PART
I
CERTAIN
INFORMATION
In
this annual report on Form 20-F, unless otherwise indicated, “we,” “us,” “our,” the “Company”
or similar terms refer to UTime Limited, a Cayman Islands exempted company, including its wholly-owned subsidiaries and variable interest
entity (“VIE”), unless the context otherwise indicates.
GLOSSARY
OF TERMS
The
following is a glossary of the electronics industry and the PRC and
Indian legal systems used in this annual report on Form 20-F. Other defined terms may be found in the body of this annual report.
AQSIQ
|
|
Administration
of Quality Supervision, Inspection and Quarantine
|
BIS
|
|
Bureau
of Indian Standards
|
BOM
|
|
bill
of materials
|
CAB
|
|
Conformance
Assessment Body
|
CCB
|
|
China
Construction Bank
|
CCI
|
|
Competition
Commission of India
|
CNCA
|
|
Certification
and Accreditation Administration of China
|
CPA
|
|
Consumer
Protection Act, 1986
|
CRBZ
|
|
China Resources Bank of Zhuhai Co., Ltd.
|
CSRC
|
|
China
Securities Regulatory Commission
|
DGFT
|
|
Directorate
General of Foreign Trade
|
DOT
|
|
The
Department of Telecommunication, Government of India
|
EMS
|
|
Electronics
Manufacturing Services
|
EPF
Act
|
|
Employees’
Provident Funds and Miscellaneous Provisions Act, 1952
|
ESI
Act
|
|
Employees’
State Insurance Act, 1948
|
FDI
|
|
Foreign
Direct Investment
|
FEMA
|
|
Foreign
Exchange and Management Act, 1999
|
FEMA
Rules, 2019
|
|
Foreign
Exchange Management (Non-debt Instruments) Rules, 2019
|
FLA
|
|
Foreign
Liabilities and Assets
|
Gratuity
Act
|
|
Payment
of Gratuity Act, 1972
|
ID
|
|
Industrial
Design
|
IE
Code
|
|
Importer
Exporter Code Number
|
IMF
|
|
International
Monetary Fund
|
IoT
|
|
Internet
of Things
|
IPR
|
|
Intellectual
Property Right
|
JV
|
|
joint
venture
|
mAh
|
|
Milliamp
hour
|
MD
|
|
Mechanic
Design
|
MIIT
|
|
Ministry
of Industry and Information Technology
|
MOFCOM
|
|
Ministry
of Commerce of the PRC
|
MRP
|
|
Material
Requirements Planning
|
NCLT
|
|
National
Company Law Tribunal
|
NDRC
|
|
National
Development and Reform Commission
|
ODM
|
|
Original
Design Manufacturer
|
OEM
|
|
Original
Equipment Manufacturer
|
OGL
|
|
Open
General License
|
PCAOB
|
|
Public
Company Accounting Oversight Board (United States)
|
PCBA
|
|
Printed
circuit board and assembly
|
PFIC
|
|
passive
foreign investment company
|
POSH
Act
|
|
Sexual
Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013
|
PRC
|
|
People’s
Republic of China
|
RBI
|
|
Reserve
Bank of India
|
Rs.
|
|
Indian
Rupee
|
SAFE
|
|
State
Administration of Foreign Exchange
|
SCNPC
|
|
Standing
Committee of the National People’s Congress
|
SEBI
|
|
Securities
and Exchange Board of India
|
Shops
Act
|
|
Shops
and Commercial Establishments Act
|
SMF
|
|
Single
Master Form
|
SMT
|
|
Surface
Mounting Technology
|
TM
Act
|
|
Trade
Marks Act, 1999
|
TQM
|
|
Total
Quality Management
|
VIE
|
|
Variable
Interest Entity, which refers to United Time Technology Co., Ltd.
|
WOS
|
|
wholly
owned subsidiary
|
Unless
the context indicates otherwise, all references to “China” and the “PRC” refer to the People’s Republic
of China, all references to “Renminbi” or “RMB” are to the legal currency of the People’s Republic of China
and all references to “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States.
This annual report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader.
We make no representation that the Renminbi or U.S. dollar amounts referred to in this report could have been or could be converted into
U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On March 31, 2021, the cash buying rate announced
by the People’s Bank of China was RMB6.5713 to $1.00.
FORWARD-LOOKING
STATEMENTS
This
report contains “forward-looking statements” for purposes of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 that represent our beliefs, projections and predictions about future events. All statements other than statements
of historical fact are “forward-looking statements,” including any projections of earnings, revenue or other financial items,
any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects
or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs,
goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may”,
“will”, “should”, “could”, “would”, “predicts”, “potential”,
“continue”, “expects”, “anticipates”, “future”, “intends”, “plans”,
“believes”, “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking
statements.
These
statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause
our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements
described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking
statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their
likely impact, and the accuracy and completeness of the publicly available information with respect to the factors upon which our business
strategy is based or the success of our business.
Forward-looking
statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether,
or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the
time those statements are made and management’s belief as of that time with respect to future events, and are subject to risks
and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking
statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings
“Risk Factors”, “Operating and Financial Review and Prospects,” and elsewhere in this report.
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
Applicable.
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not
Applicable.
ITEM
3. KEY INFORMATION
3.A.
Selected Financial Data
|
|
For the years ended March 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
Statements of Comprehensive Income (Loss) Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
737,858
|
|
|
|
376,902
|
|
|
|
238,096
|
|
|
|
193,088
|
|
|
|
246,899
|
|
|
|
37,572
|
|
Cost of Sales
|
|
|
682,958
|
|
|
|
347,864
|
|
|
|
213,098
|
|
|
|
173,735
|
|
|
|
228,732
|
|
|
|
34,808
|
|
Gross profit
|
|
|
54,900
|
|
|
|
29,038
|
|
|
|
24,998
|
|
|
|
19,353
|
|
|
|
18,167
|
|
|
|
2,764
|
|
Total operating expenses
|
|
|
45,386
|
|
|
|
59,541
|
|
|
|
34,970
|
|
|
|
39,062
|
|
|
|
32,697
|
|
|
|
4,976
|
|
Income (loss) from operations
|
|
|
9,514
|
|
|
|
(30,503
|
)
|
|
|
(9,972
|
)
|
|
|
(19,709
|
)
|
|
|
(14,530
|
)
|
|
|
(2,212
|
)
|
Interest expenses
|
|
|
1,039
|
|
|
|
779
|
|
|
|
1,479
|
|
|
|
1,745
|
|
|
|
2,461
|
|
|
|
375
|
|
Income (loss) before income taxes
|
|
|
8,475
|
|
|
|
(31,282
|
)
|
|
|
(11,451
|
)
|
|
|
(21,454
|
)
|
|
|
(16,991
|
)
|
|
|
(2,587
|
)
|
Income tax expenses (benefits)
|
|
|
1,946
|
|
|
|
106
|
|
|
|
498
|
|
|
|
247
|
|
|
|
(364
|
)
|
|
|
(55
|
)
|
Net income (loss)
|
|
|
6,529
|
|
|
|
(31,388
|
)
|
|
|
(11,949
|
)
|
|
|
(21,701
|
)
|
|
|
(16,627
|
)
|
|
|
(2,532
|
)
|
Net income (loss) attributable to UTime Limited
|
|
|
3,344
|
|
|
|
(18,138
|
)
|
|
|
(10,895
|
)
|
|
|
(21,701
|
)
|
|
|
(16,627
|
)
|
|
|
(2,532
|
)
|
Income (losses) per share attributable to UTime Limited (1)
|
|
|
0.76
|
|
|
|
(4.14
|
)
|
|
|
(2.49
|
)
|
|
|
(4.81
|
)
|
|
|
(3.68
|
)
|
|
|
(0.56
|
)
|
Weighted average common stock outstanding (1)
|
|
|
4,380,000
|
|
|
|
4,380,000
|
|
|
|
4,380,000
|
|
|
|
4,507,223
|
|
|
|
4,517,793
|
|
|
|
4,517,793
|
|
(1)
|
Income
(losses) per share is calculated by dividing net income attributable to the equity holders
of our company by the weighted average number of ordinary shares outstanding during each
of the periods reported. The weighted average ordinary shares outstanding for the fiscal
years ended March 31, 2017, 2018, 2019, 2020 and 2021 have been retrospectively adjusted
to reflect the repurchase of 7,859,721 ordinary shares on April 29, 2020 as part of the reorganization
of the Company.
|
|
|
As of March 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
7,155
|
|
|
|
7,408
|
|
|
|
554
|
|
|
|
8,977
|
|
|
|
1,366
|
|
Working deficit
|
|
|
(21,990
|
)
|
|
|
(26,025
|
)
|
|
|
(4,030
|
)
|
|
|
(17,289
|
)
|
|
|
(2,631
|
)
|
Total assets
|
|
|
230,594
|
|
|
|
188,160
|
|
|
|
168,118
|
|
|
|
173,581
|
|
|
|
26,414
|
|
Total liabilities
|
|
|
199,887
|
|
|
|
170,882
|
|
|
|
128,181
|
|
|
|
148,403
|
|
|
|
22,583
|
|
Total shareholders’ equity
|
|
|
30,707
|
|
|
|
17,278
|
|
|
|
39,937
|
|
|
|
25,178
|
|
|
|
3,831
|
|
3.B.
Capitalization and Indebtedness
Not
Applicable.
3.C.
Reasons For The Offer And Use Of Proceeds
Not
Applicable.
3.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 and Industry
We
have incurred significant losses and we may continue to experience losses in the future.
We
have incurred significant losses in the past. In fiscal year 2020 and 2021, respectively, we had losses from operations of RMB19.7 million
and RMB14.5 million (US$2.2 million), and net losses of RMB21.7 million and RMB16.6 million (US$2.5 million). We also had net cash used
by operating activities of RMB17.1 million in fiscal year 2020, and cash used in operations of RMB2.5 million (US$0.4 million) in fiscal
year 2021. We may continue to have an adverse effect on our shareholders’ equity and working capital in the future.
We
cannot assure you that we will be able to generate profits or positive cash flow from operating activities in the future. Our ability
to achieve profitability depends in large part on our ability to manage our costs and expenses. We intend to manage and control our costs
and expenses as a proportion of our total revenues, but there can be no assurance that we will achieve this goal. We may experience losses
in the future due to our continued investments in technology, talent, content and other initiatives. In addition, our ability to achieve
and sustain profitability is affected by various factors, some of which are beyond our control, such as changes in macroeconomic and
regulatory environment or competitive dynamics in the industry. Accordingly, you should not rely on our financial results of any prior
period as an indication of our future performance.
We
may need to raise additional capital or obtain loans from financial institutions from time to time and our operations could be curtailed
if we are unable to obtain the required additional funding when needed. We may not be able to do so when necessary, and/or the terms
of any financings may not be advantageous to us.
As
of the fiscal year ended March 31, 2020 and 2021, respectively, we had accumulated deficit of RMB32.8 million and RMB49.4 million (US$7.5
million). Due to our accumulated deficit, we may need to obtain additional funding from outside sources, including from the sales of
our securities, grants or other forms of financing. Our accumulated deficit increases the difficulty in completing such sales or securing
alternative sources of funding, and there can be no assurances that we will be able to obtain such funding on favorable terms or at all.
If we are unable to obtain sufficient financing from the sale of our securities or from alternative sources, we may be required to reduce,
defer or discontinue certain of our research and development and operating activities or we may not be able to continue as a going concern.
If we cannot continue as a going concern, our shareholders may lose their entire investment in our ordinary shares. Future reports from
our independent registered public accounting firm may contain statements expressing doubt about our ability to continue as a going concern.
We
generate a significant portion of our net revenues from a small number of major customers and key projects and any loss of business from
these customers or key projects could reduce our net revenues and significantly harm our business.
We
have derived, and believe that in the foreseeable future we will continue to derive, a significant portion of our net revenues from a
small number of major customers and key projects. Our top three customers in fiscal year 2020 accounted for approximately 57.3%, 9.6%
and 6.0% of our net revenues in fiscal year 2020. For the year ended March 31, 2021, our top three customers accounted for approximately
41.3%, 6.8% and 6.3% of our net revenues.
Our
ability to maintain close relationships with our major customers is essential to the growth and profitability of our business. However,
the volume of work performed for a specific customer is likely to vary from year-to-year and project-to-project, especially since we
are generally not the exclusive service solutions provider for our customers, some of our customers have in-house research and development
capabilities, and we do not have long-term purchase commitments from any of our customers. A major customer in one year may not provide
the same level of net revenues for us in any subsequent year. The products we provide to our customers, and the net revenues and income
from those products, may decline or vary as the type and quantity of products changes over time. In addition, reliance on any individual
customer for a significant portion of our net revenues may give that customer a degree of pricing leverage when negotiating contracts
and terms of service with us.
In
addition, a number of factors not within our control could cause the loss of, or reduction in, business or revenues from any customer,
and these factors are not predictable. These factors include, among others, a customer’s decision to re-negotiate the royalty payment
of a contract if the volume of unit sales exceeds original expectations, pricing pressure from competitors, a change in a customer’s
business strategy, or failure of a mobile chipset manufacturer or mobile device OEM to develop competitive products. Our customers may
also choose to pursue alternative technologies and develop alternative products in addition to, or in lieu of, our products, either on
their own or in collaboration with others, including our competitors. The loss of any major customer or key project, or a significant
decrease in the volume of customer demand or the price at which we sell our products to customers, could materially adversely affect
our financial condition and results of operations.
The
outbreak of the coronavirus in China, India and across the world may have a material adverse effect on our business.
Our
business could be materially and adversely affected by the outbreak of the Coronavirus Disease 2019 (“COVID-19” or the “coronavirus”),
or the coronavirus, in China. On January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public Health
Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help
mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain
types of public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have
an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates.
Our
headquarters (Shenzhen) and our factory (Guizhou) are located in China where the coronavirus originated. The World Health Organization
has declared the coronavirus outbreak in China a public health emergency of international concern. As this virus is transmitted between
humans, the Chinese government has imposed travel restrictions in certain parts of the country and several businesses operating in China
have scaled back operations. The development of the coronavirus outbreak could materially disrupt our business and operations, slow down
the overall economy, curtail consumer spending, interrupt our sources of supply, and make it difficult to adequately staff our operations.
As a result, our operating results, financial condition and cash flows could be materially adversely impacted.
The
coronavirus is impacting several areas of the world, including Asia and the United States. Many factories in China closed during February
2020 at the mandate of the Chinese government and did not reopen until March 2020. This has impacted the manufacturing productivity of
our factories as well as those of our suppliers, and therefore the amount of inventory we receive and can ship to customers. We are hopeful
that all operations will return to normal as soon as possible. We are doing everything we can to keep customer production running and
to keep things as smooth and stable as possible. However, the coronavirus could negatively impact our sales performance, depending on
the duration and severity of the coronavirus’ impact on the operations of our vendors and suppliers, as well as our ability to
restore production to normal levels.
The
impact of COVID-19 on our business, financial condition, and results of operations include, but are not limited to, the following:
|
●
|
We
temporarily closed our offices and manufacturing facility and implemented a work from-home policy beginning in February 2020, as required
by relevant PRC regulatory authorities. Our manufacturing facility in Guizhou was allowed to reopen on February 14, 2020 by the local
government. From mid-February until mid-April, our PRC office and factory have reopened on a limited, transitional basis. Although our
PRC office and factory have since become fully operational, in connection with the temporary PRC closures and lingering effects of the
pandemic since the country has reopened, we implemented a series of cost control procedures, including cutting approximately 45 redundant
workers, rescheduling office hours and increasing employees’ unpaid leave to maintain our cash position and cash flow.
|
|
●
|
On
March 24, 2020, the Indian government ordered a 21-day nationwide lockdown, followed by another order on April 14, 2020 and which was
extended until May 31, 2020 with numerous relaxations which inter alia permitted opening of businesses and offices with certain restrictions.
On May 30, 2020, the Indian government further extended the lockdown in specific areas identified as “containment zones”
until June 30, 2020 and permitted the re-opening of the economy in a phased manner in areas outside the containment zones. The Indian
Ministry of Home Affairs announced that from July 1, 2020 to July 30, 2020, lockdown measures were only imposed in containment zones.
In all other areas, most activities were permitted. From August 1, 2020, night curfews were removed and all inter-and intra-state travel
and transportation was permitted. However, the respective state/union territory governments have been empowered to prohibit activities
in areas outside containment zones or impose such restrictions as deemed necessary to contain the spread of COVID-19, which has slowed
down the rate of resumption of business activities. Due to the lockdown, our operations in India were halted for several weeks. Since
May 11, 2020, we resumed our sales operations in various parts of India (except those falling under containment zones). While the Indian
government lifted the lockdown throughout India and took requisite steps to bring back the Indian economy on track in early 2021, a second
larger outbreak of COVID-19 occurred in India in March 2021. To curb the spread of the virus, various state governments have announced
lockdowns and imposed curbs on movement and economic activities of different time periods. The lockdown in the capital of India, Delhi has been lifted to a large
extent. While the governments of each affected state have commenced easing the lockdown restrictions, the same may be extended or made
stringent to control the spread of COVID-19.
Such restrictions on continued business activities will have a detrimental impact on our business in India.
|
|
●
|
During
March 2020 through June 2020, due to the pandemic outbreak in China and subsequently the national lockdown in India, our business operations,
especially sales and marketing in India, were reduced significantly. During the fiscal year 2021, revenue generated from Do Mobile decreased
approximately RMB11.7 million or 66% compared to the fiscal year 2020. Total Do Mobile shipments were only 107,848 units during the period,
representing a decrease of approximately 62.5% from the fiscal year 2020, and we realized only about 38% of our forecasted sales plan.
We estimate that total revenue loss from Do Mobile was between RMB5 million (US$0.8 million) to RMB7 million (US$1.1 million) in the
2021 calendar year.
|
|
●
|
Our
logistics channels have been negatively impacted by the outbreak, which may delay our products delivery. As a result, our revenue and
account receivables outside of India has been negatively impacted in fiscal year 2021. Some of our orders have been delayed due to nationwide
lockdowns in Mainland China, Europe, the United States, South America and Africa. However, to date, none of these orders have been returned
or cancelled. We had no delayed orders excluding India before October 2020. However, from October 2020 to April 2021, delayed orders
started to increase again due to the worsened situation relating to COVID-19 outside China. Although we had approximately US$1.2 million
orders delayed by COVID-19 as of early April 2021, we have managed to complete all of them and we have no additional orders delayed by
COVID-19 as of the date of this report.
|
|
●
|
Some
of our customers have been and could continue to be negatively impacted by the outbreak, which may reduce their orders. Our customers
may reduce their future purchases from us if they are not able to complete the manufacture of their products due to the shortage of components
from other suppliers. Although to date, none of our customers have terminated contracts with us, our revenue and income has been and
may continue to be negatively impacted.
|
|
●
|
The
situation may worsen if the COVID-19 outbreak continues. Certain of our customers have requested, and additional customers may request,
additional time to pay us or fail to pay us on time, or at all, which may require us to record additional allowances. We are currently
working with customers on finalizing payment schedules and have not experienced significant collection issues so far. We will continue
to closely monitor our collections throughout 2021.
|
|
●
|
The
global stock markets have experienced, and may continue to experience, significant decline from the COVID-19 outbreak. It is possible
that the price of our ordinary shares will decline significantly after the date of this report, in which case you may lose your investment.
|
We
depend on third party service providers for logistics and aftersales services, and any failure of our third party service providers to
perform may have a material negative impact on our business.
We
outsource all of our transportation and logistics services, as well as after-sale services, for our products to third-party service providers.
We rely on these outsourcing partners to bring our products to our customers and provide after sale services. While these arrangements
allow us to focus on our main business, they also reduce our direct control over the logistics and aftersales services provided to our
customers. Any failure of our logistics partners to perform may have a material negative impact on the timely delivery of our products
and customer satisfaction. In addition, logistics in our primary locations or transit to final destinations may be disrupted for a variety
of reasons including, natural and man-made disasters, information technology system failures, commercial disputes, military actions or
economic, business, labor, environmental, public health, or political issues. We may also be unable to pass any increase in logistics
costs to our customers. Errors that occur in product maintenance processes can compromise our products and services, adversely affect
customer experience, and harm our business.
We
rely on outsourcing manufacturers to produce a majority of our products. If we encounter issues with them, our business and results of
operations could be materially and adversely affected.
We
rely on outsourcing manufacturers to produce a majority of our products. However, the volume of orders designated to a specific manufacturer
is likely to vary from year-to-year and project-to-project, especially since we generally do not enter into exclusive relationship with
the manufacturers and we do not have long-term or fixed-term purchase commitments with any of our outsourcing manufacturers. A major
manufacturer in one year may not provide the same amount of products to us in any subsequent year. The products each manufacturer supplies
us may decline or vary our customer orders change over time. Additionally, our contracts with these manufacturers can be terminated at
any time. Therefore, we may not be able to maintain a long-term cooperative relationship with our outsourcing manufacturers for our existing
products. We may also experience operational difficulties with our outsourcing manufacturers, including reductions in the availability
of production capacity, failure to comply with product specifications, insufficient quality control, failure to meet production deadlines,
increases in manufacturing costs and longer lead time. Our outsourcing manufacturers may experience disruptions in their manufacturing
operations due to equipment breakdowns, labor strikes or shortages, natural disasters, component or material shortages, cost increases,
violation of environmental, health or safety laws and regulations, or other problems. We may be unable to pass the cost increases to
our customers. We may have disputes with our outsourcing manufacturers, which may result in litigation expenses, divert our management’s
attention and cause supply shortages to us. In addition, we may not be able to identify outsourcing manufacturers who are capable of
producing new products we target to launch in the future.
Our
expansion into new product categories and scenarios, and substantial increases in product lines may expose us to new challenges and more
risks.
We
strive to continue to expand and diversify our product offerings to cover additional scenarios in the mobile or IoT era. Expanding into
new product categories and scenarios outside of the mobile phone and accessories category, such as to wearable devices, speakers and
related consumer electronics and substantially increasing our product lines involve new risks and challenges. Our potential lack of familiarity
with new products and scenarios and the lack of relevant customer data relating to these products may make it more difficult for us to
anticipate user demand and preferences. We may misjudge market demand, resulting in inventory buildup and possible inventory write-downs.
We may not be able to effectively control our costs and expenses in rolling out these new product categories and scenarios. We may have
certain quality issues and experience higher return rates on new products, receive more customer complaints and face costly product liability
claims, such as injury allegedly or actually caused by our products, which would harm our brand and reputation as well as our financial
performance.
Furthermore,
we may need to price our new products more aggressively to penetrate new markets, and gain market share or remain competitive. It may
be difficult for us to achieve profitability in the new product categories and our profit margin, if any, may be lower than we anticipate,
which would adversely affect our overall profitability and results of operations.
Our
international expansion is subject to a variety of costs and risks and we may not be successful, which could adversely affect our profitability
and operating results.
We
intend to expand or enter into new geographic markets, such as the United States and Canada, where we have limited or no experience in
marketing, selling our products and deploying our services. International expansion has required and will continue to require us to invest
significant capital and other resources and our efforts may not be successful. Our expansion may be subject to risks such as: brand awareness,
sales and distribution network, differences in customer preference, political and economic instability, trade restrictions, difficulties
in forming and managing local staff and teams, lesser degrees of intellectual property protection.
The
occurrence of any of these risks could negatively affect our international business and consequently our business and operating results.
In addition, the concern over these risks may also prevent us from entering into or releasing certain of our products in certain markets.
Our
use of open source software could materially adversely affect our business, financial condition, operating results and cash flow.
Certain
of our technology and our suppliers’ technology may contain or may be derived from “open source” software, which, under
certain open source licenses, may offer accessibility to a portion of a product’s source code and may expose related intellectual
property to adverse licensing conditions. Licensing of such technology may impose certain obligations on us if we were to distribute
derivative works of the open source software. For example, these obligations may require us to make source code for derivative works
available or license such derivative works under a particular type of license that is different from what we customarily use to license
our technology. While we believe we have taken appropriate steps and employ adequate controls to protect our intellectual property rights,
our use of open source software presents risks that, if we inappropriately use open source software, we may be required to reengineer
our technology, discontinue the sale of our technology, release the source code of our proprietary technology to the public at no cost
or take other remedial actions, which could adversely affect our business, operating results and financial condition. There is a risk
that open source licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize
our products or solutions, which could adversely affect our business, operating results and financial condition.
We
operate in a rapidly evolving industry. If we fail to keep up with technological developments and changing requirements of our customers,
business, financial condition and results of operations may be materially and adversely affected.
The
mobile industry is rapidly evolving and subject to continuous technological developments. Our success depends on our ability to keep
up with these technological developments and the resulting changes in customers’ demands. There may also be changes in the industry
landscape as different types of platforms compete with one another for market share. If we do not adapt our software and service platform
solutions to such changes in an effective and timely manner as more mobile operating system platforms become available in the future,
we may suffer a loss in market share. Given that we operate in a rapidly evolving industry, we also need to continuously invest significant
resources in research and development in order to enhance our existing products and to respond to changes in customer preference, new
challenges and industry changes in a timely and effective manner. If we fail to keep up with technological developments and continue
to innovate to meet the needs of our customers, our software and service platform solutions may become less attractive to customers,
which in turn may adversely affect our reputation, competitiveness, results of operations and prospects.
We
face intense competition from onshore and offshore third party software providers in the mobile phone market, and, if we are unable to
compete effectively, we may lose customers and our revenues may decline. The lack of technological development and increase in competition
may lead to a decline in our sustainable growth.
The
mobile phone market is highly fragmented and competitive, and we expect competition to persist and intensify from both existing competitors
and new market entrants. We believe that the principal competitive factors in our industry are reliability and efficiency, performance,
product features and functionality, development complexity and time-to-market, price, support for multiple architectures and processors,
interoperability with other systems, support for emerging industry and customer standards and protocols and levels of training, technical
services and customer support.
The
market in which we operate is highly competitive and is subject to frequent changes due to technological improvements and advancements,
availability of new and alternative services and frequently changing client preferences and demands. Our ability to anticipate changes
in technology and regulatory standards and to develop and introduce new and enhanced products successfully on a timely basis will be
a significant factor in our ability to grow and to remain competitive. The development and acquisition of technology requires substantial
investments, and we cannot guarantee that we will be able to achieve the technological advances that may be necessary for us to remain
competitive. If we fail to update the technology used in their handsets, it will be challenging for us to experience sustained growth
in both existing and new markets and consequently, we may lose our market share and revenue.
We
may undertake acquisitions, investments, joint ventures or other strategic alliances in the future, which could expose us to new operational,
regulatory and market risks. In addition, such future undertakings may not be successful, which may adversely affect our business, results
of operations, financial condition and prospects.
We
intend to grow both organically by expanding our current business lines and geographic coverage and through acquisitions, investments,
joint ventures or other strategic alliances if the appropriate opportunities arise. These potential business plans, acquisitions, investments,
joint ventures and strategic alliances may expose us to new operational, regulatory and market risks, as well as risks associated with
additional capital requirements. In addition, we may not be able to identify suitable future acquisition or investment candidates or
joint venture or alliance partners. Even if we identify suitable candidates or partners, we may be unable to complete an acquisition,
investment or alliance on terms commercially acceptable to us. If we fail to identify appropriate candidates or partners, or complete
desired acquisitions, investments or alliances, we may not be able to implement our strategies effectively or efficiently.
In
addition, our ability to successfully integrate acquired companies and their operations may be adversely affected by a number of factors,
including, among others, the ability to capitalize on anticipated synergies, diversion of resources and management’s attention,
difficulties in retaining personnel of the acquired companies, unanticipated problems or legal liabilities and tax and accounting issues.
If we fail to integrate any acquired company efficiently, our earnings, revenues, gross margins, operating margins and business operations
could be adversely affected. The integration of acquired companies is a complex, time-consuming and expensive process.
Security
and privacy breaches may expose us to liability and harm our reputation and business.
As
part of our business we may receive and process information about our employees, customers and partners, and we may store (or contract
with third parties to store) our customers’ data. There are numerous laws governing privacy and the storage, sharing, use, disclosure
and protection of personally identifiable information and user data. Specifically, personally identifiable and other confidential information
is increasingly subject to legislation and regulations in numerous domestic and international jurisdictions. The regulatory framework
for privacy protection in China and worldwide, including India and the United States, is currently evolving and is likely to remain uncertain
for the foreseeable future. We could be adversely affected if legislation or regulations in China and elsewhere on the world where we
have business operations are expanded to require changes in business practices or privacy policies, or if the relevant governmental authorities
in China and elsewhere on the world where we have business operations interpret or implement their legislation or regulations in ways
that negatively affect our business, financial condition and results of operations. For example, in November 2016, China released the
Cybersecurity Law, which took effect in June 2017. The Cybersecurity Law requires network operators to perform certain functions related
to cybersecurity protection and the strengthening of network information management. For instance, under the Cybersecurity Law, network
operators of key information infrastructure, including network operators of key information infrastructures in public communications
and information industry, generally shall, during their operations in the PRC, store the personal information and important data collected
and produced within the territory of the PRC and their purchase of network products and services that may affect national securities
shall be subject to national cybersecurity review. While we take security measures relating to service platform solutions, specifically,
and our operations (including MVNO business operation), generally, those measures may not prevent security breaches that could harm our
business and we cannot assure you that the measures we have taken or will take are adequate under the Cybersecurity Law and other relevant
laws and regulations. Advances in computer capabilities, inadequate technology or facility security measures or other factors may result
in a compromise or breach of our systems and the data we store and process. Our security measures may be breached as a result of actions
by third parties or employee error or malfeasance. A party who is able to circumvent our security measures or exploit inadequacies in
our security measures, could, among other things, misappropriate proprietary information (including information about our employees,
customers and partners and our customers’ information), cause the loss or disclosure of some or all of this information, cause
interruptions in our operations or our customers’ or expose our customers to computer viruses or other disruptions or vulnerabilities.
Any compromise of our systems or the data it stores or processes could result in a loss of confidence in the security of our service
platform solutions, damage our reputation, disrupt our business, lead to legal liability and adversely affect our financial condition
and results of operations. Moreover, a compromise of our systems could remain undetected for an extended period of time, exacerbating
the impact of that compromise. Actual or perceived vulnerabilities may lead to claims against us by our customers, partners or other
third parties, which could be material. While our customer agreements typically contain provisions that seek to limit our liability,
there is no assurance these provisions will be enforceable and effective under applicable law. In addition, the cost and operational
consequences of implementing further data protection measures could be significant.
We
are vulnerable to technology infrastructure failures, which could harm our reputation and business.
We
rely on our technology infrastructure for many functions, including selling our service platform solutions, supporting our customers
and billing, collecting and making payments. We also rely on our own technology infrastructure, which is located on a third-party site,
as well as the technology infrastructure of third parties, to provide some of our back-end services. This technology infrastructure may
be vulnerable to damage or interruption from natural disasters, power loss, telecommunication failures, terrorist attacks, computer intrusions
and viruses, software errors, computer denial-of-service attacks and other events. A significant number of the systems making up this
infrastructure are not redundant, and our disaster recovery planning is not sufficient for every eventuality. This technology infrastructure
is also subject to break-ins, sabotage and intentional acts of vandalism by internal employees, contractors and third parties. Despite
any precautions we or our third-party partners may take, such problems could result in, among other consequences, interruptions in our
services and loss of data, which could harm our reputation, business and financial condition. We do not carry business interruption insurance
sufficient to protect us from all losses that may result from interruptions in our services as a result of technology infrastructure
failures or to cover all contingencies. Any interruption in the availability of our websites and on-line interactions with customers
and partners would create a large volume of questions and complaints that would need to be addressed by our support personnel. If our
support personnel cannot meet this demand, customer and partner satisfaction levels may fall, which in turn could cause additional claims,
reduced revenue, reputation damage or loss of customers.
We
may not be able to continue to use or adequately protect our intellectual property rights, which could harm our business reputation and
competitive position.
We
believe that patents, trademarks, trade secrets, copyright, software registration and other intellectual property we use are important
to our business. We rely on a combination of patent, trademark, copyright, software registration and trade secret protection laws in
China, the United States, the Philippines, Kenya and other jurisdictions, as well as confidentiality procedures and contractual provisions
to protect our intellectual property and brand name. Risks related to mis-branded counterfeit, unlawful copying can lead to security
problems, loss of consumer confidence, losing out on the brand image, reputation and goodwill. Presently, “Do Mobile” is
not a registered trademark in India. Any failure by us to maintain or protect our intellectual property rights, including any unauthorized
use of our intellectual property by third parties or use of “UTime” or “Do Mobile” as a company name to conduct
software or services business, may adversely affect our current and future revenues and our reputation.
In
addition, the validity, enforceability and scope of protection available under intellectual property laws with respect to the mobile
and Internet industries in China, where a significant part of our business and operations are located, are uncertain and still evolving.
Implementation and enforcement of PRC intellectual property-related laws have historically been deficient, ineffective and hampered by
corruption and local protectionism. Accordingly, protection of intellectual property rights in China may not be as effective as in the
United States or other countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we
may need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of
our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result
in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.
We
also may be required to enter into license agreements with certain third parties to use their intellectual property for our business
operations. If such third parties fail to perform under these license agreements or if the agreements are terminated for any reason,
our business and results of operations may be negatively impacted. Furthermore, if we are deemed to be using third parties’ intellectual
property without due authorization, we may become subject to legal proceedings or sanctions, which may be time-consuming and costly to
defend, divert management attention and resources or require us to enter into licensing agreements, which may not be available on commercial
terms, or at all.
The
international nature of our business exposes us to risks that could adversely affect our financial condition and results of operations.
We
conduct our business throughout the world in multiple locations. Our corporate structure also spans multiple jurisdictions, with our
parent company incorporated in the Cayman Islands and structured as a holding company and intermediate and operating subsidiaries incorporated
in China, Hong Kong and India. As a result, we are exposed to risks typically associated with conducting business internationally, many
of which are beyond our control. These risks include, among others:
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significant
currency fluctuations between the U.S. dollar and other currencies in which we transact business;
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difficulty
in identifying appropriate mobile chipset manufacturers, mobile device OEMs, mobile operators and/or joint venture partners, and establishing
and maintaining good relationships with them;
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legal
uncertainty owing to the overlap and inconsistencies of different legal regimes, problems in asserting contractual or other rights across
international borders and the burden and expense of complying with the laws and regulations of various jurisdictions;
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potentially
adverse tax consequences, such as scrutiny of transfer pricing arrangements by authorities in the countries in which we operate;
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adverse
effect of inflation and increase in labor costs;
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current
and future tariffs and other trade barriers, including restrictions on technology and data transfers;
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general
global economic downturn;
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unexpected
changes in political environment and regulatory requirements; and
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terrorist
attacks and other acts of violence or war.
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The
potential for war or terrorist attacks may also cause uncertainty and cause our business to suffer in ways that we cannot predict. Our
business could also be adversely affected by the outbreaks of epidemics in China and globally, such as the coronavirus which originated
in Wuhan, China at the end of 2019, Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome, or SARS, or
other epidemics. Past occurrences of epidemics have caused different degrees of damage to the national and local economies in India.
A recurrence of an outbreak of any kind of epidemic could cause a slowdown in the levels of economic activity generally, which may adversely
affect our business, financial condition and results of operations. Should major public health issues, including pandemics, arise, we
could be adversely affected by more stringent employee travel restrictions, additional limitations in freight services, governmental
actions limiting the movement of products between regions, delays in production ramps of new products and disruptions in the operations
of our component suppliers.
The
occurrence of any of these events could have a material adverse effect on our results of operations and financial condition.
Furthermore,
we are in the process of implementing policies and procedures designed to facilitate compliance with laws and regulations in various
jurisdictions applicable to us, but there can be no assurance that our employees, contractors or agents will not violate such laws and
regulations or our policies. Any such violations could, individually or in the aggregate, materially and adversely affect our financial
condition and operating results.
Inadequacy
of skilled personnel may lead to decline in sales of mobile phones by us.
Competition
in our industry for qualified employees, especially technical employees, is intense, and our competitors directly target our employees
from time to time. We have also experienced employees leaving us to start competing businesses or to join the in-house research and development
teams of our customers. The loss of the technical knowledge and industry expertise of any of these individuals could seriously impede
our success. Moreover, the loss of these individuals, particularly to a competitor, some of which are in a position to offer greater
compensation, and any resulting loss of customers or trade secrets and technological expertise could further lead to a reduction in our
market share and adversely affect our business. If we are required to increase the compensation payable to our qualified employees to
compete with certain competitors with greater resources than we have or to discourage employees from leaving us to start competing businesses,
our operating expenses will increase which, in turn, will adversely affect our results or operations.
Moreover,
our sales team plays a pivotal role in the success of the business of every organization. The unique and important role of sales is to
bridge the gap between the potential customer’s needs and the products/services that the organization offers that can fulfil their
needs. Every organization strives to have best sales team who possess skill set for understanding consumer behavior and consumer needs
and excellent communication skill. Our growth strategy places significant dependence on the experience and the continued efforts of our
sales executives. There has always been dearth of such skilled sales personnel, and we may need to incur significant expenditure for
attracting skilled sales personnel and for retaining its existing sales team. We may not be able to retain our existing sales team or
attract and recruit new sales executives in the future. This may result in drop in sale of mobile handsets and will consequently have
an adverse effect on our revenue and sustained growth.
Our
success depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely
disrupted if we lose their services.
Our
future success heavily depends upon the continued services of our senior executives and other key employees. In particular, we rely on
the expertise, experience, customer relationships and reputation of Minfei Bao, our founder, chairman and chief executive officer. We
currently do not maintain key man life insurance for any of the senior members of our management team or other key employees. If one
or more of our senior executives or key employees are unable or unwilling to continue in their present positions, it could disrupt our
business operations, and we may not be able to replace them easily or at all. In addition, competition for senior executives and key
employees in our industry is intense, and we may be unable to retain our senior executives and key employees or attract and retain new
senior executive and key employees in the future, in which case our business may be severely disrupted, and our financial condition and
results of operations may be materially and adversely affected.
If
any of our senior executives or key employees joins a competitor or forms a competing company, it may lose customers, know-how and other
key employees and staff members to them. Also, if any of our business development managers, who generally keep a close relationship with
our customers, joins a competitor or forms a competing company, we may lose customers, and our net revenues may be materially and adversely
affected. Additionally, there could be unauthorized disclosure or use of our technical knowledge, practices or procedures by such employees.
All of our executives and key employees have entered into employment agreements with us that contain non-competition provisions, non-solicitation
and nondisclosure covenants. However, if any dispute arises between our executive officers or key employees and us, such non-competition,
non-solicitation and nondisclosure provisions might not provide effective protection to us, especially in China, where most of these
executive officers and key employees reside, in light of the uncertainties with China’s legal system.
We
could be impacted by unfavorable results of legal proceedings, including the pending proceeding against Do Mobile, and may, from time
to time, be involved in future litigation in which substantial monetary damages are sought.
The
Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business, from time to time, and
new claims may arise in the future.
On
September 17, 2018, Wukai Song, the majority shareholder in Bridgetime, filed a complaint with the NCLT against Ekta Grover and Yunchuan
Li, the directors of Do Mobile at the time, alleging mismanagement of corporate affairs, embezzlement of funds and absenting themselves
from the management of Do Mobile. Further, Mr. Song sought the following relief from the NCLT:
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prevent
Ms. Grover and Mr. Li from exercising any of their powers as directors of Do Mobile;
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restrain
Ms. Grover and Mr. Li from operating the bank account of Do Mobile and restraining DBS Bank from acting on the instructions of Ms. Grover
and Mr. Li;
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permit
the company secretary of Do Mobile to carry out the daily affairs of Do Mobile, which are ordinarily carried out by the directors of
a company, until a new board of directors of Do Mobile is constituted and to file an application seeking extension of the date for holding
an annual general meeting beyond September 30, 2018;
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appoint
Mr. Amit Kumar and Mr. Huiyun Chen as interim directors of Do Mobile; and
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direct
Ms. Grover and Mr. Li, directors of Do Mobile, to hand over all documents and material related to Do Mobile in their possession, back
to Do Mobile and sign all statutory documents and filings to be made for the time period when they were acting as directors of Do Mobile.
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On
November 16, 2018 and November 15, 2018, Ms. Grover and Mr. Li, respectively, filed an answer with the NCLT. Further, on November 17,
2018, Mr. Wukai Song filed an application for interim relief seeking removal of Ms. Grover and Mr. Li from the board of directors of
Do Mobile.
On
September 30, 2019, the NCLT issued its interim order, which allowed Mr. Wukai Song to carry out certain statutory compliances of Do
Mobile, and the NCLT has also directed Ms. Grover, director of Do Mobile, to handover the digital signature of directors to Mr. Wukai
Song for carrying out said statutory compliances and undertaking its business pending resolution of the litigation.
Since
the litigation involves Ms. Ekta Grover and Mr. Li Yunchuan, who were the directors of Do Mobile, and who resigned on December 24, 2020
and March 3, 2021 respectively, such directors could no longer attend to the affairs of Do Mobile. As a result, Do Mobile did not have
an effective board and was facing significant challenges in its daily operation. For instance, Do Mobile was unable to undertake certain
corporate actions, such as: (a) convening and holding board meetings of Do Mobile as mandatorily required under the provisions of the
Companies Act, 2013 every year; (b) convening an annual general meeting where among other things, the Do Mobile shareholders approve
and adopt the financial statements of Do Mobile as required under the Companies Act, 2013; (c) reporting annual compliances with the
provisions of the Companies Act, 2013 through various e-forms with the office of the Registrar of Companies, Ministry of Corporate Affairs;
(d) submitting an annual report titled ‘Foreign Liabilities and Assets’ each year as required by companies receiving foreign
direct investment and other related compliances under Foreign Exchange Management Act, 1999; and (e) maintenance of statutory registers
as required under various applicable laws.
Do
Mobile is also a party to two other matters initiated in connection with the aforesaid matter before the NCLT. These matters, which were
filed at Tis Hazari court (district court) in Delhi, India were (i) Do Mobile Pvt. Ltd. v. DBS Bank Ltd. (civil suit no. 813/2019); and
(ii) Ekta Grover v. Do Mobile India Pvt. Ltd. (civil suit no. 917/2019).
The
above-mentioned instances of non-compliance expose Do Mobile to potential fines and penalties. Do Mobile directors and officers may also
be prosecuted for such non-compliance under the official-in-default doctrine in the Companies Act, 2013, should they fail to undertake
their statutory duties to act in the best interest of Do Mobile.
The
litigation against Ekta Grover and Yunchuan Li is still pending before
Delhi Bench of the NCLT and the matter was scheduled to be heard again on June 3, 2021. However due to the lockdown, the courts were functioning
at a limited capacity and the matter could not be taken up on the designated date. Do Mobile is awaiting intimation regarding the revised
date of hearing in this matter. In order to amicably settle such ongoing litigation between Do Mobile and its directors, Do Mobile and
director Ms. Grover have entered into a settlement agreement, dated January 16, 2020 (“Settlement Agreement”). In terms of
the Settlement Agreement, Do Mobile and Ms. Grover have arrived at the following understanding:
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Ms.
Grover has agreed to withdraw the litigation initiated by her against Do Mobile at the Tis Hazari court. She has also agreed not to file
any claim before any tribunal or court against Do Mobile and its officers in future. In furtherance of the aforesaid, Ms. Grover has
filed a withdrawal application in relation to the matter of Ekta Grover v. Do Mobile India Pvt. Ltd. (civil suit no. 917/2019) before
Tis Hazari Court, New Delhi, India, consequent to which the said matter has been disposed-off as settled/ withdrawn by the Tis Hazari
Court, Delhi, India vide its order dated February 23, 2021.
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Do
Mobile has agreed to withdraw the name of Ms. Grover from the ongoing litigation before the NCLT by filing a withdrawal application before
the NCLT. Do Mobile has also agreed that it will not file any claim against Ms. Grover pursuant to her resignation from the board of
directors of Do Mobile. Mr. Wukai Song (through his authorized representative) filed a withdrawal application before the NCLT on January
21, 2021 requesting it to permit unconditional withdrawal of the petition filed by him against Ms. Grover and Mr. Li in their capacity
as the directors of Do Mobile due to his inability to pursue the matter in light of the restrictions imposed due to the COVID-19 pandemic.
However, the NCLT has yet to pass an order allowing the application and the requested withdrawal of the petition.
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In
consideration of the settlement so arrived, Do Mobile has issued a post-dated check dated April 10, 2020 for INR 5,00,000/- (Indian Rupees
Five Lakhs Only) to Ms. Grover towards her full and final settlement of all claims against Do Mobile. However, this check could not be
en-cashed due to the lockdown. Consequently, Do Mobile issued another cheque for the same amount dated January 21, 2021 which has been
en-cashed by Ms. Ekta Grover.
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Ms.
Grover also agreed to cooperate in the appointment of new directors of Do Mobile as recommended by Do Mobile.
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Do
Mobile also agreed to change its registered office, which was situated at 3A/41, First Floor, WEA, Sat Nagar, Karol Bagh, New Delhi,
India, to another location. The registered office of Do Mobile is now located at House No. 25, Street No. 7, Goyala Vihar, Near Saint
Thomas School, New Delhi – 110071. Necessary filings with the jurisdictional Registrar of Companies have been made in this regard
by Do Mobile.
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The
matter of Do Mobile Pvt. Ltd. v. DBS Bank Ltd. (civil suit no. 813/2019) was initiated by Mr. Li in the Tis Hazari district court to
seek revival of the authority granted to him and Ms. Grover to operate the bank account of Do Mobile. Since the dispute regarding the
powers of Mr. Li and Ms. Grover in their capacity as directors of Do Mobile was pending before the NCLT, the district court refused to
grant any interim relief to the then directors of Do Mobile. An application seeking withdrawal of the matter was filed by Do Mobile on
April 1, 2021. At present, the matter is pending before the Tis Hazari district court and will be heard next on September 22, 2021. The
court is yet to pass an order allowing the application requesting withdrawal of the suit.
Since
the litigation commenced, all major decisions for Do Mobile have been made by the Company’s group headquarters in Shenzhen, China.
Such decisions include those relating to the type and quantum of products to be released in the market. Furthermore, all sales are being
made and the marketing strategy for Do Mobile is being formulated from the corporate headquarter in Shenzhen, China. However, Do Mobile
is making its own decisions relating to customer acquisition, recruitment of sales forces and office administration.
In
order to avoid operational challenges in Do Mobile on account of ongoing litigation at the NCLT, the Company nominated the following
persons to manage the daily operations of Do Mobile:
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Andy
Liu, Vice President of Overseas Department at UTime SZ, managed daily external affairs related to clients, vendors, products, sales &
purchase, marketing, business development, etc. from October 2019 until his resignation in August 2020. Since Mr. Liu’s resignation,
Mr. Wukai Song has been managing these affairs at Do Mobile.
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Wukai
Song manages daily internal affairs related to finance, human resource, office administration, etc.
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Do
Mobile has also appointed another officer in India, Tarun Garg, to manage the banking and accounting operations of Do Mobile, as its
Finance Head with effect from July 2020. He is working in close coordination with Shibin Yu, Chief Financial Officer of the Company,
and Wendy Long, an accountant from corporate headquarters in Shenzhen, China. In addition to this, Tarun Garg is also assisting Wukai
Song in relation to day-to-day operations of the Do Mobile in India.
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In
order to avoid operational challenges due to the on-going litigation in the NCLT, effective December 12, 2020, Do Mobile appointed two
new directors on its board, Mr. Song and Aayushi Gautam. At present, the board of Do Mobile consists of two directors, Mr. Song and Ms.
Gautam. Ms. Grover and Mr. Li both have resigned from their directorship in Do Mobile with effect from December 24, 2020 and March 3,
2021 respectively. Further, one share of Do Mobile which was held by Ms. Grover has been transferred by her to Ms. Aayushi Gautam. Do
Mobile has also appointed Mr. Tarun Garg as its Finance Head, effective in July 2020. As a result of the constitution of a new board
of directors, Do Mobile has been able to overcome its operational challenges.
On
August 24, 2018, UTime GZ submitted an arbitration against Guizhou Nianfu Supply Chain Management Co., Ltd. (“Nianfu GZ”),
alleging Nianfu GZ defaulted payment of RMB7,428,592.35 (US$1.1 million) under certain supply chain service agreement between UTime GZ
and Nianfu GZ (No. GZNF-GZLD2017-386, the “Service Agreement”), and seeking compensation losses. On July 24, 2019, a judgment
was rendered awarding that (i) Nianfu GZ shall pay RMB1,748,689.70 (US$0.3 million) for the balance for goods to UTime GZ; and (ii) Nianfu
GZ shall pay UTime GZ the property preservation fees and legal fees of RMB18,728.70 (US$2,850.1) in total. This judgment has taken effect
and UTime GZ has received the amount of RMB1,816,621.90 (US$0.3 million) on September 23, 2019. On August 14, 2019, UTime GZ has submitted
a new arbitration against Nianfu GZ at Shenzhen Court of International Arbitration (“SCIA”), mainly because our management
was not satisfied with the amount of the compensation awarded by the SCIA, seeking termination of the Service Agreement and the payment
of RMB5,932,637.83 (US$0.9 million) by Nianfu GZ under the Service Agreement. The new arbitration application was accepted by SCIA on
September 3, 2019 and the tribunal heard the case on November 14, 2019. On March 16, 2020, a new judgment was rendered by the arbitration
tribunal awarding that the Service Agreement shall be terminated and Nianfu GZ shall pay RMB5,679,902.65 (US$0.9 million) to UTime GZ.
The new judgment has taken effect and on June 19, 2020, UTime GZ has received the amount of RMB5,820,000.00 (US$0.9 million) including
the arbitration fee and attorney’s fee.
On
August 23, 2018, UTime SZ submitted an arbitration against Shenzhen Nianfu Supply Chain Management Co., Ltd. (“Nianfu SZ”),
alleging Nianfu SZ defaulted on payment of RMB1,913,616.60 (US$0.3 million) under certain supply chain service agreement between UTime
SZ and Nianfu SZ, seeking compensation losses. On March 29, 2019, SCIA issued the Correspondence No. Hua Nan Guo Zhong Shen Fa [2019]
D3704 stating that the arbitration tribunal decided to suspend the case (No. SHEN DX20180565) from March 29, 2019, due to the fact that
Nianfu SZ was going through the bankruptcy proceedings and the time for resuming the arbitration procedure shall be notified by the arbitration
tribunal separately. On June 24, 2020, UTime SZ has withdrawn the case (No. SHEN DX20180565) from the SCIA.
Regardless
of the merit of particular claims, litigation may be expensive, time consuming, disruptive to our operations and distracting to management.
For instance, if such litigation against Do Mobile stays pending, there will be no effective board of Do Mobile, which may lead to serious
complications for Do Mobile. Continued non-compliance may impact Do Mobile’s operations negatively, which could result in the imposition
of substantial penalties by the government and lead to prosecution of our management. Therefore, our business operations could be negatively
impacted by unfavorable results of legal proceedings.
In
addition, we may from time to time be involved in future litigation in which substantial monetary damages are sought. Litigation claims
may relate to intellectual property, contracts, employment, securities and other matters arising out of the conduct of our current and
past business activities. Any claims, whether with or without merit, could be time consuming, expensive to defend and could divert management’s
attention and resources. We may maintain insurance against some, but not all, of these potential claims, and the levels of insurance
we do maintain may not be adequate to fully cover any and all losses. Nonetheless, the results of any future litigation or claims are
inherently unpredictable, and such outcomes could have a material adverse effect on our results of operations, cash from operating activities
or financial condition.
Compromised
product quality of our mobile products may damage our brand and reputation of and customers could stop using our mobile handsets.
Quality
of any product plays a vital role towards its demand and any failure to maintain quality standards may impact sales and revenues. Much
of the mobile products we sell, for instance, the mobile handsets sold by Do Mobile, are being manufactured by third party vendors. Though
we conduct frequent vendor inspections in an effort to ensure that these vendors adhere to our prescribed quality standards; however,
there remains an element of risk about the quality of mobile handsets as we cannot guarantee that our inspections will capture all existing
or latent defects. Our inability to maintain the quality of our products, may materially impact our reputation and business.
We
may not be able to successfully sustain our growth strategy into new geographic markets and innovative consumer electronic products.
Inability to effectively manage growth, our current and planned resources and related issues could materially and adversely affect our
business of and impact future financial performance.
We
have experienced rapid growth since we commenced operations. Our rapid expansion may expose us to new challenges and risks. Currently
we are not involved in any other business vertical and are solely dependent upon revenue from its mobile handset business. In the event,
our mobile handset vertical becomes vulnerable due to any unforeseen circumstance or we become unable to successfully augment our existing
business of sale of mobile handsets, then our business and financial condition could material adverse effect. Even if we introduce any
new service or product as a part of its business operations, it may take time to establish in a highly competitive Asian market, hence,
there can be no assurance that we will be able to achieve its intended return on investments.
A
further principal component of our growth strategy is to expand the geographical scope of our business. This growth strategy will require
deployment of additional funds and resources, continued expansion and enhancement of our infrastructure and technology, improvement of
our operational and financial systems and controls, and will also entail procuring additional approvals, permissions and licenses from
regulatory authorities. This will put strain on our funds position and there will always be a requirement of infusion of additional capital.
For example, we currently manage all of our human resources functions with a traditional and basic system and expect that we will need
to upgrade our current system as we continue to increase our headcount. We also need to expand, train and manage our growing employee
base. In addition, our management will be required to obtain, maintain or expand relationships with mobile chipset manufacturers, mobile
device OEMs and mobile operators, as well as other third-party business partners. We cannot assure you that our current and planned personnel,
infrastructure, systems, procedures and controls will be adequate to support our expanding operations. As we enter new markets, such
expansion may subject us to various challenges, including those relating to our lack of familiarity with the culture, legal regulations
and economic conditions of the new regions, difficulties in selection and appointment of distributors, display centers, staffing and
managing such operations. The risks involved in entering new geographical markets may be higher than expected, and we may face significant
competition in such markets. By expanding into new markets, we may be exposed to significant liabilities and could lose some or all of
our investment in such regions. If we fail to manage our expansion effectively, our business, results of operations and prospects may
be materially and adversely affected. Any delay or non-availability of additional capital will also impact our growth curve and may lead
to stagnation and loss of business.
Continuous
expansion also involves challenges relating to recruitment, training and retention of human resources of caliber. Failure to train and
retain employees may result in attrition, which will put pressure on us for recruitment, which may also lead to increased human resource
costs, which may also impact our financial position.
We
are dependent on raw materials and mobile device components from off shore entities and from local markets, and an increase in their
cost could have an adverse effect on our business.
