ITEM 1A. RISK FACTORS
In addition to the other information in this
Form 10-K, readers should carefully consider the following important factors. These factors, among others, in some cases have affected,
and in the future could affect, our financial condition and results of operations and could cause our future results to differ materially
from those expressed or implied in any forward-looking statements that appear in this on Form 10-K or that we have made or will make elsewhere.
Risks Related to Our Business
We are susceptible to general economic conditions, natural catastrophic
events and public health crises, and a potential downturn in advertising and marketing spending by advertisers could adversely affect
our operating results in the near future.
Our business is subject to the impact of natural
catastrophic events, such as earthquakes, or floods, public health crisis, such as disease outbreaks, epidemics, or pandemics in China,
and all these could result in a decrease or sharp downturn of economies, including our markets and business locations in the current and
future periods. The outbreak of the coronavirus (COVID-19) pandemic in China resulted in increased travel restrictions, and
shutdown of businesses, which has caused slower recovery of the China economy. We may experience impact from quarantines, market
downturns and changes in customer behavior related to pandemic fears and impact on our workforce if the virus continues to spread. We
experienced a decrease in revenue in 2020 due to the outbreak. COVID-19 affected a significant number of our workforce employed in our
operations, and as a result we are experiencing a slow resumption of operations and may experience delays or the inability to delivery
our service on a timely basis. In addition, one or more of our customers, partners, service providers or suppliers may experience financial
distress, delayed or defaults on payment, file for bankruptcy protection, sharp diminishing of business, or suffer disruptions in their
business due to the outbreak. The extent to which the COVID-19 pandemic impacts our results will depend on future developments and reactions
in China, which are highly uncertain and will include emerging information concerning the severity of the COVID-19 pandemic and the actions
taken by governments and private businesses to attempt to contain the coronavirus. The COVID-19 situation is likely to result in a potential
material adverse impact on our business, results of operations and financial condition in the short run if it has become worse in China.
Wider-spread COVID-19 in China and globally could prolong the deterioration in economic conditions and could cause decreases or delays
in advertising spending and reduce and/or negatively impact our short-term ability to grow our revenues. Any decreased collectability
of accounts receivable, bankruptcy of small and medium businesses, or early termination of agreements due to deterioration in economic
conditions could negatively impact our results of operations.
We may be subject to, and may expend significant resources in
defending against, government actions and civil suits based on the content and services we provide through our Internet advertising and
data service platforms.
PRC advertising laws and regulations require advertisers,
advertising operators and advertising distributors, including businesses such as ours, to ensure that the content of the advertisements
they prepare or distribute is fair, accurate and in full compliance with applicable laws, rules and regulations. Although we comply with
the requirements by reviewing the business licenses and the profiles of our clients, clients may post advertisements about business opportunities
that are not legitimate and over which we have no control. On April 24, 2015, the Fourteenth Session of the Standing Committee of the
Twelfth National People’s Congress adopted the Revised Advertising Law, which became effective on September 1, 2015 and was further
amended on October 26, 2018. The Revised Advertising Law further established the advertisement standards and restrictions of certain industries,
such as: medical instruments, education and training, franchise and investments; defined separate standards and restrictions for Internet
advertisements and reinforced the regulatory responsibilities of the related competent authorities. We cannot assure you that our operating
entities will be fully in compliance with these new rules during normal course of business. Violation of these laws, rules or regulations
may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the advertisements and orders
to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the PRC government may
revoke a violator’s license for its advertising business operations.
We operate in the advertising and data service industry, which
is particularly sensitive to changes in economic conditions and advertising trends.
Advertising and data service spending by our clients
is particularly sensitive to changes in general economic conditions. For example, advertising and data service expenditures typically
decrease during periods of economic downturn. Advertisers may reduce the amount of money they spend to advertise and obtain precision
marketing data and data analysis on/from our advertising and data service platforms for a number of reasons, including:
· a general decline in economic conditions;
· a decline in advertising and marketing spending in general.
A decrease in the demand for advertising media
in general, and for our advertising and marketing services in particular, would materially and adversely affect our ability to generate
revenues, and have a material adverse effect on our financial condition and results of operations.
We face significant competition, and if we do not compete successfully
against new and existing competitors, we may lose our market share, and our profitability may be adversely affected.
Increased competition could reduce our profitability
and result in a loss of market share. Some of our existing and potential competitors may have competitive advantages, such as significantly
greater financial, marketing or other resources, and may successfully mimic and adopt our business models. Moreover, increased competition
will provide advertisers with a wider range of media and advertising and marketing service alternatives, which could lead to lower prices
and decreased revenues, gross margins and profits. We cannot assure you that we will be able to successfully compete against new or existing
competitors.
Key employees are essential to growing our business.
