectual property, this failure could have a significant adverse effect on our business,
financial condition, and results of operations.
If
we are unable to adequately protect our intellectual property rights, or if we are accused of infringing on the intellectual property
rights of others, our competitive position could be harmed or we could be required to incur significant expenses to enforce or defend
our rights.
Our
commercial success will depend in part on our success in obtaining and maintaining patents, copyrights, trademarks, trade secrets and
other intellectual property rights in China and elsewhere and protecting our proprietary technology. If we do not adequately protect
our intellectual property and proprietary technology, competitors may be able to use our technologies or the goodwill we have acquired
in the marketplace and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.
We
cannot make any assurances that our core trademarks include a scope sufficient to protect our services and products. For example, our
key trademarks “
”
(Infobird), “
”
(Xun Niao), “
”
(Yun Tong Bao) and “
”
(Qi Tong Bao) are not registered under the category “Software as a Service (SaaS)” in Class 42, in which event third parties
would be able to use such logos under category “Software as a Service (SaaS)” in Class 42 without our authorization, and
we may even be subjected to claims by third parties for infringement by using such logos. In addition, we did not enter into a trademark
transfer agreement with the transferor on trademark “
”
in 2012, in which event the transferor may claim that the historical transfer of the trademark is flawed and file a claim against the
ownership of the transferred trademark.
We
cannot make any assurances that the protection of our copyrights are sufficient. For example, our core technology, our no-code development
platform, is not registered as a software copyright, which makes the technology vulnerable to the risk of third party’s infringement.
Even though we intend to submit an application for copyright registration for our no-code development platform, we cannot assure you
when the application will be submitted or the registration will be completed, if at all, and whether the application will be rejected
by the National Copyright Administration of the PRC once submitted.
We
cannot provide any assurances that any of our patents have, or that any of our pending patent applications that mature into issued patents
will include, claims with a scope sufficient to protect our products, any additional features we develop for our products or any new
products. Other parties may have developed technologies that may be related or competitive to our system, may have filed or may file
patent applications and may have received or may receive patents that overlap or conflict with our patent applications, either by claiming
the same methods or devices or by claiming subject matter that could dominate our patent position. Our patent position may involve complex
legal and factual questions, and, therefore, the scope, validity and enforceability of any patent claims that we may obtain cannot be
predicted with certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated or circumvented. Proceedings challenging
our patents could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or
more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we may own
may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third
party receiving the patent right sought by us, which in turn could affect our ability to commercialize our products.
Though
an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may
not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Competitors
could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts,
willfully infringe our intellectual property rights, design around our patents, or develop and obtain patent protection for more effective
technologies, designs or methods. We may be unable to prevent the unauthorized disclosure or use of our technical knowledge or trade
secrets by consultants, suppliers, vendors, former employees and current employees.
Our
ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not
advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement
in a competitor’s or potential competitor’s product. We may not prevail in any lawsuits that we initiate and the damages
or other remedies awarded if we were to prevail may not be commercially meaningful.
In
addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable or interpreted
narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in
one or more of our patents are invalid or otherwise unenforceable. If any of our patents covering our products are invalidated or found
unenforceable, or if a court found that valid, enforceable patents held by third parties covered one or more of our products, our competitive
position could be harmed or we could be required to incur significant expenses to enforce or defend our rights.
The
degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
| |
● |
any of our patents, or
any of our pending patent applications, if issued, will include claims having a scope sufficient to protect our products; |
| |
● |
any of our pending patent applications
will be issued as patents; |
| |
● |
we will be able to successfully
commercialize our products on a substantial scale, if approved, before our relevant patents we may have expire; |
| |
● |
we were the first to make
the inventions covered by each of our patents and pending patent applications; |
| |
● |
we were the first to file
patent applications for these inventions; |
| |
● |
others will not develop
similar or alternative technologies that do not infringe our patents; any of our patents will be found to ultimately be valid and
enforceable; |
| |
● |
any patents issued to us will
provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive advantages or will
not be challenged by third parties; |
| |
● |
we will develop additional
proprietary technologies or products that are separately patentable; or |
| |
● |
our commercial activities
or products will not infringe upon the patents of others. |
We
rely, in part, upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our
competitive position. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.
Litigation
or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money
and could prevent us from selling our products or affect our stock price.
Our
commercial success will depend in part on not infringing the patents or copyrights, or otherwise violating the other proprietary rights,
of others. Significant litigation regarding patent rights and copyright rights occur in our industry. Our competitors in both the United
States and abroad, many of which have substantially greater resources and have made substantial investments in patent portfolios and
competing technologies, may have applied for or obtained or may in the future apply for and obtain, patents that will prevent, limit
or otherwise interfere with our ability to make, use and sell our products. We do not always conduct independent reviews of patents issued
to third parties. In addition, patent applications in China and elsewhere can be pending for many years before issuance, or unintentionally
abandoned patents or applications can be revived, so there may be applications of others now pending or recently revived patents of which
we are unaware. These applications may later result in issued patents, or the revival of previously abandoned patents, that will prevent,
limit or otherwise interfere with our ability to make, use or sell our products. Third parties may, in the future, assert claims that
we are employing their proprietary technology without authorization, including claims from competitors or from non-practicing entities
that have no relevant product revenue and against whom our own patent portfolio may have no deterrent effect. As we continue to commercialize
our products in their current or updated forms, launch new products and enter new markets, we expect competitors may claim that one or
more of our products infringe their intellectual property rights as part of business strategies designed to impede our successful commercialization
and entry into new markets. The large number of patents, the rapid rate of new patent applications and issuances, the complexities of
the technology involved, and the uncertainty of litigation may increase the risk of business resources and management’s attention
being diverted to patent litigation. We have, and we may in the future, receive letters or other threats or claims from third parties
inviting us to take licenses under, or alleging that we infringe, their patents.
Moreover,
we may become party to future adversarial proceedings regarding our patent portfolio or the patents of third parties. Patents may be
subjected to opposition, post-grant review or comparable proceedings lodged in various foreign, both national and regional, patent offices.
The legal threshold for initiating litigation or contested proceedings may be low, so that even lawsuits or proceedings with a low probability
of success might be initiated. Litigation and contested proceedings can also be expensive and time-consuming, and our adversaries in
these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we can. We
may also occasionally use these proceedings to challenge the patent rights of others. We cannot be certain that any particular challenge
will be successful in limiting or eliminating the challenged patent rights of the third party.
Any
lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights.
Any potential intellectual property litigation also could force us to do one or more of the following:
| |
● |
stop making, selling or
using products or technologies that allegedly infringe the asserted intellectual property; |
| |
● |
lose the opportunity to license
our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property rights
against others; incur significant legal expenses; |
| |
● |
pay substantial damages
or royalties to the party whose intellectual property rights we may be found to be infringing; |
| |
● |
pay the attorney’s
fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing; |
| |
● |
redesign those products
that contain the allegedly infringing intellectual property, which could be costly, disruptive and infeasible; and |
| |
● |
attempt to obtain a license
to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all, or from third
parties who may attempt to license rights that they do not have. |
Any
litigation or claim against us, even those without merit, may cause us to incur substantial costs, and could place a significant strain
on our financial resources, divert the attention of management from our core business and harm our reputation. If we are found to infringe
the intellectual property rights of third parties, we could be required to pay substantial damages (which may be increased up to three
times of awarded damages) and/or substantial royalties and could be prevented from selling our products unless we obtain a license or
are able to redesign our products to avoid infringement. Any such license may not be available on reasonable terms, if at all, and there
can be no assurance that we would be able to redesign our products in a way that would not infringe the intellectual property rights
of others. We could encounter delays in product introductions while we attempt to develop alternative methods or products. If we fail
to obtain any required licenses or make any necessary changes to our products or technologies, we may have to withdraw existing products
from the market or may be unable to commercialize one or more of our products.
If
we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be harmed.
We
rely on copyright, patent, trade secret, and trademark protection as well as confidentiality agreements with our employees, consultants
and third parties, and we may in the future rely on additional intellectual property protection, to protect our confidential and proprietary
information. In addition to contractual measures, we try to protect the confidential nature of our proprietary information using commonly
accepted physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade
secret by an employee or third party with authorized access, provide adequate protection for our proprietary information. Our security
measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and recourse
we take against such misconduct may not provide an adequate remedy to protect our interests fully. Unauthorized parties may also attempt
to copy or reverse engineer certain aspects of our products that we consider proprietary. Enforcing a claim that a party illegally disclosed
or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. Even though we use
commonly accepted security measures, trade secret violations are often a matter of state law, and the criteria for protection of trade
secrets can vary among different jurisdictions. In addition, trade secrets may be independently developed by others in a manner that
could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed
or misappropriated, or if any such information was independently developed by a competitor, our business and competitive position could
be harmed.
Third
parties may assert ownership or commercial rights to inventions we develop, which could have a material adverse effect on our business.
Third
parties may in the future make claims challenging the inventorship or ownership of our intellectual property. Any infringement claims
or lawsuits, even if not meritorious, could be expensive and time consuming to defend, divert management’s attention and resources,
require us to redesign our products and services, if feasible, require us to pay royalties or enter into licensing agreements in order
to obtain the right to use necessary technologies, and/or may materially disrupt the conduct of our business.
In
addition, we may face claims by third parties that our agreements with employees, contractors or third parties obligating them to assign
intellectual property to us are ineffective or in conflict with prior or competing contractual obligations of assignment, which could
result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture
the commercial value of such intellectual property. Litigation may be necessary to resolve an ownership dispute, and if we are not successful,
we may be precluded from using certain intellectual property or may lose our exclusive rights in that intellectual property. Either outcome
could harm our business and competitive position.
Third
parties may assert that our employees or contractors have wrongfully used or disclosed confidential information or misappropriated trade
secrets, which could result in litigation.
We
may employ individuals who previously worked with other companies, including our competitors or potential competitors. Although we try
to ensure that our employees and contractors do not use the proprietary information or know-how of others in their work for us, we may
be subject to claims that we or our employees or contractors have inadvertently or otherwise used or disclosed intellectual property
or personal data, including trade secrets or other proprietary information, of a former employer or other third party. Litigation may
be necessary to defend against these claims. If we fail in defending any such claims or settling those claims, in addition to paying
monetary damages or a settlement payment, we may lose valuable intellectual property rights or personnel. Even if we are successful in
defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Our
computer systems and operations may be vulnerable to security breaches, which could materially and adversely affect our business.
We
believe the safety of our computer network and our secure transmission of information over the internet will be essential to our operations
and our services. Our network and our computer infrastructure are potentially vulnerable to physical breaches or to the introduction
of computer viruses, abuse of use and similar disruptive problems and security breaches that could cause loss (both economic and otherwise),
interruptions, delays or loss of services to our users. It is possible that advances in computer capabilities or new technologies could
result in a compromise or breach of the technology we use to protect user transaction data. A party that is able to circumvent our security
systems could misappropriate proprietary information, cause interruptions in our operations or utilize our network without authorization.
Security breaches also could damage our reputation and expose us to a risk of loss, litigation and possible liability. We cannot guarantee
you that our security measures will prevent security breaches.
Risks
Related to Our Corporate Structure
We
depend upon the Contractual Arrangements in conducting our business in China, which may not be as effective as direct ownership.
Our affiliation with Infobird
Beijing is managed through the Contractual Arrangements, which agreements may not be as effective in providing us with control over Infobird
Beijing as direct ownership in controlling entities organized in the PRC, which often hold the licenses necessary to conduct business
in the PRC. The Contractual Arrangements are not equivalent to equity ownership in the business of the VIE. Neither the investors in
Infobird Cayman, the Cayman Islands holding company, nor Infobird Cayman itself have an equity ownership in, direct foreign investment
in, or control of, through such ownership or investment, the VIE. Further, the Contractual Arrangements have not been tested in a court
of law, including in China courts. The Contractual Arrangements are governed by and would be interpreted in accordance with the laws
of the PRC. If Infobird Beijing fails to perform the obligations under the Contractual Arrangements, we may have to rely on legal remedies
under the laws of the PRC, including seeking specific performance or injunctive relief, and claiming damages. There is a risk that we
may be unable to obtain any of these remedies, which could affect our investors and the value of their investment. The legal environment
in the PRC is not as developed as in other jurisdictions. As a result, uncertainties in the PRC legal system could limit our ability
to enforce the Contractual Arrangements, or could affect the validity of the Contractual Arrangements. Thus, the Contractual Arrangements
may be less effective than direct ownership and we may incur substantial costs to enforce the terms of the Contractual Arrangements.
We
may not be able to consolidate the operations and financial results of some of our affiliated companies or such consolidation could materially
and adversely affect our operating results and financial condition.
The Contractual Arrangements are not equivalent
to equity ownership in the business of the VIE. Neither the investors in Infobird Cayman, the Cayman Islands holding company, nor Infobird
Cayman itself have an equity ownership in, direct foreign investment in, or control of, through such ownership or investment, the VIE.
Our business is conducted through Infobird Beijing, which is considered a VIE for accounting purposes, and we, through Infobird WFOE,
are considered the primary beneficiary for accounting purposes, thus enabling us to consolidate Infobird Beijing’s operations and
financial results in our consolidated financial statements. Infobird Cayman and Infobird HK were established as the holding companies
of Infobird WFOE. Infobird WFOE is the primary beneficiary for accounting purposes of Infobird Beijing and its subsidiaries. All of these
entities are under common control which results in the consolidation of Infobird Beijing and subsidiaries which have been accounted for
as a reorganization of entities under common control at carrying value. Infobird WFOE is deemed to have a controlling financial interest
and be the primary beneficiary for accounting purposes of Infobird Beijing because it has both of the following characteristics: (1)
the power to direct activities at Infobird Beijing that most significantly impact such entity’s economic performance, and (2) the
right to receive benefits from Infobird Beijing that could potentially be significant to such entity.
In the event that in the future Infobird Beijing
no longer meets the definition of a VIE under applicable accounting rules, or we are deemed not to be the primary beneficiary for accounting
purposes, we would not be able to consolidate line by line Infobird Beijing’s operations and financial results in our consolidated
financial statements for reporting purposes. Also, if in the future an affiliate company becomes a VIE and we become the primary beneficiary
for accounting purposes, we would be required to consolidate that entity’s operations sand financial results in our consolidated
financial statements for accounting purposes. If such entity’s financial results were negative, this would have a corresponding
negative impact on our operating results for reporting purposes.
Because
we rely on the Contractual Arrangements for our revenue, the termination of these agreements would severely and detrimentally affect
our continuing business viability under our current corporate structure.
We are a holding company and
all of our business operations are conducted through the Contractual Arrangements. The Contractual Arrangements are not equivalent to
equity ownership in the business of the VIE. Neither the investors in Infobird Cayman, the Cayman Islands holding company, nor Infobird
Cayman itself have an equity ownership in, direct foreign investment in, or control of, through such ownership or investment, the VIE.
Further, the Contractual Arrangements have not been tested in a court of law, including in China courts. Although Infobird Beijing does
not have termination rights pursuant to the Contractual Arrangements, it could terminate, or refuse to perform under, the Contractual
Arrangements. Because neither we, nor our subsidiaries, own equity interests of Infobird Beijing, the termination or non-performance
of the Contractual Arrangements would sever our ability to receive payments from Infobird Beijing under our current holding company structure.
While we are currently not aware of any event or reason that may cause the Contractual Arrangements to terminate, we cannot assure you
that such an event or reason will not occur in the future. In the event that the Contractual Arrangements are terminated, this would
have a severe and detrimental effect on our continuing business viability under our current corporate structure, which, in turn, would
affect the value of your investment.
Contractual
arrangements in relation to the VIE may be subject to scrutiny by the PRC tax authorities and they may determine that we or the VIE owe
additional taxes, which could negatively affect our financial condition and the value of your investment.
Under
applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the
PRC tax authorities within ten years after the taxable year when the transactions are conducted. We could face material and adverse tax
consequences if the PRC tax authorities determine that the VIE contractual arrangements were not entered into on an arm’s-length
basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust
the income of the VIE in the form of a transfer pricing adjustment. The PRC tax authorities could effectively disregard the VIE structure,
resulting in increased tax liabilities. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions
recorded by the VIE for PRC tax purposes, which could in turn increase tax liabilities without reducing our tax expenses. In addition,
the PRC tax authorities may impose late payment fees and other penalties on the VIE for the adjusted but unpaid taxes according to the
applicable regulations. Our financial position could be materially and adversely affected if the VIE’s tax liabilities increase
or if it is required to pay late payment fees and other penalties.
We
conduct our business through Infobird Beijing by means of Contractual Arrangements. If the PRC courts or administrative authorities determine
that these Contractual Arrangements do not comply with applicable regulations, we could be subject to severe
penalties and our business could be adversely affected. In addition, changes in or different interpretations of such PRC laws and regulations
may also materially and adversely affect our business.
PRC laws and regulations
impose certain restrictions or prohibitions on foreign ownership of companies that engage in internet and other related businesses, including
the provision of domestic call center services. The major foreign investor of a domestic call center services provider is required to
have a record of good performance and operating experience in managing value-added telecommunications business, however, such requirement
of record of good performance and operating experience in managing value-added telecommunications business for the major foreign investor
was repealed by the Decision of the State Council on Revising and Repealing Certain Administrative Regulations, effective on May 1, 2022.
We are a company registered in the Cayman Islands and Infobird WFOE is considered a foreign-invested enterprise. To comply with PRC laws
and regulations, we conduct our business in China mainly through Infobird Beijing and its subsidiaries, based on a series of contractual
arrangements by and among Infobird WFOE, Infobird Beijing and its shareholders, or the Contractual Arrangements. The Contractual Arrangements
are not equivalent to equity ownership in the business of the VIE. Neither the investors in Infobird Cayman, the Cayman Islands holding
company, nor Infobird Cayman itself have an equity ownership in, direct foreign investment in, or control of, through such ownership
or investment, the VIE. Further, the Contractual Arrangements have not been tested in a court of law, including in China courts.
There
are uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including the laws, rules and regulations
governing the validity and enforcement of the Contractual Arrangements between Infobird WFOE and Infobird Beijing. We have been advised
by our PRC counsel, Fangda Partners, based on their understanding of the current PRC laws, rules and regulations, that (i) the structure
for operating our business in China (including our corporate structure and Contractual Arrangements with Infobird WFOE, Infobird Beijing
and its shareholders) will not result in any violation of PRC laws or regulations currently in effect; and (ii) the Contractual Arrangements
among Infobird WFOE and Infobird Beijing and its shareholders governed by PRC law are valid, binding and enforceable, and will not result
in any violation of PRC laws or regulations currently in effect. However, there are substantial uncertainties regarding the interpretation
and application of current or future PRC laws and regulations concerning foreign investment in the PRC, and their application to and
effect on the legality, binding effect and enforceability of the Contractual Arrangements. In particular, we cannot rule out the possibility
that PRC regulatory authorities, courts or arbitral tribunals may in the future adopt a different or contrary interpretation or take
a view that is inconsistent with the opinion of our PRC legal counsel. Therefore, the Contractual Arrangements may be determined by PRC
authorities to be inconsistent with the laws and regulations of the PRC, including those related to foreign investment in certain industries.
Our ordinary shares could decline in value or become worthless if such determinations, changes, or interpretations result in our inability
to assert contractual control over the assets of our PRC subsidiaries and the VIE that conduct substantially all of our operations.
In
addition, if any of our PRC entities or their ownership structure or the Contractual Arrangements are determined to be in violation of
any existing or future PRC laws, rules or regulations, or any of our PRC entities fail to obtain or maintain any of the required governmental
permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:
| |
● |
revoking the business and
operating licenses; |
| |
● |
discontinuing or restricting
the operations; |
| |
● |
imposing conditions or
requirements with which the PRC entities may not be able to comply; |
| |
● |
requiring us and our PRC
entities to restructure the relevant ownership structure or operations, including termination of the Contractual Arrangements with the
VIE and deregistering the equity pledge of the VIE, which in turn would affect our ability to consolidate, derive economic interests
from, or exert effective control the VIE; |
| |
● |
restricting or prohibiting
our use of the proceeds from our initial public offering to finance our business and operations in China, and taking other regulatory
or enforcement actions that could be harmful to our business; or |
| |
● |
imposing fines or confiscating
the income from our PRC subsidiaries or the VIE. |
The
imposition of any of these penalties would severely disrupt our ability to conduct business and have a material adverse effect on our
financial condition, results of operations and prospects.
The
shareholders of the VIE may have actual or potential conflicts of interest with us and as a result may refuse to perform, or may breach,
the Contractual Arrangements, which may materially and adversely affect our business and financial condition.
The
shareholders of the VIE may have actual or potential conflicts of interest with us. These shareholders may refuse to perform or sign
or may breach, or cause the VIE to breach, or refuse to renew, the existing Contractual Arrangements, which would have a material and
adverse effect on our ability to effectively control the VIE and receive economic benefits from it. As a result, control over, and funds
due from, the VIE may be jeopardized if the shareholders of the VIE breach, or refuse to renew, the Contractual Arrangements. For example,
the shareholders may be able to cause our agreements with the VIE to be performed in a manner adverse to us by, among other things, failing
to remit payments due under the Contractual Arrangements to us on a timely basis. We cannot assure you that when conflicts of interest
arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.
Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If
we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings,
which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
Any
failure by the VIE or its shareholders to perform their obligations under the Contractual Arrangements, or any unauthorized use of indicia
of corporate power or authority, would have a material adverse effect on our business.
If
the VIE or its shareholders fail to perform their respective obligations under the Contractual Arrangements or if any physical instruments,
such as chops and seals, or other indicia of corporate power or authority, are used without our authorization, we may have to incur substantial
costs and expend additional resources to seek legal remedies under PRC laws, including specific performance or injunctive relief, and/or
claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of the VIE were to refuse
to transfer their equity interest in the VIE to us or our designee if we exercise the purchase option pursuant to the Contractual Arrangements,
or if they were otherwise to act in bad faith toward us, then we may have to take legal action to compel them to perform their contractual
obligations.
The
Contractual Arrangements are governed by PRC laws. Accordingly, any disputes would be resolved in accordance with PRC legal procedures.
The legal environment in the PRC is not as developed as in other jurisdictions, such as the U.S. As a result, uncertainties in the PRC
legal system could limit our ability to enforce the Contractual Arrangements or could affect the validity of the Contractual Arrangements,
and as a result we may not be able to exert effective control over the VIE, and our ability to conduct our business may therefore be
materially adversely affected.
Our current corporate
structure and business operations may be affected by the relatively newly enacted Foreign Investment Law.
On March 15, 2019, the National
People’s Congress approved the Foreign Investment Law, which took effect on January 1, 2020. In addition, the State Council approved
the Regulation on Implementing the PRC Foreign Investment Law, or the Implementation Regulations, on December 26, 2019, effective from
January 1, 2020. Since they are relatively new, uncertainties exist in relation to their interpretation. The Foreign Investment Law does
not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed as foreign-invested
enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition
of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws,
administrative regulations or the State Council of the PRC, or the State Council. Therefore, it still leaves leeway for future laws,
administrative regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign investment.
Therefore, there can be no assurance that our control over the VIE through contractual arrangements will not be deemed as foreign investment
in the future.
The
Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate
in industries specified as either “restricted” or “prohibited” from foreign investment in a “negative list”.
The Foreign Investment Law provides that foreign-invested entities operating in “restricted” or “prohibited”
industries will require market entry clearance and other approvals from relevant PRC government authorities. If our control over the
VIE through contractual arrangements are deemed as foreign investment in the future, and any business of the VIE is “restricted”
or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed to
be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over the VIE may be deemed
as invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our business operations, any
of which may have a material adverse effect on our business operations.
Furthermore,
if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure
to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure and business operations.
If
any of our affiliated entities becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy
assets held by such entity, which could materially and adversely affect our business, financial condition and results of operations.
We
currently conduct our operations in China through our Contractual Arrangements. As part of these arrangements, substantially all of our
assets that are significant to the operation of our business are held by our affiliated entities. If any of these entities becomes bankrupt
and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all
of our business activities, which could materially and adversely affect our business, financial condition and results of operations.
In addition, if any of our affiliated entities undergoes a voluntary or involuntary liquidation proceeding, its equity owner or unrelated
third-party creditors may claim rights relating to some or all of these assets, which would hinder our ability to operate our business
and could materially and adversely affect our business, our ability to generate revenue and the market price of our ordinary shares.
Risks
Related to Doing Business in China
We
face risks related to natural disasters, health epidemics and other outbreaks, specifically the coronavirus, which could significantly
disrupt our operations.
In recent years, there have
been outbreaks of epidemics in various countries, including China. Recently, there was an outbreak of a novel strain of coronavirus,
or COVID-19, in China, which spread rapidly to several parts of the world. COVID-19 has resulted in quarantines, travel restrictions,
and the temporary closure of stores and facilities throughout China and several other parts of the world. In March 2020, the World
Health Organization declared COVID-19 a pandemic.
Substantially
all of our revenues and our workforce are concentrated in China. Consequently, our results of operations will likely be adversely, and
may be materially, affected, to the extent that the COVID-19 pandemic or any other epidemic harms the Chinese and global economy in general.
Any potential impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding
the duration and severity of the COVID-19 pandemic and the actions taken by government authorities and other entities to contain the
COVID-19 pandemic or treat its impact, almost all of which are beyond our control. Current and potential impacts include, but are not
limited to, the following:
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We temporarily closed our offices and implemented a work-from-home policy beginning in February 2020, as required by relevant PRC regulatory authorities. We reopened our offices in April 2020. We then closed our office again in Shanghai in April 2022 (which remain closed as of the date of this annual report), and the majority of the employees at our Beijing offices are working from home while such offices remain open as of the date of this annual report, as required by relevant PRC regulatory authorities. Our other offices in China remain open and employees are currently working onsite as of the date of this annual report; |
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Due to the nature of our business, the impact of the closure on our operational capabilities was not significant, as most of our work force continued working offsite during such office closures; |
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Our customers were negatively impacted by COVID-19, which may reduce their budgets for customer services in 2021 and beyond. We experienced a slowdown in revenue growth in 2021, as our business was negatively impacted by the COVID-19 pandemic; and |
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The situation may worsen if the COVID-19 pandemic
continues. Some of our customers has been affected by COVID-19 and requested additional time to pay us which required us to record additional
allowances of $2.3 million. We will continue to closely monitor our payment collections throughout 2021 and beyond.
