ITEM 3. KEY INFORMATION
Our Corporate Structure
We are an offshore holding company incorporated
in the Cayman Islands. As a holding company with no material operations, our operations were conducted in China by (i) Haitian Weilai,
our indirect subsidiary, (ii) the VIE, Hitek and the VIE’s subsidiaries, Huasheng and Huoerguosi. Neither we nor our subsidiaries
own any equity interests in the VIE. WFOE, the VIE and the shareholders of the VIE entered into a series of contractual arrangements,
also known as the “VIE Agreements”, pursuant to which we are able to consolidate the financial results of the VIE in our consolidated
financial statements because we are deemed as the primary beneficial of the VIE under generally accepted accounting principles in the
U.S. (“U.S. GAAP”), and this structure involves unique risks to investors.
The following diagram illustrates our corporate
structure as of the date of this annual report:
The VIE Agreements
The VIE Agreements by and among Tian Dahai (Xiamen)
Information Technology Co. Ltd. (the “WFOE”), HiTek, and HiTek’s shareholders include (i) certain power of attorney
agreements and equity interest pledge agreement, pursuant to which shareholders of HiTek pledged all of their equity interests in HiTek
to WFOE guarantee the performance of HiTek’s obligations under the exclusive technical consulting and service agreement; (ii) an
exclusive technical consulting and service agreement which allows WFOE to receive substantially all of the economic benefits from HiTek;
and (iii) certain exclusive equity interest purchase agreements which provide WFOE with an exclusive option to purchase all or part of
the equity interests in and/or assets of HiTek when and to the extent permitted by PRC laws. Through the VIE Agreements among WFOE, HiTek
and HiTek’s shareholders, we are deemed to have a controlling financial interest in, and be the primary beneficiary of, the VIE
for accounting purposes only and must consolidate the VIE because it met the conditions under U.S. GAAP to consolidate the VIE.
Each of the VIE Agreements is described in detail below:
Exclusive Technical Consulting and Service Agreement
Pursuant to the Exclusive Technical Consulting
and Service Agreement between HiTek and WFOE, WFOE provides HiTek with technical support, consulting services and other management services
relating to its day-to-day business operations and management, on an exclusive basis. The Exclusive Technical Consulting and Service Agreement
has come into effect as of March 31, 2018. For services rendered to HiTek by WFOE under this agreement, WFOE is entitled to collect a
service fee that shall be paid per quarter of 100% of HiTek’s quarterly profit. The term of the Exclusive Technical Consulting and
Service Agreement is ten years unless it is terminated by WFOE with 30-day prior notice.
Equity Interest Pledge Agreement
WFOE, HiTek and HiTek shareholders entered into
an Equity Interest Pledge Agreement, pursuant to which HiTek shareholders pledged all of their equity interests in HiTek to WFOE
in order to guarantee the performance of HiTek’s obligations under the Exclusive Technical Consulting and Service Agreement as described
above. The Equity Interest Pledge Agreement has come into effect as of March 31, 2018. During the term of the pledge, WFOE is entitled
to receive any dividends declared on the pledged equity interests of HiTek. The Equity Interest Pledge Agreement ends when all contractual
obligations under the Exclusive Technical Consulting and Service Agreement have been fully performed.
Exclusive Equity Interests Purchase Agreement
Under the Exclusive Equity Interests Purchase
Agreement, the HiTek Shareholders granted WFOE (or its designee) an exclusive option to purchase, to the extent permitted under PRC law,
part or all of their equity interests in HiTek. The option price is equal to the capital paid in by the HiTek Shareholders subject to
any appraisal or restrictions required by applicable PRC laws and regulations. The Exclusive Equity Interests Purchase Agreement remains
effective for a term of ten years and may be extended for another ten years at WFOE’s election.
Power of Attorney
Pursuant to the Power of Attorney, each HiTek
Shareholder authorizes WFOE to act on their behalf as their exclusive agent and attorney with respect to all rights as shareholders, including
but not limited to: (a) the attendance of the shareholder’s meeting and the execution of relative shareholder resolution(s) of HiTek;
(b) exercising all the shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the
articles of association, including but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and
(c) designating and appointing on behalf of shareholders the legal representative, the executive director, supervisor, the chief executive
officer and other senior management members of HiTek.
Although it is not explicitly stipulated in the
Powers of Attorney, the term of the Powers of Attorney shall be the same as the term of that of the Exclusive Equity Interests Purchase
Agreement.
The Powers of Attorney are coupled with an interest
and shall be irrevocable and continuously valid from the date of their execution, so long as the relevant HiTek Shareholder is a shareholder
of Company.
Risks Associated with Our Corporate Structure
and the VIE Agreements
However, the VIE structure cannot completely replicate
a foreign investment in China-based companies, as the shareholders will not and may never hold equity interests in the Chinese operating
entities. Instead, the VIE structure provides contractual exposure to foreign investment in us. Because we do not hold equity interests
in the VIE, we are subject to risks due to uncertainty of the interpretation and the application of the PRC laws and regulations, including
but not limited to limitation on foreign ownership of internet technology companies, regulatory review of oversea listing of PRC companies
through a special purpose vehicle, and the validity and enforcement of the VIE Agreements as they have not been tested in a court of law.
The VIE Agreements may not be effective in providing control over HiTek. See “Risk Factors — Risks Relating to Our
Corporate Structure” starting on page 14 of this annual report, “Risk Factors — Risks Relating to Doing Business
in the PRC” starting on page 19 of this annual report for more information.
We are subject to the risks of uncertainty about
any future actions of the PRC government in this regard that could disallow the VIE structure, which would likely result in a material
change in our operations and the value of Ordinary Shares may depreciate significantly or become worthless. We are also subject to certain
legal and operational risks associated with the VIE’s operations in China. PRC laws and regulations governing our current business
operations are sometimes vague and uncertain, and therefore, these risks may result in a material change in the VIE’s operations,
significant depreciation of the value of our Ordinary Shares, or a complete hindrance of our ability to continue to offer our securities
to investors. Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in
China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based
companies listed overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews,
and expanding the efforts in anti-monopoly enforcement.
Pursuant to the PRC Cybersecurity Law, which was
promulgated by the Standing Committee of the National People’s Congress on November 7, 2016 and took effect on June 1, 2017, personal
information and important data collected and generated by a critical information infrastructure operator in the course of its operations
in China must be stored in China, and if a critical information infrastructure operator purchases internet products and services that
affects or may affect national security, it should be subject to cybersecurity review by the Cyberspace Administration of China (“CAC”).
Due to the lack of further interpretations, the exact scope of “critical information infrastructure operator” remains unclear.
On December 28, 2021, the CAC and other relevant PRC governmental authorities jointly promulgated the Cybersecurity Review Measures (the
“CAC Revised Measures”) to replace the original Cybersecurity Review Measures. The CAC Revised Measures took effect on February
15, 2022. Pursuant to the CAC Revised Measures, if critical information infrastructure operators purchase network products and services,
or network platform operators conduct data processing activities that affect or may affect national security, they will be subject to
cybersecurity review. On November 14, 2021, CAC published the Administration Measures for Cyber Data Security (Draft for Public Comments),
or the “Cyber Data Security Measure (Draft)”, which requires cyberspace operators with personal information of more than 1
million users who want to list abroad to file a cybersecurity review with the Office of Cybersecurity Review. The cybersecurity review
will evaluate, among others, the risk of critical information infrastructure, core data, important data, or a large amount of personal
information being influenced, controlled or maliciously used by foreign governments and risk of network data security after going public
overseas. As confirmed by our PRC counsel, Jingtian & Gongcheng, we are not subject to cybersecurity review with the CAC in accordance
with the CAC Revised Measures, because (i) we are not in possession of or otherwise holding personal information of over one million users
and it is also very unlikely that it will reach such threshold in the near future; and (ii) as of the date of this annual report, we have
not received any notice or determination from applicable PRC governmental authorities identifying it as a critical information infrastructure
operator. However, since these statements and regulatory actions are new, it is highly uncertain how soon legislative or administrative
regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will
be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our daily business
operation, the ability to accept foreign investments and list on an U.S. exchange.
On February 17, 2023, the CSRC promulgated the
Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Trial Measures, and five supporting
guidelines, which came into effect on March 31, 2023. Pursuant to the Trial Measures, domestic companies that seek to offer or list securities
overseas, both directly and indirectly, shall complete filing procedures with the CSRC pursuant to the requirements of the Trial Measures
within three working days following its submission of initial public offerings or listing application. If a PRC company fails to complete
required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such PRC company may
be subject to administrative penalties, such as order to rectify, warnings, fines, and its controlling shareholders, actual controllers,
the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and
fines. In addition, on February 24, 2023, the CSRC, together with Ministry of Finance of the PRC, National Administration of State
Secrets Protection and National Archives Administration of China, revised the Provisions on Strengthening Confidentiality and Archives
Administration for Overseas Securities Offering and Listing which was issued by the CSRC, National Administration of State Secrets Protection
and National Archives Administration of China in 2009, or the Provisions. The revised Provisions is issued under the title the Provisions
on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies, and came
into effect on March 31, 2023 together with the Trial Measures. One of the major revisions to the revised Provisions is expanding its
application to cover indirect overseas offering and listing, as is consistent with the Trial Measures. The revised Provisions require
that, including but not limited to (a) a domestic company that plans to, either directly or indirectly through its overseas listed entity,
publicly disclose or provide to relevant individuals or entities including securities companies, securities service providers and overseas
regulators, any documents and materials that contain state secrets or working secrets of government agencies, shall first obtain approval
from competent authorities according to law, and file with the secrecy administrative department at the same level; and (b) domestic
company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals
and entities including securities companies, securities service providers and overseas regulators, any other documents and materials that,
if leaked, will be detrimental to national security or public interest, shall strictly fulfill relevant procedures stipulated by applicable
national regulations. As of the date of this annual report, as advised by Jingtian & Gongcheng, our PRC counsel, as our
post-effective amendment to the registration statement on Form F-1 relating to our initial public offering was declared effective on March
30, 2023 and we have completed our initial public offering and listing prior to September 30, 2023, we are not required to complete the
filing procedures pursuant to the Trial Measures for our initial public offering. If in the future we are going to conduct any offering
or financing in the U.S., we will complete filing procedures with the CSRC pursuant to the requirements of the Trial Measures. In addition,
we have not received any formal inquiry, notice, warning, sanction, or objection from the CSRC with respect our listing on the Nasdaq
Capital Market. However, there remains significant uncertainty as to the enactment, interpretation and implementation of regulatory
requirements related to overseas securities offerings and other capital markets activities. Any failure or perceived failure of us to
fully comply with such new regulatory requirements could significantly limit or completely hinder our ability to continue to offer securities
to investors, cause significant disruption to our business operations, and severely damage our reputation, which could materially and
adversely affect our financial condition and results of operations and could cause the value of our securities to significantly decline
or be worthless.
Furthermore, as an auditor of companies that are
registered with the SEC and publicly traded in the United States and a firm registered with the PCAOB, our auditor, Wei, Wei & Co.
LLP, is headquartered in the United States and is required under the laws of the United States to undergo regular inspections by the U.S.
Public Company Accounting Oversight Board (“PCAOB”) to assess their compliance with the laws of the United States and professional
standards. Although we operate through HiTek in mainland China, a jurisdiction where the PCAOB is currently unable to conduct inspections
without the approval of the Chinese government authorities, our auditor is currently inspected fully by the PCAOB. Inspections of other
auditors conducted by the PCAOB outside mainland China have at times identified deficiencies in those auditors’ audit procedures
and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality.
Even though our auditor is based in United
States and under full inspection by the PCAOB and is not currently subject to the determinations announced by the PCAOB on December
16, 2021, if any PRC law relating to the access of the PCAOB to auditor files were to apply to a company such as HiTek or its
auditor, the PCAOB may be unable to fully inspect our auditor, which may result in our securities being delisted or prohibited from
being traded “over-the-counter” pursuant to the Holding Foreign Companies Accountable Act (the “HFCA Act”)
and materially and adversely affect the value and/or liquidity of your investment. On August 26, 2022, the China Securities
Regulatory Commission, the Ministry of Finance of the PRC (the “MOF”), and the PCAOB signed a Statement of Protocol (the
“Protocol”), governing inspections and investigations of audit firms based in mainland China and Hong Kong, taking the
first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in
mainland China and Hong Kong. Pursuant to the fact sheet with respect to the Protocol disclosed by the U.S. Securities and Exchange
Commission (the “SEC”), the PCAOB shall have independent discretion to select any issuer audits for inspection or
investigation and has the unfettered ability to transfer information to the SEC. On December 15, 2022, the PCAOB Board determined
that the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in
mainland China and Hong Kong and voted to vacate its previous determinations to the contrary. However, should PRC authorities
obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB Board will consider the need to issue a
new determination. See “Risk Factors—Risks Related to Doing Business in the PRC” starting on page 19 of this
annual report for a detailed description of risks related to the PRC. On December 29, 2022, a legislation entitled
“Consolidated Appropriations Act, 2023” (the “Consolidated Appropriations Act”), was signed into law by
President Biden, which amended the HFCA Act by reducing the number of consecutive non-inspection years required for triggering the
prohibitions under the HFCA Act from three years to two. There are risks and uncertainties which we cannot foresee for the time
being, and rules and regulations in the PRC can change quickly with little or no advance notice. The PRC government may intervene or
influence HiTek’s future operations in the PRC at any time, or may exert more control over offerings conducted overseas and/or
foreign investment in companies like us. The PRC government may intervene or influence HiTek’s future operations in the PRC at
any time, or may exert more control over offerings conducted overseas and/or foreign investment in companies like us. In the event
it is later determined that the PCAOB is unable to inspect or investigate completely our auditor, then such lack of inspection could
cause trading in our securities to be prohibited under the HFCA Act, and ultimately result in a determination by a securities
exchange to delist our securities.
Our management monitors the cash position of each
entity within our organization regularly and prepare budgets on a monthly basis to ensure each entity has the necessary funds to fulfill
its obligation for the foreseeable future and to ensure adequate liquidity. As a holding company, we may rely on dividends and other distributions
on equity paid by our subsidiary in Hong Kong, Hitek HK, and the consolidated VIE in mainland China, HiTek, for our cash and financing
requirements. According to the Companies Ordinance of Hong Kong, a Hong Kong company may only make a distribution out of profits available
for distribution. In order for us to pay dividends to our shareholders, we will rely on payments made from HiTek to WFOE, pursuant to
VIE Agreements between them, and the distribution of such payments to HiTek HK as dividends from WFOE. Certain payments from our HiTek
to WFOE are subject to PRC taxes, including business taxes and VAT. We intend to keep any future earnings to re-invest in and finance
the expansion of our business, and we do not anticipate that any cash dividends will be paid or any assets will be transferred in the
foreseeable future. As of the date of this annual report, there has been no distribution of dividends or assets among the holding company,
the subsidiary or the consolidated VIE. In the future, cash proceeds raised from overseas financing activities may be transferred
by us to the consolidated VIE via capital contribution or shareholder loans, as the case may be. Other than the above, we did not adopt
or maintain any cash management policies and procedures as of the date of this annual report.
Dividend Distributions or Assets Transfer among
the Holding Company, its Subsidiaries and the VIE
We intend to keep any future earnings to re-invest
in and finance the expansion of our business, and we do not anticipate that any cash dividends will be paid or any assets will be transferred
in the foreseeable future. As of the date of this annual report, there has been no distribution of dividends or assets among the holding
company, the subsidiary or the consolidated VIE. Under Cayman Islands law, a Cayman Islands company may pay a dividend on its shares
out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result in the company
being unable to pay its debts due in the ordinary course of business. If we determine to pay dividends on any of our Ordinary Shares in
the future, as a holding company, we will be dependent on receipt of funds from our Hong Kong subsidiary, HiTek HK.
Current PRC regulations permit our indirect PRC
subsidiaries to pay dividends to the Company 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. Each of such entity in China
is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be
set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other
ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve
funds are not distributable as cash dividends except in the event of liquidation.
The PRC government also imposes controls on the
conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in
completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits,
if any. Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict
their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations
through the current VIE Agreements, we may be unable to pay dividends on our Ordinary Shares.
Cash dividends, if any, on our Ordinary Shares
will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas
shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10.0%.
In order for us to pay dividends to our shareholders,
we will rely on payments made from HiTek to WFOE, pursuant to VIE Agreements between them, and the distribution of such payments to HiTek
HK as dividends from WFOE. Certain payments from our HiTek to WFOE are subject to PRC taxes, including business taxes and VAT.
Pursuant to the Arrangement between Mainland China
and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance
Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC project.
However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation
that (a) the Hong Kong project must be the beneficial owner of the relevant dividends; and (b) the Hong Kong project must directly hold
no less than 25% share ownership in the PRC project during the 12 consecutive months preceding its receipt of the dividends. In current
practice, a Hong Kong project must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding
tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that
we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding
tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiary to its immediate holding
company, HiTek HK. As of the date of this annual report, we have not applied for the tax resident certificate from the relevant Hong Kong
tax authority. HiTek HK intends to apply for the tax resident certificate when WFOE plans to declare and pay dividends to HiTek HK. See
“Risk Factors - There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiary,
and dividends payable by our PRC subsidiary to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.”
Permission or Approval Required from the PRC Authorities for The
VIE’s Operation
To operate the general business activities currently
conducted in China, the consolidated VIE is required to obtain a business license from the State Administration for Market Regulation
(“SAMR”). HiTek has obtained a valid business license from the SAMR, and no application for any such license has been denied.
We are aware, however, recently, the PRC government
initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including
cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable
interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly
enforcement.
On July 6, 2021, the General Office of the Central
Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking
Down on Illegal Securities Activities According to Law,” or the Opinions. The Opinions emphasized the need to strengthen the administration
over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Effective
measures, such as promoting the construction of relevant regulatory systems will be taken to deal with the risks and incidents of China-concept
overseas listed companies, and cybersecurity and data privacy protection requirements and similar matters. The Opinions and any related
implementing rules to be enacted may subject us to compliance requirement in the future. Given the current regulatory environment in the
PRC, we are still subject to the uncertainty of different interpretation and enforcement of the rules and regulations in the PRC adverse
to us, which may take place quickly with little advance notice.
On December 28, 2021, the CAC published the CAC
Revised Measures, which further restates and expands the applicable scope of the cybersecurity review. The CAC Revised Measures took effect
on February 15, 2022. Pursuant to the CAC Revised Measures, if a network platform operator holding personal information of over one million
users seeks for “foreign” listing, it must apply for the cybersecurity review. In addition, operators of critical information
infrastructure purchasing network products and services are also obligated to apply for the cybersecurity review for such purchasing activities.
Although the CAC Revised Measures provides no further explanation on the extent of “network platform operator” and “foreign”
listing, we do not believe we are obligated to apply for a cybersecurity review pursuant to the CAC Revised Measures, considering that
(i) we are not in possession of or otherwise holding personal information of over one million users and it is also very unlikely that
we will reach such threshold in the near future; (ii) as of the date of this this annual report, we have not received any notice or determination
from applicable PRC governmental authorities identifying it as a critical information infrastructure operator.
That being said, the CAC Revised Measures empowers
the cybersecurity review office to initiate cybersecurity review when they believe any particular data processing activities “affect
or may affect national security”. In addition, on November 14, 2021, the CAC promulgated the Regulations on the Administration of
Cyber Data Security (Draft for Comments) (the “Draft CAC Regulations”), and according to the Draft CAC Regulations, any data
processors shall, in accordance with relevant state provisions, apply for a cybersecurity review when carrying out, among other things,
“other data processing activities that affect or may affect national security”. However, neither the CAC Revised Measures
nor the Draft CAC Regulations provides for any further explanation or interpretation over what constitutes activities that “affect
or may affect national security”. Therefore, if any competent government authorities deem that HiTek’s data processing activities
may affect national security, we may be subject cybersecurity review, and in that scenario, failure to pass such cybersecurity review
and/or to comply with the data privacy and data security requirements raised during such cybersecurity review could subject HiTek to penalties,
damage its reputation and brand, and harm its business and results of operations. See risk factor titled “in light of recent events
indicating greater oversight by the CAC over data security, particularly for companies seeking to list on a foreign exchange, we are subject
to a variety of laws and other obligations regarding cybersecurity and data protection, and any failure to comply with applicable laws
and obligations could have a material and adverse effect on our business, our listing on Nasdaq, financial condition, results of operations,
and the offering” starting on page 26 of this annual report for more information.
In summary, we, our subsidiaries, or the VIE are
not required to obtain permission or approval from the PRC authorities including CSRC or CAC for the VIE’s operation, nor have we,
our subsidiaries, or VIE received any denial for the VIE’s operation. We are subject to the risks of uncertainty of any future actions
of the PRC government in this regard including the risk that we inadvertently conclude that the permission or approvals discussed here
are not required, that applicable laws, regulations or interpretations change such that we or HiTek is required to obtain approvals in
the future, or that the PRC government could disallow our holding company structure, which would likely result in a material change in
our operations, including our ability to continue our existing holding company structure, carry on our current business, accept foreign
investments, and continue to offer securities to our investors. These adverse actions could cause the value of our Ordinary Shares to
significantly decline or become worthless. We may also be subject to penalties and sanctions imposed by the PRC regulatory agencies, including
the CSRC, if we fail to comply with such rules and regulations, which would likely adversely affect the ability of our securities to be
listed on the U.S. exchange, which would likely cause the value of our securities to significantly decline or become worthless.
A. [RESERVED]
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 the headings “Forward-Looking Statements” and “Operating
and Financial Review and Prospects” before you decide to invest in our ordinary shares. We are a holding company with substantial
operations in China and are subject to a legal and regulatory environment that in many respects differs from 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 could be materially and adversely affected.
Risks Related to Our Business Operations
We face risks related to health epidemics
such as the COVID-19, and other outbreaks, which could significantly disrupt our operations and adversely affect our business, financial
condition and results of operations.
Our business could be materially and adversely
affected by health epidemics such as the COVID-19 and other outbreaks affecting the PRC. Health epidemics may give rise to severe interruptions
to public transportation and usual business operations, which could severely disrupt our operations. Our business operations depend on
overall economy and demand for IT consulting and solutions service in Xiamen area, which could be disrupted by health epidemics. For example,
our office had to shut down from February 3, 2020 to February 23, 2020. Public transportation services in Xiamen city were curtailed over
COVID-19 concerns. For our Tax Devices and Services sector, we have to collect the service fee on-site from those customers who have not
used our online payment platform, which may lead to a delay in collection. The number of our new customers decreased in February 2020.
The COVID-19 outbreak may have the same impact on our IT services sector. As of the date this annual report, there is no clear sign of
slow-down in our hardware and software sales. In early December 2022, China announced a nationwide loosening of its zero-COVID policy,
and the country may face a wave in infections after the lifting of these restrictions. The impact of COVID-19 pandemic still depends on
the future developments of the pandemic, including new information concerning the global severity of and actions taken to contain the
pandemic, or the appearance of new or more severe strains of the virus, which are highly uncertain and unpredictable. Therefore, while
we do not expect the COVID-19 pandemic to negatively impacting our business, results of operations, and financial position, the related
financial impact cannot be reasonably estimated at this time.
Our future revenues and growth prospects
depend on the ACTCS pricing model mandated by the PRC government. If the PRC government continues to reduce the annual fee per user we
are allowed to charge, our operations and revenues may be negatively impacted.
We sell ACTCS tax devices and provide ACTCS supporting
services to our clients. The prices of GTD and annual service fees are regulated and subject to the State Tax Administration’s pricing
mandates. In the past 20 years, the annual service fee has undergone three major adjustments -- from RMB 450 per year per user to RMB
370 per year per user, and then further reduced to RMB 330 per year per user. Most recently, the ACTCS annual service fee was again reduced
to RMB 280 per year per user, according to the “Notice of the National Development and Reform Commission on Relevant Issues Concerning
the Reduction of ACTCS Products and Maintenance Service Fee” (Development and Reform Commission Case [2017] No. 1243). According
to relevant notice, the small-scale taxpayers for which sales amount did not exceed RMB 100,000 for each month are exempt from ACTCS or
GTD technical service fee since 2019. Besides, the Company provides tax invoicing management services and charges service fee on an annual
basis. The tax invoicing management service period is usually one year for RMB299. Tax invoicing management services is to host customers’
tax devices, provide training service on using Nuonuo, complete tax declaration automatically and back up data online. Since we do not
control the pricing of the ACTCS services, we cannot guarantee our profit margin will be stable or we will make a profit on such services
at all. We cannot guarantee that the annual service fee will not be further reduced, and therefore our revenues to be derived from ACTCS
supporting services may be subject to significant fluctuation.
