UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

☐ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal year ended _____________

 

OR

 

☒ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from October 1, 2017 to December 31, 2017

 

☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report             

 

Commission file number: 001-34738

 

Luokung Technology Corp.

(Exact name of Registrant as specified in its charter)

 

Not applicable

(Translation of Registrant’s name into English)

 

British Virgin Islands  

LAB 32, SOHO 3Q, No 9, Guanghua Road, Chaoyang District, Beijing

People’s Republic of China, 100020

(Jurisdiction of incorporation or organization)   (Address of principal executive offices)

 

Mr. Muqiao Geng

LAB32, SOHO 3Q, No 9, Guanghua Road, Chaoyang District, Beijing
People’s Republic of China 100020
Tel: (86) 10-85866721

(Name, telephone, Email and/or facsimile number and address of company contact person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered

Ordinary shares, par value $0.01 per share

 

None

Preferred shares, par value $0.01 per share   None

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

none

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

none

(Title of Class)

 

 

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the transition report. 187,097,599 Ordinary Shares, including 186,383,224 Ordinary Shares represented by 714,375 American Depositary Shares, and 1,000,000 Preferred Shares outstanding as of September 20, 2018.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   ☐   Yes       No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    ☐  Yes       No

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes    ☐  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).       Yes   ☐   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☐                 Accelerated filer  ☐                 Non-accelerated filer  ☒

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

 

U.S. GAAP    

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☐

  Other  ☐

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ☐    Item 18  ☐

 

If this is an transition report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes       No

 

 

 

 

 

 

Explanatory Note

 

Luokung Technology Corp. (the “Company”) is filing this transition report on Form 20-F (“Transition Report”) in connection with the completion of the exchange of certain of its assets for substantially all of the assets of C Media Limited (“C Media”) pursuant to that Asset Exchange Agreement, dated January 25, 2018 (the “Original AEA”), as supplemented by the Addendum to Asset Exchange Agreement, dated October 3, 2018 (the “Addendum” and together with the Original AEA, the “AEA”). Following the consummation of the AEA, on October 4, 2018, the Company changed its fiscal year end from September 30 to the fiscal year end used by C Media, December 31. This Transition Report covers the three-month period from Octorber 1, 2017 to December 31, 2017, and the fiscal years described herein.

 

 

 

 

In this transition report:

 

  References to the “Company”, “we”, “our” and “us” are to Luokung Technology Corp. and its consolidated subsidiaries and variable interest entity, except as the context otherwise requires;

 

  This transition report on Form 20-F covers the three-month period from October 1, 2017 through December 31, 2017 (the “Transition Period”) and reflects our financial results thereof. Prior to this transition report on Form 20-F, our two most recent annual reports on Form 20-F cover the fiscal years ended September 30, 2017 and September 30, 2016, respectively, and reflect financial results for the respective twelve-month periods from October 1 to September 30. Unless otherwise noted, all references to years are to the calendar year from January 1 to December 31 and references to our fiscal year or years are to the fiscal year or years which, prior to the Transition Period, ended September 30, while from and after the Transition Period, ended December 31;
     
  References to an “ADS” are to an American Depositary Share, each of which represents one of our Ordinary Shares with a par value of $.01 per share.

 

Special Note Regarding Forward-looking Statements

 

This transition report contains forward-looking statements that involve risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

 

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this transition report. These forward-looking statements include:

 

  our future business development, results of operations and financial condition;

 

  expected changes in our net revenues and certain cost or expense items;

 

  our ability to attract and retain customers; and

 

  trends and competition in the enterprise mobile software application market.

 

You should read this transition report thoroughly with the understanding that our actual future results may be materially different from, and/or worse, than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this transition report include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

This transition report also contains estimates, projections and statistical data related to the market for the provision of Wi-Fi and mobile applications in China. This market data, including data from IDC, a leading provider of market data and intelligence, speaks as of the date it was published and includes projections that are based on a number of assumptions and are not representations of fact. The market for the provision of Wi-Fi and mobile applications in China may not grow at the rates projected by the market data, or at all. The failure of the market to grow at the projected rates may materially and adversely affect our business and the market price of our ADSs. In addition, the rapidly changing nature of the market for the provision of Wi-Fi and mobile applications subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data proves to be incorrect, actual results may differ from the projections based on these assumptions.

 

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

 

 

 

TABLE OF CONTENTS

 

 

Part I      
Item 1.   Identity of Directors, Senior Management and Advisers. 1
Item 2.   Offer Statistics and Expected Timetable. 1
Item 3.   Key Information. 1
  A. Selected Financial Data. 1
  B. Capitalization and Indebtedness. 3
  C. Reasons for the Offer and Use of Proceeds. 3
  D. Risk Factors. 3
Item 4.   Information on the Company. 19
  A. History and Development of the Company. 19
  B. Business Overview. 20
  C. Organizational Structure. 30
  D. Property, Plants and Equipment. 32
Item 4A.   Unresolved Staff Comments. 32
Item 5.   Operating and Financial Review and Prospects. 32
  A. Operating Results. 32
  B. Liquidity and Capital Resources. 35
  C. Research and Development, Patents and Licenses, etc. 35
  D. Trend Information. 35
  E. Off-balance Sheet Arrangements. 35
  F. Tabular Disclosure of Contractual Obligations. 36
Item 6.   Directors, Senior Management and Employees. 36
  A. Directors and Senior Management. 36
  B. Compensation. 37
  C. Board Practices. 40
  D. Employees. 43
  E. Share Ownership. 43
Item 7.   Major Shareholders and Related Party Transactions. 44
  A. Major Shareholders. 44
  B. Related Party Transactions. 45
  C. Interests of Experts and Counsel. 45
Item 8.   Financial Information. 45
  A. Consolidated Statements and Other Financial Information. 45
  B. Significant Changes. 46
Item 9.   The Offer and Listing. 46
  A. Offer and Listing Details. 46
  B. Plan of Distribution. 47
  C. Markets. 47
  D. Selling shareholders. 48
  E. Dilution. 48
  F. Expenses of the issue. 48
Item 10.   Additional Information. 48
  A. Share Capital. 48
  B. Memorandum and Articles of Association. 48
  C. Material Contracts. 53
  D. Exchange Controls. 54
  E. Taxation. 61
  F. Dividends and Paying Agents. 67
  G. Statement by Experts. 67
  H. Documents on Display. 67
  I. Subsidiary Information. 68
Item 11.   Quantitative and Qualitative Disclosures about Market Risk. 68
Item 12.   Description of Securities Other than Equity Securities. 69
  A. Debt Securities. 69
  B. Warrants and Rights. 69
  C. Other Securities. 69
  D . American Depositary Shares. 69

 

i

 

  

Part II      
Item 13.   Defaults, Dividend Arrearages and Delinquencies. 71
Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds. 71
Item 15.   Controls and Procedures. 71
Item 16.   [Reserved.] 72
Item 16A. Audit Committee Financial Expert. 72
Item 16B.   Code of Ethics. 73
Item 16C.   Principal Accountant Fees and Services. 73
Item 16D. Exemptions from the Listing Standards for Audit Committees. 73
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers. 73
Item 16F.   Change in Registrant’s Certifying Accountant. 73
Item 16G.   Corporate Governance. 73
Item 16H. Mine Safety Disclosure. 73
       
Part III      
Item 17.   Financial Statements. 74
Item 18.   Financial Statements. 74
Item 19.   Exhibits. 74
       
Index to Consolidated Financial Statements F-1

 

ii

 

 

PART I

 

ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.

 

The directors of Luokung Technology Corp. are Xuesong Song, Kegang Peng, Dennis Galgano, Jin Shi, Jiming Ha, Zhihao Xu and Chuang Tao. The business address for our directors is LAB 32, SOHO 3Q, No 9, Guanghua Road, Chaoyang District, Beijing, People’s Republic of China.

 

Moore Stephens CPA Limited has served as our auditor since October 5, 2018, and is located at 801-806 Silvercord Tower 1, 30 Canton road, Tsimshatsui, Kowloon, Hong Kong. BDO China Shun Lun Pan Certified Public Accountants LLP served as our auditors for the last three years, and are located at 4F, No. 61 Nanjing Road, Shanghai, People’s Republic of China.

 

Garvey Schubert Barer, P.C., serves as our legal counsel in the United States, and is located at Flour Mill Building, 1000 Potomac Street NW, Suite 200, Washington, D.C., 20007-3501.

 

Conyers Dill & Pearlman serves as our legal counsel with regard to the laws of the British Virgin Islands, and is located at 29 th Floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong.

 

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE.

 

Not applicable.

 

ITEM 3.  KEY INFORMATION.

 

A.   SELECTED FINANCIAL DATA.

 

Luokung Technology Corp. and its consolidated subsidiaries (“Luokung Technology”, “we”, “us”, or “the Company”) consummated an asset exchange agreement pursuant to which we exchanged our existing assets with those of C Media Limited (the “Asset Exchange”) on August 17, 2018, and we changed our name from Kingtone Wirelessinfo Solution Holding Ltd. to our current name on August 20, 2018. 

 

On October 4, 2018, in connection with the consummation of the Asset Exchange, we changed our fiscal year end from September 30 to December 31.

 

1

 

 

The selected financial data for the fiscal years ended December 31 2017 and 2016 have been derived from our audited consolidated and combined financial statements. The selected consolidated and combined financial data should be read in conjunction with our audited financial statements and the accompanying notes and “Item 5 – Operating and Financial Review and Prospects.” Our consolidated and combined financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods. You should not view our historical results as an indicator of our future performance.

 

LK TECHNOLOGY LTD. AND SUBSIDIARIES

SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(IN U.S. DOLLARS)

 

    For the years ended December 31,  
    2017     2016  
             
Revenues   $ 26,082,417     $ 5,233,145  
Less: Cost of revenues     5,547,779       6,315,504  
Less: Operating expenses:                
Selling and marketing     23,908,733       6,209,804  
General and administrative     2,451,249       2,108,854  
Research and development     1,046,198       2,882,202  
Total operating expenses     27,406,180       11,200,860  
Loss from operations     (6,871,542 )     (12,283,219 )
Other income (expense):                
Interest expense     (26,611 )     (4,412 )
Foreign exchange gains(losses)     350,679       (298,257 )
Loss from investment     -       (428,571 )
Other income (expense), net     (262,980 )     (34,572 )
Total other income (expense), net     61,088       (765,812 )
Loss before income taxes     (6,810,454 )     (13,049,031 )
Income taxes     -       -  
Net loss   $ (6,810,454 )   $ (13,049,031 )
Other comprehensive income:                
Foreign currency translation adjustment     90,671       387,375  
Total comprehensive loss   $ (6,719,783 )   $ (12,661,656 )

 

2

 

 

LK TECHNOLOGY LTD. AND SUBSIDIARIES

SELECTED CONSOLIDATED BALANCE SHEETS

(IN U.S. DOLLARS)

 

    As of December 31,  
    2017     2016  
Accounts receivable, net of allowance for doubtful accounts     9,729,625       1,865,836  
Amounts due from related parties     11,760,692       -  
Property and equipment, net     5,044,872       7,771,027  
Goodwill     7,239,936       7,239,936  
TOTAL ASSETS     37,582,858       21,114,832  
Accounts payable     8,784,518       6,446,584  
Accrued liabilities and other payables     12,962,912       11,329,613  
Total liabilities     25,311,113       33,905,520  
                 
Total Shareholder’s Equity (Deficit)     12,271,745       (12,790,688 )
                 
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY (DEFICIT)     37,582,858       21,114,832  

 

B.  CAPITALIZATION AND INDEBTEDNESS.

 

Not applicable.

 

C.  REASONS FOR THE OFFER AND USE OF PROCEEDS.

 

Not applicable.

 

D.  RISK FACTORS.

 

An investment in our ADSs and 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 transition report, including the matters discussed under “Special Note Regarding Forward-Looking Statements,” before you decide to invest in our ADSs or ordinary shares. You should pay particular attention to the fact that we are a holding company with substantial operations in China and are subject to legal and regulatory environments that in many respects differ from those of the United States. If any of the following risks, or any other risks and uncertainties that are not presently foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects would be materially and adversely affected. You should also consider all other information contained in this transition report before deciding to invest in our ADSs or ordinary shares.