Our construction progress in Guiyang has been further
delayed due to the temporary postponement of certain activities by local government authorities to slow the spread of COVID-19. As a result,
for the year ended December 31, 2021, we recorded an impairment of approximately $2.4 million through the delay of our construction progress
and land use rights from our subsidiary, Infobird Guiyang. In addition, due to reduced profit projections as a result of the resurgence
of COVID-19 in China in the first quarter of 2022 that caused lock-downs in various places in China, we recorded additional impairment
on our intangible assets of $1.3 million for the year ended December 31, 2021. |
Because of the uncertainty surrounding
the COVID-19 pandemic, the financial impact related to COVID-19 cannot be reasonably estimated at this time. Our consolidated results
for fiscal year 2021 have been adversely affected, but we expect our revenue in 2022 to increase due to demand for our services across
industries. However, due to various reasons, such as actual operational capability and the recent outbreak of COVID-19 in China, we cannot
guarantee that our total revenues for fiscal year 2022 will grow or remain at a similar level compared to fiscal year 2021, and such results
of operations for fiscal year 2022 may still be adversely impacted by the COVID-19 pandemic.
In
general, our business could be adversely affected by the effects of epidemics, including, but not limited to, COVID-19, avian influenza,
severe acute respiratory syndrome (SARS), the influenza A virus, Ebola virus, severe weather conditions such as a snowstorm, flood or
hazardous air pollution, or other outbreaks. In response to an epidemic, severe weather conditions, or other outbreaks, government and
other organizations may adopt regulations and policies that could lead to severe disruption to our daily operations, including temporary
closure of our offices and other facilities. These severe conditions may cause us and/or our partners to make internal adjustments, including
but not limited to, temporarily closing down business, limiting business hours, and setting restrictions on travel and/or visits with
clients and partners for a prolonged period of time. Various impacts arising from severe conditions may cause business disruption, resulting
in material, adverse impact to our financial condition and results of operations.
Changes
in China’s economic, political or social conditions or government policies could have a material adverse effect on our business
and operations.
Substantially
all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and
prospects may be influenced to a significant degree by political, economic and social conditions in China generally and therefore by
the significant discretion of Chinese governmental authorities. The Chinese economy differs from the economies of most developed
countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign
exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market
forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate
governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In
addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial
policies. The PRC government also exercises significant control over China’s economic growth through allocating resources,
controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to
particular industries or companies. The increased global focus on environmental and social issues and China’s potential
adoption of more stringent standards in these areas may adversely impact the operations of China-based issuers, including
us.
While
the Chinese economy has experienced significant growth over past decades, growth has been uneven, both geographically and among various
sectors of the economy, and the rate of growth has been slowing since 2012. Any adverse changes in economic conditions in China, in the
policies of the PRC government or in the laws and regulations in China could have a material adverse effect on the overall economic growth
of China. Such developments could materially and adversely affect our business and operating results, lead to a reduction in demand for
our services and adversely affect our competitive position. The PRC government has implemented various measures to encourage economic
growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative
effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital
investments or changes in tax regulations. In addition, in the past the PRC government has implemented certain measures, including interest
rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may materially
and adversely affect our business and operating results.
We
are based in, and our operations are located in, China through our subsidiaries, the VIE and its subsidiaries. Our ability to
operate in China may be impaired by changes in Chinese laws and regulations, including those relating to taxation, environmental regulation,
restrictions on foreign investment, and other matters.
Because
our operations are conducted in China through our subsidiaries, the VIE and its subsidiaries, the Chinese government may exercise
significant oversight and discretion over the conduct of our business, may intervene in or influence our operations at any time, and
may exert more oversight and control over offerings conducted overseas and/or foreign
investment in China-based issuers, any of which such actions by the Chinese government 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, and could result in a material change in our operations and/or the value of our ordinary shares. The
Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. The central Chinese government or local governments having jurisdiction within China may
impose new, stricter regulations, or interpretations of existing regulations, that would require additional expenditures and efforts
on our part to ensure our compliance with such regulations or interpretations. As such, our subsidiaries, the VIE and its
subsidiaries in the PRC may be subject to governmental and regulatory interference in the provinces in which they operate. We could
also be subject to regulation by various political and regulatory entities, including local and municipal agencies and other
governmental subdivisions. Our ability to operate in China may be impaired by any such laws or regulations, or any changes in laws
and regulations in the PRC. We may incur increased costs necessary to comply with existing and future laws and regulations or
penalties for any failure to comply. Recent statements by the Chinese government have indicated an intent to exert more oversight
and control over offerings that are conducted overseas and/or foreign investments in China-based issuers. Given the current
regulatory environment in the PRC, we are subject to the uncertainty of different interpretation and enforcement of rules and
regulations in the PRC adverse to us, which may be announced or implemented with little or no advance notice. Our operations could
be adversely affected, directly or indirectly, by existing or future laws and regulations relating to our business or industry,
particularly in the event permission to list on U.S. exchanges becomes required, or if such permission may be withheld or rescinded
once granted. Accordingly, the Chinese government’s actions in the future, including any decision to intervene in or influence
our operations at any time or to exert control over foreign investment in China-based issuers, may cause us to make material changes
to our operations, may significantly limit or completely hinder our ability to offer or continue to offer securities to investors,
and/or may cause the value of such securities to significantly decline or be worthless.
If
we become subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed China-based companies, we may have to
expend significant resources to investigate and resolve the matter which could harm our business operations and our reputation and could
result in a loss of your investment in our ordinary shares, in particular if such matter cannot be addressed and resolved favorably.
Recently,
U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and
negative publicity by investors, financial commentators and regulatory agencies. Much of the scrutiny, criticism and negative publicity
has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate
corporate governance policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a result of the scrutiny, criticism
and negative publicity, the publicly traded stock of many U.S.-listed China-based companies has decreased in value and, in some cases,
has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting
internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative
publicity will have on us or our business. If we become the subject of any unfavorable allegations, whether such allegations are proven
to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation
may be a major distraction to our management. If such allegations are not proven to be groundless, our business operations will be severely
hindered and your investment in our ordinary shares could be rendered worthless.
U.S.
regulatory bodies may be limited in their ability to conduct investigations or inspections of our operations in China.
Any
disclosure of documents or information located in China by foreign agencies may be subject to jurisdiction constraints and must comply
with China’s state secrecy laws, which broadly define the scope of “state secrets” to include matters involving economic
interests and technologies. There is no guarantee that requests from U.S. federal or state regulators or agencies to investigate or inspect
our operations will be honored by us, by entities who provide services to us or with whom we associate, without violating PRC legal requirements,
particularly those entities that are located within China. Furthermore, under the current PRC laws, an on-site inspection of our facilities
by any of these regulators may be limited or prohibited.
There
are uncertainties under the PRC laws relating to the procedures for U.S. regulators to investigate and collect evidence from companies
located in the PRC.
Shareholder
claims that are common in the United States, including securities law class actions and fraud claims, generally are difficult to pursue
as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to obtaining information
needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities. Although the local authorities
in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to
implement cross-border supervision and administration, such regulatory cooperation with the securities regulatory authorities in the
Unities States have not been efficient in the absence of mutual and practical cooperation mechanism. According to Article 177 of the
PRC Securities Law, which became effective in March 2020, or Article 177, the securities regulatory authority of the State Council may
collaborate with securities regulatory authorities of other countries or regions in order to monitor and oversee cross border securities
activities. Article 177 further provides that overseas securities regulatory authorities are not allowed to carry out investigation and
evidence collection directly within the territory of the PRC, and that any Chinese entities and individuals are not allowed to provide
documents or materials related to securities business activities to overseas agencies without prior consent of the securities regulatory
authority of the State Council and the competent departments of the State Council.
Our
principal business operations are conducted in the PRC. In the event that the U.S. regulators carry out investigations on us and there
is a need to conduct investigation or collect evidence within the territory of the PRC, the U.S. regulators may not be able to carry
out such investigation or evidence collection directly in the PRC under the PRC laws. The U.S. regulators may consider cross-border cooperation
with securities regulatory authority of the PRC by way of judicial assistance, diplomatic channels or regulatory cooperation mechanism
established with the securities regulatory authority of the PRC. However, there is no assurance that the U.S. regulators could succeed
in establishing such cross-border cooperation in a specific case or could establish the cooperation in a timely manner. If U.S. regulators
are unable to conduct such investigations, such U.S. regulators may determine to suspend and ultimately delist our ordinary shares from
the Nasdaq Capital Market or choose to suspend or de-register our SEC registration.
Uncertainties
with respect to China’s legal system could materially and adversely affect us.
There
are risks arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws. In particular,
there are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations, and changes in policies, laws,
rules and regulations in the PRC could adversely affect us. Most of our operations are conducted in the PRC through our subsidiaries,
the VIE and its subsidiaries, and are governed by PRC laws, rules and regulations. The PRC legal system is a civil law system based on
written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have
limited precedential value.
In 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,
PRC law still restricts certain foreign investments in China, and such laws are continually evolving, as more fully described under “Item
4. Information on the Company - B. Business Overview - Regulations - Regulations Relating to Foreign Investment”. 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 interpretation and enforcement of these laws and regulations involve uncertainties. Further,
rules and regulations in China can change quickly with little advance notice. In particular, because these laws, rules and regulations
are relatively new and quickly evolving, and because of the limited number of published decisions and the non-precedential nature of
these decisions, and because the laws, rules and regulations often give the relevant regulator certain discretion in how to enforce them,
the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable.
Since PRC administrative and court authorities have significant discretion in interpreting
and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and
court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal
requirements and our ability to enforce our contractual arrangements and rights, including under the Contractual Arrangements,
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, which could result in a material change in our operations and/or the value of our ordinary shares. In
addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources
and management attention. Further, such evolving laws and regulations and the inconsistent enforcement thereof could also lead to failure
to obtain or maintain licenses and permits to do business in China, which would adversely affect us.
Our business generates
and processes a large amount of data, and we are required to comply with PRC and other applicable laws relating to privacy and
cybersecurity. The improper use or disclosure of data could have a material and adverse effect on our business and prospects.
Our business generates and
processes a large quantity of data. We face risks inherent in handling and protecting a large volume of data. In general, we expect
that data security and data protection compliance will receive greater attention and focus from regulators, both domestically and
globally, as well as attract continued or greater public scrutiny and attention going forward, which could increase our compliance
costs and subject us to heightened risks and challenges associated with data security and protection. If we are unable to manage
these risks, we could become subject to penalties, including fines, suspension of business and revocation of required licenses, and
our reputation and results of operations could be materially and adversely affected.
The PRC regulatory and enforcement
regime with regard to data security and data protection is evolving and may be subject to different interpretations or significant changes.
Moreover, different PRC regulatory bodies, including the Standing Committee of the National People’s Congress, or the SCNPC, the
Ministry of Industry and Information Technology, or the MIIT, the CAC, the Ministry of Public Security, or the MPS and State Administration
of Market Regulation, or the SAMR, have enforced data privacy and protections laws and regulations with varying standards and applications.
See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations Relating to Information
Security and Privacy Protection.” Compliance with the PRC Cybersecurity Law, the PRC National Security Law, the Data Security Law,
the Personal Information Protection Law, the Cybersecurity Review Measures, as well as additional laws and regulations that may come
into effect in the future, including the Measures for the Security Assessment of Cross-border Data Transmission and other data security
and personal information protection laws and regulations, may result in a significant increase in our compliance costs, force us to change
our business practices, adversely affect our business performance as well as subject us to negative publicity, which could harm our reputation
among users and negatively affect the trading price of our securities. As many of these laws and regulations have not come into effect
yet, or only came into effect recently, there are uncertainties with respect to how they will be interpreted, implemented and enforced
in practice, and we may be subject to regulatory investigations, fines, suspension of businesses and revocation of licenses.
As of the date of this annual
report, we, our subsidiaries and the VIE, are not covered by permissions requirements from the CAC or any other governmental agency that
is required to approve the VIE’s operations, as we, our subsidiaries and the VIE (i) are not required to go through cybersecurity
review by the CAC, and (ii) have not received or were denied any such requisite permissions or approvals by any PRC authority. However,
considering that the interpretation and application of data protection laws are often uncertain, in flux and complicated, and the regulatory
framework in China for the protection of information in cyberspace is evolving quickly, we cannot assure you that we would be able to
fully comply with them. Any failure to or delay in clearing such review process would subject us to restrictions and penalties imposed
by the CAC or other PRC regulatory authorities, which could include fines and penalties on our operations in China, delays of or restrictions
on the repatriation of the proceeds from our offshore offerings into China, or other actions that could materially and adversely affect
our business, financial condition, results of operations, and prospects, as well as the trading price of our securities.
The following are examples of certain recent PRC regulatory activities
in this area:
Cybersecurity and Data Security
In June 2021, the SCNPC promulgated
the Data Security Law, which took effect in September 2021. The Data Security Law, among other things, provides for security review procedure
for data-related activities that may affect national security. The Data Security Law prohibits entities and individuals in China from
providing any foreign judicial or law enforcement authority with any data stored in China without approval from competent PRC authority,
and sets forth the legal liabilities of entities and individuals found to be in violation of their data protection obligations, including
rectification order, warning, fines, suspension of relevant business, and revocation of business permits or licenses. In July 2021, the
state council promulgated the Regulations on Protection of Critical Information Infrastructure, which became effective on September 1,
2021. Pursuant to this regulation, critical information infrastructure means key network facilities or information systems of critical
industries or sectors, such as public communication and information service, energy, transportation, water conservation, finance, public
services, e-government affairs and national defense science, the damage, malfunction or data leakage of which may endanger national security,
people’s livelihoods and the public interest. In December 2021, the CAC, together with other authorities, jointly promulgated the
Cybersecurity Review Measures, which became effective on February 15, 2022 and replaces its predecessor regulation. Pursuant to the Cybersecurity
Review Measures, critical information infrastructure operators that procure internet products and services must be subject to the cybersecurity
review if their activities affect or may affect national security. The Cybersecurity Review Measures further stipulates that network
platform operators that hold personal information of over one million users must apply with the Cybersecurity Review Office for a cybersecurity
review before any public listing on a foreign stock exchange. As of the date of this annual report, no detailed rules or implementation
rules have been issued by any authority and we have not been informed that we are a critical information infrastructure operator by any
government authorities. Furthermore, the exact scope of “critical information infrastructure operators” under the current
regulatory regime remains unclear, and the PRC government authorities may have wide discretion in the interpretation and enforcement
of the applicable laws. Therefore, it is uncertain whether we would be deemed to be a critical information infrastructure operator under
PRC law. If we are deemed to be a critical information infrastructure operator under the PRC cybersecurity laws and regulations, we may
be subject to obligations in addition to what we have fulfilled under the PRC cybersecurity laws and regulations.
In November 2021, the CAC released
the Regulations of Internet Data Security Management (Draft for Comments), or the Draft Regulations. The Draft Regulations provide that
data processors refer to individuals or organizations that, during their data processing activities such as data collection, storage,
utilization, transmission, publication and deletion, have autonomy over the purpose and the manner of data processing. In accordance
with the Draft Regulations, data processors shall apply for a cybersecurity review for certain activities, including, among other things,(i)
the listing in a foreign country of data processors that process the personal information of more than one million users and (ii) any
data processing activity that affects or may affect national security. However, there have been no clarifications from the relevant authorities
as of the date of this annual report as to the standards for determining whether an activity is one that “affects or may affect
national security.” In addition, the Draft Regulations requires that data processors that process “important data”
or are listed overseas must conduct an annual data security assessment by itself or commission a data security service provider to do
so, and submit the assessment report of the preceding year to the municipal cybersecurity department by the end of January each year.
As of the date of this annual report, the Draft Regulations was released for public comment only, and their respective provisions and
anticipated adoption or effective date may be subject to change with substantial uncertainty. In light of the fact that the interpretation
and application of data protection laws are often uncertain, in flux and complicated, it is possible that existing or newly introduced
laws and regulations, or their interpretation, application or enforcement, could significantly affect the value of our data, force us
to change our data collection, data use and other business practices, cause us to incur significant compliance costs, and subject us
to regulatory investigations, fines, suspension of businesses and revocation of licenses, which may materially and adversely affect our
business, financial condition, results of operations, and prospects, as well as the trading price of our securities. Furthermore, if
such regulations were to be adopted in their current form, given that our business generates and processes a large quantity of data,
we may be subject to additional regulatory obligations with respect to data security, and may face challenges in addressing their requirements
and amending our internal data processing policies and practices to ensure compliance therewith.
Moreover, on July 7, 2022,
the CAC promulgated the Measures for the Security Assessment of Cross-border Data Transmission, which will come into effect on September
1, 2022. According to these measures, personal data processors will be subject to security assessment conducted by the CAC prior to any
cross-border transfer of data if the transfer involves (i) important data; (ii) personal information transferred overseas by operators
of critical information infrastructure or a data processor that has processed personal data of more than one million persons; (iii) personal
information transferred overseas by a data processor who has already provided personal data of 100,000 persons or sensitive personal
data of 10,000 persons overseas since January 1 of last year; or (iv) other circumstances as requested by the CAC. According to the official
interpretation of the CAC, the Measures for the Security Assessment of Cross-border Data Transmission cover (1) overseas transmission
and storage by data processors of data generated during PRC domestic operations, and (2) access to or use of the data collected and generated
by data processors and stored in the PRC by overseas institutions, organizations or individuals. Furthermore, any cross-border data transfer
activities conducted in violation of the Measures for the Security Assessment of Cross-border Data Transmission before the effectiveness
of these measures are required to be rectified by March 2023. As of the date of this annual report, these measures have not taken effect,
and substantial uncertainties still exist with respect to the interpretation and implementation of these measures in practice and how
they will affect our business operations. Despite the fact that we do not collect or process personal data of more than one million persons,
nor collect or process personal data of 100,000 persons or sensitive personal data of 10,000 persons, considering that the interpretation
and application of data protection laws are often uncertain, in flux and complicated, if we were found by the regulatory authorities
to have failed to comply with the applicable rules and regulations on cyber security, we would be subject to warnings, fines, confiscation
of illegal revenue, revocation of licenses, cancellation of filings, or even criminal liability and our business, results of operations
and financial condition would also be adversely affected. Furthermore, in light of the evolving regulatory framework in China for the
protection of information in cyberspace, we may be subject to uncertainties of and adjustments to our business practices, which may incur
additional operating expenses and adversely affect our results of operations and financial condition.
Although
as of the date of this annual report, we, our subsidiaries and the VIE, are not covered by permissions requirements from the CAC or any
other governmental agency that is required to approve the VIE’s operations, considering the uncertainty of the interpretation and
application of data protection laws, we will closely monitor and assess any development in the rule-making process. To address the concerns
brought by the recently issued laws and regulations on data privacy and security, we are taking a more prudent approach in business operation
and believe we can reduce our risk of exposure related to the implementation of these laws and regulations to a certain extent by the
following measures:
| l | Pay
close attention to the latest trends in regulatory development and maintain continuous communication
with the relevant regulatory authorities; |
| l | Enhance
and improve the data processing activities in accordance with the latest regulatory requirements; |
| l | Adopt
additional security measures and internal control system to protect the customer data from
the risks of data leakage, theft and destruction and illegal control, and make advanced preparations
in light of the regulatory development; and |
| l | Continue
to improve cybersecurity awareness in our future network development and deployment. |
Although
we are making efforts to comply with the applicable laws, regulations and standards, there can be no assurance that our measures will
be effective and sufficient under the foregoing rules and regulations. If we were found by the regulatory authorities to have failed
to comply with the applicable rules and regulations on cyber security, we would be subject to warnings, fines, confiscation of illegal
revenue, revocation of licenses, cancellation of filings, or even criminal liability and our business, results of operations and financial
condition would also be adversely affected.
Personal Information
and Privacy
In August 2021, the SCNPC promulgated
the Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy
protection and took effect on November 1, 2021. We update our privacy policies from time to time to meet the latest regulatory requirements
of PRC government authorities and adopt technical measures to protect data and ensure cybersecurity in a systematic way. Nonetheless,
the Personal Information Protection Law elevates the protection requirements for personal information processing, and many specific requirements
of this law remain to be clarified by the regulatory authorities, and courts in practice. We may be required to make further adjustments
to our business practices to comply with the personal information protection laws and regulations.
Many of
the data-related legislations are relatively new and certain concepts thereunder remain subject to interpretation by the regulators.
If any data that we possess belongs to data categories that are subject to heightened scrutiny, we may be required to adopt stricter
measures for protection and management of such data. The Cybersecurity Review Measures and the Draft Regulations remain unclear on whether
the relevant requirements will be applicable to companies that are already listed in the United States, such as us. We cannot predict
the impact of the Cybersecurity Review Measures and the Draft Regulations, if any, at this stage, and we will closely monitor and assess
any development in the rule-making process. If the Cybersecurity Review Measures and the enacted version of the Draft Regulations mandate
clearance of cybersecurity review and other specific actions to be taken by issuers like us, we face uncertainties as to whether these
additional procedures can be completed by us timely, or at all, which may subject us to government enforcement actions and investigations,
fines, penalties or suspension of our non-compliant operations, and materially and adversely affect our business and results of operations.
As of the date of this annual report, we have not been involved in any formal investigations on cybersecurity review made by the CAC
on such basis. In general, compliance with the existing PRC laws and regulations, as well as additional laws and regulations that PRC
regulatory bodies may enact in the future, related to data security and personal information protection, may be costly and result in
additional expenses to us, and subject us to negative publicity, which could harm our reputation and business operations. There are also
uncertainties with respect to how such laws and regulations will be implemented and interpreted in practice.
The
approval of, or report and fillings with the CSRC or other PRC government authorities may be required in connection with our offshore
offerings under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete
such filing and report process.
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, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC
domestic companies and controlled by PRC persons or entities to obtain the approval of the CSRC prior to the listing and trading
of such special purpose vehicle’s securities on an overseas stock exchange. The interpretation and application of the regulations
remain unclear, and our offshore offerings may ultimately require approval of the CSRC. If the CSRC approval is required, it is
uncertain whether we can or how long it will take us to obtain the approval and, even if we obtain such CSRC approval, the approval
could be rescinded. Any failure to obtain or delay in obtaining the CSRC approval for any of our offshore offerings, or a rescission
of such approval if obtained by us, would subject us to sanctions imposed by the CSRC or other PRC regulatory authorities, which
could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside
of China, and other forms of sanctions that may materially and adversely affect our business, financial condition, and results
of operations.
On July 6, 2021, the relevant
PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law.
These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas
listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory
systems to deal with the risks and incidents faced by China-based overseas-listed companies. As a follow-up, on December 24, 2021,
the CSRC issued a draft of the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing
by Domestic Companies, and a draft of Administration Measures for the Filing of Overseas Securities Offering and Listing by Domestic
Companies for public comments. These draft measures propose to establish a new filing-based regime to regulate overseas offerings
and listings by domestic companies. Specifically, an overseas offering and listing by a PRC company, whether directly or indirectly,
an initial or follow-on offering, must be filed with the CSRC. The examination and determination of an indirect offering and listing
will be conducted on a substance-over-form basis, and an offering and listing shall be deemed as a PRC company’s indirect
overseas offering and listing if the issuer meets the following conditions: (i) any of the operating income, gross profit, total
assets, or net assets of the PRC enterprise in the most recent fiscal year was more than 50% of the relevant line item in the issuer’s
audited consolidated financial statement for that year; and (ii) senior management personnel responsible for business operations
and management are mostly PRC citizens or are ordinarily resident in the PRC, and the principal place of business is in the PRC
or carried out in the PRC. The issuer or its affiliated PRC entity, as the case may be, shall file with the CSRC for its initial
public offering, follow-on offering and other equivalent offing activities. Particularly, the issuer shall submit the filing with
respect to its initial public offering and listing within three business days after its initial filing of the listing application,
and submit the filing with respect to its follow-on offering within three business days after the completion of the follow-on offering.
Failure to comply with the filing requirements may result in fines to the relevant PRC companies, suspension of their businesses,
revocation of their business licenses and operation permits and fines on the controlling shareholder and other responsible persons.
Theses draft measures also set forth certain regulatory red lines for overseas offerings and listings by PRC enterprises. On April
2, 2022, the CSRC promulgated Provisions on Strengthening the Confidentiality and Archives Administration of Overseas Securities
Issuance and Listing by Domestic Enterprises (Draft for Comments), according to which, a domestic company that plans to, either
directly or through its overseas listed entity, publicly disclose or provide to relevant entities or individuals including securities
companies, securities service providers, and overseas regulators, documents and materials that contain state secrets or government
work secrets, shall first obtain approval from competent authorities according to law, and file with the secrecy administrative
department at the same level. A domestic company that plans to, either directly or through its overseas listed entity, publicly
disclose or provide to relevant entities or individuals including securities companies, securities service providers, and overseas
regulators, other documents and materials that, if divulged, will jeopardize national security or public interest, shall strictly
fulfil relevant procedures stipulated by applicable national regulations. For more information, see “Item 4. Information
on the Company—B. Business Overview—Regulations—Regulations Related to Mergers and Acquisitions and Overseas
Listings.”