Key employees, such as our chief executive officer,
head of our Internet advertising business unit and head of our research and development team are essential to our ability to continue
to grow our business. They have established relationships within the industries in which we operate. If they were to leave us, our growth
strategy might be hindered, which could limit our ability to increase revenue.
In addition, we face competition for attracting
skilled personnel with increasing labor cost. If we fail to attract and retain qualified personnel to meet current and future needs, this
could slow our ability to grow our business, which could result in a decrease in market share.
We may need additional capital and we may not be able to obtain
it at acceptable terms, or at all, which could adversely affect our liquidity and financial position.
We may need additional cash resources due to changed
business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell
additional equity or debt securities or obtain a credit facility. The incurrence of indebtedness would result in increased debt service
obligations and could result in operating and financing covenants that would restrict our operations and liquidity.
Our ability to obtain additional capital on acceptable
terms is subject to a variety of uncertainties, including:
· our future results of operations, financial condition and cash flow;
· economic, political and other conditions in China; and
· PRC governmental policies relating to foreign currency borrowings.
Our failure to protect our intellectual property rights could
have a negative impact on our business.
We believe our brand, trade name, copyrights, domain
name and other intellectual property are critical to our success. The success of our business depends in part upon our continued ability
to use our brand, trade names and copyrights to further develop and increase brand awareness. The infringement of our trade names and
copyrights could diminish the value of our brand and its market acceptance, competitive advantages or goodwill. In addition, our information
and operational systems, which have not been patented or otherwise registered as our property, are a key component of our competitive
advantage and our growth strategy.
Monitoring and preventing the unauthorized use
of our intellectual property is difficult. The measures we take to protect our brand, trade names, copyrights, domain name and other intellectual
property rights may not be adequate to prevent their unauthorized use by third parties. Furthermore, application of laws governing intellectual
property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us. If we are unable to adequately
protect our brand, trade names, copyrights, domain name and other intellectual property rights, we may lose these rights and our business
may suffer materially. Further, unauthorized use of our brand, domain name or trade names could cause brand confusion among advertisers
and harm our reputation. If our brand recognition decreases, we may lose advertisers and fail in our expansion strategies, and our business,
results of operations, financial condition and prospects could be materially and adversely affected.
We may be subject to intellectual property infringement claims
or other allegations, which may materially and adversely affect our business, financial condition and prospects.
We cannot be certain that we do not or will not
infringe patents, copyrights, trademarks or other intellectual property rights held by external parties. From time to time, we may be
subject to legal proceedings and claims alleging infringement of patents, trademarks, copyrights or other intellectual property rights,
or misappropriation of creative ideas or formats, or other infringement of proprietary, which may materially and adversely affect our
business, financial condition and prospects.
We rely on computer software and hardware systems in managing
our operations, the failure of which could adversely affect our business, financial condition and results of operations.
We are dependent upon our computer software and
hardware systems in supporting our network and managing and monitoring programs on the network. In addition, we rely on our computer hardware
for the storage, delivery and transmission of the data on our network. Any system failure that interrupts the input, retrieval and transmission
of data or increases the service time could disrupt our normal operation. Any failure in our computer software or hardware systems could
decrease our revenues and harm our relationships with advertisers and consumers, which in turn could have a material adverse effect on
our business, financial condition and results of operations.
Any failure or interruptions in the internet infrastructure, bandwidth
providers, data center providers, other third parties or our own systems for providing our solutions to customers could negatively impact
our business.
Our ability to deliver
our solutions is dependent on the development and maintenance of the internet and other telecommunications services by third parties.
Such services include maintenance of a reliable network backbone with the necessary speed, data capacity and security for providing reliable
internet access and services and reliable telecommunications systems that connect our operations. While our solutions are designed to
operate without interruption, we may experience interruptions and delays in services and availability from time to time. We rely on systems
as well as third-party vendors, including data center, bandwidth, and telecommunications equipment providers, to provide our solutions.
We do not maintain redundant systems or facilities for some of these services. In the event of a catastrophic event with respect to one
or more of these systems or facilities, we may experience an extended period of system unavailability, which could negatively impact our
relationship with our customers.
Privacy and data security concerns, laws, or other regulations
could expose us to liability or impair our operations.
Privacy and data
security are rapidly evolving areas of concern and regulation. Changes in laws restricting or otherwise governing data and transfer thereof
could be difficult to comply with, result in increased costs, or impair our operations. Security measures that we implement may fail due
to third-party attack, employee error or sabotage, or other causes. Hacking techniques change frequently and therefore can be difficult
to prevent. In addition, service providers could suffer security breaches or data losses that affect our customers’ information.
A security breach could damage our reputation, resulting in loss of customers or reluctance of potential customers to try our platform,
or civil or criminal liability.
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.
If we are unable to maintain appropriate internal financial reporting
controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements,
harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial
information and have a negative effect on the market price for shares of our Common Stock.