  

Risks Related to Our Company and Our Industry

 

The Company had incurred negative cash flows from operating activities and net losses as of December 31, 2017. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the year ended December 31, 2017, the Company had incurred significant operating losses and working capital deficit. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

3

 

 

We may undertake acquisitions, investments, joint ventures or other strategic alliances, which could have a material adverse effect on our ability to manage our business. In addition, such undertakings may not be successful.

 

Our strategy includes plans to grow both organically and through acquisitions, participation in joint ventures or other strategic alliances. Joint ventures and strategic alliances may expose us to new operational, regulatory and market risks, as well as risks associated with additional capital requirements. We may not be able, however, to identify suitable future acquisition candidates or alliance partners. Even if we identify suitable candidates or partners, we may be unable to complete an acquisition or alliance on terms commercially acceptable to us. If we fail to identify appropriate candidates or partners, or complete desired acquisitions, we may not be able to implement our strategies effectively or efficiently. 

 

In addition, our ability to successfully integrate acquired companies and their operations may be adversely affected by several factors. These factors include:

 

  1. diversion of management’s attention;
     
  2. difficulties in retaining customers of the acquired companies;
     
  3. difficulties in retaining personnel of the acquired companies;
     
  4. entry into unfamiliar markets;
     
  5. unanticipated problems or legal liabilities; and
     
  6. tax and accounting issues.

 

If we fail to integrate acquired companies efficiently, our earnings, revenue growth and business could be negatively affected.

  

Due to intense competition for highly-skilled personnel, we may fail to attract and retain enough sufficiently trained employees to support our operations; our ability to bid for and obtain new projects may be negatively affected and our revenues could decline as a result.

 

The IT industry relies on skilled employees, and our success depends to a significant extent on our ability to attract, hire, train and retain qualified employees. There is significant competition in China for professionals with the skills necessary to develop the products and perform the services we offer to our customers. Increased competition for these professionals, in the mobile application design area or otherwise, could have an adverse effect on us if we experience significant increase in the attrition rate among employees with specialized skills, which could decrease our operating efficiency and productivity and could lead to a decline in demand for our services.

 

In addition, our ability to serve existing customers and business partners and obtain new business will depend, in large part, on our ability to attract, train and retain skilled personnel that enable us to keep pace with growing demands for wi-fi connectivity and mobile applications, evolving industry standards and changing customer preferences. Our failure to attract, train and retain personnel with the qualifications necessary to fulfill the needs of our existing and future customers or to assimilate new employees successfully could have a material adverse effect on our business, financial condition and results of operations. Our failure to retain our key personnel on business development or find suitable replacements of the key personnel upon their departure may lead to shrinking new implementation projects, which could materially adversely affect our business.

 

4

 

 

Our business depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.

 

Our future success heavily depends upon the continued services of our senior executives and other key employees, particularly since we recently appointed a new chairman. We are reliant on the services of Mr. Xuesong Song, our chairman, chief executive officer and member of our board of directors. If one or more of our senior executives or key employees is unable or unwilling to continue in his or her present position, we may not be able to replace such employee easily, or at all, we may incur additional expenses to recruit, train and retain replacement personnel, our business may be severely disrupted, and our financial condition and results of operations may be materially adversely affected.

 

Our business could suffer if our executives and directors compete against us and our non-competition agreements with them cannot be enforced.

 

If any of our senior executives or key employees joins a competitor or forms a competing company, we may lose customers, know-how and key professionals and staff members to them. Also, if any of our business development managers who keep a close relationship with our customers and business partners joins a competitor or forms a competing company, we may lose customers, and our revenues may be materially adversely affected. Most of our executives have entered, or will soon enter, into employment agreements with us that contain or will contain non-competition provisions. However, if any dispute arises between our executive officers and us, such non-competition provisions may not be enforceable, especially in China, where all of these executive officers and key employees reside, in light of the uncertainties with China’s legal system. See “Risk Factors — Risks Related to Doing Business in China — Uncertainties with respect to the PRC legal system could adversely affect us.”

 

Our computer networks may be vulnerable to security risks that could disrupt our services and adversely affect our results of operations.

 

Our computer networks may be vulnerable to unauthorized access, computer hackers, computer viruses and other security problems caused by unauthorized access to, or improper use of, systems by third parties or employees. A hacker who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. Computer attacks or disruptions may jeopardize the security of information stored in and transmitted through computer systems and mobile devices of our customers. Actual or perceived concerns that our systems may be vulnerable to such attacks or disruptions may deter customers from using our services. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches, which could adversely affect our results of operations.

 

If we do not continually enhance our solutions and service offerings, we may have difficulty in retaining existing customers and attracting new customers.

 

We believe that our future success will depend, to a significant extent, upon our ability to enhance our existing applications and platform, and to introduce new features to meet the preferences and requirements of our customers in a rapidly developing and evolving market. Unexpected technical, operational, distribution or other problems could delay or prevent the introduction of one or more of these products or services, or any products or services that we may plan to introduce in the future. Our present or future products may not satisfy the evolving preferences and tastes of our customers, and these solutions and services may not achieve anticipated market acceptance or generate incremental revenue. If we are unable to anticipate or respond adequately to the need for service or product enhancements due to resource, technological or other constraints, our business, financial condition and results of operations could be materially and adversely affected.

 

5

 

 

If we are unable to develop competitive new products and service offerings our future results of operations could be adversely affected.

 

Our future revenue stream depends to a large degree on our ability to utilize our technology in a way that will allow us to offer new types of mobile applications and services to a broader customer base. We will be required to make investments in research and development in order to continually develop new software applications and related service offerings, enhance our existing platform, mobile applications and related service offerings and achieve market acceptance of our mobile applications and service offerings. We may incur problems in the future in innovating and introducing new mobile applications and service offerings. Our development-stage mobile applications may not be successfully completed or, if developed, may not achieve significant customer acceptance. If we are unable to successfully define, develop and introduce competitive new mobile applications, and enhance existing mobile applications, our future results of operations would be adversely affected. The timely availability of new applications and their acceptance by customers are important to our future success. A delay in the development of new applications could have a significant impact on its results of operations.

 

Changes in technology could adversely affect our business by increasing our costs, reducing our profit margins and causing a decline in our competitiveness.

 

China’s wireless telecom industry, in which we operate, is characterized by rapidly changing technology, evolving industry standards, frequent introductions of new services and solutions and enhancements as well as changing customer demands. New solutions and new technologies often render existing solutions and services obsolete, excessively costly or otherwise unmarketable. As a result, our success depends on our ability to adapt to the latest technological progress, such as the 5G standard and technologies, and to develop or acquire and integrate new technologies into our platform, mobile applications and related services. Advances in technology also require us to commit substantial resources to developing or acquiring and then deploying new technologies for use in our operations. We must continuously train personnel in new technologies and in how to integrate existing hardware and software systems with these new technologies. We may not be able to adapt quickly to new technologies or commit sufficient resources to compete successfully against existing or new competitors in bringing to market solutions and services that incorporate these new technologies. We may incur problems in the future in innovating and introducing new mobile applications and service offerings. Our development of new mobile applications and platform enhancements may not be successfully completed or, if developed, may not achieve significant customer acceptance. If we fail to adapt to changes in technologies and compete successfully against established or new competitors, our business, financial condition and results of operations could be adversely affected.

 

Problems with the quality or performance of our hardware, software or other systems may cause delays in the introduction of new solutions or result in the loss of customers and revenues, which could have a material and adverse effect on our business, financial condition and results of operations.

 

Our hardware and software systems are complex and may contain defects, errors or bugs when first introduced to the market or to a particular customer, or as new versions are released. Because we cannot test for all possible scenarios, our systems may contain errors that are not discovered until after they have been installed or implemented, and we may not be able to timely correct these problems. These defects, errors or bugs could interrupt or delay the completion of projects or sales to our customers. In addition, our reputation may be damaged and we may fail to acquire new projects from existing customers or new customers. Errors may occur when we provide systems integration and maintenance services. Even in cases where we have agreements with our customers that contain provisions designed to limit our exposure to potential claims and liabilities arising from customer problems, these provisions may not effectively protect us against such claims in all cases and in all jurisdictions. In addition, as a result of business and other considerations, we may undertake to compensate our customers for damages arising from the use of our solutions, even if our liability is limited by these provisions. Moreover, claims and liabilities arising from customer problems could also result in adverse publicity and materially and adversely affect our business, results of operations and financial condition. We currently do not carry any product or service liability insurance and any imposition of liability on us may materially and adversely affect our business and increase our costs, resulting in reduced revenues and profitability.

 

Our products may contain undetected software defects, which could negatively affect our revenues.

 

Our software products are complex and may contain undetected defects. Although we test our products, it is possible that errors may be found or occur in our new or existing products after we have commenced commercial shipment of those products. Defects, whether actual or perceived, could result in adverse publicity, loss of revenues, product returns, a delay in market acceptance of our products, loss of competitive position or claims against us by customers. Any such problems could be costly to remedy and could cause interruptions, delays, or cessation of our product sales, which could cause us to lose existing or prospective customers and could negatively affect our results of operations.

 

6

 

 

We may be subject to infringement, misappropriation and indemnity claims in the future, which may cause us to incur significant expenses, pay substantial damages and be prevented from providing our services or technologies.

 

Our success depends, in part, on our ability to carry out our business without infringing the intellectual property rights of third parties. Patent and copyright law covering software-related technologies is evolving rapidly and is subject to a great deal of uncertainty. Our self-developed or licensed technologies, processes or methods may be covered by third-party patents or copyrights, either now existing or to be issued in the future. Any potential litigation may cause us to incur significant expenses. Third-party claims, if successfully asserted against us may cause us to pay substantial damages, seek licenses from third parties, pay ongoing royalties, redesign our services or technologies, or prevent us from providing services or technologies subject to these claims. Even if we were to prevail, any litigation would likely be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

 

Our failure to protect our intellectual property rights may undermine our competitive position, and subject us to costly litigation to protect our intellectual property rights.

 

Any misappropriation of our technology or the development of competitive technology could seriously harm our business. We regard a substantial portion of our hardware and software systems as proprietary and rely on statutory copyright, trademark, patent, trade secret laws, customer license agreements, employee and third-party non-disclosure agreements and other methods to protect our proprietary rights. Nevertheless, these resources afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate. In particular, third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition and results of operations. In addition, intellectual property rights and confidentiality protection in China may not be as effective as in the United States, and policing unauthorized use of proprietary technology can be difficult and expensive. Further, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. The outcome of any such litigation may not be in our favor. Any such litigation may be costly and may divert management attention, as well as our other resources, away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all litigation costs in excess of the amount recoverable from other parties. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. 

 

Our solutions incorporate a portion of, and work in conjunction with, third-party hardware and software solutions. If these third-party hardware or software solutions are not available to us at reasonable costs, or at all, our results of operations could be adversely impacted.

 

Although our hardware and software systems and mobile applications primarily rely on our own core technologies, some elements of our systems incorporate a small portion of third-party hardware and software solutions. If any third party were to discontinue making their intellectual property available to us or our customers on a timely basis, or increase materially the cost of their licensing such intellectual property, or if our systems or applications failed to properly function or interoperate with replacement intellectual property, we may need to incur costs in finding replacement third-party solutions and/or redesigning our systems or applications to replace or function with or on replacement third-party proprietary technology. Replacement technology may not be available on terms acceptable to us or at all, and we may be unable to develop alternative solutions or redesign our systems or applications on a timely basis or at a reasonable cost. If any of these were to occur, our results of operations could be adversely impacted.

 

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Our ability to sell our products is highly dependent on the quality of our service and support offerings, and our failure to offer high quality service could have a material adverse effect on our ability to market and sell our products.

 

Our customers depend upon our customer service and support staff to resolve issues relating to our products. High-quality support services are critical for the successful marketing and sale of our products. If we fail to provide high-quality support on an ongoing basis, our customers may react negatively and we may be materially and adversely affected in our ability to sell additional products to these customers. This could also damage our reputation and prospects with potential customers. Our failure to maintain high-quality support services could have a material and adverse effect on our business, results of operations and financial condition.

 

Weaknesses in our internal controls over financial reporting or disclosure controls and procedures may have a material adverse effect on our business, the price of our ordinary shares, operating results and financial condition.