There are substantial uncertainties
as to whether these draft measures to regulate direct or indirect overseas offering and listing would be further amended, revised
or updated, their enactment timetable and final content. As the CSRC may formulate and publish guidelines for filings in the future,
the draft of Administration Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies for public
comments does not provide for detailed requirements of the substance and form of the filing documents. In a Q&A released on
its official website, the respondent CSRC official indicated that the proposed new filing requirement will start with new companies
and the existing companies seeking to carry out activities like follow-on financing. As for the filings for the existing companies,
the regulator will grant adequate transition period and apply separate arrangements. The Q&A also addressed the contractual
arrangements and pointed out that if relevant domestic laws and regulations have been observed, companies with compliant VIE structure
may seek overseas listing after completion of the CSRC filings. Nevertheless, it does not specify what qualify as compliant VIE
structures and what relevant domestic laws and regulations are required to be complied with. The draft Provisions on Strengthening
the Confidentiality and Archives Administration of Overseas Securities Issuance and Listing by Domestic Enterprises does not provide
for a clear scope of government work secrets or the documents and materials that, if divulged, will jeopardize national security
or public interest, and the PRC government authorities may have wide discretion in the interpretation and enforcement of the applicable
laws. Given the substantial uncertainties surrounding the latest CSRC filing requirements at this stage, we cannot assure you that
we will be able to complete the filings and fully comply with the relevant new rules on a timely basis, if at all.
As of the date of this annual
report, we, our subsidiaries and the VIE, are not covered by permissions requirements from the CSRC, or any other governmental agency
that is required to approve the VIE’s operations, as we, our subsidiaries and the VIE (i) are not required to obtain permissions
from the CSRC; and (iii) have not received or were denied any such requisite permissions or approvals by any PRC authority.
However, given that our business
generates and processes a large quantity of data, in connection with any future overseas capital markets activities, we may need to obtain
permission from the CSRC or meet other regulatory requirements that may be adopted in the future by PRC authorities. To the extent such
requirements are or become applicable, we cannot assure you that we would be able to fully comply with them on a timely basis, if at
all. Any failure to obtain or delay in obtaining such permission or meeting such requirements would subject us to restrictions and penalties
imposed by the CSRC or other PRC regulatory authorities, which could include fines and penalties on our operations in China, delays of
or restrictions on the repatriation of the proceeds from our offshore offerings into China, or other actions that could materially and
adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our securities.
Changes
in international trade policies, trade disputes, barriers to trade, or the emergence of a trade war may dampen growth in China and may
have a material adverse effect on our business.
Political
events, international trade disputes, and other business interruptions could harm or disrupt international commerce and the global economy,
and could have a material adverse effect on us and our customers, service providers, and other partners. International trade disputes
could result in tariffs and other protectionist measures which may materially and adversely affect our business. Tariffs could increase
the cost of the goods and products which could affect customers’ spending levels. In addition, political uncertainty surrounding
international trade disputes and the potential of the escalation to trade war and global recession could have a negative effect on customer
confidence, which could materially and adversely affect our business. We may have also access to fewer business opportunities, and our
operations may be negatively impacted as a result. In addition, the current and future actions or escalations by either the United States
or China that affect trade relations may cause global economic turmoil and potentially have a negative impact on our markets, our business,
or our results of operations, and we cannot provide any assurances as to whether such actions will occur or the form that they may take.
You
may experience difficulties in effecting service of legal process, enforcing foreign judgments, including those obtained in the U.S.,
or bringing actions in China against us or our management based on foreign laws.
We
are a holding company incorporated under the laws of the Cayman Islands. We conduct substantially all of our operations in China and
substantially all of our assets are located in China. In addition, all our senior employees reside within China for a significant portion
of the time and most are PRC residents. As a result, it may be difficult for our shareholders to effect service of process upon us or
those persons inside mainland China, including our management. In addition, China does not have treaties providing for the reciprocal
recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition
and enforcement in China of judgments of a court in any of these non-PRC jurisdictions, including the U.S., in relation to any matter
not subject to a binding arbitration provision may be difficult or impossible.
We
may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may
have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our
ability to conduct our business.
We
are a Cayman Islands holding company and we rely principally on dividends and other distributions on equity from our PRC subsidiaries
for our cash requirements, including for services of any debt we may incur. Our PRC subsidiaries’ ability to distribute dividends
is based upon its distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to its respective shareholders
only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each
of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve
until such reserve reaches 50% of its registered capital. Each of our PRC subsidiaries as a FIE is also required to further set aside
a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at its
discretion. These reserves are not distributable as cash dividends. If our PRC subsidiaries incur debt on their own behalf in the future,
the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability
of our PRC subsidiaries to distribute dividends or other payments to their respective shareholders could materially and adversely limit
our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and
conduct our business.
In addition, the Enterprise
Income Tax Law, or EIT Law, and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to
dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties
or arrangements between the PRC central government and governments of other countries or regions where the non-PRC resident enterprises
are incorporated.
Pursuant to a special arrangement
between Hong Kong and China, such rate may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity
interest in the PRC company. Under the Notice of the State Taxation Administration on Issues regarding the Administration of the
Dividend Provision in Tax Treaties promulgated in 2009, the taxpayer needs to satisfy certain conditions to enjoy the benefits
under a tax treaty. These conditions include, but are not limited to: (i) the taxpayer must be the beneficial owner of the relevant
dividends, and (ii) the corporate shareholder to receive dividends from the PRC subsidiaries must have met the direct ownership
thresholds during the 12 consecutive months preceding the receipt of the dividends. Further, the STA promulgated the Announcement
of the Certain Issues with Respect to the “Beneficial Owner” in Tax Treaties in 2018, which sets forth certain detailed
factors in determining “beneficial owner” status, and specifically, if an applicant’s business activities do
not constitute substantive business activities, the applicant will not qualify as a “beneficial owner.” Entitlement
to a lower tax rate on dividends according to tax treaties or arrangements between the PRC central government and governments of
other countries or regions is subject to the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties
promulgated by the STA on October 14, 2019 and became effective from January 1, 2020, which provides that non-resident enterprises
are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead,
non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria
to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, collect and retain relevant materials
for reference in accordance with these treaties and accept supervision and management from the tax authorities.
PRC regulation of
loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may
restrict or prevent us from using the proceeds of our initial public offering to make loans or additional capital contributions
to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Any funds we transfer to
our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration
with relevant governmental authorities in China. According to the relevant PRC regulations on FIEs in China, capital contributions
to our PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management
Information System and registration with other governmental authorities in China. In addition, (a) any foreign loan procured by
our PRC subsidiaries is required to be registered with SAFE or its local branches, and (b) our PRC subsidiaries may not procure
loans which exceed the statutory limits. Any medium-or long- term loan to be provided by us to our PRC subsidiaries must be filed
and registered with the National Development and Reform Commission, or NDRC and the SAFE or its local branches. We may not obtain
these government approvals or complete such registrations on a timely basis, with respect to future capital contributions or foreign
loans by us to our PRC subsidiaries. If we fail to receive such approvals or complete such registration, our ability to use the
proceeds of our initial public offering and to capitalize our PRC operations may be negatively affected, which could materially
and adversely affect our liquidity and our ability to fund and expand our business.
In 2008, SAFE promulgated
the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of
Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142. SAFE Circular 142 regulates the conversion by FIEs
of foreign currency into Renminbi by restricting the usage of converted Renminbi. SAFE Circular 142 provides that any Renminbi
capital converted from registered capitals in foreign currency of FIEs may only be used for purposes within the business scopes
approved by PRC governmental authority and such Renminbi capital may not be used for equity investments within China unless otherwise
permitted by PRC law. In addition, the SAFE strengthened its oversight of the flow and use of Renminbi capital converted from registered
capital in foreign currency of FIEs. The use of such Renminbi capital may not be changed without SAFE approval, and such Renminbi
capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been utilized. On July 4, 2014,
SAFE issued the Circular of the SAFE on Relevant Issues Concerning the Pilot Reform in Certain Areas of the Administrative Method
of the Conversion of Foreign Exchange Funds by Foreign-invested Enterprises, or SAFE Circular 36, which launched the pilot reform
of administration regarding conversion of foreign currency registered capitals of FIEs in 16 pilot areas. According to SAFE Circular
36, some of the restrictions under SAFE Circular 142 will not apply to the settlement of the foreign exchange capitals of an ordinary
FIE in the pilot areas, and such FIE is permitted to use Renminbi converted from its foreign-currency registered capital to make
equity investments in the PRC within and in accordance with the authorized business scope of such FIEs, subject to certain registration
and settlement procedure as set forth in SAFE Circular 36. On March 30, 2015, the SAFE promulgated the Circular on Reforming the
Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19. SAFE
Circular 19 took effect as of June 1, 2015 and superseded SAFE Circular 36 and SAFE Circular 142 on the same date. SAFE Circular
19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allows FIEs
to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted
from their foreign exchange capitals for expenditure beyond their business scopes, providing entrusted loans or repaying loans
between non-financial enterprises. Violations of these Circulars could result in severe monetary or other penalties. SAFE Circular
19 may significantly limit our ability to use transfer any foreign currency we hold, including the net proceeds of our initial
public offering to fund the establishment of new entities in China by our subsidiaries, to invest in or acquire any other PRC companies
through our PRC subsidiaries, or to establish variable interest entities in the PRC, which may materially and adversely affect
our business, financial condition and results of operations. In light of the various requirements imposed by PRC regulations on
loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete
the necessary registration or obtain the necessary approval on a timely basis, or at all. If we fail to complete the necessary
registration or obtain the necessary approval, our ability to make loans or equity contributions to our PRC subsidiaries may be
negatively affected, which could materially and adversely affect our PRC subsidiaries’ liquidity and its ability to fund
its working capital and expansion projects and meet its obligations and commitments.
Discontinuation
of any of the preferential tax treatments available to us or imposition of any additional taxes could adversely affect our financial
condition and results of operations.
The EIT Law and its implementation
rules, effective 2008, unified the previously existing separate income tax laws for domestic enterprises and FIEs and adopted a
unified 25% enterprise income tax, or the EIT, rate applicable to all resident enterprises in China, subject to certain exceptions.
In addition, certain enterprises may enjoy a preferential EIT rate of 15% under the EIT Law if they qualify as High and New Technology
Enterprise, or HNTE, subject to various qualification criteria. For example, in 2021, Infobird Beijing qualified as a HNTE and
was eligible for a 15% preferential tax rate effective for two years starting from 2021 to 2023. If Infobird Beijing fails to maintain
or renew its HNTE status, its applicable EIT rate may be increased to 25%, which could have a material adverse effect on our financial
condition and results of operations.
Fluctuations
in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.
The
value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political
and economic conditions in China and by China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old
policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over
the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the
U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly
and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year
review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016,
Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S.
dollar, the Euro, the Japanese yen and the British pound. With the development of the foreign exchange market and progress towards interest
rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange
rate system, and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar
in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the
Renminbi and the U.S. dollar in the future.
Significant
revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the
Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose
of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the Renminbi
would have a negative effect on the U.S. dollar amount available to us. In addition, appreciation or depreciation in the value of the
Renminbi relative to U.S. dollars would affect our financial results reported in U.S. dollar terms regardless of any underlying change
in our business or results of operations.
Very
limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into
any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging
transactions in the future, the availability and effectiveness of these hedges may be limited, and we may not be able to adequately hedge
our exposure, or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict
our ability to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material and adverse effect
on your investment.
PRC
governmental control of currency conversion
may limit our ability to utilize our net revenues effectively and affect the value of your investment.
The
PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of
currency into or out of China, which essentially may restrict the ability to transfer funds into or out of China. We receive substantially
all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend
payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions,
can be made in foreign currencies without prior approval of the SAFE by complying with certain procedural requirements. Specifically,
under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries
in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities
is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment
of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of
our PRC subsidiaries to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other
capital expenditure payments outside China in a currency other than Renminbi. The PRC government may at its discretion restrict access
to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining
sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our
shareholders.
Certain
PRC regulations may make it more difficult for us to pursue growth through acquisitions.
Among other things, 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, established additional procedures and requirements that could make merger and
acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that
the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor acquires control of a PRC domestic
enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior
Notification of Concentrations of Undertakings, issued by the State Council in 2008, are triggered. Moreover, the Anti-Monopoly
Law promulgated by the Standing Committee of the NPC which became effective in 2008 requires that transactions which are deemed
concentrations and involve parties with specified turnover thresholds must be cleared by the MOFCOM before they can be completed.
In addition, PRC national security review rules which became effective in September 2011 require acquisitions by foreign investors
of PRC companies engaged in military related or certain other industries that are crucial to national security be subject to security
review before consummation of any such acquisition. 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 in September 2011, to implement Circular 6. Under Circular 6, a security review is
required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers
and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises with “national
security” concerns. Under the foregoing MOFCOM regulations, MOFCOM will focus on the substance and actual impact of the transaction
when deciding whether a specific merger or acquisition is subject to security review. If MOFCOM decides that a specific merger
or acquisition is subject to a security review, it will submit it to the Inter-Ministerial Panel, an authority established under
Circular 6 led by the NDRC, and MOFCOM under the leadership of the State Council, to carry out security review. The regulations
prohibit foreign investors from bypassing the security review by structuring transactions through trusts, indirect investments,
leases, loans, control through contractual arrangements or offshore transactions. There is no explicit provision or official interpretation
stating that the merging or acquisition of a company engaged in the software services 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.
On December 19, 2020, the NDRC and the MOFCOM jointly promulgated the Measures on the Security Review of Foreign Investment, effective
on January 18, 2021, setting forth provisions concerning the security review mechanism on foreign investment, including the types
of investments subject to review, review scopes and procedures, among others. The Office of the Working Mechanism of the Security
Review of Foreign Investment, or the Office of the Working Mechanism, will be established under the NDRC, who will lead the task
together with the MOFCOM. Foreign investor or relevant parties in China must declare the security review to the Office of the Working
Mechanism prior to the investments in, among other industries, important cultural products and services, important information
technology and internet products and services, important financial services, key technologies and other important fields relating
to national security, and obtain control in the target enterprise. See “Item 4. Information on the Company—B. Business
Overview—Regulations— Regulations Relating to Foreign Investment.”
We may pursue potential strategic acquisitions that are complementary to our business and operations. Complying with the
requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including
obtaining approval or clearance from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our
ability to expand our business or maintain our market share.
PRC
regulations relating to the establishment of offshore special purpose 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, limit our PRC
subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
In
July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore
Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant
Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special
Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires
PRC residents (including PRC individuals and PRC corporate entities) to register with SAFE or its local branches in connection with their
direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be
applicable to any offshore acquisitions that we make in the future.
Under
SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments
in offshore SPVs will be required to register such investments with the SAFE or its local branches. In addition, any PRC resident who
is a direct or indirect shareholder of a SPV is required to update its filed registration with the local branch of SAFE with respect
to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders
to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration
or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or
the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional
capital contributions into its subsidiary in China. On February 13, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving
Foreign Exchange Administration Policy on Direct Investment, or SAFE Circular 13, which became effective on June 1, 2015. Under SAFE
Circular 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments,
including those required under SAFE Circular 37, will be filed with qualified banks instead of the SAFE. The qualified banks will directly
examine the applications and accept registrations under the supervision of the SAFE.
We
cannot assure you that all of our shareholders that may be subject to SAFE regulations have completed all necessary registrations with
the local SAFE branch or qualified banks as required by SAFE Circular 37, and we cannot assure you that these individuals may continue
to make required filings or updates on a timely manner, or at all. We can provide no assurance that we are or will in the future continue
to be informed of identities of all PRC residents holding direct or indirect interest in our company. Any failure or inability by such
individuals to comply with the SAFE regulations may subject us to fines or legal sanctions, such as restrictions on our cross-border
investment activities or our PRC subsidiaries’ ability to distribute dividends to, or obtain foreign exchange-denominated loans
from, our company or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to
make distributions to you could be materially and adversely affected.
Furthermore,
as these foreign exchange regulations are still relatively new and their interpretation and implementation has been constantly evolving,
it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted,
amended and implemented by the relevant government authorities. For example, we may be subject to a more stringent review and approval
process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings,
which may materially and adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC
domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary
approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability
to implement our acquisition strategy and could adversely affect our business and prospects.
As
of the date of this annual report, to our knowledge, all of our shareholders had registered according to SAFE Circular 37.
We
face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On
February 3, 2015, the State Administration of Taxation of the PRC, or the SAT, issued the Announcement of the State Administration of
Taxation on Several Issues Relating to Enterprise Income Tax on Indirect Transfers of Assets by Non-resident Enterprises, or SAT Bulletin
7, which was partially abolished on December 1, 2017 and December 29, 2017. SAT Bulletin 7 extends its tax jurisdiction to transactions
involving transfer of taxable assets through the offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin
7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market.
SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer)
of taxable assets.
On
October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident
Enterprise Income Tax at Source, or SAT Bulletin 37, which was partially revised. SAT Bulletin 37 came into effect on December 1, 2017.
The SAT Bulletin 37 further clarifies the practice and procedure of withholding of non-resident enterprise income tax.
Where
a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which
is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable
assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC
tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established
for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to
PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable
taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee
may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We
face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved,
such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing
obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company
is transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfer of shares in our company by investors who
are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin
37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 or to request the
relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not
be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
Additional
factors outside of our control related to doing business in China could negatively affect our business.
Additional
factors that could negatively affect our business include a potential significant revaluation of the Renminbi, which may result in an
increase in the cost of producing products in China, labor shortages and increases in labor costs in China as well as difficulties in
moving products manufactured in China out of the country, whether due to port congestion, labor disputes, slowdowns, product regulations
and/or inspections or other factors. Prolonged disputes or slowdowns can negatively impact both the time and cost of transporting goods.
Natural disasters or health pandemics impacting China can also have a significant negative impact on our business. Further, the imposition
of trade sanctions or other regulations against products imported by us from, or the loss of “normal trade relations” status
with, China, could significantly increase our cost of products exported outside of China and harm our business.
The
recent joint statement by the SEC and the Public Company Accounting Oversight Board, or the PCAOB, proposed rule changes submitted by
Nasdaq, and the Holding Foreign Companies Accountable Act, or the HFCAA, all call for additional and more stringent criteria to be applied
to emerging market companies upon assessing the qualification of their auditors, especially non-U.S. auditors who are not inspected by
the PCAOB.
On
April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint
statement highlighting the risks associated with investing in companies based in or that 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 a “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 HFCAA requiring a foreign company to certify it is not owned or controlled by a foreign government
if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the
PCAOB is unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to
trade on a national exchange. On December 2, 2020, the U.S. House of Representatives approved the HFCAA. On December 18, 2020, the HFCAA
was signed into law. Additionally, in July 2020, the U.S. President’s Working Group on Financial Markets issued recommendations
for actions that can be taken by the executive branch, the SEC, the PCAOB or other federal agencies and department with respect to Chinese
companies listed on U.S. stock exchanges and their audit firms, in an effort to protect investors in the United States. In response,
on November 23, 2020, the SEC issued guidance highlighting certain risks, and their implications to U.S. investors, associated with investments
in China-based issuers and summarizing enhanced disclosures the SEC recommends China-based issuers make regarding such risks.
On
December 2, 2021, the SEC adopted final amendments to its rules relating to the implementation of certain disclosure and documentation
requirements of the HFCAA, which took effect on January 10, 2022. We will be required to comply with these rules if the SEC identifies
us as having a “non-inspection” year, as defined in the rules, under a process to be subsequently established by the SEC.
The SEC is assessing how to implement other requirements of the HFCAA, including the listing and trading prohibition requirements described
above. Under the HFCAA, our securities may be prohibited from trading on the Nasdaq or other U.S. stock exchanges if our auditor is not
inspected by the PCAOB for three consecutive years, and this ultimately could result in our shares being delisted. Furthermore, on June
22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCAA
and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to
PCAOB inspections for two consecutive years instead of three consecutive years, meaning the number of “non-inspection” years
would be decreased from three to two, and thus, would reduce the time before securities may be prohibited from trading or delisted. 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.
Pursuant to the HFCAA, 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; and (2) Hong Kong, a Special Administrative
Region of the PRC, because of positions taken by PRC authorities in those jurisdictions. Our auditor, Friedman LLP, who audited our financial
statements for the fiscal years ended December 31, 2021, 2020 and 2019, is not headquartered in mainland China or Hong Kong and was not
identified by the PCAOB in its report on December 16, 2021 as a firm subject to the PCAOB’s determination. Notwithstanding the
foregoing, if the PCAOB is not able to fully conduct inspections of our auditor’s work papers in China, investors may be deprived
of the benefits of such inspection which could result in limitation or restriction of our access to the U.S. capital markets and trading
of our securities may be prohibited under the HFCAA.
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, 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. Although our auditor was not identified by the PCAOB in its report as a firm subject to the
PCAOB’s determination, should the PCAOB be unable to fully conduct inspection of our auditor’s work papers in China, this
could adversely affect us and our securities for the reasons noted above.
Our auditor, Friedman LLP,
the independent registered public accounting firm that issues the audit report included elsewhere in this annual report and who audited
our financial statements for the fiscal years ended December 31, 2021, 2020 and 2019, as an auditor of companies that are traded publicly
in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts
regular inspections to assess our auditor’s compliance with the applicable professional standards. Our auditor, Friedman LLP, is
headquartered in Manhattan, New York, and has been inspected by the PCAOB on a regular basis with the last inspection in June 2018. However,
the recent developments may add uncertainties and 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.
Risks
Related to our Ordinary Shares
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.
Prior
to our initial public offering, we were a private company with limited accounting personnel and other resources with which to address
our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal control over
financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial
reporting.
In the course of auditing our
consolidated financial statements as of and for the year ended December 31, 2021, we and our independent registered public accounting
firm identified eight material weaknesses in our internal control over financial reporting. As defined in standards established by the
Public Company Accounting Oversight Board (United States), a “material weakness” is a deficiency, or a combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual
or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified relate to (i)
a lack of accounting staff and resources with appropriate knowledge of generally accepted accounting principles in the United States,
or U.S. GAAP, and SEC reporting and compliance requirements. The other material weaknesses related to the absence of policies and procedures
and related risk mitigations surrounding our IT policies and procedures, including (ii) deficiencies in third party vendor management,
(iii) deficiencies in backup management and recovery management, (iv) deficiencies in user accounts management, (v) lack of segregation
of duties and monitoring of privileged accounts, (vi) deficiencies in monitoring access to systems and data, (vii) deficiencies in password
management and (viii) deficiencies in vulnerability assessment and patch management. We are currently in the process of remediating the
material weaknesses described above and we intend to continue implementing the following measures, among others, to remediate the material
weaknesses. We plan to: (i) improve our reporting process by actively hiring more qualified accounting personnel; (ii) prepare a systematic
policies and procedures manual for our IT processes in order to develop enhanced risk assessment procedures and controls related to changes
in IT systems; (iii) regularly conduct internal evaluation for IT-related departments and all IT staff; (iv) regularly conduct network
security training for IT employees to provide employees with security awareness; (v) establish a qualification assessment procedure for
third-party service providers; (vi) improve demand analysis and detailed design/specification of new IT projects. All new IT projects
undergo user acceptance testing and implementation approval; (vii) ensure system and information security, strictly control the approval
of system permissions and review them regularly, enforce password complexity policies, and regularly audit and analyze logs; and (viii)
enforce and monitor IT standard procedures and safety management specifications.
We
are now a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002
requires that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning
with this annual report for the fiscal year ending December 31, 2021. See “Item 15. Disclosure Controls and Procedures” for
further information. In addition, once we cease to be an “emerging growth company” as such term is defined under the JOBS
Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial
reporting. 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 in our consolidated 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.
An
active trading market for our ordinary shares may not be sustained.
Our
ordinary shares have been listed on Nasdaq only since April 20, 2021, and we cannot assure you that an active trading market for our
ordinary shares will be sustained or maintained. The lack of an active trading market may impair the value of your shares and your ability
to sell your shares at the time you wish to sell them. An inactive trading market may also impair our ability to raise capital by selling
our ordinary shares and entering into strategic partnerships or acquiring other complementary products, technologies or businesses by
using our ordinary shares as consideration. In addition, if we fail to satisfy exchange listing standards, we could be delisted, which
would have a negative effect on the price of our ordinary shares.
We
expect that the price of our ordinary shares will fluctuate substantially and you may not be able to sell your shares at or above the
price you purchased the shares at.
The
market price of our ordinary shares is likely to be highly volatile and may fluctuate substantially due to many factors, including:
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the volume and timing of sales
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the introduction of new products
or product enhancements by us or others in our industry; |
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disputes or other developments
with respect to our or others’ intellectual property rights; |
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our ability to develop, obtain
regulatory clearance or approval for, and market new and enhanced products on a timely basis; |
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product liability claims or
other litigation; |
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quarterly variations in our
results of operations or those of others in our industry; |
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media exposure of our products
or of those of others in our industry; |
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changes in governmental regulations
or in reimbursement; |
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changes in earnings estimates
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general market conditions and
other factors, including factors unrelated to our operating performance or the operating performance of our competitors. |
In
recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of those companies. Broad market and industry factors may significantly affect the market price of our ordinary
shares, regardless of our actual operating performance.
In
addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods
of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit
or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results
and divert management’s attention and resources from our business.
Our
stock may trade below $5.00 per ordinary share and thus could be known as a penny stock, subject to certain exceptions. Trading in penny
stocks has certain restrictions and these restrictions could negatively affect the price and liquidity of our ordinary shares.