Effective internal controls are necessary for us
to provide reliable financial reports and effectively prevent fraud. We maintain a system of internal control over financial reporting,
which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer,
or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
As a public company, we have significant additional
requirements for enhanced financial reporting and internal controls. We are required to document and test our internal control
procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments
of the effectiveness of our internal controls over financial reporting. The process of designing and implementing effective internal
controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments
and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as
a public company.
Our management will continue to evaluate the effectiveness
of our overall control environment and will continue to refine existing controls as they, in conjunction with the Audit Committee of our
Board of Directors, chief executive officer and chief financial officer, consider necessary. We cannot assure you that we will not, in
the future, identify areas requiring improvement in our internal control over financial reporting. We cannot assure you that the
measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate
controls over our financial processes and reporting in the future as we continue our growth. If we are unable to maintain appropriate
internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement
of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence
in our reported financial information and have a negative effect on the market price for shares of our Common Stock.
Our blockchain business is at an early stage and the PRC laws
and regulations may have a potential effect.
As an initiation
of our Business Opportunity Social Ecosystem, we are in the process of developing our Business Opportunity Chain platform based
on the blockchain technology to facilitate our company’s business. The laws and regulations governing the blockchain in China are
developing and evolving and subject to changes.
The PRC government adopts a positive attitude to
the blockchain technology and it has been mentioned several times in the national strategy reports. However, for the initial coin offering
(the “ICO”) which may appear in the most blockchain projects, the PRC government authorities have strictly prohibited the
ICO and any similar activities within the PRC by issuing the Announcement of the People's Bank of China, the Office of the Central Leading
Group for Cyberspace Affairs, the Ministry of Industry and Information Technology and Other Departments on Preventing the Financing Risks
of Initial Coin Offerings on September 4, 2017. The Banking and Insurance Regulatory Commission, the Office of the Central Cyberspace
Affairs Commission, the Ministry of Public Security, the People's Bank of China and the State Administration for Market Regulation also
issued the Risk Warning for Preventing Illegal Fundraising in the Name of "Virtual Currency" or "Blockchain" on August 24, 2018. The Internet
Finance Association of China also issued a series of notices to remind the potential risks of ICO and the cryptocurrency trading to the
PRC residents, including the Risk Warning on Guarding against the "Virtual Currency" such as Bitcoin on September 13, 2017, Risk Warning
on Guarding against the Disguised Initial Coin Offering Activities on January 12, 2018 and Risk Warning on Guarding against the Offshore
Initial Coin Offering Activities and the Cryptocurrency Trading on January 26, 2018.
We do not plan to initiate any ICO in China or
any other jurisdictions. We have been advised by our PRC counsel, as long as we do not issue any virtual currency coins, we only need
to record filing as required by the Cyberspace Administration of China's Regulations on the Management of Blockchain Information
Services that went into effect on February 15, 2019. We do not believe that such record filing procedure will have a material effect on
our blockchain-powered platform. However, as the laws and regulations governing the blockchain in China are developing and evolving and
subject to changes, we cannot assure you that that our blockchain technology related business will continue to be compliance with the
PRC law. If our practice is deemed to have violated any PRC law or regulations, our blockchain related business would be materially and
adversely affected.
Given the continuing changing of the regulation
regime and the government policy of this area in the PRC, an overall limited industry experiences in developing and operating a blockchain-powered
platform, and our lack of operating history to serve as a transaction facilitation and verification services provider, our ability to
generate substantial revenue from the blockchain-powered platform upon its launch remains unproven. It may be difficult for you to evaluate
its performance and prospects.
Risks Relating to Regulation of Our Business
and to Our Structure
If the PRC government finds that the agreements that establish
the structure for operating our China business do not comply with PRC governmental restrictions on foreign investment in industries in
which we operate, we could be subject to severe penalties.
Our operations are substantially conducted through
our PRC Operating Entities, or VIEs, and through our contractual agreements with each of our PRC Operating Entities in China. PRC regulations
restrict foreign investments in value-added telecommunication services, including providing Internet information services (“ICP”)
and used to have restrictions on foreign investments in advertising business, which was lifted on June 29, 2015. In consideration of the
restrictions on foreign investments in ICP and advertising business, our whole-owned subsidiary in China, Rise King WFOE, is ineligible
to apply for the required licenses for providing Internet information services and was ineligible to apply for the required licenses for
providing advertising services in China before June 29, 2015. Our PRC Operating Entities hold the requisite licenses and permits to provide
Internet information services and advertising services in China. We have been and are expected to continue to be dependent on these PRC
Operating Entities to operate our ICP and advertising business for the foreseeable future. We have entered into Contractual Agreements
with the PRC Operating Entities, pursuant to which we, through Rise King WFOE, provide technical support and consulting services to the
PRC Operating Entities. In addition, we have entered into agreements with our PRC Operating Entities and each of their shareholders which
provide us with the substantial ability to control these affiliates.