The
stability or variability in the prices of materials or components depends on various factors which could have an adverse effect on our
business and accordingly, a major fluctuation should not be ruled out in the future. Several components used in handsets sold by us are
sourced from offshore companies, primarily from China. The price and availability of the materials or components depends on several factors
beyond our control, including supplier’s preferability, overall economic conditions, production levels, market demand for such
material, production and transportation cost, duties, taxes and trade restrictions. Any impact on supply of components for any reason
whatsoever will have direct impact on our business.
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
have entered into a number of transactions with related parties, including
our significant shareholders and directors. For example, we have entered into several transactions with persons or our Chief Executive
Officer, Minfei Bao, where we borrowed funds from him for additional working capital demand. See “Item 7. Major Shareholders And
Related Party Transactions — B. Related Party Transactions — Loans from Mr. Bao”. 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 that these transactions were in our best interests, we cannot assure you that these transactions
were entered into on terms as favorable to us as those that could have been obtained in an arms-length transaction. We may also engage
in transactions with related parties in the future. 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.
We
may be adversely affected by product liability exposure claims.
We
face an inherent business risk of exposure to product liability claims in the event that our products fail to perform to their specifications.
In case of any product liability claim, we may need to incur significant expenditure in defending any such claims. We may incur losses
relating to these claims or the defense of these claims.
We
may also be required to participate in recalls involving our mobile products, if any prove to be defective, or we may voluntarily initiate
a recall or make payments related to such claims as a result of various industry or business practices or the need to maintain good customer
relationships. Such a recall would result in a diversion of resources. Where defective designs or defective components parts cause significant
bodily damage or injury, our liability risks will increase.
We
do not maintain product liability insurance, and to the extent we do obtain such insurance in the future, we cannot assure investors
that it will be sufficient to cover all product liability claims, that such claims will not exceed our insurance coverage limits or that
such insurance will continue to be available on commercially reasonable terms, if at all. Any product liability claim brought against
us could have a material adverse effect on the results of our operations.
Our
management and auditors identified material weaknesses in our internal control over financial reporting that, if not properly remediated,
could result in material misstatements in our consolidated financial statements that could cause investors to lose confidence in our
reported financial information and have a negative effect on the trading price of our ordinary shares.
Neither
we nor BDO China Shu Lun Pan Certified Public Accountants LLP (“BDO
China”), our independent registered public accounting firm, has performed a comprehensive assessment of our internal control over
financial reporting, as defined by the standards of the PCAOB, for purposes of identifying and reporting material weaknesses and other
control deficiencies. We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act and therefore are not required
to assess the effectiveness of our internal control over financial reporting. Further, BDO China has not been engaged to express, nor
has it expressed, an opinion on the effectiveness of our internal control over financial reporting. In connection with its audits of our
consolidated financial statements as of, and for the year ended, March 31, 2021, BDO China identified certain errors relating to accounts
and disclosures, in the aggregate, material to the consolidated financial statements. The Company has reflected all material proposed
adjustments and disclosures in its financial statements.
The
material weaknesses identified related to (i) our lack of sufficient qualified financial reporting and accounting personnel with an appropriate
knowledge under accounting principles generally accepted in the United States (“U.S. GAAP”), and (ii) our lack of comprehensive
accounting policies and procedures manual in accordance with U.S. GAAP. We are taking remedial measures to improve the effectiveness
of our controls, including by hiring additional accounting and finance personnel and by seeking to engage an outside consultant. The
existence of material weaknesses is an indication that there is a more than remote likelihood that a material misstatement of our financial
statements will not be prevented or detected in a future period, and the process of designing and implementing effective internal controls
and procedures will be a continual effort that may require us to expend significant resources to establish and maintain a system of controls
that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures we take will be sufficient
to remediate the material weaknesses identified by our management and BDO China or that we will implement and maintain adequate controls
over our financial processes and reporting in the future in order to avoid additional material weaknesses or controlled deficiencies
in our internal control over financing reporting. If our remediation efforts are not successful or other material weaknesses or control
deficiencies occur in the future, we may be unable to report our financial results accurately or on a timely basis, which could cause
our reported financial results to be materially misstated and result in the loss of investor confidence and cause the trading price of
our ordinary shares to decline. Moreover, ineffective controls could significantly hinder our ability to prevent fraud.
Our
internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able
to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.
Prior
to our initial public offering in April 2021, we were a private company with limited accounting personnel and other resources with which
to address our internal controls and procedures. We will be in a continuing process of developing, establishing, and maintaining internal
controls and procedures that will allow our management to report on, and our independent registered public accounting firm to attest
to, our internal controls over financial reporting if and when required to do so under Section 404 of the Sarbanes-Oxley Act. Although
our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial
reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act until the date we are no longer an emerging growth company and neither
a large accelerated filer nor an accelerated filer, our management will be required to report on our internal controls over financial
reporting under Section 404 of the Sarbanes-Oxley Act. If we fail to achieve and maintain the adequacy of our internal controls, we would
not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section
404 of the Sarbanes-Oxley Act. At such time, our independent registered public accounting firm may issue a report that is adverse in
the event it is not satisfied with the level at which our controls are documented, designed or operating. Moreover, our testing, or the
subsequent testing by our independent registered public accounting firm, may reveal other material weaknesses or that the material weaknesses
described above have not been fully remediated. If we do not remediate the material weaknesses described above, or if other material
weaknesses are identified or we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner,
our reported financial results could be materially misstated or could subsequently require restatement, we could receive an adverse opinion
regarding our internal controls over financial reporting from our independent registered public accounting firm and we could be subject
to investigations or sanctions by regulatory authorities, which would require additional financial and management resources, and the
market price of our ordinary shares could decline.
We
are subject to various anti-corruption and anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, and U.K., PRC and Indian
anti-corruption and anti-bribery laws; any determination that we have violated such laws could damage our business and reputation, limit
our ability to bid for certain business opportunities, and subject us to significant criminal and civil penalties, civil litigation (such
as shareholder derivative suits), and commercial liabilities.
We
are subject to anti-corruption and anti-bribery laws in the United States, United Kingdom, China, and India that prohibit certain improper
payments made directly or indirectly to government departments, agencies, and instrumentalities; officials of those government departments,
agencies, and instrumentalities; political parties and their officials; candidates for political office; officials of public international
organizations; persons acting on behalf of the foregoing; and commercial counterparties. These laws include the U.S. Foreign Corrupt
Practices Act, the PRC Criminal Law, the PRC Anti-Unfair Competition Law, the Prevention of Corruption Act 1988 of India, the Indian
Penal Code, 1860, the Prevention of Money Laundering Act, 2002 and anti-corruption laws in various Indian states.
We
are engaged in business in a number of countries that are regarded as posing significant risks of corruption. Of particular note, we
conduct operations, have agreements with state-controlled enterprises and other third parties and make sales in the PRC, and we have
research and development activities in India, each of which may be exposed to corruption risk. It is our policy to implement safeguards
and procedures to prohibit these practices by our employees, officers, directors, or by third parties acting on our behalf. However,
we cannot rule out the risk that any of our employees, officers, directors, or third parties acting on our behalf may engage in breaches
of our policies or anti-corruption laws, for which we might be held responsible.
Allegations
of violations of these anti-corruption and anti-bribery laws, and investigation into such allegations, could negatively affect our reputation,
business, operating results, and financial condition. The violation of these laws may result in substantial monetary and even criminal
sanctions, follow-on civil litigation (such as shareholder derivative suits), and monitoring of our compliance program by the United
States or other governments, each of which could negatively affect our reputation, business, operating results, and financial condition.
In addition, the United States or other governments may seek to hold us liable for violations of these laws committed by companies in
which we invest or acquire.
The
agreements governing the loan facilities we currently have contain restrictions and limitations that could significantly affect our ability
to operate our business, raise capital, as well as significantly affect our liquidity, and therefore could adversely affect our results
of operations.
We
have incurred certain indebtedness under loan facilities with various lenders including Shenzhen Rural Commercial Bank (“SRCB”)
and CRBZ.
Covenants
governing our loan facilities with SRCB and CRBZ restrict, among other things, our ability to:
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incur
or permit to exist any additional indebtedness;
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guarantee
or otherwise become liable with respect to the obligations of another party or entity;
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acquire
any assets, except in the ordinary course of business, or make any investments;
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use
the loan hereunder for investment in fixed assets or equity, or for investment in securities or futures market; and
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complete
a merger, division, transfer of equity and creditor’s rights, external investment, material increase of debt financing, or a sale
of all or substantially all of our assets.
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Historically, we have been subject to certain financial covenants from
our lenders. Before we paid off our loan from CCB, our credit agreement with CCB required us to satisfy certain financial covenants, including
periodic status reports and a debt to asset ratio of no more than seventy-five percent (75%). Our credit agreements with SRCB also require
us to meet certain monthly revenue targets, each for a term of three years. These credit agreements require us to maintain monthly revenue
at least RMB3.0 million (US$0.5 million). Such monthly revenue amounts shall be deposited into an account established by UTime SZ and
under the supervision of SRCB. UTime SZ may withdraw funds from such account only after ensuring that the applicable principal and interest
of the SRCB loans are paid off as they become due on a monthly basis. Apart from the aforementioned restriction, UTime SZ is able to fully
control the funds in the supervision account. However, if UTime SZ fails to meet the minimum monthly revenue covenant in the
credit agreement, SRCB shall have the right to raise the interest rate by 50% from the date of funding (i.e. July 16, 2021) or to
accelerate the loan.
In
addition to the above-mentioned financial covenants, the SRCB and CRBZ loan documents contain customary events of default, including
but not limited to: non-payment of principal, interest and fees or other amounts; violation of covenants; inaccuracy of representations
and warranties; and certain bankruptcy and other insolvency events. If UTime SZ is in breach of any of these credit agreements, the applicable
lender shall have the right to dispose of the collateral in accordance with the law.
Our ability to comply with these and other provisions under our outstanding
loans may be affected by events beyond our control. Although as of July 21, 2021, we believe we are in compliance with all of our loan
covenants, such covenants and obligations are ongoing, and the breach of any such covenants or obligations not otherwise waived or cured
could result in a default under the applicable debt obligations and could trigger acceleration of those obligations.
Any
defaults under our loan arrangements could adversely affect our growth, our financial condition, our results of operations and our ability
to make payments on our debt. The ability to make payments of principal and interest on indebtedness will depend on our financial condition,
which is subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations,
many of which are beyond our control. If sufficient cash flow is not generated from operations to service such debt, we may be required,
among other things, to:
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seek
additional financing in the debt or equity markets;
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delay,
curtail or abandon altogether our research & development or investment plans;
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refinance
or restructure all or a portion of our indebtedness; or
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Such
measures might be insufficient to service the indebtedness. In addition, any such financing, refinancing or sale of assets may not be
available on commercially reasonable terms, or at all. In addition, we may not be able to grow market share, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements, which could negatively impact our business, operating
results and financial condition.
Defaults
under either of our loan agreements with each of SRCB and CRBZ could result in a substantial loss of our assets.
Historically, we have mortgaged our assets to obtain loans with various
banking institutions. We have mortgaged our office owned by UTime SZ and pledged accounts receivables equal to RMB22,500,000 (US$3.4 million)
owned by UTime SZ under our credit agreement with CCB, which was terminated in November 2020. Additionally, we have pledged accounts receivables
due to UTime GZ between January 1, 2020 and July 1, 2021 from one of our customers, TCL Huizhou, pursuant to a factoring agreement with
an affiliate of TCL Huizhou. We have mortgaged our office owned by UTime SZ under our credit agreement with CRBZ. See “Item 5. Operating
And Financial Review And Prospects— Liquidity and Capital Resources — Financing Activities.”
A
failure to repay any of the indebtedness under either of our loan agreements with SRCB or CRBZ as they become due or to otherwise comply
with the covenants contained in any of such agreements could result in an event of default thereunder. If not cured or waived, an event
of default under any of such agreements could enable the lender thereunder to declare all borrowings outstanding on such debt, together
with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit. Such lenders
could also elect to foreclose on our assets securing such debt. In such an event, the Company may not be able to refinance or repay all
of its indebtedness, pay dividends or have sufficient liquidity to meet operating and capital expenditure requirements. Any such acceleration
could cause us to lose a substantial portion of our assets and will substantially adversely affect our ability to continue our operations.
Controversies
affecting China’s trade with the United States could harm our operations.
In
July 2018 and again in September 2018, the United States imposed tariffs on a wide range of products and other goods from China. In May
2019, negotiations on tariffs and other trade matters between the United States and China came to a halt, and both sides escalated the
trade dispute. In June 2019, trade talks resumed between the United States and China, and the United States indicated it would not impose
additional tariffs at this time. Although negotiation resumed in the second half of 2019 between the United States and China and the
two countries reached a trade deal in January 2020, it is possible the United States will impose additional tariffs. Given our major
manufacturing in China, the imposition of tariffs by the United States presents negative effect for us. Tariffs that have already been
announced and implemented have covered certain of our products. The trade controversy between the United States and China is still evolving,
and we cannot predict future trade policy. However, future tariffs could cover more or all of our products, resulting in an adverse effect
on our operations, including customer demand from the United States.
Risks
Related to Our Corporate Structure
We
are a holding company, and will rely on dividends paid by our subsidiaries for our cash needs. Any limitation on the ability of our subsidiaries
to make dividend payments to us, or any tax implications of making dividend payments to us, could limit our ability to pay our parent
company expenses or pay dividends to holders of our ordinary shares.
We
are a holding company and conduct substantially all of our business through our operating subsidiaries, including limited liability companies
established in China and in India. We will rely on dividends paid by our subsidiaries for our cash needs, including the funds necessary
to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses.
We
rely on dividends and other distributions on equity paid by our PRC Subsidiary to fund any cash and financing requirements we may have,
and any limitation on the ability of our PRC Subsidiary to make payments to us could have a material adverse effect on our ability to
conduct our business. If our PRC Subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict
its ability to pay dividends or make other distributions to us. Under PRC laws and regulations, our PRC Subsidiary, which is a wholly
foreign-owned enterprise, may pay dividends only out of its accumulated profits as determined in accordance with PRC accounting standards
and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits
each year, if any, to fund a certain statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered capital.
Such reserve funds cannot be distributed to us as dividends. At its discretion, a wholly foreign-owned enterprise may allocate a portion
of its after-tax profits based on PRC accounting standards to an enterprise expansion fund, or a staff welfare and bonus fund.
Our
PRC Subsidiary generates primarily all of its revenue in Renminbi, which is not freely convertible into other currencies. As result,
any restriction on currency exchange may limit the ability of our PRC Subsidiary to use its Renminbi revenues to pay dividends to us.
The PRC government may continue to strengthen its capital controls, and more restrictions and substantial vetting process may be put
forward by State Administration of Foreign Exchange (the “SAFE”) for cross-border transactions falling under both the current
account and the capital account. Any limitation on the ability of our PRC Subsidiary to pay dividends or make other kinds of payments
to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business,
pay dividends, or otherwise fund and conduct our business.
In
addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be applicable
to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties
or arrangements between the PRC central government and governments of other countries or regions where the non-PRC resident enterprises
are incorporated. Any limitation on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially
and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or
otherwise fund and conduct our business.
With
respect to Do Mobile, our Indian subsidiary, any limitation on declaration and payment of dividend may create a barrier for us to meet
our cash and financing requirements and this could have a material adverse effect on our ability to conduct our business. As per the
extant provisions of Indian laws and regulations, our Indian subsidiary (being a wholly foreign owned company), may pay dividends only
out of its profits from the current year or previous years or its free reserves subject to the treatment and adjustment prescribed in
applicable Indian law, i.e., the Companies Act, 2013. Pursuant to applicable Indian taxation law until March 31, 2020, it was necessary
for our Indian subsidiary to pay tax on the dividend declared and distributed to the shareholders and, a non-resident shareholder of
an Indian company was not liable to pay any tax in India on the dividends received by it. However, Finance Act, 2020 (which became effective
on April 1, 2020) amends certain provisions relating to taxation of dividends declared by Indian companies, and provides that any distribution
of dividend from April 1, 2020 onwards will only be subject to tax in the hands of the recipient shareholder and the Indian companies
are not required to pay any tax on the dividend declared and distributed to the shareholders. Furthermore, non-resident shareholders
would now be paying tax on the dividend income as per the rate prescribed under the relevant double taxation avoidance agreements or
Indian law, whichever is more beneficial. The said amendments shall entitle foreign investors to claim credit in their country of residence
of tax paid in India in respect of dividend distributed by domestic companies. The change in the tax regime by Indian Government regarding
payment of taxes may increase tax burden in the hands of the parent company of our Indian Subsidiary.
Minfei
Bao, our founder, chairman and chief executive officer, as well as Min He, one of our directors, will continue to have significant influence
over us after our initial public offering, including control over decisions that require the approval of shareholders, which could limit
your ability to influence the outcome of matters submitted to shareholders for a vote.
As of the date of this report, Minfei Bao beneficially owns 4,380,000
of our ordinary shares, or 52.98% of our issued and outstanding ordinary shares, through Grandsky Phoenix Limited, a British Virgin Islands
company, of which Mr. Bao controls 100% of the equity interest. As of the date of this report, Min He, one of our directors, beneficially
owns 137,793 of our ordinary shares, or 1.66% of our issued and outstanding ordinary shares through HMercury Capital Limited, a British
Virgin Islands company, of which Mr. He is the controlling shareholder. Prior to our initial public offering, Mr. Bao and Mr. He, collectively
controlled 100% of our outstanding ordinary shares. Immediately after our initial public offering, they collectively control approximately
54.64% of our outstanding ordinary shares. As long as Mr. Bao owns or controls a significant amount of our outstanding voting power of
our ordinary shares, Mr. Bao, or Mr. Bao and Mr. He, if they act together, has or have the ability to exercise substantial control over
all corporate actions requiring shareholder approval, irrespective of how our other shareholders may vote, including:
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the
election and removal of directors and the size of our board of directors;
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any
amendment of our memorandum or articles of association; or
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the
approval of mergers, consolidations and other significant corporate transactions, including a sale of substantially all of our assets.
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Moreover,
beneficial ownership of our ordinary shares by Mr. Bao may also adversely affect the trading price of our ordinary shares on Nasdaq to
the extent investors perceive disadvantages in owning shares of a company with a controlling shareholder. As a result, this concentration
of ownership may not be in the best interests of our other shareholders.
We
are a “controlled company” within the meaning of Nasdaq’s 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 Nasdaq’s Rules because Mr. Bao holds more than 50% of our voting power,
and we continue to be a controlled company upon completion of our initial public offering. For so long as we remain a controlled company
under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from the obligation to comply with certain
corporate governance requirements, including:
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the
requirement that our directors must be selected or recommended solely by independent directors; and
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the
requirement that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written
charter addressing the committee’s purpose and responsibilities.
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As
a result, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance
requirements of the NASDAQ Stock Market Rules, if we utilize such exemptions. We currently do not intend to utilize the controlled company
exemptions. To the extent we cease to qualify as a controlled company, we will no longer be able to rely on any of these exemptions.
Change
in the tax regime in India will increase tax burden on us.
Bridgetime
Limited holds 99.99% shareholding in Do Mobile in India. Until March 31, 2020, a non-resident shareholder of an Indian company was not
liable to pay any tax in India on the dividends received by it. However, with the introduction of the Finance Act, 2020 (which became
effective from April 1, 2020), non-resident shareholders will now be paying tax on the dividend income distributed by an Indian company
from April 1, 2020 onwards as per the rate prescribed under the relevant double taxation avoidance agreements or Indian law, whichever
is more beneficial. Accordingly, this will increase tax burden on Bridgetime Limited. Further, there are number of taxes and other levies
imposed at the level of the Central Government and State Government in India. In addition to income tax, it includes: (i) goods and service
tax; (ii) stamp duty charges; and (iii) surcharges and cess. These tax rates may increase in future creating more financial burden on
Do Mobile and may affect the overall tax efficiency of Do Mobile. Additional tax exposure could adversely affect its business and results
of operations.
We
may become subject to taxation in the Cayman Islands, which would negatively affect our results.
We
have received an undertaking from the Financial Secretary of the Cayman Islands that, in accordance with section 6 of the Tax Concessions
Act (As Revised) of the Cayman Islands, until the date falling 20 years after October 15, 2018, being the date of such undertaking, no
law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to us
or our operations and, 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 (i) on or in respect of the shares, debentures or other obligations of our company or
(ii) by way of the withholding in whole or in part of a payment of dividend or other distribution of income or capital by our company
to its members or a payment of principal or interest or other sums due under a debenture or other obligation of our company. If we otherwise
were to become subject to taxation in the Cayman Islands, our financial condition and results of operations could be materially and adversely
affected. See “Item 10.E. Taxation — Cayman Islands Taxation”.
We
are subject to various changing laws and regulations regarding regulatory matters, corporate governance and public disclosure that have
increased both our costs and the risk of non-compliance.
We
are subject to rules and regulations by various governing bodies, including, for example, the SEC, which is charged with the protection
of investors and the oversight of companies whose securities are publicly traded, and to new and evolving regulatory measures under applicable
law. Our efforts to comply with new and changing laws and regulations have resulted in and are likely to continue to result in, increased
general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance
activities.
Moreover,
because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time
as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs
necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these regulations
and any subsequent changes, we may be subject to penalty and our business may be harmed.
Because
we are incorporated under the laws of the Cayman Islands, you may face difficulties in protecting your interests, and your ability to
protect your rights through the U.S. Federal courts may be limited.
We
are a Cayman Islands exempted company with limited liability and substantially all of our assets will be located outside the United States.
In addition, most of our directors and officers are nationals or residents of jurisdictions other than the United States and all or a
substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service
of process within the United States upon us or our directors or executive officers, or enforce judgments obtained in the United States
courts against us or our directors or officers.
Further,
mail addressed to us and received at our registered office will be forwarded unopened to the forwarding address supplied by our directors.
Our directors will only receive, open or deal directly with mail which is addressed to them personally (as opposed to mail which is only
addressed to us). We, our directors, officers, advisors or service providers (including the organization which provides registered office
services in the Cayman Islands) will not bear any responsibility for any delay, howsoever caused, in mail reaching this forwarding address.
Our
corporate affairs are governed by our amended and restated memorandum and articles of association, the Companies Act (As Revised) (as
the same may be supplemented or amended from time to time) and 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 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 technically 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 not as clearly established as they would be under statutes or judicial precedent in some
jurisdictions in the United States. In particular, the Cayman Islands has a less exhaustive body of securities laws as compared to the
United States, and certain states, such as Delaware, have more fulsome and judicially interpreted bodies of corporate law. As a result,
there may be significantly less protection for investors than is available to investors in companies organized in the United States,
particularly Delaware. In addition, Cayman Islands companies may not have standing to initiate a shareholders’ derivative action
in a Federal court of the United States.
The
Cayman Islands courts are also unlikely:
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to
recognize or enforce against us judgments of courts of the United States based on the civil liability provisions of United States securities
laws; and
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to
impose liabilities against us, in original actions brought in the Cayman Islands, based on the civil liability provisions of United States
securities laws that impose liabilities that are penal in nature.
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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.
Like
many jurisdictions in the United States, in certain circumstances Cayman Islands law permits mergers and consolidations between Cayman
Islands companies and between Cayman Islands companies and non-Cayman Islands companies (provided that is facilitated by the laws of
that other jurisdiction) and any such company may be the surviving entity for the purposes of mergers or the consolidated company for
the purposes of consolidations. For these purposes, (a) “merger” means the merging of two or more constituent companies and
the vesting of their undertaking, property and liabilities in one of such companies as the surviving company and (b) a “consolidation”
means the combination of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and
liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent
company must approve a written plan of merger or consolidation, which must, in most instances, then be authorized by a special resolution
(usually a majority of 66 2/3% in value) of the shareholders of each constituent company and such other authorization, if any, as may
be specified in such constituent company’s articles of association. A merger between a Cayman parent company and its Cayman subsidiary
or subsidiaries does not require authorization by a resolution of shareholders provided a copy of the plan of merger is given to every
member of each subsidiary company to be merged (unless waived by such member). For this purpose a subsidiary is a company of which at
least 90% of the votes cast at its general meeting are held by the parent company. The consent of each holder of a fixed or floating
security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands. The plan
of merger or consolidation must be filed with the Registrar of Companies who, if satisfied that the requirements of the Companies Act
(As Revised) which includes certain other formalities, have been complied with, will register it. The filing must include a declaration
as to the solvency of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an
undertaking that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent
company and published in the Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their shares
(which, if not agreed between the parties, will be determined by the Cayman Islands court) if they follow the required procedures, subject
to certain exceptions. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory
procedures.
In
addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies in certain circumstances, provided
that the arrangement is 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 two-thirds 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 meetings, convened for that purpose. The convening of the meetings
and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the
right to express to the court the view that the transaction ought not be approved, the court can be expected to approve the arrangement
if it determines that:
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the
company is not proposing to act illegally or beyond the scope of its corporate authority and the statutory provisions as to the required
majority vote have been met;
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the
shareholders have been fairly represented at the meeting in question, the statutory majority are acting bona fide without coercion of
the minority to promote interests adverse to those of the class and that the meeting was properly constituted;
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the
arrangement is such that it may reasonably be approved by an intelligent and honest man of that share class acting in respect of his
interest; and
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the
arrangement is not one which would be more properly sanctioned under some other provision of the Companies Act, or that would amount
to “fraud on the minority.”
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If
the arrangement and reconstruction is approved, the dissenting shareholder would have no rights comparable to appraisal rights, which
would otherwise ordinarily be available to dissenting shareholders of U.S. corporations, providing rights to receive payment in cash
for the judicially determined value of the shares.
In
addition, there are further statutory provisions to the effect that, when a take-over offer is made and approved by holders of 90.0%
in value of the shares affected (within four months after the making of the offer), the offeror may, within two months following the
expiry of such 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 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.
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.
Provisions
of our amended and restated memorandum and articles of association or Cayman Islands law could delay or prevent an acquisition of our
company, even if the acquisition may be beneficial to our shareholders, could make it more difficult for you to change management, and
could have an adverse effect on the market price of our ordinary shares.
Provisions
in our amended and restated memorandum and articles of association may discourage, delay or prevent a merger, acquisition or other change
in control that shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for
their shares. In addition, these provisions may frustrate or prevent any attempt by our shareholders to replace or remove our current
management by making it more difficult to replace or remove our board of directors. Such provisions may reduce the price that investors
may be willing to pay for our ordinary shares in the future, which could reduce the market price of our ordinary shares. These provisions
include:
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a
prohibition on shareholder action through written consent;
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a
requirement that extraordinary general meetings of shareholders be called only by a majority of the board of directors or, in limited
circumstances, by the board upon shareholder requisition;
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an
advance notice requirement for shareholder proposals and nominations to be brought before an annual general meeting;
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the
authority of our board of directors to issue preferred shares with such terms as our board of directors may determine; and
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a
requirement of approval of not less than two-thirds of the votes cast by shareholders entitled to vote thereon in order to amend any
provisions of our amended and restated memorandum and articles of association.
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If
the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply
with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change
in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
We
are a Cayman Islands exempted company and our PRC Subsidiary is considered foreign-invested enterprise. In December 2018, UTime HK established
a wholly owned subsidiary in China, UTime WFOE, our wholly-owned foreign enterprise (“WFOE”). In March 2019, we obtained
control over UTime SZ via our WFOE by entering into a series of contractual arrangements with UTime SZ, our VIE, and its shareholder.
In August 2019, the amended and restated contractual agreements were entered into among UTime SZ, our VIE, and its shareholders, which
were further amended and restated in September 2019.
Our
WFOE has entered into a series of contractual arrangements with our VIE and its shareholders, respectively, which enable us to (i) exercise
effective control over our VIE, (ii) receive substantially all of the economic benefits of our VIE, and (iii) have an exclusive option
to purchase all or part of the equity interests and assets in our VIE when and to the extent permitted by PRC laws. As a result of these
contractual arrangements, we have control over and are the primary beneficiary of our VIE and hence consolidate their financial results
into our consolidated financial statements under U.S. GAAP. See “Item 4A. — History and Corporate Structure — Contractual
Arrangements with the VIE and its Respective Shareholders” for further details.
In
the opinion of B&D Law Firm, our PRC legal counsel, (i) the ownership structures of our VIE in China and our WFOE, both currently
and immediately after giving effect to our initial public offering, comply with all existing PRC laws and regulations; and (ii) the contractual
arrangements between our WFOE, our VIE and its shareholders governed by PRC law are valid, binding and enforceable, and will not result
in any violation of PRC laws or regulations currently in effect. However, our PRC legal counsel has also advised us that there are substantial
uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC
regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC
laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or
our VIE is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required
permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations
or failures, including:
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revoking
the business license and/or operating licenses of our WFOE or our VIE;
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discontinuing
or placing restrictions or onerous conditions on our operations through any transactions between our WFOE and our VIE;
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imposing
fines, confiscating the income from our WFOE or our VIE, or imposing other requirements with which we or our VIE may not be able to comply;
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requiring
us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIE and deregistering
the equity pledges of our VIE, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective
control over our VIE; or
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restricting
or prohibiting our use of the proceeds of our initial public offering to finance our business and operations in China.
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The
imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business. In addition,
it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of our
VIE in our consolidated financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements
to be in violation of PRC laws and regulations. If the imposition of any of these government actions causes us to lose our right to direct
the activities of our VIE or our right to receive substantially all the economic benefits and residual returns from our VIE and we are
not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the
financial results of our VIE in our consolidated financial statements. Either of these results, or any other significant penalties that
might be imposed on us in this event, would have a material adverse effect on our financial condition and results of operations.
We
rely on contractual arrangements with our VIE and its shareholders for a large portion of our business operations, which may not be as
effective as direct ownership in providing operational control.
We
have relied and expect to continue to rely on contractual arrangements with our VIE and its shareholders to conduct certain of our key
businesses. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE. For
example, our VIE and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct
their operations in an acceptable manner or taking other actions that are detrimental to our interests.
If
we had direct ownership of our VIE, we would be able to exercise our rights as a shareholder to effect changes in the board of directors
of our VIE, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational
level. However, under the current contractual arrangements, we rely on the performance by our VIE and its shareholders of their obligations
under the contracts to exercise control over our VIE. However, the shareholders of our consolidated VIE may not act in the best interests
of our Company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend
to operate certain portions of our business through the contractual arrangements with our VIE. If any disputes relating to these contracts
remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation
and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements
with our VIE may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership
would be.
Any
failure by our VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material
and adverse effect on our business.
We
refer to the shareholders of our VIE as its nominee shareholders because although they remain the holders of equity interests on record
in our VIE, pursuant to the terms of the relevant power of attorney, such shareholders have irrevocably authorized our WFOE or any individual
duly appointed by WFOE to exercise their rights as a shareholder of the relevant VIE. However, if our VIE or its shareholders fail to
perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional
resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance
or injunctive relief, and claiming damages, which we cannot assure, will be effective under PRC law. For example, if the shareholders
of our VIE refuse to transfer their equity interest in our VIE to us or our designee if we exercise the purchase option pursuant to these
contractual arrangements, or if they otherwise act in bad faith toward us, then we may have to take legal actions to compel them to perform
their contractual obligations.
Our
contractual arrangements are governed by PRC laws. Accordingly, these contracts would be interpreted in accordance with PRC laws, and
any disputes would be resolved in accordance with PRC legal procedures, which may not protect you as much as those of other jurisdictions,
such as the United States.
All
of the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration
in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance
with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States.
As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. See “Risks
Related to Doing Business in China — Uncertainties with respect to the PRC legal system and changes in laws and regulations in
China could adversely affect us.” Meanwhile, there is very little precedent and formal guidance as to how contractual arrangements
in the context of a VIE should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate
outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final, parties
cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed
time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings,
which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer
significant delays or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective
control over our VIE, and our ability to conduct our business may be negatively affected.
PRC
regulation of loans to and direct investment in PRC entities by offshore holding companies to PRC entities may delay or prevent us from
making loans or additional capital contributions to our PRC operating subsidiaries.
As
an offshore holding company of our PRC Subsidiary, we may make loans to our PRC Subsidiary, our VIE and the VIE’s subsidiaries,
or may make additional capital contributions to our PRC Subsidiary, subject to satisfaction of applicable governmental registration and
approval requirements.
Any
loans we extend to our PRC Subsidiary, which are treated as foreign-invested enterprises under PRC law, cannot exceed the statutory limit
and must be registered with the local counterpart of the SAFE.
We
may also decide to finance our PRC Subsidiary by means of capital contributions. According to the relevant PRC regulations on foreign-invested
enterprises in China, these capital contributions are subject to registration with or approval by local Administration for Market Regulation
(“AMR”). In addition, the PRC government also restricts the convertibility of foreign currencies into Renminbi and use of
the proceeds. On March 30, 2015, SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration
of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or SAFE Circular 19, which took effect and replaced certain
previous SAFE regulations from June 1, 2015. SAFE further promulgated the Notice of the State Administration of Foreign Exchange on Reforming
and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016,
which, among other things, amend certain provisions of SAFE Circular 19. According to SAFE Circular 19 and SAFE Circular 16, the flow
and use of the Renminbi capital converted from foreign currency denominated registered capital of a foreign-invested company is regulated
such that Renminbi capital may not be used for business beyond its business scope or to provide loans to persons other than affiliates
unless otherwise permitted under its business scope. Violations of the applicable circulars and rules may result in severe penalties,
including substantial fines as set forth in the Foreign Exchange Administration Regulations. If our VIE requires financial support from
us or our WOS in the future and we find it necessary to use foreign currency-denominated capital to provide such financial support, our
ability to fund our VIE’s operations will be subject to statutory limits and restrictions, including those described above. These
circulars may limit our ability to transfer any foreign currency we hold, including the net proceeds from our initial public offering,
to our VIE and our PRC subsidiary, which may adversely affect our liquidity and our ability to fund and expand our business in China.
Despite the restrictions under these SAFE circulars, our PRC Subsidiary may use its income in Renminbi generated from their operations
to finance the VIE through entrustment loans to the VIE or loans to the VIE’s shareholders for the purpose of making capital contributions
to the VIE. In addition, our PRC Subsidiary can use Renminbi funds converted from foreign currency registered capital to carry out any
activities within their normal course of business and business scope. On October 23, 2019, the SAFE promulgated the Notice of the State
Administration of Foreign Exchange on Further Promoting the Convenience of Cross-border Trade and Investment, or the SAFE Circular 28,
which, among other things, allows all foreign-invested companies to use Renminbi converted from foreign currency-denominated capital
for equity investments in China, as long as the equity investment is genuine, does not violate applicable laws, and complies with the
negative list on foreign investment.
In
light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding
companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government
approvals on a timely basis, if at all, with respect to future loans to our PRC Subsidiary or our VIE or future capital contributions
by us to our PRC Subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect
to receive from our initial public offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which
could materially and adversely affect our liquidity and our ability to fund and expand our business.
The
shareholders of our VIE may have potential conflicts of interest with us, which may materially and adversely affect our business and
financial condition.
As
of the date of this report, Mr. Bao and Mr. He hold 96.95% and 3.05% equity interest in UTime SZ, respectively. The shareholders of our
VIE may have potential conflicts of interest with us. The shareholders may breach, or cause our VIE to breach, or refuse to renew, the
existing contractual arrangements we have with them and our VIE, which would have a material and adverse effect on our ability to effectively
control our VIE and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with our VIE
to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to
us on a timely basis. We cannot assure you that when conflicts of interest arise the shareholders will act in the best interests of our
Company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of
interest between the shareholders and our Company. If we cannot resolve any conflict of interest or dispute between us and the shareholders,
we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty
as to the outcome of any such legal proceedings.
The
shareholders of our VIE may be involved in personal disputes with third parties or other incidents that may have an adverse effect on
their equity interests in our VIE and the validity or enforceability of our contractual arrangements with our VIE and its shareholder.
For example, in the event that one of the shareholders of our VIE divorces his spouse, the spouse may claim that the equity interest
of our VIE held by such shareholder is part of their community property and should be divided between such shareholder and his spouse.
If such claim is supported by the court, the relevant equity interest may be obtained by the shareholder’s spouse or any third
party who is not subject to obligations under our contractual arrangements, which could result in a loss of our effective control over
the VIE. Similarly, if any of the equity interests of our VIE is inherited by a third party on whom the current contractual arrangements
are not binding, we could lose our control over the VIE or have to maintain such control by incurring unpredictable costs, which could
cause significant disruption to our business and operations and harm our financial condition and results of operations.
Although
under our current contractual arrangements, each of the spouses of Mr. Bao and Mr. He have executed spousal consent letters, under which
each of them agreed that she will not take any actions or raise any claims to interfere with the performance by her spouse of the obligations
under these contractual arrangements, including claiming community property ownership on the equity interest, and renounce any and all
right and interest related to the equity interest that she may be entitled to under applicable laws. We cannot assure you that these
undertakings and arrangements will be complied with or effectively enforced. In the event that any of them is breached or becomes unenforceable
and leads to legal proceedings, it could disrupt our business, distract our management’s attention and subject us to substantial
uncertainties as to the outcome of any such legal proceedings.
Contractual
arrangements in relation to our VIE may be subject to scrutiny by the PRC tax authorities and they may determine that we or our VIE owes
additional taxes, which could negatively affect our financial condition and the value of your investment.
Under
applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the
PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the VIE contractual
arrangements were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under
applicable PRC laws, rules and regulations, and adjust the income of our VIE in the form of a transfer pricing adjustment. A transfer
pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIE for PRC tax purposes, which
could in turn increase its tax liabilities without reducing our WFOE’s tax expenses. In addition, the PRC tax authorities may impose
late payment fees and other penalties on our VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial
position could be materially and adversely affected if our VIE’s tax liabilities increase or if it is required to pay late payment
fees and other penalties.
We
may lose the ability to use and enjoy assets held by our VIE that are material to the operation of certain portion of our business if
our VIE goes bankrupt or becomes subject to a dissolution or liquidation proceeding.
As
part of our contractual arrangements with our VIE, our VIE and its subsidiaries hold certain assets that are material to the operation
of certain portion of our business, including intellectual property and premise. If our VIE goes bankrupt and all or part of its assets
become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which
could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements,
our VIE may not, in any manner, sell, transfer, mortgage or dispose of its assets or legal or beneficial interests in the business without
our prior consent. However, in the event that the shareholders breach this obligation and voluntarily liquidate our VIE, or our VIE declares
bankruptcy, or all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some
or all of our operations, which could materially and adversely affect our business, financial condition and results of operations. Furthermore,
if our VIE or its subsidiaries undergo a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors
may claim rights to some or all of its assets, hindering our ability to operate our business, which could materially and adversely affect
our business, financial condition and results of operations.
Our
current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law.
On
March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which took effect on January 1, 2020. On December
26, 2019, the Regulation on the Implementation of the Foreign Investment Law of the People’s Republic of China, was issued by the
State Council and came into force on January 1, 2020. The Foreign Investment Law defines the “foreign investment” as the
investment activities in China conducted directly or indirectly by foreign investors in the following manners: (i) a foreign investor,
individually or collectively with other investors establishes a foreign-invested enterprise within China; (ii) a foreign investor acquires
stock shares, equity shares, shares in assets, or other like rights and interests of an enterprise within China; (iii) a foreign investor,
individually or collectively with other investors, invests and establishes new projects within China; and (iv) a foreign investor invests
through other approaches as stipulated by laws, administrative regulations, or otherwise regulated by the State Council. Since the Foreign
Investment Law is relatively new, uncertainties exist in relation to its interpretation and implementation. The Foreign Investment Law
does not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed
as foreign invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision
under definition of “foreign investment” that includes investments made by foreign investors in China through other means
as provided by laws, administrative regulations or the State Council. The Foreign Investment Law still leaves leeway for future laws,
administrative regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign investment.
Therefore, there can be no assurance that our control over our VIE through contractual arrangements will not be deemed as foreign investment
in the future.
The
Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate
in industries specified as either “restricted” or “prohibited” from foreign investment in a “negative list”.
The Foreign Investment Law provides that foreign-invested entities operating in “restricted” or “prohibited”
industries will require market entry clearance and other approvals from relevant PRC government authorities. On June 23, 2020, the Ministry
of Commerce of the PRC (the “MOFCOM”) and the National Development and Reform Commission (the “NDRC”) jointly
issued the latest version of Negative List (Edition 2020), which became effective on July 23, 2020. See “Regulations — Regulations
relating to Foreign Investment — The Guidance Catalogue of Industries for Foreign Investment”. Currently, our business related
to the operation of designing, manufacturing and marketing mobile communication devices, and selling a variety of related accessories
falls within the permitted category. However, we cannot assure you that our current operations or any newly-developed business in the
future will still deemed to be “permitted” in the “negative list”, which may be promulgated or be amended from
time to time by the MOFCOM and the NDRC. If our control over our VIE through contractual arrangements are deemed as foreign investment
in the future, and any business of our VIE is “restricted” or “prohibited” from foreign investment under the
“negative list” promulgated or amended in the future, we may be deemed to be in violation of the Foreign Investment Law,
the contractual arrangements that allow us to have control over our VIE may be deemed as invalid and illegal, and we may be required
to unwind such contractual arrangements and/or restructure our business operations, any of which may have a material adverse effect on
our business operation.
Furthermore,
if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure
to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure and business operations.
Risks
Related to Doing Business in China
Changes
in China’s economic, political or social conditions or government policies could have a material adverse effect on our business
and operations.
Substantially
most of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects
may be influenced to a significant degree by political, economic and social conditions in China generally. The Chinese economy differs
from the economies of most developed countries in many respects, including the level of government involvement, level of development,
growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing
the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of
improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government.
In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies.
The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling
payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries
or companies.
While
the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various
sectors of the economy, and the rate of growth has been slowing since 2012. Any adverse changes in economic conditions in China, in the
policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic
growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services
and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on
us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments
or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate
adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely
affect our business and operating results.
Uncertainties
with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us.
We
conduct our business primarily through our PRC Subsidiary, VIE and UTime GZ in China. Our operations in China are governed by PRC laws
and regulations. Our PRC Subsidiary, VIE and UTime GZ are subject to laws and regulations applicable to foreign investment in China.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil
law system may be cited for reference but have limited precedential value. In addition, any new or changes in PRC laws and regulations
related to foreign investment in China could affect the business environment and our ability to operate our business in China.
From
time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court
proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC
administrative and court authorities have significant discretion in interpreting and implementing statutory provisions 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. These uncertainties may impede our ability to enforce the contracts into which we have entered
and could materially and adversely affect our business and results of operations.
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. Such unpredictability towards our contractual, property and procedural rights could adversely affect our business
and impede our ability to continue our operations.
Changes
in international trade policies, trade dispute or the emergence of a trade war, may have a material adverse effect on our business.
Political
events, international trade disputes, and other business interruptions could harm or disrupt international commerce and the global economy,
and could have a material adverse effect on us and our customers, service providers, network carriers and other partners.
International
trade disputes could result in tariffs and other protectionist measures that could adversely affect our business. Tariffs could increase
the cost of the goods and products which could affect consumers’ discretionary spending levels and therefore adversely impact our
business. In addition, political uncertainty surrounding international trade disputes and the potential of the escalation to trade war
and global recession could have a negative effect on consumer confidence, which could adversely affect our business.
There are significant uncertainties under the PRC Enterprise Income
Tax 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.
We
are an exempted company incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity
from our PRC Subsidiary to satisfy part of our liquidity requirements. Pursuant to the PRC Enterprise Income Tax Law, a withholding tax
rate of 10% currently applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless any
such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment.
Pursuant
to the Arrangement between the 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 came into effect on December 8, 2006, and four conventions implemented
as of June 11, 2008, December 20, 2010, December 29, 2015 and December 6, 2019, such withholding tax rate may be lowered to 5% if a Hong
Kong resident enterprise owns no less than 25% of a PRC enterprise. Under the Circular on Certain Issues with Respect to the Enforcement
of Dividend Provisions in Tax Treaties issued in February 2009 by the SAT, the taxpayer needs to satisfy certain conditions to enjoy
the benefits under a tax treaty. These conditions include: (i) the taxpayer must be the beneficial owner of the relevant dividends, and
(ii) the corporate shareholder to receive dividends from the PRC Subsidiary must have met the direct ownership thresholds during the
12 consecutive months preceding the receipt of the dividends. However, if the main purpose of an offshore arrangement is to obtain a
preferential tax treatment, the PRC tax authorities have the discretion to adjust the preferential tax rate enjoyed by the relevant offshore
entity. Further, the SAT promulgated the Notice on How to Understand and Recognize the “Beneficial Owner” in Tax Treaties
in 2009, which limits the “beneficial owner” to individuals, enterprises or other organizations normally engaged in substantive
operations, and sets forth certain detailed factors in determining “beneficial owner” status; and based on the Announcement
on Certain Issues with Respect to the “Beneficial Owner” in Tax Treaties, issued on February 3, 2018, and effective on April
1, 2018, that the business activities conducted by the applicant do not constitute substantive business activities is one of the factors
which are not conductive to the determination of an applicant’s status as a “beneficial owner”.
In
addition, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties, or SAT Public Notice No.60,
which became effective in August 2015, require non-resident enterprises to determine whether they are qualified to enjoy the preferential
tax treatment under the tax treaties and file relevant report and materials with the tax authorities. In October 2019, the State Administration
of Taxation (SAT) issued the Announcement of the SAT on Issuing the Measures for the Administration of Non-resident Taxpayers’
Enjoyment of Treaty Benefits (SAT Public Notice No.35), which took effect on January 1, 2020, while SAT Public Notice No.60 will be abolished
at the same time. SAT Public Notice No.35 stipulates that non-resident taxpayers can enjoy tax treaty benefits via the “self-assessment
of eligibility, claiming treaty benefits, retaining documents for inspection” mechanism. There are also other conditions for enjoying
the reduced withholding tax rate according to other relevant tax rules and regulations. As of March 31, 2021 and 2020, we did not record
any withholding tax on the retained earnings of our subsidiaries in the PRC as we intended to re-invest all earnings generated from our
PRC Subsidiary for the operation and expansion of our business in China, and we intend to continue this practice in the foreseeable future.
Should our tax policy change to allow for offshore distribution of our earnings, we would be subject to a significant withholding tax.
We cannot assure you that our determination regarding our qualification to enjoy the preferential tax treatment will not be challenged
by the relevant tax authority or we will be able to complete the necessary filings with the relevant 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 UTime
HK, our Hong Kong subsidiary.
We,
or entities who provide services to us or with whom we associate, are not permitted to be subject to inspection by the U.S. federal or
state regulators such as PCAOB, and therefore, our investors may be deprived of the benefits of such inspection. Additionally, we could
be delisted if we are unable to meet the PCAOB inspection requirements in time.
Any
disclosure of documents or information located in China by foreign agencies may be subject to jurisdiction constraints and must comply
with China’s state secrecy laws, which broadly define the scope of “state secrets” to include matters involving economic
interests and technologies. There is no guarantee that requests from U.S. federal or state regulators or agencies to investigate or inspect
our operations will be honored by us, by entities, who provide services to us or with whom we associate, without violating PRC legal
requirements, especially as those entities are located in China. Furthermore, under the current PRC laws, an on-site inspection of our
facilities by any of the U.S. regulators may be limited or prohibited.
Our
independent registered public accounting firm that issues the audit report included in this annual report filed with the SEC, as an auditor
of companies that are traded publicly in the United States and a firm registered with the PCAOB is required by the laws of the United
States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards.
Because our auditor is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of
the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected
by PCAOB.
In
May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities
Regulatory Commission, or CSRC, and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the
production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the PRC Ministry of Finance
in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC, and the PRC Ministry of Finance
to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.
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. However, it remains unclear
what further actions, if any, the SEC and the PCAOB will take to address the problem.
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. However, it remains unclear
what further actions, if any, the SEC and the PCAOB will take to address these problems. Inspections of other firms that PCAOB has conducted
outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed
as part of the inspection process to improve future audit quality.
On
August 6, 2020, the President’s Working Group on Financial Markets (“PWG”) released a report recommending that the
SEC take steps to implement the five recommendations outlined in the report. In particular, to address companies from jurisdictions that
do not provide the PCAOB with sufficient access to fulfill its statutory mandate, or Non-Cooperating Jurisdictions (“NCJs”),
the PWG recommends enhanced listing standards on U.S. stock exchanges. This would require, as a condition to initial and continued exchange
listing, PCAOB access to work papers of the principal audit firm for the audit of the listed company. Companies unable to satisfy this
standard as a result of governmental restrictions on access to audit work papers and practices in NCJs may satisfy this standard by providing
a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work
papers and practices to conduct an appropriate inspection of the co-audit firm. The report permits the new listing standards to provide
for a transition period until January 1, 2022 for listed companies, but would apply immediately to new listings once the necessary rulemakings
and/or standard-setting are effective. The measures in the PWG Report are presumably subject to the standard SEC rulemaking process before
becoming effective. On August 10, 2020, the SEC announced that SEC Chairman had directed the SEC staff to prepare proposals in response
to the PWG Report, and that the SEC was soliciting public comments and information with respect to these proposals. After we are listed
on the Nasdaq Capital Market, if we fail to meet the new listing standards before the deadline specified thereunder due to factors beyond
our control, we could face possible de-listing from the Nasdaq Capital Market, deregistration from the SEC and/or other risks, which
may materially and adversely affect, or effectively terminate, our ordinary shares trading in the United States.
The
inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult
to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived
of the benefits of PCAOB inspections.
As
part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law,
in particular China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, which
if passed, would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate an auditor report
issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our
Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S.
national securities exchanges of issuers included on the SEC’s list for three consecutive years. On May 20, 2020 and December 2,
2020, the U.S. Senate and the U.S. House of Representatives, respectively, passed S. 945, the Holding Foreign Companies Accountable Act,
or the “Kennedy Bill.” U.S. President Donald J. Trump signed into law on December 18, 2020 the Holding Foreign Companies
Accountable Act, which will require the SEC to propose rules within 90 days after its enactment to prohibit securities of any registrant
from being listed on any of the U.S. securities exchanges or traded “over the counter” if the auditor of the registrant’s
financial statements is not subject to PCAOB inspection for three consecutive years after the law becomes effective. We could be delisted
if we are unable to cure the situation to meet the PCAOB inspection requirement in time. On July 21, 2020, the U.S. House of Representatives approved its
version of the National Defense Authorization Act for Fiscal Year 2021, which contains provisions comparable to the Kennedy Bill. These
bills amend the Sarbanes-Oxley Act of 2002 to direct the SEC to prohibit securities of any registrant from being listed on any of the
U.S. securities exchanges or traded “over-the-counter” if the auditor of the registrant’s financial statements is not
subject to PCAOB inspection for three consecutive years after the law becomes effective. Enactment of this legislation or other efforts
to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the
market price of our ordinary shares could be adversely affected, and we could be delisted if we are unable to cure the situation to meet
the PCAOB inspection requirement in time. Furthermore, there have been recent media reports on deliberations within the U.S. government
regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such deliberations were
to materialize, the resulting legislation may have a material and adverse impact on the stock performance of China-based issuers listed
in the United States, including ours.
You
may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us
or our management named in this report based on foreign laws.
We
are an exempted company incorporated under the laws of the Cayman Islands, we conduct substantially most of our operations in China and
substantially most of our assets are located in China. In addition, most of our senior executive officers reside within China for a significant
portion of the time and most are PRC nationals. As a result, it may be difficult for you to effect service of process upon us or those
persons inside mainland China. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on
the civil liability provisions of the U.S. federal securities laws against us and our officers and directors who reside and whose assets
are located outside the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would
recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities
laws of the United States or any state.
The
recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce
foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the
country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms
of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition,
according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers
if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a
result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.
See
also “Risks Related to our Corporate Structure — Because we are incorporated under the laws of the Cayman Islands, you may
face difficulties in protecting your interests, and your ability to protect your rights through the U.S. Federal courts may be limited”
for risks associated with investing in us as a Cayman Islands company.
There
are uncertainties under the PRC laws relating to the procedures for U.S. regulators to investigate and collect evidence from companies
located in the PRC.
According
to Article 177 of the newly amended PRC Securities Law which became effective in March 2020 (the “Article 177”), the securities
regulatory authority of the PRC State Council may collaborate with securities regulatory authorities of other countries or regions in
order to monitor and oversee cross border securities activities. Article 177 further provides that overseas securities regulatory authorities
are not allowed to carry out investigation and evidence collection directly within the territory of the PRC, and that any Chinese entities
and individuals are not allowed to provide documents or materials related to securities business activities to overseas agencies without
prior consent of the securities regulatory authority of the PRC State Council and the competent departments of the PRC State Council.
Our
PRC counsel has advised us of their understanding that (i) the Article 177 is applicable in the limited circumstances related to direct
investigation or evidence collection conducted by overseas authorities within the territory of the PRC (in such case, the foregoing activities
are required to be conducted through collaboration with or by obtaining prior consent of competent Chinese authorities); (ii) from the
view of the internal logical relations of the Article 177, it seems that the Article 177 does not limit or prohibit the Company, as a
company duly incorporated in Cayman Islands and to be listed on NASDAQ, from providing the required documents or information to NASDAQ
or the SEC pursuant to applicable Listing Rules and U.S. securities laws; and (iii) as the Article 177 is relatively new and there is
no implementing rules or regulations which have been published regarding application of the Article 177, it remains unclear how the law
will be interpreted, implemented or applied by the Chinese Securities Regulatory Commission or other relevant government authorities.
As of the date hereof, we are not aware of any implementing rules or regulations which have been published regarding application of Article
177. However, we cannot assure you that relevant PRC government agencies, including the securities regulatory authority of the PRC State
Council, would reach the same conclusion as we do. As such, there are uncertainties as to the procedures and time requirement for the
U.S. regulators to bring about investigations and evidence collection within the territory of the PRC.
Our
principal business operation is conducted in the PRC. In the event that the U.S. regulators carry out investigation on us and there is
a need to conduct investigation or collect evidence within the territory of the PRC, the U.S. regulators may not be able to carry out
such investigation or evidence collection directly in the PRC under the PRC laws. The U.S. regulators may consider cross-border cooperation
with securities regulatory authority of the PRC by way of judicial assistance, diplomatic channels or regulatory cooperation mechanism
established with the securities regulatory authority of the PRC. However, there is no assurance that the U.S. regulators could succeed
in establishing such cross-border cooperation in a specific case or could establish the cooperation in a timely manner. If U.S. regulators
are unable to conduct such investigations, such U.S. regulators may determine to suspend and ultimately delist our ordinary shares from
the Nasdaq Capital Market or choose to suspend or de-register our SEC registration.
Fluctuations
in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.
The
conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The
Renminbi has fluctuated against the U.S. dollar, 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 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 the U.S. dollar in the future.