 

We are required to establish and maintain appropriate internal controls over financial reporting and disclosure controls and procedures. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules adopted by the Securities and Exchange Commission, every public company is required to include a management report on its internal controls over financial reporting in its transition report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting.  This requirement first applied to our annual report on Form 20-F for the fiscal year ended on September 30, 2011. In connection with our assessments of our disclosure controls and procedures and internal controls over financial reporting, management concluded that as of September 30, 2018, our disclosure controls and procedures and our internal controls over financial reporting were not effective due to lack of U.S. generally accepted accounting principles (“U.S. GAAP”) expertise in our current accounting team. Please refer to the discussion under Item 15, “Controls and Procedures” for further discussion of our material weakness as of December 31, 2017. Should we be unable to remediate the material weakness promptly and effectively, such weakness could harm our operating results, result in a material misstatement of our financial statements, cause us to fail to meet our financial reporting obligations or prevent us from providing reliable and accurate financial reports or avoiding or detecting fraud. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on the trading price of our ordinary shares. Any litigation or other proceeding or adverse publicity relating to the material weaknesses could have a material adverse effect on our business and operating results. 

 

We have very limited insurance coverage which could expose us to significant costs and business disruption.

 

We do not maintain any insurance coverage for our leased properties. Should any natural catastrophes such as earthquakes, floods, typhoons or any acts of terrorism occur in Beijing, China, where our head office is located and most of our employees are based, or elsewhere in China, we might suffer not only significant property damages, but also loss of revenues due to interruptions in our business operations, which could have a material adverse effect on our business, operating results or financial condition.

 

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources, particularly if it affects our technology platforms which we depend on for delivery of our software and services, and could have a material adverse effect on our financial condition and results of operations.

 

We may be liable to our customers for damages caused by unauthorized disclosure of sensitive and confidential information, whether through our employees or otherwise.

 

We are typically required to manage, utilize and store sensitive or confidential customer data in connection with the products and services we provide. Under the terms of our customer contracts, we are required to keep such information strictly confidential. We seek to implement specific measures to protect sensitive and confidential customer data. We require our employees to enter into non-disclosure agreements to limit such employees’ access to, and distribution of, our customers’ sensitive and confidential information and our own trade secrets. We can give no assurance that the steps taken by us in this regard will be adequate to protect our customers’ confidential information. If our customers’ proprietary rights are misappropriated by our employees, in violation of any applicable confidentiality agreements or otherwise, our customers may consider us liable for that act and seek damages and compensation from us. However, we currently do not have any insurance coverage for mismanagement or misappropriation of such information by our employees. Any litigation with respect to unauthorized disclosure of sensitive and confidential information might result in substantial costs and diversion of resources and management attention.

 

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We may face intellectual property infringement claims that could be time-consuming and costly to defend. If we fail to defend ourselves against such claims, we may lose significant intellectual property rights and may be unable to continue providing our existing products and services.

 

It is critical that we use and develop our technology and products without infringing upon the intellectual property rights of third parties, including patents, copyrights, trade secrets and trademarks. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. A successful infringement claim against us, whether with or without merit, could, among others things, require us to pay substantial damages, develop non-infringing technology, or re-brand our name or enter into royalty or license agreements that may not be available on acceptable terms, if at all, and cease making, licensing or using products that have infringed a third party’s intellectual property rights. Protracted litigation could also result in existing or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation, or could require us to indemnify our customers against infringement claims in certain instances. Also, we may be unaware of intellectual property registrations or applications relating to our services that may give rise to potential infringement claims against us. Parties making infringement claims may be able to obtain an injunction to prevent us from delivering our services or using technology containing the allegedly infringing intellectual property. Any intellectual property litigation could have a material adverse effect on our business, results of operations or financial condition. 

 

Seasonality and fluctuations in our customers’ spending cycle and other factors can cause our revenues and operating results to vary significantly from quarter to quarter and from year to year.

 

Our revenues and operating results will vary significantly from quarter to quarter and from year to year due to a number of factors, many of which are outside of our control. Our new lines of business acquired upon the consummation of the asset exchange transaction discussed below see higher customer use and activity during the Chinese New Year holiday than other times during the year when rail travel is high, which lead to higher revenue during this period as more customers would like to place more advertising. Due to these and other factors, our operating results may fluctuate significantly from quarter to quarter and from year to year. These fluctuations are likely to continue in the future, and operating results for any period may not be indicative of our future performance in any future period.

 

Our corporate actions are substantially controlled by our principal shareholders, who can cause us to take actions in ways you may not agree with.

 

Mr. Xuesong Song, our chairman, chief executive officer and a member of our board of directors, beneficially owns 19.31% of our outstanding ordinary shares and 1,000,000 preferred shares, and each preferred share has the right to 399 votes at a meeting of the members of the Company. Our officers and directors as a group beneficially own an aggregate of approximately 33.69% of our outstanding ordinary shares. These shareholders, acting individually or as a group, could exert control and substantial influence over matters such as electing directors, amending our constitutional documents, and approving acquisitions, mergers or other business combination transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our shares. Alternatively, our controlling shareholders may cause a merger, consolidation or change of control transaction even if it is opposed by our other shareholders, including those who purchase shares in this offering.

 

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We depend on a small number of customers to derive a significant portion of our revenues.  If we were to become dependent again upon a few customers, such dependency could negatively impact our business, operating results and financial condition.

 

We derived a material portion of our revenues from a small number of customers.  In the years ended December 31, 2017 and 2016, our five largest customers accounted for 99.8% and 78.5% of our total sales, respectively, and our largest customer - Guangdong Zhanshi Media Advertising Co., Ltd. accounted for approximately 80.8% of our total sales during for the fiscal year ended December 31, 2017. As our customer base may change from year-to-year, during such years that the customer base is highly concentrated, the fluctuation of our sales to any of such major customers could have a material adverse effect on our business, operating results and financial condition. Moreover, our high customer base concentration may also adversely affect our ability to negotiate contract prices with these customers, which may in turn materially and adversely affect our results of operations.

 

Our historical outstanding accounts receivable have been relatively high. Inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition, liquidity and results of operations.

 

Historically, our outstanding accounts receivable have been relatively high.  As of December 31, 2017 and 2016, our outstanding accounts receivable before impairment were $10.4 million and $2.10 million, respectively. Although we conduct credit evaluations of our customers, we generally do not require collateral or other security from our customers. In addition, we have had a relatively high customer concentration. The outstanding accounts receivable balance for our largest customer was 45.3% and 38.5% of our total accounts receivable balance as of December 31, 2017 and 2016, respectively. As a result, an extended delay or default in payment relating to a significant account would likely have a material and adverse effect on the aging schedule and turnover days of our accounts receivable. Our inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition, liquidity and results of operations.

 

Risks Related to Doing Business in China

 

Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our services and materially and adversely affect our competitive position.

 

Substantially all of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. Although the Chinese economy is no longer a planned economy, the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. These government involvements have been instrumental in China’s significant growth in the past 30 years. The reorganization of the telecommunications industry encouraged by the PRC government has directly affected our industry and our growth prospect. In response to the recent global and Chinese economic downturn, the PRC government has adopted policy measures aimed at stimulating the economic growth in China. If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth or if any aspect of the PRC government’s policies limits the growth of the telecommunications industry in China or our industry or otherwise negatively affects our business, our growth rate or strategy, our results of operations could be adversely affected as a result. 

 

Our business benefits from certain government tax incentives. Expiration, reduction or discontinuation of, or changes to, these incentives will increase our tax burden and reduce our net income.

 

Under the PRC Enterprise Income Tax Law passed in 2007 and the implementing rules, both of which became effective on January 1, 2008, or the New EIT Law, a unified enterprise income tax rate of 25% and unified tax deduction standard is applied equally to both domestic-invested enterprises and foreign-invested enterprises, or FIEs. Enterprises established prior to March 16, 2007 eligible for preferential tax treatment in accordance with the then tax laws and administrative regulations shall gradually become subject to the New EIT Law rate over a five-year transition period starting from the date of effectiveness of the New EIT Law. However, certain qualifying high-technology enterprises may still benefit from a preferential tax rate of 15% if they own their core intellectual properties and they are enterprises in certain State-supported high-tech industries to be later specified by the government. As a result, if our PRC subsidiaries qualify as “high-technology enterprises,” they will continue to benefit from the preferential tax rate of 15%, subject to transitional rules implemented from January 1, 2008. Our subsidiary, Beijing Zhong Chuan Shi Xun Technology Limited, is qualified as a “high-technology enterprise” until the end of the November 2018, and therefore it had benefited from the preferential tax rate of 15%, subject to transitional rules implemented on January 1, 2008. Although we intend to apply for a renewal of this qualification, if Beijing Zhong Chuan Shi Xun ceases to qualify as a “high-technology enterprise”, or the tax authorities change their position on our preferential tax treatments in the future, our future tax liabilities may materially increase, which could materially and adversely affect our financial condition and results of operations.

 

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If we were deemed a “resident enterprise” by PRC tax authorities, we could be subject to tax on our global income at the rate of 25% under the New EIT Law and our non-PRC shareholders could be subject to certain PRC taxes.

 

Under the New EIT Law and the implementing rules, both of which became effective January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC may be considered a PRC “resident enterprise” and will be subject to the enterprise income tax at the rate of 25% on its global income as well as PRC enterprise income tax reporting obligations. The implementing rules of the New EIT Law define “de facto management” as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. However, as of the date of this transition report, no final interpretations on the implementation of the “resident enterprise” designation are available. Moreover, any such designation, when made by PRC tax authorities, will be determined based on the facts and circumstances of individual cases. Therefore, if we were to be considered a “resident enterprise” by the PRC tax authorities, our global income would be taxable under the New EIT Law at the rate of 25% and, to the extent we were to generate a substantial amount of income outside of PRC in the future, we would be subject to additional taxes. In addition, the dividends we pay to our non-PRC enterprise shareholders and gains derived by such shareholders or ADS or ordinary share holders from the transfer of our shares or ADSs may also be subject to PRC withholding tax at the rate up to 10%, if such income were regarded as China-sourced income.

 

Our holding company structure may limit the payment of dividends.

 

We have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. As a result, there may be limitations on the ability of our PRC subsidiaries to pay dividends or make other investments or acquisitions that could be beneficial to our business or otherwise fund and conduct our business.

 

In addition, under the New EIT Law and the implementing rules that became effective on January 1, 2008, dividends generated from the business of our PRC subsidiaries after January 1, 2008 and payable to us may be subject to a withholding tax rate of 10% if the PRC tax authorities subsequently determine that we are a non-resident enterprise, unless there is a tax treaty with China that provides for a different withholding arrangement.

 

Uncertainties with respect to the PRC legal system could adversely affect us.

 

We conduct all of our business through our subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.

 

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Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

 

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our May 2010 public offering to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

In utilizing the proceeds of our May 2010 public offering as an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Any loans to our PRC subsidiaries are subject to PRC regulations. For example, loans by us to our subsidiaries in China, which are FIEs, to finance their activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange, or SAFE. On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. The notice requires that RMB converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise. The foreign currency-denominated capital shall be verified by an accounting firm before converting into RMB. In addition, SAFE strengthened its oversight over the flow and use of RMB funds converted from the foreign currency-denominated capital of a foreign-invested company. To convert such capital into RMB, the foreign-invested company must report the use of such RMB to the bank, and the RMB must be used to the reported purposes. According to Circular 142, change of the use of such RMB without approval is prohibited. In addition, such RMB may not be used to repay RMB loans if the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Rules.

 

We may also decide to finance our subsidiaries by means of capital contributions. These capital contributions may need approval from the PRC Ministry of Commerce, or MOFCOM, or its local counterpart. We may not be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiaries. If we fail to receive such approvals in such cases when approval is required, our ability to use the proceeds of our May 2010 public offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

Governmental control of currency conversion may affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs or ordinary shares.

 

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Fluctuation in the value of the RMB may have a material adverse effect on the value of your investment.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximate 26.8% appreciation of the RMB against the U.S. dollar between July 21, 2005 and September 30, 2015. Provisions on Administration of Foreign Exchange, as amended in August 2008, further changed China’s exchange regime to a managed floating exchange rate regime based on market supply and demand. Since reaching a high against the U.S. dollar in July 2008, however, the RMB has traded within a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high but never exceeding it. As a consequence, the RMB has fluctuated sharply since July 2008 against other freely-traded currencies, in tandem with the U.S. dollar. In August 2015, the PRC Government devalued its currency by approximately 3%, representing the largest yuan depreciation for 20 years. Concerns remain that China’s slowing economy, and in particular its exports, will need a stimulus that can only come from further cuts in the exchange rate.

