UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to
_________________
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number: 001-34738
Luokung Technology Corp.
(Exact name of Registrant as specified in its charter)
Not applicable
(Translation of Registrant’s name into English)
British
Virgin Islands |
|
B9-8, Block B, SOHO Phase II, No. 9, Guanghua Road, Chaoyang
District, Beijing
People’s Republic of China, 100020
|
(Jurisdiction
of incorporation or organization) |
|
(Address
of principal executive offices) |
Miss. Qinyu ZhaoB9-8, Block B, SOHO Phase II, No. 9, Guanghua Road,
Chaoyang District, Beijing
People’s Republic of China 100020
Tel: (86) 10-65065217 (Name, telephone, Email and/or facsimile
number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b)
of the Act:
Title
of each class |
|
Name
of each exchange on which registered |
Ordinary
shares, par value $0.01 per share |
|
None |
Preferred
shares, par value $0.01 per share |
|
None |
Securities registered or to be registered pursuant to Section 12(g)
of the Act:
none
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
none
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s
classes of capital or common stock as of the close of the period
covered by the annual report. 209,081,533 Ordinary Shares and
22,794,872 Preferred Shares outstanding as of December 31,
2019.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities
Act. ☐ Yes ☒ No
If this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934. ☐ Yes ☒ No
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90
days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such
files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or
an “emerging growth company.” See definition of “accelerated filer
and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer ☐
Accelerated
filer ☐
Non-accelerated filer ☒
Emerging growth company ☐
If an emerging growth company that prepares its financial
statements in accordance with U.S. GAAP, indicate by check mark if
the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark which basis of accounting the registrant has
used to prepare the financial statements included in this
filing.
U.S. GAAP ☒ |
|
International Financial Reporting Standards as issued
by the International Accounting Standards Board ☐
|
|
Other ☐ |
If “Other” has been checked in response to the previous question,
indicate by check mark which financial statement item the
registrant has elected to
follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). ☐ Yes ☒ No
In this annual report:
|
● |
References
to the “Company”, “we”, “our” and “us” are to Luokung Technology
Corp. and its consolidated subsidiaries, subsidiaries controlled by
contract and variable interest entities, except as the context
otherwise requires; |
|
● |
References
to an “ADS” are to an American Depositary Share, each of which
represented one of our Ordinary Shares with a par value of $.01 per
share; |
|
● |
References
to a particular “fiscal” year, such as “fiscal 2019”, are to our
fiscal year ended on December 31, of that
year. |
Note Regarding Reliance on SEC Order
On April 29, 2020, the Company filed a Current Report on Form 6-K
(the “Form 6-K) to indicate its intention to rely on the order
issued by the United States Securities and Exchange Commission (the
“SEC”) on March 25, 2020 (the “SEC Order”) to delay the
filing of its Annual Report on Form 20-F because the Company’s
operations and business were experiencing disruption due to the
unprecedented conditions surrounding the COVID-19 pandemic.
Consistent with the Company’s statements in the Form 6-K, the
Company was unable to file its Annual Report on Form 20-F on or
before April 30, 2020 because the Company followed the
recommendations of local health authorities to minimize exposure
risk for its employees, including the temporary closures of our
offices, and having many employees work remotely. There was a
country wide lockdown in China from January 23, 2020 to April 8,
2020. As a result of the above-mentioned factors, the Company’s
books and records were not easily accessible, resulting in delay in
preparation, compilation and completion of our annual financial
statements for the 2019 fiscal year. On June 15, 2020, the
Company filed a “Notification of Late Filing” on Form 12b-25
pursuant to Rule 12b-25 of the Exchange Act to further delay the
filing of the Company’s Annual Report on Form 20-F for the year
ended December 31, 2019.
Special Note Regarding Forward-looking Statements
This annual report contains forward-looking statements that involve
risks and uncertainties. These statements involve known and unknown
risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different
from those expressed or implied by the forward-looking statements.
These statements are made under the “safe harbor” provisions of the
U.S. Private Securities Litigations Reform Act of 1995.
You can identify these forward-looking statements by words or
phrases such as “may,” “will,” “expect,” “anticipate,” “aim,”
“estimate,” “intend,” “plan,” “believe,” “likely to” or other
similar expressions. We have based these forward-looking statements
largely on our current expectations and projections about future
events and financial trends that we believe may affect our
financial condition, results of operations, business strategy and
financial needs. These forward-looking statements include, but are
not limited to, statements about:
|
● |
our
future business development, results of operations and financial
condition; |
|
● |
expected
changes in our net revenues and certain cost or expense
items; |
|
● |
our
ability to attract and retain customers; and |
|
● |
trends
and competition in the spatial-temporal big-data processing and
interactive location-based services market. |
You should read this annual report and the documents that we refer
to in this annual report and have filed as exhibits to this annual
report completely and with the understanding that our actual future
results may be materially different from what we expect. Other
sections of this annual report discuss factors which could
adversely impact our business and financial performance. Moreover,
we operate in an evolving environment. New risk factors emerge from
time to time and it is not possible for our management to predict
all risk factors, nor can we assess the impact of all factors on
our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those
contained in any forward-looking statements. We qualify all of our
forward-looking statements by these cautionary
statements.
You should not rely upon forward-looking statements as predictions
of future events. The forward-looking statements made in this
annual report relate only to events or information as of the date
on which the statements are made in this annual report. Except as
required by law, we undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise, after the date on which
the statements are made or to reflect the occurrence of
unanticipated events.
TABLE OF CONTENTS
PART I
ITEM 1. IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
Not applicable.
ITEM 2. OFFER
STATISTICS AND EXPECTED TIMETABLE.
Not applicable.
ITEM 3. KEY
INFORMATION.
A. SELECTED
FINANCIAL DATA.
Luokung Technology Corp. and its consolidated subsidiaries
(“Luokung Technology”, “we”, “us”, or “the Company”) consummated an
asset exchange agreement pursuant to which we exchanged our
existing assets with those of C Media Limited (the “Asset
Exchange”) on August 17, 2018, and we changed our name from
Kingtone Wirelessinfo Solution Holding Ltd. to our current name on
August 20, 2018.
On October 4, 2018, in connection with the consummation of the
Asset Exchange, we changed our fiscal year end from September 30 to
December 31.
The selected financial data for the fiscal years ended
December 31, 2019, 2018 and 2017 have been derived from our
audited consolidated financial statements. The selected
consolidated financial data should be read in conjunction with our
audited financial statements and the accompanying notes and “Item 5
– Operating and Financial Review and Prospects.” Our consolidated
financial statements are prepared and presented in accordance with
United States generally accepted accounting principles, or U.S.
GAAP. Our historical results do not necessarily indicate our
results expected for any future periods. You should not view our
historical results as an indicator of our future performance.
SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS DATA
(IN U.S. DOLLARS)
|
|
For the years ended December 31, |
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
18,779,172 |
|
|
$ |
21,042,363 |
|
|
$ |
26,082,417 |
|
Less: Cost of revenues |
|
|
14,976,016 |
|
|
|
6,938,063 |
|
|
|
5,547,779 |
|
Less: Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and
marketing |
|
|
3,764,792 |
|
|
|
14,695,165 |
|
|
|
23,908,733 |
|
General and
administrative |
|
|
22,844,383 |
|
|
|
6,750,417 |
|
|
|
2,451,249 |
|
Research and
development |
|
|
8,710,746 |
|
|
|
3,478,570 |
|
|
|
1,046,198 |
|
Total operating expenses |
|
|
35,319,921 |
|
|
|
24,924,152 |
|
|
|
27,406,180 |
|
Loss from operations |
|
|
(31,516,765 |
) |
|
|
(10,819,852 |
) |
|
|
(6,871,542 |
) |
Total other income (expense), net |
|
|
(505,438 |
) |
|
|
(1,033,675 |
) |
|
|
61,088 |
|
Loss before income taxes |
|
|
(32,022,203 |
) |
|
|
(11,853,527 |
) |
|
|
(6,810,454 |
) |
Income tax benefit (expense) |
|
|
70,992 |
|
|
|
(74,009 |
) |
|
|
- |
|
Net loss |
|
$ |
(31,951,211 |
) |
|
$ |
(11,927,536 |
) |
|
$ |
(6,810,454 |
) |
Less: Net loss attributable to
non-controlling interest |
|
|
438,033 |
|
|
|
- |
|
|
|
- |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustment |
|
|
541,489 |
|
|
|
447,246 |
|
|
|
90,671 |
|
Total comprehensive loss |
|
$ |
(31,409,722 |
) |
|
$ |
(11,480,290 |
) |
|
$ |
(6,719,783 |
) |
Net loss per ordinary share, basic and
diluted |
|
$ |
(0.16 |
) |
|
$ |
(0.16 |
) |
|
$ |
(6,810,454 |
) |
Weighted average number of ordinary shares outstanding, basic and
diluted |
|
|
201,005,995 |
|
|
|
72,919,624 |
|
|
|
1 |
|
SELECTED CONSOLIDATED BALANCE SHEETS DATA
(IN U.S. DOLLARS)
|
|
As of December 31, |
|
|
|
2019 |
|
|
2018 |
|
Cash |
|
|
3,695,687 |
|
|
|
1,192,218 |
|
Accounts receivable, net of allowance
for doubtful accounts |
|
|
10,004,951 |
|
|
|
22,661,594 |
|
Amounts due from related parties |
|
|
200,682 |
|
|
|
4,935,698 |
|
Property and equipment, net |
|
|
588,881 |
|
|
|
898,007 |
|
Other receivables, net |
|
|
27,071,241 |
|
|
|
2,749,000 |
|
Intangible assets |
|
|
47,299,120 |
|
|
|
52,763,998 |
|
Other receivables (non-current) |
|
|
16,636,403 |
|
|
|
150,286 |
|
Goodwill |
|
|
11,728,600 |
|
|
|
11,728,600 |
|
TOTAL ASSETS |
|
|
117,896,169 |
|
|
|
97,079,401 |
|
Accounts payable |
|
|
4,314,162 |
|
|
|
758,386 |
|
Accrued liabilities and other
payables |
|
|
23,697,143 |
|
|
|
28,239,477 |
|
Accrued
liabilities and other payables(non-current) |
|
|
32,938,926 |
|
|
|
244,755 |
|
Total liabilities |
|
|
63,923,166 |
|
|
|
33,978,642 |
|
Total Shareholders’ Equity |
|
|
54,406,158 |
|
|
|
63,100,759 |
|
B. CAPITALIZATION
AND INDEBTEDNESS.
Not applicable.
C. REASONS
FOR THE OFFER AND USE OF PROCEEDS.
Not applicable.
D. RISK
FACTORS.
An investment in our ordinary shares involves a high degree of
risk. You should carefully consider the risks and uncertainties
described below together with all other information contained in
this annual report, including the matters discussed under “Special
Note Regarding Forward-Looking Statements,” before you decide to
invest in our ordinary shares. You should pay particular attention
to the fact that we are a holding company with substantial
operations in China and are subject to legal and regulatory
environments that in many respects differ from those of the United
States. If any of the following risks, or any other risks and
uncertainties that are not presently foreseeable to us, actually
occur, our business, financial condition, results of operations,
liquidity and our future growth prospects would be materially and
adversely affected. You should also consider all other information
contained in this annual report before deciding to invest in our
ordinary shares.
Our business activities for fiscal 2020 are
expected to be adversely affected by the COVID-19
pandemic.
In December 2019, a novel strain of coronavirus causing respiratory
illness, or COVID-19, has surfaced in Wuhan, China, spreading at a
fast rate in January and February of 2020, and confirmed cases were
also reported in other parts of the world. In reaction to this
outbreak, an increasing number of countries imposed travel
suspensions to and from China following the World Health
Organization’s “public health emergency of international concern”
(PHEIC) announcement on January 30, 2020. Since this outbreak,
domestic business activities in China have been disrupted by a
series of emergency quarantine measures taken by the
government.
Emergency quarantine measures and travel restrictions caused
business disruptions in many sectors across China, which seriously
slowed down our business operation for the first quarter of 2020.
Our sales have been and will continue to be adversely affected as a
result of these measures. The Company rolled out active
precautionary measures and has gradually resumed work since early
March to reduce the impact on the Company’s production and
operation.
The extent to which COVID-19 negatively impacts our business is
highly uncertain and cannot be accurately predicted. We believe
that the coronavirus outbreak and the measures taken to control it
may have a significant negative impact on economic activities in
China. Our revenues are generated in China. The magnitude of this
negative effect on the continuity of our business operation in
China remains uncertain. These uncertainties impede our ability to
conduct our daily operations and could materially and adversely
affect our business, financial condition and results of operations.
We expect our full year 2020 results of operations to be adversely
affected.
We may undertake acquisitions, investments, joint ventures or
other strategic alliances, which could have a material adverse
effect on our ability to manage our business. In addition, such
undertakings may not be successful.
Our strategy includes plans to grow both organically and through
acquisitions, participation in joint ventures or other strategic
alliances. Joint ventures and strategic alliances may expose us to
new operational, regulatory and market risks, as well as risks
associated with additional capital requirements. We may not be
able, however, to identify suitable future acquisition candidates
or alliance partners. Even if we identify suitable candidates or
partners, we may be unable to complete an acquisition or alliance
on terms commercially acceptable to us. If we fail to identify
appropriate candidates or partners, or complete desired
acquisitions, we may not be able to implement our strategies
effectively or efficiently.
In addition, our ability to successfully integrate acquired
companies and their operations may be adversely affected by several
factors. These factors include:
|
1. |
diversion
of management’s attention; |
|
|
|
|
2. |
difficulties
in retaining customers of the acquired companies; |
|
|
|
|
3. |
difficulties
in retaining personnel of the acquired companies; |
|
|
|
|
4. |
entry
into unfamiliar markets; |
|
|
|
|
5. |
unanticipated
problems or legal liabilities; and |
|
|
|
|
6. |
tax
and accounting issues. |
If we fail to integrate acquired companies efficiently, our
earnings, revenue growth and business could be negatively
affected.
Due to intense competition for highly-skilled personnel, we
may fail to attract and retain enough sufficiently trained
employees to support our operations; our ability to bid for and
obtain new projects may be negatively affected and our revenues
could decline as a result.
The IT industry relies on skilled employees, and our success
depends to a significant extent on our ability to attract, hire,
train and retain qualified employees. There is significant
competition in China for professionals with the skills necessary to
develop the products and perform the services we offer to our
customers. Increased competition for these professionals, in the
mobile application design area or otherwise, could have an adverse
effect on us if we experience significant increase in the attrition
rate among employees with specialized skills, which could decrease
our operating efficiency and productivity and could lead to a
decline in demand for our services.
In addition, our ability to serve existing customers and business
partners and obtain new business will depend, in large part, on our
ability to attract, train and retain skilled personnel that enable
us to keep pace with growing demands for spatial-temporal big-data
processing and interactive location-based services, evolving
industry standards and changing customer preferences. Our failure
to attract, train and retain personnel with the qualifications
necessary to fulfill the needs of our existing and future customers
or to assimilate new employees successfully could have a material
adverse effect on our business, financial condition and results of
operations. Our failure to retain our key personnel on business
development or find suitable replacements of the key personnel upon
their departure may lead to shrinking new implementation projects,
which could materially adversely affect our business.
Our business depends substantially on the continuing efforts
of our senior executives and other key personnel, and our business
may be severely disrupted if we lose their services.
Our future success heavily depends upon the continued services of
our senior executives and other key employees, particularly since
we recently appointed a new Chairman. We are reliant on the
services of Mr. Xuesong Song, our Chairman, Chief Executive Officer
and member of our board of directors. If one or more of our senior
executives or key employees is unable or unwilling to continue in
his or her present position, we may not be able to replace such
employee easily, or at all, we may incur additional expenses to
recruit, train and retain replacement personnel, our business may
be severely disrupted, and our financial condition and results of
operations may be materially adversely affected.
Our business could suffer if our executives and directors
compete against us and our non-competition agreements with them
cannot be enforced.
If any of our senior executives or key employees joins a competitor
or forms a competing company, we may lose customers, know-how and
key professionals and staff members to them. Also, if any of our
business development managers who keep a close relationship with
our customers and business partners joins a competitor or forms a
competing company, we may lose customers, and our revenues may be
materially adversely affected. Most of our executives have entered,
or will soon enter, into employment agreements with us that contain
or will contain non-competition provisions. However, if any dispute
arises between our executive officers and us, such non-competition
provisions may not be enforceable, especially in China, where all
of these executive officers and key employees reside, in light of
the uncertainties with China’s legal system. See “Risk Factors
— Risks Related to Doing Business in
China — Uncertainties with respect to the PRC legal
system could adversely affect us.”
Our computer networks may be vulnerable to security risks
that could disrupt our services and adversely affect our results of
operations.
Our computer networks may be vulnerable to unauthorized access,
computer hackers, computer viruses and other security problems
caused by unauthorized access to, or improper use of, systems by
third parties or employees. A hacker who circumvents security
measures could misappropriate proprietary information or cause
interruptions or malfunctions in operations. Computer attacks or
disruptions may jeopardize the security of information stored in
and transmitted through computer systems and mobile devices of our
customers. Actual or perceived concerns that our systems may be
vulnerable to such attacks or disruptions may deter customers from
using our services. As a result, we may be required to expend
significant resources to protect against the threat of these
security breaches or to alleviate problems caused by these
breaches, which could adversely affect our results of
operations.
If we do not continually enhance our solutions and service
offerings, we may have difficulty in retaining existing customers
and attracting new customers.
We believe that our future success will depend, to a significant
extent, upon our ability to enhance our existing technologies,
applications and platform, and to introduce new features to meet
the preferences and requirements of our customers in a rapidly
developing and evolving market. Unexpected technical, operational,
distribution or other problems could delay or prevent the
introduction of one or more of these products or services, or any
products or services that we may plan to introduce in the future.
Our present or future products may not satisfy the evolving
preferences and tastes of our customers, and these solutions and
services may not achieve anticipated market acceptance or generate
incremental revenue. If we are unable to anticipate or respond
adequately to the need for service or product enhancements due to
resource, technological or other constraints, our business,
financial condition and results of operations could be materially
and adversely affected.
If we are unable to develop competitive new products and
service offerings our future results of operations could be
adversely affected.
Our future revenue stream depends to a large degree on our ability
to utilize our technology in a way that will allow us to offer new
types of products in relation to maps and geospatial data
processing, mobile applications and services to a broader customer
base. We will be required to make investments in research and
development in order to continually develop new products, software
applications and related service offerings, enhance our existing
products, platform, mobile applications and related service
offerings and achieve market acceptance of our mobile applications
and service offerings. We may incur problems in the future in
innovating and introducing new products, mobile applications and
service offerings. Our development-stage products, mobile
applications may not be successfully completed or, if developed,
may not achieve significant customer acceptance. If we are unable
to successfully define, develop and introduce competitive new
mobile applications, and enhance existing mobile applications, our
future results of operations would be adversely affected. The
timely availability of new applications and their acceptance by
customers are important to our future success. A delay in the
development of new applications could have a significant impact on
its results of operations.
Changes in technology could adversely affect our business by
increasing our costs, reducing our profit margins and causing a
decline in our competitiveness.
China’s spatial-temporal big-data processing and interactive
location-based services industry, in which we operate, is
characterized by rapidly changing technology, evolving industry
standards, frequent introductions of new services and solutions and
enhancements as well as changing customer demands. New solutions
and new technologies often render existing solutions and services
obsolete, excessively costly or otherwise unmarketable. As a
result, our success depends on our ability to adapt to the latest
technological progress, such as the 5G standard and technologies,
and to develop or acquire and integrate new technologies into our
products, mobile applications and related services. Advances in
technology also require us to commit substantial resources to
developing or acquiring and then deploying new technologies for use
in our operations. We must continuously train personnel in new
technologies and in how to integrate existing systems with these
new technologies. We may not be able to adapt quickly to new
technologies or commit sufficient resources to compete successfully
against existing or new competitors in bringing to market solutions
and services that incorporate these new technologies. We may incur
problems in the future in innovating and introducing new mobile
applications and service offerings. Our development of new mobile
applications and platform enhancements may not be successfully
completed or, if developed, may not achieve significant customer
acceptance. If we fail to adapt to changes in technologies and
compete successfully against established or new competitors, our
business, financial condition and results of operations could be
adversely affected.
Problems with the quality or performance of our software or
other systems may cause delays in the introduction of new solutions
or result in the loss of customers and revenues, which could have a
material and adverse effect on our business, financial condition
and results of operations.
Our products are complex and may contain defects, errors or bugs
when first introduced to the market or to a particular customer, or
as new versions are released. Because we cannot test for all
possible scenarios, our systems may contain errors that are not
discovered until after they have been installed or implemented, and
we may not be able to timely correct these problems. These defects,
errors or bugs could interrupt or delay the completion of projects
or sales to our customers. In addition, our reputation may be
damaged and we may fail to acquire new projects from existing
customers or new customers. Errors may occur when we provide
systems integration and maintenance services. Even in cases where
we have agreements with our customers that contain provisions
designed to limit our exposure to potential claims and liabilities
arising from customer problems, these provisions may not
effectively protect us against such claims in all cases and in all
jurisdictions. In addition, as a result of business and other
considerations, we may undertake to compensate our customers for
damages arising from the use of our solutions, even if our
liability is limited by these provisions. Moreover, claims and
liabilities arising from customer problems could also result in
adverse publicity and materially and adversely affect our business,
results of operations and financial condition. We currently do not
carry any product or service liability insurance and any imposition
of liability on us may materially and adversely affect our business
and increase our costs, resulting in reduced revenues and
profitability.
Our products may contain undetected software defects, which
could negatively affect our revenues.
Our software products are complex and may contain undetected
defects. Although we test our products, it is possible that errors
may be found or occur in our new or existing products after we have
delivered those products to the customers. Defects, whether actual
or perceived, could result in adverse publicity, loss of revenues,
product returns, a delay in market acceptance of our products, loss
of competitive position or claims against us by customers. Any such
problems could be costly to remedy and could cause interruptions,
delays, or cessation of our product sales, which could cause us to
lose existing or prospective customers and could negatively affect
our results of operations.
We may be subject to infringement, misappropriation and
indemnity claims in the future, which may cause us to incur
significant expenses, pay substantial damages and be prevented from
providing our services or technologies.
Our success depends, in part, on our ability to carry out our
business without infringing the intellectual property rights of
third parties. Patent and copyright law covering software-related
technologies is evolving rapidly and is subject to a great deal of
uncertainty. Our self-developed or licensed technologies, processes
or methods may be covered by third-party patents or copyrights,
either now existing or to be issued in the future. Any potential
litigation may cause us to incur significant expenses. Third-party
claims, if successfully asserted against us may cause us to pay
substantial damages, seek licenses from third parties, pay ongoing
royalties, redesign our services or technologies, or prevent us
from providing services or technologies subject to these claims.
Even if we were to prevail, any litigation would likely be costly
and time-consuming and divert the attention of our management and
key personnel from our business operations.
Our failure to protect our intellectual property rights may
undermine our competitive position, and subject us to costly
litigation to protect our intellectual property rights.
Any misappropriation of our technology or the development of
competitive technology could seriously harm our business. We regard
a substantial portion of our hardware and software systems as
proprietary and rely on statutory copyright, trademark, patent,
trade secret laws, customer license agreements, employee and
third-party non-disclosure agreements and other methods to protect
our proprietary rights. Nevertheless, these resources afford only
limited protection and the actions we take to protect our
intellectual property rights may not be adequate. In particular,
third parties may infringe or misappropriate our proprietary
technologies or other intellectual property rights, which could
have a material adverse effect on our business, financial condition
and results of operations. In addition, intellectual property
rights and confidentiality protection in China may not be as
effective as in the United States, and policing unauthorized use of
proprietary technology can be difficult and expensive. Further,
litigation may be necessary to enforce our intellectual property
rights, protect our trade secrets or determine the validity and
scope of the proprietary rights of others. The outcome of any such
litigation may not be in our favor. Any such litigation may be
costly and may divert management attention, as well as our other
resources, away from our business. An adverse determination in any
such litigation will impair our intellectual property rights and
may harm our business, prospects and reputation. In addition, we
have no insurance coverage against litigation costs and would have
to bear all litigation costs in excess of the amount recoverable
from other parties. The occurrence of any of the foregoing could
have a material adverse effect on our business, financial condition
and results of operations.
Our solutions incorporate a portion of, and work in
conjunction with, third-party hardware and software solutions. If
these third-party hardware or software solutions are not available
to us at reasonable costs, or at all, our results of operations
could be adversely impacted.
Although our hardware and software systems and mobile applications
primarily rely on our own core technologies, some elements of our
systems incorporate a small portion of third-party hardware and
software solutions. If any third party were to discontinue making
their intellectual property available to us or our customers on a
timely basis, or increase materially the cost of their licensing
such intellectual property, or if our systems or applications
failed to properly function or interoperate with replacement
intellectual property, we may need to incur costs in finding
replacement third-party solutions and/or redesigning our systems or
applications to replace or function with or on replacement
third-party proprietary technology. Replacement technology may not
be available on terms acceptable to us or at all, and we may be
unable to develop alternative solutions or redesign our systems or
applications on a timely basis or at a reasonable cost. If any of
these were to occur, our results of operations could be adversely
impacted.
Our ability to sell our products is highly dependent on the
quality of our service and support offerings, and our failure to
offer high quality service could have a material adverse effect on
our ability to market and sell our products.
Our customers depend upon our customer service and support staff to
resolve issues relating to our products. High-quality support
services are critical for the successful marketing and sale of our
products. If we fail to provide high-quality support on an ongoing
basis, our customers may react negatively and we may be materially
and adversely affected in our ability to sell additional products
to these customers. This could also damage our reputation and
prospects with potential customers. Our failure to maintain
high-quality support services could have a material and adverse
effect on our business, results of operations and financial
condition.
Weaknesses in our internal controls over financial reporting
or disclosure controls and procedures may have a material adverse
effect on our business, the price of our ordinary shares, operating
results and financial condition.
We are required to establish and maintain appropriate internal
controls over financial reporting and disclosure controls and
procedures. Pursuant to Section 404 of the Sarbanes-Oxley Act of
2002 and the related rules adopted by the Securities and Exchange
Commission, every public company is required to include a
management report on its internal controls over financial reporting
in its annual report, which contains management’s assessment of the
effectiveness of the company’s internal controls over financial
reporting. This requirement first applied to our annual
report on Form 20-F for the fiscal year ended on September 30,
2011. In connection with our assessments of our disclosure controls
and procedures and internal controls over financial reporting,
management concluded that as of December 31, 2019, our
disclosure controls and procedures and our internal controls over
financial reporting were not effective due to lack of U.S.
generally accepted accounting principles (“U.S. GAAP”) expertise in
our current accounting team. Please refer to the discussion under
Item 15, “Controls and Procedures” for further discussion of our
material weakness as of December 31, 2019. Should we be unable
to remediate the material weakness promptly and effectively, such
weakness could harm our operating results, result in a material
misstatement of our financial statements, cause us to fail to meet
our financial reporting obligations or prevent us from providing
reliable and accurate financial reports or avoiding or detecting
fraud. This, in turn, could result in a loss of investor confidence
in the accuracy and completeness of our financial reports, which
could have an adverse effect on the trading price of our ordinary
shares. Any litigation or other proceeding or adverse publicity
relating to the material weaknesses could have a material adverse
effect on our business and operating results.
We have very limited insurance coverage which could expose us
to significant costs and business disruption.
We do not maintain any insurance coverage for our leased
properties. Should any natural catastrophes such as earthquakes,
floods, typhoons or any acts of terrorism occur in Beijing, China,
where our head office is located and most of our employees are
based, or elsewhere in China, we might suffer not only significant
property damages, but also loss of revenues due to interruptions in
our business operations, which could have a material adverse effect
on our business, operating results or financial condition.
The insurance industry in China is still at an early stage of
development. Insurance companies in China offer limited business
insurance products, and do not, to our knowledge, offer business
liability insurance. As a result, we do not have any business
liability insurance coverage for our operations. Moreover, while
business disruption insurance is available, we have determined that
the risks of disruption and cost of the insurance are such that we
do not require it at this time. Any business disruption, litigation
or natural disaster might result in substantial costs and diversion
of resources, particularly if it affects our technology platforms
which we depend on for delivery of our software and services, and
could have a material adverse effect on our financial condition and
results of operations.
We may be liable to our customers for damages caused by
unauthorized disclosure of sensitive and confidential information,
whether through our employees or otherwise.
We are typically required to manage, utilize and store sensitive or
confidential customer data in connection with the products and
services we provide. Under the terms of our customer contracts, we
are required to keep such information strictly confidential. We
seek to implement specific measures to protect sensitive and
confidential customer data. We require our employees to enter into
non-disclosure agreements to limit such employees’ access to, and
distribution of, our customers’ sensitive and confidential
information and our own trade secrets. We can give no assurance
that the steps taken by us in this regard will be adequate to
protect our customers’ confidential information. If our customers’
proprietary rights are misappropriated by our employees, in
violation of any applicable confidentiality agreements or
otherwise, our customers may consider us liable for that act and
seek damages and compensation from us. However, we currently do not
have any insurance coverage for mismanagement or misappropriation
of such information by our employees. Any litigation with respect
to unauthorized disclosure of sensitive and confidential
information might result in substantial costs and diversion of
resources and management attention.
We may face intellectual property infringement claims that
could be time-consuming and costly to defend. If we fail to defend
ourselves against such claims, we may lose significant intellectual
property rights and may be unable to continue providing our
existing products and services.
It is critical that we use and develop our technology and products
without infringing upon the intellectual property rights of third
parties, including patents, copyrights, trade secrets and
trademarks. Intellectual property litigation is expensive and
time-consuming and could divert management’s attention from our
business. A successful infringement claim against us, whether with
or without merit, could, among others things, require us to pay
substantial damages, develop non-infringing technology, or re-brand
our name or enter into royalty or license agreements that may not
be available on acceptable terms, if at all, and cease making,
licensing or using products that have infringed a third party’s
intellectual property rights. Protracted litigation could also
result in existing or potential customers deferring or limiting
their purchase or use of our products until resolution of such
litigation, or could require us to indemnify our customers against
infringement claims in certain instances. Also, we may be unaware
of intellectual property registrations or applications relating to
our services that may give rise to potential infringement claims
against us. Parties making infringement claims may be able to
obtain an injunction to prevent us from delivering our services or
using technology containing the allegedly infringing intellectual
property. Any intellectual property litigation could have a
material adverse effect on our business, results of operations or
financial condition.
On February 15, 2019, Beijing iQIYI Technology Co., Ltd. filed
lawsuits with Beijing Internet Court alleging Shenzhen Jiu Zhou Shi
Dai Digital and Technology Limited and Beijing Zhong Chuan Shi Xun
Technology Limited are in infringement of exclusive rights to
communication through information network of certain works,
performances, audio and video products and claiming the economic
loss amounts to approximately $562,000 (RMB 3,920,000).
On December 14, 2019, Beijing Internet Court arranged a trial;
Beijing iQIYI and the Company are negotiating a potential
settlement while expecting a verdict from the court. According to
legal counsel, it is probable that the settlement will amount to
approximately $93,000 (RMB650,000).
Seasonality and fluctuations in our customers’ spending
cycles and other factors can cause our revenues and operating
results to vary significantly from quarter to quarter and from year
to year.
Our revenues and operating results will vary from quarter to
quarter and from year to year due to a number of factors, many of
which are outside of our control. Our new lines of business
acquired upon the consummation of the asset exchange transaction
discussed below see higher customer use and activity during the
Chinese New Year holiday than other times during the year, which
lead to higher revenue during this period as more customers would
like to place more advertising. Historically, the products of our
subsidiary Superengine Graphics Software Technology Development
(Suzhou) Co., Ltd (“Superengine”) have a pattern of decreased sales
in the first fiscal quarter as a result of industry buying
patterns. Due to these and other factors, our operating results may
fluctuate from quarter to quarter and from year to year. These
fluctuations are likely to continue in the future, and operating
results for any period may not be indicative of our future
performance in any future period.
Our corporate actions are substantially controlled by Mr.
Xuesong Song, our Chairman and Chief Executive Officer, who can
cause us to take actions in ways you may not agree
with.
Mr. Xuesong Song, our Chairman and Chief Executive Officer,
beneficially owns 18.25% of our outstanding ordinary shares and
1,000,000 preferred shares, and each preferred share has the right
to 399 votes at a meeting of the shareholders of the Company. As a
result, Mr. Song has approximately 71.89% of the voting rights of
the shareholders of the Company. Mr. Song can exert control and
substantial influence over matters such as electing directors,
amending our constitutional documents, and approving acquisitions,
mergers or other business combination transactions. This
concentration of ownership and voting power may also discourage,
delay or prevent a change in control of our company, which could
deprive our shareholders of an opportunity to receive a premium for
their shares as part of a sale of our company and might reduce the
price of our shares. Alternatively, our controlling shareholders
may cause a merger, consolidation or change of control transaction
even if it is opposed by our other shareholders, including those
who purchase shares in this offering
We depend on a small number of customers to derive a
significant portion of our revenues. If we were to
continue being dependent upon a few customers, such dependency
could negatively impact our business, operating results and
financial condition.
We derived a material portion of our revenues from a small number
of customers. In the years ended December 31, 2019,
2018 and 2017, our five largest customers accounted for 69.3%,
94.4% and 99.8% of our total sales, respectively. As our customer
base may change from year-to-year, during such years that the
customer base is highly concentrated, the fluctuation of our sales
to any of such major customers could have a material adverse effect
on our business, operating results and financial condition.
Moreover, our high customer base concentration may also adversely
affect our ability to negotiate contract prices with these
customers, which may in turn materially and adversely affect our
results of operations.
Our historical outstanding accounts receivable have been
relatively high. Inability to collect our accounts receivable on a
timely basis, if at all, could materially and adversely affect our
financial condition, liquidity and results of
operations.