Significant
revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert
U.S. dollars we receive 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. To date, we have not entered into
any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging
transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge
our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict
our ability to convert Renminbi into foreign currency.
Governmental
control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.
The
PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of
currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands
exempted company primarily relies on dividend payments from our PRC Subsidiary to fund any cash and financing requirements we may have.
Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments
and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying
with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated
from the operations of our PRC Subsidiary in China may be used to pay dividends to our company. However, approval from or registration
with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China
to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval
to use cash generated from the operations of our PRC Subsidiary, VIE and UTime GZ to pay off their respective debt in a currency other
than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.
In
light of the flood of capital outflows of China in 2016 due to the weakening RMB, the PRC government has imposed more restrictive foreign
exchange policies and stepped up scrutiny of major outbound capital movement including overseas direct investment. More restrictions
and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. If
any of our shareholders regulated by such policies fails to satisfy the applicable overseas direct investment filing or approval requirement
timely or at all, it may be subject to penalties from the relevant PRC authorities. The PRC government may at its discretion further
restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents
us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign
currencies to our shareholders.
China’s
M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of PRC companies by foreign investors,
which could make it more difficult for us to pursue growth through acquisitions in China.
The
Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, and other recently adopted
regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and
acquisition activities by foreign investors more time consuming and complex. For example, the M&A Rules require that MOFCOM be notified
in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any
important industry is concerned, (ii) such transaction involves factors that impact or may impact national economic security, or (iii)
such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand.
Moreover, the Anti-Monopoly Law promulgated by the SCNPC effective in 2008 requires that transactions which are deemed concentrations
and involve parties with specified turnover thresholds (i.e., during the previous fiscal year, (i) the total global turnover of all operators
participating in the transaction exceeds RMB10 billion (US$1.5 billion) and at least two of these operators each had a turnover of more
than RMB400 million (US$60.9 million) within China, or (ii) the total turnover within China of all the operators participating in the
concentration exceeded RMB2 billion, and at least two of these operators each had a turnover of more than RMB400 million (US$60.9 million)
within China) must be cleared by MOFCOM before they can be completed. In addition, in 2011, the General Office of the State Council promulgated
a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, also known
as Circular 6, which officially established a security review system for mergers and acquisitions of domestic enterprises by foreign
investors. Further, MOFCOM promulgated the Regulations on Implementation of Security Review System for the Merger and Acquisition of
Domestic Enterprises by Foreign Investors, effective 2011, to implement Circular 6. Under Circular 6, a security review is required for
mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions
by which foreign investors may acquire the “de facto control” of domestic enterprises with “national security”
concerns. Under the foregoing MOFCOM regulations, MOFCOM will focus on the substance and actual impact of the transaction when deciding
whether a specific merger or acquisition is subject to security review. If MOFCOM decides that a specific merger or acquisition is subject
to a security review, it will submit it to the Inter-Ministerial Panel, an authority established under Circular 6 led by the NDRC, and
MOFCOM under the leadership of the State Council, to carry out security review. The regulations prohibit foreign investors from bypassing
the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual arrangements
or offshore transactions.
In
the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations
and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining
approval from MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions. It is unclear whether
our business would be deemed to be in an industry that raises “national defense and security” or “national security”
concerns. However, MOFCOM or other government agencies may publish explanations in the future determining that our business is in an
industry subject to the security review, in which case our future acquisitions in China, including those by way of entering into contractual
control arrangements with target entities, may be closely scrutinized or prohibited.
PRC
regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial
owners or our PRC Subsidiary to liability or penalties, limit our ability to inject capital into our PRC Subsidiary, limit our PRC Subsidiary’s
ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
In
July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore
Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, and its implementation guidelines,
to replace the Circular on Several Issues Concerning Foreign Exchange Administration for Domestic Residents to Engage in Return Investments
via Overseas Special Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE
Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with SAFE or its local branches
in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are
PRC residents and may be applicable to any offshore acquisitions that we make in the future.
Under
SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments
in offshore special purpose vehicles, or SPVs, will be required to register such investments with SAFE or its local branches. In addition,
any PRC resident who is a direct or indirect shareholder of a SPV, is required to update its filed registration with the local branch
of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the
PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make
the required registration or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from
distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be
prohibited from making additional capital contributions into its subsidiary in China. On February 13, 2015, SAFE promulgated the Circular
on Further Simplifying and Improving the Policies Concerning Foreign Exchange Control on Direct Investment, or SAFE Circular 13, which
became effective on June 1, 2015. Under SAFE Circular 13, applications for foreign exchange registration of inbound foreign direct investments
and outbound overseas direct investments, including those required under SAFE Circular 37, will be filed with qualified banks instead
of SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of SAFE.
If
our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches, our PRC Subsidiary
may be prohibited from distributing their profits and any proceeds from any reduction in capital, share transfer or liquidation to us,
and we may be restricted in our ability to contribute additional capital to our PRC Subsidiary. Moreover, failure to comply with SAFE
registration requirements could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
Mr.
Bao and Mr. He, who indirectly hold a majority of our shares, and who are known to us as being PRC residents have completed the initial
SAFE registration in connection with our financings and will update their registration filings with SAFE under SAFE Circular 37 when
any changes should be registered under SAFE Circular 37.
However,
we may not at all times be fully aware or informed of the identities of all our shareholders or beneficial owners that are required to
make or update such registrations, and we cannot compel our beneficial owners to comply with SAFE registration requirements. As a result,
we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will
in the future make or obtain any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or
beneficial owners to comply with SAFE regulations or failure by us to amend the foreign exchange registrations of our PRC Subsidiary,
could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiary’s
ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
If
we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences
to us and our non-PRC shareholders.
Under
the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with “de facto management
body” within the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its
global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises
full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise.
In 2009, the State Administration of Taxation, or SAT, issued the Circular on Issues Concerning the Identification of Chinese-Controlled
Overseas Registered Enterprises as Resident Enterprises in Accordance With the Actual Standards of Organizational Management, known as
SAT Circular 82, which has been revised by the Decision of the State Administration of Taxation on Issuing the Lists of Invalid and Abolished
Tax Departmental Rules and Taxation Normative Documents on December 29, 2017 and by the Decision of the State Council on Cancellation
and Delegation of a Batch of Administrative Examination and Approval Items on November 8, 2013. Circular 82 has provided certain specific
criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore
is located in China. Further to SAT Circular 82, the SAT issued the Administrative Measures for Enterprise Income Tax of PRC-Controlled
Offshore Incorporated Resident Enterprises (Trial), or SAT Bulletin 45, effective 2011, to provide more guidance on the implementation
of SAT Circular 82. SAT Bulletin 45 clarified certain issues in the areas of resident status determination, post-determination administration
and competent tax authorities’ procedures.
According
to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as
a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income
tax on its global income only if all of the following conditions are met: (i) the places where the senior management and senior management
departments responsible for the daily production, operation and management of the enterprise perform their duties are mainly located
within the territory of the PRC; (ii) decisions relating to the enterprise’s financial matters (such as money borrowing, lending,
financing and financial risk management) and human resource matters (such as appointment, dismissal and salary and wages) are made or
are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records,
company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members
or senior executives habitually reside in the PRC. Although SAT Circular 82 and SAT Bulletin 45 only apply to offshore incorporated enterprises
controlled by PRC enterprises or PRC enterprise groups and not those controlled by PRC individuals or foreigners, the determination criteria
set forth therein may reflect the SAT’s general position on how the term “de facto management body” could be applied
in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals
or foreigners.
In
addition, the SAT issued the Announcement of the State Administration of Taxation on Issues concerning the Determination of Resident
Enterprises Based on the Standards of Actual Management Institutions in January 2014 to provide more guidance on the implementation of
SAT Circular 82. This bulletin further provides that, among other things, an entity that is classified as a “resident enterprise”
in accordance with the circular shall file the application for classifying its status of residential enterprise with the local tax authorities
where its main domestic investors are registered. From the year in which the entity is determined to be a “resident enterprise,”
any dividend, profit and other equity investment gain shall be taxed in accordance with the enterprise income tax law and its implementing
rules.
We believe that none of our
entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Regulation — Regulations on Tax —
PRC Enterprise Income Tax”. However, the tax resident 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.” Our PRC legal counsel
has also advised us that there is a risk that the PRC tax authorities may deem us as a PRC resident enterprise since a substantial majority
of the members of our management team are located in China. If the PRC tax authorities determine that we are a PRC resident enterprise
for enterprise income tax purposes, we will be subject to the enterprise income tax on our global income at the rate of 25% and we will
be required to comply with PRC enterprise income tax reporting obligations. In addition, we may be required to withhold a 10% withholding
tax from dividends we pay to our shareholders that are non-resident enterprises, and non-resident enterprise shareholders may be subject
to PRC tax on gains realized on the sale or other disposition of ordinary shares, if such income is treated as sourced from within the
PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to our non-PRC individual shareholders and any gain realized
on the transfer of ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% unless a reduced rate is available
under an applicable tax treaty. It is unclear whether non-PRC shareholders of our company 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. Any such tax
may reduce the returns on your investment in the ordinary shares.
We
face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On
December 10, 2009, SAT issued the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident
Enterprises, or SAT Circular 698, with retroactive effect from January 1, 2008. Pursuant to the SAT Circular 698, where a non-resident
enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas
holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective
tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall
report to the competent tax authority of the PRC resident enterprise this Indirect Transfer.
On
February 3, 2015, the SAT issued the Announcement of the State Administration of Taxation on Several Issues Relating to Enterprise Income
Tax of Transfers of Assets between Non-resident Enterprises, or SAT Bulletin 7. SAT Bulletin 7 has introduced a new tax regime that is
significantly different from the previous one under former SAT Circular 698 (which was repealed by the Announcement of the State Administration
of Taxation on Matters Concerning Withholding of Income Tax of Non-resident Enterprises at Source by SAT). SAT Bulletin 7 extends its
tax jurisdiction to not only Indirect Transfers set forth under former SAT Circular 698 but also transactions involving transfer of other
taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 provides clearer criteria
than former SAT Circular 698 for assessment of reasonable commercial purposes and has introduced safe harbors for internal group restructurings
and the purchase and sale of equity of a same listed foreign enterprise by a non-resident enterprise through a public securities market.
SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer)
of taxable assets. Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas
holding company, which is an Indirect Transfer, the non-resident enterprise, being the transferor, or the transferee, or the PRC entity
that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over
form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial
purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect
Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is
obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and
the transferor fails to pay the taxes. However, according to the aforesaid safe harbor rule, the PRC tax would not be applicable to the
transfer by any non-resident enterprise of our ordinary shares acquired and sold on public securities markets.
On
October 17, 2017, SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident
Enterprise Income Tax at Source, or SAT Bulletin 37, which, among others, repealed the Circular 698 on December 1, 2017. SAT Bulletin
37 further details and clarifies the tax withholding methods in respect of income of non-resident enterprises under Circular 698. And
certain rules stipulated in SAT Bulletin 7 are replaced by SAT Bulletin 37. Where the non-resident enterprise fails to declare the tax
payable pursuant to Article 39 of the Enterprise Income Tax Law, the tax authority may order it to pay the tax due within required time
limits, and the non-resident enterprise shall declare and pay the tax payable within such time limits specified by the tax authority;
however, if the non-resident enterprise voluntarily declares and pays the tax payable before the tax authority orders it to do so within
required time limits, it shall be deemed that such enterprise has paid the tax in time.
We
face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved,
such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to withholding
obligations if our company is transferee in such transactions, under SAT Bulletin 37 and SAT Bulletin 7. For transfer of shares in our
company by investors who are non-PRC resident enterprises, our PRC Subsidiary may be required to expend valuable resources to comply
with SAT Bulletin 37 and SAT Bulletin 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these
circulars, or to establish that our company should not be taxed under these circulars, which may have an adverse effect on our financial
condition and results of operations.
The
approval of the China Securities Regulatory Commission may be required in connection with our initial public offering, and, if required,
we cannot predict whether we will be able to obtain such approval.
The
Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory
agencies requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and
controlled by PRC companies or individuals to obtain the approval of the 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.
Our
PRC counsel, B&D Law Firm, has advised us based on their understanding of the current PRC laws, rules and regulations that the CSRC’s
approval is not required for the listing and trading of our ordinary shares on NASDAQ in the context of our initial public offering,
given that: (i) our PRC Subsidiary was incorporated as wholly foreign-owned enterprises by means of direct investment rather than by
merger or acquisition of equity interest or assets of a PRC domestic company owned by PRC companies or individuals as defined under the
M&A Rules that are our beneficial owners; and (ii) no provision in the M&A Rules clearly classifies contractual arrangements
as a type of transaction subject to the M&A Rules.
However,
our PRC counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented
in the context of an overseas offering and its opinions summarized above are subject to any new laws, rules and regulations or detailed
implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies,
including the CSRC, would reach the same conclusion as we do. If it is determined that CSRC approval is required for our initial public
offering, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek CSRC approval for our initial public
offering. These sanctions may include fines and penalties on our operations in the PRC, limitations on our operating privileges in the
PRC, delays in or restrictions on the repatriation of the proceeds from our initial public offering into the PRC, restrictions on or
prohibition of the payments or remittance of dividends by our PRC Subsidiary, or other actions that could have a material and adverse
effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ordinary
shares.
Failure
to make adequate contributions to various government-sponsored employee benefits plans as required by PRC laws and regulations may subject
us to penalties.
Companies
operating in China are required to participate in various government-sponsored employee benefit plans, including certain social insurance,
housing provident funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages
of salaries, including bonuses and allowances, of employees up to a maximum amount specified by the local government from time to time
at locations where the labor relations between us and our employees are based. The laws and regulations on employee benefit plans have
not been enforced consistently by the local governments in China given the different levels of economic development in different locations.
Following local common practice, we do not pay certain social insurance or housing fund contributions for each of our employees and the
amount we paid was lower than the requirements of relevant PRC regulations. Therefore, in our consolidated financial statements, we have
made an estimate and accrued a provision in relation to the potential make-up of our contributions for these plans. If we are determined
by local authorities to have failed to make adequate contributions to any employee benefits as required by relevant PRC laws and regulations,
we may face late fees or fines in relation to the underpaid employee benefits. As a result, our financial condition and results of operations
may be materially and adversely affected.
Increases
in labor costs and enforcement of stricter labor laws and regulations in the PRC may adversely affect our business and our profitability.
China’s
overall economy and the average wage in China have increased in recent years and are expected to continue to grow. The average wage level
for our employees has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will continue
to increase. Unless we are able to pass on these increased labor costs to those who pay for our 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 pensions, housing fund, medical insurance, work-related injury insurance, unemployment
insurance and maternity insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract
Law and its implementation rules, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages,
paying remuneration, determining the term of employee’s probation and unilaterally terminating labor contracts. In the event that
we decide to terminate some of our employees or otherwise change our employment or labor practices, the PRC Labor Contract Law and its
implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect
our business and results of operations.
In October 2010, the SCNPC
promulgated the Law on Social Insurance of the PRC, effective on July 1, 2011. On April 3, 1999, the State Council promulgated the Regulations
on the Administration of Housing Provident Fund, which was amended on March 24, 2002. Companies registered and operating in China are
required under the Law on Social Insurance of the PRC and the Regulations on the Administration of Housing Provident Fund to apply for
social insurance registration and housing fund deposit registration within 30 days of their establishment and to pay for their employees
different social insurance including pension insurance, medical insurance, work-related injury insurance, unemployment insurance and maternity
insurance to the extent required by law. We could be subject to orders by the competent labor authorities for rectification and failure
to comply with the orders which may further subject us to administrative fines. See “Regulations — Regulations on Labor Protection”.
As
the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment
practices do not and will not violate labor-related laws and regulations in China, which may subject us to labor disputes or government
investigations. We cannot assure you that we have complied or will be able to comply with all labor-related law and regulations including
those relating to obligations to make social insurance payments and contribute to the housing provident funds. If we are deemed to have
violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business,
financial condition and results of operations will be adversely affected.
If
our preferential tax treatments are revoked, become unavailable or if the calculation of our tax liability is successfully challenged
by the PRC tax authorities, we may be required to pay tax, interest and penalties in excess of our tax provisions, and our results of
operations could be materially and adversely affected.
The
PRC government has provided tax incentives to our VIE entity — United Time Technology Co., Ltd. These incentives include reduced
enterprise income tax rates. For example, under the Enterprise Income Tax Law and its implementation rules, the statutory enterprise
income tax rate is 25%. However, the income tax of an enterprise that has been determined to be a high and new technology enterprise
can be reduced to a preferential rate of 15%, and the certificate of a high and new technology enterprise is valid for three years.
Our
VIE entity has obtained the Certificate of High and New Technology Enterprise since November 2, 2015, which is renewed on October 16,
2018 and is thus eligible to enjoy a preferential tax rate of 15% for the periods presented, to the extent it has taxable income under
the PRC Enterprise Income Tax Law. Any increase in the enterprise income tax rate applicable to our VIE entity in China, or any discontinuation
or retroactive or future reduction of any of the preferential tax treatments currently enjoyed by our VIE entity, could adversely affect
our business, financial condition and results of operations. In addition, in the ordinary course of our business, we are subject to complex
income tax and other tax regulations and significant judgment is required in the determination of a provision for income taxes. Although
we believe our tax provisions are reasonable, if the PRC tax authorities successfully challenge our position and we are required to pay
tax, interest and penalties in excess of our tax provisions, our financial condition and results of operations would be materially and
adversely affected.
Discontinuation
of any of the government subsidies or imposition of any additional taxes and surcharges could adversely affect our financial condition
and results of operations.
Our
VIE and UTime GZ have received various financial subsidies from PRC local government authorities. The financial subsidies result from
discretionary incentives and policies adopted by PRC local government authorities. Meanwhile, to promote our productions and operations,
our VIE and UTime GZ built cooperative relations with government authorities, based on which financial subsidies and a series of other
governmental supports are provided for the purpose of facilitation of more tax payment to the local tax authorities. In order to attract
investment, the Management Committee of Guizhou Xinpu Economic Development Zone offers preferential policies to UTime GZ, the PRC Subsidiary
of our VIE, to establish its operations in Xinpu Economic Development Zone. As of the date of this report, UTime GZ has received subsidies
of approximately RMB1.2 million (US$0.2 million) in the form of logistics and employees’ rent subsidies for public rental housing
from the Management Committee of Guizhou Xinpu Economic Development Zone. However, local governments may decide to change, withdraw or
discontinue such financial subsidies at any time. The discontinuation of such financial subsidies or imposition of any additional taxes
could adversely affect our financial condition and results of operations.
If
the custodians or authorized users of controlling non-tangible assets of our company, including our corporate chops and seals, fail to
fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations could be materially and adversely
affected.
Under
PRC laws, legal documents for corporate transactions are executed using the chops or seal of the signing entity or with the signature
of a legal representative whose designation is registered and filed with the relevant branch of the Administration for Market Regulation.
Although we usually utilize
company seals to enter into contracts, the designated legal representatives of our PRC Subsidiary, VIE and UTime GZ have the apparent
authority to enter into contracts on behalf of such entities without chops and bind such entities. All designated legal representatives
of our PRC Subsidiary, VIE and UTime GZ are members of our senior management team who have signed employment agreements with us or our
PRC Subsidiary, VIE and UTime GZ under which they agree to abide by various duties they owe to us. In order to maintain the physical security
of our chops and chops of our PRC entities, we generally store these items in secured locations accessible only by the authorized personnel
in the legal or finance department of PRC Subsidiary, VIE and UTime GZ. Although we monitor such authorized personnel, there is no assurance
such procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse or misappropriate
our corporate chops or seals, we could encounter difficulties in maintaining control over the relevant entities and experience significant
disruption to our operations. If a designated legal representative obtains control of the chops in an effort to obtain control over PRC
Subsidiary, VIE and UTime GZ, we or our PRC Subsidiary, VIE and UTime GZ would need to pass a new shareholder or board resolution to designate
a new legal representative and we would need to take legal action to seek the return of the chops with the relevant authorities, or otherwise
seek legal redress for the violation of the representative’s fiduciary duties to us, which could involve significant time and resources
and divert management attention away from our regular business. In addition, the affected entity may not be able to recover corporate
assets that are sold or transferred out of our control in the event of such a misappropriation if a transferee relies on the apparent
authority of the representative and acts in good faith.
We
face certain risks relating to the real properties that we lease.
We
lease real properties from third parties primarily for our office and processing workshops being used in China, and most of our lease
agreements for these properties have not been registered with the PRC governmental authorities as required by PRC laws. Although the
failure to do so does not in itself invalidate the leases, we may be ordered by the PRC government authorities to rectify such noncompliance
and, if such noncompliance were not rectified within a given period of time, we may be subject to fines imposed by PRC government authorities
ranging from RMB1,000 and RMB10,000 for each lease agreement that has not been registered with the relevant PRC governmental authorities.
Most
of the proof of ownership or proof of right to lease in relation to our leased real properties have not been provided to us by the relevant
lessors. Therefore, we cannot assure you that such lessors are entitled to lease the relevant real properties to us. If the lessors are
not entitled to lease the real properties to us and the owners of such real properties decline to ratify the lease agreements between
us and the respective lessors, we may not be able to enforce our rights to keep leasing such properties under the respective lease agreements
against the owners. As of the date of this report, we are not aware of any claim or challenge brought by any third parties concerning
the use of our leased properties. If our lease agreements are claimed as null and void by third parties who are the real owners of such
leased real properties, we could be required to vacate the properties, in the event of which we could only initiate the claim against
the lessors under relevant lease agreements for indemnities for their breach of the relevant leasing agreements.
Furthermore,
the registered office of UTime SZ is 64D-403, Tian Zhan Building F2, Tian’an Che Kung Temple Industrial Zone, Xiangmi Lake, Futian
District, Shenzhen, while the principal executive office is located at 7th Floor, Building 5A, Shenzhen Software Industry
Base, Nanshan District, Shenzhen. According to PRC laws, rules and regulations, a company shall register its main office as registered
office. Where a company fails to undergo the relevant modification registration in accordance with relevant regulations for any modification
of the contents of company registration, the company registration authority shall order the company to register within a prescribed time
limit, and, if the company fails to do so, impose a fine of not less than RMB10,000 but not more than RMB100,000 on the company.
We
cannot assure you that suitable alternative locations are readily available on commercially reasonable terms, or at all, and if we are
unable to relocate our offices or processing workshops in a timely manner, our operations may be interrupted.
Risks
Related to Doing Business in India
Our
business activities in India could be subject to Indian competition laws, and any violation or alleged violation thereof may negatively
impact our operations.
The
Competition Commission of India (“CCI”) is the market regulator in India and the Competition Act, 2002 specifically provides
that any agreement which restricts the production, supply, distribution, acquisition or control of goods or provision of services, which
causes or is likely to cause an appreciable adverse effect on competition (AAEC) within India, is prohibited and void. Anti-competitive
agreements may include horizontal and vertical agreements. The definition of the term ‘agreement’ envisaged under the Competition
Act, 2002 is wide enough to include any tacit or explicit practice, any arrangement, understanding or action in concert. Any company
entering into such kind of agreements may come under the investigation by CCI, and if found violating provisions of the Competition Act,
2002, may be subjected to prosecution and penalty which may extend to 10% of the turnover of preceding 3 financial years. Therefore,
any exclusive supply or exclusive distribution agreement(s) may lead to competition law concerns.
Further,
any combinations, such as merger, amalgamation, acquisition or similar arrangement, which meet a certain asset/turnover threshold as
prescribed in the Competition Act, 2002 mandates CCI approval which involves complex filing requirements. CCI has extra territorial jurisdiction,
to investigate, order inquiry and pass order, in respect of the acts taken place outside India which has or may have appreciable adverse
effect in India.
Therefore,
our business activities of are also subject to the provisions of the Competition Act, 2002 and any violation or alleged violation thereof
may seriously impact our operations and business and our parent companies.
Our
business is substantially affected by prevailing economic, political and other prevailing conditions in India, and any downshift or perceived
downshift in the Indian economy could negatively impact our business.
Do
Mobile is a company incorporated in India, and the substantial portion of our assets and employees are located in India. Therefore, we
are highly dependent on prevailing economic conditions in India and its operational results are significantly affected by factors influencing
the Indian economy. Factors that may adversely affect the Indian economy, and hence results of our operations, may include:
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a)
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any
increase in foreign exchange rates;
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b)
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any
increase in interest rates or the inflation;
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c)
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any
scarcity of credit or other financing in India, resulting in an adverse impact on economic conditions in India and scarcity of financing
of our business developments and expansions;
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e)
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changes
in Indian tax rates and other monetary policies;
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f)
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political
instability, terrorism or military conflict in India or in countries in the region or globally including India’s neighboring countries;
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g)
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occurrence
of natural or man-made disasters;
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h)
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prevailing
regional or global economic conditions, including in India’s principal export markets; and
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i)
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other
significant regulatory or economic developments in or affecting India or its telecom sector.
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Any
downshift or perceived downshift in the Indian economy could negatively impact our business, results of operations and financial condition.
Introduction
of 5G compatible mobile handsets and other new technologies may be expensive, and if we are unable to provide 5G compatible mobile handsets,
our business will suffer.
In
the Indian market, 5th Generation (5G) cellular network technology is being unveiled and once 5G tenders are issued, mobile
manufacturing companies are required to update the technology to make 5G compatible mobile handsets. Updating to 5G technology will be
a costly affair for us. In order to remain in business and ahead of competition, we will need to upgrade their handsets or otherwise
integrate 5G capabilities into its products and services so as to provide 5G services. If we are not able to provide 5G compatible mobile
handsets, then its market share will get significantly eroded, thus having material adverse effect on its operations and revenues.
We
are subject to supervision and regulation by the Reserve Bank of India (or “RBI”) and the Department of Telecommunication,
and any non-compliance may adversely impact our business.
Do
Mobile is a wholly owned subsidiary of a foreign company. The foreign investment in India is regulated by the Reserve Bank of India and
business of telecommunication is regulated by the Department of Telecommunication. Currently, the business of Do Mobile falls within
the meaning of “manufacturing sector.” Foreign investment in manufacturing sector is automatically permitted and an Indian
company can sell its products, without obtaining any government permission. Any change in legislative and regulatory requirements may
impact the business activity of Do Mobile and may also lead to higher cost of compliance. This may adversely impact our business.
Our
operating results may be adversely affected by law and regulations to which we are subject.
We
are required to comply with central, state, local and foreign laws and regulations governing the protection of the environment and occupational
health and safety, including laws stringent norms prescribed by Bureau of Indian Standards and Department of Telecommunication. We cannot
assure you that we will at all times be in complete compliance with such laws, regulations and norms. If we violate or fail to comply
with the requirements, we could be fined or otherwise sanctioned by regulators. In some instances, such a fine or sanction could be material.
In addition, these requirements may become more stringent over time and we cannot assure you that we will not incur material costs or
liabilities in the future. These could include new regulations that we may be unable to comply with and this will impact our business.
Moreover,
there are number of taxes and other levies imposed at the level of the Central Government and State Government in India. These include:
(i) income tax; (ii) goods and service tax; (iii) state duty; (iv) stamp duty charges; and (v) other taxes and surcharges. These tax
rates may increase in future creating more financial burden on us and may affect our overall tax efficiency. Additional tax exposure
could adversely affect its business and results of operations.
Non-compliance
with the Indian labor law requirements may invite criminal and civil actions against us in India.
India
has stringent labor legislation that protects the interests of workers, including legislation that govern relationships with employees,
in such areas as minimum wage and maximum working hours, overtime, working conditions, and hiring and terminating of employees. Do Mobile
is irregular in labor law compliances, primarily relating to maintenance of statutory records and registers. Do Mobile has not obtained
any registration under applicable Shops and Establishment Act, wherever applicable. Furthermore, Sexual Harassment of Women at Workplace
(Prevention, Prohibition and Redressal) Act, 2013, mandatorily requires companies to have a defined policy on Prevention of Sexual Harassment
at Workplace and must set up an Internal Complaints Committee to redress grievances related to sexual harassment. Do Mobile neither has
any defined written policy on Prevention of Sexual Harassment nor have constituted any Internal Complaints Committee to redress the issues
relating to sexual harassment at workplace. Any non-compliance of applicable labor laws, will expose Do Mobile and its key managerial
personnel to penalties and fines which may impact our operations and growth.
Do
Mobile is subject to new certification regulations for mobile handsets introduced by the Department of Telecommunications, Government
of India, which could delay the launch of our new products and negatively impact our operations.
The
Department of Telecommunication, Government of India (“DOT”) is a nodal regulator to regulate the telecommunication industry
in India. DOT issues several regulations and guidelines to govern the telecommunication market. Since Do Mobile is involved in marketing
and selling of mobile handset, the business activity of Do Mobile falls within the ambit of telecommunication.
Recently,
the Telecommunication Engineering Centre of DOT has notified the Procedure for Mandatory Testing and Certification of Telecommunication
(“Certification Procedures”) vide its notification dated October 2, 2018 as per the Indian Telegraph Act, 1885 and
the Indian Telegraph Rules, 1951. The Certification Procedure has been enforced in phases. Phase-I came into effect from October 1, 2019
for the telecom equipment covered under Simplified Certification Scheme prescribed by the Government of India (i.e. SCS) which inter
alia included two wire telecom equipment, modem, G3 fax machine, ISDN CPE and in respect of certain telecom equipment under General Certification
Scheme prescribed by the Government of India (i.e. GCS) which inter alia included cord-less phones and PABX. Thereafter, Phase II was
enforced from October 1, 2020 and covered equipment which inter alia covered transmission terminal equipment, PON (passive optical network)
family of broadband equipment and feedback devises.
In
accordance with the Certification Procedures, every original equipment manufacturer, importer and dealer of the telecom equipment (i.e.,
mobile phones) engaged in sale or import of any telecom equipment in India is required to mandatorily obtain a certificate from Telecommunication
Engineering Centre and mark or affix the equipment with the appropriate certification label. Additionally, in order to obtain the Certification,
it is mandatory that the equipment needs to be tested only from a designated Conformance Assessment Body (“CAB”) or recognized
CAB of Mutual Recognition Agreement partner country. The Certification Procedure mandates the certification of mobile handsets manufactured
by mobile manufacturers and mobile manufacturer cannot sell the mobile handsets without such certification.
Do
Mobile is not engaged in manufacturing mobile handsets and outsources such manufacture to third-party manufacturers. We believe the Certification
Procedure will be applicable to such third-party manufacturers. The cost of obtaining the certification will result in an increase of
the cost of mobile handsets and thus, may impact sales of mobile handsets of Do Mobile. Therefore, we will be required to more carefully
assess the market when launching new models of our products and the new certification regulations could delay the launch of new products,
which impacts our operations and revenue negatively.
Do
Mobile is non-compliant with respect to certain issuances of its share capital and may be subject to regulatory action by the Registrar
of Companies and Ministry of Corporate Affairs, which could adversely affect our business operations and profitability.
Do
Mobile, being an Indian company, is required to comply with certain procedures with respect to its share capital. However, there have
been some lapses on the part of Do Mobile with respect to its share capital. Procedural lapses include but are not limited to:
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a)
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Under
the extant provisions of Companies Act, 2013, an Indian company cannot issue and allot shares in excess of its authorized share capital.
The board of directors of Do Mobile at their meeting dated December 15, 2017 had approved and allotted 483,940 shares of Rs. 10 to Bridgetime.
The authorized share capital of Do Mobile as on December 15, 2017 was Rs. 35,000,000. Whereas, on account of the aforesaid allotment
the paid-up share capital of Do Mobile increased to Rs. 35,509,150, which was in excess of its then authorized share capital of Rs. 35,000,000.
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b)
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There
have been certain inconsistencies regarding historical increases in authorized share capital of Do Mobile from Rs. 35,000,000 to Rs.
50,000,000.
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c)
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In
terms of Section 89 of the Companies Act, 2013 read with the Companies (Management and Administration) Rules, 2014, a person whose name
is entered in the register of members of a company but who does not hold the beneficial interest in such shares must file a declaration
to such effect with the company in the prescribed form. Further, every person holding beneficial interest in shares of a company must
file with the company, a declaration disclosing such interest in the prescribed form. Such declarations are to be noted by the company
in its register of members and make filings with the Registrar of Companies evidencing the same. Ms. Grover held 1 share of Do Mobile
as a nominee of Bridgetime, parent company of Do Mobile, and her name was entered in the register of members. Thus, Ms. Grover had the
registered ownership and Bridgetime Limited has beneficial ownership of said 1 share. No declaration with respect to registered and beneficial
ownership of 1 share has been made by Ms. Grover and Bridgetime Limited respectively, nor has Do Mobile made any filing in this regard
with the Registrar of Companies. Pursuant to Ms. Grover’s resignation, the said share was transfer to Ms. Aayushi Gautam who is
now its registered owner while Bridgetime Limited continues to the beneficial owner of the said share. A declaration with respect to
the registered and beneficial ownership of this one share is yet to be made by Do Mobile with the Registrar of Companies.
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Do
Mobile may be subject to regulatory action by the Registrar of Companies and Ministry of Corporate Affairs on account of the aforesaid
non-compliances in relation to issuance of its share capital, thus exposing it to certain fines and penalties. Directors and key management
of Do Mobile are also liable for such non-compliance and may be subjected to fines and penalties.
While
no penalties have been imposed on Do Mobile for the aforesaid non-compliance thus far, Do Mobile cannot assure that any regulatory authorities
will not impose any penalty on Do Mobile or will not take any penal action with respect to the aforesaid non-compliance. If any adverse
actions are taken against Do Mobile, results of operations and profitability of Do Mobile could be adversely affected.
Do
Mobile is delayed in complying with reporting guidelines under the provisions of the Foreign Exchange Management (Non-debt Instruments)
Rules, 2019 (which replaced erstwhile Foreign Exchange Management (Transfer or issue of security by a person resident outside India)
Regulations, 2017) and may be subject to regulatory action by the Reserve Bank of India, which could adversely affect our business and
operations.
Under
the extant provisions of Foreign Exchange Management Act, 1999 read with Foreign Exchange Management (Non-debt Instruments) Rules, 2019,
every Indian company receiving foreign direct investment for issuance of shares shall within a period of 30 days from the date of issue
of shares to the foreign entity file a form FC-GPR (now part of Single Entity Master Form) with the Reserve Bank of India. There has
been some delay on the part of Do Mobile in complying with aforesaid filing of form FC-GPR within the stipulated timelines. Also, in
terms of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, an Indian company receiving foreign direct investment must
file an annual report titled ‘Foreign Liabilities and Assets’ (“FLA”) on or before July 15 of each year. Do Mobile
has not filed its FLA for the financial year 2017-18, 2018-19 and 2019-20 with the Reserve Bank of India. While no penalties have been imposed on Do Mobile
for the aforesaid non-compliances thus far; there cannot be any assurance that Reserve Bank of India will not impose any penalty on Do
Mobile or will not take any penal action in relation aforesaid non-compliances. If any penalties or other penal measures are enforced,
this could adversely affect our business and operations.
Any
foreign direct investment in Do Mobile from an entity of a country, which shares a land border with India or the beneficial owner of
an investment into India who is situated in or is a citizen of any such country, shall invest only with governmental approval. Any delay
in obtaining such governmental approval could adversely affect business operations and cash flow position of Do Mobile.
Do
Mobile liquidity and its working capital requirements are mainly met through foreign direct investment. Do Mobile’s potential investors
are either based out of China, or such investments are from persons or entities whose ultimate beneficial ownership is situated in or
is from a citizen of such countries which share land borders with India including China. Additionally, as per current corporate structure,
Mr. Bao Minfei, who is a citizen of China, holds ultimate beneficial ownership in Do Mobile indirectly through various subsidiaries.
The Government of India vide Notification S.O. 1278 (E) dated April 22, 2020 (i.e., Foreign Exchange Management (Non-debt Instruments)
Amendment Rules, 2020) introduced a crucial amendment in the provisions of the FEMA Rules and has now stipulated that any investment
by an entity of a country, which shares land border with India, or where the beneficial owner of an investment into India is situated
in or is a citizen of any such country, can be made only upon seeking prior approval of the Government of India. These restrictions will
also apply in the case of transfer of ownership. Although Mr. Bao’s existing beneficial ownership in Do Mobile is not subject to
approval, any new investment in Do Mobile by a Chinese entity or Chinese citizen or entities that are beneficially owned by Chinese entities
or citizens, will be subject to prior approval of the Government of India. The Government of India will grant approval depending upon
the facts and circumstances of each case. Any delay in receipt of such approvals, will adversely impact operations and cash flow position
of Do Mobile and will put Do Mobile in a challenging position.
Risks
Related to Our Ordinary Shares and Our Initial Public Offering
Prior
to our April 2021 initial public offering, there had been no prior public market for our ordinary shares, and an active, liquid and orderly
trading market for our ordinary shares may not develop or be maintained in the United States, which could limit your ability to sell
our ordinary shares.
We
cannot assure you that an active U.S. public market for our ordinary shares will be sustained after our initial public offering. If an
active market does not continue, the value of our ordinary shares may be impaired and you may experience difficulty selling the ordinary
shares that you purchase in our initial public offering.
Our
ordinary share price may be volatile after the offering and, as a result, you could lose a significant portion or all of your investment.
The
market price of the ordinary shares on Nasdaq may fluctuate after listing as a result of several factors, including the following:
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volatility
in the mobile telecommunications and IoT industry, both in China and internationally;
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variations
in our operating results;
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risks
relating to our business and industry, including those discussed above;
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strategic
actions by us or our competitors;
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reputational
damage from accidents or other adverse events related to our company or its operations;
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investor
perception of us, the technology sector in which we operate, the investment opportunity associated with the ordinary shares and our future
performance;
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addition
or departure of our executive officers or directors;
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changes
in financial estimates or publication of research reports by analysts regarding our ordinary shares, other comparable companies or our
industry generally;
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trading
volume of our ordinary shares;
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future
sales of our ordinary shares by us or our shareholders;
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domestic
and international economic, legal and regulatory factors unrelated to our performance; or
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the
release or expiration of lock-up or other transfer restrictions on our outstanding ordinary shares.
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Furthermore,
the stock markets often experience significant price and volume fluctuations that have affected and continue to affect the market prices
of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance
of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as
recessions or interest rate changes may cause the market price of ordinary shares to decline.
Sales
of a substantial number of our ordinary shares in the public market by our existing shareholders could cause our share price to fall.
Sales
of a substantial number of our ordinary shares in the public market, or the perception that these sales might occur, could depress the
market price of our ordinary shares and could impair our ability to raise capital through the sale of additional equity securities. We
are unable to predict the effect that sales may have on the prevailing market price of our ordinary shares. All of the ordinary shares
owned by our directors, officers and existing shareholders are subject to lock-up agreements with the underwriters in our initial public
offering that restrict the shareholders’ ability to transfer our ordinary shares until after October 3, 2021. Substantially all
of our outstanding ordinary shares will become eligible for unrestricted sale upon expiration of the lock-up period. In addition, ordinary
shares issued or issuable upon exercise of options and warrants vested as of the expiration of the lock-up period will be eligible for
sale at that time. Sales of ordinary shares by these shareholders could have a material adverse effect on the trading price of our ordinary
shares.
There
are no assurance that our securities, including our ordinary shares, will continue to be listed or, if listed, that we will be able to
comply with the continued listing standards of Nasdaq, which could limit investors’ ability to make transactions in our securities
and subject us to additional trading restrictions.
Even
though our ordinary shares are currently listed on the NASDAQ, we cannot assure you that we will be able to meet NASDAQ’s continued
listing requirement or maintain other listing standards. If our ordinary shares are delisted by NASDAQ, and we are not able to list our
securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were
to occur, then, we could face significant material adverse consequences, including:
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less
liquid trading market for our securities;
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more
limited market quotations for our securities;
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determination
that our ordinary shares are a “penny stock” that requires brokers to adhere to more stringent rules and possibly resulting
in a reduced level of trading activity in the secondary trading market for our securities;
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more
limited research coverage by stock analysts;
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loss
of reputation; and
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more
difficult and more expensive equity financings in the future.
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The
National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the
sale of certain securities, which are referred to as “covered securities.” If our ordinary shares remain listed on NASDAQ,
our ordinary shares will be covered securities. Although the states are preempted from regulating the sale of our securities, the federal
statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity,
then the states can regulate or bar the sale of covered securities in a particular case. If our securities were no longer listed on NASDAQ
and therefore not “covered securities”, we would be subject to regulation in each state in which we offer our securities.
Future
issuance of our ordinary shares could cause dilution of ownership interests and adversely affect our stock price.
We
may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds
for our current or future operating plans. To the extent that additional capital is raised through the sale of our equity or convertible
debt securities, the issuance of such securities could result in further dilution to our shareholders or result in downward pressure
on the price of our ordinary shares
Shares
eligible for future sale may depress our stock price.
As
of the date of this report, we had 8,267,793 ordinary shares outstanding. All of the ordinary shares of held by affiliates are restricted
or control securities under Rule 144 promulgated under the Securities Act. Sales of ordinary shares under Rule 144 or another exemption
under the Securities Act or pursuant to a registration statement could have a material adverse effect on the price of the ordinary shares
and could impair our ability to raise additional capital through the sale of equity securities.
We
may issue preferred shares to investor that grant them superior rights than holders of our ordinary shares without obtaining shareholder
approval.
Our
amended and restated memorandum and articles of association authorize our board of directors to issue one or more series of preferred
shares and set the terms of the preferred shares without seeking any further approval from our shareholders. Any preferred shares that
are issued may rank ahead of our ordinary shares, in terms of dividends, liquidation rights and voting rights.
If
securities or industry analysts do not publish or cease publishing research reports about us, if they adversely change their recommendations
regarding our ordinary shares or if our operating results do not meet their expectations, the price of our ordinary shares could decline.
The
trading market for our ordinary shares will be influenced by the research and reports that industry or securities analysts may publish
about us, our business, our market or our competitors. Securities and industry analysts currently publish limited research on us. If
there is limited or no securities or industry analyst coverage of our company, the market price and trading volume of our ordinary shares
would likely be negatively impacted. Moreover, if any of the analysts who may cover us downgrade our ordinary shares, provide more favorable
relative recommendations about our competitors or if our operating results or prospects do not meet their expectations, the market price
of our ordinary shares could decline. If any of the analysts who may cover us were to cease coverage or fail to regularly publish reports
on us, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.
As
a foreign private issuer, we are subject to different U.S. securities laws and NASDAQ governance standards than domestic U.S. issuers.
This may afford less protection to holders of our ordinary shares, and you may not receive corporate and company information and disclosure
that you are accustomed to receiving or in a manner in which you are accustomed to receiving it.
As
a foreign private issuer, the rules governing the information that we disclose differ from those governing U.S. corporations pursuant
to the Exchange Act. Although we intend to report quarterly financial results and report certain material events, we are not required
to file quarterly reports on Form 10-Q or provide current reports on Form 8-K disclosing significant events within four days of their
occurrence and our quarterly or current reports may contain less information than required for domestic issuers. In addition, we are
exempt from the SEC’s proxy rules, and proxy statements that we distribute will not be subject to review by the SEC. Our exemption
from Section 16 rules regarding sales of ordinary shares by insiders means that you will have less data in this regard than shareholders
of U.S. companies that are subject to the Exchange Act. As a result, you may not have all the data that you are accustomed to having
when making investment decisions with respect to U.S. public companies.
As
a foreign private issuer, we are exempt from complying with certain corporate governance requirements of the NASDAQ applicable to a U.S.
issuer. As the corporate governance standards applicable to us are different than those applicable to domestic U.S. issuers, you may
not have the same protections afforded under U.S. law and the Nasdaq Stock Market rules as shareholders of companies that do not have
such exemptions.
We
may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
We
could cease to be a foreign private issuer if a majority of our outstanding voting securities are directly or indirectly held of record
by U.S. residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. The regulatory
and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher than costs we incur as a
foreign private issuer, which could have a material adverse effect on our business and financial results.
As
an “emerging growth company” under the JOBS Act, we are allowed to postpone the date by which we must comply with some of
the laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the
SEC, which could undermine investor confidence in our company and adversely affect the market price of our ordinary shares.
For
so long as we remain an “emerging growth company” as defined in the JOBS Act, we have taken and intend to continue to take
advantage of certain exemptions from various requirements that are applicable to public companies that are not “emerging growth
companies” including:
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being
permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements,
with correspondingly reduced “Item 5. Operating And Financial Review And Prospects” disclosure;
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not
being required to comply with the auditor attestation requirements for the assessment of our internal control over financial reporting
provided by Section 404 of the Sarbanes-Oxley Act of 2002;
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not
being required to comply with any requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm
rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about
the audit and our financial statements;
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reduced
disclosure obligations regarding executive compensation; and
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not
being required to hold a nonbinding advisory vote on executive compensation or seek shareholder approval of any golden parachute payments
not previously approved.
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We
have taken and intend to continue to take advantage of certain of these exemptions until we are no longer an “emerging growth company.”
We will remain an emerging growth company until the earlier of: (1) the last day of the fiscal year (a) following the fifth anniversary
of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in
which we are deemed to be a large accelerated filer, which means the market value of our ordinary shares that is held by non-affiliates
exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, and (2) the date on which we have
issued more than $1 billion in non-convertible debt during the prior three-year period.
We
have incurred and will continue to incur increased costs as a result of becoming a public company in the United States.
As
a newly public company in the United States upon the completion of our IPO on April 8, 2021, we have incurred and will continue to incur
significant legal, accounting, insurance and other expenses that we have not incurred when we were a private company, including costs
associated with U.S. public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley
Act of 2002 and the Dodd Frank Wall Street Reform and Consumer Protection Act and related rules implemented by the SEC and the NASDAQ.
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 (“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%.
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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.
Taking the amount of cash
we raised in our initial public offering into account, together with any other assets held for the production of passive income, it is
possible that, for our 2021 taxable year or for any subsequent year, more than 50% of our assets may be assets which produce passive income.
We will make this determination following the end of any particular tax year. Although the law in this regard is unclear, we treat our
consolidated affiliated entities as being owned by us for United States federal income tax purposes, not only because we exercise effective
control over the operation of such entities but also because we are entitled to substantially all of their economic benefits. 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.
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
— Material U.S. Federal Income Tax Considerations — Passive Foreign Investment Company”.
ITEM
4. INFORMATION ON THE COMPANY
4A.
History and Development of the Company
We commenced our operations
in June 2008 through UTime SZ, a PRC company established by Mr. Bao, Mr. Junlin Zhou and Mr. Bo Tang. As of March 31, 2017, Mr. Bao, Mr.
Zhou and Mr. Tang held 52%, 28% and 20% of the equity interests of UTime SZ, respectively. In February 2018, Mr. Bao acquired the equity
interests of UTime SZ held by Mr. Zhou and Mr. Tang and became UTime SZ’s sole shareholder. In April 2019, UTime SZ approved a board
resolution and in August 2019 approved a shareholder resolution, both of which approved Mr. He, the controlling shareholder of HMercury
Capital Limited, to purchase a RMB21.4 million equity interest in UTime SZ which has been received as of the date of this report. On September
3, 2019, UTime SZ approved a shareholder resolution to allow Mr. Bao to invest an additional RMB23.9 million equity interest in UTime
SZ, for which the consideration primarily consisted of the amount due to Shenzhen Kaiweixin Technology Co., Ltd. (“Kaiweixin”)
of RMB23.0 million as of March 31, 2019. Kaiweixin was controlled by Mr. Bao through an entrust agreement with Mr. Wukai Song, who owned
100% of equity interest of Kaiweixin and Mr. Bao assumed all creditor rights after Kaiweixin was deregistered on June 21, 2019. As of
the date of this report, Mr. Bao and Mr. He held 96.95% and 3.05% equity interests of UTime SZ, respectively.
Beginning
in late 2018, the following transactions were undertaken to reorganize the legal structure (the “Reorganization”) of the
Company. In October 2018, UTime Limited was incorporated in the Cayman Islands. In November 2018, UTime HK, a WOS of the Company, was
incorporated in Hong Kong and in December 2018, UTime WFOE, a WOS of the Company, was incorporated in China, respectively.
In
March 2019, UTime WFOE entered into a series of contractual agreements with our VIE, UTime SZ and its principal shareholder, Mr. Bao,
which were further amended and restated in August and September of 2019, respectively, and were entered into among UTime WFOE, VIE, Mr. Bao
and Mr. He. Pursuant to these agreements, we believe that these contractual arrangements enable us to (1) have power to direct the
activities that most significantly affects the economic performance of UTime SZ and its subsidiaries, and (2) receive the economic benefits
of UTime SZ and its subsidiaries that could be significant to UTime SZ and its subsidiaries. Accordingly, the Company is considered the
primary beneficiary of UTime SZ and is able to consolidate UTime SZ and its subsidiaries.
Do
Mobile is a Company subsidiary that was incorporated by the Company on October 24, 2016 in New Delhi, India. Do Mobile is an operating
entity that sells cell phone products and provides after-sale services of our own in-house brand in India. Prior to the Reorganization,
the majority of Do Mobile’s equity interests were held by Mr. Bao through an entrustment agreement with Mr. Wukai Song through
a holding company, Bridgetime. Bridgetime was incorporated on September 5, 2016 in the British Virgin Islands (“BVI”) under
the laws of the BVI, with Mr. Wukai Song owning 70% of the equity interest of Bridgetime through an entrust agreement between him and
Mr. Bao, and Mr. Li owning 30% of the equity interest of Bridgetime.
On
March 5, 2018, Bridgetime issued 100,000 ordinary shares to Mr. Wukai Song, changing the shareholders’ structure
of Bridgetime so that Mr. Wukai Song owned a 90% equity interest in Bridgetime, which were controlled by Mr. Bao through an
entrust agreement between him and Mr. Wukai Song, and Mr. Li owning 10% of equity interest. On December 5, 2018, Bridgetime
approved a board resolution that appointed and registered Mr. Yihuang Chen a new director. On March 11, 2019, Bridgetime approved
a board resolution that transferred 1 share of Do Mobile to Mr. Yihuang Chen and made him nominal shareholder of Do Mobile,
removed Mr. Li as the director of Bridgetime and authorized representative of Do Mobile, and appointed Mr. Wukai Song as the authorized
representative of Do Mobile. On April 4, 2019, Bridgetime approved a board resolution that forfeited 15,000 ordinary shares of Bridgetime
held by Mr. Li, cancelled those shares accordingly and amended Bridgetime’s memorandum of association that changed the number of
its authorized shares from 150,000 to 135,000 at a par value of US$1.00. After this, Mr. WuKai Song owned 100% of the equity interest
of Bridgetime, which was controlled by Mr. Bao through an entrust agreement between him and Mr. Wukai Song. On May 23, 2019, Bridgetime
approved a board resolution that transferred the 135,000 ordinary shares owned by Mr. Wukai Song to UTime Limited. As a result, Bridgetime
is currently a WOS of the Company. Since inception, Bridgetime has only made nominal investments in Do Mobile and no substantial business
operations have occurred.
On
May 20, 2019, the Company approved a board resolution that agreed to transfer 12,000,000 of its ordinary shares then owned by Mr. Bao
to Grandsky Phoenix Limited, a company that was established under the laws of the British Virgin Islands and 100% owned by Mr. Bao.
On
June 3, 2019, the Company entered into a share subscription agreement with HMercury Capital Limited, a company that was incorporated
under the laws of the British Virgin Islands and controlled by Mr. He, one of our directors, pursuant to which HMercury Capital Limited
purchased an aggregate of 377,514 of the Company’s ordinary shares. On the same day, the Company approved a board resolution for
issuance of 377,514 of the Company’s ordinary shares at par value US$0.0001 to HMercury Capital Limited based on the share subscription
agreement. As a result, Mr. Bao, through Grandsky Phoenix Limited, and Mr. He, through HMercury Capital Limited, owned 96.95% and 3.05%
of the equity interest of the Company, respectively.
On
April 29, 2020, the Company approved a board resolution that agreed to repurchase 7,620,000 and 239,721 ordinary shares, which were subsequently
cancelled, at par value from Grandsky Phoenix Limited and HMercury Capital Limited, respectively, pursuant to a share repurchase agreement
that the Company entered into with Grandsky Phoenix Limited and HMercury Capital Limited on April 29, 2020. On August 13, 2020, the Company
approved a board resolution and signed capital contribution letter with Grandsky Phoenix Limited and HMercury Capital Limited, respectively.
Based on the capital contribution letter, each shareholder opted not to receive the consideration for the Repurchased Shares and made
a pure capital contribution in the sum of the purchase price in favor of the Company without the issue of additional shares of the Company.
In April 2021, we completed our initial public offering of 3,750,000 ordinary shares. As a result, Mr. Bao, through Grandsky Phoenix
Limited, and Mr. He, through HMercury Capital Limited, own 4,380,000 ordinary shares, representing 52.98% of equity interest and 137,793
ordinary shares, representing 1.66% of equity interest of the Company, respectively, as of the date of this report.
The
following diagram illustrates our corporate structure as of the date of this report.
Ownership
and Organization Chart
As
of the date of this report, details of the material subsidiaries of the Company and UTime SZ are set forth below:
Name
|
|
Date
of Incorporation
|
|
Jurisdiction
of Incorporation
|
|
Percentage
of beneficial ownership
|
|
Principal Activities
|
Subsidiaries
of the Company
|
|
|
|
|
|
|
|
|
UTime
International Limited
|
|
November 1, 2018
|
|
Hong
Kong
|
|
100%
|
|
Investment
holding company
|
Shenzhen
UTime Technology Consulting Co., Ltd.
|
|
December 18, 2018
|
|
China
|
|
100%
|
|
Investment
holding company
|
Bridgetime
Limited
|
|
September 5, 2016
|
|
British
Virgin Island
|
|
100%
|
|
Investment
holding company
|
Do
Mobile India Private Ltd.
|
|
October 24, 2016
|
|
India
|
|
99.99%
|
|
Sales
of in-house brand products in India
|
|
|
|
|
|
|
|
|
|
VIE
|
|
|
|
|
|
|
|
|
United
Time Technology Co., Ltd.
|
|
June 12, 2008
|
|
China
|
|
100%
|
|
Research
and development of products, and sales
|
|
|
|
|
|
|
|
|
|
Subsidiaries
of the VIE
|
|
|
|
|
|
|
|
|
Guizhou
United Time Technology Co., Ltd. (“UTime GZ”)
|
|
September 23, 2016
|
|
China
|
|
UTime SZ’s
subsidiary
|
|
Manufacturing
|
UTime
Technology (HK) Company Limited (“UTime Trading”)
|
|
June 25, 2015
|
|
Hong
Kong
|
|
UTime SZ’s
subsidiary
|
|
Trading
|
UTime
India Private Limited (“UTime India”)
|
|
February 7,
2019
|
|
India
|
|
UTime
Trading’s Subsidiary
|
|
Trading
|
Contractual
Arrangements with the VIE and its Respective Shareholders
We
conduct substantially all of our business in the PRC through a series of contractual arrangements with our VIE, UTime SZ, and UTime GZ.