Our future revenues and growth prospects
depend on the growth of new business entities in the Xiamen metropolitan areas, which is not within our control and the growth rate may
decrease. As such, our operations and revenues may be negatively impacted.
The willingness of people to establish business
entities in the Xiamen metropolitan areas is beyond our control. There are multiple reasons people may find appealing to establish a particular
business in the Xiamen metropolitan areas, such as people’s personal belief and volatility in the Chinese capital markets. To the
extent that people are unwilling to establish new businesses in the Xiamen metropolitan area either due to political or economic climate,
we will not be able to acquire new customers to our ACTCS services. Thus, our ability to generate revenue or operate profitably may be
negatively impacted.
Increased use of electronic invoice will
reduce the number of customers using our ACTCS services.
From 2018, the Chinese tax regulators have been
rolling out the electronic invoicing system. Currently, electronic invoices are mostly used by businesses in the Fast Moving Consumer
Goods (“FMCG”) industry such as fast food restaurants and coffee shops. The electronic invoices enable FMCG enterprises to
apply for, issue, transfer and check the invoices through the unified online electronic invoice management system of Chinese tax authorities.
Electronic invoices are very useful in helping business entities reduce operating costs and streamline service process, since they do
not involve printing, storage and postage procedures. Businesses who use electronic invoices still need to purchase tax reporting devices
such as GTD. But they will not need maintenance services. Currently, approximately 1.5% of our SME clients are FMCG business entities.
According to relevant notice, small-scale taxpayers with sales amount not in excess of RMB 100,000 for each month are exempt from ACTCS
or GTD technical service fee since 2019. From January 2021, new taxpayers in Xiamen could receive free tax Ukeys from the Tax authorities.
The increased use of electronic invoices, the exemption of ACTCS technical service fee for small-scale taxpayers and free tax Ukeys for
new tax payers will reduce our annual service fee revenue and thus negatively affect our total revenue.
Future inflation in China may inhibit
our ability to conduct business in China.
During the past ten years, the Chinese economy
has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has
been as high as 3.3% and as low as 1.1%. These factors have led to the adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the
future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic
activity in China, and thereby harm the market for our products and our company.
The war in Ukraine could
materially and adversely affect our business and results of operations.
The recent outbreak of war in Ukraine has
already affected global economic markets, including a dramatic increase in the price of oil and gas, and the uncertain resolution of this
conflict could result in protracted and/or severe damage to the global economy. Russia’s recent military interventions in Ukraine
have led to, and may lead to, additional sanctions being levied by the United States, European Union and other countries against Russia.
Russia’s military incursion and the resulting sanctions could adversely affect global energy and financial markets and thus could
affect our customers’ businesses and our business, even though we do not have any direct exposure to Russia or the adjoining geographic
regions. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could
be substantial. Any such disruptions caused by Russian military action or resulting sanctions may magnify the impact of other risks described
herein. We cannot predict the progress or outcome of the situation in Ukraine, as the conflict and governmental reactions are rapidly
developing and beyond their control. Prolonged unrest, intensified military activities or more extensive sanctions impacting the region
could have a material adverse effect on the global economy, and such effect could in turn have a material adverse effect on our business,
financial condition, results of operations and prospects.
Increasing competition within our industry
could have an impact on our business prospects.
While the VAT reporting service industry in China
is a heavily regulated industry where new players must obtain approval by the relevant PRC government agencies before entering this industry,
it is still highly possible that new competitors will enter into the market and have significantly greater financial and other resources
than we have and may offer services that is more attractive and more advanced that we can provide for large business enterprises and SMEs.
Thus, we anticipate increasing competition, which may have a negative impact on both our revenues and our profit margins.
Our IT services and hardware and software
sales rely on evolving information technologies to maintain our competitiveness, and any failure to adapt to technological developments
or industry trends could harm our business.
We depend upon the use of sophisticated information
technologies and systems, including technologies and systems utilized for communications, procurement and administrative systems. As our
operations grow in both size and scope, we continuously need to improve and upgrade our systems and infrastructure to offer an increasing
number of clients enhanced products, services, features and functionality, while maintaining the reliability and integrity of our systems
and infrastructure. Our future success in IT services and hardware and software sales also depends on our ability to adapt to rapidly
changing technologies, particularly the increasing use of internet-based products and services, to change our services and infrastructure
so they address evolving industry standards and to improve the performance, features and reliability of our services in response to competitive
service and product offerings in the Chinese software markets and the evolving demands of the IT service markets. If there are technological
impediments to introducing new technological products or maintaining current technologies or other products and services, or if these
products and services do not meet the requirements of our clients’ evolving needs, our business, financial condition or results
of operations may be adversely affected.
In addition, the emergence of competitors which
may be able to optimize products, services or strategies that use advanced computing such as cloud computing, as well as other technological
changes and developing technologies, such as machine learning and artificial intelligence, have, and will mandate us to make new and costly
investments. Transitioning to new technologies may be disruptive to resources and the services we provide, and may increase our reliance
on third party service providers. We may not be successful, or may be less successful than our current or new competitors, in developing
technology that operates effectively across multiple devices and platforms and that is appealing to our customers, either of which would
negatively affect our business and financial performance.
It is possible that, if we are not able to maintain
existing systems, obtain new technologies and systems, or replace or introduce new technologies and systems as quickly as our competitors
or in a cost-effective manner, our business and operations could be materially adversely affected. Also, we may not achieve the benefits
anticipated or required from any new technology or system, or be able to devote financial resources to new technologies and systems in
the future.
We are dependent upon software, equipment
and services provided by third parties.
We are dependent upon software, equipment and
services provided and/or managed by third parties in the operation of our business. In the event that the performance of such software,
equipment or services provided and/or managed by third parties deteriorates or our arrangements with any of these third parties related
to the provision and/or management of software, equipment or services are terminated, we may not be able to find alternative services,
equipment or software on a timely basis or on commercially reasonable terms, or at all, or be able to do so without significant cost or
disruptions to our business, and our relationships with our customers may be adversely impacted.
A significant portion of our revenue is
concentrated on a few large customers, and we do not have long-term service agreements with our key customers and rely upon our longstanding
relationship with them. If we lose one or more of our customers, our results of operations may be adversely and materially impacted.
For the year ended December 31, 2022, two customers
accounted for 49% of total HiTek’s revenues, the largest of which represented 36%. For the year ended December 31, 2021, two customers
accounted for 42% of total HiTek’s revenues, the largest of which represented 28%. Since we do not have long-term customer supply
agreements with such large customers and rely primarily upon our goodwill and reputation to sustain the business relationship, our results
of operations may be adversely and materially impacted if one or more of these customers stop purchasing from us.
Extended payment terms may cause deferred
payments or bad debts, which could negatively affect our business operations.
The Company gave a two-year credit period to large
customers such as large-scale oil and coal mining groups. Their collection period is usually longer than other medium or small-sized companies.
An extended credit period will have a potential risk of causing deferred payments or bad debts, which could negatively affect our business
operations.
We source our retail hardware primarily
from a limited number of suppliers. If we lose one or more of the suppliers, our operation may be disrupted, and our results of operations
may be adversely and materially impacted.
For the year ended December 31, 2022, four suppliers
accounted for 16%, 15%, 13% and 11% of the total purchases, respectively. For the year ended December 31, 2021, two suppliers accounted
for 11% and 10% of the total purchases, respectively. If we lose suppliers and are unable to swiftly engage new suppliers, our operations
may be disrupted or suspended, and we may not be able to deliver hardware products to our customers on time. We may also have to pay a
higher price to source from a different supplier on short notice. While we are actively searching for and negotiating with new suppliers,
there is no guarantee that we will be able to locate appropriate new suppliers or supplier merger targets in our desired timeline. As
such, our results of operations may be adversely and materially impacted.
We face the risk
that a third party borrower may not repay the loans we made to it. An event of default could have a material adverse effect on our cash
flow, results of operations and financial condition.
On January 21, 2022, March 28, 2022, and June
14, 2022, Hitek and HiTek, Beijing Baihengda Petroleum Technology Co., Ltd. (“Beijing Baihengda,” together with HiTek, the
“Lenders”) and Guangxi Beihengda Mining Co., Ltd. (“Guangxi Beihengda,” or the “Borrower”) entered
into three loan agreements with similar terms, pursuant to which the Lenders loaned an aggregate amount of RMB 40 million (approximately
US$5.98 million with an exchange rate of 0.1494 as of June 30, 2022) (collectively, the “Loans”) to the Borrower at a monthly
interest rate of 1%. Each of HiTek and Baihengda funded RMB 20 million of the Loans (approximately US$2.99 million with an exchange rate
of 0.1494 as of June 30, 2022). As of the date of this annual report, the aggregate outstanding principal amount of the Loans is
RMB37 million (approximately US $5.36 million with an exchange rate of 0.1447 as of December 31, 2022). All of the Loans have a two-year
term. The Borrower can pre-pay the outstanding loan amount after 12 months without penalty. Pursuant to a mining right pledge agreement
dated August 5, 2022 between HiTek, as representative of the Lenders, and the Borrower, the Loans are secured by the Borrower’s
coal mining permit, issued by Bobai County Natural Resources Bureau, which grants the Borrower a 20-year mining rights for certain building
granite mine in Daguang Village, Shuiming Town, Bobai County, Guangxi Province, for a production of 1.306 million cubic meters per year.
In the event the Borrower is unable to make full
and timely payments of interest and principal on the Loans when due, our cash flow, results of operations and financial conditions may
be adversely affected. In addition, there is risk that the mining property may decrease in value during the term of the Loans. In the
event the underlying collateral value is less than the loan amount at the time of default, we will suffer a loss.
We may need additional capital to fund our
future operations and, if it is not available when needed, we may need to reduce our planned expansion and marketing efforts, which may
reduce our revenue.
We believe that our existing working capital and
cash available from operations will enable us to meet our working capital requirements for at least the next 12 months. However, if cash
from future operations is insufficient, or if cash is used for acquisitions or other currently unanticipated uses, we may need additional
capital. As a result, we could be required to raise additional capital. To the extent that we raise additional capital through the sale
of equity or convertible debt securities, the issuance of such securities could result in dilution of the shares held by existing shareholders.
If additional funds are raised through the issuance of debt or equity securities, such securities may provide the holders certain rights,
preferences, and privileges senior to those of shareholders holding Ordinary Shares, and the terms of any such debt securities could impose
restrictions on our operations. We cannot assure you that additional capital, if required, will be available on acceptable terms, or at
all. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned product
development and marketing efforts, which could harm our business, financial condition and operating results.
If we are unable to manage our anticipated
growth effectively, our business could be adversely affected.
To develop our business, we need to hire and retain
key managers and executives in all areas of our operations. Our future operating results depend to a large extent on our ability to develop
and manage expansion and growth successfully. For us to manage such growth, we must put in place legal and accounting systems, and implement
human resource management and other tools. We have taken preliminary steps to put this structure in place. However, there is no assurance
that we will be able to expand our business or successfully manage any growth that may result. Failure to expand our operations or manage
our growth effectively could materially and adversely affect our ability to market our services in multiple venues.
Because we rely upon a third party to perform
the payment processing for our clients, the failure or inability of the third party to provide these services could impair our ability
to operate.
Because we do not possess an internal payment
method, all payments by participants or customers are processed by third parties such as Alipay and WeChat Pay. The payment processing
business is highly regulated, and it is subject to a number of risks that could materially and adversely affect their abilities to provide
payment processing and escrow services to us, including:
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increased regulatory focus and the requirement that it comply with numerous complex and evolving laws, rules and regulations; |
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increases in the costs to the third party, including fees charged by banks to process funds through the third parties, which could result in increased costs to us and to our participants; |
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dissatisfaction with the third parties’ services; |
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a decline in the use of the third parties’ services generally which could result in increases in costs to users such as us and our participants; |
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the ability of the third parties to maintain adequate security procedures to prevent the hacking or other unauthorized access to account and other information provided by us and the participants who use the system; |
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system failures or failure to effectively scale the system to handle large and growing transaction volumes; |
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the failure or inability of the third parties to manage funds accurately or the loss of funds by the third parties, whether due to employee fraud, security breaches, technical errors or otherwise; and |
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the failure or inability of these third parties to adequately manage business and regulatory risks. |
We rely on the convenience and ease of use that
third party’s payment methods provide to our users. If the quality, utility, convenience or attractiveness of these payment services
declines for any reason, the attractiveness of our services could be materially impaired. If we need to migrate to other third-party payment
services for any reason, the transition could require considerable time and management resources, and the third-party payment services
may not be as effective, efficient or well-received by our clients. Further, our clients may be reluctant to use a different payment system.
Our success depends substantially on the
continued retention of certain key personnel and our ability to hire and retain qualified personnel in the future to support our growth
and execute our business strategy.
If one or more of our senior executives or other
key personnel are unable or unwilling to continue in their present positions, our business may be disrupted and our financial condition
and results of operations may be materially and adversely affected. While we depend on the abilities and participation of our current
management team generally, we rely particularly upon Mr. Shenping Yin, Chairman of the Board and Ms. Xiaoyang Huang, our Chief Executive
Officer who is responsible for the development and implementation of our business plan. The loss of the services of Mr. Yin for any reason
could significantly adversely impact our business and results of operations. Competition for senior management and senior technology personnel
in the PRC is intense and the pool of qualified candidates is very limited. We cannot assure you that the services of our senior executives
and other key personnel will continue to be available to us, or that we will be able to find a suitable replacement for them if they were
to leave.
We may not be able to adequately protect
our intellectual property rights, and our competitors may be able to offer similar products and services, which would harm our competitive
position.
Our success depends in part upon our intellectual
property rights. We rely primarily on copyright, trade secret laws, confidentiality procedures, license agreements and contractual provisions
to establish and protect our proprietary rights over our products, procedures and services. Other persons could copy or otherwise obtain
and use our technology without authorization, or develop similar IP independently. We may also pursue the registration of our domain names,
trademarks, and service marks in other jurisdictions, including the United States. However, the intellectual property laws in China are
not considered as strong as comparable laws in the United States or the European Union. We cannot assure you that we will be able to protect
our proprietary rights. Further, our competitors may be able to independently develop similar or more advanced technology, duplicate our
products and services or design around any intellectual property rights we hold. Further, our intellectual property rights may be subject
to termination or expirations. The loss of intellectual property protections or the inability to timely regain intellectual property protections
could harm our business and ability to compete.
We have engaged in transactions with related
parties, and such transactions present possible conflicts of interest that could have an adverse effect on our business and results of
operations.
We entered into a number of transactions with
related parties, including our significant shareholder and director. For example, we entered into several transactions with Beijing Zhongzhe
Yuantong Technology Co., Ltd. which is under common control with one minority shareholder of HiTek or business entities affiliated with
or owned by Chairman, Shenping Yin, where we have sales revenues or have advances from these entities. See “Related Party Transactions”.
We may in the future enter into additional transactions with entities in which members of our board of directors and other related parties
hold ownership interests.
Transactions with related parties present potential
for conflicts of interest, as the interests of related party may not align with the interests of our shareholders. Although we believe
these transactions were in our best interests, we cannot assure you that these transactions were entered into on terms as favorable to
us as those that could have been obtained in an arms-length transaction. We may also engage in transactions with related parties in the
future. Conflicts of interests arise when we transact business with related parties. These transactions, individually or in the aggregate,
may have an adverse effect on our business and results of operations or may result in government enforcement actions or other litigation.
Risks Relating to Our Corporate Structure
We do not have direct ownership of our operating
entities in China, but have control rights and the rights to the assets, property, and revenue of HiTek and its subsidiaries through VIE
Agreements, which may not be effective in providing control over HiTek.
We do not have direct ownership of our operating
entities in China, but have control rights and the rights to the assets, property, and revenue of HiTek and its subsidiaries through VIE
Agreements. All of our current revenue and net income is derived from HiTek, the VIE in China. Foreign ownership of internet technology
businesses, such as distribution of online information, is subject to restrictions under current PRC laws and regulations. For example,
foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider (except
e-commerce) and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain
a good track record in accordance with the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2020 Version)
promulgated on June 23, 2020 and effective on July 23, 2020, respectively, and other applicable laws and regulations.
To comply with PRC laws and regulations, we do
not intend to have an equity ownership interest in HiTek but rely on VIE Agreements with HiTek to control and operate its business. However,
as discussed above, these VIE Agreements may not be effective under PRC laws in providing us with the necessary control over HiTek and
its operations. Any deficiency in these VIE Agreements may result in our loss of control over the management and operations of HiTek,
which will result in a significant loss in the value of an investment in our company. Because of the practical restrictions on direct
foreign equity ownership imposed by the Fujian provincial government authorities, we must rely on contractual rights through the VIE structure
to effect control over and management of HiTek, which exposes us to the risk of potential breach of contract by the shareholders of HiTek.
In addition, as our Chairman of the Board Mr. Yin and his wife Ms. Xiaoyang Huang, our Chief Executive Officer, holds 29.82% and 44.74%
of HiTek’s outstanding equity, it may be difficult for us to change our corporate structure if such shareholders refuse to cooperate
with us.
Because we are an offshore holding company
and our business was conducted through VIE Agreements with HiTek, the VIE in China, if we fail to comply with applicable PRC law, we could
be subject to severe penalties and our business could be adversely affected.
We are an offshore holding company incorporated
in the Cayman Islands. As a holding company with no material operations, our operations were conducted in China by our subsidiaries and
through VIE Agreements with HiTek, the VIE in China, the equity of which is owned by Xiaoyang Huang, Shenping Yin, Bo Shi, Zhishuang Wang,
Liuqing Huang, Jingru Li, Mian Tang, Ce Tian, Xianfeng Lin, Inner Mongolia Guangxin Investment Co., Ltd. and Baotou Zhongzhe Hengtong
Technology Co., Ltd. through VIE Agreements, as a result of which, under United States generally accepted accounting principles, the assets
and liabilities of HiTek are treated as our assets and liabilities and the results of operations of HiTek are treated in all respects
as if they were the results of our operations. There are uncertainties regarding the interpretation and application of PRC laws, rules
and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of the VIE Agreements
between WFOE and HiTek.
The Provisions Regarding Mergers and Acquisitions
of Domestic Projects by Foreign Investors (the “M&A Rules”) requires an overseas special purpose vehicle that are controlled
by PRC companies or individuals formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions
of PRC domestic companies using shares of such special purpose vehicle or held by its shareholders as considerations to obtain the approval
of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities
on an overseas stock exchange. However, the application of the M&A Rules remains unclear. If CSRC approval is required for future
public offerings in the U.S., it is uncertain whether it would be possible for us to obtain such approval. Any failure to obtain or delay
in obtaining CSRC approval for future public offerings in the U.S. would subject us to sanctions imposed by the CSRC and other PRC regulatory
agencies.
Furthermore, regulatory requirements on cybersecurity,
data security and data privacy in China are evolving and are subject to varying interpretations or significant changes, resulting in uncertainties
about the scope of HiTek’s responsibilities in that regard. On June 10, 2021, the Standing Committee of the National People’s
Congress promulgated the PRC Data Security Law, which took effect September 1, 2021. The Data Security Law provides for a security review
procedure for the data activities that may affect national security. Furthermore, Measures for Cybersecurity Review, which became effective
on June 1, 2020, set forth the cybersecurity review mechanism for critical information infrastructure operators, and provided that critical
information infrastructure operators who intend to purchase internet products and services that affect or may affect national security
shall be subject to a cybersecurity review. On December 28, 2021, the CAC published the CAC Revised Measures which further restates and
expands the applicable scope of the cybersecurity review. The CAC Revised Measures took effect on February 15, 2022. Pursuant to the CAC
Revised Measures, if a network platform operator holding personal information of over one million users seeks for “foreign”
listing, it must apply for the cybersecurity review, and operators of critical information infrastructure purchasing network products
and services are also obligated to apply for the cybersecurity review for such purchasing activities. Although the CAC Revised Measures
provides no further explanation on the extent of “network platform operator” and “foreign” listing, we do not
believe we are obligated to apply for a cybersecurity review pursuant to the CAC Revised Measures, considering that (i) we are not in
possession of or otherwise holding personal information of over one million users and it is also very unlikely that we will reach such
threshold in the near future; and (ii) as of the date of this annual report, we have not received any notice or determination from applicable
PRC governmental authorities identifying it as a critical information infrastructure operator. That being said, considering that the CAC
Revised Measures empowers the cybersecurity review office to initiate cybersecurity review when they believe any particular data processing
activities “affect or may affect national security”, and it is uncertain whether the competent government authorities will
deem that HiTek’s data processing activities may affect national security and thus initiating the cybersecurity review against HiTek’s
businesses. Failure of cybersecurity, data privacy and data security compliance could subject HiTek to penalties, damage its reputation
and brand, and harm its business and results of operations.
If WFOE, HiTek or their ownership structure or
the VIE Agreements are determined to be in violation of any existing or future PRC laws, rules or regulations, or WFOE or HiTek fails
to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have broad
discretion in dealing with such violations, including:
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revoking the business and operating licenses of WFOE or HiTek; |
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discontinuing or restricting the operations of WFOE or HiTek; |
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imposing conditions or requirements with which we, WFOE, or HiTek may not be able to comply; |
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requiring us, WFOE, or HiTek to restructure the relevant ownership structure or operations which may significantly impair the rights of the holders of our Ordinary Shares in the equity of HiTek; |
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restricting or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; and |
We cannot assure you that the PRC courts or regulatory
authorities may not determine that our corporate structure and VIE Agreements violate PRC laws, rules or regulations. If the PRC courts
or regulatory authorities determine that our contractual arrangements are in violation of applicable PRC laws, rules or regulations, the
VIE Agreements will become invalid or unenforceable, and HiTek will not be treated as a VIE entity and we will not be entitled to treat
HiTek’s assets, liabilities and results of operations as our assets, liabilities and results of operations, which could effectively
eliminate the assets, revenue and net income of HiTek from our balance sheet, which would most likely require us to cease conducting our
business and would result in the delisting of our Ordinary Shares from Nasdaq Capital Market and a significant impairment in the market
value of our Ordinary Shares.
We may have difficulty in enforcing any
rights we may have under the VIE Agreements in PRC.
As all of the VIE Agreements with HiTek are governed
by the PRC laws and provide for the resolution of disputes through arbitration in the PRC, they would be interpreted in accordance with
PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed
as in the United States. As a result, uncertainties in the PRC legal system could further limit our ability to enforce these VIE Agreements.
Furthermore, these VIE Agreements may not be enforceable in China if PRC government authorities or courts take a view that such VIE Agreements
contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event we are unable to enforce
these VIE Agreements, we may not be able to exert effective control over HiTek, and our ability to conduct our business may be materially
and adversely affected.
The approval of the China Securities Regulatory
Commission and other compliance procedures may be required in connection with the offering of our securities in the U.S., and, if required,
we cannot predict whether we will be able to obtain such approval. As a result, both you and us face uncertainty about future actions
by the PRC government that could significantly affect the operating company’s financial performance and the enforceability of the
VIE Agreements.
The Provisions Regarding Mergers and Acquisitions
of Domestic Projects by Foreign Investors (the “M&A Rules”) require an overseas special purpose vehicle that are controlled
by PRC companies or individuals formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions
of PRC domestic companies using shares of such special purpose vehicle or held by its shareholders as considerations to obtain the approval
of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities
on an overseas stock exchange. However, the application of the M&A Rules remains unclear. If CSRC approval is required for any of
our future offerings in the U.S., it is uncertain whether it would be possible for us to obtain the approval. Any failure to obtain or
delay in obtaining CSRC approval for our future offerings in the U.S. would subject us to sanctions imposed by the CSRC and other PRC
regulatory agencies.