As discussed above, the Foreign Investment Law,
which came into effect on January 1, 2020, replaced the trio of existing laws regulating foreign investment in China, together with their
implementation rules and ancillary regulations. The Foreign Investment Law stipulates three forms of foreign investment but does not explicitly
stipulate the contractual arrangements under the VIE structure as a form of foreign investment. The Foreign Investment Law also stipulates
that foreign investment includes “foreign investors invest in China through any other methods under laws, administrative regulations,
or provisions prescribed by the State Council.”
Since the Foreign Investment Law is relatively
new, uncertainties still exist in relation to its interpretation and implementation. There is no assurance that foreign investment via
contractual arrangements would not be interpreted as a type of indirect foreign investment activities under the Foreign Investment Law
in the future.
If our contractual arrangements will be deemed
to be in violation of the market access requirements for foreign investment under the PRC laws and regulations, or furthermore we will
fail to complete any actions to be taken by companies with respect to existing contractual arrangements as mandated by future laws, administrative
regulations or provisions prescribed by the State Council in a timely manner, or at all, the relevant PRC regulatory authorities, including
the SAMR and the MIIT, which regulates ICP and advertising companies, would have broad discretion in dealing with such violations, including:
The imposition of any of these penalties would
result in a material and adverse effect on our ability to conduct our business and would have a material adverse impact on our cash flows,
financial position and operating performance.
We rely on contractual arrangements with the PRC Operating Entities
and their shareholders for our China operations, which may not be as effective in providing operational control as direct ownership.
We rely on contractual arrangements with our PRC
Operating Entities and their shareholders to operate our ICP and advertising business. These contractual arrangements may not be as effective
in providing us with control over the PRC Operating Entities as direct ownership. If we had direct ownership of the PRC Operating Entities,
we would be able to exercise our rights as a shareholder to effect changes in the board of directors of those companies, which in turn
could affect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual
arrangements, as a legal matter, if the PRC Operating Entities or any of their subsidiaries and shareholders fail to perform its or their
respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements,
and rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we
cannot assure you to be effective. Accordingly, it may be difficult for us to change our corporate structure or to bring claims against
the PRC Operating Entities if they do not perform their obligations under its contracts with us or if any of the PRC citizens who hold
the equity interest in the PRC Operating Entities do not cooperate with any such actions.
Many of these contractual arrangements are governed
by PRC laws and provide for the resolution of disputes through either arbitration or litigation in the PRC. Accordingly, these contracts
would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal
environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC
legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual
arrangements, we may not be able to exert effective control over our operating entities, and our ability to conduct our business may be
negatively affected. In addition, a PRC court or arbitration tribunal may refuse to enforce the contractual arrangements on the grounds
that they are designed to circumvent PRC foreign investment restrictions and therefore are against PRC public policy.
Contractual arrangements we have entered into among the PRC Operating
Entities may be subject to scrutiny by the PRC tax authorities and a finding that we owe additional taxes or are ineligible for our tax
exemption, or both, could substantially increase our taxes owed, and reduce our net income and the value of your investment.
Under PRC law, arrangements and transactions among
related parties may be subject to audit or challenge by the PRC tax authorities. If any of the transactions we have entered into among
our subsidiaries and affiliated entities are found not to be on an arm’s-length basis, or to result in an unreasonable reduction
in tax under PRC law, the PRC tax authorities have the authority to disallow our tax savings, adjust the profits and losses of our respective
PRC entities and assess late payment interest and penalties.
If any of our PRC Operating Entities incurs debt
on its own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions
to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements with the PRC
Operating Entities we currently have in place in a manner that would materially and adversely affect the PRC Operating Entities’
ability to pay dividends and other distributions to us. Furthermore, relevant PRC laws and regulations permit payments of dividends by
the PRC Operating Entities only out of their retained earnings, if any, determined in accordance with PRC accounting standards and regulations.
Under PRC laws and regulations, each of the PRC Operating Entities is also required to set aside a portion of its net income each year
to fund specific reserve funds. These reserves are not distributable as cash dividends. In addition, subject to certain cumulative limits,
the statutory general reserve fund requires annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends.
As a result of these PRC laws and regulations, the PRC Operating Entities are restricted in their ability to transfer a portion of their
net assets to us whether in the form of dividends, loans or advances. Any limitation on the ability of the PRC Operating Entities to pay
dividends to us 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.
Risks Associated With Doing Business In
China
There are substantial risks associated with doing business in China,
as set forth in the following risk factors.
Our operations and assets in China are subject to significant
political and economic uncertainties.