Historically, our outstanding accounts receivable have been
relatively high. As of December 31, 2019, 2018 and
2017, our outstanding accounts receivable before impairment were
$23.8 million $25.0 million and $10.4 million, respectively.
Although we conduct credit evaluations of our customers, we
generally do not require collateral or other security from our
customers. In addition, we have had a relatively high customer
concentration. The largest outstanding accounts receivable balance
accounted for 31.8%, 24.4% and 48.5% of our total accounts
receivable balance as of December 31, 2019, 2018 and 2017,
respectively. As a result, an extended delay or default in payment
relating to a significant account would likely have a material and
adverse effect on the aging schedule and turnover days of our
accounts receivable. Our inability to collect our accounts
receivable on a timely basis, if at all, could materially and
adversely affect our financial condition, liquidity and results of
operations.
Risks Related to Doing Business in China
Adverse changes in political and economic policies of the PRC
government could have a material adverse effect on the overall
economic growth of China, which could reduce the demand for our
services and materially and adversely affect our competitive
position.
Substantially all of our business operations are conducted in
China. Accordingly, our business, results of operations, financial
condition and prospects are subject to a significant degree to
economic, political and legal developments in China. Although the
Chinese economy is no longer a planned economy, the PRC government
continues to exercise significant control over China’s economic
growth through direct allocation of resources, monetary and tax
policies, and a host of other government policies such as those
that encourage or restrict investment in certain industries by
foreign investors, control the exchange between RMB and foreign
currencies, and regulate the growth of the general or specific
market. These government involvements have been instrumental in
China’s significant growth in the past 30 years. The reorganization
of the telecommunications industry encouraged by the PRC government
has directly affected our industry and our growth prospect.
Growth of China’s economy has been uneven, both geographically and
among various sectors of the economy, and the growth of the Chinese
economy has slowed down in recent years. Some of the government
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. Any
stimulus measures designed to boost the Chinese economy may
contribute to higher inflation, which could adversely affect our
results of operations and financial condition. For example, certain
operating costs and expenses, such as employee compensation and
office operating expenses, may increase as a result of higher
inflation.
Our business benefits from certain government tax incentives.
Expiration, reduction or discontinuation of, or changes to, these
incentives will increase our tax burden and reduce our net
income.
Under the PRC Enterprise Income Tax Law passed in 2007 and the
implementing rules, both of which became effective on January 1,
2008, or the New EIT Law, a unified enterprise income tax rate of
25% and unified tax deduction standard is applied equally to both
domestic-invested enterprises and foreign-invested enterprises, or
FIEs. Enterprises established prior to March 16, 2007 eligible for
preferential tax treatment in accordance with the then tax laws and
administrative regulations shall gradually become subject to the
New EIT Law rate over a five-year transition period starting from
the date of effectiveness of the New EIT Law. However, certain
qualifying high-technology enterprises may still benefit from a
preferential tax rate of 15% if they own their core intellectual
properties and they are enterprises in certain State-supported
high-tech industries to be later specified by the government. As a
result, if our PRC subsidiaries qualify as “high-technology
enterprises,” they will continue to benefit from the preferential
tax rate of 15%, subject to transitional rules implemented from
January 1, 2008. Our subsidiaries, Beijing Zhong Chuan Shi Xun
Technology Limited and Superengine Graphics Software Technology
Development (Suzhou) Co., Ltd, are qualified as a “high-technology
enterprise” until the end of the November 2021 and October 2021,
respectively, and therefore they have benefited from the
preferential tax rate of 15%, subject to transitional rules
implemented on January 1, 2008. Although we intend to apply for a
renewal of this qualification, if Beijing Zhong Chuan Shi Xun and
Suzhou Superengine cease to qualify as a “high-technology
enterprise”, or the tax authorities change their position on our
preferential tax treatments in the future, our future tax
liabilities may materially increase, which could materially and
adversely affect our financial condition and results of
operations.
If we were deemed a “resident enterprise” by PRC tax
authorities, we could be subject to tax on our global income at the
rate of 25% under the New EIT Law and our non-PRC shareholders
could be subject to certain PRC taxes.
Under the New EIT Law and the implementing rules, both of which
became effective January 1, 2008, an enterprise established outside
of the PRC with “de facto management bodies” within the PRC may be
considered a PRC “resident enterprise” and will be subject to the
enterprise income tax at the rate of 25% on its global income as
well as PRC enterprise income tax reporting obligations. The
implementing rules of the New EIT Law define “de facto management”
as “substantial and overall management and control over the
production and operations, personnel, accounting, and properties”
of the enterprise. However, as of the date of this annual report,
no final interpretations on the implementation of the “resident
enterprise” designation are available. Moreover, any such
designation, when made by PRC tax authorities, will be determined
based on the facts and circumstances of individual cases.
Therefore, if we were to be considered a “resident enterprise” by
the PRC tax authorities, our global income would be taxable under
the New EIT Law at the rate of 25% and, to the extent we were to
generate a substantial amount of income outside of PRC in the
future, we would be subject to additional taxes. In addition, the
dividends we pay to our non-PRC enterprise shareholders and gains
derived by such shareholders from the transfer of our shares may
also be subject to PRC withholding tax at the rate up to 10%, if
such income were regarded as China-sourced income.
Our holding company structure may limit the payment of
dividends.
We have no direct business operations, other than our ownership of
our subsidiaries. While we have no current intention of paying
dividends, should we decide in the future to do so, as a holding
company, our ability to pay dividends and meet other obligations
depends upon the receipt of dividends or other payments from our
operating subsidiaries and other holdings and investments. Current
PRC regulations permit our PRC subsidiaries to pay dividends to us
only out of their accumulated profits, if any, determined in
accordance with Chinese accounting standards and regulations. In
addition, each of our subsidiaries in China 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. These reserves are not distributable as cash
dividends. Furthermore, if our subsidiaries in China 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. As a result, there may be limitations on the ability of our
PRC subsidiaries to pay dividends or make other investments or
acquisitions that could be beneficial to our business or otherwise
fund and conduct our business.
In addition, under the New EIT Law and the implementing rules that
became effective on January 1, 2008, dividends generated from the
business of our PRC subsidiaries after January 1, 2008 and payable
to us may be subject to a withholding tax rate of 10% if the PRC
tax authorities subsequently determine that we are a non-resident
enterprise, unless there is a tax treaty with China that provides
for a different withholding arrangement.
Uncertainties with respect to the PRC legal system could
adversely affect us.
We conduct all of our business through our subsidiaries in China.
Our operations in China are governed by PRC laws and regulations.
Our PRC subsidiaries are generally subject to laws and regulations
applicable to foreign investments in China and, in particular, laws
and regulations applicable to wholly foreign-owned enterprises. The
PRC legal system is based on statutes. Prior court decisions may be
cited for reference but have limited precedential value.
Since 1979, PRC legislation and regulations have significantly
enhanced the protections afforded to various forms of foreign
investments in China. However, 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, because these laws and regulations are
relatively new, and because of the limited volume of published
decisions and their nonbinding nature, the interpretation and
enforcement of these laws and regulations involve uncertainties. 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 some time after the violation. In addition, any
litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.
Governmental control of currency conversion may affect the
value of your investment.
The PRC government imposes controls on the convertibility of the
RMB into foreign currencies and, in certain cases, the remittance
of currency out of China. We receive substantially all of our
revenues in RMB. Under our current corporate structure, our income
is primarily derived from dividend payments from our PRC
subsidiaries. Shortages in the availability of foreign currency may
restrict the ability of our PRC subsidiaries to remit sufficient
foreign currency to pay dividends or other payments to us, or
otherwise satisfy their foreign currency denominated obligations.
Under existing PRC foreign exchange regulations, payments of
current account items, including profit distributions, interest
payments and expenditures from trade-related transactions, can be
made in foreign currencies without prior approval from SAFE by
complying with certain procedural requirements. However, approval
from appropriate government authorities is required where RMB is to
be converted into foreign currency and remitted out of China to pay
capital expenses such as the repayment of loans denominated in
foreign currencies. The PRC government may also at its discretion
restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system
prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we may not be able to pay dividends in
foreign currencies to our shareholders.
Fluctuation in the value of the RMB may have a material
adverse effect on the value of your investment.
The value of the RMB against the U.S. dollar and other currencies
may fluctuate and is affected by, among other things, changes in
political and economic conditions. On July 21, 2005, the PRC
government changed its decade-old policy of pegging the value of
the RMB to the U.S. dollar. Under the new policy, the RMB is
permitted to fluctuate within a narrow and managed band against a
basket of certain foreign currencies. This change in policy has
resulted in an approximate 26.8% appreciation of the RMB against
the U.S. dollar between July 21, 2005 and September 30, 2015.
Provisions on Administration of Foreign Exchange, as amended in
August 2008, further changed China’s exchange regime to a managed
floating exchange rate regime based on market supply and demand.
Since reaching a high against the U.S. dollar in July 2008,
however, the RMB has traded within a narrow band against the U.S.
dollar, remaining within 1% of its July 2008 high but never
exceeding it. As a consequence, the RMB has fluctuated sharply
since July 2008 against other freely-traded currencies, in tandem
with the U.S. dollar. In August 2015, the PRC Government devalued
its currency by approximately 3%, representing the largest yuan
depreciation for 20 years. Concerns remain that China’s slowing
economy, and in particular its exports, will need a stimulus that
can only come from further cuts in the exchange rate.
It is difficult to predict how long the current situation may
continue and when and how it may change again as the People’s Bank
of China may regularly intervene in the foreign exchange market to
achieve economic policy goals. Substantially all of our revenues
and costs are denominated in the RMB, and a significant portion of
our financial assets are also denominated in RMB. We principally
rely on dividends and other distributions paid to us by our
subsidiaries in China. Any significant revaluation of the RMB may
materially and adversely affect our cash flows, revenues, earnings
and financial position, and the value of, and any dividends payable
on, our ADSs or ordinary shares in U.S. dollars. Any fluctuations
of the exchange rate between the RMB and the U.S. dollar could also
result in foreign currency translation losses for financial
reporting purposes.
PRC laws and regulations governing our businesses. If we are
found to be in violation of such PRC laws and regulations, we could
be subject to sanctions. In addition, changes in such PRC laws and
regulations may materially and adversely affect our
business.
There are substantial uncertainties regarding the interpretation
and application of PRC laws and regulations, including, but not
limited to, the laws and regulations governing our business. These
laws and regulations are relatively new and may be subject to
change, and their official interpretation and enforcement may
involve substantial uncertainty. The effectiveness of newly enacted
laws, regulations or amendments may be delayed, resulting in
detrimental reliance by foreign investors. New laws and regulations
that affect existing and proposed future businesses may also be
applied retroactively.
The PRC government has broad discretion in dealing with violations
of laws and regulations, including levying fines, revoking business
and other licenses and requiring actions necessary for compliance.
In particular, licenses and permits issued or granted to us by
relevant governmental bodies may be revoked at a later time by
higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our
businesses. We cannot assure you that our current ownership and
operating structure would not be found in violation of any current
or future PRC laws or regulations. As a result, we may be subject
to sanctions, including fines, and could be required to restructure
our operations or cease to provide certain services. In addition,
any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention. Any of
these or similar actions could significantly disrupt our business
operations or restrict us from conducting a substantial portion of
our business operations, which could materially and adversely
affect our business, financial condition and results of
operations.
On February 15, 2019, Beijing iQIYI Technology Co., Ltd. filed
lawsuits with Beijing Internet Court alleging Shenzhen Jiu Zhou Shi
Dai Digital and Technology Limited and Beijing Zhong Chuan Shi Xun
Technology Limited are in infringement of exclusive rights to
communication through information network of certain works,
performances, audio and video products and claiming the economic
loss amounts to approximately $562,000 (RMB 3,920,000).
On December 14, 2019, Beijing Internet Court arranged a trial;
Beijing iQIYI and the Company are negotiating a potential
settlement while expecting a verdict from the court. According to
legal counsel, it is probable that the settlement will amount to
approximately $93,000 (RMB650,000).
If we were required to obtain the prior approval of the China
Securities Regulatory Commission, or CSRC, of the listing and
trading of our ordinary shares on the NASDAQ Capital Market, we may
face regulatory actions or other sanctions from the CSRC or other
PRC regulatory agencies.
On August 8, 2006, six PRC regulatory agencies, including the
Ministry of Commerce, the State Assets Supervision and
Administration Commission, the State Administration for Taxation,
the State Administration for Industry and Commerce, the CSRC and
the SAFE, jointly issued the Regulations on Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors, which
became effective on September 8, 2006 (the “New M&A Rules”).
This regulation, among other things, includes provisions that
purport to require that an offshore special purpose vehicle formed
for the purposes of overseas listing of equity interests in PRC
companies and controlled directly or indirectly by PRC companies or
individuals obtain the approval of the CSRC prior to the listing
and trading of such special purpose vehicle’s securities on an
overseas stock exchange. On September 21, 2006, the CSRC published
on its official website procedures regarding its approval of
overseas listings by special purpose vehicles. The CSRC approval
procedures require the filing of a number of documents with the
CSRC and it would take several months to complete the approval
process, if practicable at all. The application of this new PRC
regulation remains unclear with no consensus currently existing
among leading PRC law firms regarding the scope of the
applicability of the CSRC approval requirement.
Prior to our May 2010 initial public offering, our PRC counsel has
advised us that, based on its understanding of the current PRC laws
and regulations as well as the procedures announced on September
21, 2006: (i) Softech was directly incorporated by Topsky as a
foreign investment enterprise under PRC law; therefore, there was
no acquisition of the equity of a “PRC domestic company” as defined
under the New M&A Rules; and (ii) the contractual arrangements
between Kingtone Information and Softech were not clearly defined
and considered as the transaction which shall be applied to the New
M&A Rules. Therefore, we did not seek prior CSRC approval for
our initial public offering.
However, if the CSRC required that we obtain its approval prior to
the completion of our initial public offering and the listing of
our ordinary shares on the NASDAQ Capital Market, we may face
regulatory actions or other sanctions from the CSRC or other PRC
regulatory agencies. 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 our initial public offering into the PRC, 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.
Also, if the CSRC requires that we obtain its approval, we may be
unable to obtain a waiver of the CSRC approval requirements if and
when procedures are established to obtain such a waiver. Any
uncertainties and/or negative publicity regarding this CSRC
approval requirement could have a material adverse effect on the
trading price of our shares.
PRC regulations relating to the establishment of offshore
special purpose companies by PRC residents may subject our PRC
resident shareholders to penalties and limit our ability to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries’
ability to distribute profits to us, or otherwise adversely affect
us.
On October 21, 2005, the SAFE issued the Notice on Issues Relating
to the Administration of Foreign Exchange in Fund-raising and
Reverse Investment Activities of Domestic Residents Conducted via
Offshore Special Purpose Companies, or Notice 75, which became
effective as of November 1, 2005. According to Notice 75, prior
registration with the local SAFE branch is required for PRC
residents to establish or to control an offshore company for the
purposes of financing such offshore company with assets or equity
interests in an onshore enterprise located in the PRC, or an
offshore special purpose company. An amendment to registration or
filing with the local SAFE branch by such PRC resident is also
required for the injection of equity interests or assets of an
onshore enterprise in the offshore special purpose company or
overseas funds raised by such offshore company, or any other
material change involving a change in the capital of the offshore
special purpose company. Moreover, Notice 75 applies retroactively.
As a result, PRC residents who have established or acquired control
of offshore special purpose companies that have made onshore
investments in the PRC in the past are required to have completed
the relevant registration procedures with the local SAFE branch by
March 31, 2006. To further clarify the implementation of Notice 75,
the SAFE issued Circular 106 on May 29, 2007. Under Circular 106,
PRC subsidiaries of an offshore special purpose company are
required to coordinate and supervise the filing of SAFE
registrations by the offshore holding company’s shareholders or
beneficial owners who are PRC residents in a timely manner.
Some of our current shareholders and/or beneficial owners may fall
within the ambit of the SAFE notice and be required to register
with the local SAFE branch as required under the SAFE notice. If so
required, and if such shareholders and/or beneficial owners fail to
timely register their SAFE registrations pursuant to the SAFE
notice, or if future shareholders and/or beneficial owners of our
company who are PRC residents fail to comply with the registration
procedures set forth in the SAFE notice, this may subject such
shareholders, beneficial owners and/or our PRC subsidiaries to
fines and legal sanctions and may also limit our ability to
contribute additional capital into our PRC subsidiaries, limit our
PRC subsidiaries’ ability to distribute dividends to our company,
or otherwise adversely affect our business.
Risks Associated with our Ordinary Shares
The market price of our Ordinary Shares has historically been
highly volatile, and you may not be able to resell our ordinary
shares at or above your initial purchase price.
There is a limited public market for our ordinary shares. We cannot
assure you that there will be an active trading market for our
ordinary shares. You may not be able to sell your ordinary shares
quickly or at the market price if trading in our ordinary shares is
not active.
The trading price of our ordinary shares may be volatile. The price
of our ordinary shares could be subject to wide fluctuations in
response to a variety of factors, including the following:
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Introduction
of new products, services or technologies offered by us or our
competitors; |
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Failure
to meet or exceed revenue and financial projections we provide to
the public; |
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Actual
or anticipated variations in quarterly operating
results; |
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4. |
Failure
to meet or exceed the estimates and projections of the investment
community; |
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5. |
General
market conditions and overall fluctuations in United States equity
markets; |
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6. |
Announcements
of significant acquisitions, strategic partnerships, joint ventures
or capital commitments by us or our competitors; |
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7. |
Disputes
or other developments relating to proprietary rights, including
patents, litigation matters and our ability to obtain patent
protection for our technologies; |
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8. |
Additions
or departures of key management personnel; |
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9. |
Issuances
of debt or equity securities; |
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Significant
lawsuits, including patent or shareholder litigation; |
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11. |
Changes
in the market valuations of similar companies; |
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12. |
Sales
of additional ordinary shares or other securities by us or our
shareholders in the future; |
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13. |
Trading
volume of our ordinary shares; |
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14. |
Fluctuations
in the exchange rate between the U.S. dollar and
Renminbi; |
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Negative
market perception and media coverage of our company or other
companies in the same or similar industry with us; and |
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Other
events or factors, many of which are beyond our
control. |
In addition, the stock market in general, and the NASDAQ Capital
Market and software products and services companies in particular,
have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of these companies. Broad market and industry factors
may negatively affect the market price of our ordinary shares,
regardless of our actual operating performance.
Our ordinary shares may be subject to the SEC’s penny stock
rules which may make it difficult for broker-dealers to complete
customer transactions and trading activity in our
securities.
Our ordinary shares may be deemed to be “penny stock” as that term
is defined under the Securities Exchange Act of 1934, as
amended. Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered
on certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with
respect to transactions in such securities is provided by the
exchange or system). Penny stock rules impose additional
sales practice requirements on broker-dealers who sell to persons
other than established customers and “accredited investors.” The
term “accredited investor” refers generally to institutions with
assets in excess of $5,000,000 or individuals with a net worth in
excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouse in each of the prior two
years.
The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules,
to deliver a standardized risk disclosure document in a form
prepared by the SEC, which provides information about penny stocks
and the nature and level of risks in the penny stock
market. Moreover, broker-dealers are required to
determine whether an investment in a penny stock is a suitable
investment for a prospective investor. A broker-dealer must receive
a written agreement to the transaction from the investor setting
forth the identity and quantity of the penny stock to be
purchased. These requirements may make it more difficult
for broker-dealers to effectuate customer transactions and trading
activity in our securities. As a result, the market price of our
ordinary shares may be depressed, and you may find it more
difficult to sell our ordinary shares.
Sales of a substantial number of ordinary shares in the
public market by our existing shareholders could cause the price of
our ordinary shares to fall.
Sales of a substantial number of our ordinary shares in the public
market or the perception that these sales might occur, could
depress the market price of our ordinary shares and could impair
our ability to raise capital through the sale of additional equity
securities. We are unable to predict the effect that sales may have
on the prevailing market price of our ordinary shares.
Subject to certain limitations all of our total outstanding shares
are now eligible for sale. Sales of ordinary shares by these
shareholders could have a material adverse effect on the trading
price of our ordinary shares.
Future sales and issuances of our ordinary shares, or rights
to purchase our ordinary shares, including pursuant to our 2010
Omnibus Incentive Plan, could result in additional dilution of the
percentage ownership of our shareholders and could cause the price
of our ordinary shares to fall.
We expect that significant additional capital will be needed in the
future to continue our planned operations. To the extent we raise
additional capital by issuing equity securities, our shareholders
may experience substantial dilution. We may sell ordinary shares,
convertible securities or other equity securities in one or more
transactions at prices and in a manner we determine from time to
time. If we sell ordinary shares, convertible securities or other
equity securities in more than one transaction, investors may be
materially diluted by subsequent sales. Such sales may also result
in material dilution to our existing shareholders, and new
investors could gain rights superior to our existing
shareholders.
We do not intend to pay dividends on our ordinary shares, so
any returns will be limited to the value of our ordinary
shares.
We have never declared or paid any cash dividend on our ordinary
shares. We currently anticipate that we will retain future earnings
for the development, operation and expansion of our business and do
not anticipate declaring or paying any cash dividends for the
foreseeable future. Any return shareholders will therefore be
limited to the value of their ordinary shares.
As the rights of shareholders under British Virgin Islands
law differ from those under U.S. law, you may have fewer
protections as a shareholder.
Our corporate affairs will be governed by our memorandum of
association and articles of association, the BVI Business Companies
Act, 2004, or the BVI Act, of the British Virgin Islands and the
common law of the British Virgin Islands. The rights of
shareholders to take legal action against our directors, actions by
minority shareholders and the fiduciary responsibilities of our
directors under British Virgin Islands law are to a large extent
governed by the BVI Act and the common law of the British Virgin
Islands. The common law of the British Virgin Islands is derived in
part from comparatively limited judicial precedent in the British
Virgin Islands as well as from English common law, which has
persuasive, but not binding, authority on a court in the British
Virgin Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under British Virgin Islands law
are not as clearly established as they would be under statutes or
judicial precedents in some jurisdictions in the United States. In
particular, the British Virgin Islands has a less developed body of
securities laws as compared to the United States, and some states
(such as Delaware) have more fully developed and judicially
interpreted bodies of corporate law.
As a result of all of the above, holders of our ordinary shares may
have more difficulty in protecting their interests through actions
against our management, directors or major shareholders than they
would as shareholders of a U.S. company.
British Virgin Islands companies may not be able to initiate
shareholder derivative actions, thereby depriving shareholders of
the ability to protect their interests.
British Virgin Islands companies may not have standing to initiate
a shareholder derivative action in a federal court of the United
States. The circumstances in which any such action may be brought,
and the procedures and defenses that may be available in respect to
any such action, may result in the rights of shareholders of a
British Virgin Islands company being more limited than those of
shareholders of a company organized in the United States.
Accordingly, shareholders may have fewer alternatives available to
them if they believe that corporate wrongdoing has occurred. The
British Virgin Islands courts are also unlikely to recognize or
enforce against us judgments of courts in the United States based
on certain liability provisions of U.S. securities law; and to
impose liabilities against us, in original actions brought in the
British Virgin Islands, based on certain liability provisions of
U.S. securities laws that are penal in nature. There is no
statutory recognition in the British Virgin Islands of judgments
obtained in the United States, although the courts of the British
Virgin Islands will generally recognize and enforce the non-penal
judgment of a foreign court of competent jurisdiction without
retrial on the merits.
The laws of the British Virgin Islands provide little
protection for minority shareholders, so minority shareholders will
have little or no recourse if the shareholders are dissatisfied
with the conduct of our affairs.
Under the law of the British Virgin Islands, there is little
statutory law for the protection of minority shareholders other
than the provisions of the BVI Act dealing with shareholder
remedies. The principal protection under statutory law is that
shareholders may bring an action to enforce the constituent
documents of the Company, our memorandum of association and
articles of association. Shareholders are entitled to have the
affairs of the Company conducted in accordance with the general law
and the memorandum of association and articles of association.
There are common law rights for the protection of shareholders that
may be invoked, largely dependent on English company law, since the
common law of the British Virgin Islands is limited. Under the
general rule pursuant to English company law known as the rule in
Foss v. Harbottle, a court will generally refuse to interfere with
the management of a company at the insistence of a minority of its
shareholders who express dissatisfaction with the conduct of the
company’s affairs by the majority or the board of directors.
However, every shareholder is entitled to have the affairs of the
company conducted properly according to law and the company’s
constituent documents. As such, if those who control the company
have persistently disregarded the requirements of company law or
the provisions of the company’s memorandum of association and
articles of association, then the courts will grant relief.
Generally, the areas in which the courts will intervene are the
following: (1) an act complained of which is outside the scope of
the authorized business or is illegal or not capable of
ratification by the majority; (2) acts that constitute fraud on the
minority where the wrongdoers control the company; (3) acts that
infringe on the personal rights of the shareholders, such as the
right to vote; and (4) where the company has not complied with
provisions requiring approval of a majority of shareholders, which
are more limited than the rights afforded minority shareholders
under the laws of many states in the United States.
Anti-takeover provisions in our memorandum of association and
articles of association and our right to issue preference shares
could make a third-party acquisition of us difficult.
Some provisions of our memorandum of association and articles of
association may discourage, delay or prevent a change in control of
our company or management that shareholders may consider favorable,
including provisions that authorize our board of directors to issue
preference shares in one or more series and to designate the price,
rights, preferences, privileges and restrictions of such preference
shares.
You may not be able to participate in rights offerings and
may experience dilution of your holdings as a result.
We may from time to time distribute rights to our shareholders,
including rights to acquire our securities. However, we may not
offer those rights to ordinary shareholders unless both the rights
and the underlying securities to be distributed to ordinary
shareholders are registered under the Securities Act, or the
distribution of them to ordinary shareholders is exempted from
registration under the Securities Act with respect to all ordinary
shareholders. We are under no obligation to file a registration
statement with respect to any such rights or underlying securities
or to endeavor to cause such a registration statement to be
declared effective. In addition, we may not be able to rely on an
exemption from registration under the Securities Act to distribute
such rights and securities. Accordingly, our ordinary shareholders
may be unable to participate in our rights offerings and may
experience dilution in their holdings as a result.
We may be a passive foreign investment company, or PFIC,
which could lead to additional taxes for U.S. holders of our
ordinary shares.
We do not expect to be, for U.S. federal income tax purposes, a
passive foreign investment company, or a PFIC, which is a foreign
company for which, in any given taxable year, either at least 75%
of its gross income is passive income, or investment income in
general, or at least 50% of its assets produce or are held to
produce passive income, for the current taxable year, and we expect
to operate in such a manner so as not to become a PFIC for any
future taxable year. However, because the determination of PFIC
status for any taxable year cannot be made until after the close of
such year and requires extensive factual investigation, including
ascertaining the fair market value of our assets on a quarterly
basis and determining whether each item of gross income that we
earn is passive income, we cannot assure you that we will not
become a PFIC for the current taxable year or any future taxable
year. If we are or become a PFIC, a U.S. holder’s ordinary shares
could be subject to additional U.S. federal income taxes on gain
recognized with respect to the ordinary shares and on certain
distributions, plus an interest charge on certain taxes treated as
having been deferred under the PFIC rules. Non-corporate U.S.
holders will not be eligible for reduced rates of taxation on any
dividends received from us if we are a PFIC in the taxable year in
which such dividends are paid or in the preceding taxable year.
If the trading price of our ordinary shares fails to comply
with the continued listing requirements of the NASDAQ Capital
Market, we would face possible delisting, which would result in a
limited public market for our ordinary shares and make obtaining
future debt or equity financing more difficult for
us.
Companies listed on NASDAQ are subject to delisting for, among
other things, failure to maintain a minimum closing bid price of
$1.00 per share for 30 consecutive business days. On April 13,
2020, we received a letter from NASDAQ indicating that for the last
30 consecutive business days, the closing bid price of our ordinary
shares fell below the minimum $1.00 per share requirement pursuant
to NASDAQ Listing Rule 5550(a)(2) for continued listing on the
NASDAQ Capital Market. Under Nasdaq Listing Rule 5810(c)(3)(A), the
Company has been granted a 180 calendar day grace period, or until
October 12, 2020, to regain compliance with the minimum bid price
requirement. The continued listing standard will be met if the
Company evidences a closing bid price of at least $1.00 per share
for a minimum of 10 consecutive business days during the 180
calendar day grace period. In order for Nasdaq to consider granting
the Company additional time beyond October 12, 2020, the Company
would be required, among other things, to meet the continued
listing requirement for market value of publicly held shares as
well as all other standards for initial listing on Nasdaq, with the
exception of the minimum bid price requirement. In the event the
Company does not regain compliance with the $1.00 bid price
requirement by October 12, 2020, eligibility for Nasdaq’s
consideration of a second 180 day grace period would be determined
on the Company’s compliance with the above referenced criteria on
October 12, 2020. There can be no assurance that the Company will
be able to regain compliance or that Nasdaq will grant the Company
a further extension of time to regain compliance, if necessary. We
cannot be sure that the price of our ordinary shares will comply
with this requirement for continued listing on the NASDAQ Capital
Market in the future. If we were not able to do so, our ordinary
shares would be subject to delisting and would likely trade on the
over-the-counter market. If our ordinary shares were to trade on
the over-the-counter market, selling our ordinary shares could be
more difficult because smaller quantities of shares would likely be
bought and sold, transactions could be delayed, and security
analysts’ coverage of us may be reduced. In addition,
broker-dealers have certain regulatory burdens imposed upon them,
which may discourage broker-dealers from effecting transactions in
our ordinary shares, further limiting the liquidity of our ordinary
shares. As a result, the market price of our ordinary shares may be
depressed, and you may find it more difficult to sell our ordinary
shares. Such delisting from the NASDAQ Capital Market and continued
or further declines in our share price could also greatly impair
our ability to raise additional necessary capital through equity or
debt financing.
ITEM 4. INFORMATION
ON THE COMPANY.
A.
HISTORY AND DEVELOPMENT OF THE COMPANY.
Overview
We are a holding company and conduct our operations through our
wholly-owned subsidiary named LK Technology Ltd., a British Virgin
Islands limited liability company (“LK Technology”), and its
wholly-owned subsidiaries, MMB Limited and its respective
subsidiaries, which possess two core brands “Luokuang” and
“SuperEngine”. “Luokuang” is a mobile application to provide
Business to Customer (B2C) location-based services and
“SuperEngine” provides Business to Business (B2B) and Business to
Government (B2G) services in connection with spatial-temporal big
data processing. In May 2010, we consummated an initial public
offering of our American Depository Shares, or ADSs, for gross
proceeds of $16 million, and our ADSs were listed on the NASDAQ
Capital Market under the ticker symbol “KONE”. On August 17, 2018,
we completed the transactions contemplated by the Asset Exchange
Agreement (“AEA”) with C Media Limited (“C Media”) entered into on
January 25, 2018. On August 20, 2018, we changed our name to
Luokung Technology Corp., our American Depository Shares (“ADSs”)
were voluntarily delisted from the NASDAQ Capital Market on
September 19, 2018 and on January 3, 2019 our ordinary shares
started trading on NASDAQ under the ticker symbol “LKCO”.
On August 17, 2018, we consummated an asset exchange transaction,
pursuant to which we exchanged all issued and outstanding capital
stock in Topsky Info-Tech Holdings Pte Ltd., the parent of Softech,
for the issued and outstanding capital stock of LK Technology (the
“Asset Exchange”). In connection with the Asset Exchange, we
changed our name on August 20, 2018, and on September 20, 2018,
issued to the shareholders of C Media Limited, the former parent of
LK Technology, (i) 185,412,599 of our ordinary shares, par value
$0.01 per share and (ii) 1,000,000 of our preferred shares. Upon
the consummation of the Asset Exchange, we ceased our previous
business operations and became a company focused on the provision
of location-based service and mobile application products for long
distance rail travelers in China.
On August 25, 2018, LK Technology entered into a Stock Purchase
Agreement (the “Agreement”) with the shareholders (“Shareholders”)
of Superengine Holding Limited, a limited liability company
incorporated under the laws of the British Virgin Islands (the
“Superengine”), pursuant to which LK Technology acquired all of the
issued and outstanding shares of Superengine for an aggregate
purchase price of US$60 million (the “Purchase Price”), which was
paid by the issuance of our Ordinary Shares in an amount equal to
the quotient of (x) the Purchase Price divided by (y) the average
of the closing prices of the Ordinary Shares on the NASDAQ Capital
Market over the 12 months period preceding July 31, 2018. We are a
party to the Agreement in connection with the issuance of the
Ordinary Shares and certain other limited purposes.
On August 28, 2019, the Company entered into a Share Purchase
Agreement, pursuant to which the Company will acquire 100% of the
equity interests of Saleya from Saleya’s shareholders for an
aggregate purchase price of RMB 836 million (approximately
equivalent to $120 million), which includes approximately RMB 709
million (approximately equivalent to $101 million) in cash and the
remaining RMB 127 million (approximately equivalent to $18 million)
will be paid by issuance of the Company’s common stock at the
conversion rate of $7 per share. In connection with its acquisition
of Saleya, as of December 31, 2019 and on January 21, 2020, the
Company made a partial cash payment of $14,334,451 and $18,539,343,
respectively, and on February 5, 2020 it issued 2,708,498 common
shares to certain shareholders of Saleya in accordance with Share
Purchase Agreement. On February 24, 2020, the Company reached an
agreement with two of the Saleya’s shareholders to issue 1,500,310
of Series B preferred shares instead of a cash payment of
$6,182,000 (RMB43,128,000) as a change of consideration for the
acquisition of Saleya,
On November 13, 2019, the Company entered into a Share Subscription
Agreement with Geely Technology Group Co., Ltd. (“Geely
Technology”) to issue 21,794,872 series A preferred shares at a
purchase price of $1.95 per share for an aggregate purchase price
of $42,500,000. Per the terms of the agreement and in accordance
with ASC Topic 480-10, the Company recognized $32,910,257 as loan.