The General Office of the Central Committee of
the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Severe and Lawful Crackdown on
Illegal Securities Activities, which was available to the public on July 6, 2021. These opinions emphasized the need to strengthen the
administration over illegal securities activities and the supervision on overseas listings by China-based companies. These opinions proposed
to take effective measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and incidents facing
China-based overseas-listed companies and the demand for cybersecurity and data privacy protection. The aforementioned policies and any
related implementation rules to be enacted may subject us to additional compliance requirement in the future. As of the date of this annual
report, we have not received or denied any permission from the PRC authorities regarding our listing on the Nasdaq Capital Market. As
these opinions were recently issued, official guidance and interpretation of the opinions remain unclear in several respects at this time.
Therefore, we cannot assure you that we will remain fully compliant with all new regulatory requirements of these opinions or any future
implementation rules on a timely basis, or at all. We face uncertainty about future actions by the PRC government that could significantly
affect the operating company’s financial performance and the enforceability of the VIE Agreements.
On February 17, 2023, the CSRC promulgated the
Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Trial Measures, and five supporting
guidelines, which came into effect on March 31, 2023. Pursuant to the Trial Measures, domestic companies that seek to offer or list securities
overseas, both directly and indirectly, shall complete filing procedures with the CSRC pursuant to the requirements of the Trial Measures
within three working days following its submission of initial public offerings or listing application. If a domestic company fails to
complete required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such domestic
company may be subject to administrative penalties, such as order to rectify, warnings, fines, and its controlling shareholders, actual
controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as
warnings and fines. See “Regulations—M&A Rules and Overseas Listings.”
On February 24, 2023, the CSRC, together with
Ministry of Finance of the PRC, National Administration of State Secrets Protection and National Archives Administration of China, revised
the Provisions on Strengthening Confidentiality and Archives Administration for Overseas Securities Offering and Listing which was issued
by the CSRC, National Administration of State Secrets Protection and National Archives Administration of China in 2009, or the Provisions.
The revised Provisions is issued under the title the Provisions on Strengthening Confidentiality and Archives Administration of Overseas
Securities Offering and Listing by Domestic Companies, and came into effect on March 31, 2023 together with the Trial Measures. One of
the major revisions to the revised Provisions is expanding its application to cover indirect overseas offering and listing, as is consistent
with the Trial Measures. The revised Provisions require that, including but not limited to (a) a domestic company that plans to, either
directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals or entities including
securities companies, securities service providers and overseas regulators, any documents and materials that contain state secrets or
working secrets of government agencies, shall first obtain approval from competent authorities according to law, and file with the secrecy
administrative department at the same level; and (b) domestic company that plans to, either directly or indirectly through its overseas
listed entity, publicly disclose or provide to relevant individuals and entities including securities companies, securities service providers
and overseas regulators, any other documents and materials that, if leaked, will be detrimental to national security or public interest,
shall strictly fulfill relevant procedures stipulated by applicable national regulations.
Any failure or perceived failure by the Company,
the Company’s subsidiaries in China or the VIE to comply with the above confidentiality and archives administration requirements
under the revised Provisions and other PRC laws and regulations may result in that the relevant entities would be held legally liable
by competent authorities, and referred to the judicial organ to be investigated for criminal liability if suspected of committing a crime.
As there are still uncertainties regarding the interpretation and implementation of such regulatory guidance, we cannot assure you that
we will be able to comply with new regulatory requirements relating to our future overseas capital-raising activities. Notwithstanding
the foregoing, as of the date of this annual report, we are not aware of any Chinese laws or regulations in effect requiring that we obtain
permission from any Chinese authority to issue securities to foreign investors, and we have not received any inquiry, notice, warning,
sanction or any regulatory objection to our initial public offering from the CSRC.
As advised by Jingtian & Gongcheng, our PRC
counsel, as our post-effective amendment to the registration statement on Form F-1 relating to our initial public offering was declared
effective on March 30, 2023 and we have completed our initial public offering and listing prior to September 30, 2023, we are not required
to complete the filing procedures pursuant to the Trial Measures for our initial public offering. If in the future we are going to conduct
any offering or financing in the U.S., we will complete filing procedures with the CSRC pursuant to the requirements of the Trial Measures.
. Based on the above and our understanding of the Chinese laws and regulations currently in effect as of the date of this annual report,
we are not aware of any PRC laws or regulations in effect requiring that we obtain permission or approval from any PRC authorities for
our subsidiaries or the VIE’s operations and to issue securities to foreign investors, and we have not received any inquiry, notice,
warning, sanction, or any regulatory objection to our offerings from the CSRC, the CAC, or any other PRC authorities that have jurisdiction
over our operations.. However, there remains uncertainty as to the enactment, interpretation and implementation of regulatory requirements
related to overseas securities offerings and other capital markets activities. Any failure to obtain or delay in obtaining such approval,
complete required filing or procedures, or a rescission of any such approval or filing obtained by us, would subject us to sanctions by
the CSRC or other PRC regulatory authorities. These regulatory agencies may impose fines and penalties on our operations in mainland China,
limit our ability to pay dividends outside of China, limit our operations in China, delay or restrict the repatriation of the proceeds
from our initial public offering into mainland China or take other actions that could have a material adverse effect on our business,
financial condition, results of operations and prospects, as well as the trading price of the Ordinary Shares. In addition, if the CSRC,
or other regulatory agencies later promulgate new rules requiring that we obtain their approvals for our initial public offering, we may
be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties
and/or negative publicity regarding such an approval requirement could have a material adverse effect on the trading price of the Ordinary
Shares.
PRC laws and regulations governing our current
business operations are sometimes vague and uncertain and any changes in such laws and regulations may impair our ability to operate profitable.
There are uncertainties regarding the interpretation
and application of PRC laws and regulations including, but not limited to, the laws and regulations governing our business and the enforcement
and performance of our arrangements with customers in certain circumstances. The laws and regulations are sometimes vague and may be subject
to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness and interpretation
of newly enacted laws or regulations, including amendments to existing laws and regulations, may be delayed, and our business may be affected
if we rely on laws and regulations which are subsequently adopted or interpreted in a manner different from our understanding of these
laws and regulations. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.
On July 6, 2021, the General Office of the Communist
Party of China Central Committee and the General Office of the State Council jointly issued a document to crack down on illegal activities
in the securities market and promote the high-quality development of the capital market, which, among other things, requires the relevant
governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over
China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws.
Since this document is relatively new, uncertainties still exist in relation to how soon legislative or administrative regulation making
bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated,
if any, and the potential impact such modified or new laws and regulations will have on companies like us.
Regulations relating to offshore investment
activities by PRC residents may limit our ability to acquire PRC companies and could adversely affect our business.
In July 2014, State Administration of Foreign
Exchange, or SAFE, promulgated the Circular on Issues Concerning Foreign Exchange Administration Over the Overseas Investment and Financing
and Roundtrip Investment by Domestic Residents Via Special Purpose Vehicles, or Circular 37, which replaced Relevant Issues Concerning
Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment through Offshore Special Purpose Vehicles,
or Circular 75. Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment
or indirect control of an offshore entity, referred to in Circular 37 as a “special purpose vehicle” for the purpose of holding
domestic or offshore assets or interests. Circular 37 further requires amendment to a PRC resident’s registration in the event of
any significant changes with respect to the special purpose vehicle, such as an increase or decrease in the capital contributed by PRC
individuals, share transfer or exchange, merger, division or other material event. Under these regulations, PRC residents’ failure
to comply with specified registration procedures may result in restrictions being imposed on the foreign exchange activities of the relevant
PRC entity, including the payment of dividends and other distributions to its offshore parent, as well as restrictions on capital inflows
from the offshore entity to the PRC entity, including restrictions on its ability to contribute additional capital to Company’s
subsidiaries in China or the VIE. Further, failure to comply with the SAFE registration requirements could result in penalties under PRC
law for evasion of foreign exchange regulations.
Mr. Shenping Yin and Ms. Xiaoyang Huang, together
with ten other PRC residents, who are our beneficial owners, filed applications for Circular 37 registration, and our PRC counsel believes
there is no substantial legal impediment to the registration of the aforementioned beneficial owners’ Circular 37 registration.
As the promulgation of Circular 37 is relatively recent, it is unclear how these regulations will be interpreted and implemented. We cannot
assure you that our ultimate shareholders who are PRC residents will in the future provide sufficient supporting documents required by
the SAFE or complete the required registration with the SAFE in a timely manner, or at all. Any failure by any of our shareholders who
is a PRC resident, or is controlled by a PRC resident, to comply with relevant requirements under these regulations could subject us to
fines or sanctions imposed by the PRC government, including restrictions on our overseas or cross-border investment activities, restrictions
on WFOE’s ability to pay dividends or make distributions to us and on our ability to increase our investment in the WFOE.
Although we believe that our agreements relating
to our structure are in compliance with current PRC regulations, we cannot assure you that the PRC government would agree that these VIE
Agreements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies
that may be adopted in the future.
Uncertainties exist with respect to the
interpretation and implementation of the Foreign Investment Law and how it may impact the viability of our current corporate structure,
corporate governance and business operations.
On March 15, 2019, the National People’s
Congress approved the Foreign Investment Law (“FIL”), which came into effect on January 1, 2020 and replaced the trio of existing
laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative
Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations.
The FIL embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international
practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since
it is relatively new, uncertainties exist in relation to its interpretation and implementation. For instance, under the FIL, “foreign
investment’’ refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other
entities in China. Though it does not explicitly classify VIE Agreements as a form of foreign investment, there is no assurance that operations
conducted by foreign investors or foreign-invested enterprises via contractual arrangement would not be interpreted as a type of indirect
foreign investment activities under the definition in the future. In addition, the definition contains a catch-all provision which includes
investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the
State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the Stale Council
to provide for VIE Agreements as a form of foreign investment. In any of these cases, it will be uncertain whether the VIE Agreements
will be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. Furthermore,
if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies
with respect to existing VIE Agreements, we may face substantial uncertainties as to whether we can complete such actions in a timely
manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges
could materially and adversely affect our current corporate structure, corporate governance and business operations
Risks Relating to Doing Business in the PRC
Although the audit report included in this
annual report is prepared by U.S. auditors which are currently inspected by the PCAOB, there is no guarantee that future audit reports
will be prepared by auditors inspected by the PCAOB and, as such, in the future investors may be deprived of the benefits of such inspection.
Furthermore, trading in our securities may be prohibited under the HFCA Act, as Amended, if the SEC subsequently determines our audit
work is performed by auditors that the PCAOB is unable to inspect or investigate completely for two consecutive years, and as a result,
U.S. national securities exchanges, such as the Nasdaq, may determine to delist our securities.
As an auditor of companies that are registered
with the SEC and publicly traded in the US (“U.S.”) and a firm registered with the PCAOB, our auditor is required under the
laws of the U.S. to undergo regular inspections by the PCAOB to assess their compliance with the laws of the U.S. and professional standards.
Our auditor, the independent registered public
accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly
in the U.S. and a firm registered with the PCAOB, is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections
to assess its compliance with the applicable professional standards. Our auditor is currently subject to PCAOB inspections and PCAOB is
able to inspect our auditor. However, we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent
criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of
personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements
On May 20, 2020, the U.S. Senate passed the HFCA
Act, which includes requirements for the SEC to identify issuers whose audit work is performed by auditors that the PCAOB is unable to
inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction.
The U.S. House of Representatives passed the HFCA Act on December 2, 2020, and the HFCA Act was signed into law on December 18, 2020.
On March 24, 2021, the SEC adopted interim final
rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. We would be required to comply
with these rules if the SEC identifies us as having a “non-inspection” year (as defined in the interim final rules) under
a process to be subsequently established by the SEC. The SEC was assessing how to implement other requirements of the HFCA Act, including
the listing and trading prohibition requirements described above.
On September 22, 2021, the PCAOB adopted a final
rule implementing the HFCA Act, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act,
whether the Board is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction
because of a position taken by one or more authorities in that jurisdiction.
On December 2, 2021, the SEC issued amendments
to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC
identifies as having filed an annual report with an audit report issued by a registered public accounting firm located in a foreign jurisdiction
and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions.
On December 16, 2021, SEC announced that the PCAOB
designated China and Hong Kong as the jurisdictions where the PCAOB is not allowed to conduct full and complete audit inspections as mandated
under the HFCA Act.
On August 26, 2022, the CSRC, the MOF, and the PCAOB signed the Protocol, governing inspections and investigations of audit firms based
in mainland China and Hong Kong, taking the first step toward opening access for the PCAOB to inspect and investigate registered public
accounting firms headquartered in mainland China and Hong Kong. Pursuant to the fact sheet with respect to the Protocol disclosed by the
SEC the PCAOB shall have independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability
to transfer information to the SEC.
On December 15, 2022, the PCAOB Board determined
the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China
and Hong Kong and voted to vacate its previous determinations to the contrary.
On December 29, 2022, the Consolidated Appropriations
Act was signed into law by President Biden, which amended the HFCA Act by requiring the SEC to prohibit an issuer’s securities from
trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three, thus
reducing the time period for triggering the prohibition on trading.
However, should PRC authorities obstruct or otherwise
fail to facilitate the PCAOB’s access in the future, the PCAOB Board will consider the need to issue a new determination. Delisting
of our Ordinary Shares would force holders of our Ordinary Shares to sell their Ordinary Shares. The market price of our Ordinary Shares
could be adversely affected as a result of anticipated negative impacts of these executive or legislative actions upon, as well as negative
investor sentiment towards, companies with significant operations in China that are listed in the U.S., regardless of whether these executive
or legislative actions are implemented and regardless of our actual operating performance.
The recent joint statement by the SEC, proposed
rule changes submitted by Nasdaq, and an act passed by the U.S. Senate and the U.S. House of Representatives, all call for additional
and more stringent criteria to be applied to emerging market companies. These developments could add uncertainties to our offering, business
operations, share price and reputation.
U.S. public companies that have substantially
all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators
and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting
irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies
or a lack of adherence thereto and, in many cases, allegations of fraud.
On December 7, 2018, the SEC and the PCAOB issued
a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed
companies with significant operations in China. On April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III,
along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or
have substantial operations in emerging markets including China, reiterating past SEC and PCAOB statements on matters including the difficulty
associated with inspecting accounting firms and audit work papers in China and higher risks of fraud in emerging markets and the difficulty
of bringing and enforcing SEC, Department of Justice and other U.S. regulatory actions, including in instances of fraud, in emerging markets
generally.
On May 20, 2020, the U.S. Senate passed the HFCA
Act requiring a foreign company to certify it is not owned or controlled by a foreign government if the PCAOB is unable to audit specified
reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s
auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange. On December 2, 2020,
the U.S. House of Representatives approved the Holding Foreign Companies Accountable Act.
On May 21, 2021, Nasdaq filed three proposals
with the SEC to (i) apply minimum offering size requirement for companies primarily operating in a “Restrictive Market”, (ii)
prohibit Restrictive Market companies from directly listing on Nasdaq Capital Market, and only permit them to list on Nasdaq Global Select
or Nasdaq Global Market in connection with a direct listing and (iii) apply additional and more stringent criteria to an applicant or
listed company based on the qualifications of the company’s auditors.
As discussed in the previous risk factor, our
Ordinary Shares are subject to the risk of being delisted under the HFCA Act and the Consolidated Appropriations Act, in the event that
PCAOB determines it is unable to inspect or investigate completely our auditor because of a position taken by an authority in a foreign
jurisdiction for two consecutive years. The PCAOB Board determined, on December 15, 2022, that it was able to secure complete access to
inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous
determinations to the contrary. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the
future, the PCAOB Board will consider the need to issue a new determination.
As a result of this scrutiny, criticism and negative
publicity, the publicly traded stock of many U.S. listed Chinese companies sharply decreased in value and, in some cases, became virtually
worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and
external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity
will have on us, our offering, business and our share price. If we become the subject of any unfavorable allegations, whether such allegations
are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company.
This situation will be costly and time consuming and distract our management from developing our growth. If such allegations are not proven
to be groundless, we and our business operations will be severely affected and you could sustain a significant decline in the value of
our share.
Nasdaq may apply additional and more stringent
criteria for our continued listing because we plan to have a small public offering and our insiders will hold a large portion of our listed
securities.
Nasdaq Listing Rule 5101 provides Nasdaq with
broad discretionary authority over the initial and continued listing of securities in Nasdaq and Nasdaq may use such discretion to deny
initial listing, apply additional or more stringent criteria for the initial or continued listing of particular securities, or suspend
or delist particular securities based on any event, condition, or circumstance that exists or occurs that makes initial or continued listing
of the securities on Nasdaq inadvisable or unwarranted in the opinion of Nasdaq, even though the securities meet all enumerated criteria
for initial or continued listing on Nasdaq. In addition, Nasdaq has used its discretion to deny initial or continued listing or to apply
additional and more stringent criteria in the instances, including but not limited to: (i) where the company engaged an auditor that has
not been subject to an inspection by PCAOB, an auditor that PCAOB cannot inspect, or an auditor that has not demonstrated sufficient resources,
geographic reach, or experience to adequately perform the company’s audit; (ii) where the company planned a small public offering,
which would result in insiders holding a large portion of the company’s listed securities. Nasdaq was concerned that the offering
size was insufficient to establish the company’s initial valuation, and there would not be sufficient liquidity to support a public
market for the company; and (iii) where the company did not demonstrate sufficient nexus to the U.S. capital market, including having
no U.S. shareholders, operations, or members of the board of directors or management. Our public float is relatively small and the insiders
of our Company hold a large portion of the company’s listed securities. Therefore, we may be subject to the additional and more
stringent criteria of Nasdaq for our continued listing.
It may be difficult for overseas shareholders
and/or regulators to conduct investigation or collect evidence within China.
Shareholder claims or regulatory investigation
that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China,
there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated
outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities
of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory
authorities in the U.S. may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of
the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to
directly conduct investigation or evidence collection activities within the territory of the PRC. While detailed interpretation of or
implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to
directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting
your interests.
Our principal business operation is conducted
in the PRC. If U.S. regulators carry out an investigation of us and there is a need to conduct investigation or collect evidence within
the territory of the PRC, the U.S. regulators may not be able to carry out such investigation or evidence collection directly in the PRC
under the PRC laws. The U.S. regulators may consider cross-border cooperation with securities regulatory authority of the PRC by way of
judicial assistance, diplomatic channels or regulatory cooperation mechanism established with the securities regulatory authority of the
PRC.
Because we are a Cayman Islands corporation
and all of our business is conducted in the PRC, you may be unable to bring an action against us or our officers and directors or to enforce
any judgment you may obtain.
We are a company incorporated under the laws of
the Cayman Islands, we conduct substantially all of our operations in China, and substantially all of our assets are located in China.
In addition, all our senior executive officers reside within China for a significant portion of the time and are all PRC nationals. As
a result, it may be difficult for our shareholders to effect service of process upon us or those persons in the Cayman Islands or in China.
In addition, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman
Islands and many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these
non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible. See “Enforceability
of Civil Liabilities.”
Shareholder claims that are common in the U.S.
including securities law class actions and fraud claims, generally are difficult to pursue as a matter of law or practicality in China.
For example, in China, there are significant legal and other obstacles to obtaining information needed for shareholder investigations
or litigation outside China or otherwise with respect to foreign entities. Although the local authorities in China may establish a regulatory
cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and
administration, such regulatory cooperation with the securities regulatory authorities in the Unities States have not been efficient in
the absence of mutual and practical cooperation mechanism. According to Article 177 of the PRC Securities Law which became effective in
March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the
territory of the PRC.
In addition, our corporate affairs are governed
by our amended and restated memorandum and articles of association, the Companies Act or the common law of the Cayman Islands. The rights
of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors
to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands
is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the decisions
of whose courts are of persuasive authority, but are not binding on a court in the Cayman Islands. The rights of our shareholders and
the fiduciary responsibilities of our directors under Cayman Islands law are different from statutes or judicial precedent in some jurisdictions
in the U.S.. In particular, the Cayman Islands has a different body of securities laws as compared to the U.S.. In addition, Cayman Islands
companies may not have standing to initiate a shareholder derivative action in a Federal court of the U.S..
We have been advised by our Cayman Islands legal
counsel, Maples and Calder (Cayman) LLP, that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments
of courts of the U.S. predicated upon the civil liability provisions of the federal securities laws of the U.S. or any state; and (ii)
in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the civil liability provisions of
the federal securities laws of the U.S. or any state, so far as the liabilities imposed by those provisions are penal in nature. In those
circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the U.S., the courts of the Cayman
Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits
based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for
which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment
must be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman
Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be of a kind the enforcement
of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be
held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought
elsewhere.
As a result of all of the above, public shareholders
may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or
controlling shareholders than they would as public shareholders of a U.S. company.
Economic conditions in China could impact
our business and results of operations in both lines of our business
The VIE entity and its subsidiaries’ business
and operating results are impacted by Chinese economic conditions, such as a potential general reduction in net disposable income as a
result of fiscal measures adopted by Chinese government to address high levels of budgetary indebtedness, which may adversely affect our
business, results of operations and financial condition. The most recent global financial crisis and recession resulted in large-scale
business failures and tightened credit markets in China, which directly impacts the Chinese IT service market and VAT reporting service
industry. Future adverse economic developments in areas such as employment levels, business conditions, interest rates, tax rates, fuel
and energy costs and other matters could reduce discretionary spending and cause the industries where we operate to contract.
There may be changes in the regulations
of PRC government bodies and agencies relating to VAT collection procedure and ACTCS business
PRC laws, regulations and policies concerning
VAT collection procedures and ACTCS business are evolving and the PRC government authorities may promulgate new laws, regulations and
policies in the future. We cannot assure you that our practices would not be deemed to violate any PRC laws, regulations or policies either
now or in the future.
Moreover, developments in the ACTCS service industry
may lead to changes in PRC laws, regulations and policies or in the interpretation and application of existing laws, regulations and policies,
which may limit or restrict the ACTCS hardware and services we offer. Furthermore, we cannot rule out the possibility that the PRC government
will institute a new licensing regime covering services we provide in the future. If such a licensing regime were introduced, we cannot
assure you that we would be able to obtain any newly required license in a timely manner, or at all, which could materially and adversely
affect our business and impede our ability to continue our operations.
Changes in the policies of the PRC government
could have a significant impact upon our ability to operate profitably in the PRC.
We conduct all of our operations and all of our
revenue is generated in the PRC. Accordingly, economic, political and legal developments in the PRC will significantly affect our business,
financial condition, results of operations and prospects. Policies of the PRC government can have significant effects on economic conditions
in the PRC and the ability of businesses to operate profitably. Our ability to operate profitably in the PRC may be adversely affected
by changes in policies by the PRC government, including changes in laws, regulations or their interpretation, particularly those dealing
with the Internet, including censorship and other restriction on material which can be transmitted over the Internet, security, intellectual
property, money laundering, taxation and other laws that affect our ability to operate our website.
China’s economic, political and social
conditions, laws and regulations, as well as possible interventions and influences of any government policies and actions are uncertain
and could have a material adverse effect on our business and the value of our Ordinary Shares.
China’s economy differs from the economies
of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control
of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past two to three decades,
growth has been uneven, both geographically and among various sectors of the economy. Although China’s economy has been transitioning
from a planned economy to a more market oriented economy since the late 1970s, the PRC government continues to play a significant role
in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s
economic growth through allocating resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting
monetary policy and providing preferential treatment to particular industries or companies. Changes in any of these policies, laws and
regulations could adversely affect the economy in China and could have a material adverse effect on our business.
The PRC government has implemented various measures
to encourage foreign investment and sustainable economic growth and to guide the allocation of financial and other resources. However,
we cannot assure you that the PRC government will not repeal or alter these measures or introduce new measures that will have a negative
effect on us, or more specifically, we cannot assure you that the PRC government will not initiate possible governmental actions or scrutiny
to us, which could substantially affect our operation and the value of our Ordinary Shares may depreciate quickly. China’s economic,
political and social conditions, as well as interventions and influences of any government policies, laws and regulations are uncertain
and could have a material adverse effect on our business.