The VIE and subsidiaries of the VIE hold the requisite licenses and permits necessary to conduct the Company’s business. In addition,
the VIE and its subsidiaries of the VIE hold the assets necessary to operate the Company’s business and generate substantially
all of the Company’s revenues. We exercise effective control over our VIE through a series of contractual arrangements among UTime
WFOE, our VIE and its shareholders.
Our
contractual arrangements with our VIE and its respective shareholders allow us to: (i) exercise effective control over our VIE; (ii)
receive substantially all of the economic benefits of our VIE; and (iii) have an exclusive option to purchase all or part of the equity
interest in and/or assets of our VIE when and to the extent permitted by PRC laws.
As
a result of our direct ownership in UTime WFOE and the contractual arrangements with our VIE, we are regarded as the primary beneficiary
of our VIE, and we treat the VIE and its subsidiaries as our consolidated affiliated entities under U.S. GAAP. We have consolidated the
financial results of our VIE and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.
The
following is a summary of the contractual arrangements by and among UTime WFOE, the VIE and the shareholders of the VIE and their spouses,
as applicable.
Agreements
that provide us with effective control over the VIE
Power
of Attorney. Pursuant to a series of powers of attorney issued by each shareholder of the VIE, each
shareholder of the VIE irrevocably authorizes UTime WFOE or any natural person duly appointed by UTime WFOE to exercise on the behalf
of such shareholder with respect to all matters concerning the shareholding of such shareholder in the VIE, including without limitation,
attending shareholders’ meetings of the VIE, exercising all the shareholders’ rights and shareholders’ voting rights,
and designating and appointing the legal representative, the chairperson, directors, supervisors, the chief executive officer and any
other senior management of the VIE.
On
September 4, 2019, UTime WFOE, the VIE and Mr. Bao, a shareholder of the VIE, entered into the second amended and restated
power of attorney, while UTime WFOE, the VIE and Mr. He, a shareholder of the VIE, entered into an amended and restated power of
attorney, which contain terms substantially similar to the power of attorney executed by the shareholders of the VIE described above.
Equity
Pledge Agreement. Pursuant to the Equity Pledge Agreement entered into among UTime WFOE, the VIE and
the shareholders of the VIE, the shareholders of the VIE agreed to pledge their 100% equity interests in the VIE to UTime WFOE to secure
the performance of the VIE’s obligations under the applicable existing exclusive call option agreement, power of attorney, exclusive
technical consultation and service agreement, business operation agreement and also the equity pledge agreement. If events of default
defined therein occur, upon giving written notice to the VIE shareholders, UTime WFOE may exercise its rights to enforce the pledged
equity interest to the extent permitted by PRC laws.
On
September 4, 2019, UTime WFOE, the VIE and the shareholders of the VIE entered into the second amended and restated equity pledge
agreement, which contains terms substantially similar to the equity pledge agreement described above.
As
of the date of this report, we have completed the equity pledge registration with the competent Administration for Market Regulation
in accordance with the PRC Property Rights Law and the Civil Code of the PRC.
Spouse
Consent Letter. Pursuant to a series of spousal consent letters, executed by the spouses of the shareholders
of the VIE, Mr. Bao and Mr. He, such signing spouses confirmed and agreed that the equity interests of the VIE are the own
property of their applicable spouses and shall not constitute the community property of the couples. Such spouses also irrevocably waived
any potential right or interest that may be granted by operation of applicable law in connection with the equity interests of the VIE
held by their applicable spouses.
On
September 4, 2019, Mr. Bao’s spouse executed the second amended and restated spousal consent letter while Mr. He’s
spouse executed an amended and restated spousal consent letter, which contains terms substantially similar to the spousal consent letter
described above.
Business
Operation Agreement. Pursuant to the business operation agreement entered into among UTime WFOE, the
VIE and the shareholders of the VIE, the shareholders of the VIE agreed that without the prior written consent of UTime WFOE or any party
designated by UTime WFOE, the VIE shall not engage in any transaction which may have a material or adverse effect on any of its assets,
businesses, employees, obligations, rights or operations (except for those occurring in the due course of business or in day-to-day business
operations, or those already disclosed to UTime WFOE and with the explicit prior written consent of UTime WFOE). In addition, the VIE
and its shareholders jointly agreed to accept and strictly implement any proposal made by UTime WFOE from time to time regarding the
employment and removal of the VIE’s employees, its day-to-day business management and the financial management system of the
VIE.
On
September 4, 2019, UTime WFOE, the VIE and the shareholders of the VIE entered into the second amended and restated business operation
agreement, which contains terms substantially similar to the business operation agreement described above.
Agreements
that allow us to receive economic benefits from our VIE
Exclusive
Technical Consultation and Service Agreement. Pursuant to the exclusive technical consultation and
service agreement entered into between UTime WFOE and the VIE, dated March 19, 2019, UTime WFOE has the exclusive right to provide or
designate any entity to provide the VIE business support, technical and consulting services. Pursuant to such agreement, the VIE agreed
to pay UTime WFOE (i) the service fees equal to the sum of 100% of the net income of the VIE of that year or such other amount otherwise
agreed by UTime WFOE and the VIE; and (ii) a service fee otherwise confirmed by UTime WFOE and the VIE for specific technical services
and consulting services provided by UTime WFOE in accordance with the VIE’s needs from time to time. The exclusive consultation
and service agreement will continue to be valid unless the written agreement is signed by all parties thereto to terminate it or a mandatory
termination is requested in accordance with applicable PRC laws and regulations.
Agreements
that provide us with the option to purchase the equity interests in and assets of our VIE
Exclusive
call option agreement. Pursuant to the exclusive call option agreement entered into among UTime WFOE, the
VIE and the shareholders of the VIE, each of the shareholders has irrevocably granted UTime WFOE an exclusive option to purchase all
or part of its equity interests in the VIE, and the VIE has irrevocably granted UTime WFOE an exclusive option to purchase all or part
of its assets.
With
regard to the equity transfer option, the total transfer price to be paid by UTime WFOE or any other entity or individual designated
by UTime WFOE for exercising such option shall be the capital contribution mirrored by the corresponding transferred equity in the registered
capital of the VIE, provided that if the lowest price permitted by the then-effective PRC laws is lower than the above capital contribution,
the transfer price shall be the lowest price permitted by the PRC laws. With regard to the asset purchase option, the transfer price
to be paid by UTime WFOE or any other entity or individual designated by UTime WFOE for exercising such option shall be the lowest price
permitted by the then-effective PRC laws.
On
September 4, 2019, UTime WFOE, VIE and the shareholders of VIE entered into the second amended and restated exclusive call option
agreement, which contains terms substantially similar to the exclusive call option agreement described above.
4B.
Business Overview
We
are committed to providing cost-effective mobile devices to consumers globally and to helping low-income individuals from established
markets, including the United States, and emerging markets, including India and countries in South Asia and Africa, have better access
to updated mobile technology.
We
are mainly engaged in the design, development, production, sales and brand operation of mobile phones, accessories and related consumer
electronics. We also provide Electronics Manufacturing Services (“EMS”), including Original Equipment Manufacturer (“OEM”),
which we manufacture products solely pursuant to customers’ orders, and Original Design Manufacturer (“ODM”) services,
which we not only manufacture but also design products based on clients’ demand, for well-known brands, such as TCL Communication
Technology Holdings, Ltd., a subsidiary of TCL Corporation, Swagtek Inc., Shanghai Sunvov Communications Technology Co., Ltd. and T2Mobile
International Limited. Our operations are based in China but most of our products are sold overseas, including India, Brazil, the United
States, and other emerging markets countries in South Asia, Africa and Europe. We have two in-house brands, “UTime,” which
is our middle-to-high end label and targets middle class consumers from emerging markets; and “Do”, our low- to mid-end brand,
which is positioned to target grassroots consumers and price-sensitive consumers in emerging markets. Our prime end user groups are segmented
into regions like South America, South Asia, Southeast Asia and Africa.
We
value systematic management and organize production with strictly high-quality standards and production technology. We continuously
endeavor to improve our overall manufacturing service level, to strengthen our cost control processes, and to enhance our ability to
respond rapidly to market dynamics in order to ensure a sustainable development in our EMS segment, especially in Printed Circuit Board
and Assembly (“PCBA”) for consumer electronic products.
Market
Opportunities
Global
Mobile Phone Market Overview
We
believe that the global mobile phone market has huge potential and broad development prospects
Benefiting
from the continuous upgrading of communication technologies and mobile phone parts, we believe that the global mobile phone market is
currently maintaining a steady growth trend. With the advent of the Fifth-Generation (“5G”) era, we estimate that the
average annual shipments value of mobile phones worldwide are expected to increase steadily from 2019 to 2022.
Due
to a fast increase in the population of Fourth-Generation (“4G”) mobile phones from 2013 to 2015, we believe that the
global mobile phone shipments volume reached its peak and the speed has tended to slow down because of the saturated market of 4G mobile
phones. However, we estimate that the mobile phone manufacturing industry, especially in China, will continue to grow and we expect the
mobile phone shipments value will increase mainly driven by the growing demand for 5G mobile phones.
We
believe that the industry is in a transitional period and product performance continues to evolve.
The
strong demand for new products triggered by technology upgrades and functional innovations has driven the mobile phone industry to achieve
rapid penetration rate. However, as the industry matures and enters the transition period from 4G to 5G, we believe that the industry
growth rate will slow down along with product homogenization. At the same time, we believe that the gradual increase driven by the demand
of 5G will make the relevant manufacturers in the mobile phone industry pay more attention to the sales growth brought by higher quality
products, which may also encourage the users to increase their frequency in changing models.
Emerging
Markets Mobile Phone Markets Overview
The
market starts late and has great potential to grow.
Consumer
electronics, for instance, mobile phones, focus more on emerging markets, where disposable income is growing fast and the market is far
less penetrated. Emerging markets are typically referred to as areas in Asia, South America, Eastern Europe and Africa. The populations
in those areas are large and the increasing household income makes consumer electronics, like mobile phones, more affordable. We believe
that predicted rapid economic development, the release of demographic dividends (in the form of an accelerated economic growth and improved
productivity from youth) and the construction of communication technology facilities will drive rapid growth in sales in emerging markets.
The
proportion of smartphones has increased with a stronger demand.
Currently,
we believe the proportion of feature phones is still higher than that of smartphones. However, with the gradual maturity of emerging
markets, the smartphones market continues to expand. The market share of smartphones in this market has increased, and we anticipate
there will be a large structural improvement. Combining the factors of great growth potential in emerging markets and the demand for
smartphones due to the development of 5G infrastructure, we believe that the smartphone shipment volume is expected to increase over
from 2019 to 2022.
Why
We are Focusing on Emerging Markets
We
estimate that from 2019 to 2022, the average annual growth rate of smartphone shipments in the world’s major emerging markets,
represented by Africa, India, and other South Asia countries, among others, will be significantly higher than the annual growth of smartphone
shipments in global established markets. Therefore, we believe that emerging markets will be the main sources of growth in global mobile
phone sales for many years to come.
As
far as emerging markets are concerned, feature phones still retain a large market share. On one hand, due to the differences in the level
of economic development in various countries, a certain proportion of the population in emerging markets has not obtained got access
to mobile phones, and the upgrade of telecommunication infrastructures from Second-Generation (“2G”) to Third-Generation (“3G”)
and 4G is constrained due to a shortage of foundational funding in emerging markets. Meanwhile, emerging markets can be affected by factors
like shortage of power supply and lagging telecommunication infrastructure, extending the life cycle of feature phones in the market
to a certain extent. In summary, feature phones still have a large market and structural demand in major emerging markets around the
world.
On
the other hand, emerging markets generally have a relatively younger population structure in terms of age. Millions of young people rush
into labor market every year, forming a rigid demand for mobile phone consumption.
Reinforce
our Focus in Established Markets
We
have developed a partnership with Quality One Wireless LLC, our client in the United States, through ODM orders since 2015, and those
orders contributed a significant portion, over 10%, of our entire revenue stream from 2017 to 2019. To align our corporate strategy with
the global trend of consumer electronics, especially mobile phones, we believe that expanding our business in established markets, like
the United States and European countries, is vital to our future. Compared to emerging markets, established markets are well developed
in terms of telecommunication infrastructure and more saturated.
We
are transforming from an EMS provider to a comprehensive technology company engaging in the design, development, production, sales and
brand operation of mobile phones, accessories and related consumer electronics. We intend to bring our own products to established markets,
including the United States, Canada and European countries. Our Amazon stores have been established in Europe, and we believe that our
recently launched products like triple-proof mobile phones and sunglasses with built-in speakers will be competitive in those
markets. We are actively evaluating the feasibility of business opportunities with wireless carriers, such as Verizon, AT&T, Sprint
and T-Mobile, in the United States.
Our
Strategies
We
intend to achieve our mission through successful execution of the key elements of our growth strategy, which include:
Optimize
the structure of OEM/ODM customers and orders.
We
have accumulated business resources and experience in both domestic and overseas OEM/ODM markets for the last decade. We are seeking
to leverage our first mover advantage in changing markets to become an international enterprise through continuous innovation. In addition,
we will seek to optimize current customer and order structure by deprioritizing small and unstable customers and eliminating low margin
orders to increase our gross profit margin. Small customers typically cannot provide sustainable OEM/ODM orders when comparing to large
customers, like TCL, and those small customers tend to negotiate a lower price per order that can decrease gross margin. Therefore, keeping
relatively large clients will help us maintain sustainable OEM/ODM orders and a higher margin.
Develop
our own brand and enhance brand recognition.
We
have sought, and will continue to develop, our brands by delivering a superior user experience to our customers in emerging markets,
such as India, Southeast Asia and Africa. We are seeking to offer an enhanced shopping experience by effectively managing our existing
distribution network and upgrading our franchised stores. Our first step will be to open (direct-sell) retail stores in key and high-traffic
locations in India and to establish a comprehensive sales network with our distributors. Then, we intend to replicate this pattern in
other emerging markets and adjust it accordingly. As a result, we intend to increase our market share and expand our brand recognition
for both “UTime” and “Do”.
Expand
our (local) sales network overseas.
We
are seeking to develop and expand our sales network in India and to establish a representative office in the United States. In addition,
we plan to further explore the African and South American markets. We believe that the representative office will help us strengthen
our business network and marketing channels in the United States and other North American regions, for instance, through participating
in telecom and technology exhibitions. We will seek to strengthen our efficient sales network and streamline our supply chain process
to keep our products and services at a reasonable price level in order to increase our user base. We will seek to continue to provide
training and support to our sales managers across the major provinces of India to expand our service portfolio and establish up to 400
after-sales outlets to improve the user experience. In addition, we will seek to provide other electronic products and accessories to
OEM/ODM overseas clients through strong production capacities to strengthen cooperation.
As
part of our expansion strategy, we are actively evaluating the strategies of cooperation with the telecommunication carriers through
our existing clients in Southern Asia, Africa, the United States and South America. We intend to expand into more markets including emerging
and established markets through business with carriers.
Dual-brand
pricing strategy.
We
plan to restructure our existing product pipeline by developing the “Do” and “UTime” brands at the same time,
but targeted to different segments. Through the “Do” brand, we target customers who are price-sensitive and cost-effective,
and let them enjoy the latest communication technology products with an affordable price. At the same time, through the “UTime”
brand, we target the newly emerging quasi-middle-class customer base in both established and emerging market countries.
Expand
and diversify our product portfolio.
We
plan to expand and diversify our product portfolio to meet the fast-changing market. More types of consumer electronics will be
added and offered to our customers. We plan to develop a range of distinctive electronic products, including triple-proof mobile
phones that are water-proof, dust-proof and puncture-, shock-, pressure- and impact-proof, portable Bluetooth speakers, and sunglasses
with built-in speakers, among others.
Our
Products and Services
We
design, manufacture, and distribute mobile phones and other consumer electronics through our operation plants in and outside China. Our
products are categorized into three major categories:
Feature
phones
Feature
phones do not have an independent operating system nor adapted third party software applications. Feature phones have tangible keyboards,
smaller screen size that is usually below 3 inches, and integrate basic functions, such as cellular call and cellular message. Camera,
FM radio and Bluetooth are typically optional functions.
Smartphones
Smartphones
have an independent operating system and allow for installation of software applications developed by third parties. Compared with feature
phones, smartphones tend to have a full view display without tangible keyboards. Screen size is usually over 5 inches. Our smartphone
products are Android-based and certified as Android Enterprise Recommended by Google.
Face masks
Since March 2020 the Company has participated
in efforts to stem the spread of the COVID-19 epidemic, namely, by serving as a temporary distributor of face masks to an existing overseas
client in Brazil. The Company does not intend for this revenue stream to become part of its long-term business strategy.
Others
Our
others mainly consists of cell phone accessories, parts of mobile phone and molds for mobile phones, as well as other consumer electronic
accessories. Our mobile phone accessories contain two categories. One is for our OEM/ODM clients, mainly including spare parts and supplemental
components that we sell to our clients. The other is for our in-house brand including consumer electronics, such as, power bank,
Bluetooth speaker, and spare parts like batteries, chargers, and cell phone shells.
Most
of our products are produced through OEM/ODM orders received from our long-term clients and sold overseas. The following charts
display our product contribution for the years ended March 31, 2019, 2020 and 2021:
|
|
Year ended March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
Category
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
(in thousands, except for percentages)
|
|
|
(in thousands, except for percentages)
|
|
Feature phone
|
|
|
175,432
|
|
|
|
73.7
|
|
|
|
173,190
|
|
|
|
89.7
|
|
|
|
144,032
|
|
|
|
21,918
|
|
|
|
58.4
|
|
Smart phone
|
|
|
57,056
|
|
|
|
24.0
|
|
|
|
19,228
|
|
|
|
10.0
|
|
|
|
56,885
|
|
|
|
8,657
|
|
|
|
23.0
|
|
Face mask
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,747
|
|
|
|
6,809
|
|
|
|
18.1
|
|
Others
|
|
|
5,608
|
|
|
|
2.3
|
|
|
|
670
|
|
|
|
0.3
|
|
|
|
1,235
|
|
|
|
188
|
|
|
|
0.5
|
|
Total
|
|
|
238,096
|
|
|
|
100
|
|
|
|
193,088
|
|
|
|
100
|
|
|
|
246,899
|
|
|
|
37,572
|
|
|
|
100
|
|
Do
Feature Phones
Do
Feature Phones are a feature phones with dual-SIM function that offer our customers a cost-effective product by implementing
call features like Speed Dial, Auto-Call Recording with folder and Blacklist. Built with 1.77 to 2.4 inches bright display, batteries
sized from 800 to 1450 mAh, a physical numeric keyboard and a loud front-facing speaker, Do Feature Phones offer reliable voice
experience to customers and enrich leisure experience by attaching Bluetooth and FM radio function inside. Do Feature Phones also enable
end users an expandable memory card slot up to 32 GB.
Do
Smartphones
The
Smartphones are Android-based 4G VoLTE smartphone that is certified as Android Enterprise Recommended by Google. The Do Mate 1 equips
with a 5.7-inch durable full display, 2000 to 3000 mAh batteries, a set of 5 to 13 plus 0.3 MP dual rear camera and 8 MP front camera
with flash. Do Smartphones have Mode SC 9832E, a product of Spreadtrum Communications, Inc. or MT 6580, a product of MediaTek Inc., processor,
1 to 2GB RAM and 8 to 16GM ROM and light, proximity and gravity sensors inside. Do Smartphones also enable end users to experience Dual-SIM with
Micro and Nano SIM card.
Others
The
Bluetooth speaker has a 400 mAh capacity battery and 4 Omega/3W speaker power. Play mode contains: Micro card, Line-in and Bluetooth
connection. The Bluetooth Box uses Bluetooth 5.0 profiles and has 12-meter connection distance. Output power is 15W with two batteries
of 2500 mAh. Its frequency range is from 2.4 to 2.480 GHz. The Bluetooth glasses apply Bluetooth 5.0 profile and True Wireless Stereo,
the battery size is 70 mAh.
Our
Operations
Order
Placement and Fulfillment Process
Procurement
We
adopt an order-oriented procurement model. Specifically, according to our forecasts towards the market and customer orders, we estimate
the total demand and actual demand of materials through Material Requirements Planning (“MRP”), plus a certain level of inventory,
and finally place the procurement order to our suppliers. MRP is a production planning, scheduling, and inventory control system used
to manage manufacturing processes. Most MRP systems are software-based, but it is possible to conduct MRP by hand as well.
The
main raw materials purchased by us can be classified into electronic components, optical components, electronic components and packaging
materials, and structural devices. According to the different procurement areas, the Company’s procurement activities can be divided
into domestic procurement and overseas procurement. The raw materials from overseas mainly include baseband chips and memory which originally
produced outside of China, and we purchase other raw materials primarily in mainland China.
Production
Our
production schedule department is responsible for coordinating all the materials planning, production planning and shipping planning,
arranging the production of our own factories, outsourcing factories and other ODMs. We also focus on improving production efficiency
and cost control while meeting customer needs. We determine the applicable production method based on our sales prospects, capacity utilization,
cost control requirements and other factors. Our production cycle takes on average 75 days, which was calculated from receiving orders
to completing production, for each new launched OEM/ODM order or own brand product. Usually, we will spend about 40 days in preparation
including material procurement, prototyping, testing and obtaining certifications. Then, it takes approximately 30 days for mass production
and fulfill the OEM/ODM order.
Our
Factory
We
established our own factory in Guizhou, China through UTime GZ. We have built a diversified flexible manufacturing system that adopts
multi-order, small-batch production methods to meet market differentiation needs under a global strategy. With the continuous growth
of business and the entry into the emerging markets, we are always striving to meet the needs of customers, taking into account the factors
such as sales forecast and orders, capacity utilization, cost control requirements and product positioning. Our factory takes almost
all the production assignments including our orders from OEM/ODM clients and our own brand products. However, before assigning the order
to our factory, the production management department will evaluate the overall cost and production schedule, if the order failed to meet
our cost budget, we will outsource the order to our collaborating factories.
Outsourcing
Factories
Our
production management department is responsible for the resource development and management of factories on which we rely to outsource
our manufacturing needs. We manage the outsourced manufacturers by imposing certain requirements such as processing requirements, limiting
labor costs, and imposing quality control and other special requirements. We signed an entrusted production agreement with the outsourcing
manufacturers. We are responsible for the product design and development as well as the raw materials procurement. The outsourcing manufacturer
is responsible for processing and assembling products according to our requirements. We provide design and production plans to the outsourcing
manufacturers and guide them to finish qualified products.
For
the feature phones offering to our American clients, we cooperate with other ODMs. We provide bill of materials (“BOM”) requirements
to other ODMs, and they participate in design, raw materials procurement, manufacturing and sell finished products to us. We often assist
other ODMs in managing the production process and offer critical structural components referring to PCBA, mobile screen and batteries,
to ensure production yield and product quality, as well as “Just-in-time” delivery rates.
For
our “Do” brand, we cooperate with an outsourced factory in India due to cost consideration. The Indian government will impose
a higher import tax on finished goods than the partially assembled one, such as a Semi-Knocked Down (“SKD”) for consumer
electronics. Therefore, we ship SKD from our factory operated by UTime GZ to Do Mobile and finish final assembling process in our outsourced
factory in India.
Quality
Control Management
We
believe that the quality of our products is crucial to our continued growth. We place great emphasis on quality control and have implemented
Total Quality Management (“TQM”) to manage our operations. Before entering our production flow, the raw materials must be
certified for quality. We also perform inspections on raw materials in the mass production flow.
Our
quality control system covers each stage of our production process. When we establish or adapt an assembly line for a new product or
model, we trial-run the assembly line to produce a sample for quality examination. The assembly line can start mass production only
if the produced sample is of adequate quality. When the in-progress product moves from one work station to another one along the
assembly line, it must be checked for quality by the responsible assembly specialists in both work stations. A product may be shipped
out of manufacturing facility only after it passes all quality control examinations and is properly documented as such. By logging and
breaking down the pass rates along our products in the production process, we are able to identify our quality control weak spots, and
improve our operation accordingly.
Supply
Chain Management
Supply
Chain Management Process
Materials,
Products and Other Suppliers
We
purchase key components from our suppliers, such as chips, batteries, mainboard, screens, battery chargers and controllers. We strategically
select our suppliers to minimize over-concentration, control our cost and maintain a good relationship with our suppliers.
To
reduce over-concentration of supply, to manage costs and to control product quality, we generally engage at least two (2) suppliers
for each of our key components. We select our suppliers based on a variety of criteria, including, among others, production capacity,
technological sophistication, quality assurance, professional certification, manpower adequacy, financial position and environmental
compliance. In addition, we review the performance of our suppliers quarterly, and make necessary adjustments to our supply chain, including
termination of under-performing suppliers. Although we have been able to maintain good and long-lasting relationships with
our suppliers, we do not formally engage them under long-term contracts or on an exclusive basis, so we retain considerable pricing
power in the meantime.
Distribution
and Logistics
We
deliver our products to overseas end customers through the services provided by the third-party supply chain companies. The third-party supply
chain companies provide import and export customs declaration, customs clearance, logistics and other services, so that we can operate
more efficiently. In order to reduce the concentration of third-party delivery supply chain companies, we usually have more than
three delivery supply chain companies to provide services at the same time.
Our
Technology
We
are an EMS service provider, mainly offering OEM/ODM services to our engaged clients. We continue investing in technology to improve
our ability in design, production, testing and software application. Our subsidiary, UTime SZ, is a national certified high technology
enterprise that has certain benefits in tax deduction and government grants.
Our
technology focuses on process optimization, which can contribute to improved accuracy or efficiency during production, and industrial
design as well as mechanical design, which enables us to meet requirements from our OEM/ODM clients and fulfill the orders.
Major
technologies applied in our operations are listed below:
Number
|
|
Category
|
|
Name
|
|
Description
|
|
Source
|
1
|
|
Production
|
|
SMT
Production line
|
|
The
length of each SMT production line is 28 meters with antistatic function attached.
|
|
Purchased
|
2
|
|
Production
|
|
Assembly
line
|
|
The
assembly line has a capacity of 45 operators worker together
|
|
Purchased
|
3
|
|
Testing
|
|
Testing
line
|
|
|
|
Purchased
|
4
|
|
Design
|
|
Mobile
phone Industrial Design Patent
|
|
An
exterior used for smartphones
|
|
Self-developed
|
5
|
|
Production
|
|
PCBA
Calibration Fixture Tools
|
|
A
clip that improves the accuracy for assembly activities
|
|
Self-developed
|
6
|
|
Design
|
|
Flex
Print Circuit Board (FPCB) for Smartphone
|
|
Circuit
board used in smartphones with enhanced function
|
|
Self-developed
|
7
|
|
Testing
|
|
Application
for Water proof Test
|
|
Application
used to test water damage of electronic components
|
|
Self-developed
|
8
|
|
Design
|
|
Application
for Access to Public Warning System
|
|
Application
installed in mobile phones to enhance signal
|
|
Self-developed
|
9
|
|
Design
|
|
Call
Filter
|
|
Application
installed in mobile phones to filter harmful incoming messages
|
|
Self-developed
|
Research
and Development
Our
research and development activities include two major sections, which are our EMS section and our own brand section. EMS section’s
purpose is to allocate a significant amount of resources and funds to developing cost-effective and reliable products for the OEM/ODM
clients and ensuring that these products meet their exacting requirements for functionality and reliability. Own brand section’s
purpose is to launch new products to obtain more market shares. Our research and development initiatives are led by our internal teams
and are supported by third parties as needed. Our product management team and our sales and marketing team spend their time interacting
with a combination of end users, distributors in our target markets, and wireless carriers to better understand the market requirements
for our products. Once defined, our design and manufacturing team develops and tests the products against these requirements to be delivered
to our clients and to be sold to the end users.
Customers
The
majority of our selling items are the feature phones and the smartphones as mentioned above. Our sales depend heavily on our major clients,
TCL Communication Limited, Swagtek Inc. and Shanghai Sunvov Communications Technology Co., Ltd., representing 41.3%, 6.8% and 6.3% of
the total revenue for fiscal year 2021, respectively. We regularly provide OEM and ODM business for them. In addition, we export our
in-house brand products to emerging markets.
The
following is a list of our top three customers for the fiscal year 2021:
Country/Area
|
|
Customer
|
|
Brand
|
|
Percentage
of total revenue
|
Asia
|
|
TCL
Communication Limited
|
|
ODM
|
|
41.3%
|
United
States
|
|
Swagtek
Inc.
|
|
ODM
|
|
6.8%
|
Asia
|
|
Shanghai
Sunvov Communications Technology Co., Ltd.
|
|
ODM
|
|
6.3%
|
The following is a list of our top three customers
for the fiscal year 2020:
Country/Area
|
|
Customer
|
|
Brand
|
|
Percentage of total revenue
|
Asia
|
|
TCL Communication Limited
|
|
ODM
|
|
57.3%
|
Asia
|
|
T2 Mobile International Limited
|
|
ODM
|
|
9.6%
|
United States
|
|
Quality One Wireless LLC
|
|
ODM
|
|
6.0%
|
The following is a list of our top three customers
for the fiscal year 2019:
Country/Area
|
|
Customer
|
|
Brand
|
|
Percentage of total revenue
|
Asia
|
|
TCL Communication Limited
|
|
ODM
|
|
50.5%
|
United States
|
|
Quality One Wireless LLC
|
|
ODM
|
|
12.5%
|
Asia
|
|
T2 Mobile International Limited
|
|
ODM
|
|
10.4%
|
Customer
Services
To
meet the requirements of our OEM and ODM customers, we support customized services for them. We assist our customers in research and
development while launching new mobile products based on our industry experience. To date, we have maintained long-term cooperation
with our main customers listed above. We have also built nearly 800 service centers for our in-house brand customer in India. During
the one-year warranty period that we provide on our phone products, customers can phone returned or repaired according to the actual
situation.
Global
Operations
Most
of our OEM and ODM customers come from established markets, including the United States, and emerging economies, including India and
countries in South Asia and Africa, which contribute considerably to our revenue. In line with our vision to expand globally, we started
to use our new brand name “Do” in India in 2017 to develop in-house brand business. Emerging markets are the main consideration
for our in-house brand sales and marketing, and India is the primary focus of Do Mobile because of its large population. We also
plan to establish a representative office in the United States to further strengthen our business network in established markets.
Sales
and Marketing
China
and other markets
We
directly provide OEM and ODM business for our customers in China and overseas. In order to maintain close relationships with these customers,
we have built a strong marketing team consisting of 16 sales force members, including a domestic client division, overseas client division
and key accounts division. Our marketing efforts consist of product marketing and orders partner marketing. Product marketing focuses
on ensuring OEM/ODM requirements related to products. Order partner marketing focuses on engaging sustainable clients, participating
in telecom and technology exhibitions, as well as developing supplemental sales tools, industry trade show materials and brand awareness.
India
We
have launched 7 mobile phone models in the Indian market, including 5 smartphones and 2 feature phones. We strive to launch products
that serve users of different demographics, and 3 to 4 additional mobile phones are currently being designed and are in development.
Additionally, we plan to offer wireless speakers, power banks, car chargers and fit bands in the future. However, due the outbreak
of the COVID-19 pandemic, our operations in India were significantly affected and our original marketing plan was delayed. We
restarted our operations in India after the Indian government began to lift lockdown measures in July 2020. However, in March 2021,
the second wave of COVID-19 spread in India resulting in lockdowns being imposed in various states of India. While we have been able
to continue our operations during the second wave of COVID-19 and have taken several steps to minimize our costs, our supply of
inventory has been affected due to the lockdown which has resulted in a significant impact on our revenue.
Warehousing
and Distributor
We
have 11 warehouses in India. Logistic transportation costs average between approximately US$2,400 to US$6,200 per month. Our self-branded products
are sold only through offline retail distributors. For our offline network, we work with local distributors. There are no instalment
or other credit strategies between our distributors and us. Our Indian sales team is comprised of approximately 30 experienced sale force
members managing over 300 active distributors.
After-sales
service
An
excellent user experience is one of our major goals. We provide customers with a one-year warranty on our phone products. Customers
can get their phones repaired during the maintenance period, usually within one year, by taking their receipts and goods to any one of
the nearly 800 service centers that has cooperated with us. Based on historical collection records, product return rate is about 1.1%.
We believe our after-sales service creates a satisfying user experience. Our after-sales team consists of 12 professionals
that perform active after-sale services to our end users throughout India.
United
States and Europe
We
cooperate with our clients in the United States through ODM orders. We intend to strengthen our business connections by establishing
a representative office in the United States. This office will help us increase our marketing efforts, such as by participating in conferences
and events that focus on the United States and other regions in North America. We are also preparing our online store on Amazon in Europe
to launch our newly developed products.
Africa
We
entered the African market through ODM orders, including smartphones and feature phones, in 2018. To expand our business in Africa, we
formed an independence team, including three account managers, a product manager and two marketing specialists, as having a local distribution
network is our main focus in the African market. Meanwhile, we also put our efforts into marketing on online channels, such as Jumia,
an online marketplace in Africa. Our cooperation with local wireless carriers is also considered part of our marketing strategy in Africa.
Seasonality
Our
business has historically been subject to seasonal fluctuations, which may be caused by product launches and various promotional events
hosted by us and our distributors. Although we have generally experienced higher sales during the fourth quarter since our customers
usually launch new products during the fourth quarter of the calendar years, this pattern does not repeat itself every year. We typically
experience our lowest sales volume in the first quarter of each year.
Competition
Overall
Competition Landscape
We
operate in a highly competitive environment serving industrial enterprises and end customers. Competition in our market is high and tends
to increase. Price is a major source of competition, while product quality, differentiation, service, research, development and commercialization
capacity, and distribution channels are also critical factors. Competition in our industry is intense and has been characterized by technology
levels, production scale and economies of scale, evolving industry standards, frequent new product introductions and rapid changes in
end user requirements.
We
face competition from manufacturers that also provide EMS, such as Wentai and XiaoMi, to the extent industrial enterprises decide to
engage and outsource production. We also face competition from mobile phone manufacturers that have a portfolio of products covering
low-end feature phones and high-end smartphones, such as Samsung Electronics Co. Ltd. We also face competition from mobile
phone companies who also target emerging markets, such as, Shenzhen Transsion Holding Limited. We believe that we compete favorably with
respect to the factors described above.
Our
Competitive Strengths
We
believe that the following competitive strengths have contributed to, or will contribute to, our recent and ongoing growth:
|
●
|
Experienced
management. Our core management team members (Chief Executive Officer, Chief Operating Officer and Chief Manufacturing
Officer) have at least 10 years of experience in the mobile phone industry, and most of them formerly worked at well-known publicly
traded companies.
|
|
●
|
Comprehensive
global industry ecosystem. Our integration of development, manufacturing, PCBA, Industrial Design (“ID”),
Mechanic Design (“MD”), sales and after-sale services in China, India, Africa, the United States and South America,
combined with our extensive industry experience, provides us a comprehensive global ecosystem for our products. In the Indian market,
we have engaged over 300 active distributors and implemented over 800 after-sales outlets across the major states.
|
|
●
|
Strong
production capacity. Currently,
we have three high-end Surface Mounting Technology (“SMT”) production lines
and test lines, eleven assembly lines of which six lines are leased, and four leased packaging
lines. Each SMT has a production capacity of 600,000 units per month, and our monthly assembling
capacity has reached over one million units. Due to the seasonality of the mobile phone
industry, we also cooperate with six manufacturers to fulfill our peak season orders, and
we believe this strategy is cost-effective.
|
|
●
|
Niche
market positioning. We have accumulated extensive business resources and partners both domestic and abroad
over the past 10 years, and we have laid our focus in the middle and low-end markets of developing countries, where the markets
are fairly new and generally devoid of intense competition that could create new demands, ahead of our competitors in the same industry
segment, such as the markets in India.
|
|
●
|
Cost-effective products.
We primarily cover two product
categories: 13 types of smartphones and 11 types of feature phones. We believe our products
are comparable in quality to the large brands and are price competitive. We believe we fit
the needs of low-to-mid income groups of many developing countries and we believe we
avoid the vicious competition from large international brands.
|
Intellectual
Property
Protection
of our intellectual property is a strategic priority for our business. We rely on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality agreements, to establish and protect our proprietary rights. Except for certain licenses for
the off-the-shelf software used in connection with our day-to-day operations, we generally do not rely on third-party licenses
of intellectual property for use in our business.
As
of the date of this report, we had obtained 34 patents and 43 registered software copyrights, registered 46 trademarks inside and outside
of China, and submitted 6 additional trademark applications.
Patents.
We had 34 registered patents in China, which cover technologies for PCAB
processing, Industrial Design and testing process. All registered patents in China are currently registered under the name of UTime SZ
and UTime GZ. 20 registered patents were granted as utility model patents, 12 registered patents were granted as design patents and 2
registered patents were granted as invention patents.
Software
copyrights. We maintain a portfolio of copyright-protected software. We had 43 registered software copyrights
in China.
Trademarks. We
had 23 registered trademarks in China and 23 registered trademarks outside of China in Africa, Asia, America and Europe. We also
have 6 pending trademark applications outside of China in the Philippines, Kenya and other jurisdictions.
Domain
names. We had 7 registered domain names in China and 7 global domain names.
In
addition to the foregoing protections, we generally control access to and use of our proprietary and other confidential information through
the use of internal and external controls, such as use of confidentiality agreement with our employees and outside consultants.
Employees
As
of the date of this report, we had 221 full-time employees and no part-time employees. Our employees are not represented by
a labor organization or covered by a collective bargaining agreement. We believe we maintain good relationships with our employees. The
table below sets forth the breakdown of our employees by function as of the date of this report:
Function
|
|
Number of
Employees
|
|
|
% of Total
|
|
Administration and Human Resources
|
|
|
18
|
|
|
|
8
|
%
|
Finance and Accounting
|
|
|
11
|
|
|
|
5
|
%
|
Production
|
|
|
90
|
|
|
|
40
|
%
|
Procurement
|
|
|
8
|
|
|
|
4
|
%
|
Sales and Marketing
|
|
|
17
|
|
|
|
8
|
%
|
Customer Services
|
|
|
1
|
|
|
|
0
|
%
|
Research and Development
|
|
|
29
|
|
|
|
13
|
%
|
Quality Control
|
|
|
37
|
|
|
|
17
|
%
|
Project and Scheduling
|
|
|
10
|
|
|
|
5
|
%
|
Total
|
|
|
221
|
|
|
|
100
|
%
|
Properties
Our
headquarters are located in Shenzhen, China, where we own the office building with an aggregate floor area of approximately 640 square
meters. Our operations facilities, including those for accounting, supply chain management, quality assurance and customer services,
are located at our headquarters. We have supply chain management, sales and marketing, communication and business development personnel
at our office in Shenzhen. Our manufacturing facilities, including those for engineering and assembling, are located at our leased factory
in Guizhou.
We
currently lease and occupy approximately 17,478 square meters of office and factory space in Guizhou, China. and approximately 279 square
meters of office space in New Delhi, India. These leases vary in duration from 1 year to 5 years. We believe that our facilities are
adequate to meet our needs for the immediate future.
Insurance
We
do not maintain property insurance policies covering potential damage to our property. We also do not maintain business interruption
insurance or general third-party liability insurance, nor do we maintain product liability insurance or key-man insurance.
Regulations
China
This
section sets forth a summary of the most significant rules and regulations that affect our business activities in China.
Regulations
relating to Foreign Investment
The
Guidance Catalogue of Industries for Foreign Investment
Investment
activities in the PRC by foreign investors are subject to the Catalogue for the Guidance of Foreign Investment Industry, or the Catalogue,
which was promulgated and is amended from time to time by the MOFCOM and the NDRC. The Foreign Investment Catalogue which was promulgated
jointly by MOFCOM and the NDRC, on June 28, 2017 and became effective on July 28, 2017, classifies industries into three categories
with regard to foreign investment: (1) “encouraged”, (2) “restricted”, and (3) “prohibited”. The
latter two categories are included in a negative list, which was first introduced into the Foreign Investment Catalog in 2017 and specified
the restrictive measures for the entry of foreign investment.
On
June 28, 2018, MOFCOM and NDRC jointly promulgated the Special Administrative Measures for Access of Foreign Investment (Negative
List), or the Negative List (Edition 2018), which replaced the negative list attached to the Foreign Investment Catalogue in 2017. On
June 30, 2019, MOFCOM and NDRC jointly issued the Special Administrative Measures for Access of Foreign Investment (Negative List),
or the Negative List (Edition 2019), which replaced the Negative List (Edition 2018), and the Catalogue of Industries for Encouraging
Foreign Investment (Edition 2019), or the Encouraging Catalogue (Edition 2019), which replaced the encouraged list attached to the Foreign
Investment Catalogue in 2017. On June 23, 2020, MOFCOM and NDRC jointly issued the Special Administrative Measures for Access of
Foreign Investment (Negative List), or the Negative List (Edition 2020), which replaced the Negative List (Edition 2019).
Pursuant
to the Negative List (Edition 2020) effective on July 23, 2020, any industry that is not listed in any of the restricted or prohibited
categories is classified as a permitted industry for foreign investment. Establishment of wholly foreign-owned enterprises is generally
allowed for industries outside of the Negative List. For the restricted industries within the Negative List, some are limited to equity
or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures.
In addition, restricted category projects are subject to higher-level government approvals and certain special requirements. Foreign
investors are not allowed to invest in industries in the prohibited category. Industries not listed in the Negative List are generally
open to foreign investment unless specifically restricted by other PRC regulations.
The
Encouraging Catalogue (Edition 2020) effective on January 27, 2021, which replaced the Encouraging Catalogue (Edition 2019) effective
on July 30, 2019, is divided into two parts, namely the Nationwide Catalogue of Encouraged Industries for Foreign Investment and
the Catalogue of Priority Industries for Foreign Investment in Central and Western China. The Nationwide Catalogue of Encouraged Industries
for Foreign Investment lists a total of 480 industry sectors that encourage foreign investments; the Catalogue of Priority Industries
for Foreign Investment in Central and Western China lists industry sectors that each province and city wish to introduce.
In
October 2016, the MOFCOM issued the Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises
or FIE Record-filing Interim Measures, which was revised in June 2018. Pursuant to FIE Record-filing Interim Measures, the
establishment and change of FIE are subject to record-filing procedures, instead of prior approval requirements, provided that the
establishment or change does not involve special entry administration measures. If the establishment or change of FIE matters involves
the special entry administration measures, the approval of the MOFCOM or its local counterparts is still required. Pursuant to the Announcement
[2016] No. 22 of the NDRC and the MOFCOM dated October 8, 2016, the special entry administration measures for foreign investment
apply to restricted and prohibited categories specified in the Catalogue, and the encouraged categories are subject to certain requirements
relating to equity ownership and senior management under the special entry administration measures.
Currently,
our business related to the operation of designing, manufacturing and marketing mobile communication devices, and selling a variety of
related accessories falls within the permitted category.
The
Foreign Investment Law
On
March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which took effect on January 1, 2020
and replaced three existing laws on foreign investments in China, namely, the PRC Sino-foreign Equity Joint Venture Law, the PRC
Sino-foreign Cooperative Joint Venture Law and the PRC Wholly Foreign-owned Enterprise Law, together with their implementation
rules and ancillary regulations. On December 26, 2019, the Regulation on the Implementation of the Foreign Investment Law of the
People’s Republic of China, was issued by the State Council and came into force on January 1, 2020. The organization form,
organization and activities of foreign-invested enterprises shall be governed, among others, by the PRC Company Law and the PRC
Partnership Enterprise Law. Foreign-invested enterprises established before the implementation of this Law may retain the original
business organization and so on within five years after the implementation of this Law. The Foreign Investment Law embodies an expected
PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative
efforts to unify the corporate legal requirements for both foreign and domestic invested enterprises in China. The Foreign Investment
Law establishes the basic framework for the access to, and the promotion, protection and administration of foreign investments in view
of investment protection and fair competition.
According
to the Foreign Investment Law, “foreign investment” refers to investment activities directly or indirectly conducted by one
or more natural persons, business entities, or otherwise organizations of a foreign country (collectively referred to as “foreign
investor”) within China, and the investment activities include the following situations: (i) a foreign investor, individually or
collectively with other investors establishes a foreign-invested enterprise within China; (ii) a foreign investor acquires stock
shares, equity shares, shares in assets, or other like rights and interests of an enterprise within China; (iii) a foreign investor,
individually or collectively with other investors, invests and establishes new projects within China; and (iv) a foreign investor invests
through other approaches as stipulated by laws, administrative regulations, or otherwise regulated by the State Council.
According
to the Foreign Investment Law, the State Council will publish or approve
to publish the “negative list” for special administrative measures concerning foreign investment. The Foreign Investment Law
grants national treatment to foreign-invested entities, or FIEs, except for those FIEs that operate in industries deemed to be either
“restricted” or “prohibited” in the “negative list”. The Foreign Investment Law provides that FIEs
operating in foreign restricted or prohibited industries will require market entry clearance and other approvals from relevant PRC governmental
authorities. If a foreign investor is found to invest in any prohibited industry in the “negative list”, such foreign investor
may be required to, among other aspects, cease its investment activities, dispose of its equity interests or assets within a prescribed
time limit and have its income confiscated. If the investment activity of a foreign investor is in breach of any special administrative
measure for restrictive access provided for in the “negative list”, the relevant competent department shall order the foreign
investor to make corrections and take necessary measures to meet the requirements of the special administrative measure for restrictive
access. On June 23, 2020, MOFCOM and NDRC jointly issued the latest version of Negative List (Edition 2020). See “Regulations — Regulations
relating to Foreign Investment — The Guidance Catalogue of Industries for Foreign Investment”.
Besides,
the PRC government will establish a foreign investment information reporting system, according to which foreign investors or foreign-invested enterprises
shall submit investment information to the competent department for commerce concerned through the enterprise registration system and
the enterprise credit information publicity system, and a security review system under which the security review shall be conducted for
foreign investment affecting or likely affecting the state security.
Furthermore,
the Foreign Investment Law provides that foreign invested enterprises established according to the existing laws regulating foreign investment
may maintain their structure and corporate governance within five years after the implementing of the Foreign Investment Law.
In
addition, the Foreign Investment Law also provides several protective rules and principles for foreign investors and their investments
in the PRC, including, among others, that a foreign investor may freely transfer into or out of China, in Renminbi or a foreign currency,
its contributions, profits, capital gains, income from disposition of assets, royalties of intellectual property rights, indemnity or
compensation lawfully acquired, and income from liquidation, among others, within China; local governments shall abide by their commitments
to the foreign investors; governments at all levels and their departments shall enact local normative documents concerning foreign investment
in compliance with laws and regulations and shall not impair legitimate rights and interests, impose additional obligations onto FIEs,
set market access restrictions and exit conditions, or intervene with the normal production and operation activities of FIEs; except
for special circumstances, in which case statutory procedures shall be followed and fair and reasonable compensation shall be made in
a timely manner, expropriation or requisition of the investment of foreign investors is prohibited; and mandatory technology transfer
is prohibited.
Company
Law
Pursuant
to the PRC Company Law, promulgated by the Standing Committee of the National People’s Congress (the “SCNPC”) on December
29, 1993, effective as of July 1, 1994, and as revised on December 25, 1999, August 28, 2004, October 27, 2005, December 28,
2013 and October 26, 2018, the establishment, operation and management of corporate entities in the PRC are governed by the PRC
Company Law. The PRC Company Law defines two types of companies: limited liability companies and companies limited by shares.
Our
PRC Subsidiary is a limited liability company. Unless otherwise stipulated in the related laws on foreign investment, foreign invested
companies are also required to comply with the provisions of the PRC Company Law.
Regulations
Relating to Overseas Investment
On
December 26, 2017, the NDRC issued the Management Rules for Overseas Investment by Enterprises, or the NDRC Order 11. As defined
in the NDRC Order 11, “overseas investment” refers to the investment activities conducted by an enterprise located in
the territory of China, either directly or through an offshore enterprise under its control, by making investment with assets and equities
or providing financing or a guarantee in order to acquire overseas ownership, control, management rights and other related interests.
Furthermore, overseas investment by a Chinese individual through overseas enterprises under his/her control is also subject to the NDRC
Order 11. According to the NDRC Order 11, (i) direct overseas investment by Chinese enterprises or indirect overseas investment
by Chinese enterprises or individuals in sensitive industries or sensitive countries and regions requires prior approval by the NDRC;
(ii) direct overseas investment by Chinese enterprises in non-sensitive industries and non-sensitive countries and regions
requires prior filing with the NDRC; and (iii) indirect overseas investment of over US$300 million by Chinese enterprises or individuals
in non-sensitive industries and non-sensitive countries and regions requires reporting with the NDRC. Uncertainties remain
with respect to the application of the NDRC Order 11, there are very few interpretations, implementation guidance or precedents
to follow in practice. We are not sure if UTime Limited was to use a portion of the proceeds raised from our initial public offering
to fund investments in and acquisitions of complementary business and assets outside of China, such use of U.S. dollars funds held outside
of China would be subject to the NDRC Order 11. We will continue to monitor any new rules, interpretation and guidance promulgated by
the NDRC and communicate with the NDRC and its local branches to seek their opinions, when necessary.
Regulations
Relating to Manufacture and Sale of Mobile Phones
General
Administration of Manufacturing and Selling Mobile Phones
According
to the Administrative Regulations for Compulsory Product Certification, which was promulgated by the General Administration of Quality
Supervision, Inspection and Quarantine PRC (the “AQSIQ”) (which has merged into the State Administration for Market Regulation)
on July 3, 2009, products specified by the state shall not be delivered, sold, imported or used in other business activities until
they are certified (the “Compulsory Product Certification”) and labeled with China Compulsory Certification mark. For products
that are subject to Compulsory Product Certification, the state implements unified product catalogs (the “3C Catalog”), unified
compulsory requirements, standards and compliance assessment procedures in technical specification, unified certification marks and unified
charging standards. Pursuant to the First Batch Compulsory Product Certification Product Catalog (the “First Batch 3C Product Catalog”)
by the AQSIQ and the Certification and Accreditation Administration of the People’s Republic of China (the “CNCA”)
on December 3, 2001, mobile user terminals and CDMA digital cellular mobile station are required to obtain the Compulsory Product
Certification in order to be delivered, sold, imported or used.
The
Regulations on Radio Administration of the PRC jointly issued by the State Council and the Central Military Commission on November 11,
2016 and became effective on December 1, 2016, provide requirements concerning verification and approval of the models of radio
transmission equipment. Pursuant to this law, except for micro-power short-range radio transmission equipment, whoever manufactures
or imports other radio transmission equipment for sales or use on the domestic market shall apply to the State Radio Administration for
model verification and approval. Whoever manufactures or imports radio transmission equipment that has not obtained model verification
and approval for sales or use on the domestic market shall be ordered by the relevant radio administration to make correction and subject
to fines.
In
addition, the Administrative Measures for the Network Access of Telecommunications Equipment, which was promulgated by the Ministry of
Information Industry on May 10, 2001 and revised by the Ministry of Industry and Information Technology (the “MIIT”)
on September 23, 2014 provide that the State applies the network access permit system to the telecommunications terminal equipment,
radio communications equipment, and equipment relating to network interconnection that is connected to public telecommunications networks.
The telecommunications equipment subject to the network access permit system shall obtain the Telecommunications Equipment Network Access
Permit issued by the MIIT (the “Network Access Permit”). Without the Network Access Permit, no telecommunications equipment
is allowed to be connected to the public telecommunications networks for use nor sold on the domestic market. In the event of an application
for the Network Access Permit, a production enterprise shall submit a testing report issued by a telecommunications equipment testing
institution or a Compulsory Product Certification. In the event of an application for the network access permit for radio transmission
equipment, a Radio Transmission Equipment Type Approval Certificate issued by the MIIT shall also be submitted.
Regulations
on Production Safety
Pursuant
to the Production Safety Law of the PRC, or the Production Safety Law, which took effect on November 1, 2002 and was amended on
August 31, 2014, the entities that are engaged in production and business operation activities must implement national industrial
standards which guarantee the production safety and comply with production safety requirements provided by the laws, administrative regulations
and national or industrial standards. An entity must take effective measures for safety production, maintain safety facilities, examine
the safety production procedures, educate and train employees and take any other measures to ensure the safety of its employees and the
public. An entity or its relevant persons-in-charge which has failed to perform such safety production liabilities will be required
to make amends within a time limit or face administrative penalties. If it fails to amend within the prescribed time limit, the production
and business operation entity may be ordered to suspend business for rectification, and serious violations may result in criminal liabilities.
Regulations
on Product Quality
The
PRC Product Quality Law, or the Product Quality Law, which was promulgated by the MOFCOM in February 1993 and most recently amended in
December 2018, applies to all production and sale activities in China. Pursuant to this law, products offered for sale must satisfy the
relevant quality and safety standards. Enterprises may not produce or sell counterfeit products in any fashion, including forging brand
labels or giving false information regarding a product’s manufacturer. Any producer or seller producing or selling products that
do not conform to the national standards or trade standards for ensuring human health and the personal or property safety shall be ordered
to stop production or sale of the products; the products illegally produced or sold shall be confiscated; a fine no less than the equivalent
of, but not more than three times, the value of the products illegally produced or sold (including those already sold and those not yet
sold, hereinafter the same) shall be imposed concurrently; if there are illegal proceeds, such proceeds shall be confiscated concurrently;
if the circumstances are serious, the business license shall be revoked. If the case constitutes a crime, criminal liability shall be
investigated. Where a defective product causes physical injury to a person or damage to another person’s property, the victim may
claim compensation from the manufacturer or from the seller of the product. If the seller pays compensation and it is the manufacturer
that should bear the liability, the seller has a right of recourse against the manufacturer and may seek full reimbursement from the
manufacturer. Similarly, if the manufacturer pays compensation and it is the seller that should bear the liability, the manufacturer
has a right of recourse against the seller and may seek full reimbursement from the seller.
Pursuant
to the General Principles of the Civil Law of the PRC promulgated by the National People’s Congress, or NPC, on April 12,
1986 and amended on August 27, 2009, both manufacturers and sellers shall be held liable where the defective products result in
property damages or bodily injuries to others. Pursuant to the Tort Liability Law of the PRC promulgated by the Standing Committee of
the NPC on December 26, 2009 and effective from July 1, 2010, manufacturers shall assume tort liabilities where the defects
in products cause damages to others. Sellers shall assume tort liabilities where the defects in products that have caused damages to
others are attributable to the sellers. The aggrieved party may claim for compensation from the manufacturer or the seller of the defected
product that has caused damage.