The Company received $21,743,857 as of December 31, 2019 and the
remaining amount was received in January 2020. Geely Technology may
request the repayment after November of 2020, under such
circumstance, the Company shall pay it back in January of 2021.
On November 13, 2019, the Company entered into a Securities
Purchase Agreement with Acuitas Capital, LLC. and a Warrant to
purchase the Company’s ordinary shares pursuant to which the
Purchaser subscribed to purchase up to $100,000,000 of units with
up to a $10,000,000 subscription at each closing, with each Unit
consisting of one ordinary share and one warrant, where each whole
warrant entitles the holder to purchase one ordinary share. The
Securities Purchase Agreement contemplates periodic closings of
$10,000,000. The first closing has not yet occurred.
On June 17, 2020, the Company entered into preferred stock
subscription agreement with Daci Haojin Foundation Limited to issue
15,000,000 preferred shares for $45,000,000. Pursuant to the
preferred stock subscription agreement the first closing will not
occur until July 2020 and such closing will be for $13,500,000.
Subsequent closings will occur on August 31 and September 30, 2020
for $13,500,000 and $18,000,000, respectively.
Corporate Information
Our principal executive offices are located at B9-8, Block B, SOHO
Phase II, No. 9, Guanghua Road, Chaoyang District, Beijing,
People’s Republic of China 100020. Our website is
www.luokung.com. We routinely post important information on our
website. The information contained on our website is not a part of
this annual report.
Our agent for service of process in the United States is Worldwide
Stock Transfer, LLC, the current transfer agent of the Company,
with a mailing address of One University Plaza, Suite 505,
Hackensack, New Jersey 07601.
B. BUSINESS
OVERVIEW.
We are a China-based provider of location-based services and mobile
application products for long distance travelers in China. Our
primary mobile application, the Luokuang platform, consists of the
Luokuang mobile applications, a series of supporting software at
the server end, and rail-Wi-Fi hardware and equipment on the trains
that we serve. The Luokuang platform incorporates technologies
covered by 22 patents and about 34 software copyrights, and serves
as a content and service distribution platform that is tailored for
particular travel stages featuring geographic location and social
interactions. The content and services distributed by Luokuang
contain information, entertainment, travel, e-commerce, online to
offline (“O2O”), advertisement and other marketing
features.
Luokuang mainly provides personalized and targeted services to long
distance travelers in two locations: on the train and at the
destination. Based on the travel environment, the core elements of
our users’ needs include staving off boredom on trains and
discovering and exploring new locations upon arrival. The main
services contain entertainment services (videos and audio, digital
readings, games specific and tailored to the travel stage) and
social services (satisfying the demand for value discovery of
unfamiliar destinations through social interaction among strangers
based on locations).
We use the most valuable Wi-Fi location—the train Wi-Fi setting—as
the entrance of our Luokuang platform and mobile applications.
Passengers typically ride trains for long-distance and
inter-provincial travel purposes. The long periods of monotonous
journeys and the cost concerns for roaming traffic fees enable the
combination of entertainment content service needs and Wi-Fi access
needs. Our rail-Wi-Fi becomes a valuable and sophisticated Wi-Fi
service in this setting—not just Wi-Fi connection service, but a
provider of sophisticated services through a Wi-Fi connection. We
do not define ourselves as a train Wi-Fi communication service
operator but as a long-distance travel mobile service and
location-based service provider. The rail Wi-Fi is our access point
to a significant pool of users and the entrance to acquiring
additional users.
The recommended services focus on providing targeted push services
to users while travelling in unfamiliar cities. Local information
and guidance service are precisely pushed according to individual
user’s interest and taste, including restaurants, entertainment,
living styles, local snacks, local products, scenic spots, cultural
history and stories. The guidance service is User Generated Content
which is shared and distributed by individual users including
travelers, local residents and local businesses.
In June 2018, China Railway Gecent Technology Co., Ltd. (or
“Gecent”) (established jointly by China Railway Investment Co.,
Ltd., Geely Holding Group and Tencent Holdings Ltd.) obtained the
exclusive right to build and operate on-train Wi-Fi for all the
High-speed trains in China. It provides a full-travelling service
including on-train Wi-Fi, entertainments, news, online meals order,
online specialty retailer and connecting travel. As the pathfinder
in on-train Wi-Fi market in China, we have accumulated great
experiences and resources in construction and operation on train
Wi-Fi on express trains in China, which enable us to cooperate with
Gecent to provide location-based services through the provision of
our map SDKs (“Software Development Kit”) and APIs
(“Application-programming Interface”), including services at train
stations covering navigation and OTO services, and to provide movie
content SDK, movie copyrights and operating services to the users
of Gecent’s mobile application. Through the cooperation with
Gecent, we are able to expand our services to more valuable
high-speed train passengers, while the high-speed train Wi-Fi in
China will cover about 3 billion passenger trips till the year of
2020.
In the first half of 2019, we gradually terminated the Wi-Fi
provision for express trains because the increase in numbers of
High-speed trains led to the shrinkage of the passenger trips on
express trains. At the beginning of 2019, we established a Luokung
Location-based services Data Marketing Platform (“LLDMP”), Luokung
Location-based services (“LBS”) Data Marketing Platform, that
combines our LBS strength with existing advertising tools. Our LBS
capability including indoor floor maps, location information, and
point of interest for more than twenty thousand commercial
buildings covers high speed train stations, shopping malls,
airports and so on.
Through the acquisition of Superengine, we obtained patented
technologies in spatial-temporal big data indexing, storage,
transmission and visualization that can support the full vector
maps without tile, which can be effectively applied to
high-definition (HD) maps, location-based services, smart cities,
intelligent transportation systems, mapping and surveying, remote
sensing and monitoring. We possess fifteen patents and nine patent
application rights in U.S., Europe, Japan and China. We believe our
graphics processing system is a thousand times more efficient than
competing technologies in querying, retrieving, transmitting and
rendering graphical information, and allowing Terabyte (TB) sized
data to be released in seconds, which enable our customers to
obtain real-time operational intelligence by harnessing the value
of their database.
Key Technologies
We believe our investments in our products and key technologies
provide significant competitive differentiation and our
technologies are disruptive innovations in computer graphics
systems, spatial-temporal data analysis and processing. Our
proprietary algorithms can eliminate certain time-consuming steps
in data preprocessing, and maintain same level of high system
performance with the amount of data increasing by orders of
magnitude. It enables a new wave of technological upgrades in
related industries to do more with less time and less power
consumption.
Spatial temporal indexing technology.
This technology provides an effective indexing technique, covering
both spatial dimension and temporal dimension. It separates the
data and indexes, and solves the technological difficulties in
spatial temporal big data processing, including storage, updating,
management, indexing, reading, spatial relationship computation and
analysis. This technology allows the users to efficiently and
accurately obtain the data they need, and minimizes the
transmission of unnecessary data, which achieves application
efficiency not being affected even with explosive growth of data
volume.
Adaptive reduction and compression technology
This technology allows full vector spatial data to be processed
directly through the adaptive reduction and compression to meet the
requirements of transmission performance for internet application.
Our competing technologies require preprocessing full vector data
into tiles in a rasterized format or in a vector format.
|
1. |
Spatial
relationship could still be strictly maintained and correctly
displayed after the reduction and compression |
|
2. |
The
adaptive reduction and compression are lossless so that the display
effect remains the same |
|
3. |
The
reduction and compression allow rapid display of map in any network
speed, adaptive to the network speed with dynamic adjustment of the
display effect. |
Progressive transmission technology
Progressive transmission technology is one of the key technologies
to realize fast response in spatial data application. It supports
lossless adaptive progressive transmission of spatial data, and the
display and operation of map can be conducted with any network
speed, for instance, by scaling, rotating, or translating. The
display of map could be adjusted automatically in accordance with
the network speed and users’ operation.
Progressive transmission technology makes system response time
independent from the growth of spatial data, and also solves the
performance problem in dealing with spatial temporal big data. The
data integrity between users’ end and server is not compromised as
the spatial relationship remains unchanged.
Full vector non-tiled technology
On the strength of our technologies, we support real-time release
and real-time update of spatial vector data without the
preprocessing step to rasterize the vector data, and we also
support personalized display and analysis for the application of
spatial data in real-time dynamic environment. Our indexing
technology enables clients to establish a fast transmission channel
between user and server, for both the large scope analysis and
accurately pinning down details. Because the client can access the
complete vector data, it solves the problem that only partial
analysis could be performed on tiles. This will greatly expand the
data computing capability of the client. In most scenarios,
indexing can fulfill most of analysis requirements and application
functions.
Our Services
Luokuang mobile application. We provide display-based online
advertising services to customers by integrating text description,
image and video, and displaying the advertisements in prominent
positions on Luokuang Application.
Luokung SDKs and APIs. Our location based products, Luokung
SDKs and APIs, provide spatial-temporal big data analysis and
customized map to software and mobile application developers, and
allow location-based contents and information to be integrated and
presented on the map, which enables software and mobile application
developers to create more diversified business models and service
functions. Our proprietary full vector map presents refreshingly
new and customizable location-based services to our business
partners.
Spatial temporal indexing cloud. The spatial temporal
indexing cloud service is a data-level virtualization technology we
offer to our clients with high availability, extensibility and
granular permission control. Our indexing cloud data centers offer
highly integrated, dependable, efficient and secure services to
meet the needs of varied spatial temporal requirements covering all
types of clients, while shielding the details of data from
disclosure to honor requested data protection.
Information SuperEngine. Our information SuperEngine
includes the server engine and web graphics image engine. The
server engine enables our clients to improve their ability and
functions to store, manage and index the spatial temporal big data
on the server side, and by establishing spatial temporal index on
the server, our clients can rapidly and more efficiently obtain
their requested data. Web graphics image engine, supports the rapid
transmission of graphics image, and rapid display and edge
computing ability for multi-terminal and cross-platform.
Spatial temporal cloud platform. Spatial temporal cloud
platform supports deployment on public and private clouds to
provide services for both industry users and public users. It
provides comprehensive online cloud services including data
storage, data resource and platform support, and it supports users
to aggregate multi-source spatial data, map services, and Internet
of things streaming data. By leveraging variety of industry
templates, simple and easy-to-use tools for data editing, analysis
and searching, users will be able to generate application systems
for specific application scenarios. Various application operations
can be performed through the mobile devices and Web browsers.
Our Strategy
We put more effort on continually improving the quality of our
products and services, and the user’s experience of our products,
as we believe satisfied users and customers are more likely to
recommend our products and services to others. Through these
efforts and with the increased use of internet in China, we will
build our brand with modest marketing expenditures. We have
implemented a number of marketing initiatives to promote our brand
awareness among potential users, customers. In addition to our
brand positioning in the market, we have also initiated a series of
marketing activities to promote our products and technologies among
existing and potential users and customers.
We intend to invest heavily in product development to deliver
additional features and performance enhancements, deployment models
and solutions that can address new end markets. Our investments may
involve hiring and associated development, acquisitions and
licensing of third-party technology.
We will continue to increase investments in our sales and marketing
organizations to expand our current customer base. Our investments
will be spread across geographies, customer tiers and industries.
We will continue to invest in and foster the growth of our channel
relationships in China.
We will continue to drive customer satisfaction and renewals by
offering community, standard, enterprise and global support to
ensure our customers’ success with our offerings.
We intend to continue our investments in SDKs and APIs that help
software developers leverage our platform. Our SDKs enable
developers to build solutions that deeply integrate the analytics
functionality of our offerings across the enterprise. Through our
investments in SDKs and APIs, we intend to promote and extend the
capabilities of our offerings to customers who wish to build
sophisticated applications and interfaces that leverage our
software and services.
Intellectual Property
We have registered the following software copyrights, patents and
trademarks for our business operations. We believe this
intellectual property forms an integral part of our competitive
strength.
Patents:
We have been granted some inventions by the State Intellectual
Property Office of PRC. We possess a complete set of technology
system including network, client-end and service and operation
platform. We have patent protections for Wi-Fi equipment on trains
and for spatial-temporal big data processing technology. We have
received the following patents:
No. |
|
Name
of patent |
|
Type |
|
|
Registration
Number |
|
Date
of Issuance |
|
1. |
|
Wireless
communication multimedia chip business consumer information
acquisition terminal device |
|
Invention |
|
|
ZL
2010 2 0528767.9 |
|
Sep
21, 2011 |
|
2. |
|
A
user behavior processing method and device for intelligent
terminal |
|
Invention |
|
|
ZL
2013 1 0301728.3 |
|
May
27, 2015 |
|
3. |
|
A
global positioning system terminal device |
|
Invention |
|
|
ZL
2010 2 0253452.8 |
|
Nov
7, 2011 |
|
4. |
|
A
wireless multimedia server |
|
Invention |
|
|
ZL
2013 2 0220183.9 |
|
Nov
13, 2013 |
|
5. |
|
Ordering
system of passengers on train |
|
Invention |
|
|
ZL
2015 2 0095381.6 |
|
Aug
5, 2015 |
|
6. |
|
A
wireless multimedia server |
|
Invention |
|
|
ZL
2015 2 0201382.4 |
|
Oct
28, 2015 |
|
7. |
|
An
antenna structure |
|
Invention |
|
|
ZL
2016 2 0424352.4 |
|
Mar
1, 2017 |
|
8. |
|
Spatial
data progressive transmission method and device |
|
Invention |
|
|
201010617383.9 |
|
|
Jun
15, 2016 |
|
9. |
|
Methods
and devices for conflict detection and avoidance of spatial entity
element labeling |
|
Invention |
|
|
201010617385.8 |
|
|
Mar
26, 2014 |
|
10. |
|
Spatial
data processing method and device |
|
Invention |
|
|
201010617399.X |
|
|
Jun
26, 2013 |
|
11. |
|
Method
and device of spatial data simplification |
|
Invention |
|
|
201010617400.9 |
|
|
Mar
13, 2013 |
|
12. |
|
Method
and device for judging the occlusion type of space
entity |
|
Invention |
|
|
201010617403.2 |
|
|
Sep
25, 2013 |
|
13. |
|
A
method and device for distributed mapping of 3d model
data |
|
Invention |
|
|
201110274924.7 |
|
|
Mar
26, 2014 |
|
14. |
|
Data
simplification of 3d model, gradual transmission method and
device |
|
Invention |
|
|
201110275336.5 |
|
|
Mar
25, 2015 |
|
15. |
|
Spatial
data transmission method and device |
|
Invention |
|
|
201110306393.5 |
|
|
Dec
13, 2014 |
|
16. |
|
Methods
and devices for spatial data processing, simplification and
progressive transmission |
|
Invention |
|
|
201210104250.0 |
|
|
Jun
10, 2015 |
|
17. |
|
Spatial
data progressive transmission method and device |
|
Invention |
|
|
201310367021.2 |
|
|
Jun
23, 2017 |
|
18. |
|
Simplification
method and device of spatial data |
|
Invention |
|
|
201310367128.7 |
|
|
Sep
22, 2017 |
|
19. |
|
The
method and device to accelerate transmission and display of graphic
data across platforms |
|
Invention |
|
|
201210116149.7 |
|
|
Aug
10, 2016 |
|
20. |
|
Methods
and devices related to spatial data compression, decompression and
progressive transmission |
|
Invention |
|
|
201310136682.4 |
|
|
Nov
10, 2017 |
|
We also have two patents outside of China.
No. |
|
Name
of patent |
|
Country |
|
|
National
Registration Number |
|
Date
of Issuance |
|
1. |
|
Spatial
data processing method and device |
|
Japan |
|
|
2012-547439 |
|
|
Jun
20, 2014 |
|
2. |
|
Methods
and devices related to spatial data compression, decompression and
progressive transmission |
|
U.S.A. |
|
|
14/394,610 |
|
|
Sep
5, 2017 |
|
Software Copyrights:
We have received the following software copyrights from the
National Copyright Administration (“NCA”) of PRC:
No. |
|
Name
of Copyright |
|
Achievement
approach |
|
Registration
number |
|
Registration
date
|
|
Duration |
1. |
|
WAP
PUSH Business operation platform system |
|
Independent
research and development |
|
2007SRBJ1464 |
|
Jul
23, 2007 |
|
50
years |
2. |
|
TD-SCDMA
Streaming media business management platform software
V1.0 |
|
Independent
research and development |
|
2009SRBJ0412 |
|
Jan
22, 2009 |
|
50
years |
3. |
|
Content
management platform system software V1.0 |
|
Independent
research and development |
|
2009SRBJ1374 |
|
Apr
1, 2009 |
|
50
years |
4. |
|
Mobile
multimedia broadcast electronic service guide system software
V1.0 |
|
Independent
research and development |
|
2009SRBJ1365 |
|
Apr
1, 2009 |
|
50
years |
5. |
|
Mobile
video business operation platform system V1.0 |
|
Independent
research and development |
|
2007SRBJ1463 |
|
Jul
23, 2007 |
|
50
years |
6. |
|
Mobile
multimedia broadcast emergency broadcast platform software
V1.0 |
|
Independent
research and development |
|
2010SRBJ0720 |
|
Mar
5, 2010 |
|
50
years |
7. |
|
Mobile
multimedia broadcast audio rich media interactive platform
softwareV1.0 |
|
Independent
research and development |
|
2010SRBJ0719 |
|
Mar
5, 2010 |
|
50
years |
8. |
|
Printer
typesetting and printing software V1.0 |
|
Independent
research and development |
|
2011SRBJ4190 |
|
Sep
28, 2011 |
|
50
years |
9. |
|
Electronic
newspaper business support platform software V1.0 |
|
Independent
research and development |
|
2011SRBJ4186 |
|
Sep
28, 2011 |
|
50
years |
10. |
|
Public
information business platform software V1.0 |
|
Independent
research and development |
|
2011SRBJ3810 |
|
Sep
27, 2011 |
|
50
years |
11. |
|
User
interface scripting software V1.0 |
|
Independent
research and development |
|
2011SRBJ3809 |
|
Sep
27, 2011 |
|
50
years |
12. |
|
Integrated
business management platform software V1.0 |
|
Independent
research and development |
|
2012SR003002 |
|
Jan
16, 2012 |
|
50
years |
13. |
|
Interactive
business development platform software |
|
Independent
research and development |
|
2011SRBJ4593 |
|
Nov
29, 2011 |
|
50
years |
14. |
|
Instant
messaging and messaging system software |
|
Independent
research and development |
|
2014SR122231 |
|
Aug
5, 2014 |
|
50
years |
15. |
|
General
statistical platform software for client products |
|
Independent
research and development |
|
2014SR216662 |
|
Dec
30, 2014 |
|
50
years |
16. |
|
CMMB
Data broadcast management platform software |
|
Independent
research and development |
|
2009SRBJ0391 |
|
Jan
22, 2009 |
|
50
years |
17. |
|
Integrated
passenger train service system |
|
Independent
research and development |
|
2012SR083665 |
|
Sep
5, 2012 |
|
50
years |
No. |
|
Name
of Copyright |
|
Achievement
approach |
|
Registration
number |
|
Registration
date |
|
Duration |
18. |
|
JHBY
Train inspection management system |
|
Independent
research and development |
|
2013SR015105 |
|
Feb
21, 2013 |
|
50
years |
19. |
|
Integrated
information engine platform software V1.0 |
|
Independent
research and development |
|
2014SR040347 |
|
Nov
30, 2001 |
|
50
years |
20. |
|
Super
information engine development platform software V5.0 |
|
Independent
research and development |
|
2014SR036792 |
|
Mar
5, 2003 |
|
50
years |
21. |
|
Core
map super network information engine platform software
V1.0 |
|
Independent
research and development |
|
2014SR036772 |
|
Sep
15, 2007 |
|
50
years |
22. |
|
Integrated
management of the grid gis software V1.0 |
|
Independent
research and development |
|
2014SR036808 |
|
Jun
20, 2008 |
|
50
years |
23. |
|
Core
map rural power grid equipment GPS patrol system software
V1.0 |
|
Independent
research and development |
|
2014SR036810 |
|
Dec
10, 2008 |
|
50
years |
24. |
|
Diagram
grid patrol PDA system software V1.0 |
|
Independent
research and development |
|
2014SR036778 |
|
Dec
12, 2008 |
|
50
years |
25. |
|
Core
map geographic information engine desktop platform software
V1.0 |
|
Independent
research and development |
|
2014SR036614 |
|
Jan
15, 2009 |
|
50
years |
26. |
|
Integrated
management of the grid geographic information Web system software
V1.0 |
|
Independent
research and development |
|
2014SR036799 |
|
Mar
10, 2009 |
|
50
years |
27. |
|
Core
map railway power supply equipment GPS patrol system software
V1.0 |
|
Independent
research and development |
|
2014SR036783 |
|
Mar
25, 2010 |
|
50
years |
28. |
|
Core
map network 3 d map server software V1.0 |
|
Independent
research and development |
|
2014SR036788 |
|
Feb
20, 2011 |
|
50
years |
29. |
|
Core
map network 3d map client softwareV1.0 |
|
Independent
research and development |
|
2014SR036637 |
|
Feb
22, 2011 |
|
50
years |
30. |
|
Core
map 3d map network publishing platform software V1.0 |
|
Independent
research and development |
|
2014SR036633 |
|
Mar
10, 2011 |
|
50
years |
31. |
|
Core
map 3d map network release plug-in system software V1.0 |
|
Independent
research and development |
|
2014SR036622 |
|
Mar
15, 2011 |
|
50
years |
32. |
|
Core
map network 3d map smartphone platform software V1.0 |
|
Independent
research and development |
|
2014SR036638 |
|
Apr
28, 2011 |
|
50
years |
33. |
|
Core
map network GIS Shared mobile platform software V1.0 |
|
Independent
research and development |
|
2014SR036634 |
|
Oct
31, 2011 |
|
50
years |
34. |
|
Core
map network GIS sharing platform software V1.0 |
|
Independent
research and development |
|
2014SR036639 |
|
Dec
16, 2011 |
|
50
years |
Trademarks:
We have registered the following trademarks with the Trademark
Office, State Administration for Industry and Commerce in the
PRC:
No |
|
Trademark |
|
Classification
Number |
|
Valid
Period |
|
Registration
Number |
1 |
|
Y-图形 |
|
38 |
|
2010.04.21-2020.04.20 |
|
6746069 |
2 |
|
Y-图形 |
|
41 |
|
2010.09.07-2020.09.06 |
|
6746067 |
3 |
|
YRADIO-文字 |
|
35 |
|
2010.07.21-2020.07.20 |
|
6733437 |
4 |
|
YRADIO-文字 |
|
38 |
|
2010.04.21.2020.04.20 |
|
6733438 |
5 |
|
YRADIO-文字 |
|
41 |
|
2010.09.07-2020.09.06 |
|
6733439 |
6 |
|
LookLook-图形 |
|
38 |
|
2009.04.07-2019.04.06 |
|
4666051 |
7 |
|
LookLook-图形 |
|
42 |
|
2008.12.21-2028.12.20 |
|
4666050 |
8 |
|
YTV-文字 |
|
35 |
|
2010.07.21-2020.07.20 |
|
6733579 |
9 |
|
YTV-文字 |
|
38 |
|
2010.05.28-2020.05.27 |
|
6733578 |
10 |
|
YTV-文字 |
|
41 |
|
2010.09.07-2020.09.06 |
|
6733581 |
11 |
|
YTV-文字 |
|
42 |
|
2010.09.07-2020.09.06 |
|
6733580 |
12 |
|
YOUTV-文字 |
|
35 |
|
2010.07.21-2020.07.20 |
|
6733440 |
13 |
|
YOUTV-文字 |
|
38 |
|
2010.05.28-2020.05.27 |
|
6733441 |
14 |
|
xfeng-文字 |
|
35 |
|
2012.03.28-2022.03.27 |
|
9229145 |
No |
|
Trademark |
|
Classification
Number |
|
Valid
Period |
|
Registration
Number |
15 |
|
xfeng-文字 |
|
38 |
|
2012.03.28-2022.03.27 |
|
9229160 |
16 |
|
xfeng-文字 |
|
41 |
|
2012.03.28-2022.03.27 |
|
9229190 |
17 |
|
xfeng-文字 |
|
42 |
|
2012.03.28-2022.03.27 |
|
9229221 |
18 |
|
中传视讯-文字+图形 |
|
42 |
|
2008.12.21-2028.12.20 |
|
4666047 |
19 |
|
中传视讯-文字 |
|
42 |
|
2008.12.21-2028.12.20 |
|
4666048 |
20 |
|
中传视讯-文字 |
|
38 |
|
2008.12.21-2028.12.20 |
|
4666049 |
21 |
|
新蜂-文字 |
|
38 |
|
2011.08.21-2021.08.20 |
|
8538907 |
22 |
|
新蜂-文字 |
|
42 |
|
2012.01.28-2022.01.27 |
|
8539078 |
23 |
|
新蜂.潮-文字 |
|
38 |
|
2011.08.21-2021.08.20 |
|
8539104 |
24 |
|
新蜂.潮-文字 |
|
42 |
|
2012.01.28-2022.01.27 |
|
8539141 |
25 |
|
新影力 |
|
41 |
|
2014.08.28-2024.08.27 |
|
12288643 |
26 |
|
小人-图形 |
|
35 |
|
2014.08.28-2024.08.27 |
|
12287985 |
27 |
|
小人-图形 |
|
38 |
|
2014.08.28-2024.08.27 |
|
12288580 |
28 |
|
小人-图形 |
|
41 |
|
2014.08.28-2024.08.27 |
|
12288629 |
29 |
|
小人-图形 |
|
42 |
|
2014.08.28-2024.08.27 |
|
12288435 |
30 |
|
中传-文字 |
|
38 |
|
2014.08.28-2024.08.27 |
|
12288267 |
31 |
|
中传-图形 |
|
38 |
|
2014.08.28-2024.08.27 |
|
12288289 |
32 |
|
中童-文字 |
|
41 |
|
2014.08.07-2024.08.06 |
|
12214085 |
33 |
|
中童在线-文字 |
|
41 |
|
2014.08.07-2024.08.06 |
|
12214092 |
34 |
|
翠鸟-文字 |
|
38 |
|
2014.08.07-2014.08.06 |
|
12214058 |
35 |
|
翠鸟-文字 |
|
42 |
|
2014.08.07-2014.08.06 |
|
12214125 |
36 |
|
爱翠鸟-文字 |
|
38 |
|
2014.08.07-2024.08.06 |
|
12214066 |
37 |
|
爱翠鸟-文字 |
|
41 |
|
2014.08.07-2024.08.06 |
|
12214096 |
38 |
|
爱翠鸟-文字 |
|
42 |
|
2014.08.07-2024.08.06 |
|
12214126 |
39 |
|
翠鸟-图形 |
|
35 |
|
2014.08.07-2024.08.06 |
|
12214040 |
40 |
|
翠鸟-图形 |
|
38 |
|
2014.08.07-2024.08.06 |
|
12214074 |
41 |
|
翠鸟-图形 |
|
41 |
|
2014.08.07-2024.08.06 |
|
12214100 |
42 |
|
翠鸟-图形 |
|
42 |
|
2014.08.07-2024.08.06 |
|
12214131 |
43 |
|
信号小喇叭图形+CMEDIA |
|
41 |
|
2015.03.21-2025.03.20 |
|
12480439 |
44 |
|
LookLook-图形 |
|
38 |
|
2015.11.14-2025.11.13 |
|
11533428 |
45 |
|
LookLook-图形 |
|
42 |
|
2014.06.21-2024.06.20 |
|
11533720 |
46 |
|
LookLook-文字 |
|
38 |
|
2014.07.14-2024.07.13 |
|
11534067 |
47 |
|
LookLook-文字 |
|
42 |
|
2014.04.14-2024.04.13 |
|
11534227 |
48 |
|
箩筐-图形 |
|
41 |
|
2016.06.14-2026.06.13 |
|
16580228 |
49 |
|
箩筐-图形 |
|
42 |
|
2016.06.14-2026.06.13 |
|
16580227 |
50 |
|
箩筐-文字 |
|
42 |
|
2016.09.28-2026.09.27 |
|
16580249 |
51 |
|
箩筐-文字 |
|
41 |
|
2016.06.14-2026.06.13 |
|
16580250 |
52 |
|
箩筐-文字 |
|
35 |
|
2016.09.21-2026.09.20 |
|
16580252 |
53 |
|
箩筐-文字 |
|
9 |
|
2016.06.14-2026.06.13 |
|
16580253 |
No |
|
Trademark |
|
Classification
Number |
|
Valid
Period |
|
Registration
Number |
54 |
|
箩筐-图形 |
|
38 |
|
2016.06.14-2026.06.13 |
|
16580229 |
55 |
|
箩筐-图形 |
|
35 |
|
2016.06.14-2026.06.13 |
|
16580230 |
56 |
|
箩筐-图形 |
|
9 |
|
2016.06.14-2026.06.13 |
|
16580231 |
57 |
|
微时光-文字 |
|
42 |
|
2016.09.28-2026.09.27 |
|
16580247 |
58 |
|
传游录屏-文字 |
|
9 |
|
2016.06.14-2026.06.13 |
|
16782144 |
59 |
|
传游录屏-文字 |
|
35 |
|
2016.06.14-2026.06.13 |
|
16782143 |
60 |
|
传游录屏-文字 |
|
38 |
|
2016.06.14-2026.06.13 |
|
16782142 |
61 |
|
传游录屏-文字 |
|
41 |
|
2016.06.14-2026.06.13 |
|
16782141 |
62 |
|
传游录屏-文字 |
|
42 |
|
2016.06.14-2026.06.13 |
|
16782140 |
63 |
|
录游器-文字 |
|
9 |
|
2016.06.14-2026.06.13 |
|
16782135 |
64 |
|
录游器-文字 |
|
35 |
|
2016.06.14-2026.06.13 |
|
16782136 |
65 |
|
录游器-文字 |
|
38 |
|
2016.06.14-2026.06.13 |
|
16782137 |
66 |
|
录游器-文字 |
|
41 |
|
2016.06.14-2026.06.13 |
|
16782138 |
67 |
|
录游器-文字 |
|
42 |
|
2016.06.14-2026.06.13 |
|
16782139 |
68 |
|
畅联TV-文字 |
|
41 |
|
2016.01.21-2026.01.20 |
|
15792467 |
69 |
|
畅联TV-文字 |
|
38 |
|
2016.01.21-2026.01.20 |
|
15792468 |
70 |
|
SuperEngine |
|
9 |
|
2016.01.21-2026.01.20 |
|
8125722 |
71 |
|
SuperEngine |
|
42 |
|
2016.01.21-2026.01.20 |
|
8125728 |
72 |
|
超擎 |
|
9/42 |
|
2016.01.21-2026.01.20 |
|
16473205 |
73 |
|
SUPERENGINE |
|
9/42 |
|
2016.01.21-2026.01.20 |
|
16473185 |
74 |
|
WhooCine-文字 |
|
9 |
|
2019.09.14-2029.09.13 |
|
36049237 |
75 |
|
WhooCine-文字 |
|
35 |
|
2019.09.07-2029.09.06 |
|
36071274 |
76 |
|
WhooCine-文字 |
|
38 |
|
2019.09.14-2029.09.13 |
|
36059065 |
77 |
|
WhooCine-文字 |
|
41 |
|
2019.09.14-2029.09.13 |
|
36046824 |
78 |
|
WhooCine-文字 |
|
42 |
|
2019.09.07-2029.09.06 |
|
36059525 |
79 |
|
速映-文字 |
|
9 |
|
2019.09.14-2029.09.13 |
|
36070079 |
80 |
|
速映-文字 |
|
35 |
|
2019.09.14-2029.09.13 |
|
36064784 |
81 |
|
速映-文字 |
|
38 |
|
2019.09.14-2029.09.13 |
|
36062805 |
82 |
|
速映-文字 |
|
41 |
|
2019.09.14-2029.09.13 |
|
36054899 |
83 |
|
速映-文字 |
|
42 |
|
2019.09.14-2029.09.13 |
|
36047495 |
|
* |
See
below for an explanation of each classification number used in the
table above. |
Classification No. 9: data processing apparatus,
couplers (data processing equipment), computer software (recorded),
monitors (computer programs), smart cards (integrated circuit
cards), electro-dynamic apparatus for the remote control of
signals, alarms, and electric installations for the remote control
of industrial operations.
Classification No. 35: auctioneering, sales promotion
for others, marketing analysis, marketing research, import-export
agencies, advisory services for business management, business
management for franchise, personnel management consultancy,
relocation services for businesses, and systemization of
information into computer databases.
Classification No. 38: include services that enable at least
sensory communication between two people. Such services allow one
person to talk to another, send messages from one person to
another, and make verbal or visual contact between one person and
the other. This classification especially includes the service for
broadcasting radio or television programs, except for radio
advertising services and telemarketing services.
Classification No. 41: instruction services, teaching,
education information, tuition, arranging and conducting of
colloquiums, publication of electronic books and journals on-line,
amusements, and vocational guidance.
Classification No. 42: technical research, studies
(technical project), computer software design, updating of computer
software, recovery of computer data, computer systems analysis,
installation of computer software, computer anti-virus protection,
and research and development for others.
Business Certificates and Qualifications
We have obtained all necessary regulatory certifications to conduct
our business in the PRC, including without limitation, the
following: Software Enterprise Recognition Certificate, Computer
Information System Integration Qualification Certificate,
Construction Enterprise Qualification Certificate, and Security
Technology & Protection Enterprise Certificate. We have also
been properly certified as a high-tech enterprise and have met the
ISO 9001:2000 qualification management system.
Legal Proceedings
Although we may, from time to time, be involved in litigation and
claims arising out of our operations in the normal course of
business, we do not believe that we are a party to any litigation
that will have a material adverse impact on our financial condition
or results of operations. To our knowledge, other than as described
below there are no material legal proceedings threatened against
us. From time to time, we may be subject to various claims and
legal actions arising in the ordinary course of business. Following
the consummation of the AEA, we became successor in interest to the
legal proceedings described below.