Because our business is dependent upon government
policies that encourage a market-based economy, change in the political or economic climate in the PRC may impair our ability to operate
profitably, if at all.
Although the PRC government has pursued been pursuing
a number of economic reform policies for more than two decades, the PRC government continues to exercise significant control over economic
growth in the PRC. Because of the nature of our business, we are dependent upon the PRC government pursuing policies that encourage private
ownership of businesses. Restrictions on private ownership of businesses would affect the VAT filing and collection in general and businesses
using ACTCS in particular. We cannot assure you that the PRC government will pursue policies favoring a market-oriented economy or that
existing policies will not be significantly altered, especially in the event of a change in leadership, social or political disruption,
or other circumstances affecting political, economic and social life in the PRC.
Because our business is conducted in RMB
and the price of our Ordinary Shares is quoted in United States dollars, changes in currency conversion rates may affect the value of
your investments.
Our business is conducted in the PRC, our books
and records are maintained in RMB, which is the currency of the PRC, and the financial statements that we file with the SEC and provide
to our shareholders are presented in U.S. dollars. Changes in the exchange rate between the RMB and dollar affect the value of our assets
and the results of our operations in U.S. dollars. The value of the RMB against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in the PRC’s political and economic conditions and perceived changes in the economy
of the PRC and the U.S.. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenue and financial
condition. Further, our Ordinary Shares offered by this annual report are offered in U.S. dollars, we will need to convert the net proceeds
we receive into RMB in order to use the funds for our business. Changes in the conversion rate between the U.S. dollar and the RMB will
affect that amount of proceeds we will have available for our business.
Under the PRC Enterprise Income Tax Law,
or the EIT Law, we may be classified as a “resident enterprise” of China, which could result in unfavorable tax consequences
to us and our non-PRC shareholders.
The EIT Law and its implementing rules provide
that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident
enterprises” under PRC tax laws. The implementing rules promulgated under the EIT Law define the term “de facto management
bodies” as a management body which substantially manages, or has control over the business, personnel, finance and assets of an
enterprise. In April 2009, the State Administration of Taxation, or SAT, issued a circular, known as Circular 82, which provides certain
specific criteria for determining whether the “de facto management bodies” of a PRC-controlled enterprise that is incorporated
offshore is located in China. However, there are no further detailed rules or precedents governing the procedures and specific criteria
for determining “de facto management body.” Although our board of directors and management are located in the PRC, it is unclear
if the PRC tax authorities would determine that we should be classified as a PRC “resident enterprise.”
If we are deemed a PRC “resident enterprise,”
we will be subject to PRC enterprise income tax on our worldwide income at a uniform tax rate of 25%, although dividends distributed to
us from our existing subsidiaries in China or the VIE and any other subsidiaries in China or the VIE which we may establish from time
to time could be exempt from the PRC dividend withholding tax due to our PRC “resident recipient” status. This could have
a material and adverse effect on our overall effective tax rate, our income tax expenses and our net income. Furthermore, dividends, if
any, paid to our shareholders may be decreased as a result of the decrease in distributable profits. In addition, if we were considered
a PRC “resident enterprise”, any dividends we pay to our non-PRC investors, and the gains realized from the transfer of our
Ordinary Shares may be considered income derived from sources within the PRC and be subject to PRC tax, at a rate of 10% in the case of
non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty).
It is unclear whether holders of our Ordinary Shares would be able to claim the benefits of any tax treaties between their country of
tax residence and the PRC in the event that we are treated as a PRC resident enterprise. This could have a material and adverse effect
on the value of your investment in us and the price of our Ordinary Shares.
There are significant uncertainties under
the EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our PRC subsidiary to our offshore
subsidiaries may not qualify to enjoy certain treaty benefits.
Under the PRC EIT Law and its implementation rules,
the profits of a foreign invested enterprise generated through operations, which are distributed to its immediate holding company outside
the PRC, will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong Kong and the PRC, such rate
may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity interest in the PRC company. Our PRC subsidiary
is wholly-owned by our Hong Kong subsidiary. Moreover, under the Notice of the State Administration of Taxation on Issues regarding the
Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009, the taxpayer needs to satisfy certain conditions
to enjoy the benefits under a tax treaty. These conditions include: (1) the taxpayer must be the beneficial owner of the relevant dividends,
and (2) the corporate shareholder to receive dividends from the PRC subsidiary must have continuously met the direct ownership thresholds
during the 12 consecutive months preceding the receipt of the dividends. Further, the State Administration of Taxation promulgated the
Notice on How to Understand and Recognize the “Beneficial Owner” in Tax Treaties on October 27, 2009, which limits the “beneficial
owner” to individuals, projects or other organizations normally engaged in substantive operations, and sets forth certain detailed
factors in determining the “beneficial owner” status. In current practice, a Hong Kong enterprise must obtain a tax resident
certificate from the relevant Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority
will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident
certificate from the relevant Hong Kong tax authority. As of the date of this annual report, we have not commenced the application process
for a Hong Kong tax resident certificate from the relevant Hong Kong tax authority, and there is no assurance that we will be granted
such a Hong Kong tax resident certificate.
Even after we obtain the Hong Kong tax resident
certificate, we are required by applicable tax laws and regulations to file required forms and materials with relevant PRC tax authorities
to prove we can enjoy the 5% lower PRC withholding tax rate. HiTek HK intends to obtain the required materials and file with the relevant
tax authorities when it plans to declare and pay dividends, but there is no assurance that the PRC tax authorities will approve the 5%
withholding tax rate on dividends received from HiTek HK.
The disclosures in our reports and other
filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.
We are regulated by the SEC and our reports and
other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities
Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of
any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by CSRC,
a PRC regulator that is responsible for oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings
and our other public pronouncements with the understanding that no local regulator has done any review of us, our SEC reports, other filings
or any of our other public pronouncements.
We operate in an emerging and evolving market.
If our market does not grow as we expect, or if we fail to adapt and respond effectively to rapidly changing technology, evolving industry
standards, changing regulations, and changing customer needs, requirements or preferences, our products and solutions may become less
competitive.
There are uncertainties over the size and rate
at which the IT service market will grow, as well as whether our solutions and products will be widely adopted. Moreover, the ACTCS industry
is subject to rapid technological change, evolving industry standards, changing regulations, as well as changing customer needs, requirements
and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on
a timely basis. If we are unable to develop new solutions and products that satisfy our customers and provide enhancements and new features
for our existing products that keep pace with rapid technological and industry change, our business, results of operations and financial
condition could be adversely affected. If new technologies emerge that are able to deliver competitive products and services at lower
prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete effectively.
Our platform must also integrate with a variety
of network, hardware, software platforms and technologies, and we need to continuously modify and enhance our products and platform to
adapt to changes and innovation. For example, if customers adopt new software platforms or infrastructure, we may be required to develop
new versions of our products to be compatible with those new software platforms or infrastructure. This development effort may require
significant resources, which would adversely affect our business, results of operations and financial condition. Any failure of our products
and platform to operate effectively with evolving or new software platforms and technologies could reduce the demand for our products.
If we are unable to respond to these changes in a cost-effective manner, our products may become less marketable and less competitive
or obsolete, and our business, results of operations and financial condition could be adversely affected.
In light of recent events indicating greater
oversight by the Cyberspace Administration of China, or CAC, over data security, particularly for companies seeking to list on a foreign
exchange, we are subject to a variety of laws and other obligations regarding cybersecurity and data protection, and any failure to comply
with applicable laws and obligations could have a material and adverse effect on our business, our listing on Nasdaq, financial condition,
results of operations, and the offering.
We are subject to various risks and costs associated
with to the collection, use, sharing, retention, security, and transfer of confidential and private information, such as personal information
and other data. This data is wide ranging and relates to our investors, employees, contractors and other counterparties and third parties.
Our compliance obligations include those relating to the Data Protection Act (As Revised) of the Cayman Islands and the relevant PRC laws
in this regard. These PRC laws apply not only to third-party transactions, but also to transfers of information between us, our WFOE,
the VIE, and the VIE’s subsidiaries, and among us, our WFOE, the VIE, and the VIE’s subsidiaries, and other parties with which
we have commercial relations. These laws continue to develop, and the PRC government may adopt other rules and restrictions in the future.
Non-compliance could result in penalties or other significant legal liabilities.
Pursuant to the PRC Cybersecurity Law, promulgated
by the Standing Committee of the National People’s Congress on November 7, 2016 and took effect on June 1, 2017, personal information
and important data collected and generated by a critical information infrastructure operator in the course of its operations in China
must be stored in China, and if a critical information infrastructure operator purchases internet products and services that affects or
may affect national security, it should be subject to cybersecurity review by the CAC. Due to the lack of further interpretations, the
exact scope of “critical information infrastructure operator” remains unclear. On December 28, 2021, the CAC published the
CAC Revised Measures which further restates and expands the applicable scope of the cybersecurity review. The CAC Revised Measures took
effect on February 15, 2022. Pursuant to the CAC Revised Measures, if a network platform operator holding personal information of over
one million users seeks for “foreign” listing, it must apply for the cybersecurity review. In addition, operators of critical
information infrastructure purchasing network products and services are also obligated to apply for the cybersecurity review for such
purchasing activities. Although the CAC Revised Measures provides no further explanation on the extent of “network platform operator”
and “foreign” listing, as confirmed by our PRC counsel, Jingtian & Gongcheng, we are not subject to cybersecurity review
with the CAC , because (i) we are not in possession of or otherwise holding personal information of over one million users and it is also
very unlikely that it will reach such threshold in the near future; and (ii) as of the date of this annual report, we have not received
any notice or determination from applicable PRC governmental authorities identifying it as a critical information infrastructure operator.
However, we cannot guarantee that we will not be subject to cybersecurity review in the future as we offer IT services and sell hardware
and software in China. During such review, we may be required to suspend our operation experience other disruptions to our operations.
Cybersecurity review could also result in negative publicity with respect to our company and diversion of our managerial and financial
resources.
Furthermore, if we were found to be in violation
of applicable laws and regulations in China during such review, we could be subject to administrative penalties, such as warnings, fines,
or service suspension. Therefore, cybersecurity review could materially and adversely affect our business, financial condition, and results
of operations.
In addition, the PRC Data Security Law, promulgated
by the Standing Committee of the National People’s Congress on June 10, 2021 and took effect on September 1, 2021, requires data
collection to be conducted in a legitimate and proper manner, and stipulates that, for the purpose of data protection, data processing
activities must be conducted based on data classification and hierarchical protection system for data security. As the Data Security Law
was recently promulgated, we may be required to make further adjustments to our business practices to comply with this law. If our data
processing activities were found to be not in compliance with this law, we could be ordered to make corrections, and under certain serious
circumstances, such as severe data divulgence, we could be subject to penalties, including the revocation of our business licenses or
other permits. Furthermore, the recently issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the
Law require (i) speeding up the revision of the provisions on strengthening the confidentiality and archives management relating to overseas
issuance and listing of securities and (ii) improving the laws and regulations relating to data security, cross-border data flow, and
management of confidential information. As there remain uncertainties regarding the further interpretation and implementation of those
laws and regulations, we cannot assure you that we will be compliant such new regulations in all respects, and we may be ordered to rectify
and terminate any actions that are deemed illegal by the regulatory authorities and become subject to fines and other sanctions. As a
result, we may be required to suspend our relevant businesses, shut down our website, take down our operating applications, or face other
penalties, which may materially and adversely affect our business, financial condition, and results of operations.
On August 20, 2021, the Standing Committee of
the National People’s Congress of China promulgated the Personal Information Protection Law of the PRC, or the PIPL, which took
effect in November 2021. As the first systematic and comprehensive law specifically for the protection of personal information in the
PRC, the PIPL provides, among others, that (i) an individual’s consent shall be obtained to use sensitive personal information,
such as biometric characteristics and individual location tracking, (ii) personal information operators using sensitive personal information
shall notify individuals of the necessity of such use and impact on the individual’s rights, and (iii) where personal information
operators reject an individual’s request to exercise his or her rights, the individual may file a lawsuit with a People’s
Court. As uncertainties remain regarding the interpretation and implementation of the PIPL, we cannot assure you that we will comply with
the PIPL in all respects, we may become subject to fines and/or other penalties which may have material adverse effect on our business,
operations and financial condition.
While we take measures to comply with all applicable
data privacy and protection laws and regulations, we cannot guarantee the effectiveness of the measures undertaken by us and our business
partners. However, compliance with any additional laws could be expensive, and may place restrictions on our business operations and the
manner in which we interact with our users. In addition, any failure to comply with applicable cybersecurity, privacy, and data protection
laws and regulations could result in proceedings against us by government authorities or others, including notification for rectification,
confiscation of illegal earnings, fines, or other penalties and legal liabilities against us, which could materially and adversely affect
our business, financial condition, results of operations and the value of our Ordinary Shares. In addition, any negative publicity on
our website or platform’s safety or privacy protection mechanism and policy could harm our public image and reputation and materially
and adversely affect our business, financial condition, and results of operations.
We are subject to anti-corruption, anti-bribery,
and similar laws, and noncompliance with such laws can subject us to criminal penalties or significant fines and harm our business and
reputation.
We are subject to the U.S. Foreign Corrupt Practices
Act of 1977, and other anti-corruption, anti-bribery, anti-money laundering, and similar laws in China and the United States. Anti-corruption
and anti-bribery laws, which have been enforced aggressively and are interpreted broadly, prohibit companies and their employees and agents
from promising, authorizing, making, or offering improper payments or other benefits to government officials and others in the public
sector. We leverage our business partners, including channel partners, to sell our products and solutions and host many of our facilities
for our network. We may also rely on our business partners to conduct our business abroad. We and our business partners may have direct
or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we may be held
liable for the corrupt or other illegal activities of our business partners and intermediaries, our employees, representatives, contractors,
channel partners and agents, even if we do not explicitly authorize such activities.
We cannot assure you that all of our employees
and agents have complied with, or in the future will comply with, our policies and applicable law. The investigation of possible violations
of these laws, including internal investigations and compliance reviews that we may conduct from time to time, could have a material adverse
effect on our business. Noncompliance with these laws could subject us to investigations, severe criminal or civil sanctions, settlements,
prosecution, loss of export privileges, suspension or debarment from Chinese government contracts and other contracts, other enforcement
actions, the appointment of a monitor, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions,
whistleblower complaints, adverse media coverage and other consequences. Other internal and government investigations, regulatory proceedings,
or litigation, including private litigation filed by our shareholders, may also follow as a consequence. Any investigations, actions,
or sanctions could materially harm our reputation, business, results of operations, and financial condition. Further, the promulgation
of new laws, rules or regulations or new interpretations of current laws, rules or regulations could impact the way we do business in
other countries, including requiring us to change certain aspects of our business to ensure compliance, which could reduce revenues, increase
costs, or subject us to additional liabilities.
Failure to comply with laws and regulations
applicable to our business in China could subject us to fines and penalties and could also cause us to lose customers or otherwise harm
our business.
Our business is subject to regulation by various
governmental agencies in China, including agencies responsible for monitoring and enforcing compliance with various legal obligations,
such as value-added telecommunication laws and regulations, privacy and data protection-related laws and regulations, intellectual property
laws, employment and labor laws, workplace safety, environmental laws, consumer protection laws, governmental trade laws, import and export
controls, anti-corruption and anti-bribery laws, and tax laws and regulations. In certain jurisdictions, these regulatory requirements
may be more stringent than in China. These laws and regulations impose added costs on our business. Noncompliance with applicable regulations
or requirements could subject us to:
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mandatory changes to our network and products; |
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disgorgement of profits, fines, and damages; |
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civil and criminal penalties or injunctions; |
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claims for damages by our customers or channel partners; |
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termination of contracts; |
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loss of intellectual property rights; |
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failure to obtain, maintain or renew certain licenses, approvals, permits, registrations or filings necessary to conduct our operations; and |
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If any governmental sanctions are imposed, or
if we do not prevail in any possible civil or criminal litigation, our business, results of operations, and financial condition could
be adversely affected. In addition, responding to any action will likely result in a significant diversion of our management’s attention
and resources and an increase in professional fees. Enforcement actions and sanctions could materially harm our business, results of operations,
and financial condition.
Additionally, companies in the technology industry
have recently experienced increased regulatory scrutiny. Any reviews by regulatory agencies or legislatures may result in substantial
regulatory fines, changes to our business practices, and other penalties, which could negatively affect our business and results of operations.
Changes in social, political, and regulatory conditions or in laws and policies governing a wide range of topics may cause us to change
our business practices. Further, our expansion into a variety of new fields also could raise a number of new regulatory issues. These
factors could negatively affect our business and results of operations in material ways.
Moreover, we are exposed to the risk of misconduct,
errors and failure to functions by our management, employees and parties that we collaborate with, who may from time to time be subject
to litigation and regulatory investigations and proceedings or otherwise face potential liability and penalties in relation to noncompliance
with applicable laws and regulations, which could harm our reputation and business.
We face exposure to foreign currency exchange
rate fluctuations, and such fluctuations could adversely affect our business, results of operations and financial condition.
The conversion of Renminbi into foreign currencies,
including the U.S. dollar, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the U.S. dollar
and other currencies, at times significantly and unpredictably. The value of Renminbi against the U.S. dollar and other currencies is
affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things.
We cannot assure you that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar and other currencies
in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi
and U.S. dollar in the future.
Significant revaluation of the Renminbi may have
a material and adverse effect on your investment. For example, to the extent we need to convert U.S. dollars we received from our initial
public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on
the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose
of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the Renminbi
would have a negative effect on the U.S. dollar amount available to us.
Very limited hedging options are available in
China to reduce our exposure to exchange rate fluctuations. As of the date of this annual report, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions
in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure,
or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to
convert Renminbi into foreign currency.
Substantially all of our revenues and costs are
denominated in Renminbi. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs.
Any significant revaluation of Renminbi may materially and adversely affect our results of operations and financial position reported
in Renminbi when translated into U.S. dollars. To the extent that we need to convert U.S. dollars we received from our initial public
offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi
amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends
on our Ordinary Shares or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect
on the U.S. dollar amount.
Increases in labor costs in the PRC may
adversely affect our business and results of operations.
China’s economy has experienced increases
in labor costs in recent years. China’s overall economy and the average wage in China are expected to continue to grow. The average
wage level for our employees has also increased in recent years. We expect that our staff costs, including wages and employee benefits,
will continue to increase. Unless we are able to pass on these increased labor costs to our customers by increasing prices for our products
or services, our profitability and results of operations may be materially and adversely affected.
In addition, we have been subject to stricter
regulatory requirements in terms of entering into labor contracts with our employees and paying various statutory employee benefits, including
housing, pension, medical insurance and unemployment insurance programs to designated government agencies for the benefit of our employees.
Compared with its predecessors, the current Labor Contract Law of the PRC imposes stricter requirements on employers in terms of signing
labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor
contracts, further increasing our labor-related costs such as by limiting our ability to terminate some of our employees or otherwise
change our employment or labor practices in a cost-effective manner. In addition, as the interpretation and implementation of labor-related
laws and regulations are still developing, we cannot assure you that our employment practices have been or will at all times be deemed
in compliance with the labor-related laws and regulations in China. If we are subject to severe penalties in connection with labor disputes
or government investigations, our business, financial condition and results of operations will be adversely affected.
The Chinese government exerts substantial
influence over the manner in which we must conduct our business activities. Any actions by Chinese government, including any decision
to intervene or influence our operations or to exert control over any offering of securities conducted overseas and/or foreign investment
in China-based issuers, may cause us to make material changes to our operation, may limit or completely hinder our ability to offer or
continue to offer securities to investors, and may cause the value of such securities to significantly decline or be worthless.
The Chinese government has exercised and continues
to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Substantially
all of our operations are located in China. Our ability to operate in China may be harmed by changes in its laws and regulations, including
those relating to taxation, environmental regulations, land use rights, property and other matters. The central or local governments of
these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures
and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future,
including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional
or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular
regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
As such, our business may be subject to various
government and regulatory interference in the provinces in which we operate. We could be subject to regulation by various political and
regulatory entities, including various local and municipal agencies and government sub-divisions. We may incur increased costs necessary
to comply with existing and newly adopted laws and regulations or penalties for any failure to comply.
Furthermore, it is uncertain when and whether
we will be required to obtain permission from the PRC government to offering securities in the U.S. in the future, and even when such
permission is obtained, whether we will be denied or rescinded. Although we are currently not required to obtain permission from any of
the PRC regulatory authorities to obtain such permission and has not received any denial regarding our listing on the Nasdaq Capital Market
and the entry into the VIE Agreements, our operations could be adversely affected, directly or indirectly, by existing or future laws
and regulations relating to our business or industry.
PRC laws and regulations governing our current
business operations are sometimes vague and uncertain and any changes in such laws and regulations may impair our ability to operate profitably.
There are uncertainties regarding the interpretation
and application of PRC laws and regulations including, but not limited to, the laws and regulations governing our business and the enforcement
and performance of our arrangements with customers in certain circumstances. The laws and regulations are sometimes vague and may be subject
to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness and interpretation
of newly enacted laws or regulations, including amendments to existing laws and regulations, may be delayed, and our business may be affected
if we rely on laws and regulations which are subsequently adopted or interpreted in a manner different from our understanding of these
laws and regulations. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.
The PRC legal system is a civil law system based
on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have
limited precedential value. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve,
the interpretations of many laws, regulations and rules are not always uniform and the enforcement of these laws, regulations and rules
involves uncertainties.
In 1979, the PRC government began to promulgate
a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past
three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has
not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC
administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual
terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy.
These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or
tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts
to extract payments or benefits from us.
Furthermore, the PRC legal system is based in
part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive effect.
As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. In addition,
any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management
attention.
From time to time, we may have to resort to administrative
and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion
in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and
court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is
based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive
effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties,
including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights,
and any failure to respond to changes in the regulatory environment in China could materially and adversely affect our business and impede
our ability to continue our operations.
Recently, the General Office of the Central Committee
of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down
on Illegal Securities Activities According to Law,” or the Opinions, which was made available to the public on July 6, 2021. The
Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision
over overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems will
be taken to deal with the risks and incidents of China-concept overseas listed companies, and cybersecurity and data privacy protection
requirements and similar matters. The Opinions and any related implementing rules to be enacted may subject us to compliance requirement
in the future.
Risks Relating to Our Ordinary Shares
We do not intend to pay dividends for the
foreseeable future.
We currently intend to retain any future earnings
to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future.
As a result, you may only receive a return on your investment in our Ordinary Shares if the market price of our Ordinary Shares increases.
If securities or industry analysts do not
publish research or reports about our business, or if the publish a negative report regarding our Ordinary Shares, the price of our Ordinary
Shares and trading volume could decline.
The trading market for our Ordinary Shares may
depend in part on the research and reports that industry or securities analysts publish about us or our business. We do not have any control
over these analysts. If one or more of the analysts who cover us downgrade us, the price of our Ordinary Shares would likely decline.
If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in
the financial markets, which could cause the price of our Ordinary Shares and the trading volume to decline.
The estimates of
market opportunity, forecasts of market growth included in this annual report may prove to be inaccurate, and any real or perceived inaccuracies
may harm our reputation and negatively affect our business. Even if the market in which we compete achieves the forecasted growth, our
business could fail to grow at similar rates, if at all.
Market opportunity estimates
and growth forecasts included in this annual report are subject to significant uncertainty and are based on assumptions and estimates
that may not prove to be accurate. The variables that go into the calculation of our market opportunities are subject to change over time,
and there is no guarantee that any particular number or percentage of addressable companies covered by our market opportunities estimates
will purchase our products and solutions at all or generate any particular level of revenues for us. Even if the market in which we compete
meets the size estimates and growth forecasted in this annual report, our business could fail to grow for a variety of reasons, including
reasons outside of our control, such as competition in our industry.
The market price of our Ordinary Shares
may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the
initial public offering price.