 

It is difficult to predict how long the current situation may continue and when and how it may change again as the People’s Bank of China may regularly intervene in the foreign exchange market to achieve economic policy goals. Substantially all of our revenues and costs are denominated in the RMB, and a significant portion of our financial assets are also denominated in RMB. We principally rely on dividends and other distributions paid to us by our subsidiaries in China. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs or ordinary shares in U.S. dollars. Any fluctuations of the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.

 

PRC laws and regulations governing our businesses. If we are found to be in violation of such PRC laws and regulations, we could be subject to sanctions. In addition, changes in such PRC laws and regulations may materially and adversely affect our business.

 

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

 

The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.

 

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If we were required to obtain the prior approval of the China Securities Regulatory Commission, or CSRC, of the listing and trading of our ADSs on the NASDAQ Capital Market, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies.

 

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and the SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective on September 8, 2006 (the “New M&A Rules”). This regulation, among other things, includes provisions that purport to require that an offshore special purpose vehicle formed for the purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several months to complete the approval process, if practicable at all. The application of this new PRC regulation remains unclear with no consensus currently existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement. 

 

Prior to our May 2010 initial public offering, our PRC counsel has advised us that, based on its understanding of the current PRC laws and regulations as well as the procedures announced on September 21, 2006: (i) Softech was directly incorporated by Topsky as a foreign investment enterprise under PRC law; therefore, there was no acquisition of the equity of a “PRC domestic company” as defined under the New M&A Rules; and (ii) the contractual arrangements between Kingtone Information and Softech were not clearly defined and considered as the transaction which shall be applied to the New M&A Rules. Therefore, we did not seek prior CSRC approval for our initial public offering.

 

However, if the CSRC required that we obtain its approval prior to the completion of our initial public offering and the listing of our ADSs on the NASDAQ Capital Market, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from our initial public offering into the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares.

 

Also, if the CSRC requires that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material adverse effect on the trading price of our shares.

 

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us, or otherwise adversely affect us.

 

On October 21, 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005. According to Notice 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing such offshore company with assets or equity interests in an onshore enterprise located in the PRC, or an offshore special purpose company. An amendment to registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore special purpose company or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore special purpose company. Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore special purpose companies that have made onshore investments in the PRC in the past are required to have completed the relevant registration procedures with the local SAFE branch by March 31, 2006. To further clarify the implementation of Notice 75, the SAFE issued Circular 106 on May 29, 2007. Under Circular 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders or beneficial owners who are PRC residents in a timely manner.

 

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Some of our current shareholders and/or beneficial owners may fall within the ambit of the SAFE notice and be required to register with the local SAFE branch as required under the SAFE notice. If so required, and if such shareholders and/or beneficial owners fail to timely register their SAFE registrations pursuant to the SAFE notice, or if future shareholders and/or beneficial owners of our company who are PRC residents fail to comply with the registration procedures set forth in the SAFE notice, this may subject such shareholders, beneficial owners and/or our PRC subsidiaries to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to our company, or otherwise adversely affect our business.

 

Risks Associated with our ADSs and Ordinary Shares

 

Our securities are not currently traded on any United States public markets and you may not be able to resell your securities for some time.

 

There is currently no public market for our ordinary shares or American Depository Shares (“ADSs”) in the United States or in any other jurisdiction. Our ADSs were voluntarily delisted from the NASDAQ Capital Market on September 19, 2018. We have applied to NASDAQ for the listing of our ordinary shares on the NASDAQ Capital Market and received an approval for listing of Ordinary Shares on August 6, 2018, and as of the date of this transition report, that application and approval are currently under review. We cannot assume that our ordinary shares will be accepted for listing on the NASDAQ Capital Market, or if listed, that we would continue to meet the applicable minimum listing requriements. You may not be able to sell your ordinary shares quickly or at all if we are unable to gain listing on a public market in the United States.

 

The market price of our ADSs has historically been highly volatile, and you may not be able to resell our ordinary shares at or above your initial purchase price.

 

There may be a limited public market for our ordinary shares and, as discussed above, our ADSs are no longer listed on any public market in the United States or any other jurisdiction. We cannot assure you that there will be an active trading market for our ordinary shares in the future. If our ordinary shares are accepted for listing on a public market, you may not be able to sell your ordinary shares quickly or at the market price if trading in our ordinary shares is not active. 

 

The trading price of our ADSs and ordinary shares may be volatile. The price of our ADSs and ordinary shares could be subject to wide fluctuations in response to a variety of factors, including the following:

 

  1. Introduction of new products, services or technologies offered by us or our competitors;
  2. Failure to meet or exceed revenue and financial projections we provide to the public;
  3. Actual or anticipated variations in quarterly operating results;
  4. Failure to meet or exceed the estimates and projections of the investment community;
  5. General market conditions and overall fluctuations in United States equity markets;
  6. Announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
  7. Disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
  8. Additions or departures of key management personnel;
  9. Issuances of debt or equity securities;
  10. Significant lawsuits, including patent or shareholder litigation;
  11. Changes in the market valuations of similar companies;
  12. Sales of additional ordinary shares or other securities by us or our shareholders in the future;
  13. Trading volume of our ordinary shares;
  14. Fluctuations in the exchange rate between the U.S. dollar and Renminbi;
  15. Negative market perception and media coverage of our company or other companies in the same or similar industry with us; and
  16. Other events or factors, many of which are beyond our control.

 

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In addition, the stock market in general, and the NASDAQ Capital Market and software products and services companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our ordinary shares, regardless of our actual operating performance. 

 

Our ADSs and ordinary shares may be subject to the SEC’s penny stock rules which may make it difficult for broker-dealers to complete customer transactions and trading activity in our securities.

 

Our ADSs and ordinary shares may be deemed to be “penny stock” as that term is defined under the Securities Exchange Act of 1934, as amended.  Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system).  Penny stock rules impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse in each of the prior two years.

 

The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market.  Moreover, broker-dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. A broker-dealer must receive a written agreement to the transaction from the investor setting forth the identity and quantity of the penny stock to be purchased.  These requirements may make it more difficult for broker-dealers to effectuate customer transactions and trading activity in our securities. As a result, the market price of our ADSs and ordinary shares may be depressed, and you may find it more difficult to sell our ADSs or ordinary shares.

 

Sales of a substantial number of ordinary shares or ADSs in the public market by our existing shareholders could cause the price of our ADSs to fall.

 

Sales of a substantial number of our ordinary shares or ADSs in the public market or the perception that these sales might occur, could depress the market price of our ADSs 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 ADSs.

 

All of our existing shareholders prior to our May 2010 offering were subject to lock-up agreements with the underwriters of the offering that restricted the shareholders’ ability to transfer ordinary shares or ADSs until expiration of the lock-up period in November 2010. The lock-up agreements limited the number of ordinary shares or ADSs that may be sold immediately following the public offering. Subject to certain limitations, approximately 1,000,000 of our total outstanding shares are now eligible for sale. Sales of ordinary shares by these shareholders could have a material adverse effect on the trading price of our ADSs.

 

Future sales and issuances of our ordinary shares, or rights to purchase our ordinary shares, including pursuant to our 2010 Omnibus Incentive Plan, could result in additional dilution of the percentage ownership of our shareholders and could cause the price of our ordinary shares to fall.

 

We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our shareholders may experience substantial dilution. We may sell ordinary shares, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell ordinary shares, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing shareholders, and new investors could gain rights superior to our existing shareholders.

 

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We do not intend to pay dividends on our ordinary shares, so any returns will be limited to the value of our ADSs and ordinary shares.

 

We have never declared or paid any cash dividend on our ordinary shares. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return shareholders will therefore be limited to the value of their ADSs or ordinary shares.

 

As the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.

 

Our corporate affairs will be governed by our memorandum of association and articles of association, the BVI Business Companies Act, 2004, or the BVI Act, of the British Virgin Islands and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the BVI Act and the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law.

 

As a result of all of the above, holders of our ADSs and ordinary shares may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company.

 

British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.

 

British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

 

The laws of the British Virgin Islands provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the shareholders are dissatisfied with the conduct of our affairs.

 

Under the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, our memorandum of association and articles of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the memorandum of association and articles of association.

 

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There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the company’s constituent documents. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum of association and articles of association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval of a majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.

 

Anti-takeover provisions in our memorandum of association and articles of association and our right to issue preference shares could make a third-party acquisition of us difficult.

 

Some provisions of our memorandum of association and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares.

 

If you hold our ADSs, you may not have the same voting rights as the holders of our ordinary shares and must act through the depositary to exercise your rights.

 

Holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Upon our written request, the depositary will mail to you a shareholder meeting notice which contains, among other things, a statement as to the manner in which your voting instructions may be given, including an express indication that such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received by the depositary from you on or before the response date established by the depositary. However, no voting instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary that (i) we do not wish such proxy given, (ii) substantial opposition exists, or (iii) such matter materially and adversely affects the rights of shareholders. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but you may not receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.

 

You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.

 

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we may not, and under the deposit agreement for the ADSs, the depositary will not, offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are registered under the Securities Act, or the distribution of them to ADS holders is exempted from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to rely on an exemption from registration under the Securities Act to distribute such rights and securities. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

 

You may be subject to limitations on transfer of your ADSs.

 

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

 

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We may be a passive foreign investment company, of PFIC, which could lead to additional taxes for U.S. holders of our ADSs or ordinary shares.

 

We do not expect to be, for U.S. federal income tax purposes, a passive foreign investment company, or a PFIC, which is a foreign company for which, in any given taxable year, either at least 75% of its gross income is passive income, or investment income in general, or at least 50% of its assets produce or are held to produce passive income, for the current taxable year, and we expect to operate in such a manner so as not to become a PFIC for any future taxable year. However, because the determination of PFIC status for any taxable year cannot be made until after the close of such year and requires extensive factual investigation, including ascertaining the fair market value of our assets on a quarterly basis and determining whether each item of gross income that we earn is passive income, we cannot assure you that we will not become a PFIC for the current taxable year or any future taxable year. If we are or become a PFIC, a U.S. holder of our ADSs or ordinary shares could be subject to additional U.S. federal income taxes on gain recognized with respect to the ADSs or ordinary shares and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules. Non-corporate U.S. holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year.

 

If our ordinary shares are listed on the NASDAQ Capital Market and the trading price of our ordinary shares fails to comply with the continued listing requirements of the NASDAQ Capital Market, we would face possible delisting, which would result in a limited public market for our ordinary shares and make obtaining future debt or equity financing more difficult for us.

 

Companies listed on NASDAQ are subject to delisting for, among other things, failure to maintain a minimum closing bid price of $1.00 per share for 30 consecutive business days. On December 19, 2011, we received a letter from NASDAQ indicating that for the last 30 consecutive business days, the closing bid price of our ADSs fell below the minimum $1.00 per share requirement pursuant to NASDAQ Listing Rule 5550(a)(2) for continued listing on the NASDAQ Capital Market. We regained compliance with the minimum bid price requirement for continued listing set forth in NASDAQ Listing Rule 5550(a)(2), as its ADS with its underlying ordinary share has achieved a closing bid price of $1.00 or greater for the 10 consecutive business days from November 6 to November 23, 2012 by implementing a 1-for-10 combination, or reverse split of the ordinary shares effective November 6, 2012. When listed, we cannot be sure that the price of our ordinary shares will comply with this requirement for continued listing on the NASDAQ Capital Market in the future. If we were not able to do so, our ordinary shares would be subject to delisting and would likely trade on the over-the-counter market. If our ordinary shares were to trade on the over-the-counter market, selling our ordinary shares could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our ordinary shares, further limiting the liquidity of our ordinary shares. As a result, the market price of our ordinary may be depressed, and you may find it more difficult to sell our ordinary shares. Such delisting from the NASDAQ Capital Market and continued or further declines in our share price could also greatly impair our ability to raise additional necessary capital through equity or debt financing.

 

ITEM 4.  INFORMATION ON THE COMPANY.

 

A .   HISTORY AND DEVELOPMENT OF THE COMPANY.