Our
stock may trade below $5.00 per share. As a result, our stock could be known as a “penny stock”, subject to certain exceptions,
which is subject to various regulations involving disclosures to be given to you prior to the purchase of any penny stock. The SEC has
adopted regulations which generally define a “penny stock” to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. Depending on market fluctuations, our ordinary shares could be considered to be a “penny
stock”, subject to certain exceptions. A penny stock is subject to rules that impose additional sales practice requirements on
broker/dealers who sell these securities to persons other than established members and accredited investors. For transactions covered
by these rules, the broker/dealer must make a special suitability determination for the purchase of these securities. In addition, a
broker/dealer must receive the purchaser’s written consent to the transaction prior to the purchase and must also provide certain
written disclosures to the purchaser. Consequently, the “penny stock” rules may restrict the ability of broker/dealers to
sell our ordinary shares, and may negatively affect the ability of holders of shares of our ordinary shares to resell them, if the “penny
stock” rules apply. These disclosures require you to acknowledge that you understand the risks associated with buying penny stocks
and that you can absorb the loss of your entire investment. Penny stocks generally do not have a very high trading volume. Consequently,
the price of the stock is often volatile and you may not be able to buy or sell the stock when you want to.
If
we fail to meet applicable listing requirements, Nasdaq may delist our ordinary shares from trading, in which case the liquidity and
market price of our ordinary shares could decline.
We
cannot assure you that we will be able to meet the continued listing standards of Nasdaq in the future. For
example, legislative or other regulatory action in the United States could result in listing standards or other requirements that, if
we cannot meet, may result in delisting and adversely affect our liquidity or the trading price of our shares that are listed or traded
in the United States. If we fail to comply with the applicable listing standards and Nasdaq delists our ordinary shares, we
and our shareholders could face significant material adverse consequences, including:
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a limited availability of market
quotations for our ordinary shares; |
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reduced liquidity for our ordinary
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a determination that our ordinary
shares are “penny stock”, which would require brokers trading in our ordinary shares to adhere to more stringent rules and
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a limited amount of news about
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The
National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the
sale of certain securities, which are referred to as “covered securities.” Because we expect that our ordinary shares will
be listed on Nasdaq, such securities will be covered securities. Although the states are preempted from regulating the sale of our securities,
the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent
activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if we were no longer listed
on Nasdaq, our securities would not be covered securities and we would be subject to regulations in each state in which we offer our
securities.
A
significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near
future. This could cause the market price of our ordinary shares to drop significantly, even if our business is doing well.
Sales of a substantial
number of our ordinary shares in the public market could occur at any time. We have issued and outstanding 5,093,315 ordinary
shares. Of that amount, 2,636,967 shares are restricted as of May 9, 2022 as a result of securities laws and/or lock-up
agreements, but will be able to be sold in the future subject to securities laws and/or lock-up agreements. If held by one of
our affiliates, the resale of those securities will be subject to volume limitations under Rule 144 of the Securities Act.
Our
directors, officers and principal shareholders have significant voting power and may take actions that may not be in the best interests
of our other shareholders.
Our directors, officers and principal
shareholders holding 5% or more of our ordinary shares, collectively, control approximately 50.12% of our outstanding ordinary shares.
As a result, these shareholders, if they act together, will be able to control the management and affairs of our company and most matters
requiring shareholder approval, including the election of directors and approval of significant corporate transactions. The interests
of these shareholders may not be the same as or may even conflict with your interests. For example, these shareholders could attempt to
delay or prevent a change in control of us, even if such change in control would benefit our other shareholders, which could deprive our
shareholders of an opportunity to receive a premium for their ordinary shares as part of a sale of us or our assets, and might affect
the prevailing market price of our ordinary shares due to investors’ perceptions that conflicts of interest may exist or arise.
As a result, this concentration of ownership may not be in the best interests of our other shareholders.
We
have broad discretion in the use of proceeds from our initial public offering designated for working capital and general corporate purposes.
In April 2021, we issued and
sold 1,250,000 ordinary shares in our initial public offering, and in June 2021, we issued and sold 25,000 ordinary shares pursuant to
the partial exercise of the underwriter’s over-allotment option in connection with our initial public offering. We have used net
proceeds from our initial public offering for strengthening sales and marketing, research and development, and general corporate purposes,
including the expenses we spent to become, and maintain our status as, a publicly listed company in the United States. Within
those categories, we have not determined the specific allocation of the net proceeds. Our management will have broad discretion over
the use and investment of the net proceeds within those categories. Accordingly, investors have only limited information concerning management’s
specific intentions and will need to rely upon the judgment of our management with respect to the use of proceeds.
We
expect to incur significant additional costs as a result of being a public company, which may materially and adversely affect our business,
financial condition and results of operations.
As
a public company, we incur significant additional costs associated with corporate governance requirements, including rules and regulations
of the SEC, under the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Exchange Act,
as well as the rules of the Nasdaq. These rules and regulations are expected to significantly increase our accounting, legal and financial
compliance costs and make some activities more time-consuming. We also expect these rules and regulations to make it more expensive for
us to obtain and maintain directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract
and retain qualified persons to serve on our board of directors or as executive officers. Accordingly, increases in costs incurred as
a result of becoming a publicly traded company may materially and adversely affect our business, financial condition and results of operations.
Our
disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We
are subject to the periodic reporting requirements of the Exchange Act. We will design our disclosure controls and procedures to provide
reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated
to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
We believe that any disclosure controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
These
inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more
people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements
due to error or fraud may occur and not be detected.
Because
we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be
your sole source of gain.
We
have never declared or paid cash dividends. We currently intend to retain all of our future earnings, if any, to finance the growth and
development of our business. As a result, capital appreciation, if any, of our ordinary shares will be your sole source of gain for the
foreseeable future.
Securities
analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our
stock price or trading volume to decline.
If
a trading market for our ordinary shares develops, the trading market will be influenced to some extent by the research and reports that
industry or financial analysts publish about us and our business. We do not control these analysts. As a newly public company, we may
be slow to attract research coverage and the analysts who publish information about our ordinary shares will have had relatively little
experience with us or our industry, which could affect their ability to accurately forecast our results and could make it more likely
that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover
us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If
one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the
market, which in turn could cause our stock price or trading volume to decline and result in the loss of all or a part of your investment
in us.
Recently
introduced economic substance legislation of the Cayman Islands may impact us and our operations.
The
Cayman Islands, together with several other non-European Union jurisdictions, has recently introduced legislation aimed at addressing
concerns raised by the Council of the European Union as to offshore structures engaged in certain activities which attract profits without
real economic activity. With effect from January 1, 2019, the International Tax Co-operation (Economic Substance) Law, 2018, or the Substance
Law, and issued Regulations and Guidance Notes came into force in the Cayman Islands introducing certain economic substance requirements
for “relevant entities” which are engaged in certain “relevant activities,” which in the case of exempted companies
incorporated before January 1, 2019, will apply in respect of financial years commencing July 1, 2019 and onwards. A “relevant
entity” includes an exempted company incorporated in the Cayman Islands, as is Infobird Cayman; however, it does not include an
entity that is tax resident outside of the Cayman Islands. Accordingly, for so long as Infobird Cayman is a tax resident outside of the
Cayman Islands, we are not required to satisfy the economic substance test set out in the Substance Law. Although it is presently anticipated
that the Substance Law will have little material impact on us and our operations, as the legislation is new and remains subject to further
clarification and interpretation, it is not currently possible to ascertain the precise impact of these legislative changes on us and
our operations.
You
may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because
we are incorporated under Cayman Islands law.
We
are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles
of association, the Companies Act (2021 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders
to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman
Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in
part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England and Wales, the decisions
of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and
the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial
precedent in some jurisdictions in the United States. In particular, the Cayman Islands have a less developed body of securities laws
than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate
law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action
in a federal court of the United States. Moreover, while under Delaware law, controlling shareholders owe fiduciary duties to the companies
they control and their minority shareholders, under Cayman Islands law, our controlling shareholders do not owe any such fiduciary duties
to our company or to our minority shareholders. Accordingly, our controlling shareholders may exercise their powers as shareholders,
including the exercise of voting rights in respect of their shares, in such manner as they think fit.
Shareholders
of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than
the memorandum and articles of association) or to obtain copies of lists of shareholders of these companies. Our directors have discretion
under our amended and restated memorandum and articles of association to determine whether or not, and under what conditions, our corporate
records may be inspected by our shareholders, but are not obliged to make them available to our shareholders unless required by the Companies
Act of the Cayman Islands or other applicable law or authorized by the directors or by ordinary resolution. This may make it more difficult
for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders
in connection with a proxy contest.
Certain
corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies
incorporated in other jurisdictions such as the United States. Currently, we do not plan to rely on home country practices with
respect to any corporate governance matter. To the extent we choose to follow home country practices with respect to corporate governance
matters, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic
issuers.
As
a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken
by our management, members of our board of directors or controlling shareholders than they would as public shareholders of a company
incorporated in the United States.
Certain
judgments obtained against us by our shareholders may not be enforceable.
We
are a Cayman Islands company and substantially all of our assets are located outside of the United States. Substantially all of our current
operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countries other
than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be
difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you
believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing
an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or
the assets of our directors and officers.
We
are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.
We
are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements
applicable to other public companies that are not emerging growth companies, including, most significantly, not being required to comply
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth
company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain
information they may deem important.
The
JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards
until such date that a private company is otherwise required to comply with such new or revised accounting standards. We do not plan
to “opt out” of such exemptions afforded to an emerging growth company. As a result of this election, our financial statements
may not be comparable to those of companies that comply with public company effective dates.
We
qualify as a foreign private issuer and, as a result, we will not be subject to U.S. proxy rules and will be subject to Exchange Act
reporting obligations that permit less detailed and less frequent reporting than that of a U.S. domestic public company.
We
report under the Exchange Act as a non-U.S. company with foreign private issuer status. Because we qualify as a foreign private
issuer under the Exchange Act, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public
companies, including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in
respect of a security registered under the Exchange Act; (ii) the sections of the Exchange Act requiring insiders to file public
reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time;
and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing
unaudited financial and other specified information, or current reports on Form 8-K upon the occurrence of specified significant
events. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit
recovery provisions of Section 16 of the Exchange Act and the rules thereunder. Therefore, our shareholders may not know on a timely
basis when our officers, directors and principal shareholders purchase or sell our ordinary shares. In addition, foreign private issuers
are not required to file their annual report on Form 20-F until one hundred twenty (120) days after the end of each fiscal
year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within seventy-five
(75) days after the end of each fiscal year. Foreign private issuers also are exempt from Regulation Fair Disclosure, aimed at preventing
issuers from making selective disclosures of material information. As a result of the above, you may not have the same protections afforded
to shareholders of companies that are not foreign private issuers.
If
we lose our status as a foreign private issuer, we would be required to comply with the Exchange Act reporting and other requirements
applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may
also be required to make changes in our corporate governance practices in accordance with various SEC and Nasdaq rules. The regulatory
and compliance costs to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S.
domestic issuer may be significantly higher than the cost we would incur as a foreign private issuer. As a result, we expect that a loss
of foreign private issuer status would increase our legal and financial compliance costs and would make some activities highly time consuming
and costly. We also expect that if we were required to comply with the rules and regulations applicable to U.S. domestic issuers, it
would make it more difficult and expensive for us to obtain and maintain directors’ and officers’ liability insurance, and
we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could
also make it more difficult for us to attract and retain qualified members of our board of directors.
As
a foreign private issuer, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ
significantly from Nasdaq corporate governance listing standards. These practices may afford less protection to shareholders than they
would enjoy if we complied fully with corporate governance listing standards.
As
a foreign private issuer, we are permitted to take advantage of certain provisions in the Nasdaq rules that allow us to follow our home
country law for certain governance matters. Certain corporate governance practices in our home country, the Cayman Islands, may differ
significantly from corporate governance listing standards. Currently, we do not plan to rely on home country practices with respect to
our corporate governance. If we choose to follow home country practices in the future, our shareholders may be afforded less protection
than they would otherwise enjoy under the Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.
There
can be no assurance that we will not be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable
year, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ordinary shares.
A
non-U.S. corporation will be a PFIC for any taxable year if either (i) at least 75% of its gross income for such year consists of certain
types of “passive” income; or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of
the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income,
or the asset test. Based on our current and expected income and assets (taking into account the expected cash proceeds and our anticipated
market capitalization following our initial public offering), we do not presently expect to be a PFIC for the current taxable year or
the foreseeable future. However, no assurance can be given in this regard because the determination of whether we are or will become
a PFIC is a fact-intensive inquiry made on an annual basis that depends, in part, upon the composition of our income and assets. In addition,
there can be no assurance that the Internal Revenue Service, or IRS, will agree with our conclusion or that the IRS would not successfully
challenge our position. Fluctuations in the market price of our ordinary shares may cause us to become a PFIC for the current or subsequent
taxable years because the value of our assets for the purpose of the asset test may be determined by reference to the market price of
our ordinary shares. The composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets
and the cash raised in our initial public offering. If we were to be or become a PFIC for any taxable year during which a U.S. Holder
holds our ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. See “Item 10.E.
Taxation— Passive Foreign Investment Company Consequences.”
We
may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
As
discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and
current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business
day of an issuer’s most recently completed second fiscal quarter. We would lose our foreign private issuer status if, for example,
more than 50% of our ordinary shares are directly or indirectly held by residents of the United States and we fail to meet additional
requirements necessary to maintain our foreign private issuer status. If we lose our foreign private issuer status on this date, we will
be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are more detailed
and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements,
and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions
of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements
under the Nasdaq rules. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal,
accounting and other expenses that we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order
to maintain a listing on a U.S. securities exchange.
ITEM
4. INFORMATION ON THE COMPANY
A.
History and Development of the Company
Our
company, Infobird Co., Ltd, or Infobird Cayman, is a holding company incorporated on March 26, 2020 under the laws of the Cayman Islands.
We have no substantive operations other than holding all of the outstanding share capital of Infobird International Limited, or Infobird
HK, which was established in Hong Kong on April 21, 2020. Infobird HK is also a holding company holding all of the outstanding equity
of Infobird Digital Technology (Beijing) Co., Ltd, or Infobird WFOE, which was established on May 20, 2020 under the laws of the PRC.
We,
through the variable interest entity, or VIE, Beijing Infobird Software Co., Ltd, or Infobird Beijing, a PRC limited liability
company, and through its subsidiaries, principally engage in developing and providing customer engagement cloud-based services. The officers
of Infobird Beijing are (i) Yimin Wu, chairman of the board of directors and the chief executive officer of each of Infobird Beijing
and Infobird Cayman; (ii) Hsiaochien Tseng, executive vice president of each of Infobird Beijing and Infobird Cayman; and (iii) Chunhsiang
Chen, vice president of Infobird Beijing and chief technology officer and vice president of Infobird Cayman. The board of directors of
Infobird Beijing consists of three individuals: (i) Yimin Wu; (ii) Bing Weng, a shareholder of Infobird Beijing and the sole director
and shareholder of OmniConnect Limited, one of Infobird Cayman’s principal shareholders; and (iii) Dongliang Jiang, one of Infobird
Cayman’s directors and the sole director and shareholder of Orbitchannel Limited, one of Infobird Cayman’s principal shareholders.
Infobird Beijing, a PRC limited
liability company, was established on October 26, 2001 under the laws of the PRC. On October 17, 2013, Infobird Beijing established a
90.18% owned subsidiary, Guiyang Infobird Cloud Computing Co., Ltd, or Infobird Guiyang, a PRC limited liability company, while Shengmin
Wu, the brother of Yimin Wu, owns 0.82% and Lanlan Luo, an unrelated third party, owns 9.00% of the noncontrolling interests in Infobird
Guiyang. On June 20, 2012, Infobird Beijing established a 99.95% owned subsidiary, Anhui Xinlijia E-commerce Co., Ltd (formerly known
as Anhui Infobird Software Information Technology Co., Ltd, which changed its name to Anhui Xinlijia E-commerce Co., Ltd in January 2022),
or Infobird Anhui, a PRC limited liability company, while Ji Meng, a shareholder of Infobird Beijing and a shareholder of one of our principal
shareholders, CRExperience Limited, owns 0.05% of the noncontrolling interests in Infobird Anhui. Infobird Guiyang engages in software
development and mainly provides business process outsourcing, or BPO, services to customers, and Infobird Anhui engages in software development
and mainly provides cloud services and technology solutions to customers.
On May 27, 2020, Infobird Cayman
completed a reorganization of entities under common control of its then existing shareholders, who collectively owned all of the equity
interests of Infobird Cayman prior to the reorganization. Infobird Cayman and Infobird HK were established as the holding companies of
Infobird WFOE. Infobird WFOE is the primary beneficiary for accounting purposes of Infobird Beijing and its subsidiaries. All of these
entities are under common control which results in the consolidation of Infobird Beijing and subsidiaries which have been accounted for
as a reorganization of entities under common control at carrying value. Infobird WFOE is deemed to have a controlling financial interest
and be the primary beneficiary for accounting purposes of Infobird Beijing because it has both of the following characteristics: (1)
the power to direct activities at Infobird Beijing that most significantly impact such entity’s economic performance, and (2) the
right to receive benefits from Infobird Beijing that could potentially be significant to such entity. The consolidated financial statements
are prepared on the basis as if the reorganization became effective as of the beginning of the first period presented in the consolidated
financial statements of Infobird Cayman. The sale of Infobird Cayman’s securities in March 2020 was in the same proportion as the
ownership of Infobird Beijing prior to the reorganization. To our knowledge, such investors still currently own their same interests
in Infobird Beijing.
On
December 2, 2021, Infobird Beijing completed a 51% acquisition of Shanghai Qishuo Technology Inc., or Shanghai Qishuo, a PRC limited
liability company and a SaaS provider of big data analysis to retail stores aimed at operation improvement, for approximately $1.3 million
(RMB 8.6 million). Shanghai Qishuo is a fast-growing provider of consumer product and retail store digitalization solutions.
On September 9, 2022, we effected
a 1-for-5 share consolidation, or the share consolidation, of our ordinary shares pursuant
to our second amended and restated memorandum and articles of association, which is filed as Exhibit 1.2 to this annual report.
We have retroactively restated all share and per share data for all of the periods presented pursuant to ASC 260 to reflect the share
consolidation.
Contractual
Arrangements
Due to legal restrictions on foreign ownership and investment in, among other
areas, the development and operation of information technology in China, including cloud computing and big data analytics, we operate
our businesses in which foreign investment is restricted or prohibited in the PRC through certain PRC domestic companies through the Contractual
Arrangements. Neither we nor our subsidiaries own any equity interest in Infobird Beijing. As such, Infobird Beijing is controlled through
the Contractual Arrangements in lieu of direct equity ownership by Infobird Cayman or any of its subsidiaries. Such Contractual Arrangements
consist of a series of three agreements, along with shareholders’ powers of attorney, or POAs, and spousal consent letters, which
were signed on May 27, 2020.
Our affiliation with Infobird
Beijing is managed through the Contractual Arrangements, which agreements may not be as effective in providing us with control over Infobird
Beijing and its subsidiaries as direct ownership in controlling entities organized in the PRC, which often hold the licenses necessary
to conduct business in the PRC. The Contractual Arrangements are not equivalent to equity ownership in the business of the VIE. Neither
the investors in Infobird Cayman, the Cayman Islands holding company, nor Infobird Cayman itself have an equity ownership in, direct foreign
investment in, or control of, through such ownership or investment, the VIE. Further, the Contractual Arrangements have not been tested
in a court of law, including in China courts. The Contractual Arrangements are governed by and would be interpreted in accordance with
the laws of the PRC. If Infobird Beijing fails to perform the obligations under the Contractual Arrangements, we may have to rely on legal
remedies under the laws of the PRC, including seeking specific performance or injunctive relief and claiming damages. There is a risk
that we may be unable to obtain any of these remedies, which could affect our investors and the value of their investment. The legal environment
in the PRC is not as developed as in other jurisdictions. As a result, uncertainties in the PRC legal system could limit our ability to
enforce the Contractual Arrangements, or could affect the validity of the Contractual Arrangements. Thus, the Contractual Arrangements
may be less effective than direct ownership and we may incur substantial costs to enforce the terms of the Contractual Arrangements. See
“Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We depend upon the Contractual
Arrangements in conducting our business in China, which may not be as effective as direct ownership.” In addition, such Contractual
Arrangements have not been tested in a court of law, including China courts, and we may face challenges enforcing these Contractual Arrangements
due to legal uncertainties and jurisdictional limits, and thus there are uncertainties regarding the status of the rights of the Cayman
Islands holding company with respect to the Contractual Arrangements with the VIE and its shareholders. See also “Item 3. Key Information—D.
Risk Factors—Risks Related to Our Corporate Structure—We conduct our business through Infobird Beijing by means of Contractual
Arrangements. If the PRC courts or administrative authorities determine that these Contractual Arrangements do not comply with applicable
regulations, we could be subject to severe penalties and our business could be adversely affected. In addition, changes in or different
interpretations of such PRC laws and regulations may also materially and adversely affect our business.”
The
significant terms of the Contractual Arrangements are as follows:
Exclusive
Business Cooperation Agreement
Pursuant
to the exclusive business cooperation agreement between Infobird WFOE and Infobird Beijing, Infobird WFOE has the exclusive right to
provide Infobird Beijing with technical support services, consulting services and other services, including technical support and training,
business management consultation, consultation, collection and research of technology and market information, marketing and promotion
services, customer order management and customer services, lease equipment or properties, provide legitimate rights to use software license,
provide deployment, maintenances and upgrade of software, design installation, daily management, maintenance and updating network system,
hardware and database, and other services requested by Infobird Beijing from time to time to the extent permitted under PRC law. In exchange,
Infobird WFOE is entitled to a service fee that equals to all of the consolidated net income. The service fee may be adjusted by Infobird
WFOE based on the actual scope of services rendered by Infobird WFOE and the operational needs and expanding demands of Infobird Beijing.
Pursuant to the exclusive business cooperation agreement, the service fees may be adjusted based on the actual scope of services rendered
by Infobird WFOE and the operational needs of Infobird Beijing.
The
exclusive business cooperation agreement remains in effect unless terminated in accordance with the following provision of the agreement
or terminated in writing by Infobird WFOE.
During
the term of the exclusive business cooperation agreement, Infobird WFOE and Infobird Beijing shall renew the operation term prior to
the expiration thereof so as to enable the exclusive business cooperation agreement to remain effective. The exclusive business cooperation
agreement shall be terminated upon the expiration of the operation term of either Infobird WFOE or Infobird Beijing if the application
for renewal of the operation term is not approved by relevant government authorities. If an application for renewal of the operation
term is not approved, according to the PRC Company Law, the expiration of the operation term may lead to the dissolution and cancellation
of such PRC company.
Exclusive
Option Agreements
Pursuant
to the exclusive option agreements among Infobird WFOE, Infobird Beijing and the shareholders who collectively owned all of Infobird
Beijing, such shareholders jointly and severally grant Infobird WFOE an option to purchase their equity interests in Infobird Beijing.
The purchase price shall be the lowest price then permitted under applicable PRC laws. Infobird WFOE or its designated person may exercise
such option at any time to purchase all or part of the equity interests in Infobird Beijing until it has acquired all equity interests
of Infobird Beijing, which is irrevocable during the term of the agreements.
The
exclusive option agreements remain in effect until all equity interest held by shareholders in Infobird Beijing has been transferred
or assigned to Infobird WFOE and/or any other person designated by the Infobird WFOE in accordance with such agreement.
Equity
Interest Pledge Agreements
Pursuant
to the equity interest pledge agreements, among Infobird WFOE, Infobird Beijing, and the shareholders who collectively owned all of Infobird
Beijing, such shareholders pledge all of the equity interests in Infobird Beijing to Infobird WFOE as collateral to secure the obligations
of Infobird Beijing under the exclusive business cooperation agreement and exclusive option agreements. These shareholders are prohibited
from transferring the pledged equity interests without the prior consent of Infobird WFOE unless transferring the equity interests to
Infobird WFOE or its designated person in accordance to the exclusive option agreements.
The equity interest pledge
agreements shall come into force the date on which the pledged interests are recorded, which is within three (3) days after signing
of the agreements on May 27, 2020, under Infobird Beijing’s register of shareholders and are registered with the competent
Administration for Market Regulation of Infobird Beijing until all of the obligations to Infobird WFOE have been fulfilled completely
by Infobird Beijing. Nineteen shareholders of Infobird Beijing have registered the pledges of equity interest with the competent
Administration for Market Regulation in accordance with the Civil Code of the PRC and we intend to register the pledge of equity
interest of one shareholder with the competent Administration for Market Regulation once practicable.
Shareholders’
POAs
Pursuant
to the shareholders’ POAs, the shareholders of Infobird Beijing give Infobird WFOE an irrevocable proxy to act on their behalf
on all matters pertaining to Infobird Beijing and to exercise all of their rights as shareholders of Infobird Beijing, including the
(i) right to attend shareholders meeting; (ii) to exercise voting rights and all of the other rights including but not limited to the
sale or transfer or pledge or disposition of the shares held in part or in whole; and (iii) designate and appoint on behalf of the shareholder
the legal representative, the directors, supervisors, the chief executive officer and other senior management members of Infobird Beijing,
and to sign transfer documents and any other documents in relation to the fulfillment of the obligations under the exclusive option agreements
and the equity interest pledge agreements. The shareholders’ POAs shall remain in effect while the shareholders of Infobird Beijing
hold the equity interests in Infobird Beijing.
Spousal
Consent Letters
Pursuant
to the spousal consent letters, the spouses of the shareholders of Infobird Beijing commit that they have no right to make any assertions
in connection with the equity interests of Infobird Beijing, which are held by the shareholders. In the event that the spouses obtain
any equity interests of Infobird Beijing, which are held by the shareholders, for any reasons, the spouses of the shareholders shall
be bound by the exclusive option agreement, the equity interest pledge agreement, the shareholder POA and the exclusive business cooperation
agreement and comply with the obligations thereunder as a shareholder of Infobird Beijing. The letters are irrevocable and shall not
be withdrawn without the consent of Infobird WFOE.