The initial public offering price for our Ordinary
Shares will be determined through negotiations between the underwriters and us and may vary from the market price of our Ordinary Shares
following our initial public offering. If you purchase our Ordinary Shares in our initial public offering, you may not be able to resell
those shares at or above the initial public offering price. We cannot assure you that the initial public offering price of our Ordinary
Shares, or the market price following our initial public offering, will equal or exceed prices in privately negotiated transactions of
our shares that have occurred from time to time prior to our initial public offering. The market price of our Ordinary Shares may fluctuate
significantly in response to numerous factors, many of which are beyond our control, including:
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actual or anticipated fluctuations in our revenue and other operating results; |
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; |
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actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; |
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announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments; |
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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; |
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lawsuits threatened or filed against us; and |
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other events or factors, including those resulting from war or incidents of terrorism, or responses to these events. |
In addition, the stock markets have experienced
extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies.
Share prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies.
In the past, shareholders have filed securities class action litigation following periods of market volatility. If we were to become involved
in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business,
and adversely affect our business.
Our management has broad discretion to determine how to use the funds raised in the offering and may use them in ways that may not enhance
our results of operations or the price of our Ordinary Shares.
We anticipate that we will use the net proceeds
from the our initial public offering for working capital and other corporate purposes. Our management will have significant discretion
as to the use of the net proceeds to us from the initial public offering and could spend the proceeds in ways that do not improve our
results of operations or enhance the market price of our Ordinary Shares.
Our lack of effective internal controls
over financial reporting may affect our ability to accurately report our financial results or prevent fraud which may affect the market
for and price of our Ordinary Share.
To implement Section 404 of the Sarbanes-Oxley
Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company’s internal control
over financial reporting. We are subject to the requirement that we maintain internal controls and that management perform periodic evaluation
of the effectiveness of the internal controls. Effective internal control over financial reporting is important to prevent fraud. As a
result, our business, financial condition, results of operations and prospects, as well as the market for and trading price of our Ordinary
Shares, may be materially and adversely affected if we do not have effective internal controls. We do not presently have the financial
resources or personnel to develop or implement systems that would provide us with the necessary information on a timely basis so as to
be able to implement financial controls. As a result, we may not discover any problems in a timely manner and current and potential shareholders
could lose confidence in our financial reporting, which would harm our business and the trading price of our Ordinary Shares. The absence
of internal controls over financial reporting may inhibit investors from purchasing our shares and may make it more difficult for us to
raise funds in a debt or equity financing.
Because we are an “emerging growth
company,” we may not be subject to requirements that other public companies are subject to, which could affect investor confidence
in us and our Ordinary Shares.
As we are an “emerging growth company,”
we may not be subject to requirements that other public companies are subject to, which could other requirements applicable to other public
companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act for so long as we are an emerging growth company and a smaller reporting company.
As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information
they may deem important.
We will incur increased costs as a result
of being a public company, particularly after we cease to qualify as an “emerging growth company.”
We became a public company after completion of
our initial public offering and expect to incur significant legal, accounting and other expenses that we did not incur as a private company.
The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq Capital Market, impose various requirements
on the corporate governance practices of public companies. As an “emerging growth company” pursuant to the JOBS Act, we may
take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. We expect
these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming
and costlier. After we are no longer an “emerging growth company,” we expect to incur significant additional expenses and
devote substantial management effort toward ensuring compliance increased disclosure requirements.
Since Mr. Shenping Yin, Chairman and his
wife, Ms. Xiaoyang Huang, chief executive office of the Board are able to exercise more than 50% of the total voting power of our issued
and outstanding share capital, Mr. Yin will have the ability to elect directors and approve matters requiring shareholder approval.
Mr. Shenping Yin, Chairman of the Board, and his
wife Ms. Xiaoyang Huang are currently the beneficial owner of 8,192,000 ordinary share or 57.74% of our outstanding shares, which are
directly held by Fortune Enterprise Holdings Limited, an entity 100% owned by Mr. Yin and Ms. Huang. As result, Mr. Yin and Ms. Huang
able to exert significant voting influence over fundamental and significant corporate matters and transactions. Depending on the percentage,
they may have the power to elect all directors and approve all matters requiring shareholder approval without the votes of any other shareholder.
They have significant influence over a decision to enter into any corporate transaction and has the ability to prevent any transaction
that requires the approval of shareholders, regardless of whether or not our other shareholders believe that such transaction is in our
best interests. Such concentration of voting power could have the effect of delaying, deterring, or preventing a change of control or
other business combination, which could, in turn, have an adverse effect on the market price of our Ordinary Shares or prevent our shareholders
from realizing a premium over the then-prevailing market price for their Ordinary Shares.
We are a “controlled company”
within the meaning of the NASDAQ Stock Market Rules and, as a result, may rely on exemptions from certain corporate governance requirements
that provide protection to shareholders of other companies.
We are a “controlled company” as defined
under the NASDAQ Stock Market Rules because two of our principal shareholders, Shenping Yin, our Chairman of the Board, and Xiaoyang Huang
our CEO, who are husband and wife, beneficially own more than 50% of voting power for the election of directors. For so long as we are
a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance
rules, including:
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an exemption from the rule that a majority of our board of directors must be independent directors; |
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an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent directors; and |
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an exemption from the rule that our director nominees must be selected or recommended solely by independent directors. |
As a result, you will not have the same protection
afforded to shareholders of companies that are subject to these corporate governance requirements.
If we cease to qualify as a foreign private
issuer, we would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers,
and we would incur significant additional legal, accounting and other expenses that we would not incur as a foreign private issuer.
As a foreign private issuer, we are exempt from
the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In
addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as
promptly as United States domestic issuers, and we are not required to disclose in our periodic reports all of the information that United
States domestic issuers are required to disclose. While we currently expect to qualify as a foreign private issuer, we may cease to qualify
as a foreign private issuer in the future.
Anti-takeover provisions in our memorandum
and articles of association may discourage, delay or prevent a change in control.
Some provisions of our memorandum and articles
of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable,
including, among other things, the following:
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provisions that authorize our board of directors to issue shares with preferred, deferred or other special rights or restrictions without any further vote or action by our shareholders; and |
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provisions that restrict the ability of our shareholders to call meetings and to propose special matters for consideration at shareholder meetings |
Our board of directors may decline to register
transfers of Ordinary Shares in certain circumstances.
Our board of directors may, in its sole discretion,
decline to register any transfer of any Ordinary Share which is not fully paid up or on which we have a lien. Our directors may also decline
to register any transfer of any share unless (i) the instrument of transfer is lodged with us, accompanied by the certificate for the
shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor
to make the transfer; (ii) the instrument of transfer is in respect of only one class of shares; (iii) the instrument of transfer is properly
stamped, if required; (iv) in the case of a transfer to joint holders, the number of joint holders to whom the share is to be transferred
does not exceed four; (v) the shares conceded are free of any lien in favor of us; or (vi) a fee of such maximum sum as Nasdaq Capital
Market may determine to be payable, or such lesser sum as our board of directors may from time to time require, is paid to us in respect
thereof.
If our directors refuse to register a transfer
they shall, within one month after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee
notice of such refusal. The registration of transfers may, on 14 days’ notice being given by advertisement in such one or more newspapers
or by electronic means, be suspended and the register closed at such times and for such periods as our board of directors may from time
to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than
30 days in any year.
You may be unable to present proposals before
general meetings or extraordinary general meetings not called by shareholders.
Cayman Islands law provides shareholders with
only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general
meeting. However, these rights may be provided in a company’s articles of association. Our articles of association allow sour shareholders
holding shares representing in aggregate not less than ten per cent in par value of the issued Shares which as at that date carry the
right to vote at general meetings, to requisition an extraordinary general meeting of our shareholders, in which case our directors are
obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting. Although our articles of association
does not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings
not called by such shareholders, any shareholder may submit a proposal to our Board of Directors for consideration of inclusion in a proxy
statement. Advance notice of at least fifteen calendar days is required for the convening of our annual general shareholders’ meeting
and any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists of at least one shareholder
present or by proxy, representing not less than one-third in nominal value of the total issued voting shares in our company.
If we are classified as a passive foreign
investment company, United States taxpayers who own our Ordinary Shares may have adverse United States federal income tax consequences.
A non-U.S. corporation such as ourselves will
be classified as a passive foreign investment company, which is known as a PFIC, for any taxable year if, for such year, either
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At least 75% of our gross income for the year is passive income; or |
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The average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income or which are held for the production of passive income is at least 50%. |
Passive income generally includes dividends, interest,
rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition
of passive assets.
If we are determined to be a PFIC for any taxable
year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our Ordinary Shares, the U.S. taxpayer may
be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.
Based on our operations and the composition of
our assets we do not expect to be treated as a PFIC under the current PFIC rules. We must make a separate determination each year as to
whether we are a PFIC, however, and there can be no assurance with respect to our status as a PFIC for our current taxable year or any
future taxable year. Although the law in this regard is unclear, we are treating HiTek as being owned by us for United States federal
income tax purposes, not only because we control their management decisions, but also because we are entitled to the economic benefits
associated with HiTek, and as a result, we are treating HiTek as our wholly-owned subsidiary for U.S. federal income tax purposes. For
purposes of the PFIC analysis, in general, a non-U.S. corporation is deemed to own its pro rata share of the gross income and assets of
any entity in which it is considered to own at least 25% of the equity by value. Therefore, the income and assets of HiTek should be included
in the determination of whether or not we are a PFIC in any taxable year.
For a more detailed discussion of the application
of the PFIC rules to us and the consequences to U.S. taxpayers if we were determined to be a PFIC, see “Taxation — United
States Federal Income Taxation — Passive Foreign Investment Company.”
Our Ordinary Shares may trade under $5.00
per share and thus will be a penny stock. Trading in penny stocks has certain restrictions and these restrictions could negatively affect
the price and liquidity of our shares.
Our Ordinary Shares may trade below $5.00 per
share after listing. As a result, our Ordinary Shares would be known as a “penny stock”, which is subject to various regulations
involving disclosures to be given to you prior to the purchase of any penny stock. The SEC has adopted regulations which generally define
a “penny stock” to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions.
Depending on market fluctuations, our Ordinary Shares could be considered to be a “penny stock”. A penny stock is subject
to rules that impose additional sales practice requirements on broker/dealers who sell these securities to persons other than established
Members and accredited investors. For transactions covered by these rules, the broker/dealer must make a special suitability determination
for the purchase of these securities. In addition, the broker/dealer must receive the purchaser’s written consent to the transaction
prior to the purchase. The broker/dealer must also provide certain written disclosures to the purchaser. Consequently, the “penny
stock” rules may restrict the ability of broker/dealers to sell our securities, and may negatively affect the ability of holders
of our Ordinary Shares to resell them. These disclosures require you to acknowledge that you understand the risks associated with buying
penny stocks and that you can absorb the loss of your entire investment. Penny stocks generally do not have a very high trading volume.
Consequently, the price of the stock is often volatile and you may not be able to buy or sell the stock when you want to.
Item 5. Operating and Financial Review and
Prospects
A. Operating Results
The following discussion and analysis should be
read in conjunction with our financial statements and related notes thereto.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
This report contains certain statements that
may be deemed “forward-looking statements” within the meaning of United States of America securities laws. All
statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project,
believe or anticipate and similar expressions or future conditional verbs such as will, should, would, could or may occur in the future
are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of
their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe
to be appropriate.
These statements include, without limitation,
statements about our anticipated expenditures, including those related to general and administrative expenses; the potential size
of the market for our services, future development and/or expansion of our services in our markets, our ability to generate revenues,
our ability to obtain regulatory clearance and expectations as to our future financial performance. Our actual results will likely differ,
perhaps materially, from those anticipated in these forward-looking statements as a result of various factors, including: our need and
ability to raise additional cash. The forward-looking statements included in this report are subject to a number of additional material
risks and uncertainties, including but not limited to the risks described in our filings with the Securities and Exchange Commission.
The following discussion and analysis of our
financial condition and results of operations should be read together with our financial statements and the related notes to those statements
included in this filing. In addition to historical financial information, this discussion may contain forward-looking statements reflecting
our current plans, estimates, beliefs and expectations that involve risks and uncertainties. As a result of many important factors, our
actual results and the timing of events may differ materially from those anticipated in these forward-looking statements.
Overview
We are an offshore holding company incorporated
in the Cayman Islands. As a holding company with no material operations, our operations were conducted in China by our subsidiaries and
through VIE Agreements, with HiTek and its subsidiaries. This is an offering of the ordinary shares of the offshore holding company in
Cayman Islands. You are not investing in HiTek, the VIE. Neither we nor our subsidiaries own any share in HiTek. The VIE Agreements are
designed so that the operations of the VIE are solely for the benefit of the Company. As such, through the VIE Agreements among WFOE,
HiTek and HiTek’s shareholders, we are deemed to have a controlling financial interest in, and be the primary beneficiary of, the
VIE for accounting purposes only and must consolidate the VIE because it met the conditions under U.S. GAAP to consolidate the VIE. However,
the VIE agreements have not been tested in a court of law, and the VIE structure cannot completely replicate a foreign investment in China-based
companies, as the investors will not and may never hold equity interests in the Chinese operating entities. Instead, the VIE structure
provides contractual exposure to foreign investment in us. See “Business — Contractual Arrangements between WFOE and
HiTek” for a summary of these VIE Agreements.
We are an IT consulting and solutions service
provider focusing on delivering services to business in various industry sectors in China. As of the date of this annual report, we have
two lines of businesses— 1) services to small and medium businesses (“SMEs”), which consists of Anti-Counterfeiting
Tax Control System (“ACTCS”) tax devices, ACTCS services, and 2) services to large businesses, which consists of hardware
sales and software sales. We expect to actively develop our system integration services and online service platform in the near future.
Our vision is to become a one-stop consulting destination for holistic IT and other business consulting services in China.
VAT reporting is mandatory for all business enterprises
in China. The ACTCS is one of the two major VAT control systems that a business entity may choose to comply with the VAT reporting requirements.
Developed by the government-owned entity China Aerospace Science and Technology Corporation (“CASTC”), ACTCS was intended
to effectively eliminate counterfeit invoices, providing accurate and complete tax information for the regional and national audit system.
The VIE entity, HiTek, is authorized to carry out the sales of GTD. We provide our customers with the necessary ACTCS for their VAT reporting,
collection and processing. We are authorized by the State Taxation Bureau, Xiamen Branch, as one of the first ACTCS service providers
in the Xiamen metropolitan area. GTD is an ACTCS hardware necessary for normal operation of ACTCS software. The purchase of GTD is allowed
only in conjunction with the use of the ACTCS software and its supporting services. Currently, there are three ACTCS services providers
for Xiamen business enterprises, and we are one of them.
While we are confident that our competitive strengths
will continue improving our business, we are keenly aware of the challenges that our business faces, especially the challenges in our
services to SMEs which are stemmed from the ACTCS services. The services provided to the SMEs are restricted in the Xiamen metropolitan
areas since authorization by the State Taxation Bureau, Xiamen Branch to provide ACTCS services is required which is the cornerstone of
our services to the SMEs. Prices of GTD and ACTCS annual service fees are regulated and subject to the State Tax Administration’s
pricing mandates. We are not able to adjust such pricing and as such our profit margin is limited. The Chinese tax regulators have been
rolling out the electronic invoicing system starting from 2018. The electronic invoices enable enterprises to apply for, issue, transfer
and check the invoices through the unified online electronic invoice management system of Chinese Tax authority. Electronic invoices are
very useful in helping business entities reduce operating costs and streamline service process, since they do not involve printing, storage
and postage procedures. From January 21, 2021, new taxpayers can receive electronic tax control ukey for free from the Tax authority.
Increased use of electronic invoices and the free distribution of GTD will reduce our annual service fee revenue and thus negatively affect
our total revenue. Our client base growth may be limited in spite of our diligent marketing efforts, since it is beyond our control how
many new SMEs will open each year in the Xiamen metropolitan area.
Complementing our physical service center, we
started developing online service platform in 2018. As of January 2019, the online service platform enables tens of thousands of businesses
in the Xiamen metropolitan area to securely process. Coupled with our first-mover advantage, this broad applicability has been driving
our client base, resulting in around 54,872 active users, or approximately 27.3% of Xiamen’s tax device service market
shares as of December 31, 2022 according to the Xiamen Province Taxation Bureau’s statistics. We plan to offer business management
service, such as agent accounting services and online IT outsourcing services, to the SME clients using our ACTCS services. We also plan
to expand our service to large businesses to other geographic regions.
In April 2021, WFOE established a wholly-owned
subsidiary, Haitian Weilai under the laws of the PRC. The strategy purpose of establishing the new subsidiary is for the integration
of tax invoicing management services from Hitek to Haitian Weilai.
As part of the services to large businesses, HiTek
currently sells Communication Interface System (“CIS”), its self-developed software which provides embedded system interface
solutions for large businesses. CIS is a universal embedded interface system used in petrochemical and coal businesses to collect industrial,
electricity, facility pressure and temperature statistics and convert to readable format for analytical purposes.
As part of our services provided to large businesses,
Huasheng sold hardware such as laptops, printers, desktop computers and associated accessories, together with certain internet servers,
cameras and monitors. After we launched CIS sales, we also introduced our hardware products to our CIS users. Our major business strategy
in the market is to connect and source through exclusive relationships with manufacturers so that Huasheng can offer competitively priced
hardware. From the beginning of 2022, Huasheng transferred the above business to the VIE. We plan to market large scale hardware integration
systems such as router for commercial use, industrial switch, server, large internet firewall etc. in the future. We have established
the online support system in the beginning of 2018. The online system further enhances our customer experience, which is complemented
by highly trained professionals and attractive physical store environment.
For the year ended December 31, 2022, HiTek’s
two business lines operated three revenue streams. The first business line, services to large businesses, include hardware sales, was
39.0% of the total revenue, and the software sales, was 33.0% of the total revenue, and the second business line, ACTCS devices and services,
was 28.0% of the total revenue. For the year ended December 31, 2021, HiTek’s two business lines operated in three revenue streams
the first business line, services to large businesses, include hardware sales, accounting for 37.7% of total revenue, and software sales,
accounting for 31.8% of total revenue, and the second business line, ACTCS devices and services accounted for 30.5% of the total revenue.
In recent years, the Chinese tax regulators have been rolling out the electronic invoicing system.
In early December 2022, China announced a nationwide
loosening of its zero-COVID policy, and the country may face a wave in infections after the lifting of these restrictions. In light of
the current circumstances, in the absence of long-term local lockdown, the Company estimates its financial results will not be adversely
affected in 2023. The Company is closely monitoring the development of the COVID-19 pandemic and continuously evaluating any further potential
impact on its business, results of operations and financial condition. If the outbreak persists or escalates, the Company may be subject
to further negative impact on its business operations and financial condition.
Holding Company Structure
Overview
We are a holding company with no material operations
of our own. We conduct substantially all of our business in China through contractual arrangements with Xiamen Hengda HiTek Computer Network
Co., Ltd., the variable interest entity, and its subsidiaries. See “Business — Contractual Agreements between WFOE
and HiTek” for a summary of these VIE arrangements. As of December 31, 2022, the VIE and its subsidiaries accounted for 96% and
98% of our total assets and total liabilities, respectively. As of December 31, 2021, the VIE and its subsidiaries accounted for 93% and
100% of our total assets and total liabilities, respectively. As of December 31, 2020, the variable
interest entities accounted for 87% and 100% of our total assets and total liabilities, respectively. As of December 31,
2022, 2021, and 2020, $955,941, $1,557,325 and $1,335,727 of cash was denominated in
RMB, respectively.
Conducting our operations through contractual
arrangements with the variable interest entities entails a risk that we may lose the power to direct the activities that most significantly
affect the economic performance of the variable interest entities, which may result in our being unable to consolidate their financial
results with our results and may impair our access to their cash flow from operations and thereby reduce our liquidity. See “Risk
Factors — Risks Relating to Doing Business in the PRC” for more information, including the risk factors titled “Our
contractual arrangements with HiTek and its shareholders may not be effective in providing control over HiTek” and “Because
we conduct our business through HiTek, a VIE, if we fail to comply with applicable law, we could be subject to severe penalties and our
business could be adversely affected.”
In addition, any transfer of funds from us to
any of our subsidiaries in China or VIEs, either as a shareholder loan or as an increase in registered capital, is subject to certain
statutory limit requirements and registration or approval of the relevant PRC governmental authorities, including the relevant administration
of foreign exchange and/or the relevant examining and approval authority. Our subsidiaries in China and VIEs are not permitted under
PRC law to directly lend money to one another.
Therefore, it is difficult to change our capital
expenditure plans once the relevant funds are remitted from our company to our subsidiaries in China or VIEs. These limitations
on the free flow of funds between us and our subsidiaries in China and VIEs could restrict our ability to act in response to changing
market conditions and reallocate funds internally in a timely manner.
Dividend Distributions
We intend to keep any future earnings to re-invest
in and finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future.
Under Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided
that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts due in the ordinary
course of business. If we determine to pay dividends on any of our Ordinary Shares in the future, as a holding company, we will be dependent
on receipt of funds from our Hong Kong subsidiary, HiTek HK.
Current PRC regulations permit our indirect subsidiaries
in China to pay dividends to the Company 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. Each of such entity in China
is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be
set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other
ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve
funds are not distributable as cash dividends except in the event of liquidation.
The PRC government also imposes controls on the
conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in
completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits,
if any. Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict
their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations
through the current VIE Agreements, we may be unable to pay dividends on our Ordinary Shares.
Cash dividends, if any, on our Ordinary Shares
will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas
shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10.0%.
In order for us to pay dividends to our shareholders,
we will rely on payments made from HiTek to WFOE, pursuant to VIE Agreements between them, and the distribution of such payments to HiTek
HK as dividends from WFOE. Certain payments from our HiTek to WFOE are subject to PRC taxes, including business taxes and VAT.
Pursuant to the Arrangement between Mainland China
and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance
Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC project.
However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation
that (a) the Hong Kong project must be the beneficial owner of the relevant dividends; and (b) the Hong Kong project must directly hold
no less than 25% share ownership in the PRC project during the 12 consecutive months preceding its receipt of the dividends. In current
practice, a Hong Kong project must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding
tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that
we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding
tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiary to its immediate holding
company, HiTek HK. As of the date of this annual report, we have not applied for the tax resident certificate from the relevant Hong Kong
tax authority. HiTek HK intends to apply for the tax resident certificate when WFOE plans to declare and pay dividends to HiTek HK. See
“Risk Factors - There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiary,
and dividends payable by our PRC subsidiary to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.”
Risks in relation to the VIE structure
The VIE structure through contractual arrangements
has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently
subject to foreign investment restrictions in China. The MOFCOM published a discussion draft of the proposed PRC Foreign Investment Law
(“FIL”) in January 2015, or the 2015 Draft FIL, according to which, variable interest entities that are controlled via contractual
arrangements would also be deemed as foreign-invested entities, if they are ultimately “controlled” by foreign investors.
In March 2019, the PRC National People’s Congress promulgated the PRC FIL, and in December 2019, the State Council promulgated the
Implementing Rules of PRC FIL, or the Implementing Rules, to further clarify and elaborate the relevant provisions of the PRC FIL. The
PRC FIL and the Implementing Rules both became effective from January 1, 2020 and replaced the major previous laws and regulations governing
foreign investments in the PRC. Pursuant to the PRC FIL, “foreign investments” refer to investment activities conducted by
foreign investors (including foreign natural persons, foreign enterprises or other foreign organizations) directly or indirectly in the
PRC, which include any of the following circumstances: (i) foreign investors setting up foreign-invested enterprises in the PRC solely
or jointly with other investors, (ii) foreign investors obtaining shares, equity interests, property portions or other similar rights
and interests of enterprises within the PRC, (iii) foreign investors investing in new projects in the PRC solely or jointly with other
investors, and (iv) investment in other methods as specified in laws, administrative regulations, or as stipulated by the State Council.