 

Overview

 

We are a holding company and conduct our operations through our wholly-owned subsidiary named LK Technology Ltd., a British Virgin Islands limited liability company (“LK Technology”), and its wholly-owned subsidiaries, MMB Limited and Mobile Media (China) Limited and their respective subsidiaries, which hold the rights to deploy Wi-Fi systems on about 700 trains in China, including 290 trains in which Wi-Fi systems have already been installed and are in operation. In May 2010, we consummated an initial public offering of our American Depository Shares, or ADSs, for gross proceeds of $16 million, and our ADSs were listed on the NASDAQ Capital Market under the ticker symbol “KONE”. Our ordinary shares are not currently listed on any trading market. Our American Depository Shares (“ADSs”) were voluntarily delisted from the NASDAQ Capital Market on September 19, 2018. We have applied to NASDAQ for the listing of our ordinary shares on the NASDAQ Capital Market and received an approval for listing of Ordinary Shares on August 6, 2018, and as of the date of this transition report, that application and approval are currently under review.

 

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On August 17, 2018, we consummated an asset exchange transaction, pursuant to which we exchanged all issued and outstanding capital stock in Topsky Info-Tech Holdings Pte Ltd., the parent of Softech, for the issued and outstanding capital stock of LK Technology (the “Asset Exchange”). In connection with the Asset Exchange, we changed our name on August 20, 2018, and on September 20, 2018, issued to the shareholders of C Media Limited, the former parent of LK Technology, (i) 185,412,599 of our ordinary shares, par value $0.01 per share and (ii) 1,000,000 of our preferred shares. Upon the consummation of the Asset Exchange, we ceased our previous business operations and became a company focused on the provision of Wi-Fi and mobile application products for long distance rail travelers in China.

 

On August 25, 2018, LK Technology entered into a Stock Purchase Agreement (the “Agreement”) with the shareholders (“Shareholders”) of Superengine Holdings Limited, a limited liability company organized under the laws of the British Virgin Islands (the “Superengine”), pursuant to which LK Technology acquired all of the issued and outstanding capital stock of Superengine for an aggregate purchase price of US$60 million (the “Purchase Price”), which are paid by the issuance of our Ordinary Shares in an amount equal to the quotient of (x) the Purchase Price divided by (y) the average of the closing prices of the Ordinary Shares on the NASDAQ Capital Market over the 12 months period preceding July 31, 2018. We are a party to the Agreement in connection with the issuance of the Ordinary Shares and certain other limited purposes.

 

Corporate Information

 

Our principal executive offices are located at LAB32, SOHO 3Q, No 9, Guanghua Road, Chaoyang District, Beijing, People’s Republic of China 100020.   Our website is www.luokung.com .  We routinely post important information on our website.  The information contained on our website is not a part of this transition report.

 

Our agent for service of process in the United States is Worldwide Stock Transfer, LLC, the current transfer agent of the Company, with a mailing address of One University Plaza, Suite 505, Hackensack, New Jersey 07601.

 

B.  BUSINESS OVERVIEW.

 

We are a China-based provider of rail Wi-Fi and mobile application products for long distance travelers in China. Our primary mobile application, the LuoKuang platform, consists of the LuoKuang mobile applications, a series of supporting software at the server end, and rail-Wi-Fi hardware and equipment on the trains that we serve. The LuoKuang platform incorporates technology covered by 22 patents and about 34 software copy rights, and serves as a content and service distribution platform that is tailored for particular travel stages featuring geographic location and social interaction. The content and services distributed by LuoKuang contain information, entertainment, travel, e-commerce, online to offline (“O2O”), advertisement and marketing features.

 

LuoKuang mainly provides personalized and precise services to long distance travelers in two locations: on the train and at the destination. Based on the travel environment, the core elements of our users’ needs include staving off boredom on trains and discovering and exploring new locations upon arrival. The main services contain entertainment services (videos and audio, digital readings, games specific and tailored to the travel stage) and social services (satisfying the demand for value discovery of unfamiliar destinations through social interaction among strangers based on locations). As of December 31, 2017, the LuoKuang platform featured about 38 million users.

 

The setting services on the train focus on providing entertainment content for passengers to pass time during long-distance travel in closed environments. For example, we provide access to long video formats such as movies and TV shows, short videos, music, digital readings and games.

 

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We use the most valuable Wi-Fi location—the train Wi-Fi setting—as the entrance of our LuoKuang platform and mobile applications. Passengers typically ride trains for long-distance and inter-provincial travel purposes. The long periods of monotonous journeys and the cost concerns for roaming traffic fees enable the combination of entertainment content service needs and Wi-Fi access needs. Our rail-Wi-Fi becomes a valuable and sophisticated Wi-Fi service in this setting—not just Wi-Fi connection service, but a provider of sophisticated services through a Wi-Fi connection. In addition, the annual traffic of 800,000 passengers onboard each train makes rail Wi-Fi a huge entry point for mobile applications. We do not define ourselves as a train Wi-Fi communication service operator but as a long-distance travel mobile service provider. We provide users with free Wi-Fi access so that users are able to connect to the LuoKuang platform and thus access related entertainment services, services on the train and destination services. The rail Wi-Fi is our access point to a significant pool of users and the entrance to acquiring additional users.

 

The setting services focus on providing targeted push services to users while travelling in unfamiliar cities. Information and service guidance are precisely pushed to appeal to the interests and tastes (eating, drinking, shopping, touring and culture) of individual users (cuisine specialties and local snacks, local events, viewing sights, culture, history, stories). The service guidance is generated, shared and distributed by individual users (travelers, local residents, local businesses) interacting with current locations and featuring users who generated contents from self-media and small and medium vertical contents providers).

 

Based on the GIS (geo-information system), Superengine is a provider of big spatial-temporal data, network graphic image technology and relevant service. Its super engine series includes computer graphic image engines and spatial database engines. Spatial-temporal cloud index is the core of the company’s spatial-temporal data engines. It is equivalent to the neural network of the big data and the Internet. It extends the value of its products and platform to its data service providers. In cooperation, its service providers can be divided into three categories, namely, basic geographic data providers, industrial data providers and behavioral data providers). Superengine’s industries-oriented spatial-temporal data engine was launched in 2016. The spatial-temporal GIS platform has been applied in industries such as aerospace, power grid, surveying & mapping, agriculture, cultural relic preservation, water conservancy, public security, railway section, smart cities, and business location selection.

 

Our primary sources of revenue are advertising and marketing promotion revenues.

 

Our Industry — Mobile Internet Industry

 

Our products and services are engaged in the mobile internet industry. Our main services consist of entertainment services (videos, audio, digital readings, games that are tailor-made for passengers on train) and other services including satisfying the demand for value discovery of unfamiliar destinations through social interactions among strangers based in such locations). The mobile internet industry in China is rapidly growing and is likely to be in a long-term growth trend. According to the Mobile Internet Blue Book of China Mobile Internet Report, in 2017 the market size of China mobile internet reached RMB 605 billion. Now China is in a leading position in terms of smartphone, mobile communication network and mobile application services. The pool of users is anticipated to keep expanding through the promotion and popularization of smartphones and the expansion of the mobile internet market.

 

Video is the leading online entertainment format in China. According to the iResearch Report, over 80% of total time spent by users on online entertainment in China in 2016 was internet video. Online entertainment, especially internet video, is attractive to Chinese users due to many favorable factors, including easy accessibility, wide content selection, and innovative platforms with social features.

 

For 2017, the transaction volume of China mobile e-commerce market reached to over RMB 4 trillion according to the China Mobile E-commerce Industry Research Report from iResearch, representing an increase of 19.1%. For the next few years, China mobile online shopping will likely maintain steady growth. The focal point of competition in China mobile e-commerce market has shifted from infrastructure service providers to integrated and accurate services providers. Drawing in users with compelling content in diversified scenes has become a trend.

 

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The revenue for China mobile gaming industry reached RMB 144.58 billion for the year of 2017, according to the China Mobile Game Industry Research Report from iResearch. With increased investment by large-scale enterprises in the sector of mobile games and the strict enforcement of the mobile game industry-related regulatory policy guidelines, the mobile game market as a whole will become more organized and standardized.

 

According to the Annual Analysis of China Mobile Reading Industry from Analysis, for the year of 2017, the mobile reading market in China reached to RMB 14.04 billion. By the end of 2016, the size of China mobile's reading market reached RMB 11.86 billion, showing an increase of 18.38% in 2017.

 

The closed and boring environment for passengers of long-distance travel and high roaming charges lead to a strong demand to use our rail Wi-Fi services. Passengers, through their own mobile phone, have access to the free Wi-Fi network in each carriage, access to our rich mobile internet entertainment content and travel services. According to the annual statistical bulletin of China Rail-way Corporation in 2017, there were about 6,030 trains in operation in China in 2017, consisting of 2,935 high speed trains and 3,095 express trains. The rail Wi-Fi system that we have installed are currently all on express trains. The market value will be multiplied several times following the extended coverage of service on other trains.

 

Our Strengths

 

We believe the following strengths differentiate us from our competitors:

 

Our strategy is to build up personalized and targeted service products for travelers through rail Wi-Fi networks, enabling our services to evolve into a core driving distribution platform that provides content, news, games, e-commerce, OTO service, travel services and advertising and marketing. In comparison, our competitors offer simple forms of media services on trains. We focus on personalized and targeted matching between users on long distance trips and services. Our competitors focus on operating and generating internet traffic.

 

We possess a complete set of technology system including network, client end and service and operation platform. We have patent protections for Wi-Fi equipment on trains. Our technology strengths are briefly summarized below.

 

Wi-Fi Equipment Patent protected. Supports Wi-Fi/3G/4G telecom modules; 4 core CPU with X86 architecture, and SSD hard disk with big storage for local contents.
Infrastructure The technology infrastructures include the application program system, big data gathering and processing systems, intelligence clouds service deployment structure systems and our Wi-Fi hardware server deployment structure system. The operation center, big data center, contents center and rail-Wi-Fi server system are built on this infrastructure. On the above layer, the equipment management platform, account and payment platform, contents management platform and advertisement distribution platform are set up for daily management purpose.

 

LuoKuang strengthens the connection of services among people, setting and locations. In catering to people on the move, we anticipate strengthening the relationship between users and their locations in a given moment. Currently, LuoKuang provides the link between users and third-party service providers and provides value added services to both users and third-party service providers. The connection is not simply a traffic diversion, but also the direct presentation of relevant services in the LuoKuang platform. The open API interface and independent product software package allows easy access by service providers and developers and supports data service, advertisement operations, billing, users promotion and product marketing services. As an API product, LuoKuang does not create content or services. The content and services are provided by our partners in the LuoKuang platform. Now, the majority of top mobile internet content and services providers in China have a presence in the Luokuang platform. Those include, but are not limited to, Toutiao, Wangyi News, iqiyi, Letv, Youdian Cinema(Hollywood films), Sohu video, Phoenix Video, Kugou Music, FM Qingting, iReader, Baidu Literature, Phoenix Novel, Baidu Game, Meituan, Dianping, and similar content providers.

 

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Our Strategy

 

LuoKuang is positioned to provide API interface services and geographic information social services. The API interface services are provided within the typical B-C model. LuoKuang pushes the content and services from third-party service providers to users. The local businesses, service practitioners, residents, and foreign travelers are all defined as a “user” and may participate in social interactions based on local value information and generate UGC content. The so-called local value information is defined as information, views, evaluations, experiences and experience sharing related to the local cultural scene, native products, entertainment, food, tourism and activities.

 

The LuoKuang user growth strategy is to have access to users through the travelers’ use of mobile devices in connection with long-distance train travel. Through deploying Wi-Fi systems on trains and providing free Wi-Fi access to passengers, LuoKuang is able to have consistent access to long-distance travelers. The Wi-Fi system on the train has become a powerful user portal at the early stage of LuoKuang and has gained substantial user traffic. We are in a leading position in terms of numbers of trains contracted and trains in operation with our free Wi-Fi system. We have contracted with about 700 trains, which cover almost 560 million annual passenger trips. As of the date of this report, approximately 290 trains are operating our rail Wi-Fi system. We will continue to install our rail Wi-Fi system in the following years.