On
May 28, 2020, the Third Session of the 13th National People’s Congress passed the Civil Code of the People’s
Republic of China which took effect on January 1, 2021, and replaced the Tort Liability Law of the PRC. According to the Civil Code
of the People’s Republic of China, the aggrieved party shall be entitled to require the manufacturer or seller to assume the tort
liability by ceasing infringement, removing the obstruction, or eliminating the danger when the defect of a product endangers the personal
or property safety.
Regulations
on Consumer Protection
The
PRC Consumer Protection Law, as amended on October 25, 2013 and effective on March 15, 2014, sets out the obligations of business
operators and the rights and interests of the consumers. Pursuant to this law, business operators must guarantee that the commodities
they sell satisfy the requirements for personal or property safety, provide consumers with authentic information about the commodities,
and guarantee the quality, function, usage and term of validity of the commodities. Failure to comply with the Consumer Protection Law
may subject business operators to civil liabilities such as refunding purchase prices, exchange of commodities, repairing, ceasing damages,
compensation, and restoring reputation, and even subject the business operators or the responsible individuals to criminal penalties
if business operators commit crimes by infringing the legitimate rights and interests of consumers. The amended PRC Consumer Protection
Law further strengthens the protection of consumers and imposes more stringent requirements and obligations on business operators, especially
on the business operators through the Internet. For example, the consumers are entitled to return the goods (except for certain specific
goods) within seven days upon receipt without any reasons when they purchase the goods from business operators via the Internet. The
consumers whose interests have been damaged due to their purchase of goods or acceptance of services on online marketplace platforms
may claim damages from sellers or service providers.
Where
business operators use internet, television, telephone, mail or other means to provide goods or services, or provide securities, insurance,
banking or other financial services, they shall provide consumers with information in regard to themselves and the goods or services
provided such as business address, contact information, quantity and quality, price or fees, term and method of performance, safety precautions,
risk warnings, after-sale services, and civil liabilities. Consumers whose legitimate rights and interests are infringed while purchasing
goods or receiving services via an online trading platform shall have the right to claim compensation from the vendor of the goods or
the provider of the services. If the goods or services a business operator provide have caused personal injuries to consumers or other
victims, the business operator shall compensate for the medical expenses, nursing expenses, transportation expenses and other reasonable
fees for treatment and rehabilitation as well as the reduced income for loss of working time.
According
to the Civil Code of the People’s Republic of China effective on January 1, 2021, producers shall bear tortious liability for any
damage caused by their defective products, while distributors shall bear tortious liability for any damage caused due to defects resulting
from their own fault.
Registrations
for Import and Export Goods
Pursuant
to the Customs Law of the People’s Republic of China promulgated by the SCNPC on January 22, 1987 and amended on July 8,
2000, June 29, 2013, December 28, 2013, November 7, 2016 and November 4, 2017 unless otherwise stipulated, the declaration
of import and export goods may be made by consignees and consignors themselves, and such formalities may also be completed by their entrusted
customs brokers that have registered with the Customs. The consignees and consignors for import or export of goods and the customs brokers
engaged in customs declaration shall register with the Customs in accordance with the laws.
Pursuant
to the Administrative Provisions of the Customs of the People’s Republic of China on the Registration of Customs Declaration Entities
promulgated by the General Administration of Customs on March 13, 2014 and amended on May 29, 2018, coming into force on July 1,
2018, the registration of customs declaration entities comprises the registration of the customs declaration enterprise and the registration
of the consignor or consignee of imported and exported goods. The consignor or consignee of imported and exported goods shall register
with local customs in accordance with the laws.
Regulation
on Information Security
The
SCNPC promulgated the Cyber Security Law of the PRC, or the Cyber Security Law, which became effective on June 1, 2017, to protect
cyberspace security and order. Pursuant to the Cyber Security Law, any individual or organization using the network must comply with
the constitution and the applicable laws, follow the public order and respect social moralities, and must not endanger cyber security,
or engage in activities by making use of the network that endanger the national security, honor and interests, or infringe on the fame,
privacy, intellectual property and other legitimate rights and interests of others. The Cyber Security Law sets forth various security
protection obligations for network operators, which are defined as “owners and administrators of networks and network service providers”,
including, among others, complying with a series of requirements of tiered cyber protection systems; verifying users’ real identity;
localizing the personal information and important data gathered and produced by key information infrastructure operators during operations
within the PRC; and providing assistance and support to government authorities where necessary for protecting national security and investigating
crimes. To comply with these laws and regulations, we have adopted security policies and measures to protect our cyber system and user
information.
Regulations
Relating to Operation of Medical Devices
According
to the Regulation on the Supervision and Administration of Medical Devices promulgated by the State Council, which was amended on December
21, 2020 and effective on June 1, 2021, the medical devices shall be classified into three categories based on the degree of risk. Class
I medical devices shall refer to those devices with low risk and whose safety and effectiveness can be ensured through routine administration.
Class II medical devices shall refer to those devices with medium risk and whose safety and effectiveness should be strictly controlled.
Class III medical devices shall refer to those devices with high risk and whose safety and effectiveness must be strictly controlled
with special measures.
Pursuant
to the Measures for the Supervision and Administration of Medical Devices Operation promulgated by the China Food and Drug Administration
on July 30, 2014 and amended on November 7, 2017 (the “PRC Medical Device Regulations”), an enterprise engaging
in the operation of medical devices shall have business premises and storage conditions suitable for the operation scale and scope, and
shall have a quality control department or personnel suitable for the medical devices it operates. An enterprise engaged in the operation
of Class II medical devices shall file with the municipal level food and drug supervision and administration department and provide proofing
materials for satisfying the relevant conditions of engaging in the operation of medical devices, while an enterprise engaged in the
operation of Class III medical devices shall apply for an operation permit to the municipal level food and drug supervision and administration
department and provide proofing materials for satisfying the relevant conditions of engaging in the operation of such medical devices.
The food and drug supervision and administration department which receives operation permit application shall grant the operation permit
if the enterprise meets the prescribed requirements. An operation permit is valid for five years and may be renewed pursuant to the relevant
regulations. An enterprise engaging in medical devices operation shall not operate or use any medical device that has not been legally
registered, without qualification certificate, out-dated, invalid or disqualified.
Furthermore,
according to the Announcement of the Ministry of Commerce, the General Administration of Customs and the National Medical Products Administration
on Conducting the Export of Medical Supplies in an Orderly Manner issued on March 31, 2020 (the “PRC Medical Supplies Export
Measures”), during the special period of prevention and control of the COVID-19 outbreak, for the purposes of effectively
supporting the global fight against the COVID-19 outbreak, and ensuring product quality safety and regulating export order, beginning
on April 1, 2020, the enterprises that export novel coronavirus testing reagents, medical masks, medical protective suits, ventilators,
and infrared thermometers shall, when declaring to Customs, provide written or electronic statements, and make a commitment that the
exported products have obtained the registration certificates of China’s medical device products and meet the requirements of quality
standards of the importing countries (regions). The Customs shall check and release products based on the medical device product registration
certificates approved by the drug supervision and administration departments. The regulatory measures for the export quality of the aforementioned
medical supplies shall be adjusted dynamically in light of the development of the epidemic situation.
Since
March 2020 the Company has participated in efforts to stem the spread of the COVID-19 epidemic, namely, by serving as a temporary
distributor of face masks to an existing overseas client in Brazil. These completed purchase orders, which aggregated approximately US$6.7 million
as of the date of this report, have helped the Company to maintain revenue and cash flow to a certain extent. However, the Company does
not intend for this revenue stream to become part of its long-term business strategy.
We
have obtained the Class II record-filing certificate for medical
device business operations from the PRC government in compliance with the PRC Medical Device Regulations, which is within the validity
term and enables us to distribute surgical and non-surgical face masks. All the face masks sold under the above-mentioned purchase
orders were sold to the customer with delivery terms entered into on a Free On Board basis at Shenzhen port. Due to the FOB method of
delivery utilized for these face mask orders, the Company is not required to handle import customs formalities for the country of destination.
As of July 21, 2021, all the transactions regarding to face masks have been completed, and in the course of such transactions the customer
has not required the Company to comply with the relevant regulations in Brazil. However, we have distributed all face masks by following
the above-mentioned PRC regulations and all face masks sold by the Company have been certified by the competent Medical Products
Administration. We have provided statements to the PRC Customs when declaring our face masks for export, certifying that the exported
face masks have obtained the applicable registration certificate for China’s medical device products and meet the requirements of
quality standards of the importing countries. As of the date of this report, the PRC Customs has checked and released for export all of
our face masks to Brazil, and the Company’s face mask distribution activity has not violated any PRC laws and regulations on the
supervision of medical supplies.
Regulations
on Intellectual Property Rights
The
PRC has adopted comprehensive legislation governing intellectual property rights, including patents, trademarks, copyrights and domain
names.
Patents
Pursuant
to the PRC Patent Law, promulgated in December 2008, which became effective in October 2009 and was recently revised by the SCNPC on
October 17, 2020 (which shall become effective on June 1, 2021), and its implementation rules, most recently amended on January 9,
2010, patents in China fall into three categories: invention, utility model and design. An invention patent is granted to a new technical
solution proposed in respect of a product or method or an improvement of a product or method. A utility model is granted to a new technical
solution that is practicable for application and proposed in respect of the shape, structure or a combination of both of a product. A
design patent is granted to a new design of the shape, pattern, or a combination thereof, as well as a combination of the color, shape
and pattern, of the entirety or a portion of a product, which creates an aesthetic feeling and is fit for industrial application. Under
the PRC Patent Law, the term of patent protection starts from the date of application. The duration of patent right for inventions shall
be twenty years, and the duration of patent right for utility models shall be ten years, and the duration of patent right for designs
shall be 15 years, counted from the date of filing. The PRC Patent Law adopts the principle of “first-to-file” system, which
provides that where more than one person files a patent application for the same invention, a patent will be granted to the person who
files the application first.
Existing
patents can become narrowed, invalid or unenforceable due to a variety of grounds, including lack of novelty, creativity, and deficiencies
in patent application. In China, a patent must have novelty, creativity and practical applicability. Under the PRC Patent Law, novelty
means that before a patent application is filed, no identical invention or utility model has been publicly disclosed in any publication
in China or overseas or has been publicly used or made known to the public by any other means, whether in or outside of China, nor has
any other person filed with the patent authority an application that describes an identical invention or utility model and is recorded
in patent application documents or patent documents published after the filing date. Creativity means that, compared with existing technology,
an invention has prominent substantial features and represents notable progress, and a utility model has substantial features and represents
any progress. Practical applicability means an invention or utility model can be manufactured or used and may produce positive results.
Patents in China are filed with the State Intellectual Property Office, or SIPO. Normally, the SIPO publishes an application for an invention
patent within 18 months after the filing date, which may be shortened at the request of applicant. The applicant must apply to the
SIPO for a substantive examination within three years from the date of application.
Article
20 of the PRC Patent Law provides that, for an invention or utility model completed in China, any applicant (not just Chinese companies
and individuals), before filing a patent application outside of China, must first submit it to the SIPO for a confidential examination.
Failure to comply with this requirement will result in the denial of any Chinese patent for the relevant invention. This added requirement
of confidential examination by the SIPO has raised concerns by foreign companies who conduct research and development activities in China
or outsource research and development activities to service providers in China.
Patent
Enforcement
Unauthorized
use of patents without consent from owners of patents, forgery of the patents belonging to other persons, or engagement in other patent
infringement acts, will subject the infringers to infringement liability. Serious offences such as forgery of patents may be subject
to criminal penalties.
When
a dispute arises out of infringement of the patent owner’s patent right, Chinese law requires that the parties first attempt to
settle the dispute through mutual consultation. However, if the dispute cannot be settled through mutual consultation, the patent owner,
or an interested party who believes the patent is being infringed, may either file a civil legal suit or file an administrative complaint
with the relevant patent administration authority. A Chinese court may issue a preliminary injunction upon the patent owner’s or
an interested party’s request before instituting any legal proceedings or during the proceedings. Damages for infringement are
calculated as the loss suffered by the patent holder arising from the infringement, or the benefit gained by the infringer from the infringement.
If it is difficult to ascertain damages in this manner, damages may be determined by using a reasonable multiple of the license fee under
a contractual license. Statutory damages may be awarded in the circumstances where the damages cannot be determined by the above mentioned
calculation standards. Generally, the patent owner has the burden of proving that the patent is being infringed. However, if the owner
of an invention patent for manufacturing process of a new product alleges infringement of its patent, the alleged infringer has the burden
of proof.
As
of the date of this report, we had 34 patents granted in China.
Trademark
Law
The
PRC Trademark Law and its implementation rules protect registered trademarks.
The PRC Trademark Office of National Intellectual Property Administration is responsible for the registration and administration of trademarks
throughout the PRC. The Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. The
validity period of registered trademarks is ten years from the date of approval of trademark application, and may be renewed for another
ten years provided relevant application procedures have been completed within twelve months before the end of the validity period. As
of the date of this report, we owned 23 registered trademarks in different applicable trademark categories in China and we owned 23 registered
trademarks in different applicable trademark categories outside of China and were in the process of applying to register 6 trademarks
outside of China.
In
addition, pursuant to the PRC Trademark Law, counterfeit or unauthorized production of the label of another person’s registered
trademark, or sale of any label that is counterfeited or produced without authorization will be deemed as an infringement to the exclusive
right to use a registered trademark. The infringing party will be ordered to stop the infringement immediately, a fine may be imposed
and the counterfeit goods will be confiscated. The infringing party may also be held liable for the right holder’s damages, which
will be equal to the gains obtained by the infringing party or the losses suffered by the right holder as a result of the infringement,
including reasonable expenses incurred by the right holder for stopping the infringement. If the gains or losses are difficult to determine,
the court may render a judgment awarding damages of no more than RMB5 million.
Software
Copyright Law
The
newly amended Copyright Law or the Copyright Law, consists of 67 articles in six chapters, and shall come into force on 1 June 2021.
The Copyright Law provides that Chinese citizens, legal entities or unincorporated organizations, whether published or not, shall enjoy
copyright in their works, which refer to ingenious intellectual achievements in the fields of literature, art and science that can be
presented in a certain form. The purpose of the Copyright Law aims to encourage the creation and dissemination of works that are beneficial
for the construction of socialist spiritual civilization and material civilization and promote the development and prosperity of Chinese
culture. The term of protection for copyrighted software of legal persons is fifty years and ends on December 31 of the 50th year
from the date of first publishing of the software.
In
order to further implement the Computer Software Protection Regulations promulgated by the State Council in 2001, and amended subsequently,
the State Copyright Bureau issued the Computer Software Copyright Registration Procedures in 2002, which apply to software copyright
registration, license contract registration and transfer contract registration.
As
of the date of this report, we had registered 43 software copyrights in China.
Regulation
on Domain Name
The
domain names are protected under the Administrative Measures on the Internet Domain Names of China promulgated by MIIT on November 5,
2004 and effective on December 20, 2004, and was replaced by the Administrative Measures on the Internet Domain Names promulgated
by MIIT on August 24, 2017, which became effective on November 1, 2017. MIIT is the major regulatory body responsible for the
administration of the PRC Internet domain names, under supervision of which China Internet Network Information Center, or CNNIC, is responsible
for the daily administration of CN domain names and Chinese domain names. On September 25, 2002, CNNIC promulgated the Implementation
Rules of Registration of Domain Name, or the CNNIC Rules, which was renewed on June 5, 2009 and May 29, 2012, respectively.
Pursuant to the Administrative Measures on the Internet Domain Names and the CNNIC Rules, the registration of domain names adopts the
“first to file” principle and the registrant shall complete the registration via the domain name registration service institutions.
In the event of a domain name dispute, the disputed parties may lodge a complaint to the designated domain name dispute resolution institution
to trigger the domain name dispute resolution procedure in accordance with the CNNIC Measures on Resolution of the Top Level Domains
Disputes, file a suit to the People’s Court or initiate an arbitration procedure.
As
of the date of this report, we had registered 14 domain names.
Regulations
on Labor Protection
The
principal laws that govern employment include: (i) the Labor Law of the PRC, or the Labor Law, promulgated by the SCNPC on July 5,
1994, which has been effective since January 1, 1995 and most recently amended on December 29, 2018; and (ii) the Labor Contract
Law of the PRC, or the Labor Contract Law, which was promulgated by the SCNPC on June 29, 2007, came into effect on January 1,
2008, and was amended on December 28, 2012 and became effective as of July 1, 2013, and the Implementation Regulations on Labor
Contract Law, which was promulgated on September 18, 2008, and became effective since the same day.
According
to the Labor Law, an employer shall develop and improve its rules and regulations to safeguard the rights of its workers. An employer
shall develop and improve its labor safety and health system, stringently implement national protocols and standards on labor safety
and health, conduct labor safety and health education for workers, guard against labor accidents and reduce occupational hazards. Labor
safety and health facilities must comply with relevant national standards. An employer must provide workers with the necessary labor
protection gear that complies with labor safety and health conditions stipulated under national regulations, as well as provide regular
health checks for workers that are engaged in operations with occupational hazards. Laborers engaged in special operations shall have
received specialized training and have obtained the pertinent qualifications. An employer shall develop a vocational training system.
Vocational training funds shall be set aside and used in accordance with national regulations and vocational training for workers shall
be carried out systematically based on the actual conditions of the company.
The
Labor Contract Law and its implementation rules regulate both parties through a labor contract, namely the employer and the employee,
and contain specific provisions involving the terms of the labor contract. It is stipulated under the Labor Contract Law and the Implementation
Regulations on Labor Contract Law that a labor contract must be made in writing. If an employer fails to enter into a written employment
contract with an employee within one year from the date on which the employment relationship is established, the employer must rectify
the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s salary
for the period from the day following the lapse of one month from the date of establishment of the employment relationship to the day
prior to the execution of the written employment contract. In addition, an employer is obligated to sign an indefinite term labor contract
with an employee if the employer continues to employ the employee after two consecutive fixed term labor contracts. The Labor Contract
Law and its implementation rules also require compensation to be paid upon certain terminations, which significantly affects the cost
of reducing workforce for employers. In addition, if an employer intends to enforce a non-compete provision in an employment contract
or non-competition agreement with an employee, it has to compensate the employee on a monthly basis during the term of the restriction
period after the termination or expiry of the labor contract. Employers in most cases are also required to provide severance payment
to their employees after their employment relationships are terminated.
Enterprises
in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds,
namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity
insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries,
including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate
their businesses or where they are located.
According
to the Interim Regulations on the Collection and Payment of Social Insurance Premiums, the Regulations on Work Injury Insurance, the
Regulations on Unemployment Insurance and the Trial Measures on Employee Maternity Insurance of Enterprises, enterprises in the PRC shall
provide benefit plans for their employees, which include basic pension insurance, unemployment insurance, maternity insurance, work injury
insurance and basic medical insurance. An enterprise must provide social insurance by processing social insurance registration with local
social insurance agencies, and shall pay or withhold relevant social insurance premiums for or on behalf of employees. The Law on Social
Insurance of the PRC, which was promulgated by the SCNPC on October 28, 2010, became effective on July 1, 2011, and was most
recently updated on December 29, 2018, has consolidated pertinent provisions for basic pension insurance, unemployment insurance,
maternity insurance, work injury insurance and basic medical insurance, and has elaborated in detail the legal obligations and liabilities
of employers who do not comply with relevant laws and regulations on social insurance. Without force majeure reasons, employers must
not suspend or reduce their payment of social insurance for employees, otherwise, competent governmental authorities will have the power
to enforce employers to pay up social insurance within a prescribed time limit, and a fine of 0.05% of the unpaid social insurance can
be charged on the part of the employers per day commencing from the first day of default. Provided that the employers still fail to make
the payment within the prescribed time limit, a fine of over one time and up to three times of the unpaid sum of social insurance can
be charged.
According
to the Regulations on the Administration of Housing Provident Fund, which was promulgated by the State Counsel and became effective on
April 3, 1999, and was amended on March 24, 2002 and was partially revised on March 24, 2019 by Decision of the State
Council on Revising Some Administrative Regulations (Decree No. 710 of the State Council), housing provident fund contributions by an
individual employee and housing provident fund contributions by his or her employer shall belong to the individual employee. Registration
by PRC companies at the applicable housing provident fund management center is compulsory and a special housing provident fund account
for each of the employees shall be opened at an entrusted bank.
The
employer shall timely pay up and deposit housing provident fund contributions in full amount and late or insufficient payments shall
be prohibited. The employer shall process housing provident fund payment and deposit registrations with the housing provident fund administration
center. Under the circumstances where financial difficulties do exist due to which an employer is unable to pay or pay up housing provident
funds, permission of labor union of the employer and approval of the local housing provident funds commission must first be obtained
before the employer can suspend or reduce their payment of housing provident funds. With respect to companies who violate the above regulations
and fail to process housing provident fund payment and deposit registrations or open housing provident fund accounts for their employees,
such companies shall be ordered by the housing provident fund administration center to complete such procedures within a designated period.
Those who fail to process their registrations within the designated period shall be subject to a fine ranging from RMB10,000 to RMB50,000.
When companies breach these regulations and fail to pay up housing provident fund contributions in full amount as due, the housing provident
fund administration center shall order such companies to pay up within a designated period, and may further apply to the People’s
Court for mandatory enforcement against those who still fail to comply after the expiry of such period.
Regulations
on Tax
PRC
Enterprise Income Tax
The
PRC Enterprise Income Tax Law, or EIT Law, which was promulgated on March 16, 2007 and took effect on January 1, 2008, and
further amended on February 24, 2017 and December 29, 2018, imposes a uniform enterprise income tax rate of 25% on all PRC
resident enterprises, including foreign-invested enterprises, unless they qualify certain exceptions. The enterprise income tax
is calculated based on the PRC resident enterprise’s global income as determined under PRC tax laws and accounting standards. Under
the PRC EIT Law, an enterprise established outside China with “de facto management bodies” within China is considered a “resident
enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its
worldwide income. Under the implementation regulations to the PRC Enterprise Income Tax Law, a “de facto management body”
is defined as the body that exercises full and substantial control and overall management over the business, productions, personnel,
accounts and properties of an enterprise. If a non-resident enterprise sets up an organization or establishment in the PRC, it will
be subject to enterprise income tax for the income derived from such organization or establishment in the PRC and for the income derived
from outside the PRC but with an actual connection with such organization or establishment in the PRC. However, if non-resident enterprises
have not formed permanent establishments or premises in the PRC, or if they have formed permanent establishments or premises in the PRC
but their relevant income derived in the PRC is not related to those establishments, then their enterprise income tax would be set at
a rate of 10% for their income sourced from inside the PRC.
The
PRC EIT Law and its implementation rules, which was promulgated on December 6, 2007 and took effect on January 1, 2008 and
partly amended on April 23, 2019 and became effective on the same date, permit certain “high and new technology enterprises
strongly supported by the state” that independently own core intellectual property and meet statutory criteria, to enjoy a reduced
15% enterprise income tax rate. On January 29, 2016, the State Administration for Taxation, or SAT, the Ministry of Science and
Technology and the Ministry of Finance jointly issued the Administrative Rules for the Certification of High and New Technology Enterprises
specifying the criteria and procedures for the certification of High and New Technology Enterprises, and the certificate of a high and
new technology enterprise, is valid for three years.
Pursuant
to Circular of the State Administration of Taxation on Printing and Distributing the Implementing Measures for Special Tax Adjustments
(for Trial Implementation), effective on January 1, 2008, enterprises shall adopt a reasonable transfer pricing method when conducting
transactions with their affiliates. Tax authorities have the power to assess whether related transactions conform to the principle of
equity and make adjustments accordingly. Therefore, the invested enterprise should faithfully report relevant information of its related
transactions. Pursuant to the Announcement of the State Administration of Taxation on Issuing the Administrative Measures for Special
Tax Adjustment and Investigation and Mutual Consultation Procedures, effective on May 1, 2017, an enterprise may adjust and pay
taxes at its own discretion when it receives a special tax adjustment risk warning or identifies its own special tax adjustment risks,
and the tax authorities may also carry out special tax investigation and adjustment in accordance with the relevant provisions in regard
to enterprises that adjust and pay taxes at their own discretion.
In
January 2009, the SAT promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises,
or the Non-resident Enterprises Measures, which was repealed by Announcement of the State Administration of Taxation on Issues Relating
to Withholding at Source of Income Tax of Non-resident Enterprises in December 2017. According to the new announcement, it shall
apply to handling of matters relating to withholding at source of income tax of non-resident enterprises pursuant to the provisions
of Article 37, Article 39 and Article 40 of the Enterprise Income Tax Law. According to Article 37, Article 39 of the Enterprise
Income Tax Law, income tax over non-resident enterprise income pursuant to the provisions of the third paragraph of Article 3 shall
be subject to withholding at the source, where the payer shall act as the withholding agent. The tax amount for each payment made or
due shall be withheld by the withholding agent from the amount paid or payable. Where a withholding agent fails to withhold tax or perform
tax withholding obligations pursuant to the provisions of Article 37, the taxpayer shall pay tax at the place where the income is
derived. Where the taxpayer fails to pay tax pursuant to law, the tax authorities may demand payment of the tax amount payable, from
a payer of the taxpayer with payable tax amounts from other taxable income items in China.
On
April 30, 2009, the MOFCOM and the SAT jointly issued the Circular on Issues Concerning Treatment of Enterprise Income Tax in Enterprise
Restructuring Business, or Circular 59, which became effective retroactively as of January 1, 2008 and was partially revised
on January 1, 2014. By promulgating and implementing this circular, the PRC tax authorities have enhanced their scrutiny over the
direct or indirect transfer of equity interests in a PRC resident enterprise by a Non-resident Enterprise.
On
February 3, 2015, the SAT issued the Announcement of the State Administration of Taxation on Several Issues Relating to Enterprise
Income Tax of Transfers of Assets between Non-resident Enterprises, or SAT Bulletin 7, which was partially abolished on December 29,
2017. SAT Bulletin 7 extends its tax jurisdiction to transactions involving transfer of immovable property in China and assets held under
the establishment, and placement in China, of a foreign company through the offshore transfer of a foreign intermediate holding company.
SAT Bulletin 7 also addresses transfer of the equity interest in a foreign intermediate holding company broadly. In addition, SAT Bulletin
7 introduces safe harbor scenarios applicable to internal group restructurings. However, it also brings challenges to both the foreign
transferor and transferee of the Indirect Transfer as they have to assess whether the transaction should be subject to PRC tax and to
file or withhold the PRC tax accordingly.
On
October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of
Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017 and was revised
on June 15, 2018. The SAT Bulletin 37 further clarifies the practice and procedure of withholding of non-resident enterprise
income tax.
If
non-resident investors were involved in our private equity financing, if such transactions were determined by the tax authorities
to lack reasonable commercial purpose, we and our non-resident investors may be at risk of being required to file a return and be
taxed under SAT Bulletin 7 and we may be required to expend valuable resources to comply with SAT Bulletin 7 or to establish that we
should not be held liable for any obligations under SAT Bulletin 7.
PRC
Value Added Tax
According
to the Temporary Regulations on Value-added Tax, which was most recently amended on November 19, 2017, and the Detailed Implementing
Rules of the Temporary Regulations on Value-added Tax, which was amended on October 28, 2011, and became effective on November 1,
2011, all taxpayers selling goods, providing processing, repair or replacement services or importing goods within the PRC shall pay Value-Added Tax.
The tax rate of 17% shall be levied on general taxpayers selling or importing various goods; the tax rate of 17% shall be levied on the
taxpayers providing processing, repairing or replacement service; the applicable rate for the export of goods by taxpayers shall be zero,
unless otherwise stipulated.
On
January 1, 2012, the State Council officially launched a pilot value-added tax reform program, or the Pilot Program, applicable
to businesses in selected industries. Businesses in the Pilot Program would pay value added tax, or VAT, instead of business tax. The
Pilot Program initially applied only to transportation industry and “modern service industries” in Shanghai and would be
expanded to eight trial regions (including Beijing and Guangdong province) and nationwide if conditions permit. The pilot industries
in Shanghai included industries involving the leasing of tangible movable property, transportation services, research and development
and technical services, information technology services, cultural and creative services, logistics and ancillary services, certification
and consulting services. Revenues generated by advertising services, a type of “cultural and creative services”, are subject
to the VAT tax rate of 6%. According to official announcements made by competent authorities in Beijing and Guangdong province, Beijing
launched the same Pilot Program on September 1, 2012, and Guangdong province launched it on November 1, 2012.
On
May 24, 2013, the MOFCOM and the SAT issued the Circular on Tax Policies in the Nationwide Pilot Collection of Value Added Tax in
Lieu of Business Tax in the Transportation Industry and Certain Modern Services Industries, or the Pilot Collection Circular. The scope
of certain modern services industries under the Pilot Collection Circular extends to the inclusion of radio and television services.
On
March 23, 2016, the MOFCOM and the SAT jointly issued the Circular on the Pilot Program for Overall Implementation of the Collection
of Value Added Tax Instead of Business Tax, or Circular 36, which took effect on May 1, 2016. Pursuant to the Circular 36,
all of the companies operating in construction, real estate, finance, modern service or other sectors which were required to pay business
tax are required to pay VAT, in lieu of business tax. The VAT rate is 6%, except for rate of 11% for real estate sale, land use right
transferring and providing service of transportation, postal sector, basic telecommunications, construction, real estate lease; rate
of 17% for providing lease service of tangible property; and rate of zero for specific cross-bond activities.
At
the State Council executive meeting on March 28, 2018, China’s State Council has announced the VAT rate on manufacturing is
to be cut by one percent to 16% which took effect on May 1, 2018. On April 4, 2018, the Ministry of Finance and the SAT promulgated
the Notice on Adjusting Value-added Tax Rates, which reduced the tax rates for sale, import and export of goods, as well as the
deduction rate for taxpayer’s purchaser of agricultural products. According to the Announcement on Relevant Policies for Deepening
the Value-Added Tax Reform, which is jointly issued by Ministry of Finance, SAT and the General Administration of Customs on March 20,
2019 and took effect on April 1, 2019, The tax rate of 16% applicable to the VAT taxable sale or import of goods by a general VAT
taxpayer shall be adjusted to 13%.
According
to the Circular of the SAT on Printing and Distributing the Administrative Measures for Tax Refund (Exemption) for Exported Goods (for
Trial Implementation), effective on May 1, 2005, unless otherwise provided by law, for the goods as exported via an export agency,
the exporter may, after the export declaration and the conclusion of financial settlement for sales, file a report to competent State
Taxation Bureau for the approval of refund or exemption of VAT or consumption tax on the strength or the relevant certificates.
PRC
Dividend Withholding Tax
Under
the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises were
exempt from PRC withholding tax. Pursuant to the EIT Law and the Implementation Rules, dividends generated after January 1, 2008
and payable by a foreign-invested enterprise in China to its foreign enterprise investors are subject to a 10% withholding tax,
unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding
arrangement.
Pursuant
to an Arrangement Between the Mainland of 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 came into effect on December 8, 2006, and other applicable PRC
laws and regulations, if a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant
conditions and requirements under such Double Tax Avoidance Arrangement and other applicable laws and regulations, the 10% withholding
tax on the dividends the Hong Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5%. According to the
Announcement of the SAT on Issuing the Measures for the Administration of Non-resident Taxpayers’ Enjoyment of Treaty Benefits
effective on January 1, 2020, non-resident taxpayers can enjoy tax treaty benefits via the “self-assessment of eligibility,
claiming treaty benefits, retaining documents for inspection” mechanism. Non-resident taxpayers who have self-assessed that
they are eligible for the treaty benefits can claim such tax treaty benefits accordingly provided that they have collected and retained
relevant supporting documents for inspection by the tax authorities in their post-filing administration process. Pursuant to the
Announcement on Certain Issues with Respect to the “Beneficial Owner” in Tax Treaties, issued by the SAT on February 3,
2018, and effective on April 1, 2018, when determining an applicant’s “beneficial owner” status regarding tax
treatments in connection with dividends, interests or royalties in tax treaties, several factors set forth below will be taken into account,
although the actual analysis will be fact-specific: (i) whether the applicant is obligated to pay more than 50% of his or her income
in 12 months to residents in a third country or region; (ii) whether the business operated by the applicant constitutes a substantial
business operation; and (iii) whether the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption
on relevant incomes or levy tax at an extremely low rate. The applicant must submit relevant documents to the competent tax authorities
to prove his or her “beneficial owner” status. Although our WFOE is currently wholly owned by UTime International Limited,
we cannot assure you that we will be able to enjoy the preferential withholding tax rate of 5% under the China-HK Taxation Arrangement.
Regulations
on Foreign Exchange
The
principal regulations governing foreign currency exchange in China are the PRC Foreign Exchange Administration Regulations, which were
promulgated by the State Council on January 29, 1996 and last amended on August 5, 2008. Under the Foreign Exchange Administration
Regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions
can be made in foreign currencies without prior approval from State Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements. However, approval from or registration with appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans.
On
August 29, 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the
Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion
by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be
used. SAFE Circular 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise
may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity
investments within China. SAFE also strengthened its oversight of the flow and use of the RMB capital converted from foreign currency
registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval,
and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. On March 30,
2015, SAFE issued SAFE Circular 19, which took effective and replaced SAFE Circular 142 on June 1, 2015. Although SAFE Circular
19 allows for the use of RMB converted from the foreign currency-denominated capital for equity investments in China, the restrictions
continue to apply as to foreign-invested enterprises’ use of the converted RMB for purposes beyond the business scope, for
entrusted loans or for inter-company RMB loans. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming
and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9,
2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted
from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition
against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 or SAFE Circular 16 could
result in administrative penalties.
On
November 19, 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on
Foreign Direct Investment which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular,
the opening of various special purpose foreign exchange accounts (e.g., pre-establishment expenses accounts, foreign exchange capital
accounts and guarantee accounts), the reinvestment of lawful incomes derived by foreign investors in China (e.g. profit, proceeds of
equity transfer, capital reduction, liquidation and early repatriation of investment), and purchase and remittance of foreign exchange
as a result of capital reduction, liquidation, early repatriation or share transfer in a foreign-invested enterprise no longer require
SAFE approval, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible before.
In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic
Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its
local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process
foreign exchange business relating to the direct investment in China based on the registration information provided by SAFE and its branches.
On
February 13, 2015, SAFE promulgated the Circular on Further Simplifying and Improving the Policies Concerning Foreign Exchange Control
on Direct Investment, or SAFE Circular 13, which took effect on June 1, 2015. SAFE Circular 13 delegates the authority to enforce
the foreign exchange registration in connection with the inbound and outbound direct investment under relevant SAFE rules to certain
banks and therefore further simplifies the foreign exchange registration procedures for inbound and outbound direct investment.
Regulations
on loans to and direct investment in the PRC entities by offshore holding companies
According
to the Implementation Rules for the Provisional Regulations on Statistics and Supervision of Foreign Debt promulgated by SAFE on September 24,
1997 and the Interim Provisions on the Management of Foreign Debts promulgated by SAFE, the NDRC and the MOFCOM and effective from March 1,
2003, loans by foreign companies to their subsidiaries in China, which accordingly are FIEs, are considered foreign debt, and such loans
must be registered with the local branches of the SAFE. Under the provisions, the total amount of accumulated medium-term and long-term foreign
debt and the balance of short-term debt borrowed by a FIE is limited to the difference between the total investment and the registered
capital of the foreign-invested enterprise.
On
January 12, 2017, the People’s Bank of China promulgated the Circular of the People’s Bank of China on Matters relating
to the Macro-prudential Management of Comprehensive Cross-border Financing, or PBOC Circular 9, which took effect on the
same date. The PBOC Circular 9 established a capital or net assets-based constraint mechanism for cross-border financing. Under
such mechanism, a company may carry out cross-border financing in Renminbi or foreign currencies at their own discretion. The total
cross-border financing of a company shall be calculated using a risk-weighted approach and shall not exceed an upper limit.
The upper limit is calculated as capital or assets multiplied by a cross-border financing leverage ratio and multiplied by a macro-prudential regulation
parameter.
In
addition, according to PBOC Circular 9, as of the date of the promulgation of PBOC Circular 9, a transition period of one year
is set for foreign-invested enterprises and during such transition period, FIEs may apply either the current cross-border financing
management mode, namely the mode provided by Implementation Rules for the Provisional Regulations on Statistics and Supervision of Foreign
Debt and the Interim Provisions on the Management of Foreign Debts, or the mode in this PBOC Circular 9 at its sole discretion. After
the end of the transition period, the cross-border financing management mode for FIEs will be determined by the People’s Bank
of China and SAFE after assessment based on the overall implementation of this PBOC Circular 9.
According to applicable PRC regulations on FIEs, capital contributions
from a foreign holding company to its PRC subsidiaries, which are considered FIEs, may be made when approval by or registration with the
SAFE and MOFCOM or their respective local counterpart is obtained.
Regulations
on Foreign Exchange Registration of Offshore Investment by PRC Residents
On
July 4, 2014, SAFE issued the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore
Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, and its implementation
guidelines, which abolished and superseded the Circular on Several Issues concerning Foreign Exchange Administration for Domestic Residents
to Engage in Financing and in Return Investments via Overseas Special Purpose Companies, SAFE Circular 75. Pursuant to SAFE Circular
37 and its implementation guidelines, PRC residents (including PRC institutions and individuals) must register with local branches of
SAFE in connection with their direct or indirect offshore investment in an overseas special purpose vehicle, or SPV, directly established
or indirectly controlled by PRC residents for the purposes of offshore investment and financing with their legally owned assets or interests
in domestic enterprises, or their legally owned offshore assets or interests. Such PRC residents are also required to amend their registrations
with SAFE when there is a change to the basic information of the SPV, such as changes of a PRC resident individual shareholder, the name
or operating period of the SPV, or when there is a significant change to the SPV, such as changes of the PRC individual resident’s
increase or decrease of its capital contribution in the SPV, or any share transfer or exchange, merger, division of the SPV. Failure
to comply with the registration procedures set forth in the Circular 37 may result in restrictions being imposed on the foreign exchange
activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate,
the capital inflow from the offshore entities and settlement of foreign exchange capital, and may also subject relevant onshore company
or PRC residents to penalties under PRC foreign exchange administration regulations.
Mr. Bao
and Mr. He, our PRC resident shareholders, have completed the required registrations with the local counterpart of SAFE in relation
to our financing and restructuring to our shareholding structure.
Regulations
on Dividend Distributions
The
principal regulations governing distribution of dividends paid by wholly foreign-owned enterprises include:
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Company
Law of the PRC (1993), as amended in 1999, 2004, 2005, 2013 and 2018;
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The
Foreign Investment Law, which came into effect on January 1, 2020;
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The
Implementation of the Foreign Investment Law of the People’s Republic of China, which came into effect on January 1, 2020.
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Under
these laws and regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise in China
is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves
until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends.
The foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus
funds. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained
from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
Regulations
on Overseas Listings
On
August 8, 2006, six PRC regulatory agencies, namely, the Ministry of Commerce, the State Assets Supervision and Administration Commission,
SAT, SAIC, China Securities Regulatory Commission, or the CSRC, and SAFE, jointly adopted the Regulations on Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and were amended
on June 22, 2009. The M&A Rules purport, among other things, to require that offshore special purpose vehicles, or SPVs, that
are controlled by PRC companies or individuals and that have been formed for overseas listing purposes through acquisitions of PRC domestic
interest held by such PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on
an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its official website specifying documents and
materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. While the application of the M&A
Rules remains unclear, our PRC legal counsel has advised us that based on its understanding of the current PRC laws, rules and regulations
and the M&A Rules, prior approval from the CSRC is not required under the M&A Rules for the listing and trading of our ordinary
shares on the NASDAQ given that (i) our PRC Subsidiary was directly established by us as a wholly foreign-owned enterprise, and
we have not acquired any equity interest or assets of a PRC domestic company owned by PRC companies or individuals as defined under the
M&A Rules that are our beneficial owners after the effective date of the M&A Rules, and (ii) no provision in the M&A Rules
clearly classifies the contractual arrangements as a type of transaction subject to the M&A Rules.
However,
our PRC legal counsel has further advised us uncertainties still exist as to how the M&A Rules will be interpreted and implemented
and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations
in any form relating to the M&A Rules. If CSRC or another PRC regulatory agency subsequently determines that prior CSRC approval
was required for our initial public offering, we may face regulatory actions or other sanctions from CSRC or other PRC regulatory agencies.
These
regulatory agencies may impose fines and penalties on our operations, limit our operating privileges, delay or restrict the repatriation
of the proceeds from our initial public offering into the PRC or payment or distribution of dividends by our PRC Subsidiary, or take
other actions that could materially adversely affect our business, financial condition, results of operations, reputation and prospects,
as well as the trading price of our ordinary shares. In addition, if CSRC later requires that we obtain its approval for our initial
public offering, we may be unable to obtain a waiver of CSRC approval requirements, if and when procedures are established to obtain
such a waiver. Any uncertainties or negative publicity regarding CSRC approval requirements could have a material adverse effect on the
trading price of our ordinary shares. See “Risk Factors — Risks Related to Doing Business in China — The approval of
the China Securities Regulatory Commission may be required in connection with our initial public offering, and, if required, we cannot
predict whether we will be able to obtain such approval.”
India
This
section sets forth a summary of the most significant laws, rules and regulations that affect our business activities in India.
Regulations
relating to Foreign Investment under Foreign Exchange and Management Act, 1999
Foreign
Investment in India and Regulatory Approvals
Investment
by person resident outside India in an Indian entity is regulated by the provisions laid down in the Foreign Exchange and Management
Act, 1999 (“FEMA”), as amended from time to time by the Foreign Exchange Department of the Reserve Bank of India (“RBI”).
Foreign
Direct Investment (“FDI”) is freely permitted in almost all sectors. Under the FDI Policy, investments can be made by non-residents in
the equity shares; fully, compulsorily and mandatorily convertible debentures; or fully, compulsorily and mandatorily convertible preference
shares, partly paid equity shares and warrants of an Indian company, through two routes: (a) the Automatic Route; and (b) the Government
Route. Under the automatic route, the non-resident investor or the Indian company does not require any approval from the Reserve
Bank or Government of India for the investment. An Indian company, not engaged in any activity/sectors where FDI is prohibited, can issue
shares or convertible debentures to a person resident outside India, subject to entry routes and sectoral caps prescribed in the FDI
Policy. FDI in activities covered under the approval route requires prior approval of the Government which are considered by respective
ministry/ department of the Government of India, as the case may be. In few sectors, there is prohibition on FDI in any form. It is pertinent
to note that 100% FDI through automatic route is allowed in all activities/ sectors which are neither covered in automatic route, approval
route nor in prohibited sector.
RBI
has issued the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“FEMA Rules, 2019”), vide Notification
No. S.O. 3732(E) dated October 17, 2019 (which replaced erstwhile Foreign Exchange Management (Transfer or issue of security by
a person resident outside India) Regulations, 2017), which is a principal regulation governing foreign investment in an Indian entity
by any person resident outside India.
FEMA
Rules, 2019 stipulates that any investment in an Indian entity by a person resident outside India (which also includes a body corporate
incorporated outside India) shall always remain subject to the entry routes, sectoral caps and other conditions laid down therein. Therefore,
in order to subscribe, purchase or sell equity instruments (including equity shares) of an Indian company, a person resident outside
India must adhere to terms and conditions given in Schedule 1 of FEMA Rules, 2019.
Since
Do Mobile operates in the manufacturing sector, it is permitted to receive 100% FDI under the automatic route as per the provisions of
FEMA Rules, 2019.
Important
Compliances pertaining to FDI under FEMA Rules, 2019
Pricing
Guidelines on Issuance of Shares and Filing of Form FC-GPR for Allotment of Shares
Pricing:
Any Indian company intending to issue equity instruments including equity shares to a person resident outside India must ensure that
the price of such equity instruments shall not be less than: (a) the price worked out on the basis of Securities and Exchange Board of
India (SEBI) guidelines in case of listed companies; and (b) the valuation of such equity instruments arrived at as per any internationally
accepted pricing methodology on arm’s length basis duly certified by a SEBI registered Merchant Banker or a Chartered Accountant
or a practicing Cost Accountant, in case of an unlisted Indian Company.
Filing
Requirements: Allotment of shares by an Indian entity to a person resident outside India (including a body corporate incorporated outside
India) will require an Indian entity to file form FC-GPR (Foreign Currency-Gross Provisional Return) within 30 days from the
date of allotment of shares, in the manner prescribed by the RBI, along with a certificate from the company secretary of the Indian company
certifying the eligibility to issue shares in terms of FEMA Rules, 2019 and a certificate from SEBI registered Merchant Banker or Chartered
Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India. Such certificates
along with the Form FC-GPR must be submitted to the Foreign Exchange Department of RBI.
Do
Mobile is also required to adhere to the aforesaid compliances regarding allotment of shares to its parent company Bridgetime Limited
and or to its prospective investors.
Compliance
of Pricing Guidelines on Transfer of Shares and Filing of Form FC-TRS for Transfer of Shares
Pricing:
Any transfer of the equity instruments (including shares) of an Indian entity from a resident Indian to a person resident outside India
or vice-versa, will be subject to the pricing guidelines and reporting requirements prescribed under the FEMA Rules, 2019.
In
the case of transfer of equity instruments (including shares) from a person resident in India to a person resident outside India, price
of such equity instruments transferred shall not be less than:
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a)
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the
price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company;
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b)
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the
price at which a preferential allotment of shares can be made under the SEBI guidelines, as applicable, in case of a listed Indian company
or in case of a company going through a delisting process as per the SEBI (Delisting of Equity Shares) Regulations, 2009.
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c)
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in
case of an unlisted Indian Company, the valuation of equity instruments done as per any internationally accepted pricing methodology
for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing
Cost Accountant.
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In
the case of transfer of equity instruments (including shares) by a person resident outside India to a person resident in India, the price
of equity instruments (including shares) transferred shall not exceed:
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a)
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The
price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company;
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b)
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The
price at which a preferential allotment of shares can be made under the SEBI guidelines, as applicable, in case of a listed Indian company
or in case of a company going through a delisting process as per the SEBI (Delisting of Equity Shares) Regulations, 2009.
The price is determined for such duration as specified in the SEBI guidelines, preceding the relevant date, which shall be the date of
purchase or sale of shares;
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c)
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The
valuation of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis
duly certified by a Chartered Accountant or a Securities and Exchange Board of India registered Merchant Banker or a practicing Cost
Accountant, in case of an unlisted Indian Company.
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The
principal intent of the government is that the person resident outside India is not guaranteed any assured exit price at the time of
making such investment/ agreement and shall exit at the price prevailing at the time of exit. The above pricing guidelines are also applicable
for issue of shares/preference shares against payment of lump sum technical know-how fee/royalty due for payment/repayment or conversion
of external commercial borrowings in convertible foreign currency into equity shares/fully compulsorily and mandatorily convertible preference
shares or capitalization of pre incorporation expenses/import payables (with prior approval of Government).
Filing
Requirements: Any transfer of shares of Indian entity from a person resident outside India to a person resident in India or vice-versa will
also require the filing of form FC-TRS (Foreign Currency — Transfer of Shares) with the RBI within 60 days of transfer of
equity instruments or receipt/remittance of funds, whichever is earlier.
In
the case of buy-back of shares pursuant to a scheme of merger /de-merger/ amalgamation of Indian companies approved by National
Company Law Tribunal, the filing of form FC-TRS is mandatory by Indian companies.
Reporting
under Single Master Form
RBI
has issued guidelines on ‘Foreign Investment in India — Reporting in Single Master Form’ vide A.P
(DIR Series) Circular No. 30 dated June 07, 2018 to integrate the extant reporting structures of various types of foreign investment
in India in a Single Master Form (“SMF”), which is required to be filed online. With effect from September 1, 2018,
the reporting requirements for foreign investment in India, irrespective of the instrument through which foreign investment is made,
has been integrated into a SMF. SMF subsumes filing of form FC-GPR, FC-TRS, Form ESOP, Form DRR, Form DI and other forms into one single
form.
Filing
of Foreign Liabilities and Assets Annual Return
An
Indian Company which has received FDI in the previous year including the current year, should submit Foreign Liabilities and Assets Annual
Return in form FLA to RBI on or before the 15th day of July of each year. Year for this purpose shall be reckoned as
April to March.
Repatriation
of Dividend
Dividends
declared by Indian companies are freely repatriable without any restrictions (net after Tax deduction at source or Dividend Distribution
Tax, if any, as the case may be). The repatriation is governed by the provisions of the Foreign Exchange Management Act (Current Account
Transactions) Rules, 2000.
Repatriation
of Interest
Interest
on fully, mandatorily and compulsorily convertible debentures is also freely repatriable without any restrictions (net of applicable
taxes). The repatriation is governed by the provisions of the FEMA (Current Account Transactions) Rules, 2000.
Regulations
relating to Overseas Investment under FEMA
Investment
in Joint Venture or Wholly Owned Subsidiary
RBI
has issued the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (“ODI Regulations”)
pursuant to the provisions of FEMA to govern the investment in a foreign entity by an Indian party, including an Indian company. The
foreign entities in which such overseas investment is made are referred to as joint venture (“JV”) or wholly owned subsidiary.
An Indian company is allowed to make overseas investment in JV or WOS either by way of contribution towards capital or subscription to
the memorandum of association of JV or WOS. Further, overseas direct investment is also permitted by way of purchase of existing shares
of JV or WOS through market or stock exchange, excluding the portfolio investment.
Like
FDI, Indian companies can make overseas investment under automatic route and approval route.
An
Indian company may make overseas direct investment in JV or its wholly owned subsidiary up to 400% of its net worth (as per its last
audited balance sheet) without any prior regulatory approval. However, if this limit is breached, then prior approval from RBI is required.
The
eligible ceiling limit under prior approval of RBI is also required if financial commitment by an Indian party becomes equal or exceeds
US$1 billion in a financial year (April to March), even when the total financial commitment of an Indian party is within the eligible
limit of automatic route. Further, an Indian party is eligible to extend loan/guarantee as a part of financial commitment only to JV
or WOS in which it has equity participation. However, if an Indian party wants to extend loan/ guarantee as a part of financial commitment
without equity contribution in JV or WOS, it may apply to RBI under the approval route. It may be note that term ‘financial commitment’
as used in above paragraphs means amount of direct investment by way of contribution to equity, loan and 100% of the amount of guarantees
and 50% of the performance guarantees issued by an Indian party to or on behalf of its JV or WOS.
Reporting
of Overseas Investment
An
Indian company undertaking FC should approach an authorized dealer category — I bank (“AD Bank”) with an application
in Form ODI (Master Document on Reporting) and prescribed enclosures / documents in Form ODI for effecting FC, such as, certified copy
of the board resolution, statutory auditors certificate and valuation report, along with Form A2. Additionally, all transactions relating
to a JV / WOS should be routed through one branch of an AD Bank to be designated by the Indian Party.
Pricing
of Overseas Investment
While
subscribing any shares by an India company in JV or WOS, it is relevant to consider that if such financial commitment is more than US$5 million,
valuation of the shares should be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker
outside India registered with the appropriate regulatory authority in the foreign country. In all other cases the valuation should be
carried out by a Chartered Accountant or a Certified Public Accountant.
Regulatory
compliances under Companies Act, 2013
The
Companies Act, 2013 (“Companies Act, 2013”) is a principal law regulating the rights and duties of a company incorporated
in India. Do Mobile being an Indian company is under an obligation to undertake several compliances mentioned under the Companies Act.
Board
of Directors
A
private limited company is required to have minimum 2 directors and maximum 15 directors on its board of directors (“Board”).
However, a private limited company may appoint more than 15 directors after passing a special resolution by its members in general meeting.
Further, in terms of the Companies Act it is mandatory to have at least one director who stays in India for a total period of not less
than 182 days during a financial year (April to March).
Dividends
As
per the Companies Act, a company may if authorized by its articles of association (“Articles”), pay dividends in proportion
to the amount paid-up on each share. A company in its general meeting may declare dividends, but no dividend shall exceed the amount
recommended by the Board of a company. The shareholders do not have any power to declare any dividend, however, the same shall be approved
by the shareholders in the annual general meeting of the company. Similarly, under the Companies Act, the dividend shall be declared
or paid only out of profits of the company of that year after providing depreciation or out of the profits of the company for any previous
financial year or years after providing for depreciation remaining undistributed, or out of both. Dividends are generally declared as
a percentage of the par value of a company’s equity shares.
Bonus
Shares
In
addition to permitting dividends to be paid out of current or retained earnings as described above, the Companies Act permits a company
to distribute an amount transferred from the reserve or surplus in the company’s profit and loss account to its shareholders in
the form of fully paid-up bonus shares. The Companies Act permits issue of bonus shares when authorized by its Articles and shall
not be issued in lieu of dividend. Bonus shares are distributed to shareholders in the proportion recommended by the Board of the company
which has been authorized in annual general meeting.
Pre-emptive
Rights and Issue of Additional Shares
The
Companies Act gives equity shareholders a right to subscribe for new shares in proportion to their respective existing shareholdings,
unless otherwise determined by a special resolution passed by a general meeting of the shareholders. Under the Companies Act, in the
event of an issuance of securities, subject to the limitations set forth above, a company must first offer the new shares to the shareholders
on a fixed record date through “letter of offer”. The Companies Act permits any other person authorized by special resolution
passed in a general meeting of the shareholders to subscribe new share of the company either for cash or consideration and company shall
comply with the provisions of private placement for such issue to other person.
Meetings
of Shareholders
A
company must convene an annual general meeting of its shareholders each year within 15 months from the previous annual general meeting
or within 6 months of the end of the previous fiscal year, whichever is earlier. In certain circumstances a 3 months extension
may be granted by the Registrar of Companies to hold the annual general meeting. In addition, the board may convene an extraordinary
general meeting of shareholders when necessary or at the request of a shareholder or shareholders holding at least 10% of the paid up
capital carrying voting rights. Written notice setting out the agenda of any meeting must be given at least 21 days prior to the date
of the general meeting to the shareholders of record, excluding the days of mailing and date of the meeting.
Register
of Shareholders; Record Dates; Transfer of Shares
A
company is required to maintain a register of shareholders either in physical form or held in electronic form. For the purpose of determining
the shares entitled to annual dividends, the register is closed for a specified period prior to the annual general meeting. The date
on which this period begins is the record date.
Audit
and Annual Report
Under
the Companies Act, a company must file its annual report with the Registrar of Companies within 30 days from the date of the annual
general meeting. At least 21 days before the annual general meeting of shareholders, a company must distribute a detailed version of
the company’s audited balance sheet and profit and loss account and the reports of the board of directors and the auditors thereon.
A company must also file an annual return containing a list of the company’s shareholders and other company information, within
60 days of the conclusion of the annual general meeting.