Based on the foregoing Contractual
Arrangements, which grant Infobird WFOE effective control of Infobird Beijing and subsidiaries and enable Infobird WFOE to receive all
of their expected residual returns, we account for Infobird Beijing as a VIE. Accordingly, we consolidate the accounts of Infobird Beijing
and subsidiaries for the periods presented herein, in accordance with Regulation S-X-3A-02 promulgated by the SEC, and Accounting Standards
Codification, or ASC, 810-10, Consolidation.
On
April 22, 2021, we completed our initial public offering, and since April 20, 2021, our ordinary shares have been listed on the Nasdaq
Capital Market under the symbol “IFBD”.
Our
principal executive office is located at Room 12A05, Block A, Boya International Center, Building 2, No. 1 Courtyard, Lize Zhongyi Road,
Chaoyang District, Beijing, China 100102. Our telephone number is 86-010-52411819. Our registered office in the Cayman Islands is located
at the office of Campbells Corporate Services Limited, Floor 4, Willow House, Cricket Square, Grand Cayman KY1-9010, Cayman Islands.
Our capital expenditures
were incurred primarily in connection with payment of property and equipment and software. Our capital expenditures were approximately
$2.2 million, $3.2 million and $2.1 million for the years ended December 31, 2021, 2020, and 2019, respectively. We were in the
process of constructing a cloud computing facility in Guiyang, China, which has been postponed due to the time needed to negotiate
with various vendors and to obtain various government permits, particularly due to the impacts of COVID-19. The facility is expected
to have two buildings consisting of approximately 43,000 square meters in total, which is expected to house our cloud and BPO services
operations and also fulfill the purposes of offices, research centers, logistics and employee dormitories. This facility is intended
to replace our current facilities in Guiyang and some of our facilities in Beijing and Hefei, China, which are currently leased.
We have completed demolition, underground structure and design. As we were in the process of negotiating with contractors and other
parties for the construction of the facility and obtaining various government permits for the start of construction, we had no
material existing capital expenditure commitments as of December 31, 2021. In June 2020, we obtained the Guiyang Provincial Enterprise
Investment Project Filing Certificate. Due to further delays of the project related to local governments’ limitation of economic
activities in response to the resurgence of COVID-19 variants, we recorded impairment loss of $2.0 million of our construction
in progress for the year ended December 31, 2021, as we were unable to estimate when we will obtain the permits to start construction
and we will continue leasing our facilities for expansion needs.
The
SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically
with the SEC on http://www.sec.gov. You can also find information on our website located at http://www.infobird.com. Information contained
on, or that can be accessed through, our website is not a part of, and shall not be incorporated by reference into, this annual report.
B.
Business Overview
We
are a software-as-a-service, or SaaS, provider of innovative AI-powered, or artificial intelligence enabled, customer engagement
solutions in China. Leveraging self-developed cloud-native architecture, AI and machine learning capabilities, patented Voice over
Internet Protocol or VoIP application technologies, no-code development platform, and in-depth industry expertise, we primarily
provide holistic software solutions to help our corporate clients proactively deliver and manage end-to-end customer engagement
activities at all stages of the sales process including pre-sales and sales activities and post-sales customer support. We also
offer AI-powered cloud-based sales force management software including intelligent quality inspection and intelligent training
software to help our clients monitor, benchmark and improve the performances of agents. We empower our clients with our business
value-driven solutions to increase revenue, reduce cost, and enhance customer service quality and customer satisfaction. We
currently specialize in serving corporate clients in the finance industry and also cover a broad array of other industries,
including the education, public services, healthcare and consumer products industries. We believe we are one of the leading and
long-standing domestic SaaS providers in serving large enterprises in the finance industry in customer engagement with over 10 years
of experience. We offer a comprehensive portfolio of customer engagement SaaS solutions that are highly intelligent, customizable
and with proof of stability and security at scale with concurrence of over 10,000 agents. We continue to innovate by developing
technologies that enable us to deliver a series of solutions and services which address the evolving and changing needs of our
corporate clientele.
We
rely on the following self-developed novel technologies to deliver customizable, high-quality, scalable, configurable, secure, and steady
customer engagement solutions.
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Cloud-native architecture.
We use a cloud-native architecture as the basic infrastructure for our software, which empowers us with flexible scale-out capabilities
and high tolerance of failures and default, and supports ultra-large-scale concurrence capabilities. |
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AI and machine learning
capabilities. We incorporate our self-developed natural language processing, or NLP, licensed automatic speech recognition, or
ASR, and text to speech, or TTS, to empower our software to have the capability of conducting multiple rounds of free conversations with
customers, referring to the context for better understanding, automatically capturing key words, recognizing the intentions of customers
and accurately converting voice to text or vice versa. |
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Patented VoIP technologies.
Our patented VoIP technologies ensure high-quality telecommunications through intelligent routing, multi-voice coding support,
and multi-endpoint access support. The intelligent routing and multi-voice coding support enable us to provide optimal voice transmission
quality by monitoring network fluctuation to deploy voice routing notes and adjusting voice coding based on the latest status of network
bandwidth. |
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No-code development platform.
We developed a no-code development platform that is flexible by design, enabling us to deploy pre-coded microservice modules
and packages to quickly respond and adjust to customer requirements, and we can also combine microservice modules into customized end-to-end
solutions, and thus, significantly reduce the time required for our software engineers to program customized services and products for
our clients. Our software developed through the no-code development platform also supports open application programming interface, or
API, and software development kit, or SDK, and therefore allows easy integration with our clients’ call centers, websites and software. |
Our
customer engagement services are founded on a series of our customer engagement software, and each may be used on an individual and/or
integrated basis. The following are the primary types of our fundamental software:
AI
Customer Engagement Software
| |
● |
Cloud call center –
proprietary technologies that ensure scalable, steady, secure, and flexible access to accounts and also support functions which can automatically
initiate outbound calls by taking into account available agents, anticipated talk time, and anticipated wait time, and then distribute
the answered calls to the agents. |
| |
|
|
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● |
Intelligent telemarketing
– automatically initiate calls in batch files, which are files often used to help load programs, run multiple processes
at a time, and perform common or repetitive tasks, support AI voice Chatbot and collect information from interactions between sales representatives
and customers to create labels for each customer and to analyze and predict customer behaviors. |
| |
|
|
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● |
Intelligent omni-channel
customer service – integrate interactions through telephone calls, videos, emails, social media platforms, websites, and text
messages, and provide tickets that can promote business flows across different departments. |
| |
|
|
| |
● |
AI voice Chatbot and AI
text Chatbot - multiple rounds of free conversation with customers, referring to the context for better understanding, and recognizing
the intentions of customers. |
AI
Sales Force Management Software
| |
● |
Intelligent quality inspection
– monitoring and benchmarking performances of sales and customer service representatives, and aiding in the fulfillment of
obligations under compliance regulations. |
| |
|
|
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● |
Intelligent training –
interactive training sessions and tests with computers for sales and customer service representatives |
We
design our software to be easy to use, customizable and self-operated. We allow our clients to incorporate their business needs and/or
approach to customer management in our software by using our self-developed no-code programming technology. Clients may also configure
certain parameters and scripts for agents. Our software also allows easy integration with our clients’ call centers, websites and
software. Through years of experience serving our clients and analyzing the interactions between our clients and their customers, we
have accumulated valuable vertical knowledge and know-how of our clients’ industries. We continually strive to understand the objectives
of our clients at different stages of their businesses to further our understanding on their operating industries. We have integrated
this knowledge with our technology to develop software that provides a comprehensive customer experience.
We value our proprietary
technologies and strong research and development capabilities, which we believe differentiate us from other software companies
in the customer engagement industry. As of December 31, 2021, we had an intellectual property portfolio consisting of 19 patents,
52 software copyrights, 1 artwork copyright, 41 registered trademarks and 27 domain names in the PRC and 3 registered trademarks
outside of the PRC.
Our research and development department
was composed of 131 personnel, including software engineers and internet technology specialists, as of December 31, 2021, which accounted
for approximately 33.5% of our total employees. We have invested significantly in research and development and intend to continue to do
so. For the years ended December 31, 2021, 2020 and 2019, our research and development expenses amounted to approximately
$3.3 million, $1.9 million and $1.5 million, respectively.
In 2021, we had approximately 4,712
average monthly paid user accounts. We have been diversifying and expanding our customer base with our standard cloud-based services which
require less customization effort than customized cloud-based services and are capable of scaling quickly. With prevailing standard cloud-based
services, we gradually decreased the percentage of revenue generated from China Guangfa Bank in our total revenue from 77.3% for the year
ended December 31, 2019 to 34.8% for the year ended December 31, 2020 and 0% for the year ended December 31, 2021. Our ability
to maintain close relationships with our clients is essential to the growth and profitability of our business. Through constant technological
innovation and accumulated vertical knowledge in our clients’ industries, we continue to build strong relationships with our clients.
Once a client utilizes our solutions, we subsequently seek to deepen such relationships through cross-selling and upselling our services
and products. We deploy both direct and indirect sales approaches, including outreach by our sales team, organizing and participating
in forums and seminars, online advertising, and cooperating with referral and reseller partners. The majority of our sales team is based
in four major cities in China: Beijing, Shanghai, Guangzhou, and Guiyang, which cover the most developed and populated cities of China.
We
intend to further expand our client base and increase our market share in the finance industry, as well as penetrating other
industries with our enhanced sales and marketing efforts. We plan to conduct a better client lifecycle management, expand our sales
team, cooperate with referral or reseller partners, continue to organize and participate in forums and seminars, launch online and
offline advertising campaigns, and improve our website and social media accounts. We also plan to attract new clients, and retain
existing clients, by continuing to innovate our products and services. In addition, we intend to construct the following
capabilities in our AI applications: customer engagement hub, one single view of customer, knowledge graphs, and customer journey
maps, in order to facilitate proactive customer engagement through consolidation of interactions with customers from various
channels, including telephone, email, social media platforms, websites and text messages, among others, along with predictions of
customers’ intentions and behaviors.
For
information on our financial performance, see “Item 5.A. Operating Results.”
Our
Products and Services
We offer cloud-based standard
and customized customer engagement services with various SaaS and BPO services to corporate clients. Our customer engagement services
are generally categorized into (i) standard cloud-based services, which are our standard SaaS or assembly of some of our fundamental SaaS
to meet our clients’ needs, which generally requires less resources than our customized cloud-based services, and (ii) customized
cloud-based services, which involve preliminary research of clients’ businesses and their objective of customer engagement, along
with design, modification, and integration of some of our fundamental SaaS in order to fit seamlessly with our clients’ actual business
processes in a short period of time and with low cost through our no-code development platform. Customized cloud-based services include
customized SaaS, voice/data plan, which includes telecommunication usage such as telephone calls and messaging that our customers can
subscribe for, and technical support. Clients that use either standard or customized cloud-based services generally enter into contracts
that range between one to three years. Dependent on the contractual arrangements, once a contract has been entered into, the clients are
subscribed to our paid user accounts and we will charge them either a one-off subscription fee or we will charge them based on the usage
of our services. For the years ended December 31, 2021, 2020 and 2019, standard cloud-based services amounted to approximately $2.0 million,
$1.4 million and $2.0 million, representing approximately 20.6%, 9.7% and 11.1% of our total revenues, respectively. For the years
ended December 31, 2021, 2020 and 2019, customized cloud-based services amounted to approximately $0, $5.0 million and $12.9 million,
representing approximately 0%, 33.8% and 70.5% of our total revenues, respectively.
The
cornerstone of our customer engagement cloud-based services is a series of customer engagement SaaS. Our SaaS is accessible from multiple
types of devices, including personal computers, tablets and mobile devices. We programmed our SaaS in the languages of Java, C++, PHP,
Objective-C and Python and to support and run on Windows, macOS, Linux, Android and iOS operating systems.
We
offer the flexibility of three methods of deployment of our SaaS: public cloud, hybrid cloud and private cloud. In a public cloud, we
rent and leverage cloud resources from third parties and therefore do not need to supply supporting infrastructure, such as hardware,
storage, and servers, and deliver the services over the internet to clients. Clients share the computing resources with others in the
public domain, which is the nature of public cloud services. In a private cloud, the infrastructure is physically located at a client’s
facility and the services are dedicated solely to such client. A hybrid cloud combines a private cloud with a public cloud. In a hybrid
cloud, data and applications can move between private and public clouds for greater flexibility and additional deployment options. Upon
clients’ requests, we also provide necessary hardware and middleware, which is software that provides services to software applications
beyond those available from the operating system, installation and maintenance services, and uptime monitoring for our clients who choose
hybrid and private clouds. We also maintain a technical support team that is responsible for installation and maintenance. We procure
or rent all infrastructure equipment from third parties. Our standard cloud-based services are typically deployed on public clouds whereas
our customized cloud-based services are typically deployed on hybrid or private clouds.
We
have obtained the national compliance operation qualification of internet information service provider and call center service provider
from the MIIT and its provincial level counterparts to conduct call center businesses. We have also obtained the international ISO27001
Certificate of Information Security Management System from China Cybersecurity Review Technology and Certification Center to meet high
cybersecurity standards required to conduct customer engagement services in certain industries such as the finance industry.
We
have categorized our primary SaaS into two groups: AI customer engagement software and AI sales force management software.
AI
Customer Engagement Software
Cloud
Call Center
Our
cloud call center services are delivered over the internet. Our clients access their accounts and take inbound or outbound calls through
applications on mobile devices, tablets, and personal computers. Our cloud call center is our longest standing product and we take pride
in the stability and high quality of telephone calls, as well as the add-on services we have provided since its introduction, such as
intelligent interactive voice response, batch inbound or outbound calls, and recording. Infobird Beijing began as a cloud-based call
center-focused company. We believe our business is differentiated from other cloud call centers as a result of our all-software approach
and patented VoIP technologies. We utilize software throughout the process from session initiation, transmission and switching to endpoints,
which requires no physical investment on the client’s part and, at the same time, ensures a high tolerance of failures and default
and flexible scale-out capabilities, and supports ultra-large-scale concurrence capabilities. By leveraging intelligent routing and multi-voice
coding support, our VoIP technologies enable us to provide high voice transmission quality by monitoring network fluctuation to deploy
voice routing notes and adjusting voice coding to the latest status of network bandwidth. To better meet user habits, we can also emulate
the use of certain telephone service equipment, such as digitized telephone sets and fax machines, with a VoIP network.
We
also incorporate the predictive dialing robot, a dialing robot that can help agents automatically dial numbers and transfer connected
phone calls to the next available agent, in our cloud call center, which can significantly increase the working efficiency of agents
by reducing the time spent on waiting for calls to be answered. It automatically initiates outbound calls by taking into account available
agents, anticipated talk time, and anticipated wait time, and then distributes the answered calls to the agents. Our clients often further
opt to configure the AI voice Chatbot with the predictive dialing robot in an attempt to increase efficiency and reduce costs.
We
have also embedded data analytics in our cloud call center. It can provide insights of performances for our clients by generating charts
that display several items of key data such as number of calls, percentage of occupancy of agents, and level of satisfaction of customers.
Intelligent
Telemarketing
Our
intelligent telemarketing software is a tool for initiating follow-up calls with sales leads. It utilizes our cloud call center and can
be packaged with other intelligent application software such as AI voice Chatbot and the predictive dialing robot. Our clients are able
to automatically initiate calls in batch files, starting the conversation with AI, and redirect prospective customers to sales representatives.
With our intelligent telemarketing software, our clients may reduce marketing costs by increasing the efficiency of sales representatives.
Depending on the clients’ needs, we also have the capability to collect information from the interactions between the sales representatives
and the customers to create labels for each customer and to analyze and predict customer behaviors.
Intelligent
Omni-Channel Customer Service
Our
intelligent omni-channel customer service software enables our clients to interact with their customers through common channels that
individuals in the China market typically use to communicate, including telephone calls, videos, websites, e-mails, social media platforms,
such as WeChat, a popular Chinese multi-purpose messaging, social media and mobile payment application, and Weibo, a popular Chinese
microblogging site, and text messages. This software creates a customer database and can label each customer with their properties for
screening. It also offers customizable worksheets and ticket management, which can be used to organize customer service issues across
different departments within the organization.
Our
intelligent omni-channel customer service software typically produces optimal outcomes when it is packaged with our intelligent application
software, including AI voice Chatbot, AI text Chatbot, intelligent form filling, and intelligent quality inspection. Intelligent form
filling is an important tool used for documenting interactions with customers and for communication between various departments within
our corporate clients. We collect information from the interactions and provide data analytics services that automatically generate summaries
of indicators of our client’s customer services. The summaries are fundamental for our clients to understand and improve the performance
of their customer service representatives.
AI
voice Chatbot and AI text Chatbot
We
have developed two AI Chatbots that are voice-based and text-based. By leveraging AI technologies such as our self-developed natural
language processing, or NLP, licensed automatic speech recognition, or ASR, and text to speech, or TTS, our AI voice and text Chatbots
are able to perform various tasks while engaging in different scenarios in customer engagement such as announcing notifications, obtaining
confirmations, carrying out limited conversations, asking questions to collect basic information, and providing answers to commonly raised
questions. Our AI Chatbots can support the customer services and sales agents to increase the working efficiency as they can carry out
pre-programmed, simple and repetitive tasks automatically without human intervention. With designed work flows, our AI Chatbots support
human and AI collaborative working scenarios, for example, our AI Chatbots interact or carry out conversations first to collect basic
information and then transfer such information to human agents for further services. Both AI voice and text Chatbots can be add-on software
to our omni-channel customer service software or other companies’ software, as they are embedded with open API, and they can also
be independent software for sale. AI text Chatbot can help answer questions using a text-based approach, and AI voice Chatbot can help
answer questions using a voice-based approach.
After
years of research and development, our AI Chatbots also encompass advanced functions. For example, they can analyze real-time conversation,
understand conversation context and flows and proactively recommend products and services. Our AI voice Chatbot also has the capability
to recognize when the customer starts and finishes talking so it will not interrupt the customer. We also implement human voice recording
in our AI voice Chatbot, in particular in the finance industry.
AI
Sales Force Management Software
Intelligent
Quality Inspection
Our
intelligent quality inspection software is designed to input AI-driven models which can measure the performances of agents and to support
financial institutions to aid in the fulfillment of their obligations under compliance regulations. Our intelligent quality inspection
software conducts mass quality inspection of recordings of conversations between agents and customers through AI and then generates results
and data analytics in minutes. The speed of inspection is cost sensitive and clients can choose their desired speed. The inspection software
examines multiple criteria of a recording including keywords, specific sentence pattern, speech speed, silence, call duration, and interruptions.
The criteria are highly customizable and we can combine multiple criteria to customize the intelligent quality inspection software to
serve in several scenarios.
We
believe that our intelligent quality inspection is highly efficient and thorough compared to traditional manual inspection. Companies
that use traditional manual inspection typically hire inspectors to sample the recordings and listen to each recording one by one. The
process can be expensive, time-consuming, and prone to error. However, with our intelligent quality inspection software, companies can
perform real-time inspections of all recordings. If our intelligent quality inspection software detects a violation of a specified criteria,
it will send a notification to the agent with an excerpt of the relevant portion of the recording within minutes. The excerpt is also
converted into text, with the violation denoted in red text, so that the agent is able to efficiently read a transcript of the relevant
text during the telephone call.
We
also offer interactive data analytics with intelligent quality inspection in order to empower our clients to monitor and benchmark the
performances of agents. For example, our clients can quantify the performances of agents by scoring recordings, listing the recurring
violations, or generating infographics showing violation trends over time.
Intelligent
Training
Our
intelligent training software is designed for standardized training for sales representatives and customer service representatives. It
may reduce costs associated with training new recruits, providing online lectures and virtual tests, and interactive training with virtual
customers. It also allows customization in contents, management of training plans, and data analytics of test results.
The
signature function of our intelligent training software is the interactive training with virtual customers. By pre-programming training
materials in our interactive training section, it can simulate real-life interactions with a potential customer. For instance, the virtual
customer would begin by asking interactive questions with the newly recruited agents or existing agents that require further training.
After answering the interactive questions, the agents will receive a final score as well as detailed score for every question answered
during the training session. They will also be provided with the correct answer for each question they answered incorrectly. This interactive
training session can assist the management team in training newly recruited agents on a cost-efficient basis and targeting specific areas
that they aim to improve for agents’ performance by providing focused training sessions. It can also provide the agents more training
flexibility as it can be accessed on mobile phones and desktops, which can result in skill improvement within a short time frame.
BPO
Services
We
provide BPO services through utilization of the technologies used in our cloud call center and our experiences in customer engagement.
BPO is the contracting of business activities and functions to third-party providers, such as technical support, sales and marketing,
customer service and BPO operation management. Our BPO services consist of call center outsourcing operation services. We supply a full
set of resources for such services, including the physical space, physical agents, call center equipment, fixed line and internet network,
system management, maintenance and other services to meet our clients’ needs. Either way, clients can choose whether to empower
such call center with our intelligent application software. We also offer data analytics on qualified indicators of performances of BPO
for clients. Revenue from BPO services is generated from assisting customers to operate the call centers services. Customers using these
services are not permitted to take possession of our software and physical resources and the contract is for a defined period, where
customers pay a monthly service fee. For the years ended December 31, 2021, 2020 and 2019, our BPO service fees amounted to approximately
$2.3 million, $1.7 million and $2.0 million, representing approximately 23.5%, 12.0% and 11.0% of our total revenues, respectively.
We have provided BPO services
exclusively through Infobird Guiyang, subsidiary of the VIE, since 2015. As of December 31, 2021, we employed 128 agents and outsourced
61 agents in connection with our BPO services, and we have served 15 corporate clients in the finance, consumer products, and information
technology services industries that utilized our BPO services.
Sales
and Marketing
We
deploy both direct and indirect sales approaches to market our services to both existing and potential clients.
We utilize the direct approaches with our sales team and in the fiscal year 2021, we formed a team of 77 sales
representatives, which mainly includes regional sales representatives and telemarketing sales representatives. Our regional sales
representatives are to target mid-to-large enterprises in four major geographic markets in China: Beijing, Shanghai, Guangzhou,
and Guiyang. We have also recruited several experienced sales representatives with rich resources in the strategic industries we
target, who we believe can proactively create high-quality new sales leads. In addition, we have established a telemarketing team
to target small-to-medium enterprises with our standard cloud-based services. Our sales team is also responsible for the renewal
of existing contracts and the promotion of new products to existing clients. Once we have established relationships with clients,
we subsequently seek to deepen such relationships through cross-selling and upselling our solutions, so that we become an integral
part of our clients’ operations.
We
also cooperate with various online advertising networks and have been promoting our services and products on widely used search engines
in China primarily to pursue small and mid-sized clients. The search engines will automatically forward the sales leads to our sales
team who will respond to the queries. Our sales team will continue to follow up with clients who have expressed interest in our services,
identify clients’ needs, and engage our software engineers to develop tailored proposals for our clients.
We
also directly engage clients through attending and organizing forums and seminars for senior management personnel in our targeted industries,
including the finance industry. During such forums and seminars, we initiate contact with such senior management to understand their
specific needs in customer engagement and develop customized solutions. For example, in May 2019, we organized the FINTECH Intelligent
Finance Forum of China International Big Data Industry Expo 2019 in Guiyang, sponsored by the Guiyang municipality government, which
attracted hundreds of attendees.
We
have also adopted indirect approaches to sales and marketing, such as relationships with telecommunications carriers. For example, we
have established relationships with certain telecommunications carriers that have immense client bases. Through proactive communication,
the carriers facilitate cooperation between us and their customers who have expressed needs in cloud-based customer engagement.
Generally,
we focus our sales and marketing efforts on increasing awareness of our company, establishing and promoting our brand, creating sales
leads and supporting our community of customers. We also work with multiple online media outlets to publish press releases about our
business, including our services and products and industry insights. We intend to continue to invest in sales and marketing by expanding
our sales team, managing clients’ lifecycles, cooperating with referral and reseller partners, engaging independent third-party
consulting and rating companies, organizing and participating in forums and seminars, launching online and offline advertising campaigns,
and improving our website and social media accounts.
Research
and Development
We
invest significant resources in research and development—not only to support our existing business and enhance our service and
product offerings—but also to incubate new technological breakthroughs and business initiatives. As of December 31, 2021, our
research and development team consisted of 131 personnel, including software engineers and internet technology specialists, which
accounted for approximately 33.5% of our total employees. We have invested significant resources to maintain our technological
advantages and intend to continue to extensively invest in our research and development capabilities. For the years ended December
31, 2021, 2020 and 2019, our research and development expenses amounted to approximately $3.3 million, $1.9 million and $1.5
million, respectively.
Our
Technologies
Our
key technologies include the following:
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Cloud-native architecture.
We believe we are one of the first SaaS companies in the customer engagement industry in China that uses cloud-native architecture
throughout the lifecycle of our software. Due to the self-developed cloud-native architecture, our products have flexible scale-out capabilities,
high tolerance of failures and default, and support ultra-large-scale concurrence capabilities. |
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|
|
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● |
AI and machine learning
capabilities. Our software is capable of conducting multiple rounds of free conversation with customers, analyzing the context
for better understanding, and automatically capturing key words and recognizing the intentions of customers. We use self-developed NLP,
licensed ASR and TTS. |
| |
● |
Patented VoIP technologies.