Changes in PRC laws and regulations, or their interpretation,
or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency
or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of
operations and financial condition. Under its current leadership, the Chinese government has been pursuing economic reform policies that
encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government
will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
We derive a substantial portion of our sales from China.
We derive a substantially portion of our sales
from China. We anticipate that sales of our services in China will continue to represent a substantial proportion of our total sales in
the near future. Any significant decline in the condition of the PRC economy could adversely affect consumer demand of our services, among
other things, which in turn would have a material adverse effect on our business and financial condition.
Currency fluctuations and restrictions on currency exchange may
adversely affect our business, including limiting our ability to convert Chinese Renminbi into foreign currencies and, if Chinese Renminbi
were to decline in value, reducing our revenue in U.S. dollar terms.
Our reporting currency is the U.S. dollar and our
operations in China use the local currency as their functional currencies. We are subject to the effects of exchange rate fluctuations
with respect to any of these currencies. For example, the value of the Renminbi depends to a large extent on Chinese government policies
and China’s domestic and international economic and political developments, as well as supply and demand in the local market. On
July 21, 2005, the Chinese government changed its policy of pegging the value of Chinese Renminbi to the U.S. dollar. Under the new policy,
Chinese Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. It is possible that the
Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of Chinese Renminbi
against the U.S. dollar. We can offer no assurance that Chinese Renminbi will be stable against the U.S. dollar or any other foreign currency.
The income statements of our operations are translated
into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies,
the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for
our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign
currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We
are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign operating subsidiaries and
VIEs into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries
and VIEs’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other
comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s
functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a
transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although
we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully
hedge our exchange rate risks.
Although Chinese governmental policies were introduced
in 1996 to allow the convertibility of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi
into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration
of Foreign Exchange, or SAFE, which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee
the availability of foreign currency conversion. We cannot be sure that we will be able to obtain all required conversion approvals for
our operations or those Chinese regulatory authorities will not impose greater restrictions on the convertibility of Chinese Renminbi
in the future. Because a significant amount of our future revenue may be in the form of Chinese Renminbi, our inability to obtain the
requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in Chinese Renminbi
to fund our business activities outside of China, or to repay foreign currency obligations, including our debt obligations, which would
have a material adverse effect on our financial condition and results of operations.
We may have limited legal recourse under PRC laws if disputes
arise under our contracts with third parties.
The Chinese government has enacted laws and regulations
dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience
in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to
resolve commercial disputes is unpredictable. If our new business ventures are unsuccessful, or other adverse circumstances arise from
these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or, may hinder or
prevent us from accessing important information regarding the financial and business operations of these acquired companies. The resolution
of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated
to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance,
or to seek an injunction under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue of the
Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material
adverse effect on our business, financial condition and results of operations.
We must comply with the Foreign Corrupt Practices Act.
We are required to comply with the United States
Foreign Corrupt Practices Act, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials
for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions.
If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors
an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put
us at a disadvantage. Although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other
agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged
in such practices, we could suffer severe penalties.
Changes in foreign exchange regulations in the PRC may affect
our ability to pay dividends in foreign currency or conduct other foreign exchange business.
The Renminbi is not a freely convertible currency,
and the restrictions on currency exchanges may limit our ability to use revenues generated in Renminbi to fund our business activities
outside the PRC or to make dividends or other payments in United States dollars. The PRC government strictly regulates conversion of Renminbi
into foreign currencies. Over the years, foreign exchange regulations in the PRC have significantly reduced the government’s control
over routine foreign exchange transactions under current accounts. In the PRC, the State Administration for Foreign Exchange, or
the SAFE, regulates the conversion of the Renminbi into foreign currencies. Pursuant to applicable PRC laws and regulations, foreign invested
enterprises incorporated in the PRC are required to apply for foreign exchange registration certificates. Currently, conversion within
the scope of the “current account” (e.g. remittance of foreign currencies for payment of dividends, etc.) can be effected
without requiring the approval of SAFE. However, conversion of currency in the “capital account” (e.g. for capital items
such as direct investments, loans, securities, etc.) still requires the approval of SAFE.
PRC regulations relating to mergers and acquisitions of domestic
enterprises by foreign investors may increase the administrative burden we face and create regulatory uncertainties.
The Regulations on Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors, (the “M&A Rules”), which adopted by six PRC regulatory agencies, took effect
as of September 8, 2006 and was subsequently amended on June 22, 2009. This regulation, among other things, has certain provisions
that require special purpose vehicles, or SPVs, formed for the purpose of acquiring PRC domestic companies and controlled by PRC individuals,
to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. However, the regulation does
not expressly provide that approval from the CSRC is required for the offshore listing of the SPV which acquires, directly or indirectly,
equity interest or shares of domestic PRC entities held by domestic companies or individuals by cash payment, nor does it expressly provide
that approval from CSRC is not required for the offshore listing of a SPV which has fully completed its acquisition of equity interest
of domestic PRC equity prior to September 8, 2006. On September 21, 2006, the CSRC published on its official website a notice specifying
the documents and materials that are required to be submitted for obtaining CSRC approval.