 

The development strategy for LuoKuang encompasses the following:

 

1. Enhance our local cycle service (a recommendation service system based on the location of travelers after their arrival, recommendations including tourist attractions, local specialties and other items of interest), strengthen services for arrivals in the form of social interaction and focus on the value of relationships between users and their current locations.
2. Focus on the development of geographic positioning technology. Get the business of local cycle and users on train mixed together. We will put our effort to maximize the synergy effect.
3. Big Data: Behavior data about passenger trips is obtained via the traffic entrance of rail Wi-Fi and these data will help to optimize our product.
4. While enhancing setting service experiences and optimizing entertainment experiences, we will enrich e-commerce services on trains featuring recommendations of customized products and e-commerce shopping guidance of products labeled with specific geographic location (and traffic diversion).
5. Focus on API positioning and attract more premium vertical service providers (contents and services).

 

Intellectual Property

 

We have registered the following software copyrights, patents and trademarks for our business operations. We believe this intellectual property forms an integral part of our competitive strength.

 

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Patents:

 

We have been granted some inventions by the State Intellectual Property Office of PRC. We possess a complete set of technology system including network, client end and service and operation platform. We have patent protections for Wi-Fi equipment on trains. We have received the following patents:

 

No.   Name of patent   Type     Registration
Number
  Date of Insurance  
1.   Wireless communication multimedia chip business consumer information acquisition terminal device   Invention     ZL 2010 2 0528767.9   Sep 21, 2011  
2.   A user behavior processing method and device for intelligent terminal   Invention     ZL 2013 1 0301728.3   May 27, 2015  
3.   A global positioning system terminal device   Invention     ZL 2010 2 0253452.8   Nov 7, 2011  
4.   A wireless multimedia server   Invention     ZL 2013 2 0220183.9   Nov 13, 2013  
5.   Ordering system of passengers on train   Invention     ZL 2015 2 0095381.6   Aug 5, 2015  
6.   A wireless multimedia server   Invention     ZL 2015 2 0201382.4   Oct 28, 2015  
7.   An antenna structure   Invention     ZL 2016 2 0424352.4   Mar 1, 2017  
8.   Spatial data progressive transmission method and device   Invention     201010617383.9     Jun 15, 2016  
9.   Methods and devices for conflict detection and avoidance of spatial entity element labeling   Invention     201010617385.8     Mar 26, 2014  
10.   Spatial data processing method and device   Invention     201010617399.X     Jun 26, 2013  
11.   Method and device of spatial data simplification   Invention     201010617400.9     Mar 13, 2013  
12.   Method and device for judging the occlusion type of space entity   Invention     201010617403.2     Sep 25, 2013  
13.   A method and device for distributed mapping of 3d model data   Invention     201110274924.7     Mar 26, 2014  
14.   Data simplification of 3d model, gradual transmission method and device   Invention     201110275336.5     Mar 25, 2015  
15.   Spatial data transmission method and device   Invention     201110306393.5     Dec 13, 2014  
16.   Methods and devices for spatial data processing, simplification and progressive transmission   Invention     201210104250.0     Jun 10, 2015  
17.   Spatial data progressive transmission method and device   Invention     201310367021.2     Jun 23, 2017  
18.   Simplification method and device of spatial data   Invention     201310367128.7     Sep 22, 2017  
19.   The method and device to accelerate transmission and display of graphic data across platforms   Invention     201210116149.7     Aug 10, 2016  
20.   Methods and devices related to spatial data compression, decompression and progressive transmission   Invention     201310136682.4     Nov 10, 2017  

  

We also have two patents outside of China.

 

No.   Name of patent   Country     National Registration Number   Date of Insurance  
1.   Spatial data processing method and device     Japan     2012-547439     Jun 20, 2014  
2.   Methods and devices related to spatial data compression, decompression and progressive transmission     U.S.A     14/394,610     Sep 5, 2017  

  

24

 

 

Software Copyrights:

 

We have received the following software copyrights from the National Copyright Administration (“NCA”) of PRC:

 

No.   Name of Copyright   Achievement approach   Registration number   Time of obtain   Expire time
1.   WAP PUSH Business operation platform system   Independent research and development   2007SRBJ1464   Jul 23, 2007   50 years
2.   TD-SCDMA Streaming media business management platform software V1.0   Independent research and development   2009SRBJ0412   Jan 22, 2009   50 years
3.   Content management platform system software V1.0   Independent research and development   2009SRBJ1374   Apr 1, 2009   50 years
4.   Mobile multimedia broadcast electronic service guide system software V1.0   Independent research and development   2009SRBJ1365   Apr 1, 2009   50 years
5.   Mobile video business operation platform system V1.0   Independent research and development   2007SRBJ1463   Jul 23, 2007   50 years
6.   Mobile multimedia broadcast emergency broadcast platform software V1.0   Independent research and development   2010SRBJ0720   Mar 5, 2010   50 years
7.   Mobile multimedia broadcast audio rich media interactive platform softwareV1.0   Independent research and development   2010SRBJ0719   Mar 5, 2010   50 years
8.   Printer typesetting and printing software V1.0   Independent research and development   2011SRBJ4190   Sep 28, 2011   50 years
9.   Electronic newspaper business support platform software V1.0   Independent research and development   2011SRBJ4186   Sep 28, 2011   50 years
10.   Public information business platform software V1.0   Independent research and development   2011SRBJ3810   Sep 27, 2011   50 years
11.   User interface scripting software V1.0   Independent research and development   2011SRBJ3809   Sep 27, 2011   50 years
12.   Integrated business management platform software V1.0   Independent research and development   2012SR003002   Jan 16, 2012   50 years
13.   Interactive business development platform software   Independent research and development   2011SRBJ4593   Nov 29, 2011   50 years
14.   Instant messaging and messaging system software   Independent research and development   2014SR122231   Aug 5, 2014   50 years
15.   General statistical platform software for client products   Independent research and development   2014SR216662   Dec 30, 2014   50 years
16.   CMMB Data broadcast management platform software   Independent research and development   2009SRBJ0391   Jan 22, 2009   50 years
17.   Integrated passenger train service system   Independent research and development   2012SR083665   Sep 5, 2012   50 years

  

25

 

 

No.   Name of Copyright   Achievement approach   Registration number   Time of obtain   Expire time
18.   JHBY Train inspection management system   Independent research and development   2013SR015105   Feb 21, 2013   50 years
19.   Integrated information engine platform software V1.0   Independent research and development   2014SR040347   Nov 30, 2001   50 years
20.   Super information engine development platform software V5.0   Independent research and development   2014SR036792   Mar 5, 2003   50 years
21.   Core map super network information engine platform software V1.0   Independent research and development   2014SR036772   Sep 15, 2007   50 years
22.   Integrated management of the grid gis software V1.0   Independent research and development   2014SR036808   Jun 20, 2008   50 years
23.   Core map rural power grid equipment GPS patrol system software V1.0   Independent research and development   2014SR036810   Dec 10, 2008   50 years
24.   Diagram grid patrol PDA system software V1.0   Independent research and development   2014SR036778   Dec 12, 2008   50 years
25.   Core map geographic information engine desktop platform software V1.0   Independent research and development   2014SR036614   Jan 15, 2009   50 years
26.   Integrated management of the grid geographic information Web system software V1.0   Independent research and development   2014SR036799   Mar 10, 2009   50 years
27.   Core map railway power supply equipment GPS patrol system software V1.0   Independent research and development   2014SR036783   Mar 25, 2010   50 years
28.   Core map network 3 d map server software V1.0   Independent research and development   2014SR036788   Feb 20, 2011   50 years
29.   Core map network 3d map client softwareV1.0   Independent research and development   2014SR036637   Feb 22, 2011   50 years
30.   Core map 3d map network publishing platform software V1.0   Independent research and development   2014SR036633   Mar 10, 2011   50 years
31.   Core map 3d map network release plug-in system software V1.0   Independent research and development   2014SR036622   Mar 15, 2011   50 years
32.   Core map network 3d map smartphone platform software V1.0   Independent research and development   2014SR036638   Apr 28, 2011   50 years
33.   Core map network GIS Shared mobile platform software V1.0   Independent research and development   2014SR036634   Oct 31, 2011   50 years
34.   Core map network GIS sharing platform software V1.0   Independent research and development   2014SR036639   Dec 16, 2011   50 years

 

 

Trademarks:

 

We have registered the following trademarks with the Trademark Office, State Administration for Industry and Commerce in the PRC:

 

No   Trademark   Classification
Number
  Valid Period   Registration
Number
1   Y-图形   38   2010.04.21-2020.04.20   6746069
2   Y-图形   41   2010.09.07-2020.09.06   6746067
3   YRADIO-文字   35   2010.07.21-2020.07.20   6733437
4   YRADIO-文字   38   2010.04.21.2020.04.20   6733438
5   YRADIO-文字   41   2010.09.07-2020.09.06   6733439
6   LookLook-图形   38   2009.04.07-2019.04.06   4666051
7   LookLook-图形   42   2008.12.21-2018.12.20   4666050
8   YTV-文字   35   2010.07.21-2020.07.20   6733579
9   YTV-文字   38   2010.05.28-2020.05.27   6733578
10   YTV-文字   41   2010.09.07-2020.09.06   6733581
11   YTV-文字   42   2010.09.07-2020.09.06   6733580
12   YOUTV-文字   35   2010.07.21-2020.07.20   6733440
13   YOUTV-文字   38   2010.05.28-2020.05.27   6733441
14   xfeng-文字   35   2012.03.28-2022.03.27   9229145

 

26

 

 

No   Trademark   Classification
Number
  Valid Period   Registration
Number
15   xfeng-文字   38   2012.03.28-2022.03.27   9229160
16   xfeng-文字   41   2012.03.28-2022.03.27   9229190
17   xfeng-文字   42   2012.03.28-2022.03.27   9229221
18   中传视讯-文字+图形   42   2008.12.21-2018.12.20   4666047
19   中传视讯-文字   42   2008.12.21-2018.12.20   4666048
20   中传视讯-文字   38   2008.12.21-2018.12.20   4666049
21   新蜂-文字   38   2011.08.21-2021.08.20   8538907
22   新蜂-文字   42   2012.01.28-2022.01.27   8539078
23   新蜂.潮-文字   38   2011.08.21-2021.08.20   8539104
24   新蜂.潮-文字   42   2012.01.28-2022.01.27   8539141
25   新影力   41   2014.08.28-2024.08.27   12288643
26   小人-图形   35   2014.08.28-2024.08.27   12287985
27   小人-图形   38   2014.08.28-2024.08.27   12288580
28   小人-图形   41   2014.08.28-2024.08.27   12288629
29   小人-图形   42   2014.08.28-2024.08.27   12288435
30   中传-文字   38   2014.08.28-2024.08.27   12288267
31   中传-图形   38   2014.08.28-2024.08.27   12288289
32   中童-文字   41   2014.08.07-2024.08.06   12214085
33   中童在线-文字   41   2014.08.07-2024.08.06   12214092
34   翠鸟-文字   38   2014.08.07-2014.08.06   12214058
35   翠鸟-文字   42   2014.08.07-2014.08.06   12214125
36   爱翠鸟-文字   38   2014.08.07-2024.08.06   12214066
37   爱翠鸟-文字   41   2014.08.07-2024.08.06   12214096
38   爱翠鸟-文字   42   2014.08.07-2024.08.06   12214126
39   翠鸟-图形   35   2014.08.07-2024.08.06   12214040
40   翠鸟-图形   38   2014.08.07-2024.08.06   12214074
41   翠鸟-图形   41   2014.08.07-2024.08.06   12214100
42   翠鸟-图形   42   2014.08.07-2024.08.06   12214131
43   信号小喇叭图形+CMEDIA   41   2015.03.21-2025.03.20   12480439
44   LookLook-图形   38   2015.11.14-2025.11.13   11533428
45   LookLook-图形   42   2014.06.21-2024.06.20   11533720
46   LookLook-文字   38   2014.07.14-2024.07.13   11534067
47   LookLook-文字   42   2014.04.14-2024.04.13   11534227
48   L-图形   35   2014.02.28-2024.02.27   11535002
49   L-图形   38   2014.02.28-2024.02.27   11535073
50   L-图形   41   2014.02.28-2024.02.27   11535181
51   L-图形   42   2014.02.28-2024.02.27   11535262
52   箩筐-图形   41   2016.06.14-2026.06.13   16580228
53   箩筐-图形   42   2016.06.14-2026.06.13   16580227
54   箩筐-文字   42   2016.09.28-2026.09.27   16580249
55   箩筐-文字   41   2016.06.14-2026.06.13   16580250
56   箩筐-文字   35   2016.09.21-2026.09.20   16580252
57   箩筐-文字   9   2016.06.14-2026.06.13   16580253