Our patented VoIP technologies feature self-developed intelligent routing, multi-voice coding support and multi-endpoint access
support. The intelligent routing and multi-voice coding support enable us to provide the most optimal voice transmission quality by monitoring
network fluctuation to deploy voice routing notes and adjusting voice coding based on the latest status of network bandwidth. In addition,
our patented VoIP technologies are able to provide multi-endpoint access supports to mobile applications, computer software, website,
session initiation protocol, or SIP, soft-phone and hard-phone, and simultaneously, support multi-endpoint software’s SDK and API,
making it easily integrated to third-party software. |
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|
|
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● |
Self-developed cloud-based
no-code development platform. Our self-developed cloud-based no-code development platform allows us to quickly develop new SaaS,
customize and package our SaaS to meet market demand. Our no-code development platform fundamentally changes how our software engineers
develop new products. It is a “middle platform” where our software engineers write codes and algorithms to generate microservice
modules, further integrate the modules to generate microservice packages, and store such pre-programmed modules and packages. The microservice
module is the smallest unit that a client can use, and the microservice package is the smallest unit that a client can subscribe. All
of our modules and packages are configurable, sharable, and scalable. Our software engineers can easily modify the parameters of the
pre-programmed microservice modules and packages and use drag-and-drop tools to configure the modules and packages to create new or customized
software. Therefore, our no-code development platform has significantly shortened the time required to develop new products compared
to the traditional way of going through the complete lifecycle of software development from designing and coding every time. We have
built a database of microservice modules and packages that cover the recurring issues throughout the years serving our clients and continuously
enhance existing modules and add new modules to respond to newly emerged market opportunities. |
Intellectual
Property
Our
success and future revenue growth depend, in part, on our ability to protect our intellectual property. We rely primarily on patent,
copyright, trademark and trade secret laws, as well as confidentiality procedures, to protect our proprietary technologies and processes.
We
believe that the core of our business is comprised of our proprietary technologies, including our patented VoIP and other internet technologies
and software copyrights. As a result, we strive to maintain a robust intellectual property portfolio. Our success and future revenue
growth may depend, in part, on our ability to protect our intellectual property as products and services that are material to our operating
results incorporate patented technology.
We
have pursued rights in intellectual property since our founding and we focus our intellectual property efforts in China. Our patent strategy
is designed to provide a balance between the need for coverage in our strategic market and the need to maintain reasonable costs.
We believe our rights to
patents, copyrights, trademarks and other intellectual property rights serve to distinguish and protect our products from infringement
and contribute to our competitive advantages. As of December 31, 2021, we had rights to 19 patents, 52 software copyrights, 1 artwork
copyright, 41 registered trademarks and 27 domain names in the PRC and 3 registered trademarks outside of the PRC.
We
cannot assure you that any patents or copyrights will be issued from any of our pending applications. In addition, any rights granted
under any of our existing or future patents, copyrights or trademarks may not provide meaningful protection or any commercial advantage
to us. With respect to our other proprietary rights, it may be possible for third parties to copy or otherwise obtain and use proprietary
technology without authorization or to develop similar technology independently. We may in the future initiate claims or litigation against
third parties to determine the validity and scope of proprietary rights of others. In addition, we may in the future initiate litigation
to enforce our intellectual property rights or to protect our trade secrets. Additional information about the risks relating to our intellectual
property is provided under “Item 3. Key Information—D. Risk Factors—Risks Related to Intellectual Property.”
Competition
We
face significant competition in our evolving market from numerous competitors, particularly cloud-based customer engagement SaaS providers
in China. We believe that the SaaS customer engagement industry in China is still at the beginning of the growth phase in the industry
lifecycle, where the market is segmented and no large players have yet dominated the market. To differentiate us from other SaaS providers
in the industry, we provide more intelligent and customized solutions with an industry focus on finance. We embed our SaaS with AI and
machine learning capabilities, and our no-code development platform allows easy customization and significantly decreases our time to
market.
Participants
in the cloud-based customer engagement service industry include call center providers, software developers focusing on customer engagement,
traditional technology companies providing customized development, implementation and support services, and several other categories
of competitors. Many of our competitors developed cloud-based software similar to us. We may also face competition from new and emerging
companies.
Compared
to our company, our current and potential competitors may have:
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● |
better established credibility
and market reputations, and broader service and product offerings; |
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|
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● |
greater financial, technical,
marketing and other resources, which may allow them to pursue enhanced design, development, sales, marketing, distribution and support
for their services and products; and |
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|
|
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● |
more extensive customer and
partner relationships, which may position them to identify and respond more successfully to market developments and changes in customer
demands. |
However,
we believe we are well positioned to compete in this developing market as a result of our comprehensive service and product portfolio,
research and development capabilities, diverse sales and marketing network and experienced management team. We also focus on the customer
engagement SaaS in the finance industry where there are high thresholds of existing entry barriers due to strict compliance and security
requirements and capabilities to handle large volumes of services with stability.
The
principal competitive factors in our market include:
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● |
intelligent and comprehensive service and product portfolio
that meets the demand of both small and medium sized businesses and large enterprises; |
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|
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● |
efficient customization of services and products; |
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|
|
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● |
in-depth industry expertise, in particular in the finance
industry; |
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brand recognition and reputation; |
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● |
efficacy, reliability and ease of use of services and products; |
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|
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● |
ability to build customer loyalty, retain existing customers
and attract new customers; |
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|
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● |
strength of sales and marketing efforts; and |
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|
|
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● |
advancement of innovation and research and development
of services and products. |
We
believe we compete favorably with respect to the factors mentioned above.
Regulations
Regulations on Value-added Telecommunications Services
The Telecommunications Regulations
of the PRC, or the Telecom Regulations, implemented on September 25, 2000 and amended on July 29, 2014 and February 6, 2016, are the primary
PRC law governing telecommunications services and set out the general framework for the provision of both “basic telecommunication
services” and “value-added telecommunication services” by domestic PRC companies. “Value-added telecommunication
services” is defined as telecommunications and information services provided through public networks, and, according to the Telecom
Regulations, operators of value-added telecommunications services shall obtain operating licenses prior to commencing operations from
the MIIT, or its provincial level counterparts. Enterprises operating telecommunication business in absence of operating license shall
be ordered by the MIIT, or its provincial level counterparts, to rectify the violations, the illegal income shall be confiscated, and
a penalty between three times and five times of the illegal income shall be imposed. If there is no illegal income or the illegal income
is lower than RMB 50,000 (approximately $7,100), a penalty between RMB 100,000 (approximately $14,200) and RMB 1,000,000 (approximately
$142,000) shall be imposed. In a serious case, the business shall be suspended.
The Catalogue of Telecommunications
Business, or the Catalogue, which was issued as an attachment to the Telecom Regulations and recently revised and promulgated on June
6, 2019, further identifies information services and online data processing and transaction processing services as value-added telecommunications
services. Pursuant to the Catalogue, the call center business refers to the provision of business consultation, information consultation
and data query services to users, with the entrustment of enterprises or institutions, based on the call center system and database technology
connected to public communication network or the internet and the information database established by information collection, processing
and storage. We engage in business activities that are value-added telecommunications services as defined and described by the Telecom
Regulations and the Catalogue.
On March 5, 2009, the MIIT issued
the Measures on the Administration of Telecommunications Business Operating Permits, or the Telecom License Measures, which initially
became effective on April 10, 2009 and was amended on July 3, 2017, effective on September 1, 2017, to supplement the Telecom Regulations.
The Telecom License Measures provide that there are two types of telecommunications operating licenses, or the VAT Licenses for operators
in China, one for basic telecommunications services and one for value-added telecommunications services. A distinction is also made to
licenses for value-added telecommunications services as to whether a license is granted for “intra-provincial” or “trans-regional”
(inter-provincial) activities. An appendix to each license granted will detail the permitted activities of the enterprise to which it
was granted. An approved telecommunications services operator must conduct its business (whether basic or value-added) in accordance with
the specifications recorded in its VAT License.
On January
8, 2021, the CAC promulgated the Internet Information Services Measures (Revised Draft for Comments), which sets forth detailed rules
on the internet information service activities. As of the date of this annual report, the draft has not been formally adopted.
Regulations on Foreign Direct Investment in Value-Added
Telecommunications Companies
Foreign direct investment in
telecommunications companies in China is governed by the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises,
or the FITE Regulations, which were issued by the State Council on December 11, 2001, became effective on January 1, 2002 and recently
amended on March 29, 2022 and took effect on May 1, 2022, and the Catalog of Industries for Encouraging Foreign Investment (2020 Version),
or the Encouragement Catalogue, which were promulgated by the NDRC and the MOFCOM on December 27, 2020 and became effective on January
27, 2021, and the Special Management Measures (Negative List) for the Access of Foreign Investment (2021 Version), or the Negative List,
which were issued by NDRC, and the MOFCOM, on December 27, 2021. Under the aforesaid regulations, foreign invested telecommunications
enterprises in the PRC, or FITEs, are generally required to be established as Sino-foreign equity joint ventures with limited exceptions.
In general, the foreign party to a FITE engaging in value-added telecommunications services may hold up to 50% of the equity of the FITE
with limited exceptions, of which the geographical area it may conduct telecommunications services is provided by the MIIT in accordance
with relevant provisions as mentioned above.
On June 30, 2016, the MIIT issued
an Announcement of the Ministry of Industry and Information Technology on Issues concerning the Provision of Telecommunication Services
in Mainland China by Service Providers from Hong Kong and Macau, or the MIIT Announcement, which provides that investors from Hong Kong
and Macau may hold no more than 50% of the equity in FITEs engaging in certain specified categories of value-added telecommunications
services.
On July 13, 2006, the MIIT issued
the Notice of the Ministry of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunications
Services, or the MIIT Notice, which reiterates certain provisions of the FITE Regulations. In addition to the provisions stated in FITE
Regulations, the MIIT Notice further provide that a domestic company that holds a value-added telecommunications license, is prohibited
from leasing, transferring or selling the value-added telecommunications license to foreign investors in any form, and from providing
any assistance, including providing resources, sites or facilities, to foreign investors to conduct value-added telecommunications businesses
illegally in China. The MIIT Notice also requires each value-added telecommunications license holder to have appropriate facilities for
its approved business operations and to maintain such facilities in the regions covered by its license, and specifically, with regard
to the domain names and trademarks, the MIIT Notice required that trademarks and domain names that are used in the provision of Internet
content services must be owned by the VAT License holder or its shareholders.
Regulations on Internet Information Services
The Administrative Measures on
Internet Information Services, or the Internet Information Measures, which was issued by the State Council on September 25, 2000 and amended
on January 8, 2011, set out guidelines on the provision of internet information services. Pursuant to the Internet Information Measures,
“internet information services” are defined as services that provide information to online users through the internet. The
Internet Information Measures classifies internet information services into commercial internet information services and non-commercial
Internet information services. The commercial internet information services refer to services that provide information or services to
internet users with charge. The Internet Information Measures requires commercial internet information services operators to obtain a
value-added telecommunications business operating license, or the ICP License, from the relevant government authorities before engaging
in any commercial internet information services operations in China.
In addition, internet information
service providers are required to monitor their websites to ensure that they do not contain content prohibited by laws or regulations.
Internet information service providers are prohibited from producing, copying, publishing or distributing information that is humiliating
or defamatory to others or that infringes the legal rights of others. The PRC government may require corrective actions to address
non-compliance by ICP License holders or revoke their ICP License for serious violations. Furthermore, the MIIT Circular on Regulating
the Use of Domain Names in Internet Information Services, issued on November 27, 2017 and that took effect on January 1, 2018,
requires internet information service providers to register and own the domain names they use in providing internet information
services.
Regulations on Mobile Internet Application
Information Services
The CAC issued the Administrative Provisions on Mobile Internet Application Information Services on June 28, 2016, which
took effect on August 1, 2016, requiring internet information service providers, or ICPs, who provide information services through
mobile internet applications, or APPs, i.e. mobile application providers, to authenticate the identity of the registered users,
establish procedures for protection of user information, establish procedures for information content censorship and management,
ensure that users are given adequate information concerning an APP and are able to choose whether an APP is installed and whether or
not to use an installed APP and its functions, protect intellectual property rights concerned and keep records of users’ logs
for sixty (60) days. Mobile application providers and application store service providers are prohibited from engaging in any
activity that may endanger national security, disturb the social order, or infringe the legal rights of third parties, and may not
produce, copy, issue or disseminate through mobile applications any content prohibited by laws and regulations. If an ICP violates
these regulations, mobile app stores through which the ICP distributes its APPs may issue warnings, suspend the release of its APPs,
or terminate the sale of its APPs, and/or report the violations to governmental authorities.
ICPs are also required under
the Interim Measures on the Administration of Pre-Installation and Distribution of Applications for Mobile Smart Terminals, which
was issued on December 16, 2016 and took effect on July 1, 2017, to ensure that APPs, as well as its ancillary resource files,
configuration files and user data, can be conveniently uninstalled by a user, unless it is a basic function software (i.e., software
that supports the normal functioning of hardware and operating system of a mobile smart device).
Regulations Relating to Information Security
and Privacy Protection
Regulations on Information Security
In recent years, PRC government
authorities have enacted laws and regulations with respect to internet information security and protection of personal information
from abusing or unauthorized disclosure. Pursuant to the Decision on the Maintenance of Internet Security issued by the NPC Standing
Committee on December 28, 2000, which was amended on August 27, 2009, persons may be subject to criminal liabilities in China for
any attempt to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive
information; (iii) leak state secrets; (iv) spread false commercial information; (v) infringe upon intellectual property
rights or damage business credit or reputation of others; (vi) intentionally make, spread computer viruses and other destructive
programs, attack computer systems and communication networks which lead to damages to such systems and networks; (vii) carry out
theft, fraud, racketeering through internet; and (viii) other activities prohibited by relevant laws and regulations.
The Administration Measures
on the Security Protection of Computer Information Network with International Connections, issued by the Ministry of Public Security
of the PRC, or MPS, on December 16, 1997 and amended by the State Council on January 8, 2011, prohibits using the internet in ways
that result in a leak of state secrets or a spread of socially destabilizing content. The MPS has supervision and inspection powers
and relevant local security bureaus may also have jurisdiction. If a value-added-telecommunications service license holder violates
these measures, the government of the PRC may revoke its value-added-telecommunications service license and shut down its websites.
The Administrative Provisions
on Mobile Internet Application Information Services, issued by the CAC on June 28, 2016, which took effect on August 1, 2016,
providing that mobile Internet application providers are prohibited from engaging in any activity that may endanger national security,
disturb social order or infringe the legal rights of third parties, and may not produce, copy, release or disseminate through mobile
Internet applications any content prohibited by laws and regulations.
On November 7, 2016, the
NPC Standing Committee promulgated the Cyber Security Law of the PRC, or the PRC Cyber Security Law, which took effect on June
1, 2017, pursuant to which, network operators must comply with laws and regulations and fulfil their obligations to safeguard security
of the network when conducting business and providing services. Those who provide services through networks must take technical
measures and other necessary measures pursuant to laws, regulations and compulsory national requirements to safeguard the safe
and stable operation of the networks, respond to network security incidents effectively, prevent illegal and criminal activities,
and maintain the integrity, confidentiality and usability of network data. It also states that network operator may not collect
personal information that is irrelevant to the services it provides or collect or use the personal information in violation of
the provisions of laws or agreements between both parties. Under the Cyber Security Law, network operators are subject to various
security protection-related obligations, including:
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complying with security protection obligations in accordance with tiered requirements with respect to maintenance of the security of Internet systems, which include formulating internal security management rules and developing manuals, appointing personnel who will be responsible for internet security, adopting technical measures to prevent computer viruses and activities that threaten Internet security, adopting technical measures to monitor and record status of network operations, holding Internet security training events, retaining user logs for at least six (6) months, and adopting measures such as data classification, key data backup, and encryption for the purpose of securing networks from interference, vandalism, or unauthorized visits, and preventing network data from leakage, theft, or tampering; |
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verifying users’ identities before signing agreements or providing services such as network access, domain name registration, landline telephone or mobile phone access, information publishing, or real-time communication services; |
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clearly indicating the purposes, methods and scope of the information collection, the use of information collection, and obtain the consent of those from whom the information is collected when collecting or using personal information; |
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strictly preserving the privacy of user information they collect, and establish and maintain systems to protect user privacy; and |
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strengthening management of information published by users. When the network operators discover information prohibited by laws and regulations from publication or dissemination, they shall immediately stop dissemination of that information, including taking measures such as deleting the information, preventing the information from spreading, saving relevant records, and reporting to the relevant governmental agencies. |
On November 15, 2018, the
CAC issued the Provisions on Security Assessment of the Internet Information Services with Public Opinion Attributes or Social
Mobilization Capacity, which came into effect on November 30, 2018. The provisions require Internet information providers to conduct
security assessments on their Internet information services if their services include forums, blogs, microblogs, chat rooms, communication
groups, public accounts, short-form videos, online live-streaming, information sharing, mini programs or other functions that provide
channels for the public to express opinions or have the capability of mobilizing the public to engage in specific activities. Internet
information providers must conduct self-assessment on, among other things, the legality of new technology involved in the services
and the effectiveness of security risk prevention measures, and file the assessment report with the local competent cyberspace
administration authority and public security authority.
The Regulations on Cyber
Security Supervision and Inspection of Public Security Organs, which was issued by the MPS on September 15, 2018 and came into
effect on November 1, 2018, is an important basis for the Public Security Bureau to strengthen the enforcement of the Cyber Security
Law.
Internet security in China
is also regulated and restricted from a national security standpoint. On July 1, 2015, the SCNPC promulgated the new National Security
Law, which took effect on the same date and replaced the former National Security Law promulgated in 1993. According to the new
National Security Law, the state shall ensure that the information system and data in important areas are secure and controllable.
In addition, according to the new National Security Law, the state shall establish national security review and supervision institutions
and mechanisms, and conduct national security reviews of key technologies and IT products and services that affect or may affect
national security. There are uncertainties on how the new National Security Law will be implemented in practice.
Pursuant to the Ninth Amendment
to the Criminal Law issued by the NPC Standing Committee on August 29, 2015, which took effect on November 1, 2015, any Internet
service provider that fails to fulfil the obligations related to internet information security administration as required by applicable
laws and refuses rectification orders is subject to criminal liability for (i) any dissemination of illegal information in large
scale, (ii) any severe effect due to leakage of the client’s information, (iii) any serious loss of criminal evidence, or
(iv) other severe situation. These amendments also state that any individual or entity that (i) sells or provides personal information
to others that violates applicable law, or (ii) steals or illegally obtains any personal information, is subject to criminal penalty
for severe violations.
On October 21, 2019, the
Supreme People’s Court and the Supreme People’s Procuratorate jointly issued the Interpretations on Certain Issues
Regarding the Applicable of Law in the Handling of Criminal Case Involving Illegal Use of Information Networks and Assisting Committing
Internet Crimes, which came into effect on November 1, 2019, and further clarifies the meaning of Internet service provider and
the severe situations of the relevant crimes.
On July 6, 2021, the relevant
PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law,
which 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-based overseas listed companies.
On June 10, 2021, for purpose
of further regulating data processing activities, safeguarding data security, promoting data development and utilization, protecting
the lawful rights and interests of individuals and organizations, and maintaining national sovereignty, security, and development
interests, the SCNPC published the PRC Data Security Law, which took effect on September 1, 2021. The Data Security Law requires
data processing, which includes the collection, storage, use, processing, transmission, provision and publication of data, to be
conducted in a legitimate and proper manner. The Data Security Law provides for data security and privacy obligations on entities
and individuals carrying out data processing activities. The Data Security Law also introduces a data classification and hierarchical
protection system based on the importance of data in economic and social development, and the degree of harm it may cause to national
security, public interests, or legitimate rights and interests of individuals or organizations if such data are tampered with,
destroyed, leaked, illegally acquired or illegally used. The appropriate level of protection measures is required to be taken for
each respective category of data. For example, a processor of important data is required to designate the personnel and the management
body responsible for data security, carry out risk assessments of its data processing activities and file the risk assessment reports
with the competent authorities. State core data, i.e., data having a bearing on national security, the lifelines of national economy,
people’s key livelihood and major public interests, shall be subject to stricter management system. Moreover, the Data Security
Law provides a national security review procedure for those data processing activities which affect or may affect national security
and imposes export restrictions on certain data and information. In addition, the Data Security Law also provides that any organization
or individual within the territory of the PRC shall not provide any foreign judicial body and law enforcement body with any data
stored within the territory of the PRC without the approval of the competent PRC governmental authorities.
On August 17, 2021, the
State Council promulgated the Regulations on Security Protection of Critical Information Infrastructure, which became effective
on September 1, 2021. Pursuant to the Regulations on Protection of Critical Information Infrastructure, critical information infrastructure
refers to any important network facilities and information systems of an important industry and field such as public communication
and information service, energy, transport, water conservation, finance, public services, e-government affairs and national defense
related science and technology industry, and other industries and fields that may seriously endanger national security, people’s
livelihood and public interest in case of damage, function loss or data leakage. In addition, relevant administration departments
of each important industry and field are responsible for formulating eligibility criteria and determining the critical information
infrastructure in the respective industry or field. The operators will be informed about the final determination as to whether
they are categorized as critical information infrastructure operators.
On December 31, 2021, the
CAC, together with the MIIT, the MPS and the SAMR, jointly issued the Administrative Provisions on Algorithm Recommendation of
Internet Information Services, with effect from March 1, 2022, which provides that algorithm recommendation service providers are
not allowed to use algorithms to register false user accounts, block information, give excessive recommendations, and that users
should be given the option to easily turn off algorithm recommendation services.
On October 29, 2021, the
CAC published the Measures for the Security Assessment of Outbound Data (Draft for Comments), which intends to regulate the outbound
transfer of (including cross-border assess to) important data and/or personal information collected or generated in domestic operations
within the People’s Republic of China. The security assessment requirement was initially introduced in the PRC Cybersecurity
Law against the critical information infrastructure operators only, but the Measures for the Security Assessment of Outbound Data
(Draft for Comments) has extended the security assessment obligation to all data processors, and provides two types of security
assessment to be undertaken before providing data from China to overseas, namely risk self-assessment and security assessment by
CAC. As of the date of this annual report, the Measures for the Security Assessment of Outbound Data (Draft for Comments) has not
been formally adopted.
On November 14, 2021, the
CAC published the Regulations of Internet Data Security Management (Draft for Comments), which further regulate the internet data
processing activities and emphasize the supervision and management of network data security, and further stipulate the obligations
of internet platform operators, such as to establish a system for disclosure of platform rules, privacy policies and algorithmic
strategies related to data, and timely disclosure of formulation procedures and adjudication procedures and more. Specifically,
the draft regulations require data processors to, among others, (i) adopt immediate remediation measures when finding that network
products and services they use or provide have security defects and vulnerabilities, or threaten national security or endanger
public interest, and (ii) follow a series of detailed requirements with respect to processing of personal information, management
of important data and proposed overseas transfer of data. In addition, such draft regulations require data processors handling
important data or the data processors listed overseas to complete an annual data security assessment and file a data security assessment
report to applicable regulators. Such annual assessment, as required by the draft regulations, would encompass areas including
but not limited to the status of important data processing, data security risks identified and the measures adopted, the effectiveness
of data protection measures, the implementation of national data security laws and regulations, data security incidents that occurred
and their handling, and a security assessment with respect to sharing and provision of important data overseas. As of the date
of this annual report, the Regulations of Internet Data Security Management (Draft for Comments) has not been formally adopted.
On January 4, 2022, the
CAC and other twelve PRC regulatory authorities jointly revised and promulgated the Measures for Cybersecurity Review, or the Cybersecurity
Review Measures, which came into effect on February 15, 2022 and the Measures for Cybersecurity Review which took effect on June
1, 2020 was abolished at the same time. The Cybersecurity Review Measures requires that critical information infrastructure operators
that purchase network products and services shall anticipate the potential national security risk of products and services after
they enter operation. If they affect or may affect national security, a cybersecurity review shall be reported to the Cybersecurity
Review Office.
Regulations on Privacy Protection
On December 13, 2005, the
MPS issued the Regulations on Technological Measures for Internet Security Protection, or the Internet Protection Measures, which
took effect on March 1, 2006, requiring internet service providers to utilize standard technical measures for internet security
protection. and to keep records of certain information about their users (including user registration information, log-in and log-out
time, IP address, content and time of posts by users) for at least sixty (60) days and submit the above information as required
by laws and regulations.
Under the Several Provisions
on Regulating the Market Order of Internet Information Services issued by the MIIT on December 29, 2011 and that took effect on
March 15, 2012, ICPs are also prohibited from collecting any personal user information or providing any information to third parties
without the consent of the user. The Cyber Security Law provides an exception to the consent requirement where the information
is anonymous, not personally identifiable and unrecoverable. ICPs must expressly inform the users of the method, content and purpose
of the collection and processing of user personal information and may only collect information necessary for its services. ICPs
are also required to properly maintain user personal information, and in case of any leak or likely leak of 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 issued by the NPC Standing Committee 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 expressly
inform their users of the internet service providers’ collection and use of user personal information, establish and publish policies
regarding the purpose, manner and scope of Internet service providers’ collection and use of personal electronic information standards,
collect and use user personal information only with the consent of the users and only within the scope of such consent and to take necessary
measures to ensure the security of the information and to prevent leakage, damage or loss. The decision also mandates that Internet services
providers and their employees must keep strictly confidential user personal information that they collect.
Furthermore, MIIT’s Order
on Protection of Personal Information of Telecommunications and Internet Users, or the Order, which was issued on July 16, 2013 and took
effect on September 1, 2013, contains detailed requirements on the use and collection of personal information as well as the security
measures to be taken by ICPs. Most of the requirements under the Order that are relevant to Internet services providers are consistent
with the requirements already established under the MIIT provisions discussed above, except that under the Order the requirements are
more strict and have a wider scope. If an Internet services provider wishes to collect or use personal information, it may do so only
if such collection is necessary for the services it provides. Further, it must disclose to its users the purpose, method and scope of
any such collection or use, and must obtain consent from the users whose information is being collected or used. Internet services providers
are also required to establish and publish their protocols relating to personal information collection or use, keep any collected information
strictly confidential, and take technological and other measures to maintain the security of such information. Internet services providers
are also required to cease any collection or use of the user personal information, and de-register the relevant user account, when a given
user stops using the relevant Internet service. Internet services providers are further prohibited from divulging, distorting or destroying
any such personal information, or selling or providing such information unlawfully to other parties. The Order states, in broad terms,
that violators may face warnings, fines, and disclosure to the public and, in the most severe cases, criminal liability.