Compliances
on Employment or Labor Laws
In
India, labor laws are considered as social-welfare legislation to govern the conditions of employment, with an aim to provide social
security and to safeguard interests of both the employer and the employees. Labor law defines the rights and obligations as workers/employees
and employers with respect to the workplace health and safety, employment standards including adequate wages, and limited hours of work.
An
Indian company is governed by several labor laws, pursuant to which it has to mandatorily provide the employment benefits to its employees
which include equal remuneration, gratuity, bonus, pension, provident funds (social security), employees’ insurance, maternity
benefits and all other benefits to which an Indian company is mandatorily required to comply with.
Besides
that, an Indian company must comply with the filing of periodical filings requirements and maintenance of registers under different labor
statutes. The Shops and Establishment Act, Payment of Gratuity Act, 1972, Maternity Benefit Act, 1961 and Employees’ State Insurance
Act, 1948 are some of the important labor laws which are applicable to an Indian company. Moreover, an Indian company is under an obligation
to get the registration done under the Shops and Establishment Act and any other statute which obliges an Indian company to get itself
registered mandatorily. An Indian company has exposure to various sanctions, fines, and penalties under the relevant laws upon non-compliance or
violations of the provisions.
There
are numerous Central and State labor legislations in India. The important ones and those relevant in relation to Do Mobile are described
herein below:
|
1.
|
Employees’
Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”): The EPF Act provides for
the institution of provident funds, pension funds, and deposit linked insurance funds for employees. It applies to all factories and
establishments employing 20 or more persons or class of persons. An establishment to which the EPF Act applies shall continue to be governed
by the EPF Act, notwithstanding that the number of persons employed therein at any time falls below 20. Once an establishment gets covered
under the EPF Act, branches of such establishment situated at any other place shall also be treated as parts of the same establishment.
Employees drawing wages exceeding Rs. 15,000/- per month are excluded from the provisions of the EPF Act.
|
|
2.
|
Employees’
State Insurance Act, 1948 (“ESI Act”): The ESI Act is a social welfare legislation enacted with the
objective of providing certain benefits to employees in case of sickness, maternity and employment injury. It is applicable to all factories
and establishment employing 10 or more persons with respect to the employees, including casual, temporary or contract employees drawing
wages less than Rs. 21,000/- per month. The existing total employee state insurance contribution is 4% of wages, where the employer contribution
is 3.25% and employees’ contribution is 0.75% of wages.
|
|
3.
|
Payment
of Gratuity Act, 1972 (“Gratuity Act”): Under the Gratuity Act, employee needs to provide continuous
service of 5 years to be eligible to receive gratuity. Gratuity becomes payable to an employee on retirement, resignation or termination
of employment due to death/disablement on account of accident/disease. Condition of providing minimum 5 years of continuous service is
not applicable in case of death/disablement. The Gratuity Act is applicable to every establishment in which 10 or more persons are employed
or were employed on any day of the preceding 12 months. The gratuity is payable at the rate of 15 days wages based on the wages
last drawn, for every year of completed service or part thereof in excess of 6 months, subject to an aggregate amount of Rs. 20,00,000/-.
However, if an employee has the right to receive higher gratuity under a contract or under an award, then the employee is entitled to
get higher gratuity.
|
|
4.
|
The
Shops and Commercial Establishments Act (“Shops Act”): The Shops Act of the respective States in India
generally contain provisions relating to registration of an establishment, working hours, overtime, leave, notice pay, working conditions
for women employees, etc. Certain industries like IT and IT-enabled services have been given relaxations by various State Governments
in respect of the observance of certain provisions of their respective Shops Act.
|
|
5.
|
Sexual
Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“POSH Act”): The
POSH Act was enacted by the Indian Parliament to provide protection against sexual harassment of women at workplace and prevention and
redressal of complaints of sexual harassment and for matters connected therewith. The POSH Act makes it mandatory for every organisation
to frame an anti-sexual harassment policy. Further an organisation having 10 or more employees is required to constitute an Internal
Complaints Committee to entertain complaints that may be made by an aggrieved woman.
|
Applicability
of Social Security Schemes i.e. Employees Provident Fund and Employees Pension Scheme to Expatriates working in India
The
Government of India (Ministry of Labor and Employment) has extended the applicability of the Employees’ Provident Fund Scheme (EPFS)
and the Employees’ Pension Scheme (EPS), notified under the EPF Act, to international workers through its notification Nos. G.S.R.
705(E) and 706(E), both dated October 01, 2008.
“International
Worker” means:
|
a)
|
an
Indian employee having worked or going to work in a foreign country with which India has entered into a social security agreement and
being eligible to avail the benefits under a social security programme of that country, by virtue of the eligibility gained or going
to gain, under the said agreement; or
|
|
b)
|
an
employee other than an Indian employee, holding other than an Indian passport, working for an establishment in India to which the Act
applies.
|
The
aforesaid notifications further define the term “excluded employee” with reference to an international worker to mean “an
international worker, who is contributing to a social security program of his/her country of origin, either as a citizen or resident,
with whom India has entered into a social security agreement on a reciprocity basis and enjoying the status of a detached worker for
the period and terms, as specified in such an agreement”.
Pursuant
to the above notifications, every international worker employed with an establishment in India to whom the EPF Act applies (the EPF Act
applies to an establishment employing 20 or more employees) would be required to become a member of the Employees Provident Fund, unless
he/she qualifies as an excluded employee. International workers working in India with an establishment to which the EPF Act applies are
required to contribute 12% of their salary (which includes basic pay, dearness allowance, retaining allowance and cash value of food
concessions) under the EPF Act. However, in case the expatriates are from such countries with which India has entered into Social Security
Agreements and are making contributions towards social security in their home countries, such expatriates would not be required to make
contribution under the EPF Act. An International Worker may withdraw the full amount of accumulations in the fund on retirement from
services at any time after the attainment of 58 years or on retirement on account of permanent or total incapacity to work due to bodily
or mental infirmity.
New
Labour Law Codes in India
Since
many of the Indian labour laws are overlapping and archaic in nature, the Indian government has amalgamated twenty-nine existing labour
laws into four codes, namely, the Code on Wages, 2019, the Industrial Relations Code, 2020, the Occupational Safety, Health and Working
Conditions Code, 2020 and the Code of Social Security, 2020 (collectively referred to as the “Codes”). These four
Codes together consolidate laws relating to: (i) wages; (ii) industrial relations; (iii) safety, working conditions and welfare and (iv)
social security. The Code on Wages, 2019 already received Presidential assent on August 8, 2019 and the rest of the three Codes,
i.e., the Industrial Relations Code, 2020; the Occupational Safety, Health and Working Conditions Code, 2020 and the Code of Social Security,
2020, received Presidential assent on September 28, 2020. The four Codes post receiving Presidential assent have also been published
in the Official Gazette of India, they will however, be brought into force only once the appointed date for their implementation is notified
by the Central Government. Accordingly, till date the earlier labour laws are in force and governing conditions of employment in India.
Regulations
related to Consumer Protection
With
changing times, the economic and business environment of India also went through a change. India has now become a global trading partner
with the world. This indeed exposed customers not only to new products but also new problems. The increase in usage of mobile handsets
in India required protecting the interests of the consumers against deficiency in services and harassment by way of unfair trade practices
and poor quality products. The Consumer Protection Act, 1986 (“CPA 1986”) was the law of the Parliament of India which addresses
the aforementioned concerns of the consumers in India. This statute also casts obligation on the traders, service providers and person
to provide customer satisfaction through guarantee of quality, function, usage and after sales-services. The Indian Government recently
on July 20, 2020 introduced the Consumer Protection Act, 2019 (“CPA 2019”) replacing the erstwhile CPA
1986. Accordingly, CPA 2019 will now overhaul the administration and settlement of consumer disputes in India in place of CPA 1986. CPA
2019 now specifically provides for prevention of unfair trade practice by e-commerce platforms and for the same Consumer Protection
(E-Commerce) Rules, 2020 are promulgated.
Forums
for Redressal under CPA 2019
With
the aim to redress the consumer disputes, CPA 2019 provides for establishment of different consumer commissions i.e. District Consumer
Disputes Redressal Commission, State Consumer Disputes Redressal Commission and National Consumer Disputes Redressal Commission. CPA
2019 lays down the pecuniary jurisdiction in relation to each of the aforesaid commissions for the purpose of entertaining the dispute
arose in relation of value of particular goods or service. Accordingly, in case the consumer finds deficiency in goods or services, then
he can file a complaint against the person before appropriate commission having pecuniary jurisdiction to entertain the dispute for such
deficiency. In addition to the aforesaid redressal commissions, CPA 2019 provides for an establishment of the Central Consumer Protection
Authority which is, inter alia, empowered to conduct investigations into violations of consumer rights, institute complaints
and order discontinuance of unfair trade practices to promote, protect and enforce the rights of consumers.
Regulations
governing the Intellectual Property Rights
Intellectual
Property Right (“IPR”) is a legal right governing the use of creations of the human mind. In India, there are several legislations
which protects different IPRs, like trademark, patent, copyright, and domain name.
Trademark
under Trade Marks Act, 1999
With
the globalization of trade, brand names, trade names and marks have attained an immense value that require uniform minimum standards
of protection and efficient procedures. India being a member nation to World Trade Organization has ratified the Agreement on Trade-Related Aspects
of Intellectual Property Rights along with other member nations of WTO. In view of the same, India has amended and repealed its old Indian
Trade and Merchandise Marks Act, 1958 and enacted new Trade Marks Act, 1999 (“TM Act”), to align with the international systems
and practices.
The
TM Act envisages the recognition and protection of the well-known trademark. The TM Act also provides for registration of trademarks,
duration, removal, renewal and revocation of the trade mark. The Indian judiciary has been proactive in the protection of trademarks,
and it has extended the protection to domain names under the TM Act. The trademark is initially registered for a period of 10 years,
which is calculated from the date of filing of the application and in case of convention application from the date of priority.
Further,
the registration of the trademark may be renewed for a period of 10 years from the date of expiration of the original registration or
of the last renewal of registration. Such renewal application should be made at least 6 months prior to expiry of registration of
the trademark. However, if such renewal application not is made within the said period, it can be filed within 6 months after the
expiry of registration or the renewal as the case may be along with a late filing fee. Additionally, if such late filing fee is not paid,
upon expiry of one year from the date of expiry of registration or the renewal as the case may be, such trademark will automatically
be removed from the register of trademarks of concerned authority.
Regulations
governing Import and Export of Goods
In
India, the import and export of goods is governed by the Foreign Trade (Development & Regulation) Act, 1992 and India’s
Export Import (EXIM) Policy. India’s Directorate General of Foreign Trade (“DGFT”) is the nodal authority to
regulate all matters related to EXIM Policy. Importers are required to register with DGFT to obtain an Importer Exporter Code Number
(“IE Code”) for undertaking import activities. Moreover, an exporter is not allowed to take benefits of exports from
DGFT without having IE Code. After an IEC has been obtained, the source of items for import must be identified and declared by an
importer.
The
Indian Trade Classification — Harmonized System (ITC-HS) allows for the free import of most goods without a special import license.
Majority of import items fall within the scope of India’s EXIM Policy regulation of Open General License (OGL) which means that
they are deemed to be freely importable without restrictions and without a license, except to the extent that they are regulated by the
provisions of the EXIM Policy or any other law. Imports of items not covered by OGL are regulated.
4C.
Organizational Structure
The
following chart reflects our organizational structure as of the date of this report. For descriptions of our subsidiaries and variable
interest entity, please see “4A. History and Development of the Company.”
4D.
Property, Plants and Equipment
Under
PRC law, land is owned by the state. “Land use rights” are granted to an individual or entity after payment of a land use
right fee is made to the applicable state or rural collective economic organization. Land use rights allow the holder the right to use
the land for a specified long-term period. We do not currently own any real estate or land use rights. For descriptions of our leased
properties, please see “Item 4B. Business Overview – Facilities.”
ITEM
4A. UNRESOLVED STAFF COMMENTS
Not
Applicable
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The
following discussion and analysis should be read in conjunction with our consolidated financial statements, the notes to those financial
statements and other financial data that appear elsewhere in this annual report. In addition to historical information, the following
discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and
the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors,
including those set forth in “Risk Factors” and elsewhere in this report. Our consolidated financial statements are prepared
in conformity with U.S. GAAP.
5A. Operating Results
We
design, manufacture, and distribute mobile phones and other consumer electronics through our operation plants in China. Our products
are categorized into three major categories: Feature phone, Smartphone and Mobile phone accessories. Most of our products are produced
due to OEM/ODM orders received from our long-term clients and sold globally, including India, Brazil, the United States, and other emerging
markets in South Asia and Africa as well as Europe. The following charts display our products contribution for the years ended March
31, 2019, 2020 and 2021.
The
following table sets forth our revenues by type of contract and as a percentage of revenue for the years indicated:
|
|
Year ended March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
Category
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
(in thousands, except for percentages)
|
|
OEM/ODM
|
|
|
204,034
|
|
|
|
85.7
|
|
|
|
175,215
|
|
|
|
90.7
|
|
|
|
195,995
|
|
|
|
29,826
|
|
|
|
79.4
|
|
In-house brand
|
|
|
34,062
|
|
|
|
14.3
|
|
|
|
17,873
|
|
|
|
9.3
|
|
|
|
6,157
|
|
|
|
937
|
|
|
|
2.5
|
|
Face mask
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,747
|
|
|
|
6,809
|
|
|
|
18.1
|
|
Total
|
|
|
238,096
|
|
|
|
100
|
|
|
|
193,088
|
|
|
|
100
|
|
|
|
246,899
|
|
|
|
37,572
|
|
|
|
100
|
|
The
following table sets forth our revenues by product lines and as a percentage of revenue for the years indicated:
|
|
Year ended March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
Category
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
(in thousands, except for percentages)
|
|
Feature phone
|
|
|
175,432
|
|
|
|
73.7
|
|
|
|
173,190
|
|
|
|
89.7
|
|
|
|
144,032
|
|
|
|
21,918
|
|
|
|
58.4
|
|
Smart phone
|
|
|
57,056
|
|
|
|
24.0
|
|
|
|
19,228
|
|
|
|
10.0
|
|
|
|
56,885
|
|
|
|
8,657
|
|
|
|
23.0
|
|
Face mask
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,747
|
|
|
|
6,809
|
|
|
|
18.1
|
|
Others
|
|
|
5,608
|
|
|
|
2.3
|
|
|
|
670
|
|
|
|
0.3
|
|
|
|
1,235
|
|
|
|
188
|
|
|
|
0.5
|
|
Total
|
|
|
238,096
|
|
|
|
100
|
|
|
|
193,088
|
|
|
|
100
|
|
|
|
246,899
|
|
|
|
37,572
|
|
|
|
100
|
|
The
following table sets forth our revenues by geographic region and as a percentage of revenue for the years indicated:
|
|
Year ended March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
Category
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
|
|
|
%
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
(in thousands, except for percentages)
|
|
PRC
|
|
|
86,754
|
|
|
|
36.4
|
|
|
|
83,124
|
|
|
|
43
|
|
|
|
112,400
|
|
|
|
17,105
|
|
|
|
45.5
|
|
Hong Kong
|
|
|
69,839
|
|
|
|
29.3
|
|
|
|
51,885
|
|
|
|
26.9
|
|
|
|
30,030
|
|
|
|
4,570
|
|
|
|
12.2
|
|
India
|
|
|
34,063
|
|
|
|
14.3
|
|
|
|
17,873
|
|
|
|
9.3
|
|
|
|
6,157
|
|
|
|
937
|
|
|
|
2.5
|
|
Africa
|
|
|
4,538
|
|
|
|
1.9
|
|
|
|
18,003
|
|
|
|
9.3
|
|
|
|
19,536
|
|
|
|
2,973
|
|
|
|
7.9
|
|
The United States
|
|
|
36,349
|
|
|
|
15.3
|
|
|
|
19,904
|
|
|
|
10.3
|
|
|
|
17,277
|
|
|
|
2,629
|
|
|
|
7
|
|
South America
|
|
|
4,065
|
|
|
|
1.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,743
|
|
|
|
6,961
|
|
|
|
18.5
|
|
Others
|
|
|
2,488
|
|
|
|
1.1
|
|
|
|
2,299
|
|
|
|
1.2
|
|
|
|
15,756
|
|
|
|
2,397
|
|
|
|
6.4
|
|
Total
|
|
|
238,096
|
|
|
|
100
|
|
|
|
193,088
|
|
|
|
100
|
|
|
|
246,899
|
|
|
|
37,572
|
|
|
|
100
|
|
Overview
The
table below sets forth certain line items from our consolidated statement of comprehensive loss (income) for the years ended March 31,
2019, 2020 and 2021:
|
|
Year ended March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Revenues
|
|
|
238,096
|
|
|
|
193,088
|
|
|
|
246,899
|
|
|
|
37,572
|
|
Costs of sales
|
|
|
213,098
|
|
|
|
173,735
|
|
|
|
228,732
|
|
|
|
34,808
|
|
Gross profit
|
|
|
24,998
|
|
|
|
19,353
|
|
|
|
18,167
|
|
|
|
2,764
|
|
Operating expenses
|
|
|
34,970
|
|
|
|
39,062
|
|
|
|
32,697
|
|
|
|
4,976
|
|
Interest expenses
|
|
|
1,479
|
|
|
|
1,745
|
|
|
|
2,461
|
|
|
|
375
|
|
Loss before income taxes
|
|
|
(11,451
|
)
|
|
|
(21,454
|
)
|
|
|
(16,991
|
)
|
|
|
(2,587
|
)
|
Income tax expenses (benefits)
|
|
|
498
|
|
|
|
247
|
|
|
|
(364
|
)
|
|
|
(55
|
)
|
Net loss
|
|
|
(11,949
|
)
|
|
|
(21,701
|
)
|
|
|
(16,627
|
)
|
|
|
(2,532
|
)
|
|
●
|
We
incurred net loss of RMB21.7 million and RMB16.6 million (US$2.5 million) for the years ended March 31, 2020 and 2021, respectively,
mainly due to the increase in OEM/ODM sales in China, selling of face masks in the South America, and reduction of operating expenses.
We incurred net loss of RMB11.9 million and RMB21.7 million for the years ended March 31, 2019 and 2020, respectively, mainly due to
decrease in revenue and increase in operating expense.
|
|
●
|
OEM/ODM
revenue increased from RMB175.2 million for the year ended March 31, 2020 to RMB196.0 million (US$29.8 million) for the year ended March
31, 2021, a 12% increase due to the increase of sales of smartphone and feature phone to customers in mainland China and Singapore. OEM/ODM
revenue decreased from RMB204.0 million for the year ended March 31, 2019 to RMB175.2 million for the year ended March 31, 2020, a 14%
decrease due to the poor market performance and temporary closure of PRC business in February 2020 due to COVID-19.
|
|
●
|
In-house
brand products generated RMB17.9 million and RMB6.2 million (US$0.9 million) for the year ended March 31, 2020 and 2021, respectively,
a 66% decrease primarily due to the lockdown and restrictions of business activities and worsen situation in India. In-house brand products
generated RMB34.1 million and RMB17.9 million for the year ended March 31, 2019 and 2020, respectively, a 48% decrease due to our switch
of strategy in India and business suspension due to the lockdown in India.
|
|
●
|
We
started online sales in Africa and the United States through ecommerce platform in August 2019, in order to develop our brand
influence and further expand the markets in these areas. Rollout of ecommerce platform was temporarily stayed due to the impact of COVID-19
and we plan to re-launch this sales channel at a later date. During August 2019 to March 2021, RMB0.7 million (US$0.1 million) e-commerce
sales were recorded.
|
|
●
|
We
developed new long-term OEM/ODM customers in China and South East Asia. We received orders of smartphone from these customers which contributed
12.5% of total revenue for the year ended March 31, 2021.
|
|
●
|
Operating
expenses consist of selling expenses, general and administrative expenses, R&D expenses and other (income) expense. The decrease
in operating expense for the year ended March 31, 2021 was mainly due to the decrease in selling expenses and R&D expenses.
|
|
●
|
Exchange
rate between RMB and US$ considerably affected our financial results as more than 50% of our products were sold to customers outside
of mainland China, and the exchange rate between the Indian Rupee and US Dollar considerably affected our financial results as our subsidiaries,
Do Mobile, operated in India. We incurred RMB4.5 million exchange gain for the year ended March 31, 2019, RMB0.3 million exchange losses
for the year ended March 31, 2020 and RMB3.7 million (US$0.6 million) exchange loss for year ended March 31, 2021 mainly due to fluctuations
of exchange rates of RMB against US$.
|
|
●
|
We
provided impairment reserve of RMB3.3 million on obsolete inventory in the year ended March 31, 2019. We wrote off impairment reserve
of RMB0.5 million for the obsolete inventories disposed 2020 and provided impairment reserve of RMB7.6 million (US$1.2 million) on obsolete
inventory for the years ended March 31, 2021. We also provided allowances of RMB0.1 million, RMB1.2 million and reversed allowances of
RMB0.8 million (US$0.1 million) on doubtful receivables for the years ended March 31, 2019, 2020 and 2021, respectively.
|
Comparison
of the year ended March 31, 2021 and 2020
Revenue
Revenue
for the year ended March 31, 2021 was RMB246.9 million (US$37.6 million), an increase of RMB53.8 million, or 28%, from RMB193.1 million
for the year ended March 31, 2020. The increase was attributable to the increase in OEM/ODM sales of RMB20.8 million and sales of face
masks of RMB44.8 million, partially offset by the decrease of in-house brand sales of RMB11.8 million.
Cost
of sales
Cost
of sales for the year ended March 31, 2021 was RMB228.7 million (US$34.8 million), an increase of RMB55.0 million, or 31.7%, from RMB173.7
million for the year ended March 31, 2020. The increase was mainly due to the increase in material costs and sales quantity.
Our
cost of sales mainly consists of cost of raw materials, third party processing fees and rental of building and machinery.
We
import screens and mother boards from overseas and purchase camera, battery and electronic components from domestic markets for mobile
phone processing and assembling.
We
wrote off impairment reserve of RMB0.5 million for the obsolete inventories disposed in the year ended March 31, 2020. We provided impairment
reserve on obsolete inventory of RMB7.6 million (US$1.2 million), which are recorded in cost of sales for year ended March 31, 2021.
Gross
profit
Gross
profit for the year ended March 31, 2021 was RMB18.2 million (US$2.8 million), representing a decrease of RMB1.2 million, or 6.1%, from
the gross profit of RMB19.4 million for the same period of 2020 as a result of factors mentioned above.
Overall gross profit margin for the year ended March 31, 2021 was 7.4%,
or 2.6 percentage points lower, as compared to gross profit margin of 10.0% for the year ended March 31, 2020. The decrease was mainly
attributable to the increasing purchase prices of raw materials resulted from global shortage of key components, including chips and screens,
in the year ended March 31, 2021.
Operating
expenses
|
|
Year ended
March 31,
|
|
|
Year ended
March 31,
|
|
|
|
2020
|
|
|
2021
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Selling expenses
|
|
|
9,510
|
|
|
|
4,127
|
|
|
|
628
|
|
General and administrative expenses(1)
|
|
|
18,791
|
|
|
|
18,502
|
|
|
|
2,815
|
|
R&D related expenses(1)
|
|
|
10,754
|
|
|
|
7,193
|
|
|
|
1,095
|
|
Other (income) expenses, net
|
|
|
7
|
|
|
|
2,875
|
|
|
|
438
|
|
Total
|
|
|
39,062
|
|
|
|
32,697
|
|
|
|
4,976
|
|
(1)
|
These
expenses are combined as general and administrative expenses in consolidated statements of comprehensive income (loss).
|
Our
operating expenses consist of selling expenses, general and administrative expenses, R&D expenses and other (income) expenses. Operating
expenses decreased by RMB6.4 million, or 16.3%, from RMB39.1 million for the year ended March 31, 2020 to RMB32.7 million (US$5.0 million)
for the year ended March 31, 2021. The decrease in our operating expenses was mainly due to decrease in selling expenses and R&D
expenses
Selling
expenses consist of salary and benefits, business travel, shipping expenses, entertainment, market promotion and other expenses relating
to our sales and marketing activities. The decrease in selling expense was mainly due to i) cost saving in travelling and entertainment
expenses and ii) reduction in overhead costs in India.
General
and administrative expenses consist of salary and benefits to our accounting, human resources, design and executive office staff, rental
expenses, property management and utilities, office supplies and etc. The decrease is mainly due to reduction in manpower cost in India
as the result of the COVID-19 related suspension of business.
R&D
related expenses mainly consist of salary and benefits, material and consumables and other expenses to carry out R&D activities.
The decrease in R&D expenses was mainly due to decrease in overhead costs (e.g. Salaries, travelling, entertainment etc.) for R&D
activities. R&D related expenses are included in general and administrative expenses in the income statement.
Other
expenses (income), net year ended March 31, 2021 was net expense of RMB2.9 million (US$0.4 million), as compared to net expense of RMB0.0
million for the same period of 2020. The increase in expenses was mainly attributed to the increase in exchange loss due to depreciation
of U.S. Dollar against RMB and recognized impairment losses on equity method investment, partially offset by the reversal of provision
on doubtful receivables.
Income tax expenses (benefits)
For
the year ended March 31, 2021, an income tax credit of about RMB0.4 million (US$0.06 million) was recorded as compared to income tax
provision of RMB0.2 million for the year ended March 31, 2020.
Net
loss
As
a result of the above, net loss was RMB16.6 million (US$2.5 million) for the year ended March 31, 2021, representing a decrease in loss
of RMB5.1 million, or 23.4% from a net loss of RMB21.7 million for the year ended March 31, 2020.
Comparison
of the years ended March 31, 2020 and 2019
Revenue
Revenue
for the year ended March 31, 2020 was RMB193.1 million, a decrease of RMB45.0 million, or 18.9%, from RMB238.1 million for the year ended
March 31, 2019. The decrease was attributable to the continued trend of reduction of OEM/ODM orders from our major customers, decreasing
sales of in-house brand products, and the impact of COVID-19 on our business activities in the PRC and India.
Cost
of sales
Cost
of sales for the year ended March 31, 2020 was RMB173.7 million, a decrease of RMB39.4 million, or 18.5%, from RMB213.1 million for the
year ended March 31, 2019. The decrease was attributable by the decrease in sales volume.
Our
cost of sales mainly consists of cost of raw materials, third party processing fees and rental of building and machinery.
We
import mother boards from overseas and purchase screens, camera, battery and electronic components from domestic markets for mobile phone
processing and assembling.
We
wrote off impairment reserve of RMB0.5 million for the obsolete inventories disposed in the year ended March 31, 2020. During the year
ended March 31, 2019, we provided reserve of RMB3.3 million for obsolete inventories.
Gross
profit
Gross
profit for the year ended March 31, 2020 was RMB19.4 million, representing a decrease of RMB5.6 million, or 22.6%, from the gross profit
of RMB25.0 million for the year ended March 31, 2019, primarily as a result of factors mentioned above.
Overall
gross profit margin for the year ended March 31, 2020 was 10.0%, or 0.5 percentage points lower, as compared to gross profit margin of
10.5% for the year ended March 31, 2019. The decrease was mainly attributable to increase cost of raw materials in the period from September 2019
to December 2019 and in March 2020, partially offset by higher margin from high-end feature phones in the year ended March
31, 2020.
Operating
expenses
|
|
Year ended March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
(in thousands)
|
|
Selling expenses
|
|
|
14,447
|
|
|
|
9,510
|
|
General and administrative expenses(1)
|
|
|
16,926
|
|
|
|
18,791
|
|
R&D related expenses(1)
|
|
|
10,508
|
|
|
|
10,754
|
|
Other income, net
|
|
|
(6,911
|
)
|
|
|
7
|
|
Total
|
|
|
34,970
|
|
|
|
39,062
|
|
(1)
|
These
expenses are combined as general and administrative expenses in consolidated statements of comprehensive loss.
|
Our
operating expenses consist of selling expenses, general and administrative expenses, R&D expenses and other (income) expenses. Operating
expenses increased by RMB4.1 million, or 11.7%, from RMB35.0 million for the year ended March 31, 2019 to RMB39.1 million for the year
ended March 31, 2020. The increase in our operating expenses was due to change in the net other (income) expenses, general and administrative
expenses and R&D related expenses, partially offset by decrease in selling expenses.
Selling
expenses consist of salary and benefits, business travel, shipping expenses, entertainment, market promotion and other expenses relating
to our sales and marketing activities. The decrease in selling expense was mainly due to (i) reduction in staff costs in India due
to the decline in sales and the lockdown in India (ii) decrease in shipping expenses, which is in line with the decrease in overseas
sales and (iii) savings in travelling and entertainment expenses.
General
and administrative expenses consist of salary and benefits to our accounting, human resources, design and executive office staff, rental
expenses, property management and utilities, and office supplies, among others. The increase is mainly due to an increase in professional
service fees, including accounting and legal fees, partially offset by the reduction in manpower cost in India due to the COVID-19 related
suspension of business.
R&D
related expenses mainly consist of salary and benefits, material and consumables and other expenses to carry out R&D activities.
R&D related expenses are included in general and administrative expenses in the income statement.
Other
(income) expenses, net for the year ended March 31, 2020 was net expense of RMB0.0 million, as compared to net income of RMB6.9 million
for the year ended March 31, 2019. The change in other (income) expenses, net was mainly attributed to (i) the net exchange
loss of RMB0.3 million for the year ended March 31, 2020 compared to net exchange gain of RMB4.5 million for the year
ended March 31, 2019 as a result of depreciation of RMB and India Rupee against U.S. Dollar and (ii) allowances of RMB1.2 million
on doubtful receivables for the year ended March 31, 2020 compared to the RMB0.15 million provided for the year ended March 31,
2019.
Income
tax expenses
For
the year ended March 31, 2020, an income tax provision of about RMB0.2 million was recorded as compared to RMB0.5 million
for the year ended March 31, 2019. For the year ended March 31, 2020, the income tax expense was mainly attributed to under
provision of income taxes of UTime GZ in prior year. No subsidiary had taxable profits during the year ended March 31, 2020.
Net
loss
As
a result of the above, net loss was RMB21.7 million for the year ended March 31, 2020, representing an increase of RMB9.8 million,
or 81.6% from a net loss of RMB11.9 million for the year ended March 31, 2019.
5B. Liquidity and Capital Resources
As
of March 31, 2021 the Company had current assets of RMB133.8 million (US$20.4 million) and current liabilities of RMB148.1 million (US$22.5
million), resulting in a working capital deficit of approximately RMB14.3 million (US$2.1 million). As of March 31, 2020 the Company
had current assets of RMB116.8 million and current liabilities of RMB120.8 million, resulting in a working capital deficit of approximately
RMB4.0 million.
On
April 8, 2021, the Company received net proceeds of $13.8 million, after deducting the underwriting discounts and commissions for the
IPO from its issuance and sale of 3,750,000 ordinary shares, which has alleviated the substantial doubt about the Company’s ability
to continue as a going concern. For year ended March 31, 2021, we incurred a net loss of RMB16.6 million (US$2.5 million). Our net cash
outflow was RMB2.5 million (US$0.4 million) from operations, a decrease of outflow of RMB14.6 million compared to the net cash outflow
of RMB17.1 million for the year ended March 31, 2020 as a result of increased revenue and better customer credit control. We continue
to focus on improving operational efficiency and cost reductions, developing core cash-generating business and enhancing efficiency.
We expect that the existing and future cash generated from operation will be sufficient to fund the future operating expenses and capital
expenditure requirements.
Cash,
Cash Equivalents and restricted cash
The
following table sets forth certain historical information with respect to our statements of cash flows:
|
|
Year ended March 31,
|
|
|
Year ended March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Net cash provided by (used) in operating activities
|
|
|
2,185
|
|
|
|
(17,124
|
)
|
|
|
(2,521
|
)
|
|
|
(385
|
)
|
Net cash used in investing activity
|
|
|
(7,638
|
)
|
|
|
(2,269
|
)
|
|
|
(2,201
|
)
|
|
|
(335
|
)
|
Net cash provided by financing activities
|
|
|
6,230
|
|
|
|
12,850
|
|
|
|
14,000
|
|
|
|
2,131
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(24
|
)
|
|
|
(311
|
)
|
|
|
(855
|
)
|
|
|
(129
|
)
|
Net increase (decrease) in cash and cash equivalents and restricted cash
|
|
|
753
|
|
|
|
(6,854
|
)
|
|
|
8,423
|
|
|
|
1,282
|
|
We
had cash, cash equivalent and restricted cash of approximate RMB1.1 million and RMB9.5 million (US$1.4 million) as of March 31, 2020
and 2021, respectively.
Operating
activities
Net cash used in operating
activities was RMB2.5 million (US$0.4 million) for the year ended March 31, 2021 as compared with RMB17.1 million used for the same period
of 2020. Net loss for the year ended March 31, 2021 was RMB16.6 million (US$2.5 million) compared to net loss of RMB21.7 million for the
same period of 2020. The difference between net loss and the net cash used in operating activities are attributed to the changes in various
asset and liability account balances throughout the year ended March 31, 2021. Major changes are i) decrease of accounts receivable in
the amount of RMB21.5 million (US$3.3 million, an increase to cash), ii) decrease of accounts payable in the amount of RMB9.9 million
(US$1.5 million, a decrease to cash), iii) increase of 10.9 million (US$1.7 million, a decrease to cash) in the ending inventory balance
as of March 31, 2021, iv) increase of 26.2 million (US$4.0 million) in prepayment and other current assets (a decrease to net cash) v)
increase of RMB28.0 million (US$4.3 million) in other payables and accrued liabilities (an increase to net cash), and vi) increase of
RMB0.5 million (US$0.1 million) in net amount of related parties (an increase to net cash) year ended March 31, 2021. In addition, the
Company had non-cash expenses relating to depreciation and amortization in the amount of RMB4.0 million (US$0.6 million), impairment provision
of RMB7.6 million (US$1.2 million) for obsolete inventory and reversal of provision of RMB0.8 million (US$0.1 million) on doubtful receivables.
Investing
activities
Net cash used in investing
activities for year ended March 31, 2021 was RMB2.2 million (US$0.3 million) as compared to net cash used in investing activities of RMB2.3
million for the same period of 2020. Cash used in the year ended March 31, 2021 were mainly for payments of licensed software.
Financing
activities
Net
cash provided by financing activities for the year ended March 31, 2021 was RMB14.0 million (US$2.1 million) as compared to RMB12.9 million
for the year ended March 31, 2020. The cash inflow was mainly attributable to loans from bank and financial institutions.
On
August 1, 2018, UTime SZ entered into a credit agreement with Shenzhen Rural Commercial Bank to borrow RMB2.0 million for a term of 3
years, which is payable at monthly installment of RMB0.04 million from August 21, 2018 to August 8, 2021, with a balloon payment of the
remaining balance in the last installment. The loan was pledged by 30% of equity interests of UTime SZ owned by Mr. Bao and is also guaranteed
by Mr. Bao. On March 19, 2019, the pledged equity interests of UTime SZ was released and replaced by deposit of RMB0.5 million as restricted
cash with the bank to secure the loan. RMB0.32 million, RMB0.5 million and RMB0.5 million (US$0.08 million) were repaid by UTime SZ during
year ended March 31, 2019, 2020 and 2021, respectively. As of March 31, 2020 and 2021, the balance of the loan are RMB1.2 million and
RMB0.7 million (US$0.1 million), respectively. Out of the total outstanding loan balance, current portion amounted were RMB0.5 million
and RMB0.7 million (US$0.1 million) as of March 31, 2020 and 2021, respectively, which are presented as current liabilities in the consolidated
balance sheet and the remaining balance of RMB0.7 million and RMB nil are presented as non-current liabilities in the consolidated balance
sheet as of March 31, 2020 and 2021, respectively.
On
August 1, 2018, UTime SZ entered into a credit agreement with Shenzhen Rural Commercial Bank to borrow RMB6.0 million for a term of 3
years, which is payable at monthly installment of RMB0.06 million from September 21, 2019 to August 20, 2021, with a balloon payment
of the remaining balance in the last installment. The loan is secured by real estate owned by Mr. Bao and guaranteed by Mr. Bao. RMB0.4
and RMB0.7 million (US$0.1 million) were repaid by UTime SZ during year ended March 2020 and 2021, respectively. As of March 31, 2020
and 2021, the balance for this loan is RMB5.6 million and RMB4.9 million (US$0.7 million), respectively. Out of the total outstanding
loan balance, current portion amounted were RMB0.7 million and RMB4.9 million (US$0.7 million) as of March 31, 2020 and 2021, respectively,
which are presented as current liabilities in the consolidated balance sheet and the remaining balance of RMB4.9 million and RMB nil
are presented as non-current liabilities in the condensed consolidated balance sheet as of March 31, 2020 and 2021, respectively.
On June 29, 2021, UTime SZ
entered into a credit agreement with Shenzhen Rural Commercial Bank to borrow RMB2.0 million for a term of 3 years, which is payable at
monthly installment of RMB0.02 million and the monthly interest from July 16, 2021 to July 16, 2024, with a balloon payment of the remaining
balance in the last installment. The loan is secured by real estate owned by Mr. Bao and guaranteed by Mr. Bao. As of the date of this
report, the balance for this loan is RMB1.98 million (US$0.3 million).
On June 29, 2021, UTime SZ
entered into a credit agreement with Shenzhen Rural Commercial Bank to borrow RMB7.0 million (US$1.1 million) for a term of 3 years, according
to which the interest is payable on a monthly basis in the first twelve months of the loan term and the balance is payable at monthly
installment of RMB 0.07 million together with the monthly interest from the thirteenth month of the loan term to July 16, 2024,
with a balloon payment of the remaining balance in the last installment. The loan is secured by real estate owned by Mr. Bao and guaranteed
by Mr. Bao. As of the date of this report the balance for this loan is RMB7.0 million (US$1.1 million).
On
April 23, 2019, UTime SZ entered into a credit agreement with China Construction Bank to borrow RMB15.0 million (US$2.3 million) as working
capital for one year at an annual effective interest rate of 5.8%. The loan is secured by the office real estate owned by UTime SZ and
accounts receivable equal to RMB22.5 million (US$3.4 million) owned by UTime SZ. The loan is also guaranteed by Mr. Bao and his spouse.
The loan was repaid on May 9, 2020.
On May 8, 2020, UTime SZ entered into a credit agreement with China
Construction Bank to borrow RMB15,000 (US$2.3 million) as working capital for one year at an annual effective interest rate of 5.40%.
The loan is secured by the office real estate owned by UTime SZ and accounts receivable equal to RMB22,500 (US$3.4 million) owned by UTime
SZ. The loan is also guaranteed by Mr. Bao and his spouse. The loan was fully repaid in advance on November 5, 2020.
In July 2020, UTime GZ and
TCL Factoring executed a factoring agreement, pursuant to which UTime GZ received a revolving credit facility and may submit unlimited
number of loan applications, so long as, among other conditions, the balance of the loan does not exceed the credit line. In July 2020,
UTime GZ obtained a loan under this factoring contract at the amount of RMB1.8 million (US$0.3 million) by factoring the receivables due
from Huizhou TCL Mobile Communication Company Limited (“TCL Huizhou”) between January 1, 2020 and July 1, 2021, the annual
effective interest rate of which is 8.0%. The loan was repaid in January 2021. TCL Factoring has the right of recourse to UTime GZ, and
as a result, these transactions were recognized as secured borrowings. UTime GZ agreed to pledge to TCL Factoring its accounts receivable
from TCL Huizhou between January 1, 2020 and July 1, 2021. This credit facility was also guaranteed respectively by Mr. Bao and UTime
SZ, each for an amount up to RMB4.0 million (US$0.6 million). UTime GZ agreed not to withdraw, utilize or dispose the accounts receivables
paid to it by TCL Huizhou without the prior consent of TCL Factoring. In January 2021, UTime GZ obtained a loan of RMB0.8 million (US$0.1
million).
On
November 13, 2020, UTime SZ entered into a credit agreement with China Resources Bank of Zhuhai Co., Ltd., according to which China Resources
Bank of Zhuhai Co., Ltd. agreed to provide Utime SZ with a credit facility of up to RMB22.0 million (US$3.4 million) with a two-year
team from November 13, 2020 to November 13, 2022. On November 18, 2020, UTime SZ entered into a working capital loan agreement with China
Resources Bank of Zhuhai Co., Ltd. to borrow RMB22.0 million (US$3.3 million) as working capital for one year at an annual effective
interest rate of 5.5%. The loan is secured by the office owned by UTime SZ and guaranteed by UTime GZ, Mr. Bao and his spouse.
In November 2020, UTime SZ
and TCL Factoring executed a factoring agreement, pursuant to which UTime SZ received a revolving credit facility and may submit unlimited
number of loan applications, so long as, among other conditions, the balance of the loan does not exceed the credit line. During December
2020 to February 2021, UTime SZ obtained loans under the factoring agreement at the total amount of RMB8.0 million (US$1.2 million) by
factoring the receivables due from TCL Huizhou between November 17, 2019 and November 17, 2022, the annual effective interest rate of
which is 8.0%. TCL Factoring has the right of recourse to UTime SZ, and as a result, these transactions were recognized as secured borrowings.
UTime SZ agreed to pledge to TCL Factoring its accounts receivable from TCL Huizhou between November 17, 2019 and November 17, 2022. This
credit facility was also guaranteed respectively by Mr. Bao and UTime GZ, each for an amount up to RMB20.0 million (US$3.0 million). UTime
SZ agreed not to withdraw, utilize or dispose the accounts receivables paid to it by TCL Huizhou without the prior consent of TCL Factoring.
On July 14, 2021 UTime SZ
entered into a working capital loan agreement with Bank of Communications, Shenzhen Branch to borrow RMB10.0 million (US$1.5 million)
for an unfixed term. On July 19, 2021, UTime SZ obtained a loan under this working capital loan agreement at the amount of RMB3.0 million
(US$0.5 million) which is due on July 6, 2022. The annual effective interest rate of this loan is 4.6% and the balance is payable on
July 6, 2022. The loan is guaranteed by Mr. Bao and his spouse. As of the date of this report, the balance for this loan is RMB3 million
(US$0.5 million).
Contractual Obligations
In
December 2017, UTime SZ signed a property sale contract with Shenzhen Fumeibang Technology Co., Ltd (“Fumeibang”), previously
known as “BuTa Entertainment” for selling office real estate in Nanshan District, Shenzhen, China for a cash price of RMB20.1
million (US$3.1 million). BuTa Entertainment agreed to lease the office estate back to the Company for a term of up to 3 years,
with an annual rental payment of approximately RMB1.0 million (US$0.15 million). According the lease agreement, the eleven months from
February 2018 to December 2018 is free of rental charge.
In
September 2019, UTime SZ signed a lease agreement with Fumeibang for a term of one year, with an annual rental payment of approximately
RMB1.0 million (US$0.15 million).
On
September 1, 2017, the Company entered a lease agreement with Guizhou Jietongda Technology Co., Ltd. (“Jietongda”). Jietongda
agreed to lease the factory building located in Xinpu District of Guizhou, China to the Company, for a term of up to 4.5 years, with
an annual rental payment of approximately RMB4.2 million (US$0.6 million).
During
the year ended March 31, 2020, the Company entered into supplementary agreement with Jietongda and modified the original warehouse lease
contract effective since September 1, 2017. Total lease amount reduced from RMB18.9 million (US$2.9 million) to RMB7.5 million (US$1.1
million) for the 4 years and 6 months’ lease period.
On
September 1, 2017, the Company entered a lease agreement with Jietongda. Jietongda agreed to lease the equipment for processing mobile
phones to the Company, for a term of up to 5 years, with an annual rental payment of approximately RMB0.6 million (US$0.1 million).
The
following table sets forth our contractual obligations as of March 31, 2021, which included the lease and loan arrangement described
above:
|
|
Payments due by period (in thousands)
|
|
Contractual obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1 – 2 years
|
|
|
2 – 3 years
|
|
|
More than
3 years
|
|
Short term borrowings
|
|
|
30,800
|
|
|
|
30,800
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Current portion of long-term borrowings
|
|
|
5,580
|
|
|
|
5,580
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Capital commitment
|
|
|
777
|
|
|
|
777
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Operating lease payments
|
|
|
2,430
|
|
|
|
2,138
|
|
|
|
292
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
39,587
|
|
|
|
39,295
|
|
|
|
292
|
|
|
|
—
|
|
|
|
—
|
|
5C. Research and Development, Patents and Licenses, etc.
See the discussion under
the headings “Research and Development” and “Intellectual Property” in Item 4 above.
5D. Trend Information
The
factors that will most significantly affect results of operations will be (i) the industry outlook of cell phone and consumer electronics,
(ii) the sustainability of our client source, (iii) the development and penetration of existing market and new market, (iv) the ability
of our R&D capacity, and (v) the outbreak of coronavirus. Our revenues will be significantly impacted by the combination of the above
factors discussed.
The
coronavirus is impacting several areas of the world, including Asia and the United States. Factories in China that produced our products
were closed during February 2020 at the mandate of the Chinese government and reopened in March 2020. Our manufacturing facility in Guizhou
was allowed to reopen on February 14, 2020 by the local government. This impacts the manufacturing productivity of the factories, and
therefore the amount of inventory we receive and can ship to customers. We are doing everything we can to keep customer production running
and to keep things as smooth and stable as possible. Furthermore, our customers in China and elsewhere may reduce their future purchases
from us if they are not able to complete the manufacture of their products due to the shortage of components from other suppliers. The
coronavirus pandemic also created global shortage of key components, such as Integrated Circuit Chip and touch screens, for consumer
electronics. Procurement cost of these key components increased considerably. If the shortage continued spreading, it might cause significant
delay of orders or further increase of procurement cost. The coronavirus has impacted and likely will continue to impact our sales performance
in a negative way, depending on the duration and severity of the coronavirus’ impact on the operations of our vendors and suppliers.
The
global consumer electronics, network communication and other products have a shorter update cycle, which has brought huge market demand
and is expected to maintain rapid development in the future. However, the shorter product update cycle and increasing market demand also
strengthen the competition. Overall, demand of feature phones is decreasing and being replaced by smartphones while smartphones are upgraded
faster and demand of them becomes more unstable.
OEM/ODM
orders were our principal source of revenue, in the years ended March 31, 2019, 2020 and 2021, which contributed 85.7%, 90.7% and 79.4%
to our revenue, respectively. Revenue from TCL Communication Limited accounted for 50.5%, 57.6% and 41.3% of total revenue, respectively
during the years ended March 31, 2019, 2020 and 2021. T2 Mobile International Limited contributed 10.4%, 9.6% and 5.6% of total revenue,
respectively during the same period. To sustain the customer source may help us secure the OEM/ODM orders. During the year ended March
31, 2021, we developed a few new customers in mainland China and Southeast Asia. Two new OEM/ODM customers contributed 6.3% and 6.2%
of total revenue, respectively for the year ended March 31, 2021.
To
respond to the rapid change of global cell phone and consumer electronics industry, we decide to implement the in-house brand strategy
and develop new markets. Revenue generated from in-house brand products for the years ended March 31, 2019, 2020 and 2021 were RMB34.0
million, RMB17.9 million and RMB6.2 million (US$0.9 million), which account for 14.3%, 9.3% and 2.5% of the total revenue, respectively.
The
implementation of our strategy in new markets depends on our R&D capacity in feature phones, smartphones and other consumer electronics
considerably. If we had sufficient R&D capacity, we might have the opportunity to penetrate the existing market faster, retain more
market shares and be able to develop another replicable market.
Although
we intend to grow our in-house brands, it is expected that in the near term, both OEM/ODM orders and sale of our own in-house brand sales
will be our principal sources of cash flow over the next two years. Cash flow from the OEM/ODM orders depends on the quantity and the
price of the order, whereas cash flow from sale of in-house brand cell phone product depends on the quality of production and the profit
obtained by the production. An increase in OEM/ODM orders or sale of in-house brand cell phone products will enable us to expanding our
operations with the increasing internally-generated funds and may allow us to obtain equity and debt financing more easily or on better
terms, lessening the difficulty of obtaining financing.
A
decline in sales (i) will reduce our internally-generated cash flow, which in turn will reduce the available funds for securing clients
and developing existing markets, (ii) will increase the difficulty of obtaining equity and debt financing and worsen the terms on which
such financing may be obtained, and (iii) will affect the activities of R&D which considerably determines our development in new
products and new markets.
The
outbreak of the coronavirus in China and globally (i) could affect our production utilization and logistics, which could directly affect
our timely delivery of our products and collection of cash flow, (ii) if the outbreak of the coronavirus continues to spread worldwide,
the entire industry could be negatively affected, leading to a certain extent of shortages in supply that could eventually raise key
components price overall. As a consequence, our production cost could increase whereas our profit could decrease.
Other
than the foregoing, the management is unaware of any trends, events or uncertainties that will have, or are reasonably expected to have,
a material impact on sales, revenues or expenses.
5E. Off-Balance Sheet Arrangements
We
do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the changes
in financial condition and the results of operations, liquidity or capital resources.
5F.
Critical Accounting Policies
Management’s
discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). The preparation
of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expense during the reporting period.
We
have identified the accounting principles which are most critical to the reported financial status by considering accounting policies
that involve the most complex and subjective decisions or assessment.
Use
of estimates
The
preparation of the consolidated financial statements in conformity with US GAAP requires management to make a number of estimates and
assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant accounting
estimates reflected in the consolidated financial statements include but are not limited to estimates and judgments applied in the allowance
for receivables, write down of other assets, estimated useful lives of property and equipment, impairment on inventory, sales return,
product warranties, the valuation allowance for deferred tax assets and income tax, provision for employee benefits, going concern. Actual
results could differ from those estimates and judgments.
Receivables
Accounts
receivable and other receivables are reflected in our consolidated balance sheets at their estimated collectible amounts. A substantial
majority of our accounts receivable are derived from sales to well-known technological clients. We follow the allowance method of recognizing
uncollectible accounts receivable and other receivables, pursuant to which we regularly assess our ability to collect outstanding customer
invoices and make estimates of the collectability of accounts receivable and other receivables. We provide an allowance for doubtful
accounts when we determine that the collection of an outstanding customer receivable is not probable. The allowance for doubtful accounts
is reviewed on a timely basis to assess the adequacy of the allowance. We take into consideration (a) historical bad debts experience,
(b) any circumstances of which we are aware of a customer’s or debtor’s inability to meet its fi The implementation of our
strategy in new markets depends on our R&D capacity in feature phones, smartphones and other consumer electronics considerably. If
we had sufficient R&D capacity, we might have the opportunity to penetrate the existing market faster, retain more market shares
and be able to develop another replicable market.
Although
we intend to grow our in-house brands, it is expected that in the near term, both OEM/ODM orders and sale of our own in-house brand sales
will be our principal sources of cash flow over the next two years. Cash flow from the OEM/ODM orders depends on the quantity and the
price of the order, whereas cash flow from sale of in-house brand cell phone product depends on the quality of production and the profit
obtained by the production. An increase in OEM/ODM orders or sale of in-house brand cell phone products will enable us to expanding our
operations with the increasing internally-generated funds and may allow us to obtain equity and debt financing more easily or on better
terms, lessening the difficulty of obtaining financing.
A
decline in sales (i) will reduce our internally-generated cash flow, which in turn will reduce the available funds for securing clients
and developing existing markets, (ii) will increase the difficulty of obtaining equity and debt financing and worsen the terms on which
such financing may be obtained, and (iii) will affect the activities of R&D which considerably determines our development in new
products and new markets.
The
outbreak of the coronavirus in China and globally (i) could affect our production utilization and logistics, which could directly affect
our timely delivery of our products and collection of cash flow, (ii) if the outbreak of the coronavirus continues to spread worldwide,
the entire industry could be negatively affected, leading to a certain extent of shortages in supply that could eventually raise key
components price overall. As a consequence, our production cost could increase whereas our profit could decrease.
Other
than the foregoing, the management is unaware of any trends, events or uncertainties that will have, or are reasonably expected to have,
a material impact on sales, revenues or expenses.
Critical
Accounting Policies
Management’s
discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). The preparation
of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expense during the reporting period.
We
have identified the accounting principles which are most critical to the reported financial status by considering accounting policies
that involve the most complex and subjective decisions or assessment.
Use
of estimates
The
preparation of the consolidated financial statements in conformity with US GAAP requires management to make a number of estimates and
assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant accounting
estimates reflected in the consolidated financial statements include but are not limited to estimates and judgments applied in the allowance
for receivables, write down of other assets, estimated useful lives of property and equipment, impairment on inventory, sales return,
product warranties, the valuation allowance for deferred tax assets and income tax, provision for employee benefits, going concern. Actual
results could differ from those estimates and judgments.
Receivables
Accounts
receivable and other receivables are reflected in our consolidated balance sheets at their estimated collectible amounts. A substantial
majority of our accounts receivable are derived from sales to well-known technological clients. We follow the allowance method of recognizing
uncollectible accounts receivable and other receivables, pursuant to which we regularly assess our ability to collect outstanding customer
invoices and make estimates of the collectability of accounts receivable and other receivables. We provide an allowance for doubtful
accounts when we determine that the collection of an outstanding customer receivable is not probable. The allowance for doubtful accounts
is reviewed on a timely basis to assess the adequacy of the allowance. We take into consideration (a) historical bad debts experience,
(b) any circumstances of which we are aware of a customer’s or debtor’s inability to meet its financial obligations, (c)
changes in our customer or debtor payment history, and (d) our judgments as to prevailing economic conditions in the industry and the
impact of those conditions on our customers and debtors. If circumstances change, such that the financial conditions of our customers
or debtors are adversely affected and they are unable to meet their financial obligations to us, we may need to record additional allowances,
which would result in a reduction of our net income.
Inventories
Inventories
of the Company consist of raw materials, finished goods and work in process. Inventories are stated at lower of cost or net realizable
value with cost being determined on the weighted average method. Elements of cost in inventories include raw materials, direct labor
costs, other direct costs, consignment manufacturing cost and manufacturing overhead. The Company assesses the valuation of inventory
and periodically writes down the value for estimated excess and obsolete inventory based upon the product life-cycle.
Impairment
of long-lived assets
We
review the carrying value of long-lived assets to be held and used when events and circumstances warrants such a review. The carrying
value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable
and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a
rate commensurate with the risk involved. Losses on long-lived assets to be disposed are determined in a similar manner, except that
fair market values are reduced for the cost to dispose.
Revenue
recognition
We
derive revenue principally from the sale of mobile phones and accessories. Revenue from contracts with customers is recognized using
the following five steps:
|
1.
|
Identify
the contract(s) with a customer;
|
|
2.
|
Identify
the performance obligations in the contract;
|
|
3.
|
Determine
the transaction price;
|
|
4.
|
Allocate
the transaction price to the performance obligations in the contract; and
|
|
5.
|
Recognize
revenue when (or as) the entity satisfies a performance obligation.
|
A
contract contains a promise (or promises) to transfer goods or services to a customer. A performance obligation is a promise (or a group
of promises) that is distinct. The transaction price is the amount of consideration a company expects to be entitled from a customer
in exchange for providing the goods or services.