It is not clear whether the provisions in the regulation
regarding the offshore listing and trading of the securities of a SPV applies to an offshore company such as us which owns controlling
contractual interest in the PRC Operating Entities. We believe that the M&A Rules and the CSRC approval are not required in the context
of the share exchange under our transaction because (i) such share exchange is a purely foreign related transaction governed by foreign
laws, not subject to the jurisdiction of PRC laws and regulations; (ii) we are not a SPV formed or controlled by PRC companies or PRC
individuals; and (iii) we are owned or substantively controlled by foreigners. However, we cannot be certain that the relevant PRC
government agencies, including the CSRC, would reach the same conclusion, and we still cannot rule out the possibility that CSRC may deem
that the transactions effected by the share exchange circumvented the M&A rules, the PRC Securities Law and other rules and notices.
If the CSRC or another PRC regulatory agency subsequently
determines that the CSRC’s approval is required for the transaction, we may face sanctions by the CSRC or another PRC regulatory
agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges
in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, restrict or prohibit payment or remittance
of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our shares. The CSRC or other PRC regulatory agencies may also take actions
requiring us, or making it advisable for us, to delay or cancel the transaction.
The M&A Rules, along with foreign exchange
regulations discussed in the above subsection, will be interpreted or implemented by the relevant government authorities in connection
with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition strategy. For example,
our operating companies’ ability to remit dividends to us, or to engage in foreign-currency-denominated borrowings, may be conditioned
upon compliance with the SAFE registration requirements by such Chinese domestic residents, over whom we may have no control. In addition,
such Chinese domestic residents may be unable to complete the necessary approval and registration procedures required by the SAFE regulations.
Such uncertainties may restrict our ability to implement our acquisition strategy and adversely affect our business and prospects.
Future inflation in China may inhibit our activity to conduct
business in China.
In recent years, the Chinese economy has experienced
periods of rapid expansion and high rates of inflation. These factors have led to the adoption by Chinese government, from time to
time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High
inflation may in the future cause Chinese government to impose controls on credit and/or prices, or to take other action, which could
inhibit economic activity in China, and thereby harm the market for our services.
The enforcement of the PRC Labor Contract Law and other labor-related
regulations in the PRC may adversely affect our business and results of operations.
The Standing Committee of the National People’s
Congress enacted the Labor Contract Law on January 2008 and amended it on December 28, 2012. The Labor Contract Law introduced specific
provisions related to fixed-term employment contracts, part-time employment, probationary periods, consultation with labor unions and
employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining to enhance previous
PRC labor laws. Under the Labor Contract Law, an employer is obligated to sign an unlimited-term labor contract with any employee who
has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract
that has already been entered into twice consecutively, the resulting contract, with certain exceptions, must have an unlimited term.
With certain exceptions, an employer must pay severance to an employee where a labor contract is terminated or expires. In addition, PRC
governmental authorities have continued to introduce various new labor-related regulations since the effectiveness of the Labor Contract
Law.
Under the PRC Social Insurance Law and the Administrative
Measures on Housing Fund, employees are required to participate in pension insurance, work-related injury insurance, medical insurance,
unemployment insurance, maternity insurance and housing funds and employers are required, together with their employees or separately,
to pay the social insurance premiums and housing funds for their employees.
These laws designed to enhance labor protection
tend to increase our labor costs. In addition, as the interpretation and implementation of these regulations are still evolving, our employment
practices may not be at all times be deemed in compliance with the regulations. As a result, we could be subject to penalties or incur
significant liabilities in connection with labor disputes or investigations, which could have a material adverse effect on our results
of operations and financial condition.
We may have difficulty establishing adequate management, legal
and financial controls in the PRC.
We may have difficulty in hiring and retaining
a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate
records and instituting business practices that meet Western standards. We may have difficulty establishing adequate management, legal
and financial controls in the PRC.
You may experience difficulties in effecting service of legal
process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us and
our management.
We conduct a substantial portion of our operations
in China and a substantial portion of our assets are located in China. In addition, some of our directors and executive officers reside
within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon
some of our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable
state securities laws. It would also be difficult for investors to bring an original lawsuit against us or our directors or executive
officers before a Chinese court based on U.S. federal securities laws or otherwise. Moreover, China does not have treaties with the United
States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.
It may be difficult for overseas regulators to conduct investigation
or collect evidence within China.
Shareholder claims or regulatory investigation
that are common in the United States 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 providing information needed for regulatory investigations or litigations
initiated outside China. Although the 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 cooperation with the securities
regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore,
according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities
regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. While detailed
interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator
to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting
your interests.