The PRC FIL and the Implementing Rules do not introduce the concept of “control” in determining whether a company would be
considered as a foreign-invested enterprise, nor do they explicitly provide whether the VIE structure would be deemed as a method of foreign
investment. However, the PRC FIL has a catch-all provision that includes into the definition of “foreign investments” made
by foreign investors in China in other methods as specified in laws, administrative regulations, or as stipulated by the State Council,
and as the PRC FIL and the Implementing Rules are newly adopted and relevant government authorities may promulgate more laws, regulations
or rules on the interpretation and implementation of the PRC FIL, the possibility cannot be ruled out that the concept of “control”
as stated in the 2015 Draft FIL may be embodied in, or the VIE structure adopted by us may be deemed as a method of foreign investment
by, any of such future laws, regulations and rules. If our consolidated VIE was deemed as a foreign-invested enterprise under any of such
future laws, regulations and rules, and any of the businesses that we operate would be in any “negative list” for foreign
investment and therefore be subject to any foreign investment restrictions or prohibitions, further actions required to be taken by us
under such laws, regulations and rules may materially and adversely affect our business, financial condition and results of operations.
Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to
existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner,
or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could
materially and adversely affect our current corporate structure, business, financial condition and results of operations.
Tabular Disclosure of Contractual Obligations
Below is a table setting forth all of our contractual
obligations as of December 31, 2022:
Payment Due by Period |
| |
| | |
Less than | | |
| | |
| | |
More than | |
Contractual Obligations | |
Total | | |
1 year | | |
1 – 3 years | | |
3 – 5 years | | |
5 years | |
Operating lease obligations | |
$ | 6,948 | | |
$ | 3,474 | | |
$ | 3,474 | | |
$ | - | | |
$ | - | |
Loan Obligations | |
| | | |
| | | |
| | | |
| | | |
| | |
Principal | |
| 2,677,628 | | |
| 506,578 | | |
| 2,171,050 | | |
| - | | |
| - | |
Interest | |
| 285,855 | | |
| 285,855 | | |
| - | | |
| - | | |
| - | |
Total | |
$ | 2,970,431 | | |
$ | 795,907 | | |
$ | 2,174,524 | | |
$ | - | | |
$ | - | |
Below is a table setting forth all of our contractual
obligations as of December 31, 2021:
Payment Due by Period |
| |
| | |
Less than | | |
| | |
| | |
More than | |
Contractual Obligations | |
Total | | |
1 year | | |
1 – 3 years | | |
3 – 5 years | | |
5 years | |
Operating lease obligations | |
$ | 44,256 | | |
$ | 26,051 | | |
$ | 18,205 | | |
$ | - | | |
$ | - | |
Total | |
$ | 44,256 | | |
$ | 26,051 | | |
$ | 18,205 | | |
$ | - | | |
$ | - | |
Below is a table setting forth all of our contractual
obligations as of December 31, 2020:
Payment Due by Period |
| |
| | |
Less than | | |
| | |
| | |
More than | |
Contractual Obligations | |
Total | | |
1 year | | |
1 – 3 years | | |
3 – 5 years | | |
5 years | |
Operating lease obligations | |
$ | 84,059 | | |
$ | 44,740 | | |
$ | 39,319 | | |
$ | - | | |
$ | - | |
Total | |
$ | 84,059 | | |
$ | 44,740 | | |
$ | 39,319 | | |
$ | - | | |
$ | - | |
Consolidation
The Company provides substantially all of its
services to large businesses and SMEs in China via the VIE and its subsidiaries, due to PRC legal restrictions of foreign ownership in
certain sectors. Substantially all of the Company’s revenues, costs and net income in China are directly or indirectly generated
through the VIE and its subsidiaries. The Company has signed various agreements with the VIE and legal shareholders of the VIE to allow
the transfer of economic benefits from the VIE to the Company and to direct the activities of the VIE.
Total assets and liabilities presented on the
Company’s consolidated balance sheets and revenue, expense, net income presented on consolidated statement of operations and comprehensive
income as well as the cash flow from operating, investing and financing activities presented on the consolidated statement of cash flows
are substantially the financial position, operation and cash flow of the Company’s VIE and VIE’s subsidiaries. The Company
has not provided any financial support to the VIE and the VIE’s subsidiaries for the years ended December 31, 2022, 2021 and 2020.
As of December 31, 2022, the VIE and its subsidiaries accounted for 96% and 98% of our total assets and total liabilities, respectively.
As of December 31, 2021, the VIE and its subsidiaries accounted for 93% and 100% of our total assets and total liabilities, respectively.
As of December 31, 2020, the VIEs accounted for an aggregate of 87% and 100% of our total assets
and total liabilities, respectively. As of December 31, 2022 and December 31, 2021, $955,941, $1,557,325 and
$1,335,727 of cash and equivalents were denominated in RMB, respectively. The following table sets forth the assets, liabilities,
results of operations and changes in cash, cash equivalents the VIE and its subsidiaries taken as a whole, which were included in the
Company’s consolidated balance sheets and statements of comprehensive income and statements of cash flows with intercompany transactions
eliminated:
| |
As of December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Current assets | |
$ | 11,276,852 | | |
$ | 11,779,996 | | |
$ | 8,952,038 | |
Total non-current assets | |
$ | 9,102,933 | | |
$ | 4,173,234 | | |
$ | 3,628,891 | |
Total Assets | |
$ | 20,379,785 | | |
$ | 15,953,230 | | |
$ | 12,580,929 | |
Total liabilities | |
$ | 5,329,843 | | |
$ | 3,793,609 | | |
$ | 3,238,595 | |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Revenues | |
$ | 6,228,595 | | |
$ | 6,473,638 | | |
$ | 5,804,727 | |
Net income | |
$ | 1,684,991 | | |
$ | 2,061,517 | | |
$ | 1,735,340 | |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Net cash provided by (used in) operating activities | |
$ | 4,016,852 | | |
$ | (757,861 | ) | |
$ | 3,025,193 | |
Net cash (used in) provided by investing activities | |
$ | (7,349,231 | ) | |
$ | 400,006 | | |
$ | (865,047 | ) |
Net cash provided by financing activities | |
$ | 2,749,498 | | |
$ | - | | |
$ | - | |
Revenue Recognition
The Company follows ASU 2014-09, Topic 606, “Revenue
from Contracts with Customers” and its related amendments (collectively referred to as “FASB ASC 606”) for its new revenue
recognition accounting policy that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the Company expects to be entitled in exchange for those goods or services. Under ASC 606, revenue is recognized when all of
the following five steps are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract;
(iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue when
(or as) each performance obligation is satisfied.
The Company generates its revenues primarily from
three sources: (1) hardware sales, (2) software sales and (3) tax devices and services. The Company recognizes revenue when performance
obligations under the terms of a contract with its customers are satisfied. This occurs when the control of the goods and services have
been transferred to the customer.
Hardware revenues are generated primarily from
the sale of computer and network hardware to end users. The products include computers, printers, internet cables, certain internet servers,
cameras and monitors. The sales of hardware represent a single performance obligation. The Company usually recognizes the revenue at the
point in time when ownership is transferred to end customers. The Company’s revenue derived from sales of hardware is reported on
a gross basis since the Company is primarily obligated in the transaction, bears inventory and credit risk and has discretion in establishing
the prices. Hardware sales are classified as “Revenue-Hardware” on the Company’s consolidated statements of operations.
HiTek also does business in software sales and
focuses on the perpetual licenses sales for one of the self-developed software Communication Interface System(“CIS”). CIS
is based on LINUX, which is a general embedded interface system used in petrochemical and coal enterprises. The system is used to communicate
the RCTX-X module, collect the work diagram, the electricity diagram, the pressure temperature and other measures, and can extract the
data and import it to the software of the windows platform to display analysis.
Performance Obligations - Software contracts with
customers include multiple performance obligations such as sale of software license, installation of software, operation training service
and warranty. The installation and operation training are essential to the functionality of the software which are provided to the clients
prior to the acceptance of the software. The Company provides a one-year warranty which mainly telephone supports. The Company estimates
that costs associated with warranty are de minimis to the overall contract. Therefore, the Company does not further allocate transaction
price.
The Company recognizes revenue when the software
is accepted by the customer. Revenues from software sales contracts are classified as “Revenue-Software” on the Company’s
consolidated statements of operations.
|
● |
Tax Devices and Services |
Before January 21, 2021, all VAT general taxpayer
businesses in China are required to purchase the Anti-Counterfeiting Tax Control System (“ACTCS” or Golden Tax Disk or GTD)
tax devices to issue the VAT Invoice and for quarterly VAT filing. HiTek is authorized to carry out the implementation of ACTCS specialty
hardware retailing. The price of GTD and related supporting services are determined by the National Development and Reform Commission.
From January 21, 2021, new taxpayers can receive electronic tax control ukey for free from the Tax authority. HiTek could provide supporting
services to the new taxpayers.
Performance Obligations - Tax devices and services
contracts with customers include multiple performance obligations such as delivery of products, installation and after-sales supporting
services, tax control system risk investigation service, and tax invoicing management service, such as training service on issuing electronic
invoice, complete tax declaration automatically and back up data online.
Revenue from sales of GTD devices is recognized
when ownership is transferred to end customers. The Company provides the tax device after-sales supporting services and tax invoicing
management service, charging the service fee on an annual basis because the service period is usually one year. Revenue related to its
service is recognized as the services are performed and amounts are earned, using the straight-line method over the term of the related
services agreement. The Company also charges a one-time service charge for each investigation request. Revenue related to tax control
system risk investigation service is recognized at the point in time when the services are performed. Revenue is recognized based on each
performance obligation’s standalone selling price that are sold separately and charged to customers at contract inception.
The Company’s revenue derived from its gross
billings is reported on a gross basis since the Company is primarily obligated in the transaction, is subject to inventory and credit
risk and has several but not all of the indications that revenue should be recorded on the gross basis.
Revenue was comprised of the followings.
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Revenues | |
| | |
| | |
| |
Hardware | |
$ | 2,504,426 | | |
$ | 2,434,694 | | |
$ | 2,360,362 | |
Tax devices and service | |
| 1,803,650 | | |
| 1,970,363 | | |
| 2,254,176 | |
Software | |
| 2,120,532 | | |
| 2,056,106 | | |
| 1,053,467 | |
IT services | |
| - | | |
| - | | |
| 136,722 | |
Total revenues | |
$ | 6,428,608 | | |
$ | 6,461,163 | | |
$ | 5,804,727 | |
Prepayments received from customers before the
services are performed are recorded as deferred revenue. Deferred revenue consists of the annual service fees for Golden Tax Disk and
tax invoicing management service received from customers while the services have not yet been performed. The Company recognizes service
fees as revenue on a straight-line basis in accordance with the service periods.
|
● |
Practical expedients and exemptions |
The Company generally expenses sales commissions
as incurred because the amortization period would have been one year or less.
Accounts Receivable, Accounts Receivable from
Related Party and Concentration of Risk
Accounts receivable is presented net of an allowance
for doubtful accounts. If any, the Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability
of its customers to make required payments. The Company reviews the collectability of its receivables on an ongoing basis. After all attempts
to collect a receivable have failed. The receivable is written off against the allowance.
The Company reviews the accounts receivable on
a periodic basis and makes general and 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, a customer’s
historical payment history, its current credit-worthiness and current economic trends.
The Company considers the following factors where
determining whether to permit a longer payment period:
|
● |
the customer’s past payment history; |
|
● |
the customer’s general risk profile, including factors such as the customer’s size, age and public or private status; |
|
● |
macroeconomic conditions that may affect a customer’s ability to pay; and |
|
● |
the relative importance of the customer relationship to the Company’s business. |
The normal payment period is approximately six
months to one year after the customers received goods or were served. The Company gave customers different credit period considering the
above factors. For large customers such as large-scale oil and coal mine customers, the Company gives a two-year credit period. For IT
outsourcing customers, the Company gives a year and half credit period. For small and medium customers, the Company gives a six months
credit period.
In accordance with ASC 210-10-45, the non-current
accounts receivable and non-current accounts receivable from related parties are the amounts that the Company does not reasonably expect
to be realized during the normal operating cycle of the Company based on the Company’s best estimates and customers’ historical
payment behaviors. The Company uses a one-year time period as the basis for the separation of current and non-current assets.
Inventories
Inventories are stated at the lower of cost (weighted
average basis) or net realizable value. The methods of determining inventory costs are used consistently from year to year. Allowance
for inventory obsolescence is provided when the market value of certain inventory items is lower than the cost.
Leases
On December 31, 2022, the Company adopted Accounting
Standards Update (“ASU”) 2016-02, Leases (as amended by ASU 2018-01, 2018-10, 2018-11, 2018-20, and 2019-01, collectively
“ASC 842”), using the modified retrospective method. The Company elected the transition method which allows entities to initially
apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
As a result of electing this transition method, previously reported financial information has not been restated to reflect the application
of the new standard to the comparative periods presented. The Company elected the package of practical expedients permitted under the
transition guidance within ASC 842, which among other things, allows the Company to carry forward certain historical conclusions reached
under ASC Topic 840 regarding lease identification, classification, and the accounting treatment of initial direct costs. The Company
elected not to record assets and liabilities on its consolidated balance sheet for new or existing lease arrangements with terms of 12
months or less. The Company recognizes lease expenses for such lease on a straight-line basis over the lease term.
The most significant impact upon adoption relates
to the recognition of Right-of-use (“ROU”) assets and lease liabilities on the Company’s consolidated balance sheets
for office and warehouse space leases. At the commencement date of a lease, the Company recognizes a lease liability for future fixed
lease payments and a right-of-use (“ROU”) asset representing the right to use the underlying asset during the lease term.
The lease liability is initially measured as the present value of the future fixed lease payments that will be made over the lease term.
The lease term includes periods for which it is reasonably certain that the renewal options will be exercised and periods for which it’s
reasonably certain that the termination options will not be exercised. The future fixed lease payments are discounted using the rate implicit
in the lease, if available, or the incremental borrowing rate (“IBR”). The Company will evaluate the carrying value of ROU
assets if there are indicators of impairment and review the recoverability of the related asset group. If the carrying value of the asset
group is determined to not be recoverable and is in excess of the estimated fair value, the Company will record an impairment loss in
other expenses in the consolidated statements of operations.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial
Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13
changes the impairment model for most financial assets and certain other instruments. The standard will replace the “incurred loss”
approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities,
entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary
impairment model. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years. The Company is in the process of evaluating the impact of adoption of this guidance on its
consolidated financial statements (“CFS”).
The Company does not believe other recently issued
but not yet effective accounting standards, if currently adopted, would have a material effect on our CFS.
Results of Operations
The following consolidated results of operations
include the results of operations of the Company, its wholly owned subsidiary and consolidated VIEs.
Our historical reporting results are not necessarily
indicative of the results to be expected for any future period.
Year Ended December 31, 2022 Compared to
Year Ended December 31, 2021
Revenue
| |
| | |
| | |
Increase / | | |
Percentage | |
| |
2022 | | |
2021 | | |
(Decrease) | | |
Change | |
Hardware | |
$ | 2,504,426 | | |
$ | 2,434,694 | | |
$ | 69,732 | | |
| 2.9 | % |
CIS Software | |
| 2,120,532 | | |
| 2,056,106 | | |
| 64,426 | | |
| 3.1 | % |
Tax devices and service | |
| 1,803,650 | | |
| 1,970,363 | | |
| (166,713 | ) | |
| (8.5 | )% |
Total revenues | |
$ | 6,428,608 | | |
$ | 6,461,163 | | |
$ | (32,555 | ) | |
| (0.5 | )% |
We have the following three streams - hardware
retail and wholesale, software sales, and ACTCS sales and services. The Hardware sales slightly increase was mainly from small retail
sales. The Software sales consist of software sales and software services. The sales of software slightly increased was due to increase
of maintenance service revenue. Tax Devices and service sales were decreased due to the new policies carried from January 2021 that the
new taxpayers in Xiamen could get free tax Ukeys from the Tax authorization. We expect the tax devices and service sales will be affected
in the future. Our total revenues for the year ended December 31, 2022 were $6,428,608, a decrease of $32,555 or 0.5% from $6,461,163
for the year ended December 31, 2021. The overall decrease in revenue was mainly resulted from the decrease of tax device and service
due to the new policy carried from January 2021.
The Company expects to expand tax control system
risk investigation service for SMEs and also increase orders for software and hardware sales from major customers in 2023.
Cost and Margin
| |
| | |
| | |
Increase / | | |
Percentage | |
| |
2022 | | |
2021 | | |
(Decrease) | | |
Change | |
Total revenues | |
$ | 6,428,608 | | |
$ | 6,461,163 | | |
$ | (32,555 | ) | |
| (0.5 | )% |
| |
| | | |
| | | |
| | | |
| | |
Cost of revenues | |
| 2,891,565 | | |
| 2,581,218 | | |
| 310,347 | | |
| 12.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 3,537,043 | | |
| 3,879,945 | | |
| (342,902 | ) | |
| (8.8 | )% |
Margin % | |
| 55.0 | % | |
| 60.1 | % | |
| (5.1 | )% | |
| | |
Cost of revenue is comprised of (i) the direct
cost of our hardware products purchased from third parties; (ii) logistics-related costs, which primarily include product packaging and
freight-in charges; (iii) third-party royalties paid related to the GTD (iv) compensation for the employees who handle the products and
perform Tax invoicing management services and other costs that are necessary for us to provide the services to our customers; and (v)
outsourcing costs, which primarily include software outsourcing service cost to the third parties.
Cost of revenues increased to $2,891,565 for the
year ended December 31, 2022 from $2,581,218 for 2021. An increase of $310,347 or 12.0%. This increase was mainly due to cost of sales
of software increased in 2022 compared to 2021.
Gross Profit.
Our gross profit decreased to $3,537,043 for the year ended December 31, 2022 from $3,879.945 for 2021. Our gross profit as a
percentage of revenue decreased to 55.0% for the year ended December 31, 2022 from 60.1% for 2021. This was mainly due to the increase
of cost of software, for the software maintenance service from March 20, 2021 to July 31, 2021 is
provided by Huoerguosi itself, which resulting in a reduction in costs and a higher GP% in 2021. The Company expects to continue to focus
on projects with high gross profit such as services for SMEs, and at the same time, increase the hardware and software sales of large
customers.
Operating Expenses
| |
| | |
| | |
Increase / | | |
Percentage | |
| |
2022 | | |
2021 | | |
(Decrease) | | |
Change | |
Selling expenses | |
$ | 437,185 | | |
$ | 76,477 | | |
$ | 360,708 | | |
| 471.7 | % |
% of revenue | |
| 6.8 | % | |
| 1.2 | % | |
| 5.6 | % | |
| - | |
General and administrative expenses | |
| 1,472,648 | | |
| 1,699,934 | | |
| (227,286 | ) | |
| (13.4 | )% |
% of revenue | |
| 22.9 | % | |
| 26.3 | % | |
| (3.4 | )% | |
| - | |
Operating expenses | |
$ | 1,909,833 | | |
$ | 1,776,411 | | |
$ | 133,422 | | |
| 7.5 | % |
Selling Expenses. Selling expenses consist
primarily of shipping and handling costs for products sold and advertisement and marketing expenses for promotion of our products. Selling
expenses increased by 471.7% or $360,708 to $437,185 in the year ended December 31, 2022 from $76,477 in 2021. The increase
was mainly because of the increase of the Company’s sales commission in connection with obtaining new orders. Selling expenses were
6.8% of total revenue for the year ended December 31, 2022 and 1.2% of total revenue in 2021. The Company expects to maintain the current
ratio of selling expenses to revenue in 2023.
General and Administrative Expenses. General
and administrative expenses consist primarily of costs in salary and welfare expenses for our general administrative and management staff,
facilities costs, depreciation expenses, professional fees, accounting fees, and other miscellaneous expenses incurred in connection with
general operations. General and administrative expenses decreased in 13.4% or $227,286 to $1,472,648 for the year ended December
31, 2022 from $1,699,934 in 2021. The decrease was mainly due to the decrease of bad debt recovery of $124,847, and offset with the
decrease of depreciation expense of $333,857. General and administrative expenses were 22.9% of total revenue for the year ended December
31, 2022 and 26.3% of total revenue in 2021. The Company expects to maintain the current ratio of general and administrative expenses
to revenue in 2023.
Net Income
| |
| | |
| | |
Increase / | | |
Percentage | |
| |
2022 | | |
2021 | | |
(Decrease) | | |
Change | |
Operating income | |
$ | 1,627,210 | | |
$ | 2,103,534 | | |
$ | (476,324 | ) | |
| (22.6 | )% |
Total other income | |
| 241,753 | | |
| 108,676 | | |
| 133,077 | | |
| 122.5 | % |
Income before income taxes | |
| 1,868,963 | | |
| 2,212,210 | | |
| (343,247 | ) | |
| (15.5 | )% |
Income tax expense | |
| (453,218 | ) | |
| (542,853 | ) | |
| 89,635 | | |
| (16.5 | )% |
Net income | |
$ | 1,415,745 | | |
$ | 1,669,357 | | |
$ | (253,612 | ) | |
| (15.2 | )% |
Effective tax rate | |
| 24.2 | % | |
| 24.5 | % | |
| | | |
| 0.3 | % |
Operating income. Operating income was
$1,627,210 for the year ended December 31, 2022, compared to $2,103,534 for 2021. The decrease in operating income in 2022 was primary
due to the decrease in gross profit.
Other income. Other income includes government
subsidy income, net investment income (loss), and interest income and expenses. Other income was $241,753 and $108,676 for the years ended
December 31, 2022 and 2021, respectively. The increase was primarily due to the increase of interest income related to the loan receivables
in the amount of $570,707 offset by the increase of interest expense for the borrowings of $285,353.
Income tax expense. Income tax expense
was $453,218 for the year ended December 31, 2022, compared to $542,853 for 2021. The decrease in income tax expense was due primarily
to the decrease in gross profit.
Effective tax rate. Effective tax rate
was 24.2% for the year ended December 31, 2022, compared to 24.5% for 2021.
Net income. As a result of the factors
described above, net income was $1,415,745 for the year ended December 31, 2022, a decrease of $253,612 from net income $1,669,357 for
2021.
Year Ended December
31, 2021 Compared to Year Ended December 31, 2020
Revenue
| |
For the Years Ended December 31, | |
| |
| | |
| | |
Increase / | | |
Percentage | |
| |
2021 | | |
2020 | | |
(Decrease) | | |
Change | |
Hardware | |
$ | 2,434,694 | | |
$ | 2,360,362 | | |
$ | 74,332 | | |
| 3.1 | % |
CIS Software | |
| 2,056,106 | | |
| 1,053,467 | | |
| 1,002,639 | | |
| 95.2 | % |
IT Services | |
| - | | |
| 136,722 | | |
| (136,722 | ) | |
| (100 | )% |
Tax devices and service | |
| 1,970,363 | | |
| 2,254,176 | | |
| (283,813 | ) | |
| (12.6 | )% |
Total revenues | |
$ | 6,461,163 | | |
$ | 5,804,727 | | |
$ | 656,436 | | |
| 11.3 | % |
We had the following
four revenue streams - hardware retail and wholesale, software sales, outsourced IT services, and ACTCS sales and services. For the year
ended December 31, 2021, we did not recognize the IT revenue because we could not reasonably be assured of collections of payments, and
we will recognize the IT revenue when cash is collected in the future. From January 21, 2021, the new taxpayers can receive electronic
tax control ukey for free from the Tax authorization, and the hardware sales of golden tax disks have decreased significantly, which was
offset by the increase of tax device service due to the increased demand for electronic invoicing technical service. We expect the tax
devices and service sales will be affected in the future. Our total revenues for the year ended December 31, 2021 were $6,461,163, an
increase of $656,436 or 11.3% from $5,804,727 for the year ended December 31, 2020. The overall increase in revenue was mainly resulted
from the increase of software sales as the business recovery from coronavirus outbreak in 2020.
Cost and Margin
| |
For the Years Ended December 31, | |
| |
| | |
| | |
Increase / | | |
Percentage | |
| |
2021 | | |
2020 | | |
(Decrease) | | |
Change | |
Total revenues | |
$ | 6,461,163 | | |
$ | 5,804,727 | | |
$ | 656,436 | | |
| 11.3 | % |
Cost of revenues | |
| 2,581,218 | | |
| 2,633,455 | | |
| (52,237 | ) | |
| (2.0 | )% |
Gross profit | |
| 3,879,945 | | |
| 3,171,272 | | |
| 708,673 | | |
| 22.3 | % |
Margin % | |
| 60.1 | % | |
| 54.6 | % | |
| 5.5 | % | |
| | |
Cost of revenue is comprised
of (i) the direct cost of our hardware products purchased from third parties; (ii) logistics-related costs, which primarily include product
packaging and freight-in charges; (iii) third-party royalties paid related to the GTD; and (iv) compensation for the employees who handle
the products and perform IT services and other costs that are necessary for us to provide the services to our customers.