Lawsuit with Gansu Jinlun Culture Media Co., Ltd.
On August 22, 2014, Zhong Chuan Rui You and Gansu Jinlun Culture
Media Co., Ltd. (“Gansu Jinlun”) signed a “Lanzhou Railway Bureau
Air-conditioned Train Wi-Fi Network System Advertising
Operation Rights Agreement” for advertising on 72 trains
for $1,467,880 (RMB9,604,633). Due to the dispute on the
project implementation, Zhong Chuan Rui You
did not pay the advertising fee. On August 23, 2017,
Gansu Jinlun filed a lawsuit with Gansu Intermediate People’s
Court. On December 19, 2017, Gansu Intermediate People’s Court
issued a verdict, ruling that Zhong Chuan Rui You
settle the overdue advertising fee. Zhong Chuan Rui You
and Gansu Jinlun agreed on the settlement amount of approximately
$502,000 (RMB3,500,000).
Lawsuit with Beijing iQIYI Technology Co., Ltd.
On February 15, 2019, Beijing iQIYI Technology Co., Ltd. filed
lawsuits with Beijing Internet Court alleging Shenzhen Jiu Zhou Shi
Dai Digital and Technology Limited and Beijing Zhong Chuan Shi Xun
Technology Limited are in infringement of exclusive rights to
communication through an information network of certain works,
performances, audio and video products and claiming the economic
loss amounts to approximately $562,000 (RMB 3,920,000).
On December 14, 2019, Beijing Internet Court arranged a trial;
Beijing iQIYI and the Company are negotiating a potential
settlement while expecting a verdict from the court. According to
legal counsel, it is probable that the settlement will amount to
approximately $93,000 (RMB650,000).
C.
ORGANIZATIONAL STRUCTURE
The following diagram illustrates our corporate structure and the
place of formation and affiliation of each of our subsidiaries and
affiliates as of December 31, 2019.

VIE Arrangements with Beijing Zhong Chuan Shi Xun Technology
Limited’s Subsidiaries and Their Respective Shareholders
To comply with the PRC legal restrictions on foreign ownership of
companies that operate mobile application services, our
subsidiaries operate in such restricted service areas in the PRC
through certain PRC domestic companies, whose equity interests are
held by certain management members or founders of LK Technology
Ltd. Part of the registered capital of these PRC domestic companies
was funded by certain management members or founders of LK
Technology Ltd. LK Technology Ltd., through its subsidiary Shenzhen
Luokuang Technology Limited previously known as Zhong Chuan Tian
Xia Information and Technology (Shenzhen) Limited (the “WFOE”), has
entered into an exclusive business cooperation agreement with
Beijing Zhong Chuan Shi Xun Technology Limited (“Zhong Chuan Shi
Xun” or the “VIE”) the PRC domestic company, which entitle the WFOE
to receive a majority of the profit of Zhong Chuan Shi Xun. In
addition, Shenzhen Luokuang Technology Limited has entered into
certain agreements with those management members or founders,
including an equity interest pledge agreement of the equity
interests held by those management members or founders and an
exclusive option agreement to acquire the equity interests in these
companies when permitted by the PRC laws, rules and regulations.
Details of the typical VIE structure of our significant
consolidated VIEs, primarily domestic companies associated with the
operations such as Zhong Chuan Shi Xun and its subsidiaries of
Jiangsu Zhong Chuan Rui You Information and Technology Limited
(“Zhong Chuan Rui You”), Huoerguosi Luokuang Information and
Technology Limited (“Huoerguosi Luokuang”) and Shenzhen Jiu Zhou
Shi Dai Digital and Technology Limited (“Jiu Zhou Shi Dai”), are
set forth below:
Exclusive Business Cooperation Agreement
The VIE has entered into an exclusive business services agreement
with the WFOE, pursuant to which the WFOE provides exclusive
business services to the VIE. In exchange, the VIE pays a service
fee to the WFOE which typically amounts to what would be
substantially all of the VIE’s pre-tax profit, resulting in a
transfer of substantially all of the profits from the VIE to the
WFOE.
Exclusive Option Agreement
The VIE equity holders have granted the WFOE exclusive call options
to purchase their equity interest in the VIE at an exercise price
equal to the minimum price as permitted by applicable PRC laws. The
WFOE may nominate another entity or individual to purchase the
equity interest, if applicable, under the call options. Each call
option is exercisable subject to the condition that applicable PRC
laws, rules and regulations do not prohibit completion of the
transfer of the equity interest pursuant to the call option. The
VIE agrees not to distribute any dividends to the VIE equity
holders without the approval of WFOE.
Equity Interest Pledge Agreement
Pursuant to the equity pledge agreement, the VIE equity holders
have pledged all of their interests in the equity of the VIE as a
continuing first priority security interest in favor of the WFOE to
secure the performance of obligations by the VIEs and/or the equity
holders under the exclusive business cooperation agreement. The
WFOE is entitled to exercise its right to dispose of the VIE equity
holders’ pledged interests in the equity of the VIE and has
priority in receiving payment by the application of proceeds from
the auction or sale of such pledged interests, in the event of any
breach or default under the exclusive business cooperation
agreement, if applicable. These equity pledge agreements remain in
force until all the obligations under the exclusive business
cooperation agreement have been fulfilled.
The exclusive business cooperation agreement and equity interest
pledge agreement described above also enable the Company to receive
substantially all of the economic benefits from the VIE by
typically entitling the WFOE to all dividends and other
distributions declared by the VIE and to any distributions or
proceeds from the disposal by the VIE equity holders of their
equity interests in the VIE.
D. PROPERTY
AND EQUIPMENT
We lease offices as headquarter located at B9-5, B9-6 and B9-8,
SOHO 3Q, No 9, Guanghua Road, Chaoyang District, Beijing, which
covers a floor space of 1013 square meters. These leases expire on
August 15, 2021 and are renewable upon negotiation.
ITEM 4A. UNRESOLVED
STAFF COMMENTS
None.
ITEM 5. OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING
RESULTS.
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with our
consolidated financial statements and the notes to those financial
statements appearing elsewhere in this report. This discussion and
analysis contain forward-looking statements that involve
significant risks and uncertainties. As a result of many factors,
such as our anticipated growth strategy, our plans to recruit more
employees, our plans to invest in research and development to
enhance our product or service lines, our future business
development, results of operations and financial condition,
expected changes in our net revenues and certain cost or expense
items, our ability to attract and retain customers, trends and
competition in the enterprise mobile software application market,
and the factors set forth elsewhere in this report, our actual
results may differ materially from those anticipated in these
forward-looking statements. In light of those risks and
uncertainties, there can be no assurance that the forward-looking
statements contained in this report will in fact occur. You should
not place undue reliance on the forward-looking statements
contained in this report.
The forward-looking statements speak only as of the date on
which they are made, and, except to the extent required by U.S.
federal securities laws, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the
occurrence of unanticipated events. Further, the
information about our intentions contained in this report is a
statement of our intention as of the date of this report and is
based upon, among other things, the existing regulatory
environment, industry conditions, market conditions and prices and
our assumptions as of such date. We may change our
intentions, at any time and without notice, based upon any changes
in such factors, in our assumptions or otherwise.
Unless the context otherwise requires, all references to (i)
“PRC” and “China” are to the People’s Republic of China; (ii) “U.S.
dollar,” “$” and “US$” are to United States dollars; and (iii)
“RMB”, “Yuan” and Renminbi are to the currency of the PRC or
China.
Overview
Luokung Technology Corp. was incorporated on October 27, 2009 under
the laws of the British Virgin Islands. We are a holding company
and conduct our operations through our wholly-owned subsidiary
named LK Technology Ltd., a British Virgin Islands limited
liability company (“LK Technology”), and its wholly-owned
subsidiaries, MMB Limited and its respective subsidiaries, which
possess two core brands “Luokuang” and “SuperEngine”. “Luokuang” is
a mobile application to provide Business to Customer (B2C)
location-based services and “SuperEngine” provides Business to
Business (B2B) and Business to Government (B2G) services in
connection with spatial-temporal big data processing. In May 2010,
we consummated an initial public offering of our American
Depository Shares, or ADSs, for gross proceeds of $16 million, and
our ADSs were listed on the NASDAQ Capital Market under the ticker
symbol “KONE”. On August 17, 2018, we completed the transactions
contemplated by the Asset Exchange Agreement (“AEA”) with C Media
Limited (“C Media”) entered into on January 25, 2018. On August 20,
2018, we changed our name to Luokung Technology Corp., our American
Depository Shares (“ADSs”) were voluntarily delisted from the
NASDAQ Capital Market on September 19, 2018 and on January 3, 2019
our ordinary shares started trading on NASDAQ under the ticker
symbol “LKCO”.
On August 17, 2018, we consummated an asset exchange transaction,
pursuant to which we exchanged all issued and outstanding capital
stock in Topsky Info-Tech Holdings Pte Ltd., the parent of Softech,
for the issued and outstanding capital stock of LK Technology (the
“Asset Exchange”). In connection with the Asset Exchange, we
changed our name on August 20, 2018, and on September 20, 2018,
completed the issuance to the shareholders of C Media Limited, the
former parent of LK Technology, of (i) 185,412,599 of our ordinary
shares, par value $0.01 per share and (ii) 1,000,000 of our
preferred shares. Upon the consummation of the Asset Exchange, we
ceased our previous business operations and became a company
focused on the provision of location-based service and mobile
application products for long distance travelers in China.
On August 25, 2018, LK Technology entered into a Stock Purchase
Agreement (the “Agreement”) with the shareholders (“Shareholders”)
of Superengine Holding Limited, a limited liability company
incorporated under the laws of the British Virgin Islands (the
“Superengine”), pursuant to which LK Technology acquired all of the
issued and outstanding shares of Superengine for an aggregate
purchase price of US$60 million (the “Purchase Price”), which was
paid by the issuance of our Ordinary Shares in an amount equal to
the quotient of (x) the Purchase Price divided by (y) the average
of the closing prices of the Ordinary Shares on the NASDAQ Capital
Market over the 12 months period preceding July 31, 2018. We are a
party to the Agreement in connection with the issuance of the
Ordinary Shares and certain other limited purposes.
Results of operations for the fiscal year ended December 31,
2019 compared to the fiscal year ended December 31, 2018.
Revenue
Display-based online advertising services. The Company
provides display-based online advertising services to customers by
integrating text description, image and video, and displaying the
advertisements in a prominent position on Luokuang mobile
application on a cost-per-click basis; the customers pay us only
when a user clicks on an advertisement on the Luokuang mobile
application. We also derive our revenue from the provision of user
acquisition services to our advertisers on the strength of the LBS
services we offer; the customers pay us based on performance, as
measured by CPI (Cost Per Install), CPM (Cost Per Mile), and CPC
(Cost Per Click). The Company recognizes revenue over time because
the customer receives and consumes the benefit of our advertising
services throughout the contract period.
Software and services The Company generates revenues
primarily in the form of sale of a software license and provision
of technology solution services. License fees include perpetual
license fees, term license fees and royalties. Technology services
primarily consist of fees for providing technology solution
services that enable customers to gain real-time operational
intelligence by harnessing the value of their data.
Revenue for the sale of software licenses is recognized at the
point in time when the control of the provided goods is provided to
our customers.
Technology solution revenue is recognized over time, as the
services are performed because the customer receives and consumes
the benefit of our performance throughout the contract period.
Milestones with corresponding payments are stated in the contracts
with customers. We bill for the services we have performed when the
milestones reached are accepted by the customer in accordance with
the terms of the contract. We recognize the revenues associated
with these professional services as we deliver each agreed portion
of the services.
|
|
Fiscal Year Ended
December 31, |
|
|
2019
to 2018 |
|
|
|
2019 |
|
|
2018 |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
Advertising |
|
$ |
17,806 |
|
|
$ |
20,703 |
|
|
|
(14.0 |
)% |
License |
|
|
- |
|
|
|
203 |
|
|
|
(100.0 |
)% |
Technology
Services |
|
|
973 |
|
|
|
136 |
|
|
|
615.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues |
|
$ |
18,779 |
|
|
$ |
21,042 |
|
|
|
(10.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
|
94.8 |
% |
|
|
98.3 |
% |
|
|
|
|
License |
|
|
- |
|
|
|
1.0 |
% |
|
|
|
|
Technology
Services |
|
|
5.2 |
% |
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
For the year ended December 31, 2019, we had revenue of
$18,779,172, as compared to revenue of $21,042,363 for the year
ended December 31, 2018, a decrease of $2,263,191, or 10.8%, which
was primarily due to the termination of the Wi-Fi provision for
express trains as the increase in numbers of High-speed trains led
to the shrinkage of the passenger trips on express trains. From the
beginning of 2019, we started generating our revenue through the
Luokung Location-based services Data Marketing Platform
(“LLDMP”).
Cost of revenue
Our cost of revenue primarily consists of traffic acquisition
costs, depreciation, Wi-Fi equipment installation fees,
amortization, spare parts, annual payments to local railway bureaus
and other costs.
|
|
Year Ended December 31, |
|
|
|
2019 |
|
|
2018 |
|
|
|
(dollars in thousands) |
|
|
|
Amount |
|
|
% of cost
of revenue |
|
|
% of
revenue |
|
|
Amount |
|
|
% of cost
of revenue |
|
|
% of
revenue |
|
Traffic acquisition
costs |
|
$ |
13,616 |
|
|
|
90.9 |
% |
|
|
72.5 |
% |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
Wi-Fi equipment installation fees |
|
|
608 |
|
|
|
4.1 |
% |
|
|
3.2 |
% |
|
|
1,884 |
|
|
|
27.2 |
% |
|
|
9.0 |
% |
Depreciation |
|
|
240 |
|
|
|
1.6 |
% |
|
|
1.3 |
% |
|
|
2,807 |
|
|
|
40.4 |
% |
|
|
13.3 |
% |
Spare parts |
|
|
32 |
|
|
|
0.2 |
% |
|
|
0.2 |
% |
|
|
1,006 |
|
|
|
14.5 |
% |
|
|
4.8 |
% |
Amortization |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
414 |
|
|
|
6.0 |
% |
|
|
2.0 |
% |
Resource cost |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
557 |
|
|
|
8.0 |
% |
|
|
2.6 |
% |
Others |
|
|
480 |
|
|
|
3.2 |
% |
|
|
2.5 |
% |
|
|
270 |
|
|
|
3.9 |
% |
|
|
1.3 |
% |
Total cost of
revenue |
|
$ |
14,976 |
|
|
|
100.0 |
% |
|
|
79.7 |
% |
|
$ |
6,938 |
|
|
|
100.0 |
% |
|
|
33.0 |
% |
Cost of revenue for the year ended December 31, 2019 was
$14,976,016, representing an increase of $8,037,953 or 115.9% as
compared to $6,938,063 for the year ended December 31, 2018. The
increase was primarily attributable to the increase of traffic
acquisition costs which we acquired to support the LLDMP. Our
traffic acquisition costs may vary due to a number of factors,
including the scale, targeted audience and the geographic location
of traffic. For the year 2018, the costs of revenues primarily
consist of depreciation, labor cost, Wi-Fi equipment installation
fees, data charges, annual payments to local railway bureaus, and
other overhead costs.
Selling and marketing expense
Our selling and marketing expense mainly includes promotional and
marketing expenses and compensation for our sales and marketing
personnel.
Selling expense totaled $3,764,792 for the year ended December 31,
2019, as compared to $14,695,165 for the year ended December 31,
2018, a decrease of $10,930,373 or 74.4%. The decrease was
primarily attributable to a decrease in promotional and marketing
activities of approximately $12,263,000, which was due to the
decrease in promotional and marketing activities conducted by the
Company to promote the Luokuang APP as a result of the termination
of the Wi-Fi provision on express trains, offset by an increase in
the salaries and benefits for the sales and marketing personnel of
approximately $1,241,000.
General and administrative expense
Our general and administrative expenses consist primarily of
salaries and benefits for our general and administrative personnel,
rent, fees and expenses for legal, accounting and other
professional services.
General and administrative expense totaled $22,844,383 for the year
ended December 31, 2019, as compared to $6,750,417 for the year
ended December 31, 2018, an increase of $16,093,966 or 238.4%. The
increase was primarily attributable to an increase in consulting
fees of approximately $5,944,000, which is mainly related to the
completion of the AEA transaction and an increase of impairment
loss of approximately $8,696,000 including an increase in allowance
for doubtful receivables of approximately $10,223,000, offset by a
decrease in bad debts written off of approximately $869,000, a
decrease in impairment loss over the intangible assets of
approximately $724,000 and a decrease in impairment loss over the
property, plant and equipment of approximately $108,000.
Research and development expenses.
Research and development expenses primarily consist of amortization
of the intangible assets, and salaries and benefits for research
and development personnel.
Research and development expenses totaled $8,710,746 for the year
ended December 31, 2019, as compared to $3,478,570 for the year
ended December 31, 2018, an increase of $5,232,176 or 150.4%. The
increase was primarily attributable to an increase in the
amortization of the intangible assets of approximately $3,648,000,
which was recognized as a result of the acquisition of Super Engine
Holdings Limited in accordance to Purchase Price Allocation and an
increase in salaries and benefits for the sales and research and
development personnel of approximately $1,180,000.
Loss from operations
As a result of the factors described above, for the year ended
December 31, 2019, loss from operations amounted to $31,516,765, as
compared to loss from operations of $10,819,852 for the year ended
December 31, 2018, an increase of $20,696,913, or 191.3%.
Other income/expense
Other income/expense mainly includes interest expenses from other
loans and foreign currency gains/losses.
For the year ended December 31, 2019, other expense, net, amounted
to $505,438 as compared to other expense, net, of $1,033,675 for
the year ended December 31, 2018, a decrease of $528,237, or 51.1%,
which was primarily attributable to a decrease in foreign currency
transaction loss of approximately $506,000 and an increase in other
income of approximately $44,000, offset by an increase in interest
expenses of approximately $22,000.
Income tax
We had income tax benefit of $70,992 for the year ended 2019 and
income tax expense of $74,009 for the year ended 2018,
respectively. We are subject to various rates of income tax under
different jurisdictions. The following summarizes the major factors
affecting our applicable tax rates in the BVI, Hong Kong and the
PRC.
BVI
We are an exempted company incorporated in the British Virgin
Islands. Under the current laws of the British Virgin Islands, we
are not subject to income, corporation or capital gains tax in the
British Virgin Islands. In addition, our payment of dividends to
our shareholders, if any, is not subject to withholding tax in the
British Virgin Islands.
Hong Kong
Our subsidiaries in Hong Kong are subject to the uniform tax rate
of 16.5%. Under Hong Kong tax law, our subsidiaries in Hong Kong
are exempted from income tax on their foreign-derived income and
there is no withholding tax in Hong Kong on remittance of
dividends.
PRC
Generally, our PRC subsidiaries, our consolidated affiliated
entities and their subsidiaries are subject to enterprise income
tax on their taxable income in the PRC at a rate of 25%. The
enterprise income tax is calculated based on the entity’s global
income as determined under PRC tax laws and accounting
standards.
An enterprise may benefit from a preferential tax rate of 15% under
the EIT Law if it qualifies as a High and New Technology
Enterprise, which is normally effective for a period of three
years. Our subsidiaries, Beijing Zhong Chuan Shi Xun Technology
Limited and Superengine Graphics Software Technology Development
(Suzhou) Co., Ltd are a High-tech enterprise and enjoy a favorable
income tax rate of 15%.
Net loss
As a result of the factors described above, our net loss was
$31,951,211 for the year ended December 31, 2019, compared to net
loss of $11,927,536 for the year ended December 31, 2018, an
increase of $20,023,675 or 167.9%.
Net loss attributable to owners of the
Company
The net loss attributable to owners of the Company was $31,513,178,
or $0.16 per ordinary share (basic and diluted), for the year ended
December 31, 2019, compared to net loss attributable to owners of
the Company of $11,927,536, or $0.16 per ordinary share (basic and
diluted), for the year ended December 31, 2018, a change of
$19,585,642 or 164.2%.
Foreign currency translation adjustment
Our reporting currency is the U.S. dollar. The functional currency
of our parent company and subsidiaries of LK Technology, MMB and
Mobile Media is the U.S. dollar and the functional currency of the
Company’s subsidiaries incorporated in China is the Chinese
Renminbi (“RMB”). The financial statements of our subsidiaries
incorporated in China are translated to U.S. dollars using period
end rates of exchange for assets and liabilities, and average rates
of exchange (for the period) for revenue, costs, and expenses. Net
gains and losses resulting from foreign exchange transactions are
included in the consolidated statements of operations and
comprehensive loss. As a result of foreign currency translations,
which are a non-cash adjustment, we reported a foreign currency
translation gain of $541,489 for the year ended December 31, 2019,
as compared to a foreign currency translation gain of $447,246 for
the year ended December 31, 2018. This non-cash gain had the effect
of increasing/decreasing our reported comprehensive
income/loss.
Comprehensive loss
As a result of our foreign currency translation adjustment, we had
comprehensive loss for the year ended December 31, 2019 of
$31,409,722, compared to comprehensive loss of $11,480,290 for the
year ended December 31, 2018.
Comparison of results of operations for the year ended
December 31, 2018 and 2017
Revenue
Display-based online advertising services. The Company
provides display-based online advertising services to customers by
integrating text description, image and video, and displaying the
advertisements in a prominent position of Luokuang mobile
application on a cost-per-click basis. The customers pay us only
when a user clicks on an advertisement on the Luokuang mobile
application. The Company recognizes revenue over time because the
customer receives and consumes the benefit of our advertising
services throughout the contract period.
Software and services The Company generates revenues
primarily in the form of a sale of software license and provision
of technology solution services. License fees include perpetual
license fees, term license fees and royalties. Technology services
primarily consist of fees for providing technology solution
services that enable customers to gain real-time operational
intelligence by harnessing the value of their data.
Revenue for the sale of software licenses is recognized at the
point in time when the control of the provided goods is provided to
our customers.
Technology solution revenue is recognized over time as the services
are performed because the customer receives and consumes the
benefit of our performance throughout the contract period.
Milestones with corresponding payments are stated in the contracts
with customers. We bill for the services we have performed when the
milestones reached are accepted by the customer in accordance with
the terms of the contract. We recognize the revenues associated
with these professional services as we deliver each agreed portion
of the services.
|
|
Fiscal Year Ended
December 31, |
|
|
2018
to 2017 |
|
|
|
2018 |
|
|
2017 |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
Advertising |
|
$ |
20,703 |
|
|
$ |
26,082 |
|
|
|
(20.6 |
)% |
License |
|
|
203 |
|
|
|
- |
|
|
|
100.0 |
% |
Technology
Services |
|
|
136 |
|
|
|
- |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues |
|
$ |
21,042 |
|
|
$ |
26,082 |
|
|
|
(19.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
|
98.3 |
% |
|
|
100.0 |
% |
|
|
|
|
LicenseSee |
|
|
1.0 |
% |
|
|
- |
|
|
|
|
|
Technology
Services |
|
|
0.7 |
% |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
For the year ended December 31, 2018, we had revenue of
$21,042,363, as compared to revenue of $26,082,417 for the year
ended December 31, 2017, a decrease of $5,040,054, or 19.3%, which
was primarily due to most of our on-train Wi-Fi equipment being
dissembled in the fourth quarter of 2018 for upgrade projects, and
we were not able to provide the on-train advertising through the
Luokuang mobile application.
Cost of revenue
Our cost of revenue primarily consists of depreciation, Wi-Fi
equipment installation fees, amortization, spare parts, annual
payments to local railway bureaus and other costs.
|
|
Year Ended December 31, |
|
|
|
2018 |
|
|
2017 |
|
|
|
(dollars in thousands) |
|
|
|
Amount |
|
|
% of cost
of revenue |
|
|
% of
revenue |
|
|
Amount |
|
|
% of cost
of revenue |
|
|
% of
revenue |
|
Depreciation |
|
$ |
2,807 |
|
|
|
40.4 |
% |
|
|
13.3 |
% |
|
$ |
2,423 |
|
|
|
43.6 |
% |
|
|
9.3 |
% |
Wi-Fi
equipment installation fees |
|
|
1,884 |
|
|
|
27.2 |
% |
|
|
9.0 |
% |
|
|
1,070 |
|
|
|
19.3 |
% |
|
|
4.1 |
% |
Spare parts |
|
|
1,006 |
|
|
|
14.5 |
% |
|
|
4.8 |
% |
|
|
348 |
|
|
|
6.3 |
% |
|
|
1.3 |
% |
Amortization |
|
|
414 |
|
|
|
6.0 |
% |
|
|
2.0 |
% |
|
|
610 |
|
|
|
11.0 |
% |
|
|
2.3 |
% |
Resource cost |
|
|
557 |
|
|
|
8.0 |
% |
|
|
2.6 |
% |
|
|
686 |
|
|
|
12.4 |
% |
|
|
2.6 |
% |
Others |
|
|
270 |
|
|
|
3.9 |
% |
|
|
1.3 |
% |
|
|
411 |
|
|
|
7.4 |
% |
|
|
1.6 |
% |
Total cost of
revenue |
|
$ |
6,938 |
|
|
|
100.0 |
% |
|
|
33.0 |
% |
|
$ |
5,548 |
|
|
|
100.0 |
% |
|
|
21.3 |
% |
Cost of revenue for the year ended December 31, 2018 was
$6,938,063, representing an increase of $1,390,284 or 25.1% as
compared to $5,547,779 for the year ended December 31, 2017. The
increase was primarily attributable to the increase in Wi-Fi
equipment installation fees and spare parts for the Wi-Fi equipment
upgrade program we conducted in 2018.
Selling and marketing expense
Our selling and marketing expense mainly include promotional and
marketing expenses and compensation for our sales and marketing
personnel.
Selling expense totaled $14,695,165 for the year ended December 31,
2018, as compared to $23,908,733 for the year ended December 31,
2017, a decrease of $9,213,568 or 38.5%. The decrease was primarily
attributable to a decrease in promotional and marketing activities
of approximately $9,100,000, which was due to the popularity of
Luokuang APP remaining quite stable, and we decided to reduce the
promotional and marketing activities at this stage.
General and administrative expense
Our general and administrative expenses consist primarily of
salaries and benefits for our general and administrative personnel,
rent, fees and expenses for legal, accounting and other
professional services.
General and administrative expense totaled $6,750,417 for the year
ended December 31, 2018, as compared to $2,451,249 for the year
ended December 31, 2017, an increase of $4,299,168 or 175.4%. The
increase was primarily attributable to an increase of impairment
loss of approximately $3,579,000 including the bad debts written
off of approximately $869,000, the allowance for doubtful
receivables of approximately $1,783,000, and impairment loss over
the intangible assets of approximately $724,000 as we are no longer
using the software system that we purchased in 2014, and an
impairment loss over the property, plant and equipment of
approximately $203,000, as we wrote off certain Wi-Fi equipment
that is no longer in use.
Research and development expenses.
Research and development expenses primarily consist of salaries and
benefits for research and development personnel.
Research and development expenses totaled $3,478,570 for the year
ended December 31, 2018, as compared to $1,046,198 for the year
ended December 31, 2017, an increase of $2,432,372 or 232.5%. The
increase was primarily attributable to the amortization of the
intangible assets of approximately $1,809,000, which was recognized
as a result of the acquisition of Super Engine Holdings Limited in
accordance to PPA.
Loss from operations
As a result of the factors described above, for the year ended
December 31, 2018, loss from operations amounted to $10,819,852, as
compared to loss from operations of $6,871,542 for the year ended
December 31, 2017, an increase of $3,948,310, or 57.5%.
Other income/expense
Other income/expense mainly includes interest expenses from other
loans and foreign currency gains/losses.
For the year ended December 31, 2018, other expense, net, amounted
to $1,033,675 as compared to other income, net, of $61,088 for the
year ended December 31, 2017, a change of $1,094,763, or 1,792.1%,
which was primarily attributable to an increase in foreign currency
transaction loss of approximately $1,555,000 and an increase in
interest expenses of approximately $54,000, offset by an increase
in other income of approximately $513,000, which mainly constitutes
the government subsidy of approximately $360,000, investment income
of approximately $37,000 and other income of approximately
$116,000.
Income tax
We had income tax expense of $74,009 and $0 for the years ended
2018 and 2017, respectively.
Net loss
As a result of the factors described above, our net loss was
$11,927,536 for the year ended December 31, 2018, compared to net
loss of $6,810,454 for the year ended December 31, 2017, an
increase of $5,117,082 or 75.1%.
Foreign currency translation adjustment
Our reporting currency is the U.S. dollar. The functional currency
of our parent company and subsidiaries of LK Technology, MMB and
Mobile Media is the U.S. dollar and the functional currency of the
Company’s subsidiaries incorporated in China is the Chinese
Renminbi (“RMB”). The financial statements of our subsidiaries
incorporated in China are translated to U.S. dollars using period
end rates of exchange for assets and liabilities, and average rates
of exchange (for the period) for revenue, costs, and expenses. Net
gains and losses resulting from foreign exchange transactions are
included in the consolidated statements of operations and
comprehensive loss. As a result of foreign currency translations,
which are a non-cash adjustment, we reported a foreign currency
translation gain of $447,246 for the year ended December 31, 2018,
as compared to a foreign currency translation gain of $ 90,671 for
the year ended December 31, 2017. This non-cash gain had the effect
of increasing/decreasing our reported comprehensive
income/loss.
Comprehensive loss
As a result of our foreign currency translation adjustment, we had
comprehensive loss for the year ended December 31, 2018 of
$11,480,290, compared to comprehensive loss of $ 6,719,783 for the
year ended December 31, 2017.
Critical accounting policies
The methods, estimates and judgments we use in applying our most
critical accounting policies have a significant impact on the
results we report in our financial statements. The SEC has defined
the most critical accounting policies as the ones that are most
important to the portrayal of our financial condition and results
and require us to make our most difficult and subjective judgments,
often as a result of the need to make estimates of matters that are
inherently uncertain. Based on this definition, our most critical
policies include revenue recognition, impairment of long-lived
assets and goodwill, allowance for doubtful accounts and valuation
allowance for deferred tax assets.
Below, we discuss these policies further, as well as the estimates
and judgments involved. We believe that our other policies either
do not generally require us to make estimates and judgments that
are as difficult or as subjective, or it is less likely that they
would have a material impact on our reported financial condition
and results of operations for a given period. For a discussion of
all our significant accounting policies, see footnote 2 to the
Consolidated Financial Statements included elsewhere in this Annual
Report.
Revenue recognition
The Company recognizes revenue in accordance with ASC Topic 606,
“Revenue from Contracts with Customers”
Display-based online advertising services
The Company provides display-based online advertising services to
customers by integrating text description, image and video, and
displaying the advertisements in a prominent position on Luokuang
mobile application on a cost-per-click basis; the customers pay us
only when a user clicks on an advertisement on the Luokuang mobile
application. We also derive our revenue from the provision of user
acquisition services to our advertisers on the strength of the LBS
services we offer; the customers pay us based on performance, as
measured by CPI (Cost Per Install), CPM (Cost Per Mile), and CPC
(Cost Per Click). The Company recognizes revenue over time because
the customer receives and consumes the benefit of our advertising
services throughout the contract period.
Software and services
The Company generates revenues primarily in the form of a sale of
software license and provision of technology solution services.
License fees include perpetual license fees, term license fees and
royalties. Technology services primarily consist of fees for
providing technology solution services that enable customers to
gain real-time operational intelligence by harnessing the value of
their data.
Revenue for the sale of a software licenses is recognized at the
point in time when the control of the provided goods is provided to
our customers.
Technology solution revenue is recognized over time as the services
are performed because the customer receives and consumes the
benefit of our performance throughout the contract period.
Milestones with corresponding payments are stated in the contracts
with customers. We bill for the services we have performed when the
milestones reached are accepted by the customer in accordance with
the terms of the contract. We recognize the revenues associated
with these professional services as we deliver each agreed portion
of the services.
The Company does not offer credits or refunds and therefore has not
recorded any sales return allowance for any of the periods
presented. Upon a periodic review of outstanding accounts
receivable, amounts that are deemed to be uncollectible are written
off against the allowance for doubtful accounts. The Company’s
policy is to record revenues net of any applicable sales, use or
excise taxes.
Impairment of long-lived assets
Long-lived assets other than goodwill are included in impairment
evaluations when events and circumstances exist that indicate the
carrying value of these assets may not be recoverable. In
accordance with FASB ASC 360, Property, Plant and Equipment, the
Company assesses the recoverability of the carrying value of
long-lived assets by first grouping its long-lived assets with
other assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows
of other assets and liabilities (the asset group) and, secondly,
estimating the undiscounted future cash flows that are directly
associated with and expected to arise from the use of and eventual
disposition of such asset group. If the carrying value of the asset
group exceeds the estimated undiscounted cash flows, the Company
recognizes an impairment loss to the extent the carrying value of
the long-lived asset exceeds its fair value. The Company determines
fair value through quoted market prices in active markets or, if
quotations of market prices are unavailable, through the
performance of internal analysis using a discounted cash flow
methodology or by obtaining external appraisals from independent
valuation firms. The undiscounted and discounted cash flow analyses
are based on a number of estimates and assumptions, including the
expected period over which the asset will be utilized, projected
future operating results of the asset group, discount rate and
long-term growth rate.
As of December 31, 2019 and 2018, the Company assessed the
impairment of its long-lived assets and identified impairment
indications. For intangible assets, the impairment loss was $nil
and $724,437 for the years ended 2019 and 2018, respectively, as
the Company was not going to use a software system that was
purchased in 2014 and written off in 2018. For property plant and
equipment, the impairment loss was $95,471 and $1,228,362 for the
years ended 2019 and 2018, respectively.