PRC enterprise income tax law could adversely affect our business
and our net income.
On March 16, 2007, the National People’s
Congress of the PRC passed the revised Enterprise Income Tax Law (or EIT Law), which took effect on of January 1, 2008 and was subsequently
amended on February 24, 2017 and December 29, 2018, respectively. The EIT Law imposes a unified income tax rate of 25% on all companies
established in China. Under the EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within
the PRC is considered as a resident enterprise and will normally be subject to the enterprise income tax at the rate of 25% on its global
income. The EIT Law, however, does not define the term “de facto management bodies.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our global income will be subject to PRC income tax at a tax rate
of 25%.
With the introduction of the EIT Law, China has
resumed imposition of a withholding tax (10% in the absence of a bilateral tax treaty or new domestic regulation reducing such withholding
tax rate to a lower rate). Per the Double Tax Avoidance Arrangement between Hong Kong and Mainland China, a Hong Kong company as
the investor, which is considered a “non-resident enterprise” under the EIT Law, may enjoy the reduced withholding tax rate
of 5% if it holds more than 25% equity interest in its PRC subsidiary. As China Net HK is the sole shareholder of Rise King WFOE,
substantially all of our income will derive from dividends we receive from Rise King WFOE through China Net HK. When we declare dividends
from the income in the PRC, we cannot assure whether such dividends may be taxed at a reduced withholding tax rate of 5% per the Double
Tax Avoidance Arrangement between Hong Kong and Mainland China as the PRC tax authorities may regard our China Net HK as a shell company
formed only for tax purposes and still deem Rise King WFOE in the PRC as the subsidiary directly owned by us. Based on the Notice on Certain
Issues with respect to the Enforcement of Dividend Provisions in Tax Treaties, issued on February 20, 2009 by the State Administration
of Taxation, 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.
Investors should note that the EIT Law provides
only a framework of the enterprise tax provisions, leaving many details on the definitions of numerous terms as well as the interpretation
and specific applications of various provisions unclear and unspecified. Any increase in our tax rate in the future could have a
material adverse effect on our financial conditions and results of operations.
Under the EIT Law, we may be classified as a “resident enterprise”
of China. Such classification will likely result in unfavorable tax consequences to us and holders of our securities.
Under the EIT Law, an enterprise established outside
of China with its “de facto management body” in China is considered a “resident enterprise,” meaning that it can
be treated the same as a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law defines “de
facto management body” as an organization that exercises “substantial and overall management and control over the production
and operations, personnel, accounting, and properties” of an enterprise. Currently no interpretation or application of the EIT Law
and its implementing rules is available, therefore it is unclear how tax authorities will determine tax residency based on the facts of
each case.
If the PRC tax authorities determine that China
Net is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could
follow. First, we will be subject to enterprise income tax at a rate of 25% on our worldwide income as well as PRC enterprise income tax
reporting obligations. This would mean that income such as interest on offering proceeds and other non-China source income would be subject
to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us by our
PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10%
withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with
respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes.
Finally, a 10% withholding tax will be imposed on dividends we pay to our non-PRC shareholders.
Our Chinese operating companies are obligated to withhold and
pay PRC individual income tax in respect of the salaries and other income received by their employees who are subject to PRC individual
income tax. If they fail to withhold or pay such individual income tax in accordance with applicable PRC regulations, they may be subject
to certain sanctions and other penalties, which could have a material adverse impact on our business.
Under PRC laws, Rise King WFOE and the PRC Operating
Entities will be obligated to withhold and pay individual income tax in respect of the salaries and other income received by their employees
who are subject to PRC individual income tax. Such companies may be subject to certain sanctions and other liabilities under PRC laws
in case of failure to withhold and pay individual income taxes for its employees in accordance with the applicable laws.
In addition, the SAT has issued several circulars
concerning employee stock options. Under these circulars, employees working in the PRC (which could include both PRC employees and expatriate
employees subject to PRC individual income tax) are required to pay PRC individual income tax in respect of their income derived from
exercising or otherwise disposing of their stock options. Our PRC entities will be obligated to file documents related to employee stock
options with relevant tax authorities and withhold and pay individual income taxes for those employees who exercise their stock options.
While tax authorities may advise us that our policy is compliant, they may change their policy, and we could be subject to sanctions.
Because Chinese laws will govern almost all of our business’
material agreements, we may not be able to enforce our rights within the PRC or elsewhere, which could result in a significant loss of
business, business opportunities or capital.