 

27

 

 

No   Trademark   Classification
Number
  Valid Period   Registration
Number
58   箩筐-图形   38   2016.06.14-2026.06.13   16580229
59   箩筐-图形   35   2016.06.14-2026.06.13   16580230
60   箩筐-图形   9   2016.06.14-2026.06.13   16580231
61   微时光-文字   42   2016.09.28-2026.09.27   16580247
62   传游录屏-文字   9   2016.06.14-2026.06.13   16782144
63   传游录屏-文字   35   2016.06.14-2026.06.13   16782143
64   传游录屏-文字   38   2016.06.14-2026.06.13   16782142
65   传游录屏-文字   41   2016.06.14-2026.06.13   16782141
66   传游录屏-文字   42   2016.06.14-2026.06.13   16782140
67   录游器-文字   9   2016.06.14-2026.06.13   16782135
68   录游器-文字   35   2016.06.14-2026.06.13   16782136
69   录游器-文字   38   2016.06.14-2026.06.13   16782137
70   录游器-文字   41   2016.06.14-2026.06.13   16782138
71   录游器-文字   42   2016.06.14-2026.06.13   16782139
72   畅联TV-文字   41   2016.01.21-2026.01.20   15792467
73   畅联TV-文字   38   2016.01.21-2026.01.20   15792468
74   SuperEngine   9   2016.01.21-2026.01.20   8125722
75   SuperEngine   42   2016.01.21-2026.01.20   8125728
76   超擎   9/42   2016.01.21-2026.01.20   16473205
77   SUPERENGINE   9/42   2016.01.21-2026.01.20   16473185

 

* See below for an explanation of each classification number used in the table above.

 

Classification No. 9:  data processing apparatus, couplers (data processing equipment), computer software (recorded), monitors (computer programs), smart cards (integrated circuit cards), electro-dynamic apparatus for the remote control of signals, alarms, and electric installations for the remote control of industrial operations.

 

Classification No. 35:  auctioneering, sales promotion for others, marketing analysis, marketing research, import-export agencies, advisory services for business management, business management for franchise, personnel management consultancy, relocation services for businesses, and systemization of information into computer databases.

 

Classification No. 38: Include services that enable at least sensory communication between two people. Such services include that allow one person to talk to another, send messages from one person to another, Make verbal or visual contact between one person and the other. This classification especially include the service for broadcasting radio or television programs. Except for radio advertising services and telemarketing services.

  

Classification No. 41:  instruction services, teaching, education information, tuition, arranging and conducting of colloquiums, publication of electronic books and journals on-line, amusements, and vocational guidance.

  

Classification No. 42:  technical research, studies (technical project), computer software design, updating of computer software, recovery of computer data, computer systems analysis, installation of computer software, computer anti-virus protection, and research and development for others. 

 

28

 

 

Business Certificates and Qualifications

 

We have obtained all necessary regulatory certifications to conduct our business in the PRC, including without limitation, the following: Software Enterprise Recognition Certificate, Computer Information System Integration Qualification Certificate, Construction Enterprise Qualification Certificate, and Security Technology & Protection Enterprise Certificate. We have also been properly certified as a high-tech enterprise and have met the ISO 9001:2000 qualification management system.

 

Legal Proceedings

 

Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we do not believe that we are a party to any litigation that will have a material adverse impact on our financial condition or results of operations. To our knowledge, other than as described below there are no material legal proceedings threatened against us. From time to time, we may be subject to various claims and legal actions arising in the ordinary course of business. Following the consummation of the AEA, we became successor in interest to the legal proceedings described below.

 

Litigation with Shanghai Fusheng Weier Intelligent Control Technology Co., Ltd.

 

On January 22, 2016, Zhong Chuan Rui You and Shanghai Fusheng Weier Intelligent Control Technology Co., Ltd. (“Fusheng Weier”) signed a contract for equipment of $1,652,842 (RMB10,800,000). Since Zhong Chuan Rui You did not make the payments of $1,126,381 (RMB7,360,000) on the due dates, Fusheng Weier filed a lawsuit against Zhong Chuan Rui You in Shanghai Xuhui District People's Court on October 8, 2016. On March 9, 2017, Xuhui District People's Court issued the verdict requiring Zhong Chuan Rui You to pay the overdue debts. In August 2017, C Media Limited made the payment of $512,075 (RMB3,346,000). The remaining balance has been accrued in accounts payable. The payment schedule for the remaining balance is being negotiated by the two parties.  On February 5, 2018, a hearing was held adding Zhong Chuan Shi Xun as a defendant. The Group plans to settle the remaining balance within one year.

 

Lawsuit with Gansu Jinlun Culture Media Co., Ltd.

 

On August 22, 2014, Zhong Chuan Rui You and Gansu Jinlun Culture Media Co., Ltd. (“Gansu Jinlun”) signed a “Lanzhou Railway Bureau Air-conditioned Train Wi-Fi Network System Advertising Operation Rights Agreement” for advertising on 72 trains of $1,467,880 (RMB9,604,633). Due to the dispute on the project implementation, Zhong Chuan Rui You did not pay the advertising fee. On August 23, 2017, Gansu Jinlun filed a lawsuit with Gansu Intermediate People's Court. On December 19, 2017, Gansu Intermediate People's Court issued a verdict, ruling that Zhong Chuan Rui You settle the overdue advertising fee. Since only 18 out of 72 trains have been installed with Wifi network system, Zhong Chuan Rui You disputed and appealed to the verdict. The next court trial date has not yet been determined.

 

C Media and Gansu Jinlun are  negotiating a potential settlement to resume the contract. According to the legal counsel, it is probable that the settlement will amount to approximately $459,000 (RMB3,000,000); therefore, this amount has been accrued in accounts payable as at December 31, 2017.

 

Litigation with Shenzhen Hua Xun Fang Zhou Technology Co., Ltd.

 

On June 16, 2015, Zhong Chuan Rui You signed a cooperation agreement with Shenzhen Hua Xun Fang Zhou Technology Co., Ltd. (“Shenzhen Hua Xun”) and Xuesong Song, a major shareholder of C Media Limited. Pursuant to this agreement, Zhong Chuan Rui You procures equipment from Shenzhen Hua Xun. Xuesong Song acts as a joint liability guarantor for the entire debts of Zhong Chuan Rui You under this agreement. As Zhong Chuan Rui You did not make the payments on the due dates, Shenzhen Hua Xun filed a lawsuit with Shenzhen Baoan District People's Court on May 31, 2016. On November 1, 2016, Zhong Chuan Rui You, Xuesong Song and Shenzhen Hua Xun reached a settlement in Shenzhen Baoan District People's Court to settle $1,735,389 (RMB11,355,000) in four instalments. On December 30, 2017, the debt was assigned to C Media Limited.

 

29

 

 

C.   ORGANIZATIONAL STRUCTURE

 

The following diagram illustrates our corporate structure and the place of formation and affiliation of each of our subsidiaries and affiliates as of September 30, 2018.

 

 

30

 

 

The following diagram illustrates our corporate structure and the place of formation and affiliation of each of our subsidiaries and affiliates as of December 31, 2017.

  

 

Contractual Arrangements with Beijing Zhong Chuan Shi Xun Technology Limited’s Subsidiaries and Their Respective Shareholders

 

To comply with the PRC legal restrictions on foreign ownership of companies that operate mobile application services, our subsidiaries operate in such restricted service areas in the PRC through certain PRC domestic companies, whose equity interests are held by certain management members or founders of the LK Technology Ltd. Part of the registered capital of these PRC domestic companies was funded by certain management members or founders of LK Technology Ltd. LK Technology Ltd., through its subsidiary Zhong Chuan Tian Xia Information and Technology (Shenzhen) Limited (the “WFOE”), has entered into an exclusive business cooperation agreement with Beijing Zhong Chuan Shi Xun Technology Limited (“Zhong Chuan Shi Xun” or the “VIE”) the PRC domestic company, which entitle the WFOE to receive a majority of profit of Zhong Chuan Shi Xun. In addition, Zhong Chuan Tian Xia Information and Technology (Shenzhen) Limited has entered into certain agreements with those management members or founders, including equity interest pledge agreement of the equity interests held by those management members or founders and exclusive option agreement to acquire the equity interests in these companies when permitted by the PRC laws, rules and regulations. Details of the typical VIE structure of our significant consolidated VIE, primarily domestic companies associated with the operations such as Zhong Chuan Shi Xun and its subsidiaries of Zhong Chuan Rui You, Huoerguosi Luokuang and Jiu Zhou Shi Dai, are set forth below:  

 

Exclusive Business Cooperation Agreement

 

The VIE has entered into an exclusive business services agreement with the WFOE, pursuant to which the WFOE provides exclusive business services to the VIE. In exchange, the VIE pays a service fee to the WFOE which amounts to be no less than the 80% of the VIE’s after-tax profit, resulting in a transfer of substantially all of the profits from the VIE to the WFOE.

 

Exclusive Option Agreement

 

The VIE equity holders have granted the WFOE exclusive call options to purchase their equity interest in the VIE at an exercise price equal to the minimum price as permitted by applicable PRC laws. The WFOE may nominate another entity or individual to purchase the equity interest, if applicable, under the call options. Each call option is exercisable subject to the condition that applicable PRC laws, rules and regulations do not prohibit completion of the transfer of the equity interest pursuant to the call option. The VIE agrees not to distribute any dividends to the VIE equity holders without the approval of WFOE.

 

31

 

 

Equity Interest Pledge Agreement

 

Pursuant to the equity pledge agreement, the VIE equity holders have pledged all of their interests in the equity of the VIE as a continuing first priority security interest in favor of the WFOE to secure the performance of obligations by the VIEs and/or the equity holders under the exclusive business cooperation agreement. The WFOE is entitled to exercise its right to dispose of the VIE equity holders’ pledged interests in the equity of the VIE and has priority in receiving payment by the application of proceeds from the auction or sale of such pledged interests, in the event of any breach or default under the exclusive business cooperation agreement, if applicable. These equity pledge agreement remain in force until all the obligations under the exclusive business cooperation agreement have been fulfilled.

 

The exclusive business cooperation agreement and equity interest pledge agreement described above also enable the Company to receive substantially all of the economic benefits from the VIE by typically entitling the WFOE to all dividends and other distributions declared by the VIE and to any distributions or proceeds from the disposal by the VIE equity holders of their equity interests in the VIE.

 

D.  PROPERTY AND EQUIPMENT

 

We lease offices located at Lab 30 & Lab 32, SOHO 3Q, No 9, Guanghua Road, Chaoyang District, Beijing, which covers a floor space of 600 square meters. These leases expire at different times throughout 2018 and are renewable upon negotiation.

 

ITEM 4A.  UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A . OPERATING RESULTS.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as our anticipated growth strategy, our plans to recruit more employees, our plans to invest in research and development to enhance our product or service lines, our future business development, results of operations and financial condition, expected changes in our net revenues and certain cost or expense items, our ability to attract and retain customers, trends and competition in the enterprise mobile software application market, and the factors set forth elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements. In light of those risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur. You should not place undue reliance on the forward-looking statements contained in this report.

 

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by U.S. federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.  Further, the information about our intentions contained in this report is a statement of our intention as of the date of this report and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices and our assumptions as of such date.  We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

 

32

 

 

Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; and (iii) “RMB”, “Yuan” and Renminbi are to the currency of the PRC or China.

 

Overview

 

Luokung Technology was incorporated on October 27, 2009 under the laws of the British Virgin Islands. We are a holding company and conduct our operations through LK Technology Ltd., a British Virgin Islands limited liability company (“LK Technology”) and its wholly-owned subsidiaries, MMB Limited and Mobile Media (China) Limited and their respective subsidiaries and a contractually-controlled entity in the PRC named Beijing Zhong Chuan Shi Xun Technology, which hold the rights to deploy Wi-Fi systems on about 700 trains in China, including 290 trains in which Wi-Fi systems have already been installed and are in operation. In May 2010, we consummated an initial public offering of our American Depository Shares, or ADSs, for gross proceeds of $16 million, and our ADSs were listed on the NASDAQ Capital Market under the ticker symbol “KONE”. Our ordinary shares are not currently listed on any trading market. Our American Depository Shares (“ADSs”) were voluntarily delisted from the NASDAQ Capital Market on September 19, 2018. We have applied to NASDAQ for the listing of our ordinary shares on the NASDAQ Capital Market and received an approval for listing of Ordinary Shares on August 6, 2018, and as of the date of this transition report, that application and approval are currently under review.