On January 5, 2015, the SAIC
promulgated the Measures on Punishment for Infringement of Consumer Rights, which was revised on October 23, 2020, pursuant to which business
operators collecting and using personal information of consumers must comply with the principles of legitimacy, propriety and necessity,
specify the purpose, method and scope of collection and use of the information, and obtain the consent of the consumers whose personal
information is to be collected. Business operators may not (i) collect or use personal information of consumers without their consent,
(ii) unlawfully divulge, sell or provide personal information of consumers to others or (iii) send commercial information to consumers
without their consent or request, or when a consumer has explicitly declined to receive such information.
On May 8, 2017, the Supreme People’s
Court and the Supreme People’s Procuratorate released the Interpretations of the Supreme People’s Court and the Supreme People’s
Procuratorate on Several Issues Concerning the Application of Law in the Handling of Criminal Cases Involving Infringement of Citizens’
Personal Information, which took effect on June 1, 2017. It clarifies several concepts regarding the crime of “infringement of citizens’
personal information,” including “citizen’s personal information,” “provision,” and “unlawful
acquisition.”
Pursuant to the Announcement
of Conducting Special Supervision against the Illegal Collection and Use of Personal Information by APP, which was issued on January 23,
2019, APP operators should collect and use personal information in compliance with the Cyber Security Law and should be responsible for
the security of personal information obtained from users and take effective measures to strengthen the personal information protection.
Furthermore, APP operators should not force their users to make authorization by means of bundling, suspending installation or in other
default forms and should not collect personal information in violation of laws, regulations or breach of user agreements. Such regulatory
requirements were emphasized by the Notice on the Special Rectification of APPs Infringing upon User’s Personal Rights and Interests,
which was issued by MIIT on October 31, 2019. On November 28, 2019, the CAC, MIIT, the MPS and SAMR jointly issued the Measures to Identify
Illegal Collection and Usage of Personal Information by Apps, which lists six types of illegal collection and usage of personal information,
including “failure to publish rules on the collection and usage of personal information,” “failure to expressly state
the purpose, manner and scope of the collection and usage of personal information,” “collecting and using personal information
without obtaining consents from users,” “collecting personal information irrelevant to the services provided,” “providing
personal information to other parties without obtaining consent” and “failure to provide the function of deleting or correcting
personal information as required by law or failure to publish the methods for complaints and reports or other information.”
In addition, the Civil Code of
the PRC, which was issued by the NPC on May 28, 2020 and took effect on January 1, 2021, requires personal information of individuals
to be protected. Any organization or individual requiring personal information of others shall obtain such information legally and ensure
the security of such information, and shall not illegally collect, use, process, or transmit such personal information, or illegally buy,
sell, provide, or publish such personal information.
On August 22, 2019, the CAC
promulgated the Provisions on the Cyber Protection of Children’s Personal Information, which took effect on October
1, 2019, requiring that before collecting, using, transferring or disclosing the personal information of a child, any Internet service
operator should inform that child’s guardians in a noticeable and clear manner and obtain their consents. Meanwhile, Internet service
operators should take measures like encryption when storing children’s personal information.
According to the Law of
the PRC on the Protection of Minors (2020 Revision), which took effect on June 1, 2021, information processors must follow the principles
of legality, legitimacy and necessity when processing personal information of minors via internet, and must obtain consent from minors’
parents or other guardians when processing personal information of minors under age of 14. In addition, internet service providers must
promptly alert upon the discovery of publishing private information by minors via the internet and take necessary protective measures.
On August 20, 2021, the SCNPC
promulgated the Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights
and privacy protection and took effect on November 1, 2021. The Personal Information Protection Law raises the protection requirements
for processing personal information, and specifies the rules for processing sensitive personal information, which refers to personal information
that, once leaked or illegally used, may easily cause harm to the dignity of natural persons or cause harm to the safety of people or
property, including information on biometric characteristics, financial accounts, individual location tracking and others, as well as
personal information of minors under the age of 14. Personal information processors shall bear responsibility for their personal information
processing activities, and adopt necessary measures to safeguard the security of the personal information they process. Otherwise, the
personal information processors will be subject to correction of its operations, suspension or termination of the provision of services,
confiscation of illegal income, fines or other penalties.
On March 12, 2021, the CAC and
other governmental authorities promulgated Necessary Personal Information Range Provisions of Common Types of Apps, effective on May 1,
2021, which specify the scope of necessary personal information for common types of mobile apps. On April 26, 2021, the MIIT promulgated
Interim Provisions on the Administration of Personal Information Protection for Apps (Draft for Comments), which further stipulate the
protection and management of the personal information on mobile apps. As of the date of this annual report, the Interim Provisions on
the Administration of Personal Information Protection for Apps (Draft for Comments) has not been formally adopted
On January 5, 2022, the CAC issued
a revised version of the Administrative Provisions on Mobile Internet Applications Information Services (Draft for Comments), which emphasises
that mobile internet app providers shall comply with relevant provisions on the scope of necessary personal information when engaging
in personal information processing activities. Furthermore, mobile internet app providers shall not compel users to agree to non-essential
personal information collection out of any reason, and are prohibited from banning users from their basic functional services due to the
users’ refusal of providing non-essential personal information
Regulations Relating to Product Liability
Manufacturers and vendors of
defective products in the PRC may incur liability for losses and injuries caused by such products. Under the Civil Code of the PRC, which
was promulgated on May 28, 2020 and became effective on January 1, 2021, manufacturers or retailers of defective products that cause property
damage or physical injury to any person will be subject to civil liability.
The Product Quality Law of the
PRC (as amended in 2000, 2009 and 2018) and the Law of the PRC on the Protection of the Rights and Interests of Consumers (as amended
in 2009 and 2013), which were enacted to protect the legitimate rights and interests of end-users and consumers and to strengthen the
supervision and control of the quality of products. If our products are defective and cause any personal injuries or damage to assets,
our customers have the right to claim compensation from us.
Regulations on Intellectual Property in the PRC
Copyright
Pursuant to the Copyright Law
of the PRC, which was first promulgated by the Standing Committee of the National People’s Congress on September 7, 1990 and became
effective from June 1, 1991, and was last amended on November 11, 2020 and became effective as of June 1, 2021, copyrights include personal
rights such as the right of publication and that of attribution as well as property rights such as the right of production and that of
distribution. Reproducing, distributing, performing, projecting, broadcasting or compiling a work or communicating the same to the public
via an information network without permission from the owner of the copyright therein, unless otherwise provided in the Copyright Law
of the PRC, constitute infringements of copyrights. The amended Copyright Law extends copyright protection to Internet activities, products
disseminated over the internet and software products. In addition, there is a voluntary registration system administered by the China
Copyright Protection Center.
In order to further implement
the Computer Software Protection Regulations, promulgated by the State Council on June 4, 1991 and amended on January 30, 2013, the National
Copyright Administration, or the NCA, issued the Computer Software Copyright Registration Procedures on April 6, 1992 and amended on February
20, 2002, which specify detailed procedures and requirements with respect to the registration of software copyrights. The China Copyright
Protection Center shall grant registration certificates to the computer software copyrights applicants which meet the requirements of
both the software copyright registration procedures and the computer software protection regulations.
Trademark
Pursuant to the Trademark Law
of the PRC, or the Trademark Law, which was first promulgated by the Standing Committee of the National People’s Congress on August
23, 1982 and became effective from March 1, 1983, and was most recently amended on April 23, 2019 and became effective on November 1,
2019, the right to exclusive use of a registered trademark shall be limited to trademarks which have been approved for registration and
to goods and/or services for which the use of such trademark has been approved. The period of validity of a registered trademark shall
be ten years, counted from the day the registration is approved, and may be renewed for another ten years provided relevant application
procedures have been completed within twelve (12) months before the end of the validity period. According to this law, using a trademark
that is identical to or similar to a registered trademark in connection with the same or similar goods and/or services without the authorization
of the owner of the registered trademark constitutes an infringement of the exclusive right to use a registered trademark.
The Implementation Regulation
for the Trademark Law promulgated by the State Council came into effect on September 15, 2002 and was further amended on April 29, 2014.
Under the Trademark Law and the implementing regulation, the Trademark Office of the State Administration for Market Regulation, or the
Trademark Office, is responsible for the registration and administration of trademarks. The Trademark Office handles trademark registrations.
As with patents, China has adopted a “first-to-file” principle for trademark registration. If two or more applicants apply
for registration of identical or similar trademarks for the same or similar commodities, the application that was filed first will receive
preliminary approval and will be publicly announced. A registrant may apply to renew a registration within twelve (12) months before the
expiration date of the registration. If the registrant fails to apply in a timely manner, a grace period of six (6) additional months
may be granted. If the registrant fails to apply before the grace period expires, the registered trademark shall be deregistered. Renewed
registrations are valid for ten years.
In addition to the above, a Trademark
Review and Adjudication Board was established for resolving trademark disputes. According to the Trademark Law, within three (3) months
since the date of the announcement of a preliminarily validated trademark, if a titleholder is of the view that such trademark in application
is identical or similar to its registered trademark for the same type of commodities or similar commodities which violates relevant provisions
of the Trademark Law, such titleholder may raise an objection to the Trademark Office within the aforesaid period. In such event, the
Trademark Office shall consider the facts and grounds submitted by both the dissenting party and the party being challenged and shall
decide on whether the registration is allowed within twelve (12) months upon the expiration of the announcement after investigation and
verification, and notify the dissenting party and the person challenged in writing.
Patent
Pursuant to the Patent Law of
the PRC, which was promulgated by the Standing Committee of the National People’s Congress on March 12, 1984 and became effective
from April 1, 1985, and was most recently amended on October 17, 2020 and became effective on June 1, 2021, patents in China are classified
into three categories, namely, inventions, utility models and designs. The protection period of a patent right is 10 years for utility
models, 15 years for designs, and 20 years for inventions from the date of application. A patentable invention, utility model or design
must meet three conditions: novelty, inventiveness and practical applicability. Patents cannot be granted for scientific discoveries,
rules and methods for intellectual activities, methods used to diagnose or treat diseases, animal and plant breeds or substances obtained
by means of nuclear transformation. The Patent Office under the State Intellectual Property Office is responsible for receiving, examining
and approving patent applications. A patent is valid for a twenty-year term for an invention, a ten-year term for a utility model and
a fifteen-year term for a design, starting from the application date. After the grant of the patent right for an invention or utility
model, except where otherwise provided for in the Patent Law, no entity or individual may, without the authorization of the patent owner,
exploit the patent, that is, make, use, offer to sell, sell or import the patented product, or use the patented process, or use, offer
to sell, sell or import any product which is a direct result of the use of the patented process, for production or business purposes.
And after a patent right is granted for a design, no entity or individual shall, without the permission of the patent owner, exploit the
patent, that is, for production or business purposes, manufacture, offer to sell, sell, or import any product containing the patented
design.
Domain Name
Pursuant to the Administrative
Measures on Internet Domain Names of China, which was recently amended by the MIIT on August 24, 2017 and became effective on November
1, 2017, “domain name” shall refer to the character mark of hierarchical structure, which identifies and locates a computer
on the internet and corresponds to the internet protocol (IP) address of that computer. The principle of “first come, first serve”
is followed for the domain name registration service. Applicants for registration of domain names shall provide the true, accurate and
complete information of their identifications to domain name registration service institutions. After completing the domain name registration,
the applicant becomes the holder of the domain name registered by him/it. Furthermore, the holder shall pay operation fees for registered
domain names on schedule. If the domain name holder fails to pay the corresponding fees as required, the original domain name registrar
shall write it off and notify the holder of the domain name in written form.
Laws and Regulations on Labor Protection
in the PRC
According to the Labor Law of
the PRC, or the Labor Law, which was promulgated by the Standing Committee of the NPC on July 5, 1994, came into effect on January 1,
1995, and was most recently amended on December 29, 2018, an employer shall develop and improve its rules and regulations to safeguard
the rights of its workers. An employer shall develop and improve its labor safety and health system, stringently implement national protocols
and standards on labor safety and health, conduct labor safety and health education for workers, guard against labor accidents and reduce
occupational hazards. Labor safety and health facilities must comply with relevant national standards. An employer must provide workers
with the necessary labor protection gear that complies with labor safety and health conditions stipulated under national regulations,
as well as provide regular health checks for workers that are engaged in operations with occupational hazards. Laborers engaged in special
operations shall have received specialized training and have obtained the pertinent qualifications. An employer shall develop a vocational
training system. Vocational training funds shall be set aside and used in accordance with national regulations and vocational training
for workers shall be carried out systematically based on the actual conditions of the company.
The Labor Contract Law of the
PRC, which was promulgated by the SCNPC on June 29, 2007, came into effect on January 1, 2008, and was amended on December 28, 2012 and
became effective as of July 1, 2013, and the Implementation Regulations on Labor Contract Law, which was promulgated on September 18,
2008, and became effective since the same day, regulate both parties through a labor contract, namely the employer and the employee, and
contain specific provisions involving the terms of the labor contract. It is stipulated under the Labor Contract Law and the Implementation
Regulations on Labor Contract Law that a labor contract must be made in writing. if labor relationships are to be or have been established
between employers and the employees An employer and an employee may enter into a fixed-term labor contract, an un-fixed term labor contract,
or a labor contract that concludes upon the completion of certain work assignments, after reaching agreement upon due negotiations. An
employer may legally terminate a labor contract and dismiss its employees after reaching agreement upon due negotiations with the employee
or by fulfilling the statutory conditions. Labor contracts concluded prior to the enactment of the Labor Law and subsisting within the
validity period thereof shall continue to be honored. With respect to a circumstance where a labor relationship has already been established
but no formal written contract has been made, a written labor contract shall be entered into within one (1) month from the commencement
date of the employment. Employers are prohibited from forcing employees to work above certain time limit and employers shall pay employees
for overtime work in accordance to national regulations. In addition, employee wages shall be no lower than local standards on minimum
wages and shall be paid to employees timely.
According to the Interim Regulations
on the Collection and Payment of Social Insurance Premiums, the Regulations on Work Injury Insurance, the Regulations on Unemployment
Insurance and the Trial Measures on Employee Maternity Insurance of Enterprises, enterprises in the PRC shall provide benefit plans for
their employees, which include basic pension insurance, unemployment insurance, maternity insurance, work injury insurance and basic medical
insurance. An enterprise must provide social insurance by processing social insurance registration with local social insurance agencies,
and shall pay or withhold relevant social insurance premiums for or on behalf of employees. The Law on Social Insurance of the PRC, which
was promulgated by the Standing Committee of the National People’s Congress on October 28, 2010, and became effective on July 1,
2011, and was most recently updated on December 29, 2018, has consolidated pertinent provisions for basic pension insurance, unemployment
insurance, maternity insurance, work injury insurance and basic medical insurance, and has elaborated in detail the legal obligations
and liabilities of employers who do not comply with relevant laws and regulations on social insurance. Where an employer fails to fully
pay social insurance premiums, relevant social insurance collection agency shall order it to make up for any shortfall within a prescribed
time limit, and may impose a late payment fee at the rate of 0.05% per day of the outstanding amount from the due date. If such employer
still fails to make up for the shortfalls within the prescribed time limit, the relevant administrative authorities shall impose a fine
of one to three times the outstanding amount upon such employer.
According to the Interim Measures
for Participation in the Social Insurance System by Foreigners Working within the Territory of China, which was promulgated by the Ministry
of Human Resources and Social Security of the PRC on September 6, 2011, and became effective on October 15, 2011, or the Interim Measures
for Foreigners, employers who employ foreigners shall participate in the basic pension insurance, unemployment insurance, basic medical
insurance, occupational injury insurance, and maternity insurance in accordance with the relevant law, with the social insurance premiums
to be contributed respectively by the employers and foreigner employees as required. In accordance with Interim Measures for Foreigners,
the social insurance administrative agencies shall exercise their right to supervise and examine the legal compliance of foreign employees
and employers and the employers who do not pay social insurance premiums in conformity with the laws shall be subject to the administrative
provisions provided in the Social Insurance Law and the relevant regulations and rules mentioned above.
According to the Regulations
on the Administration of Housing Provident Fund, which was promulgated by the State Counsel and became effective on April 3, 1999, and
was amended on March 24, 2002 and was partially revised on March 24, 2019 by Decision of the State Council on Revising Some Administrative
Regulations (Decree No. 710 of the State Council), housing provident fund contributions by an individual employee and housing provident
fund contributions by his or her employer shall belong to the individual employee. Registration by PRC companies at the applicable housing
provident fund management center is compulsory and a special housing provident fund account for each of the employees shall be opened
at an entrusted bank.
The employer shall timely pay
up and deposit housing provident fund contributions in full amount and late or insufficient payments shall be prohibited. Under the circumstances
where financial difficulties do exist due to which an employer is unable to pay or pay up house provident funds, permission of labor union
of the employer and approval of the local house provident funds commission must first be obtained before the employer can suspend or reduce
their payment of house provident funds. The employer shall process housing provident fund payment and deposit registrations with the housing
provident fund administration center. The minimum standard for housing provident funds is 5% of employees’ average monthly salary
of the preceding year, and such percentage rate may be uplifted by the local housing provident funds management commissions if examined
by the people’s government of same level and approved by people’s government of provincial, or autonomous region or municipality
level. With respect to companies who violate the above regulations and fail to process housing provident fund payment and deposit registrations
or open housing provident fund accounts for their employees, such companies shall be ordered by the housing provident fund administration
center to complete such procedures within a designated period. Those who fail to process their registrations within the designated period
shall be subject to a fine ranging from RMB 10,000 (approximately $1,400) to RMB 50,000 (approximately $7,100). When companies breach
these regulations and fail to pay up housing provident fund contributions in full amount as due, the housing provident fund administration
center shall order such companies to pay up within a designated period, and may further apply to the People’s Court for mandatory
enforcement against those who still fail to comply after the expiry of such period.
Regulations on Tax
in the PRC
Income Tax
In January 2008, the PRC Enterprise
Income Tax Law took effect, which was last amended by the Standing Committee of the National People’s Congress on December 29, 2018.
On December 6, 2007, the State Council enacted the Regulations for the Implementation of the Law on Enterprise Income Tax, which was recently
amended on April 23, 2019, together with the PRC Enterprise Income Tax Law, the EIT Law. Under the EIT Law, both resident enterprises
and non-resident enterprises are subject to tax in the PRC. Resident enterprises are defined as enterprises that are established in China
in accordance with PRC laws, or that are established in accordance with the laws of foreign countries but are actually or in effect controlled
within the PRC. Non-resident enterprises are defined as enterprises that are organized under the laws of foreign countries and whose “de
facto management body” is conducted outside the PRC, but have established institutions or premises in the PRC, or have no such established
institutions or premises but have income generated from inside the PRC. The EIT Law applies a uniform 25% enterprise income tax rate to
both resident enterprises and non-resident enterprises, except where tax incentives are granted to special industries and projects. However,
if non-resident enterprises have not formed permanent establishments or premises in the PRC, or if they have formed permanent establishment
or premises in the PRC but there is no actual relationship between the relevant income derived in the PRC and the established institutions
or premises set up by them, enterprise income tax is set at the rate of 20% with respect to their income sourced from inside the PRC.
According to the EIT Law and the Announcement on Issues concerning the Implementation of the Preferential Income Tax Policies regarding
High-Tech Enterprises promulgated by the SAT on June 19, 2017, enterprises qualified as “high-tech enterprises” are entitled
to a 15% enterprise income tax rate rather than the 25% uniform statutory tax rate. The preferential tax treatment continues as long as
an enterprise can retain its “high-tech enterprise” status.
The implementation rules define
the term “de facto management body” as the body that exercises full and substantial control and overall management over the
business, productions, personnel, accounts, and properties of an enterprise. Under the EIT Law, dividends generated from the business
of a PRC subsidiary after January 1, 2008, and payable to its foreign investor may be subject to a withholding tax rate of 10 percent
if the PRC tax authorities determine that the foreign investor is a non-resident enterprise which do not have an establishment or place
of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with
the establishment or place of business, to the extent such dividends are derived from sources within the PRC, unless there is a tax treaty
with China that provides for a preferential withholding tax rate. Distributions of earnings generated before January 1, 2008, are exempt
from PRC withholding tax.
In January 2009, the SAT promulgated
the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises, or the Non-resident
Enterprises Measures, which was repealed by Announcement of the State Administration of Taxation on Issues Relating to Withholding at
Source of Income Tax of Non-resident Enterprises in December 2017. According to the new announcement, which was amended on June 15, 2018,
it shall apply to handling of matters relating to withholding at source of income tax of non-resident enterprises pursuant to the provisions
of Article 37, Article 39 and Article 40 of the Enterprise Income Tax Law. According to Article 37, Article 39 of the Enterprise Income
Tax Law, income tax over non-resident enterprise income pursuant to the provisions of the third paragraph of Article 3 shall be subject
to withholding at the source, where the payer shall act as the withholding agent. The tax amount for each payment made or due shall be
withheld by the withholding agent from the amount paid or payable. Where a withholding agent fails to withhold tax or perform tax withholding
obligations pursuant to the provisions of Article 37, the taxpayer shall pay tax at the place where the income is derived. Where the taxpayer
fails to pay tax pursuant to law, the tax authorities may demand payment of the tax amount payable, from a payer of the taxpayer with
payable tax amounts from other taxable income items in China.
On April 30, 2009, the Ministry
of Finance of the PRC, or the MOF, and the SAT jointly issued the Circular on Issues Concerning Treatment of Enterprise Income Tax in
Enterprise Restructuring Business, or Circular 59, which became effective retroactively as of January 1, 2008 and was partially revised
on January 1, 2014. By promulgating and implementing this circular, the PRC tax authorities have enhanced their scrutiny over the direct
or indirect transfer of equity interests in a PRC resident enterprise by a non-resident Enterprise.
On February 3, 2015, the SAT
issued the Announcement of the State Administration of Taxation on Several Issues Relating to Enterprise Income Tax on Indirect Transfers
of Assets by Non-resident Enterprises, or SAT Bulletin 7, which was partially abolished on December 1, 2017 and December 29, 2017. SAT
Bulletin 7 extends its tax jurisdiction to transactions involving transfer of immovable property in China and assets held under the establishment,
and placement in China, of a foreign company through the offshore transfer of a foreign intermediate holding company. SAT Bulletin 7 also
addresses transfer of the equity interest in a foreign intermediate holding company broadly. In addition, SAT Bulletin 7 introduces safe
harbor scenarios applicable to internal group restructurings. However, it also brings challenges to both the foreign transferor and transferee
of the indirect transfer as they have to assess whether the transaction should be subject to PRC tax and to file or withhold the PRC tax
accordingly.
On October 17, 2017, the SAT
issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income
Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017 and was revised on June 15, 2018. The SAT Bulletin 37 further
clarifies the practice and procedure of withholding of non-resident enterprise income tax and provides that:
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for the income from equity investment assets, the competent tax authority for the income tax of the invested enterprise shall be the competent tax authority, while for the income from the dividends, extra dividends and other equity investment, the competent tax authority for the income tax of the enterprise distributing the income shall be the competent tax authority; |
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the withholding obligator shall declare and pay the withheld tax to the competent tax authority in the place where such withholding obligator is located within seven (7) days from the date of occurrence of the withholding obligation; |
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where the income obtained by the withholding obligator and required to be withheld at source is in the form of dividends, extra dividends or any other equity investment gains, the date of occurrence of the obligation for withholding relevant payable tax is the date of actual payment of the dividends, extra dividends or other equity investment gains; |
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for the income tax required to be withheld under Article 37 of the Enterprise Income Tax Law, if the withholding obligator fails to withhold in accordance with the law or is unable to perform withholding obligation, the non-resident enterprise obtaining the income shall declare and pay the tax not withheld to the competent tax authority of the place of the occurrence of the income in accordance with Article 39 of the Enterprise Income Tax Law and complete the Form of Report on Withholding of Enterprise Income Tax of the People’s Republic of China; where the non-resident enterprise fails to declare and pay tax in accordance with Article 39 of the Enterprise Income Tax Law, the tax authority may order it to pay the tax within a specified time limit and the non-resident enterprise shall declare and pay the tax within the time limit determined by the tax authority; the non-resident enterprise that declares and pays the tax voluntarily before the tax authority orders it to pay tax within a specified time limit shall be deemed as having paid tax as scheduled; |
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the competent tax authority may require the taxpayer, withholding obligator and relevant parties with knowledge of relevant information to provide the contracts and other relevant materials relating to the withholding of tax; |
where the withholding obligator
fails to withhold the tax required to be withheld under Article 37 of the Enterprise Income Tax Law, the competent tax authority of the
place where the withholding agent is located shall order the withholding obligator to make up for the withholding of tax in accordance
with Article 23 of the Administrative Punishment Law of the People’s Republic of China and hold the withholding agent liable in
accordance with the law; if recovery of tax payment from the taxpayer is necessary, the competent tax authority of the place where the
income occurs shall implement the recovery in accordance with the law. If the place where the withholding obligator is located is different
from the place where the income occurs, the competent tax authority of the place of occurrence of the income that is responsible for recovering
the tax payment shall give notice to the competent tax authority of the place where the withholding obligator is located for verifying
relevant information. The competent tax authority of the place where the withholding agent is located shall, within five (5) working days
from the date.
If non-resident investors were
involved in our private equity financing, if such transactions were determined by the tax authorities to lack reasonable commercial purpose,
we and our non-resident investors may be at risk of being required to file a return and be taxed under SAT Bulletin 7 and we may be required
to expend valuable resources to comply with SAT Bulletin 7 or to establish that we should not be held liable for any obligations under
SAT Bulletin 7.