Cost of revenues decreased
to $2,581,218 for the year ended December 31, 2021 from $2,633,455 for the same period in 2020. A decrease of $52,237 or 2.0%. This decrease
was mainly caused by the decrease of IT services sales and costs, and a significant increase in high-margin software revenue.
Gross Profit. Our gross
profit increased to $3,879.945 for the year ended December 31, 2021 from $3,171,272 for the same period in 2020. Our gross profit as
a percentage of revenue increased to 60.1% for the year ended December 31, 2021 from 54.6% for the same period in 2020. This was mainly
due to the increase of sales in software, which has a relatively high gross profit margin compared with other revenue streams. The Company
expects to continue to focus on projects with high gross profit such as services for SMEs, and at the same time, increase the hardware
and software sales of large customers.
Operating Expenses
| |
For the Years Ended December 31, | |
| |
| | |
| | |
Increase / | | |
Percentage | |
| |
2021 | | |
2020 | | |
(Decrease) | | |
Change | |
Selling expenses | |
$ | 76,477 | | |
$ | 2,012 | | |
$ | 74,465 | | |
| 3,701.0 | % |
% of revenue | |
| 1.18 | % | |
| 0.03 | % | |
| 1.15 | % | |
| - | |
General and administrative expenses | |
| 1,699,934 | | |
| 1,415,484 | | |
| 284,450 | | |
| 20.1 | % |
% of revenue | |
| 26.3 | % | |
| 24.4 | % | |
| 1.9 | % | |
| - | |
Operating expenses | |
$ | 1,776,411 | | |
$ | 1,417,496 | | |
$ | 358,915 | | |
| 25.3 | % |
Selling Expenses.
Selling expenses consist primarily of shipping and handling costs for products sold and advertisement and marketing expenses for promotion
of our products. Selling expenses increased by 3,701.0% or $74,465 to $76,477 in the year ended December 31, 2021 from $2,012 in the same
period of 2020. The increase was mainly because of the increase of the company’s sales commission in connection with obtaining new
orders. Selling expenses were 1.18% of total revenue for the year ended December 31, 2021 and 0.03% of total revenue in the same period
of 2020. The company expects to maintain the current ratio of Selling expenses to revenue in 2022.
General and Administrative
Expenses. General and administrative expenses consist primarily of costs in salary and welfare expenses for our general administrative
and management staff, facilities costs, depreciation expenses, professional fees, accounting fees, and other miscellaneous expenses incurred
in connection with general operations. General and administrative expenses increased in 20.1% or $284,450 to $1,699,934 for
the year ended December 31, 2021from $1,415,484 in the same period of 2020. The increase was mainly due to the increase of social
security expense of $52,651 and professional service fee of $371,269, and offset with the decrease of depreciation expense of $22,856
and $95,552 of bad debt provision. General and administrative expenses were 26.3% of total revenue for the year ended December 31, 2021
and 24.4% of total revenue in the same period of 2020. The company expects to maintain the current ratio of G&A expenses to revenue
in 2022.
Net Income
| |
For the Years Ended December 31, | |
| |
| | |
| | |
Increase / | | |
Percentage | |
| |
2021 | | |
2020 | | |
(Decrease) | | |
Change | |
Operating income | |
$ | 2,103,534 | | |
$ | 1,753,776 | | |
$ | 349,758 | | |
| 19.9 | % |
Total other income | |
| 108,676 | | |
| 204,325 | | |
| (95,649 | ) | |
| (46.8 | )% |
Income before income taxes | |
| 2,212,210 | | |
| 1,958,101 | | |
| 254,109 | | |
| 13.0 | % |
Income tax expense | |
| (542,853 | ) | |
| (269,242 | ) | |
| (273,611 | ) | |
| 101.6 | % |
Net income | |
$ | 1,669,357 | | |
$ | 1,688,859 | | |
$ | (19,502 | ) | |
| (1.2 | )% |
Effective tax rate | |
| 24.5 | % | |
| 13.8 | % | |
| 10.8 | % | |
| | |
Operating income.
Operating income was $2,103,534 for the year ended December 31, 2021, compared to $1,753,776 for the same period of 2020. The increase
in operating income in 2021was primary due to the increase in revenue and gross profit.
Other income.
Other income includes government subsidy income, net investment income (loss), and interest income and expenses. Other income was $108,676
and $204,325 for the year ended December 31, 2021 and 2020, respectively. The decrease was primarily due to the Government subsidies in
the amount of $101,965 for the year ended December 31, 2020, compared with the Government subsidies in the amount of $6,883 for the same
period of 2021.
Income tax expense.
Income tax expense was $542,853 for the year ended December 31, 2021, compared to $269,242 for the same period of 2020. The increase in
income tax expense was mainly because that the total profit was increased to $2,212,210 for the year ended December 31, 2021 from $1,958,101
in the same period of 2020, and Hitek no longer enjoys preferential tax rates for small and micro businesses in 2021.
Effective tax rate. Effective tax rate was 24.5% for the year ended December 31, 2021, compared to 13.8% for the same period of 2020.
Net income. As
a result of the factors described above, net income was 1,669,357 for the year ended December 31, 2021, a decrease of $19,502 from net
income $1,688,859 for the same period of 2020.
B. Liquidity and Capital Resources
Year Ended December 31, 2022 Compared to
Year Ended December 31, 2021
As of December 31, 2022 and 2021, we had cash
of $1,203,160 and $2,091,308 respectively.
Working Capital. Working capital as of
December 31, 2022 was $7,898,463 compared to $10,178,635 as of December 31, 2021. The decrease was mainly due to a decrease in short-term
investments of $906,667, advances to suppliers of $629,154 and deferred offering cost of $109,121 which offset by an increase in accounts
receivable of $914,104, loan receivable of $808,716 and inventory of $21,649. Current liabilities amounted to $4,203,695 as of December
31, 2022, compared to $2,788,504 as of December 31, 2021. This increase of liabilities was attributable mainly to an increase in accounts
payable of $177,995, deferred revenue of $192,524, loan payable of $506,578 and tax payable of $372,175.
Capital Resources and Capital Needs. To
date, we have financed our operations primarily through cash flows from operations and third-party loans. With the uncertainty of the
current market, our management believes it is necessary to enhance collection of outstanding accounts receivable and other receivables,
and to be cautious on operational decisions and project selection. Our management believes that our current operations can satisfy our
daily working capital needs.
During 2020, the Company engages an external vendor
to develop software APP. As of December 31, 2022, the Company paid product development costs of $421,679 and the total contract amount
was $434,210. In March 2021, the Company signed a supplementary agreement to postpone the official launch after closing of the Company’s
initial public offering. The Company had made a payment of $119,405 (VAT included) in January 2022 for the development costs and will
make the final payment of $12,531 in 2023.
On January 21, March 28 and June 14, 2022, the
Company entered into three borrowing agreements of RMB15,000,000 ($2,171,050 with an exchange rate of 0.1447 as of December 31, 2022),
RMB1,500,000 ($217,205 with an exchange rate of 0.1447 as of December 31, 2022) and RMB3,500,000 ($506,578 with an exchange rate of 0.1447
as of December 31, 2022) from another third party in a normal course of business. The loan is a credit loan. The loan is due by January
20, 2024, July 27, 2022 and June 13, 2023, at 12%. RMB1,500,000 ($217,205) of the principal was paid as of December 31, 2022.
The Company reviews the accounts receivable on
a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. Our management
is confident in the collecting account receivables and other receivables. The accounts receivable, net and the accounts receivable of
related party, net balance was $7,480,764 and $399,465 as of December 31, 2022, respectively. Subsequent to April 25, 2023, the Company
collected receivables of $1,145,325.
The Company gives customers different credit periods
considering the scale of the customer and past credit experience. For large customers such as large-scale oil and coal mine customers,
the Company gives a two-year credit period starting from March 2019 because of these customers’ long repayment cycle. Net balance
of the accounts receivable was $6,802,306 and $6,171,410 as of December 31, 2022 and 2021, respectively. Subsequent to April 25, 2023,
the Company has collected receivables of $978,411.
For IT outsourcing customers, the Company gives
18 months credit period. The accounts receivable, net balance was $nil and $64,478 as of December 31, 2022 and 2021, respectively.
For small and medium customers, the Company gives
six months credit period. The accounts receivable, net balance was $1,077,923 and $218,621 as of December 31, 2022 and 2021, respectively.
Off-Balance Sheet Arrangements.
We have not entered into any financial guarantees
or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts
that are indexed to our own shares and classified as shareholders’ equity, or that are not reflected in our financial statements.
Furthermore, 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. Moreover, we do not have any variable interest in an 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.
Cash Flows Analysis
|
(1) |
Net cash provided by operating activities was $3,824,050 for the year ended December 31, 2022, while, net cash used in operating activities was $214,575 for the year ended December 31, 2021. The increase of $4,038,625 in net cash provided by operating activities for the year ended December 31, 2022 was mainly due to (1) an increase of $5,043,891 in short-term investments, (2) an increase of $744,721 in advances to suppliers, (3) an increase of $218,773 in inventory, (4) an increase of $97,776 in accounts payable, (5) an increase of $249,767 in deferred revenue, and (6) an increase of $160,612 in taxes payable. These were partially offset by a decrease of $1,390,669 in account receivable, $680,330 in prepaid expenses and other current assets. |
|
(2) |
Net cash used in investing activities was $7,349,231
for the year ended December 31, 2022, while, net cash provided by investing activities was $400,006 for the year ended December 31, 2021.
The increase of $7,749,237 in net cash used in investing activities for the year ended December 31, 2022 was mainly due to (1) an increase
of $5,142,402 in loans lent to third parties, (2) an increase of $1,705,453 in redemption of held-to-maturity investments, (3) an increase
of $691,751 in purchase of held-to-maturity investments, (4) an increase of $117,596 in recovery of third-party loans and (5) an increase
of $92,035 in advance payment for software development.
On January 21, 2022, March 28, 2022, and June 14, 2022, HiTek, Beijing
Baihengda Petroleum Technology Co., Ltd. (“Beijing Baihengda,” together with HiTek, the Lenders) and Guangxi Beihengda Mining
Co., Ltd. (“Guangxi Beihengda,” or the Borrower) entered into three loan agreements with similar terms, pursuant to which
the Lenders loaned of RMB 40 million ($5.79 million with an exchange rate of 0.1447 as of December 31, 2022) (collectively, the “Loans”)
to the Borrower at a monthly interest rate of 1%. Each of HiTek and Baihengda funded RMB 20 million of the Loans ($2.89 million with an
exchange rate of 0.1447 as of December 31, 2022). As of the date of this annual report, the aggregate outstanding principal amount of
the Loans is RMB37 million ($5.36 million with an exchange rate of 0.1447 as of December 31, 2022). The loans will be due by January 20,
2024, and June 13, 2023, respectively. The Borrower can pre-pay the outstanding loan amount after twelve months without penalty. |
Net cash provided by financing activities was
$2,749,498 and $nil for the years ended December 31, 2022 and 2021. For the year ended December 31, 2022, we had $2,749,498 cash inflow
from borrowing from third parties.
Year Ended December 31, 2021 Compared to
Year Ended December 31, 2020
As of December 31, 2021,
and December 31, 2020, we had cash in the amount of approximately $2,091,308 and $1,861,554, respectively.
Working Capital.
Total working capital as of December 31, 2021 amounted to $10,178,635 compared to $8,394,937 as of December 31, 2020. The increase was
mainly due to an increase in short term investments of $2,370,960, accounts receivable of $227,831, advances to suppliers of $ 208,463
and inventory of $289,212, which partially offset by a decrease in accounts receivable – related parties of $281,447 and prepaid
expenses and other current assets of $714,647. Current liabilities amounted to $2,788,504 as of December 31, 2021 as compared to $2,381,231
as of December 31, 2020. This increase of liabilities was attributable mainly to an increase in tax payable of $355,695 and accounts payable
of $139,326 which partially offset by a decrease in accrued expenses and other current liabilities of $121,150.
Capital Resources
and Capital Needs. To date, we have financed our operations primarily through cash flows from operations. With the uncertainty of
the current market, our management believes it is necessary to enhance collection of outstanding accounts receivable and other receivables,
and to be cautious on operational decisions and project selection. Our management believes that our current operations can satisfy our
daily working capital needs.
During 2020, we engaged
an external vendor to develop software application. As of December 31, 2021, we paid product development costs totaled $333,717 and the
total contract amount was $472,000. In March 2021, we signed a supplementary agreement to postpone the official launch after closing of
our initial public offering. We planned to restart the project and make the final payment of $138,283 in December 2022, regardless of
whether the IPO is completed or not.
We review the accounts
receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances.
Our management is confident in the collecting account receivables and other receivables. The account receivable, net and the account receivable
of related party balance was $5,491,475 and $963,034 as of December 31, 2021, respectively. Subsequent to December 31, 2021 we had collected
receivables in the total amount of $1,077,273 as of the date of the filing. As of December 31, 2022, we expected to collect additional
$1,694,480. We may also raise capital through public offerings.
We gave customers different
credit period considering the scale of the customer and past credit experience. For large customers such as large-scale oil and coal mine
customers, the Company gave a two-year credit period starting from March 2019 because of these customers’ long repayment cycle.
The account receivable, net balance was $6,171,410 and $4,769,470 as of December 31, 2021 and 2020, respectively. From January 2022 to
April 2022, these companies have repaid $827,200. As of December 31, 2022, the Company expects to collect additional $1,680,395.
For IT outsourcing customers,
we gave a year and half credit period. The accounts receivable, net balance was $64,478 and $592,859 as of December 31, 2021 and 2020,
respectively. From January 2022 to April 2022, these companies have repaid $31,452. As of December 31, 2022, we expected to collect additional
$14,084.
For small and medium
customers, we gave a half year credit period. The account receivable, net balance was $218,621 and $286,103 as of December 31, 2021 and
2020, respectively. We had collected the remaining balance by April 30, 2022.
Off-Balance Sheet
Arrangements.
We have not entered into
any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered
into any derivative contracts that are indexed to our own shares and classified as shareholders’ equity, or that are not reflected
in our financial statements. Furthermore, 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. Moreover, we do not have any variable interest in an 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.
Cash Flows Analysis
|
(1) |
Net cash used in operating activities were $214,575 for the years ended December 31, 2021, while, Net cash provided by operating activities were $1,932,850 for the years ended December 31, 2020. The decrease of $2,147,425 in net cash provided by operating activities for the year ended December 31, 2021 was mainly due to (1) a decrease of $2,034,581 in accounts receivable, (2) a decrease of $2,450,837 in short-term investments, (3) a decrease of $674,275 in inventory. These were partially offset by an increase of $391,934 in account receivable-related party, $664,280 in advances to suppliers and $1,442,932 in prepaid expenses and other current assets, |
|
(2) |
Net cash provided by investing activities was $400,006 for the year ended December 31, 2021, while, Net cash used in investing activities was $865,047 for the year ended December 31, 2020. The increase of $1,265,053 in net cash provided by investing activities for the year ended December 31, 2021 was mainly due to (1) an increase of $259,764 in advance payment for software development, (2) an increase of $317,059 in repayment from third-party loans, (3) an increase of $1,223,403 in purchase of Held-to-maturity investments. These were partially offset by a decrease of $323,503 in redeem of Held-to-maturity investments. |
C. Research and Development, Patents and Licenses,
etc.
We have a dedicated team of three highly skilled
in-house IT specialists, which includes three full-time IT professionals responsible for controlling the direction of outsourced R&D
projects. Among all the software we have developed, CIS is the only software product we are currently marketing and generated revenue.
D. Trend information.
Other than as disclosed elsewhere in this annual
report, we are not aware of any material recent trends in production, sales and inventory, the state of the order book and costs and selling
prices since our last fiscal year. We are also unaware of any known trends, uncertainties, demands, commitments or events for the year
ended December 31, 2022 that are reasonably likely to have a material adverse effect on our revenues, net income, profitability, liquidity
or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results
or financial conditions.
E. Critical Accounting Estimates
Our CFS are prepared in accordance with accounting
principles generally accepted in the U.S., which require us to make estimates and assumptions that affect the reported amounts of assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those estimates that may have a significant effect on our financial
condition and results of operations. Our significant accounting policies are disclosed in Note 2 to our consolidated financial statements.
The following discussion of critical accounting policies addresses those policies that are both important to the portrayal of our financial
condition and results of operations and require significant judgment and estimates. We base our estimates and judgment on historical experience
and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates
under different assumptions or conditions.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following description of our memorandum and
articles of association, as amended and restated from time to time, are summaries and do not purport to be complete.
As of the date of this annual report, our authorized
share capital consists of $50,000 divided into 500,000,000 shares, par value US$0.0001 per share, comprised of 490,000,000 ordinary Shares,
and 10,000,000 preference shares.
Our amended and restated memorandum and articles
of association provide that our authorized share capital is $50,000 divided into 500,000,000 shares of a par value of $0.0001, comprised
of 490,000,000 ordinary Shares, and 10,000,000 preference shares. Our directors may, in their absolute discretion and without the approval
of our shareholders, create and designate out of the unissued preference shares of our company one or more classes or series of preference
shares, comprising such number of preference shares, and having such designations, powers, preferences, privileges and other rights,
including dividend rights, voting rights, conversion rights, terms of redemption and liquidation preferences, as our directors may determine.
As of the date hereof, there are 14,187,679 Ordinary Shares issued and outstanding. The following are summaries of material provisions
of our amended and restated memorandum and articles of association and the Companies Law insofar as they relate to the material terms
of our ordinary shares .
Ordinary shares
Dividends. Subject to any rights and restrictions
of any other class or series of shares, our board of directors may, from time to time, declare dividends on the shares issued and authorize
payment of the dividends out of our lawfully available funds. No dividends shall be declared by the board out of our company except the
following:
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profits; or |
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“share premium account,” which represents the excess of the price paid to our company on issue of its shares over the par or “nominal” value of those shares, which is similar to the U.S. concept of additional paid in capital. |
However, no dividend shall bear interest against
the Company.
Voting Rights. Holders of our ordinary
shares vote as a single class on all matters submitted to a vote of our shareholders, except as may otherwise be required by law. Subject
to any special rights or restrictions as to voting attached to any shares, every shareholder who is present in person and every person
representing a shareholder by proxy shall have one vote for each share of which he or the person represented by proxy is the holder. At
any general meeting a resolution put to the vote of the meeting shall be decided by poll.
Any ordinary resolution to be made by the shareholders
requires the affirmative vote of a simple majority of the votes of the ordinary shares cast in a general meeting, while a special resolution
requires the affirmative vote of no less than two-thirds of the votes of the ordinary shares cast.
Under Cayman Islands law, some matters, such as
amending the memorandum and articles of association, changing the name or resolving to be registered by way of continuation in a jurisdiction
outside the Cayman Islands, require approval of shareholders by a special resolution.
There are no limitations on non-residents or foreign
shareholders in the memorandum and articles of association to hold or exercise voting rights on the ordinary shares imposed by foreign
law or by the charter or other constituent document of our company. However, no person will be entitled to vote at any general meeting
or at any separate meeting of the holders of the ordinary shares unless the person is registered as of the record date for such meeting
and unless all calls or other sums presently payable by the person in respect of ordinary shares in the Company have been paid.
Winding Up; Liquidation. Upon the winding
up of our company, after the full amount that holders of any issued shares ranking senior to the ordinary shares as to distribution on
liquidation or winding up are entitled to receive has been paid or set aside for payment, the holders of our ordinary shares are entitled
to receive any remaining assets of the Company available for distribution as determined by the liquidator. The assets received by the
holders of our ordinary shares in a liquidation may consist in whole or in part of property, which is not required to be of the same kind
for all shareholders.
Calls on Ordinary Shares and Forfeiture of
Ordinary Shares. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary
shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. Any ordinary shares
that have been called upon and remain unpaid are subject to forfeiture.
Redemption of Ordinary Shares. We may issue
shares that are, or at its option or at the option of the holders are, subject to redemption on such terms and in such manner as it may,
before the issue of the shares, determine. Under the Companies Law, shares of a Cayman Islands company may be redeemed or repurchased
out of profits of the company, out of the proceeds of a fresh issue of shares made for that purpose or out of capital, provided the memorandum
and articles of association authorize this and it has the ability to pay its debts as they come due in the ordinary course of business.
No Preemptive Rights. Holders of ordinary
shares will have no preemptive or preferential right to purchase any securities of our company.
Variation of Rights Attaching to Shares.
If at any time the share capital is divided into different classes of shares, the rights attaching to any class (unless otherwise provided
by the terms of issue of the shares of that class) may, subject to the memorandum and articles of association, be varied or abrogated
with the consent in writing of the holders of three-fourth of the issued shares of that class or with the sanction of a special resolution
passed at a general meeting of the holders of the shares of that class.
Anti-Takeover Provisions. Some provisions
of our current memorandum and articles of association may discourage, delay or prevent a change of control of our company or management
that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one
or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further
vote or action by our shareholders.
Exempted Company. We are an exempted company
with limited liability under the Companies Law. The Companies Law distinguishes between ordinary resident companies and exempted companies.
Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered
as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except that an exempted
company:
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does not have to file an annual return of its shareholders with the Registrar of Companies; |
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is not required to open its register of members for inspection; |
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does not have to hold an annual general meeting; |
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may issue shares with no par value; |
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may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); |
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may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; |
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may register as a limited duration company; and |
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may register as a segregated portfolio company. |
“Limited liability” means that the
liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company.
Register of Members
Under Cayman Islands law, we must keep a register
of members and there shall be entered therein:
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(a) |
the names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed to be considered as paid, on the shares of each member; |
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(b) |
the date on which the name of any person was entered on the register as a member; and |
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(c) |
the date on which any person ceased to be a member. |
Under Cayman Islands law, the register of members
of our company is prima facie evidence of the matters set out therein (i.e. the register of members will raise a presumption of fact on
the matters referred to above unless rebutted) and a member registered in the register of members shall be deemed as a matter of Cayman
Islands law to have legal title to the shares as set against its name in the register of members. Upon the closing of this public offering,
the register of members shall be immediately updated to reflect the issue of shares by us. Once our register of members has been updated,
the shareholders recorded in the register of members shall be deemed to have legal title to the shares set against their name.
However, there are certain limited circumstances
where an application may be made to a Cayman Islands court for a determination on whether the register of members reflects the correct
legal position. Further, the Cayman Islands court has the power to order that the register of members maintained by a company should be
rectified where it considers that the register of members does not reflect the correct legal position. If an application for an order
for rectification of the register of members were made in respect of our ordinary shares, then the validity of such shares may be subject
to re-examination by a Cayman Islands court.
Preference shares
Our amended and restated memorandum and articles
of association authorizes the issuance of 10,000,000 preference shares with such designation, rights and preferences as may be determined
from time to time by our board of directors. Accordingly, our board of directors is empowered, without shareholder approval, to issue
preference shares with dividend, liquidation, redemption, voting or other rights which could adversely affect the voting power or other
rights of the holders of ordinary shares. We may issue some or all of the preference shares to effect a business combination. In addition,
the preference shares could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do
not currently intend to issue any preference shares, we cannot assure you that we will not do so in the future.
Certain Differences in Corporate Law
Cayman Islands companies are governed by the Companies
Law. The Companies Law is modeled on English Law but does not follow recent English Law statutory enactments, and differs from laws applicable
to United States corporations and their shareholders. Set forth below is a summary of the material differences between the provisions
of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.
Mergers and Similar Arrangements.
In certain circumstances, the Companies Law allows
for mergers or consolidations between two Cayman Islands companies, or between a Cayman Islands company and a company incorporated in
another jurisdiction (provided that is facilitated by the laws of that other jurisdiction).