The
unit of account for revenue recognition is a performance obligation (a good or service). A contract may contain one or more performance
obligations. Performance obligations are accounted for separately if they are distinct. A good or service is distinct if the customer
can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and
the good or service is distinct in the context of the contract. Otherwise performance obligations are combined with other promised goods
or services until the Company identifies a bundle of goods or services that is distinct. Promises in contracts which do not result in
the transfer of a good or service are not performance obligations, as well as those promises that are administrative in nature, or are
immaterial in the context of the contract. The Company has addressed whether various goods and services promised to the customer represent
distinct performance obligations. The Company applied the guidance of ASC Topic 606-10-25-16 through 18 in order to verify which promises
should be assessed for classification as distinct performance obligations.
Cooperation
with OEM/ODM customers
Revenue
is measured based on the consideration to which the Company expects to be entitled in a contract with a customer and excludes amounts
collected on behalf of third parties. The Company generates our revenue through product sales, and shipping terms generally indicate
when we have fulfilled our performance obligations and passed control of products to our customer, when the goods have been shipped to
the customer’s specific location (delivery). Following delivery, the customer has full discretion over the manner of distribution
and price to sell the goods, has the primary responsibility when selling the goods and bears the risks of obsolescence and loss in relation
to the goods but has no right to return the products (other than for defective products). A receivable is recognized by the Company when
the goods are delivered to the customer as this represents the point in time at which the right to consideration becomes unconditional,
as only the passage of time is required before payment is due. Revenue from OEM/ODM customers does not meet the criteria to be recognized
over time since 1) we do not have the right of payment for the performance completed to date, 2) our work neither create or enhance an
assets controlled by customers until goods are delivered to the customer, 3) customers do not receive and consume benefits simultaneously
provided by our performance.
Sales
of products for in-house brands
For
revenue realized in Indian market, additional term of goods return may apply. Under Do Mobile’s standard contract terms, end users
have a right of return for defective devices within 7 days. At the point of sale, a refund liability and a corresponding adjustment to
revenue is recognized for those products expected to be returned. At the same time, Do Mobile has a right to recover the product when
customers exercise their right of return so consequently recognizes a right to returned goods asset and a corresponding adjustment to
cost of sales. Do Mobile uses its accumulated historical experience to estimate the number of returns on a portfolio level using the
expected value method, taking into consideration of the type of products.
Sales
of face masks
The
Company recognizes revenue from sales of face masks upon transfer of control of its products to the customer, which typically occurs
upon delivery. The Company’s main performance obligation to its customers is the delivery of products in accordance with purchase
orders. Each purchase order defines the transaction price for the products purchased under the arrangement. Delivery of these products
occurs at that point of time when the control of the products is transferred to the customer.
Income
taxes
Income
taxes are accounted for using the asset and liability method as prescribed by ASC 740 “Income Taxes”. Under this method,
deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance would be provided for those deferred tax assets for which
if it is more likely than not that the related benefit will not be realized.
Uncertain
tax positions
The guidance on accounting for uncertainties in income taxes prescribes
a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. Guidance was also provided on the recognition of income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in
interim periods, and income tax disclosures. Significant judgment is required in evaluating the Company’s uncertain tax positions
and determining its provision for income taxes. The Company recognizes interests and penalties, if any, under accrued expenses and other
current liabilities on its balance sheet and under other expenses in its statement of comprehensive income.
Lease
Prior
to the adoption of ASC 842 on April 1, 2019:
Leases
where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Rental
expense is recognized from the date of initial possession of the leased property on a straight-line basis over the term of the lease.
Rental expenses incurred by the Company was RMB5.7 million for the year ended March 31, 2019.
The
Company has no capital leases for any of the periods presented.
Upon
and hereafter the adoption of ASC 842 on April 1, 2019:
The
Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”)
assets and liabilities in the consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset
for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating
lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information
available at commencement date in determining the present value of lease payments. It uses the implicit rate when readily determinable.
The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may
include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense
for lease payments is recognized on a straight-line basis over the lease term. The Company have elected not to recognize ROU assets and
lease liabilities for short-term leases for all classes of underlying assets. Short-term leases are leases with terms of 12 months or
less and does not include a purchase option that is reasonably certain to exercise.
Recent
Accounting Pronouncements
We
discuss recently adopted and issued accounting standards in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently
issued accounting standards” of the notes to our consolidated financial statements.
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A.
Directors, Executive Officers and Key Employees
The
following table sets forth the name, age, positions and a brief description of the business experience of each of our directors, executive
officers and key employees as of the date hereof.
Name
|
|
Age
|
|
Position
|
Minfei
Bao
|
|
48
|
|
Chief
Executive Officer and Chairman of the Board of Directors
|
Yihuang
Chen
|
|
41
|
|
Chief
Operating Officer
|
Honggang
Cao
|
|
40
|
|
Chief
Manufacturing Officer
|
Shibin
Yu
|
|
37
|
|
Chief
Financial Officer
|
Min
He
|
|
34
|
|
Director
|
David
Bolocan
|
|
56
|
|
Independent
Director
|
Lawrence
G. Eckles
|
|
62
|
|
Independent
Director
|
Mo
Zou
|
|
32
|
|
Independent
Director
|
There
are no family relationships among our directors and officers. There are no arrangements or understandings with major shareholders, customers,
suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management. The address
of each of our directors and executive officers is c/o UTime Limited, 7th Floor, Building 5A, Shenzhen Software Industry Base, Nanshan
District, Shenzhen, People’s Republic of China, 518061.
Executive
Officers and Directors
Minfei
Bao, our founder, has served as our Chief Executive Officer since December 2019 and our Chairman of the Board of Directors since
October 2018. Mr. Bao has also served as the Chief Executive Officer of UTime SZ since June 2008. From March 2006 to March
2008, Mr. Bao served as the general manager at United Creation Technology Co., Ltd., a mobile phone manufacturer (currently publicly
traded on Chinese National Equities Exchange And Quotations Co., Ltd., or NEEQ). From March 1999 to March 2006, Mr. Bao served as
Vice President at TCL Communication Technology Holdings Limited, a global mobile terminal manufacturer and internet service provider.
From May 1997 to March 1999, Mr. Bao served as a manager in wireless technology application department at UTStarcom Incorporated,
a global telecom infrastructure provider (NASDAQ: UTSI). Mr. Bao received a B.A. from the University of Electronic Science and Technology
of China (UESTC). We believe Mr. Bao’s extensive experience qualifies him to serve on our board of directors.
Yihuang
Chen has served as our Chief Operating Officer since December 2019 and has been the Senior Vice President of Product of
UTime SZ since March 2015. From July 2011 to August 2015, Mr. Chen served as a Vice President of Product at Shenzhen Hongyu Technology
Co., Ltd, an optical and optoelectronic materials provider. From April 2009 to June 2011, Mr. Chen served as a Vice President at
Shenzhen Suopuxunda Technology Co., Ltd, a mobile terminal provider. From July 2008 to March 2009, Mr. Chen served as a Director
of Product at Beijing Songliankate Co., Ltd. From July 2003 to June 2008, Mr. Chen served as a Senior Project Manager and Senior
Structural Engineer at Amoi Technology Co., Ltd, a mobile terminal manufacturer and service provider (currently publicly traded on Shanghai
Stock Exchange). Mr. Chen received a B.A. from the Guilin University of Technology.
Honggang
Cao has served as our Chief Manufacturing Officer since December 2019 and has been the Senior Vice President of Manufacture
of UTime SZ since December 2010. From December 2009 to 2010, Mr. Cao served as the Head of Quality Control and Procurement Manager
at Shenzhen Geli Telecommunication Technology Co., Ltd. From September 2006 to August 2008, Mr. Cao served as the Head of Quality
Control at United Creation Technology Co., Ltd, a mobile phone manufacturer (currently publicly traded on NEEQ). From July 2004 to August
2006, Mr. Cao served as a Quality Engineer at TCL Communication Technology Holdings Limited, a global mobile terminal manufacturer
and internet service provider. Mr. Cao received a B.A. from the North University of China.
Shibin
Yu has served as our Chief Financial Officer since December 2019 and has been the financial manager and controller of UTime
SZ since March 2019. From June 2017 to March 2019, Mr. Yu served as a senior associate at BDO Shu Lun Pan Certified Public Accountants
LLP. From November 2013 to April 2017, Mr. Yu served as the Taxation Supervisor at Edan Instruments, Inc, a Medical Electronic Equipment
manufacturer (currently publicly traded on SZSE: 300326). From February 2012 to September 2013, Mr. Yu served as the Accounting
Head at Shenzhen Dazu Photovoltaic Technology Co., Ltd, a photovoltaic equipment provider. Mr. Yu received a B.A. from Dezhou University.
Mr. Yu is also qualified as a Certified Public Accountants in China and is a CFA Charterholder.
Min
He, a director, has served as Chairman at Dongyang Changhe Industry Co., Ltd.. From January 2014 to present. From August 2011
to December 2013, Mr. He served as Chairman at Hengdian Group Zhejiang DMEGC Real Estate Development Co., Ltd.. From December 2010
to July 2011, Mr. He served as Chairman at Kaifeng DMEGC Real Estate Development Co., Ltd. Mr. He received his B.S. from Kingston
University, London. We believe Mr. He’s extensive experience qualifies him to serve on our board of directors.
David
Bolocan, a director since April 2021, has over 25 years of experience in retail banking and payments, with extensive expertise
in deposit product development, pricing, marketing, advertising, distribution, customer segmentation, lifecycle management, and portfolio
management. He became the Executive Director for Deposits and Consumer Segments at BBVA USA, a commercial bank with $80 Billion in assets,
in August 2018. In this role he is the CEO of a business line with $2 Billion in revenue, and sets the direction for consumer deposit
products design, pricing, marketing, fulfillment and servicing. In addition, Mr. Bolocan is responsible for marketing, sales incentives
and analytics, engineering prioritization, specialty programs and strategic initiatives for the Retail Line of Business. Prior to BBVA,
Mr. Bolocan was a senior managing director and Head of Retail Banking Solutions at Argus Information, which is owned by Verisk,
from June 2013 to 2018. In this role Bolocan provided consulting services and managed benchmarking and scoring products for 25 retail
banks in the US and Canada. Mr. Bolocan served on the board of Cellular Biomedicine Group, Inc., a NASDAQ listed company from 2012
to 2016, and he was the compensation committee chair and a member of the audit committee. Mr. Bolocan received an MS/MBA from the
MIT Sloan School of Management and a BA from Harvard University in Computer Science and Economics. We believe Mr. Bolocan’s
extensive experience qualifies him to serve on our board of directors.
Lawrence
G. Eckles, a director since April 2021, served in Rate Forecasting & Indirect Budget Management as the Lead of the Spacecraft
Overhead Pool, at The Boeing Company Satellite Division (currently publicly traded on NYSE: BA) from July 2010 to September 2016. From
2006 to 2010, Mr. Eckles served as an Overhead Rate Manager & Administrator at The Boeing Company Directed Energy Systems (DES)
Division. From 1996 to 2006, Mr. Eckles served as the Lead Overhead focal for Laser and Electro-Optic Systems (L&EOS) Engineering
at The Boeing Company Rocketdyne Division. Prior to that, Mr. Eckles served as a Lead Engineering Program Planner on the Expendable
Launch Vehicle (ELV) program and the Peacekeeper Missile program at Rockwell International Corporation, formerly North American Rockwell
Corporation, one of the country’s leading aerospace contractors, making launch vehicles and spacecraft for the U.S. space program.
Mr. Eckles received his B.S. from The Ohio State University (OSU). We believe Mr. Eckles’ extensive experience qualifies
him to serve on our board of directors.
Mo
Zou, a director since April 2021, served as the Head of Logistics, Marketing Management Department at Chengdu CEC Panda Co.,
Ltd. from December 2016 to July 2019. From February 2015 to November 2016, Mr. Zou served as Co-Chairman at Convoy Financial
Holdings Limited Sichuan Branch (currently publicly traded on HKEx: 1019). From October 2012 to January 2015, Mr. Zou served as
manager of Investment Development Head Office, G108 Project manager of Project Bidding Office, manager of Economic Department, The First
Research Institute of Head Office at The IT Electronics Eleventh Design & Research Institute Scientific and Technological Engineering
Co., Ltd. Mr. Zou received his B.S. from University of Manchester and M.S. from Aston University. Mr. Zou is also qualified
as a Financial Risks Manager (FRM) and is a CFA Charterholder. We believe Mr. Zou’s extensive experience qualifies him to
serve on our board of directors.
Each
of our directors will serve as a director until our next annual general meeting and until their successors are duly elected and qualified.
6.B.
Compensation
For
the fiscal years ended March 31, 2021, we paid an aggregate of RMB0.8 million (approximately $0.1 million) to our executive officers,
and we did not pay any cash compensation to our non-executive directors. We have not set aside or accrued any amount to provide
pension, retirement or other similar benefits to our directors and executive officers. Our PRC subsidiaries and consolidated variable
interest entity are required by law to make contributions equal to certain percentages of each employee’s salary for his or her
pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund.
Equity
Awards
We
have not granted any equity awards to our directors or executive officers during the fiscal year ended March 31, 2021.
Incentive
Compensation
We
do not maintain any cash incentive or bonus programs and did not maintain any such programs during the fiscal year ended March 31,
2021. We plan to set aside 3% to 5% of the ordinary shares issued and outstanding of the Company as for the employee incentive plan,
with the specific terms to be determined in the future.
Employment
Agreements
We
have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is
employed for an initial term of one year and is subject to successive, automatic one-year extensions unless either party gives notice
of non-extension to the other party at least 30 days prior to the end of the applicable term.
The
executive officers are entitled to a fixed salary and to participate in our equity incentive plans, if any and other company benefits,
each as determined by the Board from time to time.
We
may terminate the executive officer’s employment for cause, at any time, without notice or remuneration, for certain acts, such
as conviction or plea of guilty to a felony or grossly negligent or dishonest acts to our detriment, or misconduct or a failure to perform
agreed duties. In such case, the executive officer will not be entitled to receive payment of any severance benefits or other amounts
by reason of the termination, and his right to all other benefits will terminate, except as required by any applicable law. We may also
terminate his employment without cause upon 30 days’ advance written notice. In such case of termination by us, we are required
to provide the following severance payments and benefits to the executive officer: a cash payment of one month of base salary as of the
date of such termination for each year (which is any period longer than six months but no more than one year) and a cash payment of half
month of base salary as of the date of such termination for any period of employment no more than six months, provided that the total
severance payments shall not exceed twelve months of base salary.
The
executive officer may terminate his employment at any time with 30 days’ advance written notice if there is any significant change
in his duties and responsibilities or a material reduction in his annual salary. In such a case, the executive officer will be entitled
to receive compensation equivalent to 3 months of his base salary. In addition, if we or our successor terminates the employment agreements
upon a merger, consolidation, or transfer or sale of all or substantially all of our assets with or to any other individual(s) or
entity, the executive officer shall be entitled to the following severance payments and benefits upon such termination: (1) a lump
sum cash payment equal to 3 months of base salary at a rate equal to the greater of his annual salary in effect immediately prior to
the termination, or his then current annua1 salary as of the date of such termination; (2) a lump sum cash payment equal to a pro-rated
amount of target annual bonus for the year immediately preceding the termination; (3) payment of premiums for continued health benefits
under our health plans for 3 months fo1lowing the termination; and (4) immediate vesting of 100% of the then-unvested portion of
any outstanding equity awards held by the executive officer. The employment agreements also contain customary restrictive covenants relating
to confidentiality, non-competition and non-solicitation, as well as indemnification of the executive officer against certain liabilities
and expenses incurred by him in connection with claims made by reason of him being an officer of our company.
Director
Agreements
In
connection with the IPO, on April 5, 2021, the Company entered into director offer letters with David Bolocan, Lawrence G. Eckles and
Mo Zou, respectively setting forth the terms and conditions of each of their service as independent directors to the Company. As such,
effective April 5, 2021, the annual cash compensation for Mr. Bolocan, Mr. Eckles and Mr. Zou are $120,000, $100,000, and $100,000, respectively.
Pursuant to director offer letters, all or a portion of such fees may, in the sole discretion of the Board of Directors of the Company
or a designated committee thereof, be paid in equity in lieu of cash; provided, that any such equity payments shall be made from the
Company’s equity incentive plan.
6.C.
Board Practices
Terms
of Directors and Officers
Expiration
of Term of Directors
Our
officers are appointed by and serve at the discretion of our board of directors and the shareholders voting by ordinary resolution. Our
directors are not subject to a set term of office and hold office until the next general meeting called for the election of directors
and until their successor is duly appointed or such time as they die, resign or are removed from office by a shareholders’ ordinary
resolution. The office of a director will be vacated automatically if, among other things, the director resigns in writing, becomes bankrupt
or makes any arrangement or composition with his/her creditors generally or is found to be or becomes of unsound mind.
Director
Remuneration Upon Termination
The
directors may receive such remuneration as our board of directors may determine from time to time. The compensation committee will assist
the directors in reviewing and approving the compensation structure for the directors. Currently, our directors are not entitled to receive
any remuneration upon termination of employment.
Audit
Committee
Our
board of directors consists of five directors, including two executive directors and three independent directors. We have also established
an Audit Committee, a Nominating and Corporate Governance Committee and a Compensation Committee. We have adopted a charter for each
of the three committees. Each of the committees of our board of directors has the composition and responsibilities described below.
David
Bolocan, Lawrence G. Eckles and Mo Zou serve as members of our Audit Committee. Mr. Bolocan serves as the chairman of the Audit
Committee. Each of our Audit Committee members satisfies the “independence” requirements of the Nasdaq listing rules and
meet the independence standards under Rule 10A-3 under the Exchange Act. We have determined that David H. Sherman possesses accounting
or related financial management experience that qualifies him as an “audit committee financial expert” as defined by the
rules and regulations of the SEC. Our Audit Committee oversees our accounting and financial reporting processes and the audits of
our financial statements. Our Audit Committee performs several functions, including:
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selecting
the independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to
be performed by the independent registered public accounting firm;
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reviewing
with the independent registered public accounting firm any audit problems or difficulties and management’s response;
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reviewing
and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act;
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discussing
the annual audited financial statements with management and the independent registered public accounting firm;
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reviewing
the adequacy and effectiveness of our accounting and internal control policies and procedures and any special steps taken to monitor
and control major financial risk exposures;
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annually
reviewing and reassessing the adequacy of our audit committee charter;
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meeting
separately and periodically with management and the independent registered public accounting firm;
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monitoring
compliance with our code of ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance;
and
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reporting
regularly to the board.
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Compensation
Committee
David
Bolocan, Lawrence G. Eckles and Mo Zou serve as members of our Compensation Committee. Mr. Zou serves as the chair of the Compensation
Committee. All of our Compensation Committee members satisfy the “independence” requirements of the Nasdaq listing rules and
meet the independence standards under Rule 10A-3 under the Exchange Act. Our Compensation Committee is responsible for overseeing
and making recommendations to our board of our directors regarding the salaries and other compensation of our executive officers and
general employees and providing assistance and recommendations with respect to our compensation policies and practices.
Nominating
and Corporate Governance Committee
David
Bolocan, Lawrence G. Eckles and Mo Zou serve as members of our Nominating and Corporate Governance Committee. Mr. Lawrence G. Eckles
serves as the chair of the Nominating and Corporate Governance Committee. All of our Nominating and Corporate Governance Committee members
satisfy the “independence” requirements of the Nasdaq listing rules and meet the independence standards under Rule 10A-3
under the Exchange Act. Our Nominating and Corporate Governance Committee is responsible for identifying and proposing new potential
director nominees to the board of directors for consideration and reviewing our corporate governance policies.
6.D.
Employees
See
the section entitled “Employees” in Item 4.B above.
6.E.
Share Ownership
As of July 21, 2021, 8,267,793
of our ordinary shares were outstanding. Holders of our ordinary shares are entitled to vote together as a single class on all matters
submitted to shareholders for approval. No holder of ordinary shares has different voting rights from any other holders of ordinary shares.
We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
Beneficial ownership is determined
in accordance with the rules and regulations of the SEC. The percentages of shares beneficially owned in the table below are based
on 8,267,793 ordinary shares outstanding as of July 21, 2021.
The following table sets forth
information with respect to the beneficial ownership of our common shares as of July 21, 2021 by:
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each
of our directors and executive officers; and
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each
person known to us to beneficially own more than 5% of our outstanding ordinary shares.
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Unless
otherwise noted below, the address for each listed shareholder, director or executive officer is 7th Floor, Building 5A, Shenzhen Software
Industry Base, Nanshan District, Shenzhen, People’s Republic of China, 518061.
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Ordinary shares
beneficially owned
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Name
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|
Number
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%
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Directors and Executive Officers(1):
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|
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Minfei Bao
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4,380,000
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|
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52.98
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%
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Yihuang Chen
|
|
|
—
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|
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—
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%
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Honggang Cao
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|
|
—
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|
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—
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%
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Shibin Yu
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|
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-
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-
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Min He
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137,793
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|
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1.66
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%
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David Bolocan
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|
|
-
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-
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Lawrence G. Eckles
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-
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-
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Mo Zou
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|
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|
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All directors and executive officers as a group (eight persons)
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4,517,793
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54.64
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%
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Principal Shareholders:
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Grandsky Phoenix Limited
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4,380,000
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52.98
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%
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(1)
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Unless
otherwise noted, the business address of each of the following entities or individuals is 7th Floor, Building 5A, Shenzhen Software
Industry Base, Nanshan District, Shenzhen, People’s Republic of China, 518061.
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None
of our major shareholders have differing voting rights, and as of the date of this report, none of our outstanding ordinary shares are
held by record holders in the United States. We are not aware of any arrangement that may, at a subsequent date, result in a change of
control of our company.
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A.
Major Shareholders
See
Item 6.E., “Share Ownership,” for a description of our major shareholders.
7.B.
Related Party Transactions
Set
forth below are the related party transactions of our company that occurred since the beginning of the last fiscal year up to the date
of this report. The transactions are identified in accordance with the rules prescribed under Form 20-F and may not be considered
as related party transactions under PRC law.
Revenue
from related parties and amounts due from/to Philectronics Inc. (“Philectronics”)
We recorded net amount of
RMB nil (US$ nil) in revenues from Philectronics, an equity method investee of the Company, in fiscal year 2021. As of the date of this
report, 2021, the amount due from Philectronics was RMB0.5 million (US$0.1 million). As of the date of this report, 2021, the amount
due to Philectronics was RMB0.5 million (US$0.1 million).
Due
from Related Parties
As of March 31, 2021, the
Company had amounts due from Mr. Bao of RMB0.05 million (US$0.01 million). As of the date of this report, 2021, the Company had no amounts
due from Mr. Bao.
As of March 31, 2021, the
Company had amounts due from Mr. He of RMB6.4 million (US$1.0 million), which was received by the Company on April 5, 2021. As of date
of this report, 2021, the Company had no amounts due from Mr. He.
Due
to Related Parties
As of March 31, 2021, the
Company had amounts due to Mr. Bao of RMB0.8 million (US$0.1 million). In April and May, 2020, Mr. Bao provided loans of RMB0.9 million
(US$0.1 million) and the Company paid RMB1.5 million (US$0.2 million) to Mr. Bao. As of the date of this report, 2021, the Company has
amounts due to Mr. Bao of RMB0.8 million (US$0.1 million).
Loans
from Mr. Bao
As
of March 31, 2020, a loan balance of RMB2.0 million (US$0.3 million) was included in the total amounts due to Mr. Bao. See “Due
to Related Parties” above. From April 2020 to May 2020, UTime SZ borrowed an aggregate of RMB0.9 million (US$0.1 million)
from Mr. Bao for additional working capital demand arisen in connection with the COVID-19 outbreak. Such loans are non-interest bearing
and carry 10-year terms. Transaction details are listed below:
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RMB’000
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Balance as of March 31, 2020
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2,000
|
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Addition
|
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April 2020
|
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500
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May 2020
|
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|
400
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Repayment
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April 2020
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(1,000
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)
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May 2020
|
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(500
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)
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Offset by amount due from Mr. Bao
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(1,400
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)
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Balance as of March 31, 2021 and the date of this report
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-
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Variable
Interest Entity Arrangements
See “History and Corporate
Structure — Contractual Arrangements with the VIE and its Respective Shareholders.”
Share
Issuances
In
April 2020, we repurchased 7,620,000 and 239,721 ordinary shares, which were subsequently cancelled, at par value from our shareholders
Grandsky Phoenix Limited and HMercury Capital Limited, respectively, pursuant to a share repurchase agreement that the Company entered
into with Grandsky Phoenix Limited and HMercury Capital Limited on April 29, 2020. Both Grandsky Phoenix Limited and HMercury Capital
Limited confirmed that they have opted not to receive the consideration for the Repurchased Shares and made a pure capital contribution
in the sum of the purchase price in favor of the Company without the issue of additional shares of the Company. In April 2021, we completed
our initial public offering of 3,750,000 ordinary shares. As a result, Mr. Bao, through Grandsky Phoenix Limited, and Mr. He, through
HMercury Capital Limited, own 4,380,000 ordinary shares, representing 52.98% of equity interest and 137,793 ordinary shares, representing
1.66% of equity interest of the Company, respectively, as of the date of this report.
7.C.
Interests of Experts and Counsel
Not
applicable.
ITEM
8. FINANCIAL INFORMATION
Consolidated
Statements and Other Financial Information
The
financial statements required by this item may be found at the end of this report on 20-F, beginning on page F-1.
Legal
Proceedings
We
are subject to legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business.
Except as described below, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material
loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims.
On
September 17, 2018, Mr. Wukai Song, the majority shareholder in Bridgetime filed a complaint with THE NCLT against Ms. Grover
and Mr. Li, the directors of Do Mobile at the time, alleging mismanagement of corporate affairs, embezzlement of funds and absenting
themselves from the management of Do Mobile. Further, Mr. Wukai Song sought the following relief from the NCLT:
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prevent
Ms. Grover and Mr. Li from exercising any of their powers as directors of Do Mobile;
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restrain
Ms. Grover and Mr. Li from operating the bank account of Do Mobile and restraining DBS Bank from acting on the instructions of
Ms. Ekta Grover and Mr. Yunchuan Li;
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permit
the company secretary of Do Mobile to carry out the daily affairs of Do Mobile which are ordinarily carried out by the directors of a
company, until a new board of directors of Do Mobile is constituted and to file an application seeking extension of the date for holding
an annual general meeting beyond September 30, 2018;
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appoint
Mr. Amit Kumar and Mr. Chen Huiyun as interim directors of Do Mobile; and
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direct
Ms. Grover and Mr. Li, directors of Do Mobile, to hand over all documents and material related to Do Mobile in their possession,
back to Do Mobile and sign all statutory documents and filings to be made for the time period when they were acting as directors of Do
Mobile.
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On
November 16, 2018 and November 15, 2018, Ms. Grover and Mr. Li, respectively, filed an answer with the NCLT. Further,
on November 17, 2018, Mr. Wukai Song filed an application for interim relief seeking removal of Ms. Grover and Mr. Li
from the board of directors of Do Mobile.
On
September 30, 2019, the NCLT issued its interim order which allowed Mr. Wukai Song to carry-out certain statutory compliances
of Do Mobile, and the NCLT has also directed Ms. Grover, director of Do Mobile, to handover the digital signature of directors to Mr. Wukai
Song for carrying-out said statutory compliances and undertaking its business pending resolution of the litigation.
Since
the litigation involves Ms. Ekta Grover and Mr. Li, who were the directors of Do Mobile and who resigned on December 24, 2020 and March
3, 2021 respectively, such directors could no longer attend to the affairs of Do Mobile. As a result, Do Mobile currently did not have
an effective board for some time and faced significant challenges in its daily operation. For instance, Do Mobile was unable to undertake
certain corporate actions, such as: (a) convening and holding board meetings of Do Mobile as mandatorily required under the provisions
of the Companies Act, 2013 every year; (b) convening an annual general meeting where among other things, the Do Mobile shareholders approve
and adopt the financial statements of Do Mobile as required under the Companies Act, 2013; (c) reporting annual compliances with the
provisions of the Companies Act, 2013 through various e-forms with the office of the Registrar of Companies, Ministry of Corporate
Affairs; (d) submitting an annual report titled ‘Foreign Liabilities and Assets’ each year as required by companies receiving
foreign direct investment and other related compliances under Foreign Exchange Management Act, 1999; and (e) maintenance of statutory
registers as required under various applicable laws.
Do
Mobile was also made a party to two other matters initiated in connection with the aforesaid matter before the NCLT. These matters, which
were filed at Tis Hazari court (district court) in Delhi, India were (i) Do Mobile Pvt. Ltd. v. DBS Bank Ltd. (civil suit no. 813/2019);
and (ii) Ekta Grover v. Do Mobile India Pvt. Ltd. (civil suit no. 917/2019).
The
above-mentioned instances of non-compliance expose Do Mobile to potential fines and penalties. Do Mobile directors and officers
may also be prosecuted for such non-compliance under the official-in-default doctrine in the Companies Act, 2013, should they
fail to undertake their statutory duties to act in the best interest of Do Mobile.
The litigation against Ekta Grover and Yunchuan Li is still pending
before Delhi Bench of the NCLT and the matter was scheduled to be heard again on June 3, 2021. However due to the lockdown, the courts
were functioning at a limited capacity and the matter could not be taken up on the designated date. Do Mobile is awaiting intimation regarding
the revised date of hearing in this matter. In order to amicably settle such ongoing litigations between Do Mobile and its directors,
Do Mobile and director Ms. Grover have entered into a settlement agreement, dated January 16, 2020 (“Settlement Agreement”).
In terms of the Settlement Agreement, Do Mobile and Ms. Grover have arrived at the following understanding:
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Ms.
Grover has agreed to withdraw the litigation initiated by her against Do Mobile at the Tis Hazari court. She has also agreed not to file
any claim before any tribunal or court against Do Mobile and its officers in future. In furtherance of the aforesaid, Ms. Grover has
filed a withdrawal application in relation to the matter of Ekta Grover v. Do Mobile India Pvt. Ltd. (civil suit no. 917/2019) before
Tis Hazari Court, New Delhi, India, consequent to which the said matter has been disposed-off as settled/ withdrawn by the Tis Hazari
Court, Delhi, India vide its order dated February 23, 2021.
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Do
Mobile has agreed to withdraw the name of Ms. Grover from the on-going litigation before the NCLT by filing a withdrawal application
before NCLT. Do Mobile has also agreed that it will not file any claim against Ms. Grover pursuant to her resignation from the board
of directors of Do Mobile. Mr. Wukai Song (through his authorized representative) on January 21, 2021, filed a withdrawal application
before the NCLT requesting it to permit unconditional withdrawal of the petition filed by him against Ms. Grover and Mr. Li in their
capacity as the directors of Do Mobile due to his inability to pursue the matter in light of the restrictions imposed due to the COVID-19
pandemic. However, the NCLT is yet to pass an order allowing the application and the requested withdrawal of the petition.
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In consideration of the settlement so arrived, Do Mobile has issued
a post-dated check dated April 10, 2020 for INR 5,00,000/- (Indian Rupees Five Lakhs Only) to Ms. Grover towards her full and
final settlement of all claims against Do Mobile. However, this check could not be en-cashed due to the lockdown. Consequently, Do Mobile
issued another cheque for the same amount dated January 21, 2021 which has been en-cashed by Ms. Ekta Grover.
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Ms.
Grover also agreed to cooperate in appointment of new directors of Do Mobile as recommended by Do Mobile.
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Do
Mobile also agreed to change its registered office, which was situated at 3A/41, First Floor, WEA, Sat Nagar, Karol Bagh, New Delhi,
India, to another location. The registered office of Do Mobile is now located at House No. 25, Street No. 7, Goyala Vihar, Near Saint
Thomas School, New Delhi – 110071. Necessary filings with the jurisdictional Registrar of Companies have been made in this regard
by Do Mobile.
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The
matter of Do Mobile Pvt. Ltd. v. DBS Bank Ltd. (civil suit no. 813/2019) was initiated by Mr. Li in the Tis Hazari district court
to seek revival of the authority granted to him and Ms. Grover to operate the bank account of Do Mobile. Since the dispute regarding
the powers of Mr. Li and Ms. Grover was pending before the NCLT, the district court refused to grant any interim relief to the then
directors of Do Mobile. An application seeking withdrawal of the matter was filed by Do Mobile on April 1, 2021. At present, the
matter is pending before the Tis Hazari district court and will be heard next on September 22, 2021. The court is yet to pass an order
allowing the application requesting withdrawal of the suit.
Pursuant
to the commencement of the litigation against Do Mobile, all major decisions for Do Mobile have been made by the Company’s group
headquarters in Shenzhen, China. Such decisions include those relating to the type and quantum of products to be released in the market.
Furthermore, all sales are being made and the marketing strategy for Do Mobile is also presently being formulated from the corporate
headquarter in Shenzhen, China. However, Do Mobile is making its own decisions relating to customer acquisition, recruitment of sales
forces and office administration.
In
order to avoid operational challenges in Do Mobile on account of on-going litigation at the NCLT, the Company has nominated the
following persons to manage the daily operations of Do Mobile:
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Andy
Liu, Vice President of Overseas Department at UTime SZ, managed daily external affairs related to clients, vendors, products, sales &
purchase, marketing, business development, etc. from October 2019 until his resignation in August 2020. Since Mr. Liu’s resignation,
Mr. Wukai Song has been managing these affairs at Do Mobile.
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Wukai
Song manages daily internal affairs related to finance, human resource, office administration, etc.
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Do
Mobile has also appointed another officer in India, Tarun Garg, to manage the banking and accounting operations of Do Mobile, as its
Finance Head of Do Mobile with effect from July 2020. He is working in close coordination with Shibin Yu, Chief Financial Officer of
the Company, and Wendy Long, an accountant from corporate headquarters in Shenzhen, China. In addition to this, Tarun Garg is also assisting
Wukai Song in relation to day-to-day operations of the Do Mobile in India.
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In
order to avoid operational challenges due to the on-going litigation in the NCLT, effective December 12, 2020, Do Mobile has appointed
two new directors on its board namely, Mr. Wukai Song and Ms. Aayushi Gautam. Further, Ms. Grover and Mr. Li both have resigned
from their directorship in Do Mobile with effect from December 24, 2020 and March 3, 2021 respectively. At present, the board
of Do Mobile consists of two directors, namely Mr. Wukai Song and Ms. Aayushi Gautam. Further, one share of Do Mobile which was
held by Ms. Grover has been transferred to Ms. Aayushi Gautam before resignation by Ms. Grover. Pursuant to this transfer, Ms. Aayushi
Gautam is the registered owner of the said share while Bridgetime Limited continues to be its beneficial owner. Do Mobile has also appointed
Mr. Tarun Garg as its Finance Head, effective in July 2020. As a result of the constitution of a new board of directors, Do Mobile
has been able to overcome its operational challenges.
On
August 24, 2018, UTime GZ submitted an arbitration against Guizhou Nianfu Supply Chain Management Co., Ltd. (“Nianfu GZ”)
at Shenzhen Court of International Arbitration (“SCIA”), alleging Nianfu GZ defaulted on payment of RMB7,428,592.35 (US$1.1 million)
under certain supply chain service agreement between UTime GZ and Nianfu GZ (No. GZNF-GZLD2017-386, the “Service Agreement”),
and seeking compensation losses. The arbitration application filed by UTime GZ was accepted by SCIA at the same date. On July 24,
2019, the SCIA rendered a judgment awarding that (i) Nianfu GZ shall pay RMB1,748,689.70 (US$0.2 million) for the balance for
goods to UTime GZ; (ii) Nianfu GZ shall pay UTime GZ the property preservation fees and legal fees of RMB18,728.70 (US$2,648.0) in total.
This judgment has taken effect and UTime GZ has received the amount of RMB1,816,621.90 (US$0.3 million) on September 23, 2019.
On August 14, 2019, UTime GZ has submitted a new arbitration against Nianfu GZ at SCIA, mainly because our management was not satisfied
with the amount of the compensation awarded by the SCIA, seeking termination of the Service Agreement and the payment of RMB5,932,637.83
(US$0.8 million) by Nianfu GZ under the Service Agreement. The new arbitration application was accepted by SCIA on September 3,
2019 and the tribunal heard the case on November 14, 2019. On March 16, 2020, a new judgment was rendered by the arbitration
tribunal awarding that the Service Agreement shall be terminated and Nianfu GZ shall pay RMB5,679,902.65 (US$0.8 million) to UTime
GZ. The new judgment has taken effect and on June 19, 2020, UTime GZ has received the amount of RMB5,820,000.00 (US$0.8 million)
including the arbitration fee and attorney’s fee.
On
August 23, 2018, UTime SZ submitted an arbitration against Shenzhen Nianfu Supply Chain Management Co., Ltd. (“Nianfu SZ”)
at SCIA, alleging Nianfu SZ defaulted on payment of RMB1,913,616.60 (US$0.3 million) under certain supply chain service agreement
between UTime SZ and Nianfu SZ, seeking compensation losses. On August 24, 2018, SCIA has accepted the arbitration application filed
by UTime SZ. On March 29, 2019, SCIA issued the Correspondence No. Hua Nan Guo Zhong Shen Fa [2019] D3704 stating that the arbitration
tribunal decided to suspend the case (No. SHEN DX20180565) from March 29, 2019, due to the fact that Nianfu SZ was going through
the bankruptcy proceedings, and the time for resuming the arbitration procedure shall be notified by the arbitration tribunal separately.
On June 24, 2020, UTime SZ has withdrawn the case (No. SHEN DX20180565) from the SCIA.
The
outcome of litigation is inherently uncertain. If one or more legal matters were resolved against us in a reporting period for amounts
in excess of management’s expectations, our financial condition and operating results for that reporting period could be materially
adversely affected. Refer to the risk factor “We could be impacted by unfavorable results of legal proceedings, and may, from time
to time, be involved in future litigation in which substantial monetary damages are sought.”
Dividends
We
have never declared or paid any dividend on our ordinary shares and we do not anticipate paying any dividends on our ordinary shares
in the future. We currently intend to retain all future earnings to finance our operations and to expand our business.
No
Significant Changes
No
significant changes to our financial condition have occurred since the date of the annual financial statements contained herein.
ITEM
9. THE OFFER AND LISTING
9.A.
Offer and Listing Details
Our ordinary shares are listed
for trading on the NASDAQ Capital Market under the symbol “UTME.” The shares began trading on April 5, 2021 on the NASDAQ
Capital Market. The closing price for the ordinary shares was $8.81 on July 20, 2021.
9.B.
Plan of Distribution
Not
Applicable.
9.C.
Markets
Our
ordinary shares are currently traded on the NASDAQ Capital Market.
9.D.
Selling Shareholders
Not
Applicable.
9.E.
Dilution
Not
Applicable.
9.F.
Expenses of the Issuer
Not
Applicable.
ITEM
10. ADDITIONAL INFORMATION
10.A.
Share Capital
Not
Applicable.
10.B.
Memorandum and Articles of Association
We
are a Cayman Islands company and our affairs are governed by our amended and restated memorandum and articles of association and the
Companies Law (2020 Revision) of the Cayman Islands, which we refer to as the Companies Law below.
Our
authorized share capital consists of 140,000,000 ordinary shares, par value $0.0001 per share, and 10,000,000 preferred shares, par value
$0.0001 per share. As of the date of this report, 8,267,793 ordinary shares were issued and outstanding and no preferred shares were
issued and outstanding.
Share
Rights
Without
prejudice to any rights attached to any existing ordinary shares or class of shares, any share may be issued with such preferred, deferred
or other special rights or subject to such restrictions as our board of directors shall determine. We may issue redeemable shares.
Our
memorandum and articles of association provide that, subject to Cayman Islands law, all or any of the special rights for the time being
attached to the shares or any class of shares may, unless otherwise provided by the terms of issue of the shares of that class, from
time to time be varied, modified or abrogated with the sanction of a special resolution passed at a separate general meeting of the holders
of the shares of that class.
Voting
Rights
A
quorum required for a meeting of shareholders consists of two or more holders of shares together holding (or representing by proxy) not
less than an aggregate of a majority of the total voting power of all shares in issue and entitled to vote present in person or by proxy
or, if a corporation or other non-natural person, by its duly authorized representative. If a quorum is not present within half
an hour from the time appointed for a general meeting to commence or if during such a general meeting a quorum ceases to be present,
the meeting, if convened upon a shareholders’ requisition, shall be dissolved and in any other case it shall stand adjourned to
the same day in the next week at the same time and/or place or to such other day, time and/or place as our board of directors may determine,
and if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting to commence, the
shareholders present shall be a quorum.
Voting
at meetings takes place by show of hands or by a poll of shares represented at the meeting. Subject to any special rights or restrictions
attached to a class of shares, a shareholder present in person (or if an entity, present by a duly authorized representative, which is
deemed equivalent to being present in person and is referred to as such hereafter) or by proxy is entitled to one vote on a show of hands
regardless of the number of shares held, provided that where more than one proxy is appointed by a shareholder that is a clearing house
or central depository house (or its nominee(s)), each such proxy shall have one vote on a show of hands. On a poll every shareholder
present in person or by proxy shall have one vote for every fully paid share held.
Voting
will be by show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand
for a poll) a poll is demanded by: the chairman of the meeting or a shareholder or shareholders present in person or by proxy and representing
not less than one-tenth of the total voting rights of all shareholders having the right to vote at the meeting.
An
ordinary resolution to be passed by the shareholders requires a simple majority of votes cast in a general meeting, while a special resolution
requires no less than two-thirds of the votes cast. A special resolution is required for important matters such as a change of name.
Our shareholders may effect certain changes by ordinary resolution, including increasing the amount of our authorized share capital,
consolidating and dividing all or any of our share capital into shares of larger amounts than our existing shares and cancelling any
shares. As described below, some types of corporate actions may be approved only by special resolution.
Dividends
and Other Distributions; Liquidation Rights
Subject
to the capital maintenance provisions of the Companies Act, which, inter alia, permit distributions to be made only out of profits available
for the purpose or from share premium, the directors may declare and pay dividends and other distributions out of the funds of the Company
available therefor. The Companies Act prohibits the payment of any dividend if payment would cause us to be unable to pay our debts as
they fall due in the ordinary course of business. Only our board of directors may declare dividends and, except as otherwise provided
by the rights attached to a particular class of shares, all dividends shall be declared and paid pro rata according to the amounts paid
up on the ordinary shares on which the dividend is paid.
Except
as provided by the rights and restrictions attached to any class of ordinary shares, under general law, the holders of our shares will
be entitled to participate in any surplus assets in a winding up in proportion to their shareholdings. A liquidator may, with the sanction
of a special resolution and any other sanction required by the Companies Act, divide among the members in specie the whole or any part
of our assets and may, for that purpose, value any assets and determine how the division shall be carried out as between the members
or different classes of members.
Variations
of Rights of Shares
All
or any of the special rights attached to any class of shares may, subject to the provisions of the Companies Act, be varied either with
the consent in writing of the holders of not less than two thirds of the issued shares of that class or with the approval of a resolution
passed by a majority of not less than two thirds of the votes cast at a separate meeting of the holders of the shares of that class.
The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, subject to any rights
or restrictions for the time being attached to the shares of that class, be deemed to be materially adversely varied by, inter alia,
the creation, allotment or issue of further shares ranking pari passu with or subsequent to them, the creation, allotment or issuance
of further shares (whether ranking in priority to, pari passu or subsequent to them) pursuant to the board of director’s ability
to issue preference shares in the manner described herein or the redemption or purchase of any shares of any class by the Company. The
rights of the holders of shares shall not be deemed to be materially adversely varied by the creation or issue of shares with preferred
or other rights including, without limitation, the creation of shares with enhanced or weighted voting rights.
Pre-Emption
Rights
There
are no pre-emption rights applicable to the issue of new shares under either Cayman Islands law or our memorandum and articles of
association.
Alteration
of Share Capital
We
may by ordinary resolution increase, consolidate or sub-divide our share capital.
Purchase
of Own Ordinary Shares
Subject
to the provisions of the Companies Act, our board of directors may authorize the purchase of any of our own shares of any class in any
way and at any price (whether at par or above or below par) out of our distributable profits, share premium capital, capital and/or the
proceeds of a fresh issue of shares made for the purpose of financing the purchase, in accordance with the Companies Act.
Shareholder
Meetings
Meetings
of shareholders are known as general meetings and comprise of an annual general meeting and any other general meetings, known as extraordinary
general meetings, that may be called and held from time to time. We may but are not obliged by our memorandum and articles of association
to hold an annual general meeting in each year, other than the year in which these articles are adopted. General meetings may be held
at such times and places as may be determined by our board of directors.
Extraordinary
general meetings may be called only:
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by
a majority of our board of directors; or
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on
the requisition of shareholders holding not less than one third of the votes attributable to the issued shares giving the right to attend
and vote thereat.
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A
general meeting must be called by not less than 5 clear days’ notice (meaning calendar days excluding the date the notice is given
or deemed given and the date of the meeting), unless shorter notice is agreed.
No
business, except for the appointment of a chairman for the meeting, shall be transacted at any general meeting unless a quorum of shareholders
is present at the time when the meeting proceeds to business. Other than a meeting or action regarding the modification of the rights
of any class of shares, two shareholders present at a meeting in person or by proxy, entitled to vote shall be a quorum.
Directors
Our
board of directors must consist of at least one director who can be appointed by ordinary resolution of shareholders or, in the case
of vacancies and newly created directorships, by our board of directors. Our directors are not required to hold any ordinary shares in
the capital of the Company to qualify.
Our
directors may receive such compensation as they may from time to time determine. A director may be entitled to be repaid all traveling,
hotel and incidental expenses reasonably incurred by him or her in attending meetings of the board of directors or committees of the
board or general meetings or separate meetings of any class of shares or of debentures or otherwise in connection with the discharge
of his or her duties as a director.
Our
board of directors may provide benefits, whether by the payment of gratuities or pensions or by insurance or otherwise, for any past
or present director or employee of our Company or any of its subsidiaries or any corporate body associated with, or any business acquired
by, any of them, and for any member of his family or any person who is or was dependent on him.
Borrowing
Powers
Our
board of directors may exercise all the powers of our Company to borrow money and to mortgage or charge its undertaking, property and
assets (present and future) and uncalled capital of our Company, and to issue debentures, debenture shares and other securities whenever
money is borrowed or as security for any debt, liability or obligation of our Company or of any third-party.
Indemnity
of Directors and Officers
Our
amended and restated memorandum and articles of association provide that our current and former directors and officers will be indemnified
out of our assets against any liability, action, proceeding, claim, demand, costs, damages or expenses, including legal expenses, whatsoever
which they or any of them may incur as a result of any act or failure to act in carrying out their functions other than such liability
(if any) that they may incur by reason of their own actual fraud or willful default. In addition, our memorandum and articles of association
provide that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors,
unless their liability arises out of actual fraud or willful default.
We
intend to enter into agreements with our directors and officers to provide contractual indemnification in addition to the indemnification
provided in our memorandum and articles of association. We intend to purchase a policy of directors’ and officers’ liability
insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment in some circumstances
and insures us against our obligations to indemnify the directors and officers.
These
provisions may discourage shareholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions
also may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action,
if successful, might otherwise benefit us and our shareholders. Furthermore, a shareholder’s investment may be adversely affected
to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.
We believe that these provisions, the insurance and the indemnity agreements are necessary to attract and retain talented and experienced
directors and officers.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore, unenforceable.
Change
of Control
Provisions in our amended and restated memorandum and articles of association
may discourage, delay or prevent a merger, acquisition or other change in control that shareholders may consider favorable, including
transactions in which shareholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or
prevent any attempt by our shareholders to replace or remove our current management by making it more difficult to replace or remove our
board of directors. Such provisions may reduce the price that investors may be willing to pay for our ordinary shares in the future, which
could reduce the market price of our ordinary shares.
These
provisions include:
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a
requirement that extraordinary general meetings of shareholders be called only by a majority of the board of directors or, in limited
circumstances, by the board upon shareholder requisition; and
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the
authority of our board of directors to issue preferred shares with such terms as our board of directors may determine.
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However,
under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our post-offering memorandum
and articles of association for a proper purpose and for what they believe in good faith to be in the best interests of the Company.
As described below in “— Differences in Corporate Law — Mergers and Similar Arrangements” the Companies Act provides
for arrangements or compromises between a company and its shareholders, creditors, any class of its shareholders, or any class of its
creditors that are used for certain types of reconstructions, amalgamations, capital reorganizations or takeovers.
The
Companies Act includes provisions relating to takeovers and provides that where a takeover offer is made for the shares of a company
incorporated in the Cayman Islands and, within four months after the making of the offer the offeror has been approved by the holders
of not less than 90 percent in value of the shares affected, the offeror may, within two months, by notice require shareholders who do
not accept the offer to transfer their shares to the offeror on the terms of the offer.
Authorized
but Unissued Shares
Our
authorized but unissued shares are available for future issuances without shareholder approval and could be utilized for a variety of
corporate purposes, including future offerings to raise additional capital, acquisitions and employee benefit plans. In order to increase
the number of authorized shares, we are required to obtain the approval of a majority of our shareholders.
Our
board of directors is empowered to authorize and issue, out of our authorized but unissued shares, one or more classes or series of preferred
shares and to fix the designations, powers, preferences and relative, participating, optional and other rights, if any, and the qualifications,
limitations and restrictions thereof, if any, including, without limitation, the number of shares constituting each such class or series,
dividend rights, conversion rights, redemption privileges, voting powers, full or limited or no voting powers, and liquidation preferences,
and to increase or decrease the size of any such class or series (but not below the number of shares of any class or series of preferred
shares then outstanding) to the extent permitted by Cayman law. The resolution or resolutions providing for the establishment of any
class or series of preferred shares may, to the extent permitted by law, provide that such class or series shall be superior to, rank
equally with or be junior to the preferred shares of any other class or series. The existence of authorized but unissued shares and our
board of directors’ authority to issue new classes of shares could render more difficult or discourage an attempt to obtain control
of us by means of a proxy contest, tender offer, merger or otherwise.
Exempted
Company
We
are an exempted company with limited liability under the Companies Act. The Companies Act 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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an
exempted company does not have to file an annual return of its shareholders with the Registrar of Companies;
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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 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.
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“Limited
liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the
company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper
purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil).
Differences
in Corporate Law
Cayman
Islands companies are governed by the Companies Act. The Companies Act is modeled on English Law but does not follow recent English Law
statutory enactments, and differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of some
significant differences between the provisions of the Companies Act applicable to us and the laws applicable to companies incorporated
in the State of Delaware in the United States and their shareholders.
We
believe that the differences with respect to our being a Cayman Islands exempted company as opposed to a Delaware corporation do not
pose additional material risks to investors, other than the risks described under “Risk Factors — As a foreign private issuer,
we are subject to different U.S. securities laws and NASDAQ governance standards than domestic U.S. issuers. This may afford less protection
to holders of our ordinary shares, and you may not receive corporate and company information and disclosure that you are accustomed to
receiving or in a manner in which you are accustomed to receiving it, “— We may become subject to taxation in the Cayman
Islands which would negatively affect our results,” “— There may be a risk of us being subject to tax in jurisdictions
in which we do not currently consider ourselves to have any tax resident subsidiaries or permanent establishments” and “—
Because we are incorporated under the laws of the Cayman Islands, you may face difficulties in protecting your interests, and your ability
to protect your rights through the U.S. Federal courts may be limited.”
Mergers
and Similar Arrangements
In
certain circumstances, the Companies Act permits mergers and consolidations between Cayman Islands companies and between Cayman Islands
companies and non-Cayman Islands companies (provided that is facilitated by the laws of the other jurisdiction) and any such company
may be the surviving entity for the purposes of mergers or the consolidated company for the purposes of consolidations. For these purposes,
(a) “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities
in one of such companies as the surviving company and (b) a “consolidation” means the combination of two or more constituent
companies into a consolidated company and the vesting of the undertaking, property and liabilities of such companies to the consolidated
company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of
merger or consolidation, which must, in most instances, then be authorized by a special resolution (usually a majority of 66 2/3% in
value) of the shareholders of each constituent company and such other authorization, if any, as may be specified in such constituent
company’s articles of association. A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not
require authorization by a resolution of shareholders, provided a copy of the plan of merger is given to every member of each subsidiary
company to be merged (unless waived by such members). For this purpose a subsidiary is a company of which at least 90% of the votes cast
at its general meeting are held by the parent company. The consent of each holder of a fixed or floating security interest over a constituent
company is required unless this requirement is waived by a court in the Cayman Islands. The plan of merger or consolidation must be filed
with the Registrar of Companies who, if satisfied that the requirements of the Companies Act (As Revised) which includes certain other
formalities, have been complied with, will register it. The filing must include a declaration as to the solvency of the consolidated
or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate
of merger or consolidation will be given to the members and creditors of each constituent company and published in the Cayman Islands
Gazette. Dissenting shareholders have the right to be paid the fair value of their shares (which, if not agreed between the parties,
will be determined by the Cayman Islands court) if they follow the required procedures, subject to certain exceptions. Court approval
is not required for a merger or consolidation which is effected in compliance with these statutory procedures.
In
addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies in certain circumstances, provided
that the arrangement is 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 two-thirds 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 meetings, convened for that purpose. The convening of the
meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder
has the right to express to the court the view that the transaction ought not be approved, the court can be expected to approve the arrangement
if it determines that:
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the
company is not proposing to act illegally or beyond the scope of its corporate authority and the statutory provisions as to the required
majority vote have been met;
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the
shareholders have been fairly represented at the meeting in question, the statutory majority are acting bona fide without coercion of
the minority to promote interests adverse to those of the class and that the meeting was properly constituted;
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the
arrangement is such that it may reasonably be approved by an intelligent and honest man of that share class acting in respect of his
interest; and
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the
arrangement is not one which would be more properly sanctioned under some other provision of the Companies Act, or that would amount
to ‘fraud on the minority’.
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When
a takeover offer is made and accepted by holders of 90% of the shares affected within four months, the offeror may after the expiration
of such four months, 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.
If
the arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights,
which would otherwise ordinarily be available to dissenting shareholders of U.S. corporations, providing rights to receive payment in
cash for the judicially determined value of the shares.
Shareholder
Suits
In
general, we will be the proper plaintiff in any action to protect and enforce our rights and such an action cannot be brought by a minority
shareholder on behalf of our company. However, this does not prevent a shareholder bringing proceedings to protect its individual rights.