Pursuant to an Arrangement Between
the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with respect to Taxes on Income, or the Double Tax Avoidance Arrangement promulgated by the State Administration of Taxation on
August 21, 2006, and other applicable PRC laws, if a Hong Kong resident enterprise is determined by the competent PRC tax authority to
have satisfied the relevant conditions and requirements under such Double Tax Avoidance Arrangement and other applicable laws, the 10%
withholding tax on the dividends the Hong Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5%. However,
based on the Circular on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, or the SAT Circular 81,
issued on February 20, 2009 by the SAT, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from
such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential
tax treatment.
Value-Added Tax
According to the Temporary Regulations
on Value-added Tax, which was promulgated by the State Council on December 13, 1993 and was most recently amended on November 19, 2017,
and the Detailed Implementing Rules of the Temporary Regulations on Value-added Tax, which was promulgated by the MOF on December 25,
1993 and was amended on October 28, 2011, and became effective on November 1, 2011, all taxpayers selling goods, providing processing,
repair or replacement services or importing goods within the PRC shall pay Value-Added Tax. The tax rate of 17% shall be levied on general
taxpayers selling or importing various goods and providing processing, repairing or replacement service; the applicable rate for the export
of goods and cross-border sale of services and intangible assets by domestic organizations and individuals within the scope stipulated
by the State Council shall be nil, unless otherwise stipulated. On April 4, 2018, the MOF and the SAT jointly issued the Notice of Adjustment
of Value-added Tax Rates which declared that the VAT tax rate in regard to the sale of goods, provision of processing, repairs and replacement
services and importation of goods into China shall be reduced from the previous 17% to 16% from May 1, 2018. According to the PRC VAT
Regulations, the VAT rate for sale of services and sale of intangible properties is 6% unless otherwise specified.
Furthermore, according to the
Trial Scheme for the Conversion of Business Tax to Value-added Tax, which was promulgated by the MOF and the SAT on November 16, 2011,
the PRC began to launch taxation reforms in a gradual manner from January 1, 2014, whereby the collection of value-added tax in lieu of
business tax items was implemented on a trial basis in regions showing significant radiating effects in economic development and providing
outstanding reform examples, beginning with production service industries such as transportation and certain modern service industries.
In accordance with the Circular
on Notice of Comprehensive Promotion of Conversion of Business Tax to Value-added Tax promulgated by the SAT and the MOF which took effect
on May 1, 2016, upon approval of the State Council, the pilot program of the collection of value-added tax in lieu of business tax shall
be promoted nationwide in a comprehensive manner starting May 1, 2016, and all taxpayers of business tax engaged in the building industry,
the real estate industry, the financial industry and the life service industry shall be included in the scope of the pilot program with
regard to payment of value-added tax instead of business tax. Our main business is included in the scope of the pilot program with regard
to payment of value-added tax instead of business tax.
On November 19, 2017, the State
Council promulgated the Decision of State Council on Abolition of the Provisional Regulations of the PRC on Business Tax and Revision
of the Provisional Regulations of the PRC on Value-added Tax, which took effective on the same date, to formally abolish the Provisional
Regulations of the People’s Republic of China on Business Tax and amend the Temporary Regulations on Value-added Tax accordingly.
Regulations on Foreign
Exchange
Foreign Currency
Exchange
Pursuant to the Foreign Currency
Administration Rules, as amended, and various regulations issued by SAFE and other relevant PRC government authorities, Renminbi is freely
convertible to the extent of current account items, such as trade related receipts and payments, interest and dividends. Capital account
items, such as direct equity investments, loans and repatriation of investment, unless expressly exempted by laws and regulations, still
require prior approval from SAFE or its provincial branch for conversion of Renminbi into a foreign currency, such as U.S. dollars, and
remittance of the foreign currency outside of the PRC. Payments for transactions that take place within the PRC must be made in Renminbi.
Foreign currency revenues received by PRC companies may be repatriated into China or retained outside of China in accordance with requirements
and terms specified by SAFE. Foreign exchange proceeds under the current accounts may be either retained or sold to a financial institution
engaged in settlement and sale of foreign exchange pursuant to relevant SAFE rules and regulations. For foreign exchange proceeds under
the capital accounts, approval from the SAFE is generally required for the retention or sale of such proceeds to a financial institution
engaged in settlement and sale of foreign exchange.
Pursuant to the Circular of the
SAFE on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment, or the SAFE Circular 59 promulgated
by SAFE on November 19, 2012, which became effective on December 17, 2012 and was further amended on May 4, 2015 and October 10, 2018
and was partially abolished on December 30, 2019, approval is not required for opening a foreign exchange account and depositing foreign
exchange into the accounts relating to the direct investments. SAFE Circular 59 also simplified foreign exchange-related registration
required for the foreign investors to acquire the equity interests of PRC companies and further improve the administration on foreign
exchange settlement for FIEs.
On February 13, 2015, the SAFE
promulgated the Circular on Simplifying and Improving the Foreign Currency Management Policy on Direct Investment, or the SAFE Circular
13, effective from June 1, 2015, which cancels the administrative approvals of foreign exchange registration of direct domestic investment
and direct overseas investment. In addition, SAFE Circular 13 simplifies the procedure of foreign exchange-related registration, under
which investors shall register with banks for direct domestic investment and direct overseas investment.
On April 10, 2020 the SAFE issued
the Notice of the SAFE on Optimizing Foreign Exchange Administration to Support the Development of Foreign-related Business, or the SAFE
Circular 8. The SAFE Circular 8 provides that under the condition that the use of the funds is genuine and compliant with current administrative
provisions on use of income relating to capital account, enterprises are allowed to use income under capital account such as capital funds,
foreign debts and overseas listings for domestic payment, without submission to the bank prior to each transaction of materials evidencing
the veracity of such payment. The bank in charge shall conduct post spot checking in accordance with the relevant requirements.
Dividend Distribution
The principal laws and regulations
regulating the dividend distribution of dividends by FIEs in the PRC include the Company Law of the PRC, as recently amended in 2018 and
Foreign Investment Law promulgated by SCNPC on March 15, 2019 and recently came into effect on January 1, 2020.
Wholly foreign-owned enterprises
and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, as determined in accordance
with PRC accounting standards and regulations. Additionally, these FIEs may not pay dividends unless they set aside at least 10% of their
respective accumulated profits after tax each year, if any, to fund certain reserve funds, until such time as the accumulative amount
of such fund reaches 50% of the enterprise’s registered capital. These reserves are not distributable as cash dividends. A PRC
company shall not distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal
years may be distributed together with distributable profits from the current fiscal year. In addition, these companies also may allocate
a portion of their after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion.
Regulations Related
to Mergers and Acquisitions and Overseas Listings
On August 8, 2006, six PRC governmental
and regulatory agencies, including MOFCOM and the CSRC promulgated the Rules on Acquisition of Domestic Enterprises by Foreign
Investors, or the M&A Rules, governing the mergers and acquisitions of domestic enterprises by foreign investors that became effective
on September 8, 2006 and was revised on June 22, 2009. The M&A Rules, among other things, requires that offshore special purpose
vehicles that are controlled by PRC companies or individuals and that have been formed for overseas listing purposes through acquisitions
of PRC domestic interest held by such PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their
securities on an overseas stock exchange.
On April 2, 2022, the CSRC promulgated
Provisions on Strengthening the Confidentiality and Archives Administration of Overseas Securities Issuance and Listing by Domestic Enterprises
(Draft for Comments), according to which, a domestic company that plans to, either directly or through its overseas listed entity, publicly
disclose or provide to relevant entities or individuals including securities companies, securities service providers, and overseas regulators,
documents and materials that contain state secrets or government work secrets, shall first obtain approval from competent authorities
according to law, and file with the secrecy administrative department at the same level. A domestic company that plans to, either directly
or through its overseas listed entity, publicly disclose or provide to relevant entities or individuals including securities companies,
securities service providers, and overseas regulators, other documents and materials that, if divulged, will jeopardize national security
or public interest, shall strictly fulfil relevant procedures stipulated by applicable national regulations. Archives, including working
papers, that have been produced in the Chinese mainland by securities companies and securities service providers for overseas securities
offering and listing by domestic companies shall be retained in the Chinese mainland, and, without prior approval by competent authorities,
must not be brought, mailed or otherwise transferred to outside the Chinese mainland, or transmitted to any institutions or individuals
outside the Chinese mainland through any methods including via the use of information technologies. Overseas securities regulators and
competent overseas authorities may request to investigate, including to collect evidence for investigation purpose, or inspect a domestic
company that has been listed or offered securities in an overseas market or securities companies and securities service providers that
undertake securities business for such domestic companies. Such investigation and inspection shall be conducted under a cross-border regulatory
cooperation mechanism, and the CSRC and competent authorities of the Chinese government will provide necessary assistance pursuant to
bilateral and multilateral cooperation mechanisms. Before cooperating with the investigation and inspection by, or providing documents
and materials to overseas securities regulators or other competent overseas authorities, such domestic companies, securities companies
and securities service providers shall report to the CSRC or other competent authorities. As of the date of this document, this draft
has not been formally adopted and the final version and effective date of such measures are subject to change with substantial uncertainty.
Regulations Relating
to Foreign Exchange Registration of Overseas Investment by PRC Residents
The Circular of the State Administration
of Foreign Exchange on Issues Concerning the Foreign Exchange Administration over the Overseas Investment and Financing and Round-trip
Investment by Domestic Residents via Special Purpose Vehicles, or the SAFE Circular 37, issued by SAFE and effective on July 4, 2014,
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 and conduct round trip investment in China. Under 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 domestic or offshore assets or interests, while “round trip investment” refers to the 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 requires that, before establishing, controlling and making contribution into a SPV, PRC residents
or entities are required to complete foreign exchange registration with the SAFE or its local branch.
PRC residents or entities who
have contributed legitimate domestic or offshore interests or assets to SPVs but have yet to obtain SAFE registration before the implementation
of SAFE Circular 37 shall register their ownership interests or control in such SPVs with SAFE or its local branch. An amendment to the
registration is required if there is a material change in the registered SPV, such as any change of basic information (including change
of such PRC “resident’s name” and operation term), increases or decreases in investment amounts, transfers or exchanges
of shares, or mergers or divisions. Failure to comply with the registration procedures set forth in SAFE Circular 37, or making misrepresentation
on or failure to disclose controllers of a FIE that is established through round-trip investment, may result in restrictions on the foreign
exchange activities of the relevant FIEs, 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. On February 13, 2015,
SAFE further promulgated the Circular on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct
Investment, or SAFE Circular 13, which took effect on June 1, 2015. SAFE Circular 13 has amended SAFE Circular 37 by 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.
As of the date of this annual
report, to our knowledge, all of our shareholders had registered according to SAFE Circular 37.
On March 30, 2015, the SAFE promulgated
Circular 19, which came into effect on June 1, 2015 and was partially repealed on December 30, 2019. According to Circular 19, the foreign
exchange capital of FIEs shall be subject to the Discretional Foreign Exchange Settlement. The Discretional Foreign Exchange Settlement
refers to the foreign exchange capital in the capital account of a FIE for which the rights and interests of monetary contribution has
been confirmed by the local foreign exchange bureau (or the book-entry registration of monetary contribution by the banks) can be settled
at the banks based on the actual operational needs of the FIE. The proportion of Discretional Foreign Exchange Settlement of the foreign
exchange capital of a FIE is temporarily determined to be 100%. The Renminbi converted from the foreign exchange capital will be kept
in a designated account and if a FIE needs to make further payment from such account, it still needs to provide supporting documents and
go through the review process with the banks. Circular 19 allows all foreign-invested enterprises established in China to use their foreign
exchange capitals to make equity investment and prohibits foreign-invested enterprises from, among other things, using Renminbi fund converted
from its foreign exchange capitals for expenditure beyond its business scope and providing entrusted loans or repaying loans between non-financial
enterprises.
SAFE issued the Circular on
Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or Circular 16, on June 9, 2016,
which became effective simultaneously. Pursuant to Circular 16, enterprises registered in the PRC may also convert their foreign debts
from foreign currency to Renminbi on a discretionary basis. Circular 16 provides an integrated standard for conversion of foreign exchange
under capital account items (including foreign currency capital and foreign debts) on a discretionary basis which applies to all enterprises
registered in the PRC. Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company
may not be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, while such converted
Renminbi shall not be provided as loans to its non-affiliated entities. As SAFE has not provided detailed guidelines with respect to
its interpretation or implementations, it is uncertain how these rules will be interpreted and implemented. Circular 19, Circular 16
and other related regulations may delay or limit us from using the proceeds of offshore offerings to make additional capital contributions
or loans to our PRC subsidiaries and any violations of these circulars could result in severe monetary or other penalties.
Regulations on
loans to and direct investment in the PRC entities by offshore holding companies
According to the Implementation
Regulations on Statistics and Supervision of Foreign Debt promulgated by SAFE on September 24, 1997 and the Interim Measures on the Management
of Foreign Debts promulgated by SAFE, the NDRC and the MOF and effective from March 1, 2003, loans by foreign companies to their subsidiaries
in China, which accordingly are FIEs, are considered foreign debt, and such loans must be registered with the local branches of the SAFE.
Under the provisions, the total amount of accumulated medium-term and long-term foreign debt and the balance of short-term debt borrowed
by a FIE is limited to the difference between the total investment and the registered capital of the foreign invested enterprise.
On January 12, 2017, the People’s
Bank of China promulgated the Circular of the People’s Bank of China on Matters relating to the Macro-prudential Management of Comprehensive
Cross-border Financing, or PBOC Circular 9, which took effect on the same date. The PBOC Circular 9 established a capital or net assets-based
constraint mechanism for cross-border financing. Under such mechanism, a company may carry out cross-border financing in Renminbi or foreign
currencies at their own discretion. The total cross-border financing of a company shall be calculated using a risk-weighted approach and
shall not exceed an upper limit. The upper limit is calculated as capital or assets multiplied by a cross-border financing leverage ratio
and multiplied by a macro-prudential regulation parameter.
In addition, according to PBOC
Circular 9, as of the date of the promulgation of PBOC Circular 9, a transition period of one year is set for foreign-invested enterprises
and during such transition period, FIEs may apply either the current cross-border financing management mode, namely the mode provided
by Implementation Rules for the Provisional Regulations on Statistics and Supervision of Foreign Debt and the Interim Provisions on the
Management of Foreign Debts, or the mode in this PBOC Circular 9 at its sole discretion. After the end of the transition period, the cross-border
financing management mode for FIEs will be determined by the People’s Bank of China and SAFE after assessment based on the overall
implementation of this PBOC Circular 9. However, although the transitional period ended on January 10, 2018, as of the date of this annual
report, neither PBOC nor SAFE has issued any new regulations regarding the appropriate means of calculating the maximum amount of foreign
debt for foreign-invested enterprises. Domestic-invested enterprises, have only been subject to the Net Assets Limit in calculating the
maximum amount of foreign debt they may hold from the date of promulgation of PBOC Circular 9.
Regulations Relating to Foreign Investment
The Guidance Catalogue of Industries for Foreign
Investment
Investment
activities in the PRC by foreign investors are governed by the Catalogue for the Encouragement of Foreign Investment Industries (2020
Edition), or the Encouragement Catalogue and the Negative List, which were both promulgated by the MOFCOM and the NDRC and each became
effective on January 27, 2021 and January 1, 2022. The Negative List stipulates the encouraged, prohibited and restricted industries for
foreign investment. The Encouragement Catalogue stipulates the encouraged industries for foreign investment. If the investment falls within
the “encouraged” category, foreign investment can be conducted through the establishment of a wholly foreign-owned enterprise.
If the investment falls within the “restricted” category, foreign investment may be conducted through the establishment of
a wholly foreign-owned enterprise if certain requirements are met or in some cases must be conducted through the establishment of a joint
venture enterprise, with varying minimum shareholdings for the Chinese party, depending on the particular industry. If the investment
falls within the “prohibited” category, foreign investment of any kind is not allowed. Any investment that occurs within an
industry not falling into any of these categories is classified as a permitted industry for foreign investment unless otherwise specifically
restricted by other PRC rules and regulations. According to the Negative List, other than E-commerce, domestic multiparty communication,
store and forward, and call center services, the permitted foreign investment in value-added telecommunications service providers may
not be more than 50%.
The Foreign Investment Law
On March 15, 2019, the National
People’s Congress approved the Foreign Investment Law, which took effect on January 1, 2020 and replaced three existing laws on
foreign investments in China, namely, the PRC Sino-foreign Equity Joint Ventures Law, the PRC Sino-foreign Cooperative Enterprises Law
and the PRC Wholly Foreign-owned Enterprises Law. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize
its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate
legal requirements for both foreign and domestic invested enterprises in China. The Foreign Investment Law establishes the basic framework
for the access to, and the promotion, protection and administration of foreign investments in view of investment protection and fair competition.
According to the Foreign Investment
Law, “foreign investment” refers to investment activities directly or indirectly conducted by one or more natural persons,
business entities, or otherwise organizations of a foreign country (collectively referred to as “foreign investor”) within
China, and the investment activities include the following situations: (i) a foreign investor, individually or collectively with other
investors, establishes a foreign-invested enterprise within China; (ii) a foreign investor acquires stock shares, equity shares, shares
in assets, or other like rights and interests of an enterprise within China; (iii) a foreign investor, individually or collectively with
other investors, invests in a new project within China; and (iv) investments in other means as provided by laws, administrative regulations,
or the State Council.
According to the Foreign Investment
Law, the State Council will publish or approve to publish the “negative list” for special administrative measures concerning
foreign investment. The Foreign Investment Law grants national treatment to FIEs, except for those FIEs that operate in industries deemed
to be either “restricted” or “prohibited” in the “negative list”. The Foreign Investment Law provides
that FIEs operating in foreign restricted industries will require market entry clearance and other approvals from relevant PRC governmental
authorities. If a foreign investor is found to invest in any prohibited industry in the “negative list”, such foreign investor
may be required to, among other aspects, cease its investment activities, dispose of its equity interests or assets within a prescribed
time limit and have its income confiscated. If the investment activity of a foreign investor is in breach of any special administrative
measure for restrictive access provided for in the “negative list”, the relevant competent department shall order the foreign
investor to make corrections and take necessary measures to meet the requirements of the special administrative measure for restrictive
access.
On December 26, 2019, the State
Council issued Implementation Regulations for the Foreign Investment Law of the PRC, or the Implementation Rules, which came into effect
on January 1, 2020, and replaced the Implementing Rules of the Sino-foreign Equity Joint Ventures Enterprises Law of the PRC, the Implementing
Rules of the Sino-foreign Co-operative Enterprises Law of the PRC and the Implementing Rules of the Wholly Foreign invested Enterprise
Law of the PRC. According to the Implementation Rules, in the event of any discrepancy between the Foreign Investment Law, the Implementation
Rules and the relevant provisions on foreign investment promulgated prior to January 1, 2020, the Foreign Investment Law and the Implementation
Rules shall prevail. The Implementation Rules also set forth that foreign investors that invest in sectors on the Negative List in which
foreign investment is restricted shall comply with special management measures with respect to, among others, shareholding and senior
management personnel qualification in the Negative List. Pursuant to the Foreign Investment Law and the Implementation Rules, the existing
foreign-invested enterprises established prior to the effective date of the Foreign Investment Law are allowed to keep their corporate
organization forms for five years from the effectiveness of the Foreign Investment Law before such existing foreign-invested enterprises
change their organization forms and organization structures in accordance with the PRC Company Law, the Partnership Enterprise Law of
the PRC and other applicable laws.
On December 27, 2020, the NDRC
and the MOFCOM promulgated the Catalog of Industries for Encouraging Foreign Investment (2020 Version), or the Encouragement Catalogue,
which became effective on January 27, 2021, replacing the previous encouragement catalogue. On December 27, 2021, the NDRC and the MOFCOM
promulgated the Special Management Measures (Negative List) for the Access of Foreign Investment (2021 Version), or the Negative List,
which became effective on January 1, 2022, replacing previous negative list. According to the Negative List and the Encouragement Catalogue,
the value-added telecommunications business that we are operating, other than call center business, falls into the restricted category.
On December 30, 2019, the MOFCOM
and the State Administration for Market Regulation (formerly known as the State Administration for Industry and Commerce) jointly promulgated
the Measures for Reporting of Foreign Investment Information, or the Foreign Investment Reporting Measures, which came into effect on
January 1, 2020 and replaced the Interim Administrative Measures for the Record-filing of the Establishment and Modification of Foreign-invested
Enterprises. The Foreign Investment Reporting Measures establish an online reporting system for foreign investment instead of the previous
requirement of the Ministry of Commerce of the PRC filing and/or approval procedures. Pursuant to the Foreign Investment Reporting Measures,
for foreign investment carried out directly or indirectly within the mainland China, foreign investors or foreign-invested enterprises
shall submit investment information for establishments, modifications and dissolution and annual reports of the foreign-invested enterprises
on the online. Meanwhile, the PRC establishes foreign investment security review system under which the security review shall be conducted
on foreign investments affecting or likely to affect the state security, a decision legally made on security review will be considered
as final. Furthermore, the Foreign Investment Law provides that FIEs established according to the previous PRC Sino-foreign Equity Joint
Ventures Law, the PRC Sino-foreign Cooperative Enterprises Law and the PRC Wholly Foreign-owned Enterprises Law before the Foreign Investment
Law took effect may maintain their structure and corporate governance within five years after the implementing of the Foreign Investment
Law.
In addition, the Foreign Investment
Law also provides several protective rules and principles for foreign investors and their investments in the PRC, including, among others,
that a foreign investor may freely transfer into or out of China, in Renminbi or a foreign currency, its contributions, profits, capital
gains, income from disposition of assets, royalties of intellectual property rights, indemnity or compensation lawfully acquired, and
income from liquidation, among others, within China; local governments shall abide by their commitments to the foreign investors; governments
at all levels and their departments shall enact local normative documents concerning foreign investment in compliance with laws and regulations
and shall not impair legitimate rights and interests, impose additional obligations onto FIEs, set market access restrictions and exit
conditions, or intervene with the normal production and operation activities of FIEs; except for special circumstances, in which case
statutory procedures shall be followed and fair and reasonable compensation shall be made in a timely manner, expropriation or requisition
of the investment of foreign investors is prohibited; and mandatory technology transfer is prohibited.
On December 19, 2020, the NDRC
and the MOFCOM promulgated Measures for Security Review of Foreign Investment, with an effective date of January 18, 2021. The Foreign
Investment Security Review Mechanism (the “Security Review Mechanism”) in charge of organization, coordination and guidance
of foreign investment security review is thereunder established. A working mechanism office shall be established under the NDRC and led
by the NDRC and the Ministry of Commerce to undertake routine work on the security review of foreign investment. According to the Security
Review Mechanism, foreign investment activities falling in the scope such as important cultural products and services, important information
technologies and Internet products and services, important financial services, key technologies and other important fields that concern
state security while obtaining the actual control over the enterprises invested in, a foreign investor or a party concerned in the PRC
shall take the initiative to make a declaration to the working mechanism office prior to making the investment.
Company Law
Pursuant to the PRC Company Law,
promulgated by the Standing Committee of the National People’s Congress on December 29, 1993, effective as of July 1, 1994, and
as revised on December 25, 1999, August 28, 2004, October 27, 2005, December 28, 2013 and October 26, 2018, the establishment, operation
and management of corporate entities in the PRC are governed by the PRC Company Law. The PRC Company Law defines two types of companies:
limited liability companies and companies limited by shares. Our PRC operating subsidiary is a limited liability company. Unless otherwise
stipulated in the related laws on foreign investment, foreign invested companies are also required to comply with the provisions of the
PRC Company Law.
Laws and Regulations on the Protection of Consumer
Rights and Interests
Business operators in the business
of supplying and selling manufactured goods or services to consumers, shall comply with the Law of the PRC on the Protection of Consumer
Rights and Interests, or the Consumer Rights Protection Law, promulgated by the SCNPC on October 31, 1993, and effective as of January
1, 1994, and revised on August 27, 2009 and October 25, 2013.
According to the Consumer Rights
Protection Law, business operators must ensure that the goods or services provided by them meet the requirements for safeguarding personal
and property safety. For goods and services that may endanger personal and property safety, consumers should be provided with a true description
and an explicit warning, as well as a description and indication of the proper way to use the goods or accept the services and the methods
of preventing the occurrence of a hazard. If the goods or services provided by the business operators cause personal injuries to consumers
or third parties, the business operators shall compensate the injured parties for their losses.
Laws on Contracts
On May 28, 2020, the Civil Code
of the PRC was issued by the NPC and became effective on January 1, 2021 and replaced the General Principles of the Civil Law of the PRC,
the Security Law of the PRC, the Contract Law of the PRC, the Real Right Law of the PRC, the General Rules of the Civil Law of the PRC
and several other basic civil laws in the PRC. All of our contracts are subject to the Civil Code of the PRC. Under the Civil Code of
the PRC, a natural person, legal person or other legally established organization shall have full capacity of civil right and civil conduct
in order to enter into a valid contract. Except as otherwise required by other laws and regulations, the formation, validity, performance,
modification, assignment, termination, and liability for breach of a contract are governed by the Civil Code of the PRC. A contracting
party who failed to perform or failed to fulfill its contractual obligation shall bear the responsibility of a continued duty to perform
or to provide remedies and compensation as provided by PRC laws.
Standardization Law of the People’s Republic
of China
Standardization Law of the People’s
Republic of China was passed by the fifth session of the Standing Committee of the Seventh National People’s Congress on December
29, 1988, and revised on November 4, 2017. This law is formulated for the purposes of enhancing standardization work, promoting scientific
and technological advancement, improving the quality of products and services, safeguarding personal health and life and property security,
protecting state security and ecological environmental security, raising the level of economic and social development. This law applies
to technical requirements that need to be unified for agricultural field, industrial field, service industry, social undertakings industry,
and others. Enterprises which manufacture, sell, import products or provide services that fail to meet the mandatory standards, and enterprises
which manufacture products or provide services that fail to meet the technical requirements under their publicized standardization, shall
undertake civil liabilities.