Where the merger or consolidation is between two
Cayman Islands companies, the directors of each company must approve a written plan of merger or consolidation containing certain prescribed
information. That plan or merger or consolidation must then be authorized by either (a) a special resolution (usually a majority of 66.6%
in value) of the shareholders of each company; or (b) such other authorization, if any, as may be specified in such constituent company’s
articles of association. No shareholder resolution is required for a merger between a parent company (i.e., a company that owns at least
90% of the issued shares of each class in a subsidiary company) and its subsidiary company. The consent of each holder of a fixed or floating
security interest of a constituent company must be obtained, unless the court waives such requirement. If the Cayman Islands Registrar
of Companies is satisfied that the requirements of the Companies Law (which includes certain other formalities) have been complied with,
the Registrar of Companies will register the plan of merger or consolidation.
Where the merger or consolidation involves a foreign
company, the procedure is similar, save that with respect to the foreign company, the director of the Cayman Islands company is required
to make a declaration to the effect that, having made due enquiry, he is of the opinion that the requirements set out below have been
met: (i) that the merger or consolidation is permitted or not prohibited by the constitutional documents of the foreign company and by
the laws of the jurisdiction in which the foreign company is incorporated, and that those laws and any requirements of those constitutional
documents have been or will be complied with; (ii) that no petition or other similar proceeding has been filed and remains outstanding
or order made or resolution adopted to wind up or liquidate the foreign company in any jurisdictions; (iii) that no receiver, trustee,
administrator or other similar person has been appointed in any jurisdiction and is acting in respect of the foreign company, its affairs
or its property or any part thereof; (iv) that no scheme, order, compromise or other similar arrangement has been entered into or made
in any jurisdiction whereby the rights of creditors of the foreign company are and continue to be suspended or restricted.
Where the surviving company is the Cayman Islands
company, the director of the Cayman Islands company is further required to make a declaration to the effect that, having made due enquiry,
he is of the opinion that the requirements set out below have been met: (i) that the foreign company is able to pay its debts as they
fall due and that the merger or consolidated is bona fide and not intended to defraud unsecured creditors of the foreign company; (ii)
that in respect of the transfer of any security interest granted by the foreign company to the surviving or consolidated company (a) consent
or approval to the transfer has been obtained, released or waived; (b) the transfer is permitted by and has been approved in accordance
with the constitutional documents of the foreign company; and (c) the laws of the jurisdiction of the foreign company with respect to
the transfer have been or will be complied with; (iii) that the foreign company will, upon the merger or consolidation becoming effective,
cease to be incorporated, registered or exist under the laws of the relevant foreign jurisdiction; and (iv) that there is no other reason
why it would be against the public interest to permit the merger or consolidation.
Where the above procedures are adopted, the Companies
Law provides for a right of dissenting shareholders to be paid a payment of the fair value of his shares upon their dissenting to the
merger or consolidation if they follow a prescribed procedure. In essence, that procedure is as follows (a) the shareholder must give
his written objection to the merger or consolidation to the constituent company before the vote on the merger or consolidation, including
a statement that the shareholder proposes to demand payment for his shares if the merger or consolidation is authorized by the vote; (b)
within 20 days following the date on which the merger or consolidation is approved by the shareholders, the constituent company must give
written notice to each shareholder who made a written objection; (c) a shareholder must within 20 days following receipt of such notice
from the constituent company, give the constituent company a written notice of his intention to dissent including, among other details,
a demand for payment of the fair value of his shares; (d) within seven days following the date of the expiration of the period set out
in paragraph (b) above or seven days following the date on which the plan of merger or consolidation is filed, whichever is later, the
constituent company, the surviving company or the consolidated company must make a written offer to each dissenting shareholder to purchase
his shares at a price that the company determines is the fair value and if the company and the shareholder agree the price within 30 days
following the date on which the offer was made, the company must pay the shareholder such amount; (e) if the company and the shareholder
fail to agree a price within such 30 day period, within 20 days following the date on which such 30 day period expires, the company (and
any dissenting shareholder) must file a petition with the Cayman Islands Grand Court to determine the fair value and such petition must
be accompanied by a list of the names and addresses of the dissenting shareholders with whom agreements as to the fair value of their
shares have not been reached by the company. At the hearing of that petition, the court has the power to determine the fair value of the
shares together with a fair rate of interest, if any, to be paid by the company upon the amount determined to be the fair value. Any dissenting
shareholder whose name appears on the list filed by the company may participate fully in all proceedings until the determination of fair
value is reached. These rights of a dissenting shareholder are not be available in certain circumstances, for example, to dissenters holding
shares of any class in respect of which an open market exists on a recognized stock exchange or recognized interdealer quotation system
at the relevant date or where the consideration for such shares to be contributed are shares of any company listed on a national securities
exchange or shares of the surviving or consolidated company.
Moreover, Cayman Islands law also has separate
statutory provisions that facilitate the reconstruction or amalgamation of companies in certain circumstances, schemes of arrangement
will generally be more suited for complex mergers or other transactions involving widely held companies, commonly referred to in the Cayman
Islands as a “scheme of arrangement” which may be tantamount to a merger. In the event that a merger was sought pursuant to
a scheme of arrangement (the procedure of which are more rigorous and take longer to complete than the procedures typically required to
consummate a merger in the United States), the arrangement in question must be approved by a majority in number of each class of shareholders
and creditors with whom the arrangement is to be made and who must in addition represent three-fourths in value of each such class of
shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meeting summoned
for that purpose. The convening of the meetings and subsequently the terms of the arrangement must be sanctioned by the Grand Court of
the Cayman Islands. While a dissenting shareholder would have the right to express to the court the view that the transaction should not
be approved, the court can be expected to approve the arrangement if it satisfies itself that:
| ● | we are not proposing to act
illegally or beyond the scope of our corporate authority and the statutory provisions as to majority vote have been complied with; |
| ● | the shareholders have been
fairly represented at the meeting in question; |
| ● | the arrangement is such as
a businessman would reasonably approve; and |
| ● | the arrangement is not one
that would more properly be sanctioned under some other provision of the Companies Law or that would amount to a “fraud on the
minority.” |
If a scheme of arrangement or takeover offer (as
described below) is approved, any dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily
be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially
determined value of the shares.
Squeeze-out Provisions.
When a takeover offer is made and accepted by
holders of 90% of the shares to whom the offer relates within four months, the offeror may, within a two-month period, require the holders
of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands
but this is unlikely to succeed unless there is evidence of fraud, bad faith, collusion or inequitable treatment of the shareholders.
Further, transactions similar to a merger, reconstruction
and/or an amalgamation may in some circumstances be achieved through other means to these statutory provisions, such as a share capital
exchange, asset acquisition or control, through contractual arrangements, of an operating business.
Shareholders’ Suits.
Our Cayman Islands counsel is not aware of any
reported class action having been brought in a Cayman Islands court. Derivative actions have been brought in the Cayman Islands courts,
and the Cayman Islands courts have confirmed the availability for such actions. In most cases, we will be the proper plaintiff in any
claim based on a breach of duty owed to us, and a claim against (for example) our officers or directors usually may not be brought by
a shareholder. However, based both on Cayman Islands authorities and on English authorities, which would in all likelihood be of persuasive
authority and be applied by a court in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:
| ● | a company is acting, or proposing
to act, illegally or beyond the scope of its authority; |
| ● | the act complained of, although
not beyond the scope of the authority, could be effected if duly authorized by more than the number of votes which have actually been
obtained; or |
| ● | those who control the company
are perpetrating a “fraud on the minority.” |
A shareholder may have a direct right of action
against us where the individual rights of that shareholder have been infringed or are about to be infringed.
Enforcement of civil liabilities.
The Cayman Islands has a different body of securities
laws as compared to the United States and may provide less protection to investors. Additionally, Cayman Islands companies may not have
standing to sue before the Federal courts of the United States.
We have been advised by our Cayman Islands legal
counsel that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments of courts of the United States
predicated upon the civil liability provisions of the federal securities laws of the United States or any state; and (ii) in original
actions brought in the Cayman Islands, to impose liabilities against us predicated upon the civil liability provisions of the federal
securities laws of the United States or any state, so far as the liabilities imposed by those provisions are penal in nature. In those
circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts
of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial
on the merits based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay
the sum for which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands,
such judgment must be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent
with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be of
a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple
damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings
are being brought elsewhere.
Special Considerations for Exempted Companies.
We are an exempted company with limited liability
under the Companies Law. The Companies Law distinguishes between ordinary resident companies and exempted companies. Any company that
is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted
company. The requirements for an exempted company are essentially the same as for an ordinary company except for the exemptions and privileges
listed below:
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annual reporting requirements are minimal and consist mainly of a statement that the company has conducted its operations mainly outside of the Cayman Islands and has complied with the provisions of the Companies Law; |
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an exempted company’s register of members is not open to inspection; |
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an exempted company does not have to hold an annual general meeting; |
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an exempted company may issue negotiable or bearer shares or shares with no par value; |
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an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); |
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an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; |
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an exempted company may register as a limited duration company; and |
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an exempted company may register as a segregated portfolio company. |
VStock Transfer, LLC is the transfer agent and
registrar for our Ordinary Shares as its principal office at 18 Lafayette Place, Woodmere, New York 11598.
C. Material Contracts
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in “Item 4. Information on the Company,” “Item
7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” or elsewhere in this annual report on
Form 20-F.
D. Exchange Controls
Cayman Islands
There are currently no exchange control regulations
in the Cayman Islands applicable to us or our shareholders.
The PRC
China regulates foreign currency exchanges primarily
through the following rules and regulations:
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Foreign Currency Administration Rules of 1996, as amended; and |
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Administrative Rules of the Settlement, Sale and Payment of Foreign Exchange of 1996. |
Renminbi is not a freely convertible currency
at present. Under the current PRC regulations, conversion of Renminbi is permitted in China for routine current-account foreign exchange
transactions, including trade and service related foreign exchange transactions, payment of dividends and service of foreign debts. Conversion
of Renminbi for most capital-account items, such as direct investments, investments in PRC securities markets and repatriation of investments,
however, is still subject to the approval of SAFE.
Pursuant to the above-mentioned administrative
rules, foreign-invested enterprises may buy, sell and/or remit foreign currencies for current account transactions at banks in China with
authority to conduct foreign exchange business by complying with certain procedural requirements, such as presentment of valid commercial
documents. For capital-account transactions involving foreign direct investment, foreign debts and outbound investment in securities and
derivatives, approval from SAFE is a pre-condition. Capital investments by foreign-invested enterprises outside China are subject to limitations
and requirements in China, such as prior approvals from the PRC Ministry of Commerce or SAFE.
E. Taxation
The following summary of the material Cayman Islands,
PRC and U.S. tax consequences of an investment in our ordinary shares is based upon laws and relevant interpretations thereof in effect
as of the date hereof, all of which are subject to change, possibly with retroactive effect. This summary is not intended to be, nor should
it be construed as, legal or tax advice and is not exhaustive of all possible tax considerations. This summary also does not deal with
all possible tax consequences relating to an investment in our ordinary shares, such as the tax consequences under state, local, non-U.S.,
non-PRC, and non-Cayman Islands tax laws. Investors should consult their own tax advisors with respect to the tax consequences of the
acquisition, ownership and disposition of our ordinary shares.
People’s Republic of China Enterprise
Taxation
The following brief description of Chinese enterprise
laws is designed to highlight the enterprise-level taxation on our earnings, which will affect the amount of dividends, if any, we are
ultimately able to pay to our shareholders. See “Dividend Policy.”
We are a holding company incorporated in the Cayman
Islands and we gain substantial income by way of dividends paid to us from our subsidiaries in China. The EIT Law and its implementation
rules provide that China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its equity holders that
are non-resident enterprises, will normally be subject to PRC withholding tax at a rate of 10%, unless any such foreign investor’s
jurisdiction of incorporation has a tax treaty with China that provides for a preferential tax rate or a tax exemption.
Under the EIT Law, an enterprise established outside
of China with a “de facto management body” within China is considered a “resident enterprise,” which means that
it is treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the
EIT Law define “de facto management body” as a managing body that actually, comprehensively manage and control the production
and operation, staff, accounting, property and other aspects of an enterprise, the only official guidance for this definition currently
available is set forth in SAT Notice 82, which provides guidance on the determination of the tax residence status of a Chinese-controlled
offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that
has a PRC enterprise or enterprise group as its primary controlling shareholder. Although Hitek Global Inc. does not have a PRC enterprise
or enterprise group as our primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise
within the meaning of SAT Notice 82, in the absence of guidance specifically applicable to us, we have applied the guidance set forth
in SAT Notice 82 to evaluate the tax residence status of Hitek Global Inc. and its subsidiaries organized outside the PRC.
According to SAT Notice 82, a Chinese-controlled
offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in
China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met: (i) the
places where senior management and senior management departments that are responsible for daily production, operation and management of
the enterprise perform their duties are mainly located within the territory of China; (ii) financial decisions (such as money borrowing,
lending, financing and financial risk management) and personnel decisions (such as appointment, dismissal and salary and wages) are decided
or need to be decided by organizations or persons located within the territory of China; (iii) main property, accounting books, corporate
seal, the board of directors and files of the minutes of shareholders’ meetings of the enterprise are located or preserved within
the territory of China; and (iv) one half (or more) of the directors or senior management staff having the right to vote habitually reside
within the territory of China.
We believe that we do not meet some of the conditions
outlined in the immediately preceding paragraph. For example, as a holding company, the key assets and records of Hitek Global Inc., including
the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our shareholders, are located
and maintained outside the PRC. In addition, we are not aware of any offshore holding companies with a corporate structure similar to
ours that has been deemed a PRC “resident enterprise” by the PRC tax authorities. Accordingly, we believe that Hitek Global
Inc. and its offshore subsidiaries should not be treated as a “resident enterprise” for PRC tax purposes if the criteria for
“de facto management body” as set forth in SAT Notice 82 were deemed applicable to us. However, as the tax residency status
of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of
the term “de facto management body” as applicable to our offshore entities, we will continue to monitor our tax status.
The implementation rules of the EIT Law provide
that, (i) if the enterprise that distributes dividends is domiciled in the PRC or (ii) if gains are realized from transferring equity
interests of enterprises domiciled in the PRC, then such dividends or gains are treated as China-sourced income. It is not clear how “domicile”
may be interpreted under the EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore,
if we are considered as a PRC tax resident enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders which are
non-resident enterprises as well as gains realized by such shareholders from the transfer of our shares may be regarded as China-sourced
income and as a result become subject to PRC withholding tax at a rate of up to 10%. We are unable to provide a “will” opinion
because Jingtian& Gongcheng, our PRC counsel, believes that it is possible but highly unlikely that the Company and its offshore subsidiaries
would be treated as a “resident enterprise” for PRC tax purposes because they do not meet some of the conditions outlined
in SAT Notice 82. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that has
been deemed a PRC “resident enterprise” by the PRC tax authorities as of the date of the annual report. Therefore, it is possible
but highly unlikely that the income received by our overseas shareholders will be regarded as China-sourced income.
Cayman Islands Tax Considerations
The following is a discussion on certain Cayman
Islands income tax consequences of an investment in the securities of the Company. The discussion is a general summary of present law,
which is subject to prospective and retroactive change. It is not intended as tax advice, does not consider any investor’s particular
circumstances, and does not consider tax consequences other than those arising under Cayman Islands law.
Under Existing Cayman Islands Laws:
Payments of dividends and capital in respect of
our securities will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend
or capital to any holder of the securities nor will gains derived from the disposal of the securities be subject to Cayman Islands income
or corporation tax. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax
or gift tax.
No stamp duty is payable in respect of the issue
of the warrants. An instrument of transfer in respect of a warrant is stampable if executed in or brought into the Cayman Islands.
No stamp duty is payable in respect of the issue
of our Ordinary Shares or on an instrument of transfer in respect of such shares.
The Company has been incorporated under the laws
of the Cayman Islands as an exempted company with limited liability and, as such, has applied for and expects to obtain after the effectiveness
of the registration statement on Form F-1 (File No. 333-228498) an undertaking from the Financial Secretary of the Cayman Islands in the
following form:
The Tax Concessions Law (2018 Revision)
Undertaking as to Tax Concessions
In accordance with the provision of Section 6
of The Tax Concessions Law (2018 Revision), the Financial Secretary undertakes with Hitek Global Inc. (“the Company”):
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That no law which is hereafter enacted in the Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to the Company or its operations; and |
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In addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable: |
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On or in respect of the shares, debentures or other obligations of the Company; or |
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by way of the withholding in whole or part, of any relevant payment as defined in Section 6(3) of the Tax Concessions Law (2018 Revision). |
These concessions shall be for a period of twenty
years from the date hereof.
United States Federal Income Taxation
The following does not address the tax consequences
to any particular investor or to persons in special tax situations such as:
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banks; |
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financial institutions; |
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insurance companies; |
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regulated investment companies; |
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real estate investment trusts; |
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broker-dealers; |
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traders that elect to mark-to-market; |
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U.S. expatriates; |
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tax-exempt entities; |
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persons liable for alternative minimum tax; |
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persons holding our Ordinary Shares as part of a straddle, hedging, conversion or integrated transaction; |
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persons that actually or constructively own 10% or more of our voting shares; |
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persons who acquired our Ordinary Shares pursuant to the exercise of any employee share option or otherwise as consideration; or |
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persons holding our Ordinary Shares through partnerships or other pass-through entities. |
Prospective purchasers are urged to consult their
own tax advisors about the application of the U.S. Federal tax rules to their particular circumstances as well as the state, local, foreign
and other tax consequences to them of the purchase, ownership and disposition of our Ordinary Shares.
Taxation of Dividends and Other Distributions
on our Ordinary Shares
Subject to the passive foreign investment company
rules discussed below, the gross amount of distributions made by us to you with respect to the Ordinary Shares (including the amount of
any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but
only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal
income tax principles). With respect to corporate U.S. Holders, the dividends will not be eligible for the dividends-received deduction
allowed to corporations in respect of dividends received from other U.S. corporations.
With respect to non-corporate U.S. Holders, including
individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that
(1) the Ordinary Shares are readily tradable on an established securities market in the U.S., or we are eligible for the benefits of an
approved qualifying income tax treaty with the U.S. that includes an exchange of information program, (2) we are not a passive foreign
investment company (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable year, and (3)
certain holding period requirements are met. Under U.S. Internal Revenue Service authority, Ordinary Shares are considered for purpose
of clause (1) above to be readily tradable on an established securities market in the U.S. because they are listed on the Nasdaq Capital
Market. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our
Ordinary Shares, including the effects of any change in law after the date of this annual report.
Dividends will constitute foreign source income
for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of
the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the
dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign
taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed
by us with respect to our Ordinary Shares will constitute “passive category income” but could, in the case of certain U.S.
Holders, constitute “general category income.”
For the year ended December 31, 2022, we have
not declared any dividends on our Ordinary Shares. To the extent the distribution exceeds our current and accumulated earnings and profits
(as determined under U.S. federal income tax principles), it will be treated first as a tax-free return of your tax basis in your Ordinary
Shares, and to the extent the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate
our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be
treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under
the rules described above.
Taxation of Dispositions of Ordinary Shares
Subject to the passive foreign investment company
rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a share equal to
the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the Ordinary Shares.
The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held
the Ordinary Shares for more than one year, you will be eligible for (a) reduced tax rates of 0% (for individuals in the 10% or 15% tax
brackets), (b) higher tax rates of 20% (for individuals in the 39.6% tax bracket) or (c) 15% for all other individuals. The deductibility
of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States source
income or loss for foreign tax credit limitation purposes.
Passive Foreign Investment Company (PFIC)
Consequences
Based on our current and anticipated operations
and the composition of our assets, we do not expect to be treated as a passive foreign investment company, or PFIC, for U.S. federal income
tax purposes for our current taxable year. PFIC status is a factual determination for each taxable year which cannot be made until the
close of the taxable year. A non-U.S. corporation is considered a PFIC for any taxable year if either:
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at least 75% of its gross income is passive income; or |
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at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”). |
We will be treated as owning our proportionate
share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly,
at least 25% (by value) of the stock.
We must make a separate determination each year
as to whether we are a PFIC. As a result, our PFIC status may change from no to yes. In particular, because the value of our assets for
purposes of the asset test will generally be determined based on the market price of our Ordinary Shares, our PFIC status will depend
in large part on the market price of our Ordinary Shares. Accordingly, fluctuations in the market price of the Ordinary Shares may cause
us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects and the composition
of our income and assets will be affected by how, and how quickly, we spend the cash we raise in our initial public offering. If we are
a PFIC for any year during which you hold Ordinary Shares, we will continue to be treated as a PFIC for all succeeding years during which
you hold Ordinary Shares. However, if we cease to be a PFIC, you may avoid some of the adverse effects of the PFIC regime by making a
“deemed sale” election with respect to the Ordinary Shares.
If we are a PFIC for any taxable year during which
you hold Ordinary Shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive
and any gain you realize from a sale or other disposition (including a pledge) of the Ordinary Shares, unless you make a “mark-to-market”
election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions
you received during the shorter of the three preceding taxable years or your holding period for the Ordinary Shares will be treated as
an excess distribution. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over your holding period for the Ordinary Shares; |
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the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and |
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the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
The tax liability for amounts allocated to years
prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and
gains (but not losses) realized on the sale of the Ordinary Shares cannot be treated as capital, even if you hold the Ordinary Shares
as capital assets.
A U.S. Holder of “marketable stock”
(as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you
make a mark-to-market election for the Ordinary Shares, you will include in income each year an amount equal to the excess, if any, of
the fair market value of the Ordinary Shares as of the close of your taxable year over your adjusted basis in such Ordinary Shares. You
are allowed a deduction for the excess, if any, of the adjusted basis of the Ordinary Shares over their fair market value as of the close
of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the Ordinary Shares included
in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual
sale or other disposition of the Ordinary Shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible
portion of any mark-to-market loss on the Ordinary Shares, as well as to any loss realized on the actual sale or disposition of the Ordinary
Shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such Ordinary
Shares. Your basis in the Ordinary Shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market
election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that
the lower applicable capital gains rate for qualified dividend income discussed above under “— Taxation of Dividends and Other
Distributions on our Ordinary Shares” generally would not apply.
The mark-to-market election is available only
for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days during each
calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations),
including the Nasdaq Capital Market. For the year ended December 31, 2022, our Ordinary Share have not been listed on the Nasdaq Capital
Market. Our Ordinary Shares started trading on the Nasdaq Capital Market on March 31, 2023. If the Ordinary Shares are regularly traded
on the Nasdaq Capital Market and if you are a holder of Ordinary Shares, the mark-to-market election would be available to you were we
to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC
may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed above.
A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable
year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing
fund election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as
required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable
you to make a qualified electing fund election. If you hold Ordinary Shares in any year in which we are a PFIC, you will be required to
file U.S. Internal Revenue Service Form 8621 regarding distributions received on the Ordinary Shares and any gain realized on the disposition
of the Ordinary Shares.
You are urged to consult your tax advisors regarding
the application of the PFIC rules to your investment in our Ordinary Shares and the elections discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to our Ordinary
Shares and proceeds from the sale, exchange or redemption of our Ordinary Shares may be subject to information reporting to the U.S. Internal
Revenue Service and possible U.S. backup withholding at a current rate of 24%. Backup withholding will not apply, however, to a U.S. Holder
who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form
W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must
provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the
application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts
withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service
and furnishing any required information. We do not intend to withhold taxes for individual shareholders.
Under the Hiring Incentives to Restore Employment
Act of 2010, certain U.S. Holders are required to report information relating to Ordinary Shares, subject to certain exceptions (including
an exception for Ordinary Shares held in accounts maintained by certain financial institutions), by attaching a complete Internal Revenue
Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they hold Ordinary Shares.
U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding
rules.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
The Company is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended, and will file reports, registration statements and other information with the SEC.
The Company’s reports, registration statements and other information can be inspected on the SEC’s website at www.sec.gov.
You may also visit us on the World Wide Web at http http://www.xmhitek.com/. However, information contained on our website does not constitute
a part of this annual report.
I. Subsidiary Information
Not applicable.