Impairment of goodwill
The Company assesses goodwill for impairment in accordance with ASC
350-20, Intangibles—Goodwill and Other: Goodwill, which requires
that goodwill to be tested for impairment at the reporting unit
level at least annually and more frequently upon the occurrence of
certain events, as defined by ASC 350-20.
The Company has the option to assess qualitative factors first to
determine whether it is necessary to perform the two-step test in
accordance with ASC 350-20. If the Company believes, as a result of
the qualitative assessment, that it is more-likely-than-not that
the fair value of the reporting unit is less than its carrying
amount, the two-step quantitative impairment test described below
is required. Otherwise, no further testing is required. In the
qualitative assessment, the Company considers primary factors such
as industry and market considerations, overall financial
performance of the reporting unit, and other specific information
related to the operations. In performing the two-step quantitative
impairment test, the first step compares the carrying amount of the
reporting unit to the fair value of the reporting unit based on
either quoted market prices of the ordinary shares or estimated
fair value using a combination of the income approach and the
market approach. If the fair value of the reporting unit exceeds
the carrying value of the reporting unit, goodwill is not impaired
and we are not required to perform further testing. If the carrying
value of the reporting unit exceeds the fair value of the reporting
unit, then we must perform the second step of the impairment test
in order to determine the implied fair value of the reporting
unit’s goodwill. The fair value of the reporting unit is allocated
to its assets and liabilities in a manner similar to a purchase
price allocation in order to determine the implied fair value of
the reporting unit goodwill. If the carrying amount of the goodwill
is greater than its implied fair value, the excess is recognized as
an impairment loss.
In 2019, the Company performed a qualitative assessment for
goodwill and evaluated all relevant factors, including but not
limited to macroeconomic conditions, industry and market
conditions, and financial performance. The Company concluded that
it is necessary to perform a quantitative assessment. The Company
completed step one of the quantitative goodwill impairment
assessment based on the discounted future cash flows that the
reporting units are expected to generate and determined after
evaluating the results, events and circumstances, that the fair
values of the reporting units exceeded their carrying values.
Therefore, step two is not required and no impairment loss on
goodwill is required for the year ended December 31, 2019.
In 2018, the Company performed a qualitative assessment for
goodwill. Based on the requirements of ASC350-20, the Company
evaluated all relevant factors, including but not limited to
macroeconomic conditions, industry and market conditions, financial
performance. The Company weighed all factors in their entirety and
concluded that it was not more-likely-than-not the fair value was
less than the carrying amount of the reporting unit, and further
impairment testing on goodwill was unnecessary as of December 31,
2018.
Accounts receivable, net of allowance
Accounts receivable are recognized and carried at the original
invoiced amount less an allowance for any potential uncollectible
amounts. An estimate for doubtful debts is made when collection of
the full amount is no longer probable. Bad debts are written off as
incurred. The Company generally does not require collateral from
its customers.
The Company maintains allowances for doubtful accounts for
estimated losses resulting from the failure of customers to make
payments on time. The Company reviews the accounts receivable on a
periodic basis and makes specific allowances when there is doubt as
to the collectability of individual balances. In evaluating the
collectability of individual receivable balances, the Company
considers many factors, including the age of the balance, the
customer’s payment history, its current credit-worthiness and
current economic trends.
Income taxes
Deferred income taxes are recognized for temporary differences
between the tax bases of assets and liabilities and their reported
amounts in the financial statements, and net operating loss carry
forwards and credits, by applying enacted statutory tax rates
applicable to future years to these items. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Current income taxes
are provided for in accordance with the laws and regulations
applicable to the Company as enacted by the relevant tax
authorities.
The impact of an uncertain income tax positions on the income tax
return must be recognized at the largest amount that is
more-likely-than not to be sustained upon audit by the relevant tax
authorities. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained.
Additionally, the Company classifies the interest and penalties, if
any, as a component of income tax expense. For years ended December
31, 2019, 2018 and 2017, the Company did not have any material
interest or penalties associated with tax positions nor did the
Company have any significant unrecognized uncertain tax
positions.
Recent accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial
Instruments—Credit Losses (Topic 326), Measurement of Credit Losses
on Financial Instruments”, which will be effective for fiscal years
beginning after December 15, 2019, including interim periods within
those fiscal years. The guidance replaces the incurred loss
impairment methodology with an expected credit loss model for which
a company recognizes an allowance based on the estimate of expected
credit loss. In November 2019, the FASB issued ASU 2019-10.
Financial Instruments — Credit Losses (Topic 326), Derivatives and
Hedging (Topic 815), and Leases (Topic 842): Effective Dates,
finalizes effective date delays for private companies,
not-for-profit organizations, and certain smaller reporting
companies applying the credit losses, leases, and hedging
standards. The effective date for SEC filers, excluding smaller
reporting companies as defined by the SEC, remains as fiscal years
beginning after December 15, 2019. The Company does not expect a
significant difference in the amount of impairment losses to be
recognized when using the expected credit loss model in its
consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill
Impairment”. The guidance removes Step 2 of the goodwill impairment
test, which requires a hypothetical purchase price allocation.
Goodwill impairment will now be the amount by which a reporting
unit’s carrying value exceeds its fair value, not the difference
between the fair value and carrying amount of goodwill which was
the step 2 test before. The ASU should be adopted on a prospective
basis for the annual or any interim goodwill impairment tests
beginning after December 15, 2019. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017. The Company is currently evaluating
the impact of adopting this standard on its consolidated financial
statements.
In August 2018, the FASB issued ASU 2018-13, “Changes to the
Disclosure Requirements for Fair Value Measurement.” This standard
eliminates the current requirement to disclose the amount or reason
for transfers between level 1 and level 2 of the fair value
hierarchy and the requirement to disclose the valuation methodology
for level 3 fair value measurements. The standard includes
additional disclosure requirements for level 3 fair value
measurements, including the requirement to disclose the changes in
unrealized gains and losses in other comprehensive income during
the period and permits the disclosure of other relevant
quantitative information for certain unobservable inputs. The new
guidance is effective for interim and annual periods beginning
after December 15, 2019. The Company does not anticipate that the
adoption of the new standard will have a material effect on its
consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Internal-Use Software
– Customer’s Accounting for Implementation Costs Incurred in a
Cloud Computing Arrangement.” This ASU aligns the requirements for
capitalizing implementation costs incurred in a hosting arrangement
service contract with the guidance to capitalize implementation
costs of internal use software. The ASU also requires that the
costs for implementation activities during the application
development phase be capitalized in a hosting arrangement service
contract, and costs during the preliminary and post implementation
phase are expensed. The new guidance is effective for interim and
annual periods beginning after December 15, 2019. The Company is
currently evaluating the impact of adoption of this standard, but
does not anticipate that the adoption will have a material effect
on its consolidated financial statements.
B.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support
its current and future operations, satisfy its obligations and
otherwise operate on an ongoing basis. We historically have relied
on cash flow provided by operations and financing to supplement our
working capital. At December 31, 2019 and 2018, we had cash
balances of approximately $3,695,687 and $1,192,218, respectively.
The significant portion of these funds are located in financial
institutions located in the PRC and will continue to be
indefinitely reinvested in our operations in the PRC.
The following table sets forth a summary of changes in our working
capital from December 31, 2018 to December 31, 2019:
|
|
|
|
|
|
|
|
December 31, 2018 to
December 31, 2019 |
|
|
|
December 31,
2019 |
|
|
December 31,
2018 |
|
|
Change |
|
|
Percentage
Change |
|
Working capital deficit: |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
$ |
40,972,561 |
|
|
$ |
31,538,510 |
|
|
$ |
9,434,051 |
|
|
|
29.9 |
% |
Total current
liabilities |
|
|
30,687,759 |
|
|
|
33,733,887 |
|
|
|
(3,046,128 |
) |
|
|
(9.0 |
)% |
Working capital
surplus (deficit): |
|
$ |
10,284,802 |
|
|
$ |
(2,195,377 |
) |
|
$ |
12,480,179 |
|
|
|
(568.5 |
)% |
Our working capital increased by $12,480,179 to a working capital
of $10,284,802 at December 31, 2019 from working capital deficit of
$2,195,377 at December 31, 2018. This increase in working capital
is primarily attributable to an increase in other receivables of
approximately $24,322,000, which was mainly due to receivable from
Geely Technology for the subscription of preferred shares, a
decrease in amounts due to related party of approximately
$3,201,000, a decrease in accrued liabilities and other payables of
approximately $4,542,000 and a decrease in tax payable of
approximately $71,000, offset by a decrease in accounts receivable
of approximately $12,657,000, a decrease in amounts due from
related party of approximately $4,735,000, an increase in accounts
payable of approximately $3,556,000, an increase in deferred
revenue of approximately $781,000 and an increase on lease
liabilities of approximately $432,000.
We intend to meet the cash requirements for the next 12 months from
the issuance date of this report through a combination of debt and
equity financing such as by way of private placements. On June 17,
2020, the Company entered into preferred stock subscription
agreement with Daci Haojin Foundation Limited to issue 15,000,000
preferred shares for $45,000,000.
Cash flows for the year ended December 31, 2019 compared to
the year ended December 31, 2018
The following summarizes the key components of our cash flows for
the years ended December 31, 2019 and 2018:
|
|
Year Ended December 31, |
|
|
|
2019 |
|
|
2018 |
|
Net cash used in operating
activities |
|
$ |
(18,263,544 |
) |
|
$ |
(6,924,876 |
) |
Net cash (used in) provided by
investing activities |
|
|
(14,626,876 |
) |
|
|
1,184,468 |
|
Net cash provided by financing
activities |
|
|
35,440,253 |
|
|
|
6,874,994 |
|
Effect of
foreign exchange rate changes |
|
|
(46,364 |
) |
|
|
(14,747 |
) |
Net increase in
cash |
|
$ |
2,503,469 |
|
|
$ |
1,119,839 |
|
Net cash flow used in operating activities was $18,263,544 for the
year ended December 31, 2019 as compared to net cash flow used in
operating activities of $6,924,876 for the year ended December 31,
2018, an increase of $11,338,668.
Net cash flow used in operating activities for the year ended
December 31, 2019 primarily reflected our net loss of approximately
$31,951,000, and the add-back of non-cash items, mainly consisting
of depreciation and amortization of approximately $5,852,000,
allowance for doubtful receivables of approximately $12,318,000,
impairment of PPE of approximately $95,000, exchange difference of
approximately $506,000, loss on disposal of property and equipment
of approximately $46,000, write off of other payable of
approximately $79,000, amortization of right-of-use assets of
approximately $625,000 and changes in operating assets and
liabilities primarily consisting of an increase in other
receivables and prepayment of approximately $4,699,000, a decrease
in accrued liabilities and other payables of approximately
$24,057,000, a decrease in lease liability of approximately
$567,000, offset by a decrease in accounts receivable of
approximately $420,000, an increase in deferred revenue of
approximately $811,000 and an increase in accounts payable of
approximately $22,486,000.
Net cash flow used in operating activities for the year ended
December 31, 2018 primarily reflected our net loss of approximately
$11,927,000, and the add-back of non-cash items, mainly consisting
of depreciation and amortization of approximately $5,121,000,
allowance for doubtful receivables of approximately $1,845,000, bad
debts written off of approximately $944,000 impairment of
intangible assets of approximately $724,000, impairment of PPE of
approximately $1,228,000, exchange difference of approximately
$1,339,000, and changes in operating assets and liabilities
primarily consisting of an increase in accounts receivable of
approximately $16,319,000, a decrease in deferred revenue of
approximately $963,000, and a decrease in accounts payable of
approximately $2,109,000, offset by a decrease in other receivables
and prepayment of approximately $2,433,000 and an increase in
accrued liabilities and other payables of approximately
$10,684,000.
Net cash flow used in investing activities was $14,626,876 for the
year ended December 31, 2019 as compared to net cash flow provided
by investing activities of $1,184,468 for the year ended December
31, 2018. During the year ended December 31, 2019, we made partial
payment for the acquisition of Saleya Holdings Limited (“Saleya”)
as disclosed in the Form 6K filed on September 13, 2019 of
approximately $14,496,000, and payment for the purchase of
property, plant and equipment of approximately $131,000. During the
year ended December 31, 2018, we made payments for the purchase of
property, plant and equipment of approximately $33,000, offset by
proceeds received from return of deposits of approximately $604,000
and cash received from acquisition subsidiaries of approximately
$613,000.
Net cash flow provided by financing activities was $35,440,253 for
the year ended December 31, 2019 as compared to net cash flow
provided by financing activities of $6,874,994 for the year ended
December 31, 2018. During the year ended December 31, 2019, we
received advances from related parties of approximately $1,629,000,
received proceeds from the sale of shares of approximately
$12,068,000 and loan from Hangzhou Maijie Investment Co., Ltd., a
subsidiary of Geely Technology of approximately $21,744,000. During
the year ended December 31, 2018, we received advances from related
parties of approximately $6,875,000.
C. RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
The discussions of our research and development activities are
contained in “Item 4. Information about our Company – B.
Business Overview – Research and Development” and “Item
5. Operating and Financial Review and Prospects – A. Operating
Results – Operating Expenses – Research and Development
Expenses”. In the years ended December 31, 2019, 2018 and
2017, we spent $8,710,746, $3,478,570 and $1,046,198, respectively,
on research and development activities.
D. TREND
INFORMATION.
Industry and Market Outlook
China has awarded licenses to mobile phone companies to provide the
superfast 4G network to customers. The licenses, which are designed
to give mobile phone users faster access to services, were granted
by the government to China Mobile, China Unicom Hong Kong and China
Telecom. Since the grants, China Mobile has offered 4G to
subscribers from December 18, 2013. China Unicom and China Telecom,
the country’s other two major carriers, also offer 4G wireless. The
number of China Mobile 4G customers has exceeded 900 million by the
end of October in 2017. The move greatly bolstered business for
telecom equipment makers and a range of other companies.
Under China’s 12th Five-Year Plan, a key priority is for China to
transition from “Made in China” to “Designed in China.” In order to
achieve this goal, the government plans to heavily invest in
science and technology education and R&D so as to further
develop China’s intellectual property rights system and support
“Next-Generation IT” as a Strategic Emerging Industry (SEI).
Additionally, China plans to upgrade the technological capabilities
of private and public services, including “triple play” services
(the convergence of telecom, broadcasting and Internet networks),
ecommerce, and e-government and statistics systems. Furthermore,
the government plans to invest in R&D of the “Internet of
things” and cloud computing, and develop digital and virtual
technologies.
E. OFF-BALANCE
SHEET ARRANGEMENTS
We have not entered into any financial guarantees or other
commitments to guarantee the payment obligations of any third
parties. We have not entered into any derivative contracts that are
indexed to our shares and classified as shareholders’ equity, or
that are not reflected in our consolidated financial statements. We
do not have any retained or contingent interest in assets
transferred to an unconsolidated entity that serves as credit,
liquidity or market risk support to such entity. We do not have any
variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or
engages in leasing, hedging or research and development services
with us.
F. TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Contractual obligations
We have certain fixed contractual obligations and commitments that
include future estimated payments. Changes in our business needs,
cancellation provisions, changing interest rates, and other factors
may result in actual payments differing from the estimates. We
cannot provide certainty regarding the timing and amounts of
payments. We have presented below a summary of the most significant
assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within
the context of our consolidated financial position, results of
operations, and cash flows.
The following tables summarize our contractual obligations as of
December 31, 2019 (dollars in thousands), and the effect these
obligations are expected to have on our liquidity and cash flows in
future periods.
|
|
Payments Due by Period |
Contractual obligations: |
|
Total |
|
Less than 1 year |
|
1-2 years |
|
3-5 years |
|
More than
5 years |
Accounts payable |
|
$ |
4,314 |
|
|
$ |
4,314 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Accrued liabilities and other
payables |
|
|
53,318 |
|
|
|
20,379 |
|
|
|
32,939 |
|
|
|
- |
|
|
|
- |
|
Acquisition of Saleya |
|
|
87,378 |
|
|
|
18,539 |
|
|
|
68,839 |
|
|
|
|
|
|
|
|
|
Investment in Botbrain AI Limited |
|
|
6,924 |
|
|
|
- |
|
|
|
6,924 |
|
|
|
|
|
|
|
|
|
Lease
liability |
|
|
728 |
|
|
|
432 |
|
|
|
296 |
|
|
|
- |
|
|
|
- |
|
Total |
|
$ |
152,662 |
|
|
$ |
43,664 |
|
|
$ |
108,998 |
|
|
$ |
- |
|
|
$ |
- |
|
ITEM 6. DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES.
A. DIRECTORS
AND SENIOR MANAGEMENT.
Executive Officers and Directors
The following table sets forth the names and ages as of the date of
this annual report of each of our executive officers and
directors:
Name |
|
Age |
|
Position |
Xuesong
Song |
|
51 |
|
Chief
Executive Officer, Chairman and Director |
Dongpu
Zhang |
|
51 |
|
President |
Baomin
Li |
|
50 |
|
Chief
Technical Officer |
Jie
Yu |
|
35 |
|
Chief
Financial Officer |
Kegang
Peng |
|
47 |
|
Vice
President and Director |
Dennis
Galgano (1)(2) |
|
71 |
|
Director
(Independent) |
David
Wei Tang (1)(2) |
|
54 |
|
Director
(Independent) |
Jin
Meng Bryan Yap (1)(3) |
|
56 |
|
Director
(Independent) |
Zhihao
Xu (3) |
|
43 |
|
Director
(Independent) |
(1) |
Member
of the Audit Committee. |
|
|
(2) |
Member
of the Compensation Committee. |
|
|
(3) |
Member
of the Nominating and Corporate Governance Committee. |
Set forth below is biographical information concerning our
executive officers and directors.
Xuesong Song is a co-founder of C Media Limited and
served as its Chairman of the board of directors and Chief
Executive Officer from 2012 until the consummation of the AEA. From
February 2014 through April 2017, Mr. Song served as a director of
Seven Stars Cloud Group, Inc. (NASDAQ: SSC) and from January 2013
through February 2015, Mr. Song served as a director of Pingtan
Marine Enterprise Ltd. (NASDAQ: PME). From May 2006 through January
2009, Mr. Song served as the Chairman of the Board of ChinaGrowth
North Acquisition Corporation, a special purpose acquisition
company, which acquired UIB Group Limited in January 2009, in which
he remains a director. Mr. Song has been a principal of Chum
Capital Group Limited since August 2001, a merchant banking firm
that invests in growth Chinese companies and advises them in
financings, mergers & acquisitions and restructurings, and
Chief Executive Officer of Beijing Chum Investment Co., Ltd. since
December 2001. Mr. Song has been a director of Mobile Vision
Communication Ltd. since July 2004. Mr. Song received a Master’s of
Business Administration degree from Oklahoma City/Tianjin
Program.
Dongpu Zhang was appointed as the President of the
Company effective on August 25, 2018. Mr. Dongpu Zhang has served
as the General Manager of Superengine Graphics Software Technology
Development (Suzhou) Co., Ltd. (“Superengine Suzhou”) and the Chief
Executive Officer of Superengine Holding Limited since September
2016. From February, 2014 to August, 2016, Mr. Zhang served as vice
president of Industrial Development Group under China Fortune Land
Development Co., Ltd. From March, 2009 to February, 2014, Mr. Zhang
served as the vice president of Aerospace Science and Technology
Holding Group Co., Ltd. Mr. Zhang receive his Master Degree of
Computer Science from Harbin Institute of Technology in 1994 and
his Bachelor Degree of information system from Changsha Institute
of technology in 1991.
Baomin Li serves as the chief technology officer of
the Company since February 1, 2019. From 2017 to 2019, Mr. Li
served at Amazon as Sr. Software Development Manager, in charge of
Amazon’s advertising targeting systems, overseeing infrastructure,
data ingestion & modeling, and targeting products utilizing
comprehensive Amazon’s ecommerce data. Prior to Amazon, Mr. Li
served as the chief technology officer at C Media Limited from 2016
to 2017. Mr. Li worked at CreditEase Inc. as VP of Engineering in
the Big Data Innovation Center from 2014 to 2016, and at Google as
Engineering Manager in advertising quality from 2013 to 2014. From
1999 to 2012, Mr. Li worked at Microsoft Corporation and lastly
served as Senior Development Manager. Mr. Li graduated from Peking
University with a Bachelor’s Degree in Mechanics and a Master’s
Degree in Applied Mathematics, and from University of Missouri with
a Master’s Degree in Computer Science.
Jie Yu served as the chief financial officer of C
Media Limited from January 2018 until the consummation of the asset
exchange transactions. From June 2016 to January 2018, Mr. Yu
served as chief financial officer and secretary of the board of
directors of MTI Environment Group Limited. Prior to joining MTI,
Mr. Yu served as the senior manager at DA HUA CPA from November
2012 to May 2016. Previously, Mr. Yu served as the manager at Crowe
Horwath (Hong Kong) CPA. Mr. Yu holds a bachelor degree in
accounting and finance from University of Auckland and postgraduate
diploma in accounting from University of Auckland.
Kegang Peng served as the Vice Chairman of the board
of directors C Media Limited from October 2014 to the consummation
of the asset exchange transactions, and is now a member of the
Company’s board of directors. Previously, from 2012 to 2014, Mr.
Peng was Chairman of the board and founder of Jiangsu Suqian
Jinghaiboyuan Information and Technology Co., Ltd. Mr. Peng studied
at Beijing University of Aeronautics and Astronautics majoring
computer and application.
Dennis Galgano was appointed as a director of the
Company following the consummation of the asset exchange agreement.
He was a registered consultant with Morgan Joseph Triartisan LLC
from November 2016 until October 2017, and previously served as
vice Chairman and head of international investment banking for
Morgan Joseph Triartisan LLC, which is a registered broker dealer
engaged in the investment banking and financial advisory industry.
Mr. Galgano received a B.S. degree in Chemistry from St. John’s
University and an M.B.A. from The Wharton School in 1972.
Mr. David Wei Tang was appointed as a director of the
Company on December 14, 2019, prior to joining our Company, Mr.
Tang served as President of Huakang Financial Holdings, a Chinese
multi-disciplinary financial holdings group with subsidiaries in
investments, insurance, wealth management and financial technology.
From 2008 to 2010 and from 2012 to 2013, Mr. Tang served as Vice
President, Chief Financial Officer and Chief Strategy Officer of
Vimicro Corporation, a NASDAQ-listed company (NASDAQ: VIMC). Prior
to that, from 2006 to 2008 he served as the Chief Financial Officer
of Fanhua Inc., formerly known as “CNinsure Inc.”, a NASDAQ-listed
company (NASDAQ: FANH), from 2003 to 2004, he served as the Chief
Financial Officer of IRICO Group, a Hong Kong Stock Exchange-listed
company (HKSE: 438) and in 2000, he served as the Chief Financial
Officer of Chinasoft International, a Hong Kong Stock
Exchange-listed company (HKSE: 354). Prior to those positions, he
worked as an equity research analyst at Merrill Lynch & Co. in
New York. Mr. Tang also serves as Chair of Audit Committee of HXD.
Mr. Tang received a master’s degree in business administration from
the Stern School of Business, New York University.
Mr. Jin Meng Bryan Yap was appointed as a director of
the Company on December 14, 2019, Mr. Yap has extensive experience
in investment banking, financial and business consulting, financial
structuring, capital raising, portfolio optimization and balance
sheet restructuring. He is currently the CEO and Managing Director
of Daun Consulting Singapore Pte Ltd, a single family office
focusing on consulting and selective investments. He is also
currently serving as the Honorary Treasurer of the ACI (Financial
Markets Association) – Singapore since 2001.
Zhihao Xu was appointed as a director of the Company
following the consummation of the asset exchange transactions. Mr.
Xu has served as the Chief Executive Officer of Geely Technology,
in Hangzhou, China, since December 2017, and previously served as
the Chairman and Chief Executive Officer of Beijing Dingchengrenhe
Investment Co., Ltd., a funds management company, from January 2017
to December 2017. Mr. Xu served as the Chairman of president of HNA
USOLV CO., LTD., and the chief innovation officer of HNA Logistics
Group from January 2014 to December 2016, and prior to that as the
Chairman of Gopay Innovation Technology Co. Ltd., an online payment
system operator supporting online money transfers, from April 2012
to January 2014. Mr. Xu graduated from the Business School of
Renmin University of China and from the Wudaokou Finance College of
Tsinghua University with a fund qualification certificate and
securities qualification certificate.
B. COMPENSATION.
Compensation of Directors and Executive Officers
For the fiscal year ended December 31, 2019, we paid an aggregate
of approximately $517,871 in cash compensation to our executive
officers and independent directors for serving on our board of
directors.
Other than non-employee directors, we do not intend to compensate
directors for serving on our board of directors or any of its
committees. We do, however, intend to reimburse each member of our
board of directors for out-of-pocket expenses incurred by each
director in connection with attending meetings of the board of
directors and its committees.
Administration
The Incentive Plan is administered by our board of directors, or at
the discretion of the board, by our compensation committee. Our
board of directors has delegated authority to our compensation
committee to administer the Incentive Plan. Subject to the terms of
the Incentive Plan, the compensation committee may select
participants to receive awards, determine the types of awards and
terms and conditions of awards, and interpret provisions of the
Incentive Plan.
The ordinary shares issued or to be issued under the Incentive Plan
consist of authorized but unissued shares. If any ordinary shares
covered by an award are not purchased or are forfeited, or if an
award otherwise terminates without delivery of any ordinary shares,
then the number of ordinary shares counted against the aggregate
number of ordinary shares available under the plan with respect to
the award will, to the extent of any such forfeiture or
termination, again be available for making awards under the
Incentive Plan.
Eligibility
Awards may be made under the Incentive Plan to our employees,
officers, directors, consultants or advisers or to any of our
affiliates, and to any other individual whose participation in the
Incentive Plan is determined to be in our best interests by our
board of directors.
Amendment or Termination of the Plan
Our board of directors may terminate or amend the Incentive Plan at
any time and for any reason. No amendment, however, may adversely
impair the rights of grantees with respect to outstanding awards.
The Incentive Plan has a term of ten years. Amendments will be
submitted for shareholder approval to the extent required by
applicable stock exchange listing requirements or other applicable
laws.
Options
The Incentive Plan permits the granting of options to purchase
ordinary shares intended to qualify as incentive share options
under the Internal Revenue Code and share options that do not
qualify as incentive share options, or non-qualified share
options.
The exercise price of each share option may not be less than 100%
of the fair market value of our ordinary shares representing
ordinary shares on the date of grant. In the case of certain 10%
shareholders who receive incentive share options, the exercise
price may not be less than 110% of the fair market value of our
ordinary shares representing ordinary shares on the date of grant.
An exception to these requirements is made for options that we
grant in substitution for options held by employees of companies
that we acquire. In such a case the exercise price is adjusted to
preserve the economic value of the employee’s share option from his
or her former employer.
The term of each share option is fixed by the compensation
committee and may not exceed ten years from the date of grant. The
compensation committee determines at what time or times each option
may be exercised and the period of time, if any, after retirement,
death, disability or termination of employment during which options
may be exercised.
Options may be made exercisable in installments. The award
agreement provides the vesting of the options. Exercisability of
options may be accelerated by the compensation committee.
In general, an optionee may pay the exercise price of an option by
(1) cash or check (in U.S. dollars or Renminbi or other local
currency as approved by the compensation committee), (2) ordinary
shares held for such period of time as may be required by the
compensation committee, (3) delivery of a notice of a market order
with a broker with respect to ordinary shares then issuable upon
exercise of an option, and that the broker has been directed to pay
us a sufficient portion of net proceeds of the sale in satisfaction
of the exercise price, provided that payment of such proceeds is
then made to us upon settlement of such sale, (4) other property
acceptable to the compensation committee with a fair market value
equal to the exercise price, (5) cashless exercise or (6) any
combination of the foregoing.
Share options granted under the Incentive Plan may not be sold,
transferred, pledged, or assigned other than by will or under
applicable laws of descent and distribution. However, we may permit
limited transfers of non-qualified options for the benefit of
immediate family members of grantees to help with estate planning
concerns or pursuant to a domestic relations order in settlement of
marital property rights.
Other Awards
The compensation committee may also award under the Incentive
Plan:
|
1. |
ordinary shares subject to
restrictions; |
|
2. |
deferred ordinary shares, credited
as deferred ordinary share units, but ultimately payable in the
form of unrestricted ordinary shares in accordance with the terms
of the grant or with the participant’s deferral election; |
|
3. |
ordinary share units subject to
restrictions; |
|
4. |
unrestricted ordinary shares, which
are ordinary shares issued at no cost or for a purchase price
determined by the compensation committee which are free from any
restrictions under the 2011 Omnibus Incentive Plan; |
|
5. |
dividend equivalent rights
entitling the grantee to receive credits for dividends that would
be paid if the grantee had held a specified number of ordinary
shares; or |
|
6. |
a right to receive a number of
ordinary shares or, in the discretion of the compensation
committee, an amount in cash or a combination of ordinary shares
and cash, based on the increase in the fair market value of the
ADSs representing ordinary shares underlying the right during a
stated period specified by the compensation committee. |
Effect of Certain Corporate Transactions
Certain change of control transactions involving us may cause
awards granted under the Incentive Plan to vest, unless the awards
are continued or substituted for by the surviving company in
connection with the corporate transaction.
Unless otherwise provided in the appropriate option agreement on
the date of grant or provided by our board of directors thereafter
with the consent of the grantee, options granted under the
Incentive Plan become exercisable in full following (1) a
dissolution of our company or a merger, consolidation or
reorganization of our company with one or more other entities in
which we are not the surviving entity, (2) a sale of substantially
all of our assets to another person or entity, or (3) any
transaction (including without limitation a merger or
reorganization in which we are the surviving entity) which results
in any person or entity owning 50% or more of the combined voting
power of all classes of our shares.
Adjustments for Dividends and Similar Events
The compensation committee will make appropriate adjustments in
outstanding awards and the number of ordinary shares available for
issuance under the Incentive Plan, including the individual
limitations on awards, to reflect ordinary share dividends, stock
splits and other similar events.
C. BOARD
PRACTICES.
Board of Directors
Our board of directors consists of seven members being Messrs.
Xuesong Song, Kegang Peng, Dennis Galgano, David Wei Tang, Jin Meng
Bryan Yap and Zhihao Xu. Our directors hold office until our annual
meeting of shareholders, where their successors will be duly
elected and qualified, or until the directors’ death, resignation
or removal, whichever is earlier. Our directors are subject to a
four-year term of office and hold office until their resignation,
death or incapacity or until their respective successors have been
elected and qualified in accordance with our fourth amended and
restated memorandum of association and articles of association. A
director will be removed from office if, among other things, the
director (1) becomes bankrupt, (2) dies or becomes of unsound mind,
or (3) is absent from meetings of our board of directors for six
consecutive months without leave and our board of directors
resolves that the office is vacated. A director is not entitled to
any special benefits upon termination of service with the
company.
Director Independence
Our board of directors consists of seven members; Messrs. Dennis
Galgano, David Wei Tang, Jin Meng Bryan Yap and Zhihao Xu have been
determined by us to be independent directors within the meaning of
the independent director guidelines of the NASDAQ Corporate
Governance Rules (the “NASDAQ Rules”).
Committees of Our Board of Directors
To enhance our corporate governance, we established three
committees under our board of directors: an audit committee, a
compensation committee, and a nominating and corporate governance
committee. We have adopted a charter for each of these committees.
The committees have the following functions and members.
Audit Committee
Our audit committee reports to our board of directors regarding the
appointment of our independent public accountants, the scope and
results of our annual audits, compliance with our accounting and
financial policies and management’s procedures and policies
relating to the adequacy of our internal accounting controls. Our
audit committee consists of Messrs. Dennis Galgano, David Wei Tang,
and Jin Meng Bryan Yap. Mr. Galgano, having accounting and
financial management expertise, serves as the Chairman of the audit
committee and is an “audit committee financial expert” as defined
by the rules and regulations of the SEC. Our board of directors has
determined that each of these persons meet the definition of an
“independent director” under the applicable NASDAQ Rules and under
Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”).
Our audit committee is responsible for, among other things:
|
● |
the appointment, evaluation,
compensation, oversight and termination of the work of our
independent auditor (including resolution of disagreements between
management and the independent auditor regarding financial
reporting); |
|
● |
an annual performance evaluation of
the audit committee; |
|
● |
establishing procedures for the
receipt, retention and treatment of complaints regarding
accounting, internal accounting controls, auditing matters or
potential violations of law, and the confidential, anonymous
submission by our employees of concerns regarding questionable
accounting or auditing matters or potential violations of law; |
|
● |
ensuring that it receives an annual
report from our independent auditor describing our internal control
procedures and any steps taken to deal with material control
deficiencies and attesting to the auditor’s independence and
describing all relationships between the auditor and us; |
|
● |
reviewing our annual audited
financial statements and quarterly financial statements with
management and our independent auditor; |
|
● |
reviewing and approving all
proposed related party transactions; |
|
● |
reviewing our policies with respect
to risk assessment and risk management; |
|
● |
meeting separately and periodically
with management and our independent auditor; and |
|
● |
reporting regularly to our board of
directors. |
Compensation Committee
Our compensation committee assists the board of directors in
reviewing and approving the compensation structure of our directors
and executive officers, including all forms of compensation to be
provided to our directors and executive officers. In addition, the
compensation committee reviews share compensation arrangements for
all of our other employees. Members of the compensation committee
are not prohibited from direct involvement in determining their own
compensation. Our Chief Executive Officer is not permitted to be
present at any committee meeting during which his or her
compensation is deliberated. Our compensation committee consists of
Dennis Galgano and David Wei Tang, with Mr. Tang serving as the
Chairman of the compensation committee. Our board of directors has
determined that each of these persons meet the definition of
“independent director” under the applicable requirements of the
NASDAQ Rules.