The Chinese legal system is similar to a civil
law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential
value. Although legislation in the PRC over the past 40 years has significantly improved the protection afforded to various forms of foreign
investment and contractual arrangements in the PRC, these laws, regulations and legal requirements are relatively new. Due to the limited
volume of published judicial decisions, their non-binding nature, the short history since their enactments, the discrete understanding
of the judges or government agencies of the same legal provision, inconsistent professional abilities of the judicators, and the inclination
to protect local interest in the court rooms, interpretation and enforcement of PRC laws and regulations involve uncertainties, which
could limit the legal protection available to us, and foreign investors, including you. The inability to enforce or obtain a remedy under
any of our future agreements could result in a significant loss of business, business opportunities or capital and could have a material
adverse impact on our business, prospects, financial condition, and results of operations. In addition, 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) that may have a retroactive
effect. As a result, we may not be aware of our violation of these policies and rules until a period of time after the violation. In addition,
any litigation in the PRC, regardless of outcome, may be protracted and result in substantial costs and diversion of resources and management
attention.
The non-U.S. activities of our non-U.S. subsidiaries and VIEs
may be subject to U.S. taxation.
We conduct a substantial portion of our business
through our operating subsidiaries and VIEs in China and are subject to income tax in the PRC. ZW Data Action Technologies Inc. is a Nevada
corporation and is subject to income tax in the United States. New U.S. federal tax legislation, commonly referred to as the Tax Cuts
and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform significantly modified
the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for
taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial
tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign
subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries;
and providing for new taxes on certain foreign earnings.
The U.S. Tax Reform includes provisions for a new
tax on global intangible low-taxed income (“GILTI”) effective for tax years of non-U.S. corporations beginning after December 31,
2017. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations
(“CFCs”), subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income
tax liability, subject to some limitations. The new GILTI tax would be imposed on us when our subsidiaries and VIEs that are CFCs generate
income that is subject to Subpart F of the U.S. Internal Revenue Code beginning after December 31, 2017, and any such resulting U.S. corporate
income tax imposed on us would reduce our consolidated net income.
Risks Related to our Securities
Insiders have substantial control over us, and they could delay
or prevent a change in our corporate control even if our other stockholders wanted it to occur.
Our executive officers, directors, and principal
stockholders hold approximately 19% of our outstanding Common Stock. Accordingly, these stockholders are able to exert substantial
influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This
could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it to occur.
There may not be sufficient liquidity in the market for our securities
in order for investors to sell their securities.
There is currently only a limited public market for our Common Stock and there can be no assurance
that a trading market will develop further or be maintained in the future. As of April 12, 2021, the closing trade
price of our Common Stock was $2.63 per share. As of April 13, 2021, we had approximately 615 shareholders of record
of our Common Stock, not including shares held in street name. In addition, during the past two fiscal years our Common Stock
has had a trading range with a low price of $0.56 per share and a high price of $2.29 per share.
The market price of our Common Stock may be volatile.
The market price of our Common Stock has been and
will likely continue to be highly volatile, as is the stock market in general. Some of the factors that may materially affect the market
price of our Common Stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions
or trends in the industry in which we operate or sales of our common stock. These factors may materially adversely affect the market price
of our Common Stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume
volatility particularly for companies whose primary operations are located in the PRC. This volatility has significantly affected the
market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of our Common Stock.
The outstanding options and warrants may adversely affect us in
the future and cause dilution to existing stockholders.
We currently have common stock purchase options
outstanding to purchase up to 277,976 shares of our Common Stock in the aggregate issued to our management, executive directors and employees,
subject to forfeiture upon an employee's cessation of employment at the discretion of the Company. The exercise price of these options
is $3.00 per share, and these options will expire on November 29, 2021. We also have warrants outstanding to purchase up to 5,130,705
shares of our Common Stock, of which 129,000 warrants will expire on July 18, 2021, 2,030,865 will expire on December 14, 2023, and the
remaining 2,970,840 warrants will expire on August 18, 2024. The exercise prices of these warrants range from $1.4927 to $4.4875 per share,
subject to adjustment in certain circumstances. Exercise of these options and warrants may cause dilution in the interests of other stockholders
as a result of the additional Common Stock that would be issued upon exercise. In addition, sales of the shares of our Common Stock issuable
upon exercise of these options and warrants could have a depressive effect on the price of our stock, particularly if there is not a coinciding
increase in demand by purchasers of our Common Stock. Further, the terms on which we may obtain additional financing during the period
any of these options and warrants remain outstanding may be adversely affected by the existence of these options and warrants as well.
We may need additional capital and may sell additional securities
or other equity securities or incur indebtedness, which could result in additional dilution to our shareholders or increase our debt service
obligations.
We may require additional cash resources due to
changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our cash
resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit
facility. The sale of additional equity securities or equity-linked debt securities could result in additional dilution to our shareholders.
The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants
that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if
at all.
We have not paid dividends in the past and do not expect to pay
dividends in the future, and any return on investment may be limited to the value of our stock.
We have never paid any cash dividends on our Common
Stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future and any return on investment may be
limited to the value of our stock. We plan to retain any future earning to finance growth.
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