In addition, in some circumstances, a minority shareholder may be able to bring a derivative action on behalf of our company where:
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Those
who control our company are perpetrating a ‘fraud on the minority’;
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We
are acting or proposing to act illegally or beyond the scope of its authority;
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The
act complained of, although not beyond the scope of our company’s authority, could be effected only if duly authorized by more
than a simple majority vote, which has not been obtained.
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Protection
of Minority Shareholders
In
the case of a company (not being a bank) having its share capital divided into shares, the Grand Court of the Cayman Islands may, on
the application of members holding not less than one fifth of the shares of the company in issue, appoint an inspector to examine the
affairs of the company and to report thereon in such manner as the Grand Court of the Cayman Islands shall direct.
Any
of our shareholders may petition the Grand Court of the Cayman Islands which may make a winding up order if the Grand Court of the Cayman
Islands is of the opinion that it is just and equitable that we should be wound up or, as an alternative to a winding up order, (a) an
order regulating the conduct of our affairs in the future, (b) an order requiring us to refrain from doing or continuing an act
complained of by the shareholder petitioner or to do an act which the shareholder petitioner has complained we have omitted to do, (c) an
order authorizing civil proceedings to be brought in our name and on our behalf by the shareholder petitioner on such terms as the Grand
Court of the Cayman Islands may direct, or (d) an order providing for the purchase of the shares of any of our shareholders by other
shareholders or us and, in the case of a purchase by us, a reduction of our capital accordingly.
Generally,
claims against us must be based on the general laws of contract or tort applicable in the Cayman Islands or individual rights as shareholders
as established by our memorandum and articles of association.
Fiduciary
Duties of Directors
Under
Cayman Islands law, directors and officers owe the following fiduciary duties:
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●
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duty
to act in good faith in what the director or officer believes to be in the best interests of the company as a whole;
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●
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duty
to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose;
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●
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directors
should not improperly fetter the exercise of future discretion;
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●
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duty
to exercise powers fairly as between different sections of shareholders;
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●
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duty
not to put themselves in a position in which there is a conflict between their duty to the company and their personal interests; and
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●
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duty
to exercise independent judgment.
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In
addition to the above, directors also owe a duty of care which is not fiduciary in nature. This duty has been defined as a requirement
to act as a reasonably diligent person having both the general knowledge, skill and experience that may reasonably be expected of a person
carrying out the same functions as are carried out by that director in relation to the company and the general knowledge skill and experience
of that director.
As
set out above, directors have a duty not to put themselves in a position of conflict and this includes a duty not to engage in self-dealing,
or to otherwise benefit as a result of their position. However, in some instances what would otherwise be a breach of this duty can be
forgiven and/or authorized in advance by the shareholders provided that there is full disclosure by the directors. This can be done by
way of permission granted in the amended and restated memorandum and articles of association or alternatively by shareholder approval
at general meetings.
However,
by contrast to Delaware law, the fiduciary duties of directors are not as clearly established under Cayman Islands law.
Anti-Money
Laundering — Cayman Islands
If
any person in the Cayman Islands knows or suspects or has reasonable grounds for knowing or suspecting that another person is engaged
in criminal conduct or money laundering or is involved with terrorism or terrorist financing and property and the information for that
knowledge or suspicion came to their attention in the course of business in the regulated sector, or other trade, profession, business
or employment, the person will be required to report such knowledge or suspicion to (i) the Financial Reporting Authority of the Cayman
Islands, pursuant to the Proceeds of Crime Act (As Revised) of the Cayman Islands if the disclosure relates to criminal conduct or money
laundering, or (ii) a police officer of the rank of constable or higher, or the Financial Reporting Authority, pursuant to the Terrorism
Act (As Revised) of the Cayman Islands, if the disclosure relates to involvement with terrorism or terrorist financing and property.
Such a report shall not be treated as a breach of confidence or of any restriction upon the disclosure of information imposed by any
enactment or otherwise.
Data
Protection — Cayman Islands
We
have certain duties under the Data Protection Act (As Revised) of the Cayman Islands (the “Data Protection Act”) based on
internationally accepted principles of data privacy.
Privacy
Notice
Introduction
This
privacy notice puts our shareholders on notice that through your investment in the Company you will provide us with certain personal
information which constitutes personal data within the meaning of the Data Protection Act (“personal data”). In the following
discussion, the “company” refers to us and our affiliates and/or delegates, except where the context requires otherwise.
Investor
Data
We
will collect, use, disclose, retain and secure personal data to the extent reasonably required only and within the parameters that could
be reasonably expected during the normal course of business. We will only process, disclose, transfer or retain personal data to the
extent legitimately required to conduct our activities of on an ongoing basis or to comply with legal and regulatory obligations to which
we are subject. We will only transfer personal data in accordance with the requirements of the Data Protection Act, and will apply appropriate
technical and organizational information security measures designed to protect against unauthorized or unlawful processing of the personal
data and against the accidental loss, destruction or damage to the personal data.
In
our use of this personal data, we will be characterized as a “data controller” for the purposes of the Data Protection Act,
while our affiliates and service providers who may receive this personal data from us in the conduct of our activities may either act
as our “data processors” for the purposes of the Data Protection Act or may process personal information for their own lawful
purposes in connection with services provided to us.
We
may also obtain personal data from other public sources. Personal data includes, without limitation, the following information relating
to a shareholder and/or any individuals connected with a shareholder as an investor: name, residential address, email address, contact
details, corporate contact information, signature, nationality, place of birth, date of birth, tax identification, credit history, correspondence
records, passport number, bank account details, source of funds details and details relating to the shareholder’s investment activity.
Who
this Affects
If
you are a natural person, this will affect you directly. If you are a corporate investor (including, for these purposes, legal arrangements
such as trusts or exempted limited partnerships) that provides us with personal data on individuals connected to you for any reason in
relation your investment in the company, this will be relevant for those individuals and you should transmit the content of this Privacy
Notice to such individuals or otherwise advise them of its content.
How
the Company May Use a Shareholder’s Personal Data
The
company, as the data controller, may collect, store and use personal data for lawful purposes, including, in particular:
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a)
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where
this is necessary for the performance of our rights and obligations under any purchase agreements;
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b)
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where
this is necessary for compliance with a legal and regulatory obligation to which we are subject (such as compliance with anti-money laundering
and FATCA/CRS requirements); and/or
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c)
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where
this is necessary for the purposes of our legitimate interests and such interests are not overridden by your interests, fundamental rights
or freedoms.
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Should
we wish to use personal data for other specific purposes (including, if applicable, any purpose that requires your consent), we will
contact you.
Why
We May Transfer Your Personal Data
In
certain circumstances we may be legally obliged to share personal data and other information with respect to your shareholding with the
relevant regulatory authorities such as the Cayman Islands Monetary Authority or the Tax Information Authority. They, in turn, may exchange
this information with foreign authorities, including tax authorities.
We
anticipates disclosing personal data to persons who provide services to us and their respective affiliates (which may include certain
entities located outside the United States, the Cayman Islands or the European Economic Area), who will process your personal data on
our behalf.
The
Data Protection Measures We Take
Any
transfer of personal data by us or our duly authorized affiliates and/or delegates outside of the Cayman Islands shall be in accordance
with the requirements of the Data Protection Act.
We
and our duly authorized affiliates and/or delegates shall apply appropriate technical and organizational information security measures
designed to protect against unauthorized or unlawful processing of personal data, and against accidental loss or destruction of, or damage
to, personal data.
We
shall notify you of any personal data breach that is reasonably likely to result in a risk to your interests, fundamental rights or freedoms
or those data subjects to whom the relevant personal data relates.
Written
Consent
Under
the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent through amendment
to its certificate of incorporation. Cayman Islands law enables, and our memorandum and articles of association provide, that any action
required or permitted to be taken at any annual or extraordinary general meeting may be taken only upon the vote of shareholders at an
annual or extraordinary general meeting duly and may not be taken by written resolution of shareholders without a meeting.
Shareholder
Proposals
Under
the Delaware General Corporation Law, a shareholder has the right to put any proposal before the shareholders at the annual meeting,
provided that such shareholder complies with the notice provisions in the governing documents. In general terms, Cayman Islands’
law does not provide shareholders with an express right to put any proposal before a general meeting of shareholders. Depending on the
provision of the relevant Cayman Islands company’s articles of association, a shareholder may put a proposal before the shareholders
at any general meeting if it is set out in the notice calling the meeting. There is no automatic right to introduce new business at any
meeting. A general meeting may be called by the board of directors or any other person authorized to do so in the articles of association,
but shareholders may be precluded from calling general meetings, except in certain circumstances.
Under
the Delaware General Corporation Law, a corporation is required to set a minimum quorum of one-third of the issued and outstanding
shares for a shareholders’ meeting. Cayman Islands law permits a company’s articles to have any quorum. Our amended and restated
memorandum and articles of association provide that a quorum consists of two qualifying persons, other than for a meeting or action regarding
the modification of the rights of any class of shares, present at a meeting and entitled to vote on the business to be dealt with.
Election
of Directors
Under
the Delaware General Corporation Law, unless otherwise specified in the certificate of incorporation or bylaws of the corporation, directors
shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote
on the election of directors and vacancies and newly created directorships may be filled by resolution of the board. Under the laws of
the Cayman Islands, directors are appointed by the board of directors or, if provided for in the articles of association, by shareholders
pursuant to an ordinary resolution. Our amended and restated articles of association provide that directors nominated for election be
elected by the shareholders pursuant to an ordinary resolution at a general meeting and that a vacancy on our board of directors or any
additions to the existing board of directors will be filled by the resolution of directors or by ordinary resolution of our shareholders.
Cumulative
Voting
Under
the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate
of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders
on a board of directors since it permits a minority shareholder to cast all the votes to which such shareholder is entitled on a single
director, which increases such shareholder’s voting power with respect to electing such director. There are no prohibitions in
relation to cumulative voting under the laws of the Cayman Islands, but our memorandum and articles of association do not provide for
cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a
Delaware corporation.
Removal
of Directors
Under
the Delaware General Corporation Law, a director of a corporation may be removed only for cause with the approval of a majority of the
outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our memorandum and articles of
association, a director may be removed by way of an ordinary resolution of the shareholders at any time before the expiration of his
period of office.
Actions
by the Board of Directors
Under
the Delaware General Corporation Law, unless the certificate of incorporation or bylaws of a Delaware corporation provide otherwise,
a majority of the total number of directors shall constitute a quorum for the transaction of business, but in no case shall a quorum
be less than one-third of the total number of directors unless the authorized number of directors is one, and an action of the board
at a meeting with a quorum present requires at least a majority vote of those directors present. Directors of a Delaware corporation
may also act by unanimous written consent unless the corporation’s certificate of incorporation or bylaws otherwise provide. Our
amended and restated memorandum and articles of association provide for action by majority vote at a meeting or by unanimous written
consent; however, the required quorum for a directors’ meeting is two directors unless our board of directors fixes a different
number.
Dissolution;
Winding up
Under
the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by
shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors
may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to
include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board.
Under the Companies Act and our amended and restated memorandum and articles of association, our Company may be liquidated or wound up
and subsequently dissolved by special resolution of our shareholders on the basis that we are unable to pay our debts as they fall due.
Variation
of Rights of Shares
Under
the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding
shares of such class, unless the certificate of incorporation provides otherwise. Under our amended and restated memorandum and articles
of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class
only with the vote at a separate class meeting of holders of two-thirds of the shares of such class.
Amendment
of Governing Documents
Under
the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the
outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by Cayman Islands law,
except for certain amendments to the capital structure not affecting a shareholder’s economic rights, our memorandum and articles
of association may only be amended with a special resolution at a general meeting.
Rights
of Non-resident or Foreign Shareholders
There
are no limitations imposed by our amended and restated memorandum and articles of association on the rights of non-resident or foreign
shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our memorandum and articles of
association governing the ownership threshold above which shareholder ownership must be disclosed.
10.C.
Material Contracts
Below
is a summary of all material contracts to which we are a party dated within the preceding two years from the date hereof:
Title of Contract
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Party A
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Party B
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Signing Date
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Term of Contract
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Bank Credit Agreements*
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|
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Credit Agreement
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United Time Technology Co., Ltd.
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China Construction Bank
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November 15,
2017
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1 year
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Credit Agreement
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United Time Technology Co., Ltd.
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Shenzhen Rural Commercial Bank
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August 1,
2018
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3 years
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Credit Agreement
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United Time Technology Co., Ltd.
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Shenzhen Rural Commercial Bank
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August 1,
2018
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3 years
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Credit Agreement
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United Time Technology Co., Ltd.
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China Construction Bank
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April 23,
2019
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351 days
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Credit Agreement
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United Time Technology Co., Ltd.
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China Construction Bank
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May 8,
2020
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355 days
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Credit Agreement
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United Time Technology Co., Ltd.
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China Resources Bank of Zhuhai Co., Ltd.
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November 13,
2020
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1 year
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Factoring Agreement
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Guizhou United Time Technology Co., Ltd.
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Huizhou TCL Mobile Communication Company Limited
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July 17,
2020
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180 days
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Factoring Agreement
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United Time Technology Co., Ltd.
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TCL Commercial Factoring (Shenzhen) Company Limited
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November 18,
2020
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November 18, 2020 to November 17, 2022
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Working Capital Loan Agreement
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United Time Technology Co., Ltd.
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Bank of Communications
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July 14, 2021
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N/A
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Credit Agreement
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United Time Technology Co., Ltd.
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Shenzhen Rural Commercial Bank
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June 29, 2021
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July 16, 2021 to July 16, 2024
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Credit Agreement
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United Time Technology Co., Ltd.
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Shenzhen Rural Commercial Bank
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June 29, 2021
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July 16, 2021 to July 16, 2024
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*
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For
more information regarding these credit agreements, see information under “Item 5. Operating And Financial Review And Prospects”
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Purchase Agreements (Production line purchase agreements)
Mechanical
Equipment Purchase Agreement
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United
Time Technology Co., Ltd.
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Guizhou
Jietongda Technology Co., Ltd.
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March 2,
2018
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N/A
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On
March 2, 2018, we entered into a purchase agreement to acquire three SMT testing assembly lines for a total price of RMB27,772,815,
inclusive of value added tax (the “Purchase Price”) from Guizhou Jietongda Technology Co., Ltd. Pursuant to this agreement,
we had to pay (i) 10% of the Purchase Price within 15 days after the contract was executed by both parties, (ii) 80% of the Purchase
Price within 90 days after our inspection and acceptance of the assembly lines upon their arrival at our designated place, and (iii)
the remaining 10% of the Purchase Price when the installation and testing of the assembly lines was completed. Pursuant to this agreement,
we agreed not to re-sell the assembly lines to any areas other than the mainland China.
Lease Agreements (Factory lease agreements)
Factory
Lease Agreement
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Guizhou
United Time Technology Co., Ltd.
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Guizhou
Jietongda Technology Co., Ltd.
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N/A
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4
years and
6 months
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Supplemental
Agreement to Factory Lease Agreement
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Guizhou
United Time Technology Co., Ltd.
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Guizhou
Jietongda Technology Co., Ltd.
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October 10,
2019
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N/A
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In
September 2017, we entered into a Factory Lease Agreement (No. JTDLD2017090102) to lease plant for production from Guizhou Jietongda
Technology Co., Ltd, which was executed in September 2017. Pursuant to this agreement, (i) the lease term is from September 1, 2017
to February 28, 2022, (ii) the rent for the first three years shall be RMB 20 (US$3.04)/m² per month in principle and can be
adjusted according to the market price in the later period, (iii) the rent shall be paid quarterly and shall be paid before the fifteenth
day of the month following each quarter, and (iv) we shall be liable for a 5% late fee per day for any overdue payment. Furthermore,
on October 10, 2019, we entered into a Supplemental Agreement to the Factory Lease Agreement with Guizhou Jietongda Technology Co.,
Ltd, pursuant to which both parties agreed to reduce the rent from RMB 20 (US$3.04)/m² per month to RMB 8 (US$1.22)/m² per
month; and the total amount of rent shall be RMB 7,550,496 (US$1.1 million) inclusive of tax.
10.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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●
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Foreign
Currency Administration Rules of 1996, as amended; and
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●
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Administrative
Rules of the Settlement, Sale and Payment of Foreign Exchange of 1996.
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As
we disclosed in the risk factors above, 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.
10.E.
Taxation
The
following discussion of material Cayman Islands, PRC and United States federal income tax consequences of an investment in our ordinary
shares is based upon laws and relevant interpretations thereof in effect as of the date of this report, all of which are subject to change.
This discussion does not deal with all possible tax consequences relating to an investment in our ordinary shares, such as the tax consequences
under state, local and other tax laws.
Cayman
Islands Taxation
The
following is a discussion on certain Cayman Islands income tax consequences of an investment in the Shares. The discussion is a general
summary of the 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:
The
Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is
no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government
of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within,
the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on the issue of shares by, or any transfers of
shares of, Cayman Islands companies (except those which hold interests in land in the Cayman Islands). The Cayman Islands is not party
to any double tax treaties which are applicable to any payments made to or by our company. There are no exchange control regulations
or currency restrictions in the Cayman Islands.
Payments
of dividends and capital in respect of our shares will not be subject to taxation in the Cayman Islands and no withholding will be required
on the payment of dividends or capital to any holder of our shares, nor will gains derived from the disposal of our shares be subject
to Cayman Islands income or corporation tax.
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 received an undertaking from the Financial Secretary of the Cayman Islands in the following form:
The
Tax Concessions Act
(As
Revised)
Undertaking
as to Tax Concessions
In
accordance with the provision of Section 6 of The Tax Concessions Act (As Revised), the Financial Secretary undertakes with UTime Limited
(the “Company”):
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1.
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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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|
2.
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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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2.1
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On
or in respect of the shares, debentures or other obligations of the Company; or
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2.2
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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 Act (As Revised).
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These
concessions shall be for a period of 20 years from the date hereof.
People’s
Republic of China Taxation
Under
the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management
body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on
its global income. The implementation rules define the term “de facto management body” as the body that exercises full and
substantial control over and overall and substantial management of the business, productions, personnel, accounts and properties of an
enterprise. In April 2009, the State Administration of Taxation issued the Circular on Issues Concerning the Identification of Chinese-Controlled Overseas
Registered Enterprises as Resident Enterprises in Accordance With the Actual Standards of Organizational Management, known as Circular 82,
which has been revised by the Decision of the State Administration of Taxation on Issuing the Lists of Invalid and Abolished Tax Departmental
Rules and Taxation Normative Documents on December 29, 2017 and by the Decision of the State Council on Cancellation and Delegation
of a Batch of Administrative Examination and Approval Items on November 8, 2013. Circular 82 has provided certain specific criteria
for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore
is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups,
not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of
Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident
status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise
or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China
only if all of the following conditions are met: (i) the places where the senior management and senior management departments responsible
for the daily production, operation and management of the enterprise perform their duties are mainly located within the territory of
the PRC; (ii) decisions relating to the enterprise’s financial matters (such as money borrowing, lending, financing and financial
risk management) and human resource matters (such as appointment, dismissal and salary and wages) are made or are subject to approval
by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and
board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives
habitually reside in the PRC.
We
believe that UTime Limited is not a PRC resident enterprise for PRC tax purposes. UTime Limited is not controlled by a PRC enterprise
or PRC enterprise group and we do not believe that UTime Limited meets all of the conditions above. UTime Limited is a company incorporated
outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located,
and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside
the PRC. For the same reasons, we believe our other entities outside of China are not PRC resident enterprises either. However, the tax
resident 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.” There can be no assurance that the PRC government will ultimately
take a view that is consistent with us.
Our
PRC legal counsel has also advised us that there is a risk that the PRC tax authorities may deem us as a PRC resident enterprise since
a substantial majority of the members of our management team are located in China. If the PRC tax authorities determine that UTime Limited
is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends
we pay to our shareholders that are non-resident enterprises, including the holders of our ordinary shares. In addition, non-resident enterprise
shareholders may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ordinary shares, if such income is
treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders would be subject to any PRC tax
on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise.
If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available
under an applicable tax treaty. It is also unclear whether non-PRC shareholders of UTime Limited would be able to claim the benefits
of any tax treaties between their country of tax residence and the PRC in the event that UTime Limited is treated as a PRC resident enterprise.
See “Risk Factors — Risks Related to Doing Business in China — If we are classified as a PRC resident enterprise for
PRC income tax purposes, such classification could result in unfavourable tax consequences to us and our non-PRC shareholders.”
In
January 2009, the State Administration of Taxation promulgated the Provisional Measures for the Administration of Withholding of Enterprise
Income Tax for Non-resident Enterprises, pursuant to which the entities that have the direct obligation to make certain payments
to a non-resident enterprise should be the relevant tax withholders for the non-resident enterprise, and such payments include:
income from equity investments (including dividends and other return on investment), interest, rents, royalties and income from assignment
of property as well as other income subject to enterprise income tax received by non-resident enterprises in China. Further, the
measures provide that in case of an equity transfer between two non-resident enterprises which occurs outside China, the non-resident enterprise
which receives the equity transfer payment must, by itself or engage an agent to, file tax declaration with the PRC tax authority located
at place of the PRC company whose equity has been transferred, and the PRC company whose equity has been transferred should assist the
tax authorities to collect taxes from the relevant non-resident enterprise.
The
State Administration of Taxation issued SAT Circular 59 together with the Ministry of Finance in April 2009 and SAT Circular 698 in December
2009. On February 28, 2011, the SAT issued the Notice on Several Issues Regarding the Income Tax of Non-PRC Resident Enterprises,
or SAT Circular 24, which became effective on April 1, 2011. By promulgating and implementing these circulars, the PRC tax
authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise by a non-resident enterprise.
Under SAT Circular 698, where a non-resident enterprise transfers the equity interests of a PRC “resident enterprise”
indirectly by disposition of the equity interests of an overseas holding company, and the overseas holding company is located in a tax
jurisdiction that: (1) has an effective tax rate less than 12.5% or (2) does not tax foreign income of its residents, the non-resident enterprise,
being the transferor, must report to the relevant tax authority of the PRC “resident enterprise” the indirect transfer. On
February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties
by Non-Tax Resident Enterprises, or SAT Bulletin 7. SAT Bulletin 7 supersedes the rules with respect to the indirect transfer under
SAT Circular 698, but does not touch upon the other provisions of SAT Circular 698. SAT Bulletin 7 has introduced a new tax regime that
is significantly different from the previous one under SAT Circular 698. SAT Bulletin 7 extends its tax jurisdiction to not only indirect
transfers set forth under SAT Circular 698 but also transactions involving transfer of other taxable assets through offshore transfer
of a foreign intermediate holding company. In addition, SAT Bulletin 7 provides clearer criteria than SAT Circular 698 for assessment
of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity
through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person
who is obligated to pay for the transfer) of taxable assets. On October 17, 2017, the SAT issued the Announcement of the State Administration
of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37. SAT Bulletin 37,
which took effect on December 1, 2017, superseded the Non-resident Enterprises Measures and SAT Circular 698 as a whole and
partially amended some provisions in SAT Circular 24 and SAT Bulletin 7. SAT Bulletin 37 purports to clarify certain issues in the implementation
of the above regime, by providing, among others, the definition of equity transfer income and tax basis, the foreign exchange rate to
be used in the calculation of withholding amount, and the date of occurrence of the withholding obligation. Specifically, SAT Bulletin
37 provides that where the transfer income subject to withholding at source is derived by a non-PRC resident enterprise in instalments,
the instalments may first be treated as recovery of costs of previous investments. Upon recovery of all costs, the tax amount to be withheld
must then be computed and withheld.
Provided
that our Cayman Islands exempted company, UTime Limited, is not deemed to be a PRC resident enterprise, holders of our ordinary shares
who are not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other
disposition of our shares. However, under SAT Bulletin 7 and SAT Bulletin 37, where a non-resident enterprise conducts an “indirect
transfer” by transferring taxable assets, including, in particular, equity interests in a PRC resident enterprise, indirectly by
disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, or the transferee
or the PRC entity which directly owned such taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance
over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable
commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such
indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer
is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
We and our non-PRC resident investors may be at risk of being required to file a return and being taxed under SAT Bulletin 7 and
SAT Bulletin 37, and we may be required to expend valuable resources to comply with SAT Bulletin 7 and SAT Bulletin 37, or
to establish that we should not be taxed under these circulars. See “Risk Factors — Risks Related to Doing Business in
China — We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding
companies.”
India
Taxation
The
following is a general overview about Indian tax laws for corporates under the Income Tax Act, 1961 (“IT Act”)
which inter alia governs the income tax on different categories of income accrued in the hands of an Indian company.
Corporate
Taxes
As
per the provisions of the IT Act, the corporate tax is paid by the companies registered in India on the net profit that it makes from
businesses. It is taxed at a specific rate as prescribed by IT Act, subject to the changes in the rates announced every year by the Income
Tax Department, Government of India. Both domestic as well as foreign companies are liable to pay corporate tax under IT Act in India.
A domestic company is taxed on its universal income, while a foreign company is only taxed on the income earned within India.
The rates applicable to the
domestic companies and foreign companies for assessment year 2020-21 based on their turnover is:
Particulars
|
|
Tax Rate
|
|
DOMESTIC COMPANIES
|
|
|
|
Gross Turnover up to Rs. 250 crore*
|
|
25
|
%
|
Gross Turnover exceeding Rs. 250 crore*
|
|
30
|
%
|
FOREIGN COMPANIES
|
|
|
|
Where royalty and technical fees is effectively connected to Permanent Establishment (PE) in India
|
|
40
|
%
|
Where PE is absent but the case is covered by section 115A(1)
|
|
10
|
%
|
Any other income
|
|
40
|
%
|
*
|
Since
assessment year 2020-21, gross turnover threshold will increase to Rs. 400 crore subject to certain conditions under the IT Act.
|
Note:
One Crore is equivalent to Ten million
In
addition to above rates, the following surcharge is added:
Particulars
|
|
Tax
Rate
|
|
DOMESTIC
COMPANIES
|
|
|
|
If
total income exceeds Rs. 1 crore but less than Rs. 10 crore
|
|
7%
of tax calculated
|
|
If
total income exceeds Rs. 10 crore
|
|
12%
of tax calculated
|
|
FOREIGN
COMPANIES
|
|
|
|
If
total income exceeds Rs. 1 crore but less than Rs. 10 crore
|
|
2%
of tax calculated
|
|
If
total income exceeds Rs. 10 crore
|
|
5%
of tax calculated
|
|
The
Indian finance minister recently has brought in certain key amendments in the IT Act through “The Taxation laws (Amendment) Act,
2019” (“Amendment Act”) on September 20, 2019. The Amendment Act provides domestic companies with an option to
opt for lower tax rates, provided they do not claim certain deductions. As mentioned hereinabove, currently, domestic Indian companies
with annual turnover of up to Rs. 400 crore pay income tax at the rate of 25%, and for other domestic companies, the tax rate is 30%.
The Amendment Act provides domestic companies with an option to pay income tax at the rate of 22%, provided they do not claim certain
deductions under the Income Tax Act. The Indian company can choose to opt for the new tax rate 22% starting the financial year 2019-20 (i.e.
assessment year 2020-21). Once an Indian company has exercised this option, the chosen provision will apply for all the subsequent years.
Further,
currently, Indian companies with income between Rs. 1crore to Rs. 10 crore are required to pay a 7% surcharge on tax. Those with an income
of more than Rs 10 crore are required to pay a 12% surcharge on tax. The Amendment Act provides that companies opting for the new tax
rates of 22% are required to pay a 10% surcharge on the tax payable by them under the respective provisions.
Thus, in order to comply with the provisions of the IT Act, it is mandatory
for both Indian company and foreign company to pay corporate tax on the business income earned in India at the prescribed rates. Both
companies have to file their income tax return on or before September 30 with respect to its preceding financial year (April to March).
The Finance Act, 2020 (which came into effect from March 27, 2020) through an amendment has extended the said due date for filing
of income tax return from September 30 to October 31. Further, the Government of India, with respect to financial year 2019-20, on May 13,
2020 has announced the extension of due date for filing income tax return from October 30, 2020 to November 30, 2020 and the
Indian government in certain cases have given relaxations to identified set of companies to file their income tax return by February 15,
2021. Due to the spread of COVID-19 in India, the Government of Indian announced that the due date to file income tax return for financial
year 2020-21 was extended to December 31, 2021.
Health
and Education Cess
In
all the cases, the amount of income tax and surcharge would be charged and increased by a health and education cess of 4%.
Taxation
on Dividends
As
per Section 115-O of the IT Act, any amount declared, distributed or paid by a domestic company by way of dividend shall be chargeable
to dividend distribution tax (“DDT”). This provision is only applicable on domestic company (not a foreign company).
DDT is in addition to income tax chargeable in respect of total income. It is applicable whether the dividend is interim or otherwise
and whether such dividend is paid out of the current profits or accumulated profits. An Indian company is under the obligation to pay
DDT at the rate of 15% plus surcharge and education cess on DDT. As per applicable Indian taxation law until March 31, 2020, a non-resident shareholder
of an Indian company was not liable to pay any tax on the dividends received by it. However, the Finance Act, 2020 (which came into effect
from March 27, 2020) amended certain provisions relating to taxation of dividends declared by Indian companies, and provides that
any distribution of dividend from April 1, 2020 onwards will only be subject to tax in the hands of the recipient shareholder and
the Indian companies are not required to pay any tax on the dividend declared and distributed to the shareholders. Furthermore, non-resident shareholders
would now be paying tax on the dividend income as per the rate prescribed under the relevant double taxation avoidance agreements. The
said amendments shall entitle foreign investors to claim credit in their country of residence of tax paid in India in respect of dividend
distributed by domestic companies. The change in the tax regime by Indian Government regarding payment of taxes may increase tax burden
in the hands of the parent company of our Indian Subsidiary.
Aforesaid
legal provisions under the IT Act are applicable to Do Mobile, thus, Do Mobile is under an obligation to mandatory follow the provisions
under the IT Act.
Taxation
on Sale of Shares
Transfer
of shares of a private limited company will attract capital gains tax which will be either long-term or short-term capital
gains tax, on the basis of the time period for which shares of Indian company are held. Capital gains realised in respect of shares held
by a shareholder for more than 24 months are treated as long-term capital gains, while capital gains realised in respect of
shares held for 24 months or less are treated as short-term capital gains.
Remittance
on Sale Proceeds
The
Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and the FEMA (Remittance of Assets) Regulations, 2016 govern the
remittance of sale proceeds of an Indian security held by a person resident outside India.
Return
of Income
As
per IT Act, a person having income liable to tax in India is required to file a return of its income with the Income Tax Department,
Government of India. The return of income must be filed before specific due dates prescribed for various kinds of entities for each financial
year. Every company, including a foreign company, deriving income from India, is required to file such return in India.
Tax
Treaties
The
tax levied upon foreign company shall be subject to any benefits available to it by virtue of any double taxation avoidance agreement
(“DTAA”) entered into by the Government of India with the government of that country where that foreign company has been
incorporated. As per DTAA, a subsidiary company should have a permanent establishment (PE) in India, then only income generated in India
by the subsidiary company can be taxed by Indian Government. Where there is no DTAA treaty signed between India and another foreign country,
the subsidiary company would be taxed both from the source country (India) as well as the residence (foreign) country. Article 5(1) of
most of DTAA signed between India and other countries defines “Permanent Establishment” as a fixed place of business through
which the business of the enterprise is wholly or partly carried on. In computation of the income of a non-resident, the provisions of
DTAA between India and the country of residence of the non-resident are required to be examined, since the IT Act provides
that its provisions shall be applicable only insofar as they are more beneficial to the taxpayer.
Transfer
Pricing
Section
92 of the IT Act provides that income arising from an ‘international transaction’ shall be computed having regard to the
arm’s length price. The expression ‘international transaction’ has been defined to mean a transaction between two or
more ‘associated enterprises’, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible
or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits,
income, losses or assets of such enterprises. Further, two enterprises shall be treated as associated enterprises if any of the criteria
as enumerated in Section 92A of the IT Act is being satisfied.
Taxation
on Buyback
Sections
115-QA to 115-QC of the IT Act laid down that tax shall be payable by the company (whose shares are not listed on a recognised
stock exchange) on buy back of its own shares at the rate 20% of the ‘distributed income’ (plus 12% surcharge and 4% health
cess). The effective rate of buyback tax is 23.296% of the distributed income. The distributed income here refers to the amount computed
by reducing the amount received by the company on issuance of shares from the consideration paid on buyback. Such income tax paid by
the company shall be the final tax liability and consequently, the amount/ consideration received by the shareholder(s) would be exempt
from tax in their respective hands.
Withholding
Tax
A
person (except individuals in certain cases) is required to withhold tax from certain specified payments. Separate provisions exist in
respect of tax to be deducted on specific transactions with residents and non-residents. The IT Act provides for withholding of taxes
from payments made to non-residents, which are chargeable to tax under the IT Act. Any person, whether resident or non-resident, making
payment to a non-resident would be liable to withhold tax from such payment and deposit the same with the Government of India within
the prescribed time. Moreover, prescribed returns are also required to be filed periodically with the tax authorities. The payee is entitled
to adjust the taxes so withheld against his tax liability in India on production of a (tax credit) certificate to be issued by the person
withholding the tax.
Compliances
under Goods and Services Tax (GST)
Goods
and Services Act, 2017 (“GST Act”) prescribes the applicability of indirect taxes in India, which is applicable on supplying
of goods and services by business enterprises in India. Therefore, a business enterprise in India dealing in goods and services has to
comply with certain obligations under the GST Act:
|
●
|
GST
Registration: An Indian company requires registration under GST Act, which will be used for the future correspondences of the business
of the company.
|
|
●
|
Filing
of Returns: An Indian company is required to file the periodical (monthly & annually) returns as prescribed under the GST Act
on the prescribed due dates to provide detail regarding sale and purchase of goods & services and for claiming the input credit also.
|
GST
Compliances on Import of Goods
As
understood generally, import of goods means bringing goods into the territory of India. Import of goods under GST Act is treated as inter-State supplies
and hence, is subject to Integrated GST in addition to the applicable customs duties. However, in such a case, since the service provider
is situated outside India, it is the responsibility of the service recipient to deposit Integrated GST under reverse charge mechanism
and undertake related compliances.
Material
United States Federal Income Tax Considerations
Subject
to the limitations described below, the following are the material U.S. federal income tax consequences of the purchase, ownership and
disposition of ordinary shares to a “U.S. Holder.” Non-U.S. Holders are urged to consult their own tax advisors regarding
the U.S. federal income tax consequences of the purchase, ownership and disposition of ordinary shares to them. For purposes of this
discussion, a “U.S. Holder” means a beneficial owner of ordinary shares that is, for U.S. federal income tax purposes:
|
●
|
an
individual who is a citizen or resident of the United States;
|
|
●
|
a
corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws
of the United States or any of its political subdivisions;
|
|
●
|
an
estate, whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
|
|
●
|
a
trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust and one
or more U.S. persons have the authority to control all substantial decisions of the trust, or (ii) it has a valid election to be
treated as a U.S. person.
|
A
“non-U.S. Holder” is any individual, corporation, trust or estate that is a beneficial owner of ordinary shares and is not
a U.S. Holder or a partnership (or other entity treated as a partnership for U.S. federal income tax purposes).
This
discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, or the Code, applicable U.S. Treasury Regulations
promulgated thereunder, and administrative and judicial decisions as of the date of this report, all of which are subject to change,
possibly on a retroactive basis, and any change could affect the continuing accuracy of this discussion.
This
summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to each person’s
decision to purchase ordinary shares. This discussion does not address all aspects of U.S. federal income taxation that may be relevant
to any particular U.S. Holder based on such holder’s particular circumstances, including Medicare tax imposed on certain investment
income. In particular, this discussion considers only U.S. Holders that will own ordinary shares as capital assets within the meaning
of section 1221 of the Code and does not address the potential application of U.S. federal alternative minimum tax or the U.S. federal
income tax consequences to U.S. Holders that are subject to special treatment, including:
|
●
|
broker
dealers or insurance companies;
|
|
●
|
U.S.
Holders who have elected mark-to-market accounting;
|
|
●
|
tax-exempt organizations
or pension funds;
|
|
●
|
regulated
investment companies, real estate investment trusts, insurance companies, financial institutions or “financial services entities”;
|
|
●
|
U.S.
Holders who hold ordinary shares as part of a “straddle,” “hedge,” “constructive sale” or “conversion
transaction” or other integrated investment;
|
|
●
|
U.S.
Holders who own or owned, directly, indirectly or by attribution, at least 10% of the voting power of our ordinary shares;
|
|
●
|
U.S.
Holders whose functional currency is not the U.S. Dollar;
|
|
●
|
U.S.
Holders who received ordinary shares as compensation;
|
|
●
|
persons
holding ordinary shares in connection with a trade or business outside of the United States; and
|
|
●
|
certain
expatriates or former long-term residents of the United States.
|
This
discussion does not address the tax treatment of holders that are entities treated as partnerships for U.S. federal income tax purposes
or other pass-through entities or persons who hold ordinary shares through a partnership or other pass-through entity. In addition,
this discussion does not address any aspect of state, local or non-U.S. tax laws, or the possible application of U.S. federal gift or
estate tax.
BECAUSE
OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY PARTICULAR HOLDER OF ORDINARY SHARES MAY BE AFFECTED BY MATTERS
NOT DISCUSSED HEREIN, EACH HOLDER OF ORDINARY SHARES IS URGED TO CONSULT WITH ITS TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES
OF THE ACQUISITION AND THE OWNERSHIP AND DISPOSITION OF ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S.
TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND APPLICABLE TAX TREATIES.
Taxation
of Dividends Paid on Ordinary Shares
Subject
to the passive foreign investment company rules discussed below, the gross amount of distributions made by us with respect to our ordinary
shares generally will be includable in the gross income of U.S. Holders as dividend income. Because we do not determine our earnings
and profits for U.S. federal income tax purposes, a U.S. Holder will be required to treat any distribution paid on ordinary shares,
including the amount of non-U.S. taxes, if any, withheld from the amount paid, as a dividend on the date the distribution is received.
Such distribution generally will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in
respect of dividends received from other U.S. corporations.
Cash
distributions paid in a non-U.S. currency will be included in the income of U.S. Holders at a U.S. Dollar amount equal to the spot
rate of exchange in effect on the date the dividends are includible in the income of the U.S. Holders, regardless of whether the
payment is in fact converted to U.S. Dollars, and U.S. Holders will have a tax basis in such non-U.S. currency for U.S. federal income
tax purposes equal to such U.S. Dollar value. If a U.S. Holder converts a distribution paid in non-U.S. currency into U.S.
Dollars on the day the dividend is includible in the income of the U.S. Holder, the U.S. Holder generally should not be required to recognize
gain or loss arising from exchange rate fluctuations. If a U.S. Holder subsequently converts the non-U.S. currency, any subsequent gain
or loss in respect of such non-U.S. currency arising from exchange rate fluctuations will be U.S.-source ordinary income or loss.
Dividends
we pay with respect to our ordinary shares to non-corporate U.S. Holders may be “qualified dividend income,” which is
currently taxable at a reduced rate; provided that (i) our ordinary shares are readily tradable on an established
securities market in the United States, (ii) we are not a passive foreign investment company (as discussed below) with respect to
the U.S. Holder for either our taxable year in which the dividend was paid or the preceding taxable year, (iii) the U.S. Holder
has held our ordinary shares for at least 61 days of the 121-day period beginning on the date which is 60 days before the ex-dividend date,
and (v) the U.S. Holder is not under an obligation to make related payments on substantially similar or related property. We believe
our ordinary shares, which are expected to be listed on the NASDAQ, will be considered to be readily tradable on an established securities
market in the United States, although there can be no assurance that this will continue to be the case in the future. Any days during
which a U.S. Holder has diminished its risk of loss on our ordinary shares are not counted towards meeting the 61-day holding period.
U.S. Holders should consult their own tax advisors on their eligibility for reduced rates of taxation with respect to any dividends paid
by us.
Distributions
paid on ordinary shares generally will be foreign-source passive category income for U.S. foreign tax credit purposes and will not
qualify for the dividends received deduction generally available to corporations. Subject to certain conditions and limitations, non-U.S.
taxes, if any, withheld from a distribution may be eligible for credit against a U.S. Holder’s U.S. federal income tax liability.
In addition, if 50 percent or more of the voting power or value of our shares is owned, or is treated as owned, by U.S. persons (whether
or not we are a “controlled foreign corporation” for U.S. federal income tax purposes), the portion of our dividends attributable
to income which we derive from sources within the United States (whether or not in connection with a trade or business) would generally
be U.S.-source income. U.S. Holders would not be able directly to utilize foreign tax credits arising from non U.S. taxes considered
to be imposed upon U.S.-source income.
Taxation
of the Sale or Other Disposition of Ordinary Shares
Subject
to the passive foreign investment company rules discussed below, a U.S. Holder generally will recognize a capital gain or loss on the
taxable sale or other disposition of our ordinary shares in an amount equal to the difference between the U.S. Dollar amount realized
on such sale or other disposition (determined in the case of consideration in currencies other than the U.S. Dollar by reference
to the spot exchange rate in effect on the date of the sale or other disposition or, if the ordinary shares are treated as traded on
an established securities market and the U.S. Holder is a cash basis taxpayer or an electing accrual basis taxpayer, the spot exchange
rate in effect on the settlement date) and the U.S. Holder’s adjusted tax basis in such ordinary shares determined in U.S. Dollars.
The initial tax basis of ordinary shares to a U.S. Holder will be the U.S. Holder’s U.S. Dollar cost for ordinary shares (determined
in the case of consideration in currencies other than the U.S. Dollar by reference to the spot exchange rate in effect on the date
of the purchase or, if the ordinary shares are treated as traded on an established securities market and the U.S. Holder is a cash basis
taxpayer or an electing accrual basis taxpayer, the spot exchange rate in effect on the settlement date).
Capital
gain from the sale, exchange or other disposition of ordinary shares held more than one year generally will be treated as long-term capital
gain and is eligible for a reduced rate of taxation for non-corporate holders. Gain or loss recognized by a U.S. Holder on a sale
or other disposition of ordinary shares generally will be treated as U.S.-source income or loss for U.S. foreign tax credit purposes.
The deductibility of a capital loss recognized on the sale or exchange of ordinary shares is subject to limitations. A U.S. Holder that
receives currencies other than U.S. Dollars upon disposition of the ordinary shares and converts such currencies into U.S. Dollars subsequent
to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of such currencies against
the U.S. Dollar, which generally will be U.S.-source ordinary income or loss.
Passive
Foreign Investment Company
In
general, a non-U.S. corporation will be classified as a passive foreign investment company (a “PFIC”) for any taxable year
if at least (i) 75% of its gross income is classified as “passive income” or (ii) 50% of its assets (determined
on the basis of a quarterly average) produce or are held for the production of passive income. For these purposes, cash is generally
considered a passive asset. In making this determination, the non-U.S. corporation is treated as earning its proportionate share of any
income and owning its proportionate share of any assets of any corporation in which it holds 25% or more (by value) of the stock. Although
the law in this regard is unclear, we treat our consolidated affiliated entities as being owned by us for United States federal income
tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to
substantially all of their economic benefits.
Based
on our current composition of assets and income, we believe that we are not currently a PFIC for U.S. federal income tax purposes. However,
the determination of whether we are a PFIC is made annually, after the close of the relevant taxable year. Therefore, it is possible
that we could be classified as a PFIC for the current taxable year or in future years due to changes in the composition of our assets
(including as a result of the cash we raise in our initial public offering) or income, as well as changes to our market capitalization.
The market value of our assets may be determined in large part by reference to the market price of our ordinary shares, which may fluctuate.
Under
the PFIC rules, if we were considered a PFIC at any time that a U.S. Holder holds our shares, we would continue to be treated as a PFIC
with respect to such holder’s investment unless (i) we cease to be a PFIC and (ii) the U.S. Holder has made a “deemed
sale” election under the PFIC rules.
If
we are considered a PFIC at any time that a U.S. Holder holds our shares, and unless such U.S. Holder makes a valid and timely “mark
to market” election as described below, any gain recognized by the U.S. Holder on a sale or other disposition of the shares, as
well as the amount of an “excess distribution” (defined below) received by such holder, would be allocated ratably over the
U.S. Holder’s holding period for the shares. The amounts allocated to the taxable year of the sale or other disposition and to
any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject
to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would
be imposed. For purposes of these rules, an excess distribution is the amount by which any distribution received by a U.S. Holder on
its shares exceeds 125% of the average of the annual distributions on the shares received during the preceding three years or the U.S.
Holder’s holding period, whichever is shorter.
If
we are treated as a PFIC with respect to a U.S. Holder for any taxable year, the U.S. Holder will be deemed to own shares in any of our
subsidiaries that are also PFICs. However, an election for mark-to-market treatment would likely not be available with respect to
any such subsidiaries. If we are considered a PFIC, a U.S. Holder will also be subject to information reporting requirements on an annual
basis. U.S. Holders should consult their own tax advisors about the potential application of the PFIC rules to an investment in our shares.
If
we were classified as a PFIC, a U.S. Holder may be able to make a “mark-to-market” election with respect to our ordinary
shares (but not with respect to the shares of any lower-tier PFICs) if the ordinary shares are “regularly traded” on
a “qualified exchange”. In general, our ordinary shares will be treated as “regularly traded” in any calendar
year in which more than a de minimis quantity of ordinary shares are traded on a qualified exchange on at least 15 days during each calendar
quarter. However, the Company can make no assurance that the ordinary shares will be listed on a “qualified exchange” or
that there will be sufficient trading activity for the ordinary shares to be treated as “regularly traded”. Accordingly,
U.S. Holders should consult their own tax advisers as to whether their ordinary shares would qualify for the mark-to-market election.
If
a U.S. Holder makes a valid mark-to-market election for the first taxable year that such U.S. Holder holds our ordinary shares and
as to which the Company is classified as a PFIC, the holder will generally include as ordinary income the excess, if any, of the fair
market value of the ordinary shares at the end of the taxable year over their adjusted tax basis, and will be permitted an ordinary loss
in respect of the excess, if any, of the adjusted tax basis of the ordinary shares over their fair market value at the end of the taxable
year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). If a U.S.
Holder makes the election, the holder’s tax basis in our ordinary shares will be adjusted to reflect any such income or loss amounts.
Any gain recognized on the sale or other disposition of our ordinary shares will be treated as ordinary income, and any loss will be
treated as an ordinary loss to the extent of any prior mark-to-market gains.
If
a U.S. Holder makes the mark-to-market election, it will be effective for the taxable year for which the election is made and all
subsequent taxable years unless the ordinary shares are no longer regularly traded on a qualified exchange or the IRS consents to the
revocation of the election.
If
we were classified as a PFIC, U.S. Holders would not be eligible to make an election to treat us as a “qualified electing fund,”
or a QEF election, because we do not anticipate providing U.S. Holders with the information required to permit a QEF election to be made.
U.S.
Information Reporting and Backup Withholding
A
U.S. Holder is generally subject to information reporting requirements with respect to dividends paid in the United States on ordinary
shares and proceeds paid from the sale, exchange, redemption or other disposition of ordinary shares. A U.S. Holder is subject to backup
withholding (currently at 24%) on dividends paid in the United States on ordinary shares and proceeds paid from the sale, exchange,
redemption or other disposition of our ordinary shares unless the U.S. Holder is a corporation, provides an IRS Form W-9 or otherwise
establishes a basis for exemption.
Backup
withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s
U.S. federal income tax liability, and a U.S. Holder may obtain a refund from the IRS of any excess amount withheld under the backup
withholding rules, provided that certain information is timely furnished to the IRS. Holders are urged to consult their own tax advisors
regarding the application of backup withholding and the availability of and procedures for obtaining an exemption from backup withholding
in their particular circumstances.
Certain
Reporting Obligations
If
a U.S. Holder (together with persons considered to be related to the U.S. Holder) subscribes for ordinary shares for a total initial
public offering price in excess of $100,000 (or the equivalent in a foreign currency), such holder may be required to file IRS Form 926
for the holder’s taxable year in which the initial public offering price is paid. U.S. Holders should consult their own tax advisors
to determine whether they are subject to any Form 926 filing requirements.
Individuals
that own “specified foreign financial assets” may be required to file an information report with respect to such assets with
their tax returns. Subject to certain exceptions, “specified foreign financial assets” include any financial accounts maintained
by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial
institutions: (i) stocks and securities issued by non U.S. persons, (ii) financial instruments and contracts held for investment
that have non U.S. issuers or counterparties, and (iii) interests in foreign entities. The ordinary shares may be subject to these
rules. Persons required to file U.S. tax returns that are individuals are urged to consult their tax advisers regarding the application
of this legislation to their ownership of the ordinary shares.
10.F.
Dividends and Paying Agents
Not
Applicable.
10.G.
Statement by Experts
Not
Applicable.
10.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 website at www.kingwayup.com. However, information contained on our
website does not constitute a part of this annual report.
10.I.
Subsidiary Information
Not
Applicable.
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign
exchange risk
We
transact business globally in multiple currencies. Our international revenue, as well as costs and expenses denominated in foreign currencies,
expose us to the risk of fluctuations in foreign currency exchange rates against the U.S. dollar. We have foreign currency risks related
to our revenue and operating expenses denominated in currencies of the U.S. dollar and Renminbi. Accordingly, changes in exchange rates
in the future may negatively affect our future revenue and other operating results as expressed in U.S. dollars. Our foreign currency
risk is partially mitigated as our revenue recognized in currencies other than the U.S. dollar is diversified across geographic regions
and we incur expenses in the same currencies in these regions. We have not used any derivative financial instruments to hedge exposure
to such risk.
The
value of U.S. dollar against Renminbi may fluctuate and is affected by, among other things, changes in political and economic conditions
and the foreign exchange policy adopted by the PRC government. The Renminbi is not freely convertible into foreign currencies. Remittances
of foreign currencies into the PRC or remittances of Renminbi out of the PRC as well as exchange between Renminbi and foreign currencies
require approval by foreign exchange administrative authorities and certain supporting documentation. The State Administration for Foreign
Exchange, under the authority of the People’s Bank of China, controls the conversion of Renminbi into other currencies. To the
extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of Renminbi against the U.S. dollar would
reduce the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose
of making payments for dividends on our ordinary shares or ADSs, servicing our outstanding debt, or for other business purposes, appreciation
of the U.S. dollar against the Renminbi would reduce the U.S. dollar amounts available to us.
Interest
rate risk
Our
exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing
bank deposits. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes
in interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure.
We
may invest the net proceeds we received from our initial public offering in interest-earning instruments. Investments in both fixed rate
and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market
value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest
rates fall.
ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
None.
On March 24, 2020, the Indian government ordered a 21-day nationwide
lockdown, followed by another order on April 14, 2020 and was extended until May 31, 2020 with numerous relaxations which inter alia permitted
opening of businesses and offices with certain restrictions. The Indian government, on May 30, 2020 further extended the lockdown in certain
areas identified as ‘containment zones’ until June 30, 2020 and permitted re-opening of the economy in a phased manner in
areas outside the containment zones. Ministry of Home Affairs (MHA) announced that from July 1, 2020 to July 30, 2020, lockdown measures
were only imposed in containment zones. In all other areas, most activities were permitted. From August 1, 2020, night curfews were removed
and all inter-and intra-state travel and transportation is permitted. However, the respective state/union territory governments have been
empowered to prohibit activities in areas outside containment zones or impose such restrictions as deemed necessary to contain the spread
of COVID-19, which has slowed down the rate of resumption of business activities. Due to the lockdown, our operations in India were halted
for several weeks. Since May 11, 2020, we resumed our sales operations in various parts of India (except those falling under containment
zones). While the Indian government lifted the lockdown throughout India and took requisite steps to bring back the Indian economy on
track in early 2021, a second larger outbreak of COVID-19 occurred in India in March 2021. To curb the spread of the virus, various state
governments have announced lockdowns and imposed curbs on movement and economic activities of different time periods. The lockdown in
the capital of India, Delhi has been lifted to a large extent. While the governments of each affected state have commenced easing the
lockdown restrictions, the same may be extended or made stringent to control the spread of COVID-19. Such restrictions on continued business
activities will have a detrimental impact on our business in India.
The guidance on accounting for uncertainties in income taxes prescribes
a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. Guidance was also provided on the recognition of income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in
interim periods, and income tax disclosures. Significant judgment is required in evaluating the Company’s uncertain tax positions
and determining its provision for income taxes. The Company recognizes interests and penalties, if any, under accrued expenses and other
current liabilities on its balance sheet and under other expenses in its statement of comprehensive income. The Company did not recognize
any interest and penalties associated with uncertain tax positions for the years ended March 31, 2019, 2020 and 2021. As of March 31,
2020 and 2021, the Company did not have any significant unrecognized uncertain tax positions.
The Company accounts for uncertainty
in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position
will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the
tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Interest and penalties related to uncertain
tax positions are recognized and recorded as necessary in the provision for income taxes.
The Company is subject to
taxation in China, Hong Kong and India. According to the PRC Tax Administration and Collection Law, the statute of limitations is three
years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations
is extended to five years under special circumstances, where the underpayment of taxes is more than RMB100. In the case of transfer pricing
issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion.
The Company has evaluated
events subsequent to the balance sheet date of March 31, 2021, the date on which the financial statements are available to be issued
(“the date of the financial statements”).
On April 8, 2021, the Company
completed its IPO on Nasdaq Capital Market. In the offering, 3,750,000 of the Company’s ordinary shares were issued and sold to
the public at a price of US$4 per share. The net proceeds to the Company from IPO were approximately US$13.8 million after deducting underwriting
discounts and commissions.
On June 29, 2021, UTime SZ
entered into a credit agreement with Shenzhen Rural Commercial Bank to borrow RMB2,000 for a term of 3 years, which is payable at monthly
installment of RMB20 from July 16, 2021 to July 16, 2024, with a balloon payment of the remaining balance in the last installment. The
loan is secured by real estate owned by Mr. Bao and guaranteed by Mr. Bao.
On June 29, 2021, UTime SZ
entered into a credit agreement with Shenzhen Rural Commercial Bank to borrow RMB7,000 for a term of 3 years, which is payable at monthly
installment of RMB70 from July 16, 2022 to July 16, 2024, with a balloon payment of the remaining balance in the last installment. The
loan is secured by real estate owned by Mr. Bao and guaranteed by Mr. Bao.
On July 14, 2021 UTime SZ
entered into a working capital loan agreement with Bank of Communications to borrow RMB10,000 for an unfixed term. On July 19, 2021,
UTime SZ obtained a loan under this working capital loan agreement at the amount of RMB3,000 which is due on July 6, 2022. The annual
effective interest rate of this loan is 4.6% and the balance is payable on July 6, 2022. The loan is guaranteed by Mr. Bao and his spouse.