Our compensation committee is responsible for, among other
things:
|
● |
reviewing and approving corporate
goals and objectives relevant to the compensation of our Chief
Executive Officer, evaluating the performance of our Chief
Executive Officer in light of those goals and objectives and
setting the compensation level of our Chief Executive Officer based
on this evaluation; |
|
● |
reviewing and making
recommendations to the board with respect to the compensation of
our executives, incentive compensation and equity-based plans that
are subject to board approval; and |
|
● |
providing annual performance
evaluations of the compensation committee. |
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee assists the board
of directors in identifying and selecting or recommending
individuals qualified to become our directors, developing and
recommending corporate governance principles and overseeing the
evaluation of our board of directors and management. Our nominating
and corporate governance committee consists of Jin Meng Bryan Yap
and Zhihao Xu, with Mr. Yap serving as the Chairman of the
nominating and corporate governance committee. Our board of
directors has determined that each of these persons meet the
definition of “independent director” under the applicable
requirements of the NASDAQ Rules.
Our nominating and corporate governance committee is responsible
for, among other things:
|
● |
selecting and recommending to our
board nominees for election or re-election to our board, or for
appointment to fill any vacancy; |
|
● |
reviewing annually with our board
the current composition of the board of directors with regards to
characteristics such as independence, age, skills, experience and
availability of service to us; |
|
● |
selecting and recommending to our
board the names of directors to serve as members of the audit
committee and the compensation committee, as well as the nominating
and corporate governance committee itself; advising our board of
directors periodically with regards to significant developments in
the law and practice of corporate governance as well as our
compliance with applicable laws and regulations, and making
recommendations to our board of directors on all matters of
corporate governance and on any remedial action to be taken;
and |
|
● |
monitoring compliance with our code
of business conduct and ethics, including reviewing the adequacy
and effectiveness of our procedures to ensure proper
compliance. |
Code of Business Conduct and Ethics
Our board of directors adopted a code of business conduct and
ethics applicable to our directors, officers and employees.
Duties of Directors
Under British Virgin Islands law, our directors have a duty to act
honestly, in good faith and with a view to our best interests. Our
directors also have a duty to exercise care, diligence and skills
that a reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our
directors must ensure compliance with our memorandum of association
and articles of association. We have the right to seek damages if a
duty owed by our directors is breached.
The functions and powers of our board of directors include, among
others:
|
● |
appointing officers and determining
the term of office of the officers; |
|
● |
authorizing the payment of
donations to religious, charitable, public or other bodies, clubs,
funds or associations as deemed advisable; |
|
● |
exercising the borrowing powers of
the company and mortgaging the property of the company; |
|
● |
executing cheques, promissory notes
and other negotiable instruments on behalf of the company; and |
|
● |
maintaining or registering a
register of mortgages, charges or other encumbrances of the
company. |
Remuneration and Borrowing
The directors may receive such remuneration as our board of
directors may determine from time to time. Each director is
entitled to be repaid or prepaid all traveling, hotel and
incidental expenses reasonably incurred or expected to be incurred
in attending meetings of our board of directors or committees of
our board of directors or shareholder meetings or otherwise in
connection with the discharge of his or her duties as a director.
The compensation committee will assist the directors in reviewing
and approving the compensation structure for the directors.
Our board of directors may exercise all the powers of the company
to borrow money and to mortgage or charge our undertakings and
property or any part thereof, to issue debentures, debenture stock
and other securities whenever money is borrowed or as security for
any debt, liability or obligation of the company or of any third
party.
Qualification
A director is not required to hold shares as a qualification to
office.
Limitation on Liability and Other Indemnification
Matters
British Virgin Islands law does not limit the extent to which a
company’s memorandum of association and articles of association may
provide for indemnification of officers and directors, except to
the extent any such provision may be held by the British Virgin
Islands courts to be contrary to public policy, such as to provide
indemnification against civil fraud or the consequences of
committing a crime.
Under our memorandum of association and articles of association, we
may indemnify our directors, officers and liquidators against all
expenses, including legal fees, and against all judgments, fines
and amounts paid in settlement and reasonably incurred in
connection with legal administrative or investigative proceedings
to which they are party or are threatened to be made a party by
reason of their acting as our director, officer or liquidator. To
be entitled to indemnification, these persons must have acted
honestly and in good faith with a view to the best interest of the
company and, in the case of criminal proceedings, they must have
had no reasonable cause to believe their conduct was unlawful.
Compensation Committee Interlocks and Insider
Participation
None of the members of our compensation committee is an officer or
employee of our company. None of our executive officers currently
serves, or in the past year has served, as a member of the board of
directors or compensation committee of any entity that has one or
more executive officers serving on our board of directors or
compensation committee.
Employment Agreements
On August 19, 2018, the Company entered into an Employment
Agreement (the “Song Agreement”) with Mr. Xuesong Song, to serve as
the Chief Executive Officer of the Company for a four-year term,
subject to renewal. Under the terms of the Song Agreement, Mr. Song
will receive no salary for his services but will be eligible for an
annual cash bonus in the Board’s sole discretion.
On August 19, 2018, the Company entered into an Employment
Agreement (the “Yu Agreement”) with Mr. Jie Yu, to serve as the
Chief Financial Officer of the Company for a four-year term,
subject to renewal. Under the terms of the Yu Agreement, Mr. Yu
will receive an annual salary of RMB700,000, and will be eligible
for an annual cash bonus in the Board’s sole discretion.
On February 1, 2019, the Company entered into an Employment
Agreement (the “Li Agreement”) with Mr. Baomin Li, to serve as the
Chief Technology Officer of the Company for a four-year term,
subject to renewal. Under the terms of the Li Agreement, Mr. Li
will receive an annual salary of RMB2,000,000, and will be eligible
for an annual cash bonus in the Board’s sole discretion.
D. EMPLOYEES.
As of December 31, 2019 and 2018, we had a total of 182 and 111
full-time employees, including 90 and 51 in research and
development, 19 and 17 in sales and marketing and the rest in a
variety of other divisions, respectively. All of our employees are
full-time employees. None of our employees is currently represented
by a union and/or collective bargaining agreements. We believe that
we have good relations with our employees and since our inception
we have had no history of work stoppages or union organizing
campaigns.
E. SHARE
OWNERSHIP.
The following table provides information as to the beneficial
ownership of our ordinary shares as of December 31, 2019, by the
persons listed. Beneficial ownership of shares is determined under
the rules of the SEC and generally includes any shares over which a
person exercises sole or shared voting or investment power. For
purposes of the following table, a person is deemed to have
beneficial ownership of any ordinary shares if such person has the
right to acquire such shares within 60 days of December 31, 2019.
For purposes of computing the percentage of outstanding shares held
by each person, any shares that such person has the right to
acquire within 60 days after of December 31, 2019 are deemed to be
outstanding, but are not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person. Except
as otherwise noted, the persons named in the table have sole voting
and investment power with respect to all of the ordinary shares
beneficially owned by them. Unless otherwise indicated, the address
of each person listed is c/o Luokung Technologies, B9-8, Block B,
SOHO Phase II, No. 9, Guanghua Road, Chaoyang District, Beijing,
People’s Republic of China.
Percentage ownership of the ordinary shares in the following table
is based on 209,081,533 ordinary shares outstanding on December 31,
2019.
|
|
Number
of shares
|
|
|
Percent
of
class
|
|
Directors and
named executive officers |
|
|
|
|
|
|
Xuesong Song, Chairman,
Chief Executive Officer and Director (1) |
|
|
38,156,430 |
|
|
|
18.25 |
% |
Kegang Peng, Vice President and
Director (2) |
|
|
17,231,955 |
|
|
|
8.24 |
% |
Dennis Galgano, Director |
|
|
75,796 |
|
|
|
* |
% |
Zhihao Xu, Director (3) |
|
|
6,962,832 |
|
|
|
3.33 |
% |
Dongpu Zhang, President (4) |
|
|
2,321,792 |
|
|
|
1.11 |
% |
Directors and executive officers as a
group (10 persons) |
|
|
64,748,805 |
|
|
|
30.97 |
% |
|
(1) |
Consists
of (i) 4,030,882 shares owned directly by Charm Dragon
International Limited, a British Virgin Islands company and (ii)
22,624,793 shares owned directly by Bravo First Development
Limited, a British Virgin Islands company. Mr. Xuesong Song is
the controlling shareholder of Bravo First Development Limited. Mr.
Xuesong Song is the sole director of Charm Dragon
International Limited. Mr. Xuesong Song also owns all 1,000,000 of
the Company’s outstanding preferred shares, and each preferred
share has the right to 399 votes at a meeting of the shareholders
of the Company. Mr. Song therefore is the controlling
shareholder of the Company. |
|
(2) |
Consists
of 17,231,955 shares owned directly by Plenty Prestige Enterprises
Limited, a British Virgin Islands company. Mr. Kegang Peng is the
sole director of Plenty Prestige Enterprises Limited. |
|
(3) |
Consists
of 6,962,832 shares directly owned by Geely Group Limited., Mr.
Zhihao Xu is the Chief Executive Officer of Geely
Technology. |
|
(4) |
Consists
of 2,321,792 shares owned directly by Genoa Peak Limited, a British
Virgin Islands company. Mr. Dongpu Zhang controls Genoa Peak
Limited. |
|
* |
Represents
less than 1% of shares outstanding |
ITEM 7. MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
A. MAJOR
SHAREHOLDERS
Please refer to Item 6.E “Directors, Senior Management and
Employees — Share Ownership.”
To our knowledge, (A) we are not directly or indirectly owned
or controlled by (i) another corporation or (ii) any
foreign government and (B) there are no arrangements
(including any announced or expected takeover bid), the operation
of which may at a subsequent date result in a change in our
control.
The voting rights of our major shareholders do not differ from the
voting rights of other holders of the same class of shares.
B. RELATED
PARTY TRANSACTIONS. BUSINESS RELATIONSHIPS.
Our subsidiaries, consolidated affiliated entities, and the
subsidiaries of the consolidated affiliated entities have engaged,
during the ordinary course of business, in a number of customary
transactions with each other. All of these inter-company balances
have been eliminated in consolidation.
As of December 31, 2019 and 2018, we had amount due from a related
party, Ya Tuo Ji International Consultancy (Beijing) Limited, in
the amounts of $0.2 million and $0.2 million, respectively. As of
December 31, 2018, we had amount due from C Media Limited of $4.7
million. These amounts due from related parties are short term in
nature, non-interest bearing, unsecured and repayable on
demand.
As of December 31, 2019 and 2018, we had amounts due to related
parties, Mr. Song, C Media and Vision Capital Profits Limited, in
the amounts of $Nil and $1.01 million; $0.06 million and $Nil;
$0.11 million and $1.75 million, respectively. These amounts due to
related parties are short term in nature, non-interest bearing,
unsecured and payable on demand.
Our Chairman and Chief Executive Officer, Mr. Xuesong Song, serves
as an officer of Beijing Zhong Chuan Shi Xun and is one of the
legal owners of Beijing Zhong Chuan Shi Xun. The following table
sets forth the relationship of Mr. Song with Beijing Zhong Chuan
Shi Xun:
Name |
|
Relationship with
Luokung Technology
|
|
Relationship with
Beijing Zhong Chuan
Shi Xun
|
|
Percentage
Ownership Interest in
Beijing Zhong Chuan
Shi Xun
|
|
Xuesong
Song |
|
Chief
Executive Officer |
|
Chief
Executive Officer |
|
|
61.82 |
% |
C. INTERESTS
OF EXPERTS AND COUNSEL.
None.
ITEM 8. FINANCIAL
INFORMATION.
A. CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION.
See “Item 18. Financial Statements.”
Legal Proceedings
To our knowledge, other than as described below there are no
material legal proceedings threatened against us. From time to
time, we may be subject to various claims and legal actions arising
in the ordinary course of business. Following the consummation of
the AEA, we became successor in interest to the legal proceedings
described below.
Lawsuit with Gansu Jinlun Culture Media Co., Ltd.
On August 22, 2014, Zhong Chuan Rui You and Gansu Jinlun Culture
Media Co., Ltd. (“Gansu Jinlun”) signed a “Lanzhou Railway Bureau
Air-conditioned Train Wi-Fi Network System Advertising
Operation Rights Agreement” for advertising on 72 trains
of $1,467,880 (RMB9,604,633). Due to the dispute on the
project implementation, Zhong Chuan Rui You
did not pay the advertising fee. On August 23, 2017,
Gansu Jinlun filed a lawsuit with Gansu Intermediate People’s
Court. On December 19, 2017, Gansu Intermediate People’s Court
issued a verdict, ruling that Zhong Chuan Rui You
settle the overdue advertising fee. Zhong Chuan Rui You
and Gansu Jinlun agreed on the settlement amount to approximately
$502,000 (RMB3,500,000).
Lawsuit with Beijing iQIYI Technology Co., Ltd.
On February 15, 2019, Beijing iQIYI Technology Co., Ltd. filed
lawsuits with Beijing Internet Court alleging Shenzhen Jiu Zhou Shi
Dai Digital and Technology Limited and Beijing Zhong Chuan Shi Xun
Technology Limited are in infringement of exclusive rights to
communication through an information network of certain works,
performances, audio and video products and claiming the economic
loss amounts to approximately $562,000 (RMB 3,920,000).
On December 14, 2019, Beijing Internet Court arranged a trial;
Beijing iQIYI and the Company are negotiating a potential
settlement while expecting a verdict from the court. According to
legal counsel, it is probable that the settlement will amount to
approximately $93,000 (RMB650,000).
Dividend Policy
We currently intend to retain all of our available funds and future
earnings for use in the operation and expansion of our business and
do not anticipate paying cash dividends in the foreseeable future.
Under the terms of our Amended and Restated Memorandum and Articles
of Association the declaration and payment of any dividends in the
future will be determined by our board of directors, in its
discretion, and will depend on a number of factors, including our
earnings, capital requirements and overall financial condition and
our ability to receive dividends from our subsidiaries. If we pay
any dividends, we will pay our shareholders’ dividends with respect
to their underlying shares to the same extent as holders of our
ordinary shares, subject to the terms of the deposit agreement,
including the fees and expenses payable thereunder. Cash dividends
on our ordinary shares, if any, will be paid in U.S. dollars.
Our ability to receive dividends from our subsidiaries may limit
our ability to pay dividends on our ordinary shares. See
Risk Factors – Risks Related to Doing Business in
China – Our holding company structure may limit the
payment of dividends” and “Item 10. Additional
Information – D. Exchange Controls – Dividend Distribution”.
B. SIGNIFICANT
CHANGES.
N/A
ITEM 9. THE
OFFER AND LISTING
A. OFFER AND LISTING
DETAILS.
Markets and Share Price History
The primary trading market for our ordinary shares, as represented
by American Depositary Shares or ADSs is the NASDAQ Capital Market,
where our shares have been listed and traded under the symbol KONE
since May 14, 2010. On August 17, 2018, we completed the
transactions contemplated by the Asset Exchange Agreement (“AEA”)
with C Media Limited (“C Media”) entered into on January 25, 2018.
On August 20, 2018, we changed our name to Luokung Technology
Corp., our American Depository Shares (“ADSs”) were voluntarily
delisted from the NASDAQ Capital Market on September 19, 2018 and
on January 3, 2019 our ordinary shares started trading on NASDAQ
under the ticker symbol “LKCO”.
The table below sets forth the high and low reported sales prices
in dollars of our ordinary shares, as reported by NASDAQ in the
periods as indicated:
|
|
ADRs*/Ordinary
Shares |
|
|
|
High |
|
|
Low |
|
Quarterly Highs and Lows (for the two most recent full financial
years and any subsequent period, based on calendar quarter
end) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
|
|
|
|
Fourth Quarter |
|
|
6.13 |
|
|
|
1.28 |
|
Third Quarter |
|
|
10.26 |
|
|
|
5.43 |
|
Second Quarter |
|
|
7.50 |
|
|
|
5.21 |
|
First Quarter |
|
|
12.20 |
|
|
|
7.00 |
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
Third Quarter |
|
|
8.00 |
|
|
|
6.30 |
|
Second Quarter |
|
|
8.82 |
|
|
|
4.25 |
|
First Quarter |
|
|
6.40 |
|
|
|
3.70 |
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
|
5.59 |
|
|
|
2.91 |
|
Third Quarter |
|
|
3.99 |
|
|
|
2.67 |
|
Second Quarter |
|
|
4.06 |
|
|
|
3.07 |
|
First Quarter |
|
|
5.15 |
|
|
|
2.83 |
|
|
|
|
|
|
|
|
|
|
Monthly Highs and Lows (for the most recent six months) |
|
|
|
|
|
|
|
|
December 2019 |
|
|
1.57 |
|
|
|
1.32 |
|
November 2019 |
|
|
1.69 |
|
|
|
1.28 |
|
October 2019 |
|
|
6.13 |
|
|
|
1.49 |
|
September 2019 |
|
|
7.04 |
|
|
|
5.43 |
|
August 2019 |
|
|
10.26 |
|
|
|
6.11 |
|
July 2019 |
|
|
10.09 |
|
|
|
6.20 |
|
|
* |
Prior to January 3, 2019, we traded
ADS instead of Ordinary Shares. |
B. PLAN OF
DISTRIBUTION.
Not Applicable.
C. MARKETS.
The primary trading market for our ordinary shares is the NASDAQ
Capital Market, where our ordinary shares are listed and traded
since May 14, 2010. On August 17, 2018, we completed the
transactions contemplated by the Asset Exchange Agreement (“AEA”)
with C Media Limited (“C Media”) entered into on January 25, 2018.
On August 20, 2018, we changed our name to Luokung Technology
Corp., our American Depository Shares (“ADSs”) were voluntarily
delisted from the NASDAQ Capital Market on September 19, 2018 and
on January 3, 2019 our ordinary shares started trading on NASDAQ
under the ticker symbol “LKCO”.
D. SELLING
SHAREHOLDERS.
Not applicable.
E. DILUTION.
Not applicable.
F. EXPENSES OF THE
ISSUE.
Not applicable.
ITEM 10. ADDITIONAL
INFORMATION.
A. SHARE
CAPITAL
Not applicable.
B. MEMORANDUM
AND ARTICLES OF ASSOCIATION
We are a British Virgin Islands company incorporated with limited
liability and our affairs are governed by the provisions of our
memorandum of association and articles of association, as amended
and restated from time to time, and by the provisions of applicable
British Virgin Islands law.
Our memorandum of association and articles of association authorize
the issuance of up to 522,794,872 shares, which are designated into
(i) 500,000,000 ordinary shares of par value $0.01 each
(“Ordinary Shares”), (ii) 1,000,000 preferred shares of par
value $0.01 each (“Preferred Shares”), and (iii) 21,794,872
series A preferred shares of par value $0.01 each, in each case
with the rights, preferences and privileges as set out in the
memorandum and articles of association of the Company.
The following is a summary of the material provisions of our
ordinary shares and our memorandum of association and articles of
association.
Ordinary Shares
All of our issued and outstanding ordinary shares are fully paid
and non-assessable. Holders of our ordinary shares who are
non-residents of the British Virgin Islands may freely hold and
vote their shares.
Subject to the memorandum and articles of association (and, for
greater clarity, without prejudice to any special rights conferred
thereby on the holders of any other shares), an Ordinary Share of
the Company confers on the holder:
|
(a) |
the
right to one vote at a meeting of the members or on any resolution
of members; |
|
(b) |
the
right to an equal share in any distribution paid by the Company;
and |
|
(c) |
the
right to an equal share in the distribution of the surplus assets
of the Company on a winding up. |
Subject to the memorandum and articles of association (and, for
greater clarity, without prejudice to any special rights conferred
thereby on the holders of any other shares), a Preferred Share of
the Company confers on the holder:
|
(a) |
the
right to 399 votes at a meeting of the members or on any resolution
of members; |
|
(b) |
the
right to an equal share in any distribution paid by the
Company; |
|
(c) |
the
right to an equal share in the distribution of the surplus assets
of the Company on a winding up; |
|
(d) |
be
freely transferable, in whole or in part, by Mr. Xuesong Song to
any third party through one or more Private Transactions, subject
to Applicable Law; and |
|
(e) |
be
freely transferable, in whole or in part, by Mr. Xuesong Song to
any third party through one or more Public Transactions, subject to
Applicable Law and Automatic Conversion of such Preferred Share(s)
into Ordinary Share(s). |
Each Preferred Share shall be automatically converted at any time
after issue and without the payment of any additional sum into an
equal number of fully paid Ordinary Shares upon the conclusion of
any transfer by Mr. Xuesong Song to any third party through one or
more Public Transactions.
Limitation on Liability and Indemnification Matters
Under British Virgin Islands law, each of our directors and
officers, in performing his or her functions, is required to act
honestly and in good faith with a view to our best interests and
exercise the care, diligence and skill that a reasonably prudent
person would exercise in comparable circumstances. Such limitation
of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission. These provisions will not
limit the liability of directors under United States federal
securities laws.
We may indemnify any of our directors or anyone serving at our
request as a director of another entity against all expenses,
including legal fees, and against all judgments, fines and amounts
paid in settlement and reasonably incurred in connection with
legal, administrative or investigative proceedings. We may only
indemnify a director if he or she acted honestly and in good faith
with the view to our best interests and, in the case of criminal
proceedings, the director had no reasonable cause to believe that
his or her conduct was unlawful. The decision of our board of
directors as to whether the director acted honestly and in good
faith with a view to our best interests and as to whether the
director had no reasonable cause to believe that his or her conduct
was unlawful, is in the absence of fraud sufficient for the
purposes of indemnification, unless a question of law is involved.
The termination of any proceedings by any judgment, order,
settlement, conviction or the entry of no plea does not, by itself,
create a presumption that a director did not act honestly and in
good faith and with a view to our best interests or that the
director had reasonable cause to believe that his or her conduct
was unlawful. If a director to be indemnified has been successful
in defense of any proceedings referred to above, the director is
entitled to be indemnified against all expenses, including legal
fees, and against all judgments, fines and amounts paid in
settlement and reasonably incurred by the director or officer in
connection with the proceedings.
We may purchase and maintain insurance in relation to any of our
directors or officers against any liability asserted against the
directors or officers and incurred by the directors or officers in
that capacity, whether or not we have or would have had the power
to indemnify the directors or officers against the liability as
provided in our memorandum of association and articles of
association.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted for our directors or officers under
the foregoing provisions, we have been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is
therefore unenforceable as a matter of United States law.
Differences in Corporate Law
We were incorporated under, and are governed by, the laws of the
British Virgin Islands. The corporate statutes of the State of
Delaware and the British Virgin Islands are similar, and the
flexibility available under British Virgin Islands law has enabled
us to adopt memorandum of association and articles of association
that will provide shareholders with rights that do not vary in any
material respect from those they would enjoy if we were
incorporated under the Delaware General Corporation Law, or
Delaware corporate law. Set forth below is a summary of some of the
differences between provisions of the BVI Act applicable to us and
the laws application to companies incorporated in Delaware and
their shareholders.
Director’s Fiduciary Duties
Under Delaware corporate law, a director of a Delaware corporation
has a fiduciary duty to the corporation and its stockholders. This
duty has two components: the duty of care and the duty of loyalty.
The duty of care requires that a director act in good faith, with
the care that an ordinarily prudent person would exercise under
similar circumstances. Under this duty, a director must inform
himself of, and disclose to stockholders, all material information
reasonably available regarding a significant transaction. The duty
of loyalty requires that a director act in a manner he reasonably
believes to be in the best interests of the corporation. He must
not use his corporate position for personal gain or advantage. This
duty prohibits self-dealing by a director and mandates that the
best interest of the corporation and its stockholders take
precedence over any interest possessed by a director, officer or
controlling stockholder and not shared by the stockholders
generally. In general, actions of a director are presumed to have
been made on an informed basis, in good faith and in the honest
belief that the action taken was in the best interests of the
corporation. However, this presumption may be rebutted by evidence
of a breach of one of the fiduciary duties. Should such evidence be
presented concerning a transaction by a director, a director must
prove the procedural fairness of the transaction, and that the
transaction was of fair value to the corporation.
British Virgin Islands law provides that every director of a
British Virgin Islands company in exercising his powers or
performing his duties shall act honestly and in good faith and in
what the director believes to be in the best interests of the
company. Additionally, the director shall exercise the care,
diligence and skill that a reasonable director would exercise in
the same circumstances taking into account the nature of the
company, the nature of the decision and the position of the
director and his responsibilities. In addition, British Virgin
Islands law provides that a director shall exercise his powers as a
director for a proper purpose and shall not act, or agree to the
company acting, in a manner that contravenes the BVI Act or the
memorandum of association or articles of association of the
company.
Amendment of Governing Documents
Under Delaware corporate law, with very limited exceptions, a vote
of the stockholders is required to amend the certificate of
incorporation. Under British Virgin Islands law and our memorandum
of association and articles of association, (i) our shareholders
may amend our memorandum of association and articles of association
by a resolution of shareholders, or (ii) our board of directors may
amend our memorandum of association and articles of association by
a resolution of directors without a requirement for a resolution of
shareholders so long as the amendment does not:
|
● |
restrict the rights of the
shareholders to amend the memorandum of association and articles of
association; |
|
● |
change the percentage of
shareholders required to pass a resolution of shareholders to amend
the memorandum of association and articles of association; |
|
● |
amend the memorandum of association
and articles of association in circumstances where the memorandum
of association and articles of association cannot be amended by the
shareholders; or |
|
● |
amend the provisions of memorandum
of association or the articles of association pertaining to “rights
attaching to shares,” “rights not varied by the issue of the shares
pari passu,” “variation of rights” and “amendment of memorandum and
articles”. |
Written Consent of Directors
Under Delaware corporate law, directors may act by written consent
only on the basis of a unanimous vote. Under British Virgin Islands
law, directors’ consents need only a majority of directors signing
to take effect under our memorandum association and articles of
association, directors may act by written consents of all
directors.
Written Consent of Shareholders
Under Delaware corporate law, unless otherwise provided in the
certificate of incorporation, any action to be taken at any annual
or special meeting of stockholders of a corporation, may be taken
by written consent of the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to
take such action at a meeting. As permitted by British Virgin
Islands law, shareholders’ consents need only a majority of
shareholders signing to take effect. Our memorandum of association
and articles of association provide that shareholders may approve
corporate matters by way of a resolution consented to at a meeting
of shareholders or in writing by a majority of shareholders
entitled to vote thereon.
Shareholder Proposals
Under Delaware corporate law, a shareholder has the right to put
any proposal before the annual meeting of shareholders, provided it
complies with the notice provisions in the governing documents. A
special meeting may be called by the board of directors or any
other person authorized to do so in the governing documents, but
shareholders may be precluded from calling special meetings.
British Virgin Islands law and our memorandum of association and
articles of association provide that our directors shall call a
meeting of the shareholders if requested in writing to do so by
shareholders entitled to exercise 30% or more of the voting rights
in respect of the matter for which the meeting is requested.
Sale of Assets
Under Delaware corporate law, a vote of the stockholders is
required to approve the sale of assets only when all or
substantially all assets are being sold. In the British Virgin
Islands, shareholder approval is required when more than 50% of the
company’s total assets by value are being disposed of or sold.
Dissolution; Winding Up
Under Delaware corporate law, unless the board of directors
approves the proposal to dissolve, dissolution must be approved by
shareholders holding 100% of the total voting power of the
corporation. Only if the dissolution is initiated by the board of
directors may it be approved by a simple majority of the
corporation’s outstanding shares. Delaware corporate law allows a
Delaware corporation to include in its certificate of incorporation
a supermajority voting requirement in connection with dissolutions
initiated by the board. As permitted by British Virgin Islands law
and our memorandum of association and articles of association, we
may be voluntarily liquidated under Part XII of the BVI Act by
resolution of directors and resolution of shareholders if we have
no liabilities and we are able to pay our debts as they fall
due.
Redemption of Shares
Under Delaware corporate law, any stock may be made subject to
redemption by the corporation at its option or at the option of the
holders of such stock provided there remains outstanding shares
with full voting power. Such stock may be made redeemable for cash,
property or rights, as specified in the certificate of
incorporation or in the resolution of the board of directors
providing for the issue of such stock. As permitted by British
Virgin Islands law, and our memorandum of association and articles
of association, shares may be repurchased, redeemed or otherwise
acquired by us. Our directors must determine that immediately
following the redemption or repurchase we will be able to satisfy
our debts as they fall due and the value of our assets exceeds our
liabilities.
Variation of Rights of Shares
Under Delaware corporate law, a corporation may vary the rights of
a class of shares with the approval of a majority of the
outstanding shares of such class, unless the certificate of
incorporation provides otherwise. As permitted by British Virgin
Islands law, and our memorandum of association and articles of
association, if our share capital is divided into more than one
class of shares, we may vary the rights attached to any class only
with the consent in writing of holders of not less than
three-fourths of the issued shares of that class and holders of not
less than three-fourths of the issued shares of any other class of
shares which may be affected by the variation.
Removal of Directors
Under Delaware corporate law, a director of a corporation with a
classified board may be removed only for cause with the approval of
a majority of the outstanding shares entitled to vote, unless the
certificate provides otherwise. As permitted by British Virgin
Islands law and our memorandum of association and articles of
association, directors may be removed with or without cause by
resolution of directors or resolution of shareholders.
Mergers
Under the BVI Act, two or more companies may merge or consolidate
in accordance with the statutory provisions. A merger means the
merging of two or more constituent companies into one of the
constituent companies, and a consolidation means the uniting of two
or more constituent companies into a new company. In order to
merger or consolidate, the directors of each constituent company
must approve a written plan of merger or consolidation which must
be authorized by a resolution of shareholders.
Shareholders not otherwise entitled to vote on the merger or
consolidation may still acquire the right to vote if the plan of
merger or consolidation contains any provision which, if proposed
as an amendment to the memorandum association or articles of
association, would entitle them to vote as a class or series on the
proposed amendment. In any event, all shareholders must be given a
copy of the plan of merger or consolidation irrespective of whether
they are entitled to vote at the meeting or consent to the written
resolution to approve the plan of merger or consolidation.
Inspection of Books and Records
Under Delaware corporate law, any shareholder of a corporation may
for any proper purpose inspect or make copies of the corporation’s
stock ledger, list of shareholders and other books and records.
Holders of our shares have no general right under British Virgin
Islands law to inspect or obtain copies of our list of shareholders
or our corporate records. However, we will provide holders of our
shares with annual audited financial statements. See “Where You Can
Find Additional Information.”
Conflict of Interest
The BVI Act provides that a director shall, after becoming aware
that he is interested in a transaction entered into or to be
entered into by the company, disclose that interest to the board of
directors of the company. The failure of a director to disclose
that interest does not affect the validity of a transaction entered
into by the director or the company, so long as the director’s
interest was disclosed to the board prior to the company’s entry
into the transaction or was not required to be disclosed (for
example where the transaction is between the company and the
director himself or is otherwise in the ordinary course of business
and on usual terms and conditions). As permitted by British Virgin
Islands law and our memorandum of association and articles of
association, a director interested in a particular transaction may
vote on it, attend meetings at which it is considered, and sign
documents on our behalf which relate to the transaction.
Transactions with Interested Shareholders
Delaware corporate law contains a business combination statute
applicable to Delaware public corporations whereby, unless the
corporation has specifically elected not to be governed by such
statute by amendment to its certificate of incorporation, it is
prohibited from engaging in certain business combinations with an
“interested shareholder” for three years following the date that
such person becomes an interested shareholder. An interested
shareholder generally is a person or group who or that owns or
owned 15% or more of the target’s outstanding voting stock within
the past three years. This has the effect of limiting the ability
of a potential acquirer to make a two-tiered bid for the target in
which all shareholders would not be treated equally. The statute
does not apply if, among other things, prior to the date on which
such shareholder becomes an interested shareholder, the board of
directors approves either the business combination or the
transaction that resulted in the person becoming an interested
shareholder. This encourages any potential acquirer of a Delaware
public corporation to negotiate the terms of any acquisition
transaction with the target’s board of directors.
British Virgin Islands law has no comparable provision. As a
result, we cannot avail ourselves of the types of protections
afforded by the Delaware business combination statute. However,
although British Virgin Islands law does not regulate transactions
between a company and its significant shareholders, it does provide
that such transactions must be entered into bona fide in the best
interests of the company and not with the effect of constituting a
fraud on the minority shareholders.
Independent Directors
There are no provisions under Delaware corporate law or under the
BVI Act that require a majority of our directors to be
independent.
Cumulative Voting
Under Delaware corporate law, cumulative voting for elections of
directors is not permitted unless the company’s certificate of
incorporation specifically provides for it. Cumulative voting
potentially facilitates the representation of minority shareholders
on a board of directors since it permits the minority shareholder
to cast all the votes to which the shareholder is entitled on a
single director, which increases the shareholder’s voting power
with respect to electing such director. There are no prohibitions
to cumulative voting under the laws of the British Virgin Islands,
but our memorandum of association and articles of association do
not provide for cumulative voting
Anti-takeover Provisions in Our Memorandum of association and
articles of association
Some provisions of our memorandum of association and articles of
association may discourage, delay or prevent a change in control of
our company or management that shareholders may consider favorable,
including provisions that authorize our board of directors to issue
preference shares in one or more series and to designate the price,
rights, preferences, privileges and restrictions of such preference
shares.
C. MATERIAL
CONTRACTS.
On January 25, 2018, the Company executed an Asset Exchange
Agreement (“AEA”) with C Media Limited, a corporation organized
under the laws of the Cayman Islands (“C Media”), whereby the
Company agreed to purchase all the capital stock and equity
interests of LK Technology Ltd, together with its wholly-owned
subsidiaries MMB Limited and Mobile Media (China) Limited and all
respective subsidiaries from C Media in exchange for (i)
185,412,599 ordinary shares of the Company, par value $0.01 per
share (“Ordinary Shares”), (ii) 1,000,000 preferred shares of
Kingtone (“Preferred Shares”) and (iii) all issued and outstanding
capital stock or equity interests of the Company’s subsidiary,
Topsky Info-Tech Holdings Pte Ltd., and its wholly-owned subsidiary
Xi’an Softech Co., Ltd., including all entities effectively
controlled by Xi’an Softech Co., Ltd. through contractual
arrangements and variable business entities.
To consummate the contemplated transactions described above, the
Company obtained shareholder consent at a special meeting held on
May 20, 2018, (i) to authorize 1,000,000 Preferred Shares, (ii) to
authorize additional Ordinary Shares so that total authorized
Ordinary Shares is equal to 250,000,000 shares, (iii) to list such
Ordinary Shares on NASDAQ, and (iv) to approve the transactions
contemplated in the Asset Exchange Agreement. Additionally, NASDAQ
needed to approve the contemplated transactions prior to
consummation thereof. C Media had the right to terminate the AEA if
the closing had not occurred (other than through the failure of C
Media to comply fully with its obligations under the AEA) on or
before July 31, 2018. The transactions contemplated by the AEA were
consummated on August 17, 2018.
On January 25, 2018, five shareholders of the Company including its
largest shareholder and its Chief Executive Officer executed a
Securities Purchase Agreement, whereby such shareholders agreed to
sell a total of 617,988 Ordinary Shares and 282,694 American
Depository Shares of the Company to Redstone YYL Management
Limited, a company incorporated in the British Virgin Islands, in
exchange for an aggregate purchase price of $1,897,860.09.
On August 25, 2018, LK Technology entered into a Stock Purchase
Agreement (the “Agreement”) with the shareholders (“Shareholders”)
of Superengine Holding Limited, a limited liability company
incorporated under the laws of the British Virgin Islands (the
“Superengine”), pursuant to which LK Technology acquired all of the
issued and outstanding shares of Superengine for an aggregate
purchase price of US$60 million (the “Purchase Price”), which was
paid by the issuance of our Ordinary Shares in an amount equal to
the quotient of (x) the Purchase Price divided by (y) the average
of the closing prices of the Ordinary Shares on the NASDAQ Capital
Market over the 12 months period preceding July 31, 2018. We are a
party to the Agreement in connection with the issuance of the
Ordinary Shares and certain other limited purposes.
On August 28, 2019, the Company entered into a Share Purchase
Agreement, pursuant to which the Company will acquire 100% of the
equity interests of Saleya from Saleya’s shareholders for an
aggregate purchase price of RMB 836 million (approximately
equivalent to $120 million), which includes approximately RMB 709
million (approximately equivalent to $101 million) in cash and the
remaining RMB 127 million (approximately equivalent to $18 million)
will be paid by issuance of the Company’s common stock (the
“Shares”) at the conversion rate of $7 per share. In connection
with its acquisition of Saleya, on January 21, 2020, as of December
31, 2019 and on January 21, 2020, the Company made a partial cash
payment of $14,334,451 and $18,539,343, respectively, and on
February 5, 2020 it issued 2,708,498 common shares to certain
shareholders of Saleya in accordance with Share Purchase Agreement.
On February 24, 2020, the Company reached an agreement with two of
the Saleya’s shareholders to issue 1,500,310 of Series B preferred
shares instead of a cash payment of $6,182,000 (RMB43,128,000) as a
change of consideration for the acquisition of Saleya,
On November 13, 2019, the Company entered into a Share Subscription
Agreement with Geely Technology to issue 21,794,872 series A
preferred shares at a purchase price of $1.95 per share for an
aggregate purchase price of $42,500,000. Per the terms of the
agreement and in accordance with ASC Topic 480-10, the Company
recognized $32,910,257 as loan. The Company received $21,743,857 as
of December 31, 2019 and the remaining amount was received in
January 2020. Geely may request the repayment after November of
2020, under such circumstance, the Company shall pay it back in
January of 2021.
On November 13, 2019, the Company entered into a Securities
Purchase Agreement with Acuitas Capital, LLC. and a Warrant to
purchase the Company’s ordinary shares pursuant to which the
Purchaser subscribed to purchase up to $100,000,000 of units with
up to a $10,000,000 subscription at each closing, with each Unit
consisting of one ordinary share and one warrant, where each whole
warrant entitles the holder to purchase one ordinary share. The
first closing has not yet occurred.
On June 17, 2020, the Company entered into preferred stock
subscription agreement with Daci Haojin Foundation Limited to issue
15,000,000 preferred shares for $45,000,000. Pursuant to the
preferred stock subscription agreement the first closing will not
occur until July 2020 and such closing will be for $13,500,000.
Subsequent closings will occur on August 31 and September 30, 2020
for $13,500,000 and $18,000,000, respectively.
D. EXCHANGE
CONTROLS.
This section sets forth a summary of the most significant
regulations or requirements that affect our business activities in
China or our shareholders’ right to receive dividends and other
distributions from us.
Regulations on Internet Content Providers
The Administrative Measures on Internet Information Services, or
the Internet Content Measures, which was promulgated by the State
Council on September 25, 2000 and amended on January 8, 2011, set
out guidelines on the provision of internet information services.
The Internet Content Measures specifies that internet information
services regarding news, publications, education, medical and
health care, pharmacy and medical appliances, among other things,
are required to be examined, approved and regulated by the relevant
authorities. Internet information providers are prohibited from
providing services beyond those included in the scope of their
licenses or filings. Furthermore, the Internet Content Measures
specifies a list of prohibited content. Internet information
providers are prohibited from producing, copying, publishing or
distributing information that is humiliating or defamatory to
others or that infringes the legal rights of others. Internet
information providers that violate such prohibition may face
criminal charges or administrative sanctions. Internet information
providers must monitor and control the information posted on their
websites. If any prohibited content is found, they must remove the
content immediately, keep a record of such content and report to
the relevant authorities.
The Internet Content Measures classifies internet information
services into commercial internet information services and
non-commercial internet information services. Commercial internet
information services refer to services that provide information or
services to internet users with charge. A provider of commercial
internet information services must obtain an ICP License.
Regulations on Internet Audio-video Program Services
On December 20, 2007, the MII and the State Administration of
Press, Publication, Radio, Film and Television, or the SAPPRFT,
jointly issued the Administrative Provisions for the Internet
Audio-Video Program Service, or the Audio-video Program Provisions,
which came into effect on January 31, 2008 and was amended on
August 28, 2015. The Audio-video Program Provisions defines
“internet audio-video program services” as producing, editing and
integrating of audio-video programs, supplying audio-video programs
to the public via the internet, and providing audio-video programs
uploading and transmission services to a third party. Entities
providing internet audio-video programs services must obtain an
internet audio video program transmission license. Applicants for
such licenses shall be state-owned or state-controlled entities
unless an internet audio-video program transmission license has
been obtained prior to the effectiveness of the Audio-video Program
Provisions in accordance with the then-in-effect laws and
regulations. In addition, foreign-invested enterprises are not
allowed to engage in the above-mentioned services. According to the
audio video Program Provisions and other relevant laws and
regulations, audio-video programs provided by the entities
supplying Internet audio-video program services shall not contain
any illegal content or other content prohibited by the laws and
regulations, such as any content against the basic principles in
the PRC Constitution, any content that damages the sovereignty of
the country or national security, and any content that disturbs
social order or undermine social stability. An audio-video program
that has already been broadcast shall be retained in full for at
least 60 days. Movies, television programs and other media content
used as Internet audio-video programs shall comply with relevant
administrative regulations on programs broadcasts through radio,
movie and television channels. Entities providing services related
to Internet audio-video programs shall immediately delete the
audio-video programs violating laws and regulations, keep relevant
records, report relevant authorities and implement other regulatory
requirements.
The Categories of the Internet Audio-Video Program Services, or the
Audio-video Program Categories, promulgated by SAPPRFT on March 10,
2017, classifies internet audio/video programs into four
categories: (I) Category I internet audio/video program service,
which is carried out with a form of radio station or television
station; (II) Category II internet audio/video program service,
including (a) re-broadcasting service of current political news
audio/video programs; (b) hosting, interviewing, reporting and
commenting service of arts, entertainment, technology, finance and
economics, sports, education and other specialized audio/video
programs; (c) producing (interviewing not included) and
broadcasting service of arts, entertainment, technology, finance
and economics, sports, education and other specialized audio/video
programs; (d) producing and broadcasting service of internet
films/dramas; (e) aggregating and broadcasting service of films,
television dramas and cartoons; (f) aggregating and broadcasting
service of arts, entertainment, technology, finance and economics,
sports, education and other specialized audio/video programs; and
(g) live audio/video broadcasting service of cultural activities of
common social organizations, sport events or other organization
activities; and (III) Category III internet audio/video program
service, including (a) aggregating service of online audio/video
contents, and (b) re-broadcasting service of the audio/video
programs uploaded by internet users; and (IV) Category III internet
audio/video program service, including (a) re-broadcasting of the
radio/television program channels; and (b) re-broadcasting of
internet audio/video program channels.
On May 27, 2016, the SAPPRFT issued the Notice on Relevant Issues
concerning Implementing the Approval Works of Upgrading Mobile
Internet Audio-Video Program Service, or the Mobile Audio-Video
Program Notice. The Mobile Audio-Video Program Notice provides that
the mobile Internet audio-video program services shall be deemed
Internet audio-video program service. Entities which have obtained
the approvals to provide the Internet audio-video program services
may use mobile WAP websites or mobile applications to provide
audio-video program services. Entities with regulatory approvals
may operate mobile applications to provide the audio-video program
services. The types of the programs shall be within the permitted
scope as provided in the licenses and such mobile applications
shall be filed with the SAPPRFT.
Regulations on Production and Operation of Radio/Television
Programs
On July 19, 2004, the SAPPRFT promulgated the Administrative
Measures on the Production and Operation of Radio and Television
Programs, or the Radio and Television Program Production Measures,
which came into effect on August 20, 2004 and was amended on August
28, 2015. The Radio and Television Program Production Measures
provides that any business that produces or operates radio or
television programs must first obtain a Radio and Television
Program Production and Operation Permit. Entities holding such
permits shall conduct their business within the permitted scope as
provided in their permits. In addition, foreign-invested
enterprises are not allowed to engage in the above-mentioned
services.
Regulations on Online Advertising Services
On April 24, 2015, the Standing Committee of the National People’s
Congress enacted the Advertising Law of the People’s Republic of
China, or the New Advertising Law, effective on September 1, 2015.
The New Advertising Law increases the potential legal liability of
advertising services providers and strengthens regulations of false
advertising. On July 4, 2016, the State Administration for Industry
and Commerce, or the SAIC, issued the Interim Measures of the
Administration of Online Advertising, or the SAIC Interim Measures,
effective on September 1, 2016. The New Advertising Law and the
SAIC Interim Measures require that online advertisements may not
affect users’ normal internet use and internet pop-up ads must
display a “close” sign prominently and ensure one-key closing of
the pop-up windows. The SAIC Interim Measures provides that all
online advertisements must be marked “Advertisement” so that
viewers can easily identify them as such. Moreover, the SAIC
Interim Measures treats paid search results as advertisements that
are subject to PRC advertisement laws, and requires that paid
search results be conspicuously identified on search result pages
as advertisements. The New Advertising Law and SAIC Interim
Measures require us to conduct more stringent examination and
monitoring of our advertisers and the content of their
advertisements.
Regulations on Online Games
In September 2009, the GAPP (currently known as the SAPPRFT),
together with the National Copyright Administration, and the
National Office of Combating Pornography and Illegal Publications
jointly issued the Notice on Further Strengthening on the
Administration of Pre-examination and Approval of Online Game and
the Examination and Approval of Imported Online Game, or the
Circular 13. The Circular 13 states that foreign investors are not
permitted to invest in online game operating businesses in the PRC
via wholly foreign-owned entities, Sino-foreign equity joint
ventures or cooperative joint ventures or to exercise control over
or participate in the operation of domestic online game businesses
through indirect means, such as other joint venture companies or
contractual or technical arrangements. If the our contractual
arrangements were deemed under the Circular 13 to be an “indirect
means” for foreign investors to exercise control over or
participate in the operation of a domestic online game business,
our contractual arrangements might be challenged by the SAPPRFT. We
are not aware of any online game companies which use the same or
similar contractual arrangements having been challenged by the
SAPPRFT as using those contractual arrangements as an “indirect
means” for foreign investors to exercise control over or
participate in the operation of a domestic online game business or
having been penalized or ordered to terminate operations since the
Circular 13 became effective. However, it is unclear whether and
how the Circular 13 might be interpreted or implemented in the
future. See “Risk Factors—If the PRC government finds that the
agreements that establish the structure for operating certain of
our operations in China do not comply with PRC regulations relating
to the relevant industries, or if these regulations or the
interpretation of existing regulations change in the future, we
could be subject to severe penalties or be forced to relinquish our
interests in those operations.”
The Interim Measures for the Administration of Online Games, or the
Online Game Measures, issued by the MOC, which took effect on
August 1, 2010 and amended on December 15, 2017, regulates a broad
range of activities related to the online games business, including
the development, production and operation of online games, the
issuance of virtual currencies used for online games, and the
provision of virtual currency trading services. The Online Game
Measures provides that any entity that is engaged in online game
operations must obtain a Network Cultural Business Permit, and
require the content of an imported online game to be examined and
approved by the MOC prior to the game’s launch and require a
domestic online game to be filed with the MOC within 30 days after
its launch. The Notice of the Ministry of Culture on the
Implementation of the Interim Measures for the Administration of
Online Games, which was issued by the MOC on July 29, 2010 to
implement the Online Game Measures, (i) requires online game
operators to protect the interests of online game users and
specifies that certain terms that must be included in service
agreements between online game operators and the users of their
online games, (ii) requires content review of imported online games
and filing procedures for domestic online games, (iii) emphasizes
the protection of minors playing online games, and (iv) requests
online game operators to promote real-name registration by their
game users.
Regulations on Information Security, Censorship and
Privacy
The Standing Committee of the National People’s Congress, China’s
national legislative body, enacted the Decisions on the Maintenance
of Internet Security on December 28, 2000 that may subject persons
to criminal liabilities in China for any attempt to use the
internet to: (i) gain improper entry to a computer or system of
strategic importance; (ii) disseminate politically disruptive
information; (iii) leak state secrets; (iv) spread false commercial
information or (v) infringe upon intellectual property rights. In
1997, the Ministry of Public Security issued the Administration
Measures on the Security Protection of Computer Information Network
with International Connections which prohibits using the internet
to leak state secrets or to spread socially destabilizing
materials. If an ICP license holder violates these measures, the
PRC government may revoke its ICP license and shut down its
websites. Pursuant to the Ninth Amendment to the Criminal Law
issued by the Standing Committee of the National People’s Congress
on August 29, 2015, effective on November 1, 2015, any ICP provider
that fails to fulfill the obligations related to internet
information security as required by applicable laws and refuses to
take corrective measures, will be subject to criminal liability for
(i) any large-scale dissemination of illegal information; (ii) any
severe effect due to the leakage of users’ personal information;
(iii) any serious loss of evidence of criminal activities; or (iv)
other severe situations, and any individual or entity that (i)
sells or provides personal information to others unlawfully or (ii)
steals or illegally obtains any personal information will be
subject to criminal liability in severe situations.
The Cybersecurity Law of the PRC, or the Cybersecurity Law, which
was promulgated on November 7, 2016 by the Standing Committee of
the National People’s Congress and came into effect on June 1,
2017, provides that network operators shall meet their cyber
security obligations and shall take technical measures and other
necessary measures to protect the safety and stability of their
networks. Under the Cybersecurity Law, network operators are
subject to various security protection-related obligations,
including: (i) network operators shall comply with certain
obligations regarding maintenance of the security of internet
systems; (ii) network operators shall verify users’ identities
before signing agreements or providing certain services such as
information publishing or real-time communication services; (iii)
when collecting or using personal information, network operators
shall clearly indicate 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;
(iv) network operators shall strictly preserve the privacy of user
information they collect, and establish and maintain systems to
protect user privacy; (v) network operators shall strengthen
management of information published by users, and when they
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.
Relevant Regulations of the High-tech Enterprise
The Ministry of Information Industry, the Ministry of Science and
Technology and the State Tax Bureau collectively promulgated and
issued the “Certifying Standard and Managing Measures for High-tech
Enterprises” and “the High-tech Areas of Main National Support” on
April 14, 2008 to certify the High-tech enterprise and encourage
and support the development of the Chinese High-tech enterprises.
Under the High-tech Enterprises Measures, the enterprise can enjoy
the favorable tax policy when it is certified as a High-tech
enterprise by the Ministry of Information Industry, the Ministry of
Science and Technology and the State Tax Bureau or with its
provincial branch according to the stipulated standard. The
software and computer and network technology are recognized as the
main national supported High-tech field. Our subsidiaries, Beijing
Zhong Chuan Shi Xun Technology Limited and Superengine Graphics
Software Technology Development (Suzhou) Co., Ltd are a High-tech
enterprise and enjoys a favorable income tax rate of 15%.
Laws and Regulations of Intellectual Property Rights
China has adopted legislation governing intellectual property
rights, including patents, copyrights and trademarks. China is a
signatory to the main international conventions on intellectual
property rights and became a member of the Agreement on Trade
Related Aspects of Intellectual Property Rights upon its accession
to the WTO in December 2001.
Patents
The “Patent Law of the People’s Republic of China” promulgated by
the Standing Committee of the National People’s Congress, adopted
in 1985 and revised in 1992, 2001 and 2008, protects registered
patents. The State Intellectual Property Office of PRC handles
granting patent rights, providing for a twenty-year patent term for
inventions and a ten-year patent term for utility models and
designs. As we disclosed in Item 4, of this annual report on Form
20-F, through Luokung Technology, we have been granted 20 patents
by the State Intellectual Property Office (“SIPO”) of PRC and
therefore such invention is entitled to all the protections
provided under the Patent Law for twenty years.
Computer Software Copyright and
Administration
On December 20, 2001, the State Council of PRC issued the
“Regulation for Computer Software Protection of the People’s
Republic of China” (the “Regulation for Computer Software
Protection”) which became effective on January 1, 2002 to protect
the interests of copyright owners, to promote the research and
application and to encourage the development of the Chinese
software industry. Under the Regulation for Computer Software
Protection, natural persons, legal persons or any other
organizations shall have a copyright on the software developed by
such persons no matter whether such software has been published.
The protection period of software copyrights owned by the legal
person or other organization is fifty years and expires on December
31 of the fiftieth year from the initial publication date of such
computer software. Currently, Luokung Technology has 34registration
certificates for software copyrights.
Trademarks
The “Trademark Law of the People’s Republic of China” promulgated
by the State Council of PRC, adopted in 1982 and revised in 1993
and 2001, protects registered trademarks. The Trademark Office
under the Chinese State Administration for Industry and Commerce
handles trademark registrations and grants a term of ten years to
registered trademarks which are renewable for another ten years
after the application to the Trademark Office by the owners of the
trademarks. Trademark license agreements must be filed with the
Trademark Office for record. China has a “first-to-register” system
that requires no evidence of prior use or ownership. Luokung
Technology has its registered trademarks as described in Item 4 of
this annual report on Form 20-F. Accordingly, such trademarks are
entitled to the protection under the Trademark Law.
Foreign Currency Exchange
On August 29, 2008, the SAFE issued the Notice of the General
Affairs Department of the State Administration of Foreign Exchange
on the Relevant Operating Issues concerning the Improvement of the
Administration of Payment and Settlement of Foreign Currency
Capital of Foreign-funded Enterprises, or Circular 142. Pursuant to
Circular 142, RMB converted from the foreign currency-denominated
capital of a foreign-invested company may only be used for purposes
within the business scope approved by the applicable governmental
authority and may not be used for equity investments within the PRC
unless specifically provided for otherwise. The use of such
Renminbi capital may not be changed without SAFE’s approval and may
not in any case be used to repay Renminbi loans if the proceeds of
such loans have not been used.
See “Risk Factors — Risks Related to Doing Business in
China — PRC regulation of loans and direct investment by
offshore holding companies to PRC entities may delay or prevent us
from using the proceeds of our initial public offering to make
loans or additional capital contributions to our PRC operating
subsidiaries, which could materially and adversely affect our
liquidity and our ability to fund and expand our business”.
Dividend Distribution
We are a British Virgin Islands holding company and substantially
all of our operations are conducted through LK Technology. We rely
on dividends and other distributions from our LK Technology and its
subsidiaries to provide us with our cash flow and allow us to pay
dividends on the shares underlying our ADSs and meet our other
obligations. The principal regulations governing distribution of
dividends paid by wholly foreign-owned enterprises include:
|
1. |
Wholly Foreign-Owned Enterprise Law
(1986), as amended; and |
|
2. |
Implementation Rules on Wholly
Foreign-Owned Enterprise Law (1990), as amended. |
Under these regulations, wholly foreign-owned enterprises in China
may pay dividends only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and
regulations. In addition, wholly foreign-owned enterprises in China
are required to set aside at least 10% of their after-tax profit
based on PRC accounting standards each year to its general reserves
until the accumulative amount of such reserves reach 50% of its
registered capital. These reserves are not distributable as cash
dividends. The board of directors of a FIE has the discretion to
allocate a portion of its after-tax profits to staff welfare and
bonus funds, which may not be distributed to equity owners except
in the event of liquidation.
Regulation of Foreign Exchange in Certain Onshore and Offshore
Transactions
In October 2005, the SAFE issued the Notice on Issues Relating to
the Administration of Foreign Exchange in Fund-raising and Return
Investment Activities of Domestic Residents Conducted via Offshore
Special Purpose Companies, or SAFE Notice 75, which became
effective as of November 1, 2005, and was further supplemented by
two implementation notices issued by the SAFE on November 24, 2005
and May 29, 2007, respectively. Under Circular 75, prior
registration with the local SAFE branch is required for PRC
residents to establish or to control an offshore company for the
purposes of financing that offshore company with assets or equity
interests in an onshore enterprise located in the PRC. An amendment
to the registration or filing with the local SAFE branch by such
PRC resident is also required for the injection of equity interests
or assets of an onshore enterprise in the offshore company or
overseas funds raised by such offshore company, or any other
material change with respect to the offshore company in connection
with any increase or decrease of capital, transfer of shares,
merger, division, equity investment, debt investment, or creation
of any security interest over any assets located in the PRC.
Under SAFE Notice 75, PRC residents are further required to
repatriate into the PRC all of their dividends, profits or capital
gains obtained from their shareholdings in the offshore entity
within 180 days of their receipt of such dividends, profits or
capital gains. The registration and filing procedures under SAFE
Notice 75 are prerequisites for other approval and registration
procedures necessary for capital inflow from the offshore entity,
such as inbound investments or shareholders loans, or capital
outflow to the offshore entity, such as the payment of profits or
dividends, liquidating distributions, equity sale proceeds, or the
return of funds upon a capital reduction. Therefore, failure to
comply with such registration may subject us to certain
restrictions on, including but not limited to, the increase of the
registered capital of our PRC subsidiary, making loans to our PRC
subsidiary, and making distributions to us from our on-shore
companies.
Regulations of Overseas Investments and Listings
On August 8, 2006, six PRC regulatory agencies, including the
MOFCOM, the State Assets Supervision and Administration Commission,
the State Administration for Taxation, the State Administration for
Industry and Commerce, the CSRC and the SAFE, jointly adopted the
New M&A Rule, which became effective on September 8, 2006. This
regulation, among other things, includes provisions that purport to
require that an offshore SPV formed for purposes of overseas
listing of equity interests in PRC companies and controlled
directly or indirectly by PRC companies or individuals obtain the
approval of the CSRC prior to the listing and trading of such SPV’s
securities on an overseas stock exchange.
On September 21, 2006, the CSRC published on its official website
procedures regarding its approval of overseas listings by SPVs. The
CSRC approval procedures require the filing of a number of
documents with the CSRC and it would take several months to
complete the approval process.
The application of the New M&A Rule with respect to overseas
listings of SPVs remains unclear with no consensus currently
existing among the leading PRC law firms regarding the scope of the
applicability of the CSRC approval requirement.
We believe that, based on our understanding of the current PRC
laws, regulations and rules and the procedures announced on
September 21, 2006, there is no requirement in this regulation that
would require an application to be submitted to the MOFCOM or the
CSRC for the approval of the listing and trading of our ADSs on the
NASDAQ Capital Market.
See “Risk Factors — Risks Related to Doing Business in
China — If we were required to obtain the prior approval
of the China Securities Regulatory Commission, or CSRC, of the
listing and trading of our ADSs on the NASDAQ Capital Market, we
may face regulatory actions or other sanctions from the CSRC or
other PRC regulatory agencies.”
E. TAXATION
The following discussion sets forth the material British Virgin
Islands, PRC and U.S. federal income tax consequences of an
investment in our ADSs and the ordinary shares represented by our
ADSs, sometimes referred to collectively as the “securities”. It is
based upon laws and relevant interpretations thereof in effect as
of the date of this report, all of which are subject to change.
This discussion does not deal with all possible tax consequences
relating to an investment in the securities, such as the tax
consequences under state, local and other tax laws. As used in this
discussion, “we,” “our” and “us” refers only to Luokung Technology
Corp..
British Virgin Islands Taxation
Under the law of the British Virgin Islands as currently in effect,
a holder of the securities who is not a resident of the British
Virgin Islands is not liable for British Virgin Islands tax on
dividends paid with respect to the securities and all holders of
the securities are not liable to the British Virgin Islands for tax
on gains realized during that year on the sale or disposal of such
ordinary shares. The British Virgin Islands does not impose a
withholding tax on dividends paid by a company incorporated or
re-registered under the BVI Act.
There are no capital gains, gift or inheritance taxes levied by the
British Virgin Islands on companies incorporated under the BVI Act.
In addition, shares of companies incorporated under the BVI Act are
not subject to transfer taxes, stamp duties or similar charges.
There is no income tax treaty or convention currently in effect
between the United States and the British Virgin Islands or between
China and the British Virgin Islands.
People’s Republic of China Taxation
In 2007, the PRC National People’s Congress enacted the new
Enterprise Income Tax Law (the “EIT Law”), which became effective
on January 1, 2008. The new EIT Law imposes a single uniform income
tax rate of 25% on all Chinese enterprises, including
foreign-invested enterprises, and levies a withholding tax rate of
10% on dividends payable by Chinese subsidiaries to their foreign
shareholders unless any such foreign shareholders’ jurisdiction of
incorporation has a tax treaty with China that provides for a
different withholding agreement. Under the new EIT Law, enterprises
established outside China but deemed to have a “de facto management
body” within the country may be considered “resident enterprises”
for Chinese tax purposes and, therefore, may be subject to an
enterprise income tax rate of 25% on their worldwide income.
Pursuant to the implementation rules of the new EIT Law, a “de
facto management body” is defined as a body that has material and
overall management control over the business, personnel, accounts
and properties of the enterprise. Although substantially all
members of our management are located in China, it is unclear
whether Chinese tax authorities would require (or permit) us to be
treated as PRC resident enterprises. If we are deemed a Chinese tax
resident enterprise, we may be subject to an enterprise income tax
rate of 25% on our worldwide income, excluding dividends received
directly from another Chinese tax resident enterprise, as well as
PRC enterprise income tax reporting obligations. If we are not
deemed to be a Chinese tax resident enterprise, we may be subject
to certain PRC withholding taxes. See “Risk
Factors — Risks Related to Doing Business in
China — Our holding company structure may limit the
payment of dividends.” As a result of such changes, our historical
tax rates may not be indicative of our tax rates for future periods
and the value of our ADSs or ordinary shares may be adversely
affected. If we are deemed a PRC resident enterprise and investors’
gain from the sales of the securities and dividends payable by us
are deemed sourced from China, such gains and dividends payable by
us may be subject to PRC tax. See “Risk Factors — Risks
Related to Doing Business in China — If we were deemed a
“resident enterprise” by PRC tax authorities, we could be subject
to tax on our global income at the rate of 25% under the New EIT
Law and our non-PRC shareholders could be subject to certain PRC
taxes.
United States Federal Income Taxation
General
The following is a discussion of the material U.S. federal income
tax consequences to an investor of purchasing, owning and disposing
of our securities. This discussion does not address any aspects of
U.S. federal gift or estate tax or the state, local or non-U.S. tax
consequences of an investment in the securities.
YOU SHOULD CONSULT YOUR OWN TAX ADVISORS CONCERNING THE U.S.
FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF PURCHASING,
OWNING AND DISPOSING OF THE SECURITIES IN YOUR PARTICULAR
SITUATION.
This discussion applies only to those investors that purchase the
securities in this offering and that hold the securities as capital
assets within the meaning of section 1221 of the Internal Revenue
Code of 1986, as amended (the “Code”). This section does not apply
to holders that may be subject to special tax rules, including but
not limited to:
|
1. |
dealers in securities or
currencies; |
|
2. |
traders in securities that elect to
use a mark-to-market method of accounting; |
|
3. |
banks, insurance companies or
certain financial institutions; |
|
4. |
tax-exempt organizations; |
|
5. |
governments or agencies or
instrumentalities thereof; |
|
6. |
partnerships or other entities
treated as partnerships or other pass-through entities for U.S.
federal income tax purposes or persons holding the securities
through such entities; |
|
7. |
regulated investment companies or
real estate investment trusts; |
|
8. |
holders subject to the alternative
minimum tax; |
|
9. |
holders that actually or
constructively own 10% or more of the total combined voting power
of all classes of our shares entitled to vote; |
|
10. |
holders that acquired the
securities pursuant to the exercise of employee stock options, in
connection with employee stock incentive plans or otherwise as
compensation; |
|
11. |
holders that hold the securities as
part of a straddle, hedging or conversion transaction; or |
|
12. |
holders whose functional currency
is not the U.S. dollar. |
This section is based on the Code, its legislative history,
existing and proposed U.S. Treasury regulations, published rulings
and other administrative guidance of the U.S. Internal Revenue
Service (the “IRS”) and court decisions, all as in effect on the
date hereof. These laws are subject to change or different
interpretation by the IRS or a court, possibly on a retroactive
basis.
We have not sought, and will not seek, a ruling from the IRS as to
any U.S. federal income tax consequence described herein. The IRS
may disagree with the discussion herein, and its determination may
be upheld by a court. Moreover, there can be no assurance that
future legislation, regulation, administrative rulings or court
decisions will not adversely affect the accuracy of the statements
in this discussion.
The discussion below of the U.S. federal income tax consequences to
“U.S. Holders” will apply to a beneficial owner of the securities
that is for U.S. federal income tax purposes:
|
1. |
a citizen or resident of the United
States; |
|
2. |
a corporation (or other entity
treated as a corporation) that is created or organized (or treated
as created or |
|
3. |
organized) under the laws of the
United States, any state thereof or the District of Columbia; |
|
4. |
an estate whose income is subject
to U.S. federal income tax regardless of its source; or |
|
5. |
a trust if (a) a U.S. court can
exercise primary supervision over the trust’s administration and
one or more U.S. |
|
6. |
persons are authorized to control
all substantial decisions of the trust, or (b) if the trust has a
valid election in effect under applicable U.S. |
Treasury regulations to be treated as a U.S. person.
If a beneficial owner of the securities is not described as a U.S.
Holder and is not an entity treated as a partnership or other
pass-through entity for U.S. federal income tax purposes, such
owner will be considered a “Non-U.S. Holder.” The material U.S.
federal income tax consequences applicable specifically to Non-U.S.
Holders are described below under the heading “Tax Consequences to
Non-U.S. Holders.”
If a partnership (including for this purpose any entity treated as
a partnership for U.S. tax purposes) is a beneficial owner of the
securities, the U.S. tax treatment of a partner in the partnership
generally will depend on the status of the partner and the
activities of the partnership. A holder of the securities that is a
partnership or partners in such a partnership should consult their
own tax advisors about the U.S. federal income tax consequences of
holding and disposing of the securities.
This discussion assumes that any distributions made (or deemed
made) on the securities and any consideration received by a holder
in consideration for the sale or other disposition of the
securities will be in U.S. dollars.
Tax Consequences to U.S. Holders
Taxation of Distributions
Subject to the passive foreign investment company, or PFIC, rules
discussed below, the gross amount of any cash distributions we make
with respect to a U.S. Holder in respect of such U.S. Holder’s
shares will generally be treated as dividend income if the
distributions are made from our current or accumulated earnings and
profits, calculated according to U.S. federal income tax
principles. Cash dividends will generally be subject to U.S.
federal income tax as ordinary income on the day the U.S. Holder
actually or constructively receives such income. With respect to
non-corporate U.S. Holders for taxable years beginning before
January 1, 2011, dividends may be taxed at the lower applicable
long-term capital gains rate provided that (a) our shares are
readily tradable on an established securities market in the United
States, or, in the event we are deemed to be a Chinese “resident
enterprise” under the EIT Law (as described above under “People’s
Republic of China Taxation”), we are eligible for the benefits of
the income tax treaty between the United States and the PRC (the
“U.S.-PRC Tax Treaty”), (b) we are not a PFIC, as discussed below,
for either the taxable year in which the dividend was paid or the
preceding taxable year, and (c) certain holding period requirements
are met. Under published IRS authority, shares are considered for
purposes of clause (a) above to be readily tradable on an
established securities market in the United States only if they are
listed on certain exchanges, which presently include the NASDAQ
Capital Market. U.S. Holders should consult their own tax advisors
regarding the availability of the lower rate for any dividends paid
with respect to our shares.
Dividends will not be eligible for the dividends-received deduction
allowed to U.S. corporations in respect of dividends received from
other U.S. corporations. Generally, if we distribute non-cash
property as a dividend (other than pro rata distributions of our
shares) out of our current or accumulated earnings and profits (as
determined for U.S. federal income tax purposes), a U.S. Holder
generally will include in income an amount equal to the fair market
value of the property, on the date that it is distributed.
Distributions in excess of current and accumulated earnings and
profits, as determined for U.S. federal income tax purposes, will
be treated as a non-taxable return of capital to the extent of the
U.S. Holder’s basis in its shares and thereafter as capital gain.
However, we do not plan on calculating our earnings and profits in
accordance with U.S. federal income tax principles. U.S. holders
therefore should generally assume that any distributions paid by us
will be treated as dividends for U.S. federal income tax
purposes.
If PRC taxes apply to dividends paid by us to a U.S. Holder (see
“People’s Republic of China Taxation,” above), such taxes may be
treated as foreign taxes eligible for credit against such holder’s
U.S. federal income tax liability (subject to certain limitations),
and a U.S. Holder may be entitled to certain benefits under the
U.S.-PRC Tax Treaty. The rules relating to the U.S. foreign tax
credit are complex. U.S. Holders should consult their own tax
advisors regarding the creditability of any such PRC tax and their
eligibility for the benefits of the U.S.-PRC Tax Treaty.
Taxation of Dispositions of Shares
Subject to the PFIC rules discussed below, a U.S. holder that sells
or otherwise disposes of its shares will recognize capital gain or
loss for U.S. federal income tax purposes equal to the difference
between the amount realized and such U.S. Holder’s tax basis in its
shares. Prior to January 1, 2011, capital gains of a non-corporate
U.S. holder are generally taxed at a maximum rate of 15% where the
property is held for more than one year (and 20% thereafter). The
ability to deduct capital losses is subject to limitations.
If PRC taxes apply to any gain from the disposition of our shares
by a U.S. Holder, such taxes may be treated as foreign taxes
eligible for credit against such holder’s U.S. federal income tax
liability (subject to certain limitations), and a U.S. Holder may
be entitled to certain benefits under the U.S.-PRC Tax Treaty. U.S.
Holders should consult their own tax advisors regarding the
creditability of any such PRC tax and their eligibility for the
benefits of the U.S.-PRC Tax Treaty.
Passive Foreign Investment Company
We do not expect to be a PFIC for U.S. federal income tax purposes
for our current tax year or in the foreseeable future. The
determination of whether or not we are a PFIC in respect of any of
our taxable years is a factual determination that cannot be made
until the close of the applicable tax year and that is based on the
types of income we earn and the value and composition of our assets
(including goodwill), all of which are subject to change.
Therefore, we can make no assurances that we will not be a PFIC in
respect of our current taxable year or in the future.
In general, we will be a PFIC in any taxable year if either:
|
1. |
at least 75% of our gross income
for the taxable year is passive income; or |
|
2. |
at least 50% of the value,
determined on the basis of a quarterly average, of our assets is
attributable to assets that produce or are held for the production
of passive income. |
Passive income includes dividends, interest, royalties, rents
(other than certain rents and royalties derived in the active
conduct of a trade or business), the excess of gains over losses
from certain types of transactions in commodities, annuities and
gains from assets that produce passive income. We will be treated
as owning our proportionate share of the assets and earning our
proportionate share of the income of any corporation in which we
own, directly or indirectly, at least 25% (by value) of the
stock.
If we are treated as a PFIC in any year during which a U.S. Holder
owns the securities, and such U.S. Holder did not make a
mark-to-market election, as described below, the U.S. Holder will
be subject to special rules with respect to:
|
1. |
any gain recognized by the U.S.
Holder on the sale or other disposition of its shares; and any
excess distribution that we make to the U.S. Holder (generally, the
excess of the amount of any distributions to such U.S. Holder
during a single taxable year of such U.S. Holder over 125% of the
average annual distributions received by such U.S. Holder in
respect of the shares during the three preceding taxable years of
such U.S. Holder or, if shorter, such U.S. Holder holding period
for the shares). |
Under these rules:
|
2. |
the gain or excess distribution
will be allocated ratably over the U.S. Holder’s holding period for
the shares; |
|
3. |
the amount allocated to the U.S.
Holder’s taxable year in which it realized the gain or excess
distribution or to the period in the U.S. Holder’s holding period
before the first day of our first taxable year in which we are a
PFIC will be taxed as ordinary income; |
|
4. |
the amount allocated to other
taxable years (or portions thereof) of the U.S. Holder and included
in its holding period will be taxed at the highest tax rate in
effect for that year; and |
|
5. |
the interest charge generally
applicable to underpayments of tax will be imposed in respect of
the tax attributable to each such other taxable year of the U.S.
Holder. |
|
6. |
Special rules apply for calculating
the amount of the foreign tax credit with respect to excess
distributions by a PFIC. |
Alternatively,
if a U.S. Holder, at the close of its taxable year, owns ordinary
shares in a PFIC that are treated as marketable stock, the U.S.
Holder may make a mark-to-market election with respect to such
shares for such taxable year. Our shares will be “marketable” to
the extent that they remain regularly traded on a national
securities exchange, such as the NASDAQ Capital Market. If a U.S.
Holder makes this election in a timely fashion, it will not be
subject to the PFIC rules described above. Instead, in general, the
U.S. Holder will include as ordinary income each year the excess,
if any, of the fair market value of its shares at the end of the
taxable year over its adjusted basis in its shares. Any ordinary
income resulting from this election would generally be taxed at
ordinary income tax rates and would not be eligible for the reduced
rate of tax applicable to qualified dividend income. The U.S.
Holder will also be allowed to take an ordinary loss in respect of
the excess, if any, of the adjusted basis of its shares over the
fair market value at the end of the taxable year (but only to the
extent of the net amount of previously included income as a result
of the mark-to-market election). The U.S. Holder’s basis in the
shares will be adjusted to reflect any such income or loss amounts.
U.S. Holders should consult their own tax advisor regarding
potential advantages and disadvantages of making a mark-to-market
election with respect to their shares.
Alternatively,
a U.S. Holder of stock in a PFIC may avoid the PFIC tax
consequences described above in respect to our or shares by making
a timely “qualified electing fund” election to include in income
its pro rata share of our net capital gains (as long-term capital
gain) and other earnings and profits (as ordinary income), on a
current basis, in each case whether or not distributed, in the
taxable year of the U.S. Holder in which or with which our taxable
year ends. However, the qualified electing fund election is
available only if the PFIC provides such U.S. Holder with certain
information regarding its earnings and profits as required under
applicable U.S. Treasury regulations. We do not intend to furnish
the information that a U.S. Holder would need in order to make a
qualified electing fund election. Therefore, U.S. Holders will not
be able to make or maintain such election with respect to their or
shares.
If a
U.S. Holder owns our shares or during any year that we are a PFIC,
such holder must file U.S. Internal Revenue Service Form 8621
regarding such holder’s shares or and the gain realized on the
disposition of the shares. The reduced tax rate for dividend
income, discussed in “Taxation of Distributions,” is not applicable
to dividends paid by a PFIC. U.S. Holders should consult with their
own tax advisors regarding reporting requirements with respect to
their shares.
Tax Consequences to Non-U.S. Holders
Dividends
paid to a Non-U.S. Holder in respect of our or shares generally
will not be subject to U.S. federal income tax, unless the
dividends are effectively connected with the Non-U.S. Holder’s
conduct of a trade or business within the United States (and, if
required by an applicable income tax treaty, are attributable to a
permanent establishment or fixed base that such holder maintains in
the United States).
In
addition, a Non-U.S. Holder generally will not be subject to U.S.
federal income tax on any gain attributable to a sale or other
disposition of our or shares unless such gain is effectively
connected with its conduct of a trade or business in the United
States (and, if required by an applicable income tax treaty, is
attributable to a permanent establishment or fixed base that such
holder maintains in the United States) or the Non-U.S. Holder is an
individual who is present in the United States for 183 days or more
in the taxable year of sale or other disposition and certain other
conditions are met (in which case, such gain from United States
sources generally is subject to tax at a 30% rate or a lower
applicable tax treaty rate).
Dividends
and gains that are effectively connected with the Non-U.S. Holder’s
conduct of a trade or business in the United States (and, if
required by an applicable income tax treaty, are attributable to a
permanent establishment or fixed base in the United States)
generally will be subject to tax in the same manner as for a U.S.
Holder and, in the case of a Non-U.S. Holder that is a corporation
for U.S. federal income tax purposes, may also be subject to an
additional branch profits tax at a 30% rate or a lower applicable
tax treaty rate.
Information Reporting and Backup Withholding
In
general, information reporting for U.S. federal income tax purposes
generally should apply to distributions made on the securities
within the United States to a non-corporate U.S. Holder and to the
proceeds from sales and other dispositions of the securities by a
non-corporate U.S. Holder to or through a U.S. office of a broker.
Payments made (and sales and other dispositions effected at an
office) outside the United States generally should be subject to
information reporting in limited circumstances.
Dividend
payments made to U.S. Holders and proceeds paid from the sale or
other disposition the securities may be subject to information
reporting to the IRS and possible U.S. federal backup withholding
at a current rate of 28%. Certain exempt recipients, such as
corporations, are not subject to these information reporting
requirements. Backup withholding will not apply to a U.S. Holder
who furnishes a correct taxpayer identification number and makes
any other required certification, or who is otherwise exempt from
backup withholding. U.S. Holders who are required to establish
their exempt status must provide a duly executed IRS Form
W-9.
A
Non-U.S. Holder generally may eliminate the requirement for
information reporting and backup withholding by providing
certification of its foreign status, under penalties of perjury, on
a duly executed applicable IRS Form W-8 or by otherwise
establishing an exemption.
Backup
withholding is not an additional tax. Rather, the amount of any
backup withholding will be allowed as a credit against a U.S.
Holder’s or a non-U.S. Holder’s U.S. federal income tax liability
and may entitle such holder to a refund, provided that certain
required information is timely furnished to the IRS.
PROSPECTIVE
PURCHASERS OF OUR SECURITIES SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX
LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY ADDITIONAL TAX
CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF OUR
SECURITIES, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS
OF ANY STATE, LOCAL OR NON-U.S. JURISDICTION, INCLUDING ESTATE,
GIFT, AND INHERITANCE LAWS AND APPLICABLE TAX TREATIES.
F. DIVIDENDS
AND PAYING AGENTS.
Not
applicable.
G. STATEMENT
BY EXPERTS.
None.
H. DOCUMENTS
ON DISPLAY.
We
previously filed a registration statement on Form F-1 (File No.
333-166056) with the SEC relating to our initial public
offering in May 2010. This annual report does not contain all of
the information in the registration statement and the exhibits and
financial statements included with the registration statement.
References in this annual report to any of our contracts,
agreements or other documents are not necessarily complete, and you
should refer to the exhibits attached to the registration statement
for copies of the actual contracts, agreements or documents. In
addition, we will file annual reports on Form 20-F and submit other
information under cover of Form 6-K. As a foreign private issuer,
we are exempt from the proxy requirements of Section 14 of the
Exchange Act and our officers, directors and principal shareholders
will be exempt from the insider short-swing disclosure and profit
recovery rules of Section 16 of the Exchange Act. You may read and
copy the registration statement, the related exhibits and other
materials we file with the SEC at the SEC’s public reference room
in Washington, D.C. at 100 F Street, Room 1580, N.E., Washington,
D.C.20549. You can also request copies of those documents, upon
payment of a duplicating fee, by writing to the SEC. Please call
the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. The SEC also maintains an Internet
site that contains reports, proxy and information statements and
other information regarding issuers that file with the SEC. The
website address is http://www.sec.gov. You may also request
a copy of these filings, at no cost, by writing us at B9-8, Block
B, SOHO Phase II, No. 9, Guanghua Road, Chaoyang District, Beijing,
People’s Republic of China, 100020 or telephoning us at (86)
10-85866721.
I. SUBSIDIARY
INFORMATION
For a
listing of our subsidiaries, see “Item 4. Information on the
Company – C. Organizational Structure.”
ITEM 11. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest
Rate Risk
As of
December 31, 2019, we had no short-term or long-term borrowings. If
we borrow money in future periods, we may be exposed to interest
rate risk. Our exposure to market risk for changes in interest
rates relates primarily to the interest income generated by our
cash deposits with our banks and held-to-maturity investments. We
have not used any derivative financial instruments in our
investment portfolio. Interest earning instruments carry a degree
of interest rate risk. We have not been exposed, nor do we
anticipate being exposed to material risks due to changes in
interest rates. However, our future interest income may fall short
of expectations due to changes in interest rates.
Foreign
Exchange Risk
Translation
adjustments amounted to $541,489 and $447,246 gains as of the
fiscal years ended December 31, 2019 and 2018, respectively. The
Company translated balance sheet amounts with the exception of
equity at December 31, 2019 at RMB6.9762 to $1.00 as compared to
RMB6.8632 to $1.00 at December 31, 2018. The Company stated equity
accounts at their historical rate. The average translation rates
applied to income statement accounts for the fiscal years ended
December 31, 2019 and 2018 were RMB6.8985 and RMB6.6174 to US$1.00,
respectively. So far, the PRC government has been able to manage a
stable exchange rate between RMB and the U.S. Dollar. Our future
downward translation adjustments may occur and can be significant
due to changes in such exchange rate.
If we
decide to convert our RMB 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 RMB
would have a negative effect on the U.S. dollar amount available to
us.
The
PRC government imposes strict restrictions on PRC resident
companies regarding converting RMB into foreign currencies and vice
versa under capital account transactions, such as receiving equity
investments from outside of the PRC, making equity investments
outside of the PRC, borrowing money from or lending money outside
of the PRC, and repaying debt or remitting liquidated assets and/or
accumulated profits outside of the PRC. These transactions have to
be approved by the relevant PRC government authorities, including
but not limited to the commerce bureau, the tax bureau and the
State Administration of Foreign Exchange, or SAFE, and have to be
conducted at banks entrusted by the local SAFE branch. As our
business continues to grow, we may need to continuously finance our
PRC subsidiaries by raising capital from outside of the PRC. The
restriction on converting RMB into foreign currencies, and vice
versa, may limit our ability to use capital resources from outside
of the PRC. Such restrictions may also limit our ability to remit
profits from our PRC subsidiaries outside of the PRC, therefore
potentially limiting our ability to pay dividends to our
shareholders. In addition, such restrictions will limit our ability
to freely transfer temporary excess cash in our or our
subsidiaries’ bank accounts in and out of the PRC, therefore
limiting our ability to conduct cross-border cash management
activities to optimize the utilization of our cash.
Inflation
Although
China has experienced an increasing inflation rate, inflation has
not had a material impact on our results of operations in recent
years. According to the National Bureau of Statistics of China, the
change in the consumer price index in China was 0.46%, (0.77%), and
1.16% in 2001, 2002 and 2003, respectively. However, in connection
with a 3.9% increase in 2004, the PRC government announced measures
to restrict lending and investment in China in order to reduce
inflationary pressures in China’s economy. Following the
government’s actions, the consumer price index decreased to 1.8% in
2005 and to 1.5% in 2006. In 2007, the consumer price index
increased to 4.8%. In response, China’s central bank, the People’s
Bank of China, announced that the bank reserve ratio would rise
half a percentage point to 15.5% in an effort to reduce inflation
pressures. China’s consumer price index growth rate reached 8.7%
year over year in 2008. In 2009 and 2010, the change in the
consumer price index in China was minus 0.7% and 3.3%.
China
consumer price index in December 2019 was 2.6% higher than that of
the same period in 2018. China consumer price index in December
2018 was 0.1% higher than that of the same period in 2017.China
consumer price index in December 2017 was 0.3% lower than that of
the same period in 2016. China consumer price index in December
2016 was 0.5% higher than that of the same period in 2015. The
results of the PRC government’s actions to combat inflation are
difficult to predict. Adverse changes in the Chinese economy, if
any, will likely impact the financial performance of a variety of
industries in China that use, or would be candidates to use, our
software products and services.
ITEM 12. DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES.
A.
DEBT SECURITIES.
Not
applicable.
B.
WARRANTS AND RIGHTS.
Not
applicable.
C.
OTHER SECURITIES.
Mr. Xuesong Song, our Chairman and Chief Executive Officer,
beneficially owns 1,000,000 preferred shares, and each preferred
share has the right to 399 votes at a meeting of the shareholders
of the Company.
On November 13, 2019, the Company issued to Geely Technology
21,794,872 of series A preferred shares for $42,500,000.
D.
AMERICAN DEPOSITARY SHARES.
Not
applicable.
PART
II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
None.
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
Use
of Proceeds.
We
completed our initial public offering on May 14, 2010 (the “IPO”),
which generated net proceeds of approximately $14.6 million. All
remaining cash on hand from the proceeds of our IPO was transferred
to C Media Limited and its subsidiaries following the completion of
the asset exchange transactions on August 17, 2018.
ITEM 15.
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our
Chief Executive Officer and Chief Financial Officer have reviewed
and evaluated the effectiveness of our disclosure controls and
procedures, which included inquiries made to certain other of our
employees. The term “disclosure controls and procedures,” as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in
the reports, such as this report, that it files or submits under
the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and
principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer have each concluded that, as of
December 31, 2018, the Company’s disclosure controls and procedures
were not effective due to the material weakness described in the
“Management’s Report on Internal Control over Financial Reporting”
section below. However, we performed adequate analyses and
procedures, including among other things, transaction reviews and
account reconciliations, in order to provide assurance that our
consolidated financial statements included in this annual report
were prepared in accordance with U.S. GAAP and present fairly, in
all material respects, our financial position, results of
operations and cash flows for the periods presented in conformity
with U.S. GAAP.
Management’s Report on Internal Control Over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined
in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control
over financial reporting refers to the process designed by, or
under the supervision of, our principal executive officer and
principal financial officer, 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 U.S. GAAP and includes those policies and
procedures that (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S.
GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could
have a material effect on the financial statements.
Any
system of internal control, no matter how well designed, has
inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Because of the
inherent limitations of internal control, there is a risk that
material misstatements may not be prevented or detected on a timely
basis by internal control over financial reporting. However, these
inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
Management
assessed our internal control over financial reporting as of
December 31, 2018. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in the report entitled “Internal
Control-Integrated Framework (2013).” The COSO framework summarizes
each of the components of a company’s internal control system,
including (i) the control environment, (ii) risk assessment, (iii)
control activities, (iv) information and communication, and (v)
monitoring. Based on such assessment, management concluded that its
internal control over financial reporting as of December 31, 2018
was not effective because of the following material
weakness:
Lack
of U.S. GAAP expertise. Although our accounting personnel are
professional and experienced in accounting requirements and
procedures generally accepted in the PRC, they do not have
sufficient knowledge, experience and training in maintaining our
books and records and preparing financial statements in accordance
with U.S. GAAP and SEC rules and regulations. The staff needs
additional training to become experienced in U.S. GAAP-based
reporting, including the skills of U.S. GAAP-based period end
closing, consolidation of financial statements, and U.S. GAAP
conversion.
In
order to address the above material weakness, our management plans
to take the following steps:
We
will employ, as needed, outside professionals to provide key
accounting personnel ongoing technical trainings to ensure their
proper understanding of U.S. GAAP and newly announced accounting
standards.
The
Company believes the foregoing measures will remediate the
identified material weakness in future periods. The Company is
committed to monitoring the effectiveness of these measures and
making any changes that are necessary and appropriate.
However,
giving full consideration to the material weaknesses described
above, our Chief Executive Officer and Chief Financial Officer
performed adequate analyses and procedures, including among other
things, transaction reviews and account reconciliations, in order
to provide assurance that our consolidated financial statements
included in this annual report were prepared in accordance with
U.S. GAAP and present fairly, in all material respects, our
financial position, results of operations and cash flows for the
periods presented in conformity with U.S. GAAP.
Attestation report of the registered public accounting
firm.
This
annual report does not include an attestation report of the
Company’s registered public accounting firm on internal control
over financial reporting because the Company is a non-accelerated
filer exempted from section 404(b) of the Sarbanes-Oxley
Act.
Changes in Internal Control over Financial
Reporting
There
were no changes in the Company’s internal control over financial
reporting that occurred during our fiscal year ended December 31,
2018 that has materially affected or is reasonably likely to
materially affect our internal control over financial
reporting.
ITEM 16.
[RESERVED]
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT.
Our
board of directors has determined that Mr. Dennis Galgano qualifies
as an audit committee financial expert. Our board of directors has
determined that Messrs. Dennis Galgano, David Wei Tang, Jin Meng
Bryan Yap and Zhihao Xu meet the definition of an “independent
director” under the applicable NASDAQ Rules and under Rule 10A-3 of
the Securities Exchange Act of 1934, as amended.
ITEM 16B.
CODE OF ETHICS.
Our
board of directors has adopted a code of business conduct and
ethics applicable to our directors, officers and employees. We have
posted the code on our website
at http://www.luokung.com.
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The
following is a summary of the fees billed to the Company by its
principal independent registered accounting firm for professional
services rendered for the years ended December 31, 2019 and 2018
(in US dollars):
|
|
Year
Ended
December 31, |
|
|
|
2019 |
|
|
2018 |
|
Audit Fees |
|
$ |
325,000 |
|
|
$ |
325,000 |
|
Audit-Related
Fees |
|
|
160,000 |
|
|
|
- |
|
TOTAL |
|
$ |
485,000 |
|
|
$ |
325,000 |
|
“Audit
Fees” consisted of the aggregate fees billed for professional
services rendered for the audit of our annual financial statements
and the reviews of the financial statements included in our Forms
20-F and for any other services that were normally provided in
connection with our statutory and regulatory filings or
engagements.
“Audit
Related Fees” consisted of the aggregate fees billed for
professional services rendered for assurance and related services
that were reasonably related to the performance of the audit or
review of our financial statements and were not otherwise included
in Audit Fees.
Tax Fees
We
did not engage our principal accountants to provide tax or related
services during the last two fiscal years.
All Other Fees
We
did not engage our principal accountants to render services to us
during the last two fiscal years, other than as reported
above.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES.
Not
applicable.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
Not
applicable.
ITEM 16F. CHANGE
IN REGISTRANT’S CERTIFYING ACCOUNTANT.
Not
applicable.
ITEM 16G.
CORPORATE GOVERNANCE.
We
are incorporated in the BVI and our corporate governance practices
are governed by applicable BVI law as well as our memorandum and
articles of association. In addition, because our ADSs are listed
on NASDAQ, we are subject to NASDAQ’s corporate governance
requirements. NASDAQ Listing Rule 5620(a) requires each issuer to
hold an annual meeting of shareholders no later than one year after
the end of the issuer’s fiscal year end. However, NASDAQ Listing
Rule 5615(a)(3) permits a foreign private issuer like us to follow
home country practices in lieu of certain requirements of Listing
Rule 5600, provided that such foreign private issuer discloses in
its annual report filed with the SEC each requirement of Rule 5600
that it does not follow and describes the home country practice
followed in lieu of such requirement. We follow home country
practice with respect to annual meetings and did not hold an annual
shareholder meeting in the year ended December 31, 2019. We may,
however, hold annual shareholder meetings in the future if there
are significant issues that require shareholders’
approvals.
ITEM
16H. MINE SAFETY DISCLOSURE.
Not
applicable.
PART
III
ITEM 17.
FINANCIAL STATEMENTS.
We
have elected to provide financial statements and related
information specified in Item 18.
ITEM 18.
FINANCIAL STATEMENTS.
See
“Index to Consolidated Financial Statements” for a list of all
financial statements filed as part of this annual report. The
Financial Statements are beginning on page F-1.
ITEM 19.
EXHIBITS.
See
the Exhibit Index following the signature page of this report,
which is incorporated herein by reference.
SIGNATURES
The
registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its
behalf.
|
LUOKUNG
TECHNOLOGY CORP. |
|
|
|
By: |
/s/
Xuesong Song |
|
|
Xuesong
Song |
|
|
Chief
Executive Officer
(principal
executive officer)
|
June
29, 2020
INDEX
The
following documents are filed as part of this annual report on Form
20-F.
Exhibit
Number |
|
Description |
|
|
|
1.1 |
|
Amended
and Restated Memorandum of Association and Articles of Association
of Luokung Technology Corp., dated December 27, 2019, and as
currently in effect. |
|
|
|
2.1* |
|
Deposit
Agreement among the Company, depositary and holders of the American
Depositary Receipts. |
|
|
|
2.2* |
|
Form
of American Depositary Receipt. |
|
|
|
2.3* |
|
English
translation of Entrusted Management Agreement dated December 15,
2009 between Xi’an Softech Co., Ltd., Xi’an Kingtone Information
Technology Co., Ltd. and the shareholders of Xi’an Kingtone
Information Technology Co., Ltd. |
|
|
|
3.1* |
|
English
translation of Shareholder’s Voting Proxy Agreement dated December
15, 2009 between Xi’an Softech Co., Ltd., Xi’an Kingtone
Information Technology Co., Ltd. and the shareholders of Xi’an
Kingtone Information Technology Co., Ltd. |
|
|
|
4.1* |
|
English
translation of Exclusive Technology Service Agreement dated
December 15, 2009 between Xi’an Softech Co., Ltd. and Xi’an
Kingtone Information Technology Co., Ltd. |
|
|
|
4.2* |
|
English
translation of Exclusive Option Agreement dated December 15, 2009
between Xi’an Softech Co., Ltd., Xi’an Kingtone Information
Technology Co., Ltd. and the shareholders of Xi’an Kingtone
Information Technology Co., Ltd. |
|
|
|
4.3* |
|
English
translation of Equity Pledge Agreement dated December 15, 2009
between Xi’an Softech Co., Ltd., Xi’an Kingtone Information
Technology Co., Ltd. and the shareholders of Xi’an Kingtone
Information Technology Co., Ltd. |
|
|
|
4.4* |
|
English
translation of Loan Agreement dated September 14, 2009 between
Xi’an Kingtone Information Technology Co., Ltd. and Xian City
Commercial Bank. |
|
|
|
4.5* |
|
English
translation of Mortgage Agreement dated September 14, 2009 between
Xi’an Kingtone Information Technology Co., Ltd. and Xian City
Commercial Bank. |
|
|
|
4.6* |
|
English
translation of Form of Employment Agreement entered into between
the Company and the Company’s executive officers. |
|
|
|
4.7* |
|
2010
Omnibus Incentive Plan of the Company. |
|
|
|
4.8** |
|
English
translation of Project Construction Contract dated August 10, 2010
between Xi’an Hu County Yuxing Agriculture Science & Technology
Co., Ltd. and Xi’an Kingtone Information Technology Co.,
Ltd. |
|
|
|
4.9*** |
|
Asset
Exchange Agreement by and between C Media Limited and the Company
dated as of January 25, 2018. |
|
|
|
4.10*** |
|
Securities
Purchase Agreement by and among Redstone YYL Management Limited and
five shareholders holding majority of the shares of the Company
dated as of January 25, 2018. |
|
|
|
4.15**** |
|
Exclusive
Business Cooperation Agreement by and between Zhongchuan Tianxia
Information Technology (Shenzhen) Co., Ltd., and Beijing Mobile
Vision Technology Co., Ltd., dated August 31, 2015. |
|
|
|
4.16**** |
|
Exclusive
Option Agreement by and among Zhongchuan Tianxia Information
Technology (Shenzhen) Co., Ltd., Xuesong Song, Weili Chen, Ping
Wang, Donglai Liu, and Beijing Mobile Vision Technology Co., Ltd.,
dated August 31, 2015. |
|
|
|
4.17**** |
|
Equity
Interest Pledge Agreement by and among Zhongchuan Tianxia
Information Technology (Shenzhen) Co., Ltd., Xuesong Song, Weili
Chen, Ping Wang, Donglai Liu, and Beijing Mobile Vision Technology
Co., Ltd., dated August 31, 2015. |
|
|
|
4.18 |
|
Addendum
to Asset Exchange Agreement by and among the Company, Topsky
Info-tech Holdings Pte Ltd. and C Media Limited, dated October 3,
2018. [Incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 6-K filed on October 4,
2018]. |
|
|
|
4.19 |
|
Stock
Purchase Agreement, dated August 25, 2018, by and among the
Company, LK Technology Ltd., and the shareholders listed
therein. [Incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 6-K filed on August 27,
2018]. |
Exhibit
Number |
|
Description |
|
|
|
4.20**** |
|
Power
of Attorney by Weili Chen, dated August 31, 2015. |
|
|
|
4.21**** |
|
Power
of Attorney by Ping Wang, dated August 31, 2015. |
|
|
|
4.22**** |
|
Power
of Attorney by Donglai Liu, dated August 31, 2015. |
|
|
|
4.23**** |
|
Power
of Attorney by Xuesong Song, dated August 31, 2015. |
|
|
|
4.24**** |
|
Employment
Agreement, dated August 19, 2018, between Luokung Technology Corp.
and Xuesong Song.† |
|
|
|
4.25**** |
|
Employment
Agreement, dated August 19, 2018, by and between Luokung Technology
Corp. and Jie Yu.† |
|
|
|
4.26 |
|
Securities
Purchase Agreement with Honbridge Holdings Limited. [Incorporated
by reference to Exhibit 4.1 to the Company’s Current Report on Form
6-K filed on January 17, 2019]. |
|
|
|
4.27 |
|
Share Purchase Agreement as to the acquisition of Saleya.
[Incorporated by reference to Exhibit 99.1 to the Company’s Current
Report on Form 6-K filed on September 13, 2019]. |
|
|
|
4.28 |
|
Supplemental
Agreement as to the acquisition of Saleya. Incorporated by
reference to the Company’s Current Report on Form 6-K filed on
October 17, 2019. |
|
|
|
4.29 |
|
English
translation of Share Subscription Agreement with Geely Technology
Group Co., Ltd. |
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4.30 |
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English translation of Loan
Agreement with Hangzhou Maijie Investment Co., Ltd. |
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4.31 |
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Securities
Purchase Agreement with Acuitas Capital, LLC. [Incorporated by
reference to Exhibit 99.1 to the Company’s Current Report on Form
6-K filed on December 3, 2019]. |
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4.32 |
|
Warrant Agreement with Acuitas Capital, LLC. [Incorporated by
reference to Exhibit 99.2 to the Company’s Current Report on Form
6-K filed on December 3, 2019].
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4.33 |
|
2018 Omnibus Incentive Plan of the Company. Incorporated by
reference to the Company’s Current Report on Form S-8 filed on
April 17, 2020.
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4.34 |
|
English translation of Preferred Stock
Subscription Agreement and Supplemental Agreement with Daci Haojin
Foundation Limited |
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8.1 |
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List
of Subsidiaries and Consolidated Variable Interest
Entities |
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11.1 |
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Code
of Business Conduct and Ethics. [Incorporated by reference to
Exhibit 11.1 to the Company’s Annual Report on Form 20-F filed on
April 24, 2019]. |
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12.1 |
|
Certification
of Chief Executive Officer required by Rule
13a-14(a). |
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12.2 |
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Certification
of Chief Financial Officer required by Rule
13a-14(a). |
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13.1 |
|
Certification
of Chief Executive Officer required by Rule
13a-14(a). |
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13.2 |
|
Certification
of Chief Financial Officer required by Rule
13a-14(a). |
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101.INS |
|
XBRL
Instance Document. |
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101.SCH |
|
XBRL
Taxonomy Extension Schema Document. |
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101.CAL |
|
XBRL
Taxonomy Extension Calculation Linkbase Document. |
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101.DEF |
|
XBRL
Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
|
XBRL
Taxonomy Extension Label Linkbase Document. |
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101.PRE |
|
XBRL
Taxonomy Extension Presentation Linkbase Document. |
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* |
Previously
filed as an exhibit to the Company’s Registration Statement on Form
F-1 (Reg. No. 333-166056) filed with the Commission and
incorporated herein by reference. |
|
** |
Previously
filed as exhibits to the Company’s Transition Report on Form
20-F filed with the Commission on January 20, 2011 and incorporated
herein by reference. |
|
*** |
Previously
filed as exhibits to the Company’s Annual Report on Form 20-F
filed with the Commission on February 9, 2018 and incorporated
herein by reference. |
|
**** |
Previously
filed as exhibits to the Company’s Annual Report on Form 20-F filed
with the Commission on October 12, 2018 |
|
† |
Indicates
management contract or compensatory plan, contract or
arrangement. |
Luokung
Technology Corp. and Subsidiaries
CONSOLIDATED
FINANCIAL STATEMENTS
TABLE
OF CONTENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Shareholders and the Board of Directors of
Luokung
Technology Corp.
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of
Luokung Technology Corp. and. subsidiaries (the “Company”) as of
December 31, 2019 and 2018, and the related consolidated statements
of operations and comprehensive loss, changes in shareholders’
equity and cash flows for each of the three years in the period
ended December 31, 2019, and the related notes (collectively
referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the
Company as of December 31, 2019 and 2018, and the consolidated
results of its operations and its cash flows for each of the three
years in the period ended December 31, 2019, in conformity with
accounting principles generally accepted in the United States of
America.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion
on the Company’s consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and
are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ Moore Stephens CPA Limited
Certified
Public Accountants
We
have served as the Company’s auditor since 2018.
Hong
Kong
June
29, 2020
LUOKUNG
TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN U.S. DOLLARS)
|
|
As of
December 31, |
|
|
|
2019 |
|
|
2018 |
|
Assets |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash |
|
$ |
3,695,687 |
|
|
$ |
1,192,218 |
|
Accounts receivable, net of allowance for doubtful accounts |
|
|
10,004,951 |
|
|
|
22,661,594 |
|
Other receivables and prepayment |
|
|
27,071,241 |
|
|
|
2,749,000 |
|
Amounts due from related parties |
|
|
200,682 |
|
|
|
4,935,698 |
|
Total current assets |
|
|
40,972,561 |
|
|
|
31,538,510 |
|
Non-current assets: |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
588,881 |
|
|
|
898,007 |
|
Intangible assets, net |
|
|
47,299,120 |
|
|
|
52,763,998 |
|
Goodwill |
|
|
11,728,600 |
|
|
|
11,728,600 |
|
Right-of-use assets |
|
|
670,604 |
|
|
|
- |
|
Other receivables, net (long term) |
|
|
16,636,403 |
|
|
|
150,286 |
|
Total non-current assets |
|
|
76,923,608 |
|
|
|
65,540,891 |
|
TOTAL ASSETS |
|
|
117,896,169 |
|
|
|
97,079,401 |
|
Liabilities |
|
|
|
|
|
|
|
|
|