 

On August 17, 2018, we consummated an asset exchange transaction, pursuant to which we exchanged all issued and outstanding capital stock in Topsky Info-Tech Holdings Pte Ltd., the parent of Softech, for the issued and outstanding capital stock of LK Technology (the “Asset Exchange”). In connection with the Asset Exchange, we changed our name on August 20, 2018, and on September 20, 2018, completed the issuance to the shareholders of C Media Limited, the former parent of LK Technology, of (i) 185,412,599 of our ordinary shares, par value $0.01 per share and (ii) 1,000,000 of our preferred shares. Upon the consummation of the Asset Exchange, we ceased our previous business operations and became a company focused on the provision of Wi-Fi and mobile application products for long distance travelers in China.

 

On August 25, 2018, LK Technology entered into a Stock Purchase Agreement (the “Agreement”) with the shareholders (“Shareholders”) of Superengine Holdings Limited, a limited liability company organized under the laws of the British Virgin Islands (the “Superengine”), pursuant to which LK Technology acquired all of the issued and outstanding capital stock of Superengine for an aggregate purchase price of US$60 million (the “Purchase Price”), which are paid by the issuance of our Ordinary Shares in an amount equal to the quotient of (x) the Purchase Price divided by (y) the average of the closing prices of the Ordinary Shares on the NASDAQ Capital Market over the 12 months period preceding July 31, 2018. We are a party to the Agreement in connection with the issuance of the Ordinary Shares and certain other limited purposes.

 

Results of operations for the fiscal year ended December 31, 2017 compared to the fiscal year ended December 31, 2016.

 

Revenue

 

We provide display-based online advertising services to customers by integrating text description, image and video, and displaying the advertisements in a prominent position of LuoKuang Application. We recognize revenue in accordance with ASC 605, over the contractual term based on the agreements and confirmation letters signed by both parties, commencing on the date the customer’s advertisement is displayed on our platform.

 

For the year ended December 31, 2017, we had revenue of $26,082,417, as compared to revenue of $5,233,145 for the year ended December 31, 2016, an increase of $20,849,272, or 398.4%, which was primarily due to the increase of our advertising clients.

 

Cost of revenue

 

Our cost of revenue primarily consists of depreciation, labor cost, Wi-Fi equipment installation fees, data charges, annual payments to local railway bureau, other overhead costs.

 

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Cost of revenue for the year ended December 31, 2017 was $5,547,779, representing a decrease of $767,725 or 12.2% as compared to $6,315,504 for the year ended December 31, 2016. The decrease was primarily attributable to the decrease in labor cost as a result of our cost control and a decrease in the number of maintenance staff. Additionally, data charges decreased as train passengers prefer using their mobile data, leading to a decrease in 3G and 4G data.

 

Selling and marketing expense

 

Our selling and marketing expense mainly include promotional and marketing expenses and compensation for our sales and marketing personnel.

 

Selling expense totaled $23,908,733 for the year ended December 31, 2017, as compared to $6,209,804 for the year ended December 31, 2016, an increase of $17,698,929 or 285.0%. The increase was primarily attributable to the increase in promotional and marketing activities conducted by the Company.

 

General and administrative expense

 

Our general and administrative expenses consist primarily of salaries and benefits for our general and administrative personnel, rent, fees and expenses for legal, accounting and other professional services

 

General and administrative expense totaled $2,451,249 for the year ended December 31, 2017, as compared to $2,108,854 for the year ended December 31, 2016, an increase of $342,395 or 16.2%.

 

Research and development expenses.

 

Research and development expenses primarily consist of salaries and benefits for research and development personnel.

 

Research and development expenses totaled $1,046,198 for the year ended December 31, 2017, as compared to $2,882,202 for the year ended December 31, 2016, a decrease of $1,836,004 or 63.7%. The decrease was primarily attributable to the Company reduced its expenses in research and development temporarily as our products are quite stable at present.

 

Loss from operations

 

As a result of the factors described above, for the year ended December 31, 2017, loss from operations amounted to $6,871,542, as compared to loss from operations of $12,283,219 for the year ended December 31, 2016, a decrease of $5,411,677, or 44.1%.

 

Other income/expense

 

Other income/expense mainly include interest income from bank deposits, foreign currency transaction gain, and loss from investment.

  

Net loss

 

As a result of the factors described above, our net loss was $6,810,454 for the year ended December 31, 2017, compared to net loss of $13,049,031 for the year ended December 31, 2016, a decrease of $6,238,577 or 47.8%.

 

Foreign currency translation adjustment

 

Our reporting currency is the U.S. dollar. The functional currency of our parent company and subsidiaries of Merchant Supreme and Prime Cheer is the U.S. dollar and the functional currency of the Company’s subsidiaries incorporated in China is the Chinese Renminbi (“RMB”). The financial statements of our subsidiaries incorporated in China are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenue, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and comprehensive loss. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $90,671 for the year ended December 31, 2017, as compared to a foreign currency translation loss of $387,375 for the year ended December 31, 2016. This non-cash gain had the effect of increasing/decreasing our reported comprehensive income/loss.

 

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Comprehensive loss

 

As a result of our foreign currency translation adjustment, we had comprehensive loss for the year ended December 31, 2017 of $6,719,783, compared to comprehensive loss of $12,661,656 for the year ended December 31, 2016.

 

B.   LIQUIDITY AND CAPITAL RESOURCES

 

The information contained in “Item 5. Operating and Financial Review and Prospects – A. Operating Results – Liquidity and Capital Resources” is incorporated herein by reference.

 

C.  RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

 

The discussions of our research and development activities were contained in “Item 4.  Information about our Company – B. Business Overview – Research and Development” and “Item 5. Operating and Financial Review and Prospects – A. Operating Results – Operating Expenses – Research and Development Expenses” are incorporated herein by reference. In the years ended December 31, 2017 and 2016, we spent $1,046,198 and $2,882,202, respectively, on research and development activities.

 

D. TREND INFORMATION.

 

Industry and Market Outlook

 

China has awarded licenses to mobile phone companies to provide the superfast 4G network to customers. The licenses, which are designed to give mobile phone users faster access to services, were granted by the government to China Mobile, China Unicom Hong Kong and China Telecom. Since the grants, China Mobile has offered 4G to subscribers from December 18, 2013. China Unicom and China Telecom, the country's other two major carriers, also offer 4G wireless. The number of China Mobile 4G customers has exceeded 900 million by the end of October in 2017. The move greatly bolstered business for telecom equipment makers and a range of other companies.

 

Under China’s 12th Five-Year Plan, a key priority is for China to transition from “Made in China” to “Designed in China.” In order to achieve this goal, the government plans to heavily invest in science and technology education and R&D so as to further develop China’s intellectual property rights system and support “Next-Generation IT” as a Strategic Emerging Industry (SEI). Additionally, China plans to upgrade the technological capabilities of private and public services, including “triple play” services (the convergence of telecom, broadcasting and Internet networks), ecommerce, and e-government and statistics systems. Furthermore, the government plans to invest in R&D of the "Internet of things" and cloud computing, and develop digital and virtual technologies.

 

E.  OFF-BALANCE SHEET ARRANGEMENTS

 

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, except for the mortgage referenced above, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

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F.  TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

 

As of December 31, 2017, we did not have any contractual obligations required to be disclosed in this Item 5.F. 

  

ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

 

A.  DIRECTORS AND SENIOR MANAGEMENT.

 

Executive Officers and Directors

 

The following table sets forth the names and ages as of the date of this transition report of each of our executive officers and directors:

 

Name   Age   Position
Xuesong Song   50   Chief Executive Officer, Chairman and Director
Dongpu Zhang   50   President
Jie Yu   34   Chief Financial Officer
Kegang Peng   46   Vice President and Director
Chuang Tao   51   Director
Dennis Galgano (1)(2)   69   Director (Independent)
Jin Shi (1) (2)   49   Director (Independent)
Jiming Ha (1)(3)   56   Director (Independent)
Zhihao Xu (3)   42   Director (Independent)

 

(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating and Corporate Governance Committee.

 

Set forth below is biographical information concerning our executive officers and directors.

 

Xuesong Song is a co-founder of C Media Limited and served as its chairman of the board of directors and chief executive officer from 2012 until the consummation of the AEA. From February 2014 through April 2017, Mr. Song served as a director of Seven Stars Cloud Group, Inc. (NASDAQ: SSC) and from January 2013 through February 2015, Mr. Song served as a director of Pingtan Marine Enterprise Ltd. (NASDAQ: PME). From May 2006 through January 2009, Mr. Song served as the Chairman of the Board of ChinaGrowth North Acquisition Corporation, a special purpose acquisition company, which acquired UIB Group Limited in January 2009, in which he remains a director. Mr. Song has been a principal of Chum Capital Group Limited since August 2001, a merchant banking firm that invests in growth Chinese companies and advises them in financings, mergers & acquisitions and restructurings, and chief executive officer of Beijing Chum Investment Co., Ltd. since December 2001. Mr. Song has been a director of Mobile Vision Communication Ltd. since July 2004. Mr. Song received a Master’s of Business Administration degree from Oklahoma City/Tianjin Program.

 

Dongpu Zhang was appointed as the President of the Company effective on August 25, 2018. Mr. Dongpu Zhang has served as the General Manager of SuperEngine Graphics Software Technology Development (Suzhou) Co., Ltd. (“SuperEngine Suzou”) and the Chief Executive Officer of SuperEngine Holding Limited since September 2016. From February, 2014 to August, 2016, Mr. Zhang served as vice president of Industrial Development Group under China Fortune Land Development Co., Ltd. From March, 2009 to February, 2014, Mr. Zhang served as the vice president of Aerospace Science and Technology Holding Group Co., Ltd. Mr. Zhang receive his Master Degree of Computer Science from Harbin Institute of Technology in 1994 and his Bachelor Degree of information system from Changsha Institute of technology in 1991.

 

Jie Yu served as the chief financial officer of C Media Limited from January 2018 until the consummation of the asset exchange transactions. From June 2016 to January 2018, Mr. Yu served as chief financial officer and secretary of the board of directors of MTI Environment Group Limited. Prior to joining MTI, Mr. Yu served as the senior manager at DA HUA CPA from November 2012 to May 2016. Previously, Mr. Yu served as the manager at Crowe Horwath (Hong Kong) CPA. Mr. Yu holds a bachelor degree in accounting and finance from University of Auckland and postgraduate diploma in accounting from University of Auckland.

 

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Kegang Peng served as the Vice Chairman of the board of directors C Media Limited from October 2014 to the consummation of the asset exchange transactions, and is now a member of the Company’s board of directors. Previously, from 2012 to 2014, Mr. Peng was chairman of the board and founder of Jiangsu Suqian Jinghaiboyuan Information and Technology Co., Ltd. Mr. Peng studied at Beijing University of Aeronautics and Astronautics majoring computer and application.

 

Chuang (Vincent) Tao was appointed as a member of the Board effective on August 25, 2018. Dr. Tao was the Chairman of SuperEngine Suzhou from 2014 to 2017. Dr. Tao has been the president of the Seasky Angel Investment Alliance of Shanghai since 2015. Dr. Tao received his Bachelor Degree of geographic information and telemetry from Wuhan University in China in 1990 and received his Ph.D. from University of Calgary, Canada in 1997.

 

Dennis Galgano was appointed as a director of the Company following the consummation of the asset exchange agreement. He was a registered consultant with Morgan Joseph Triartisan LLC from November 2016 until October 2017, and previously served as vice chairman and head of international investment banking for Morgan Joseph Triartisan LLC, which is a registered broker dealer engaged in the investment banking and financial advisory industry. Mr. Galgano received a B.S. degree in Chemistry from St. John’s University and an M.B.A. from The Wharton School in 1972.

 

Jin Shi was appointed as a director of the Company following the consummation of the asset exchange transactions. Mr. Shi has served as the managing partner of Chum Capital Group, a merchant bank focused on helping Chinese growth companies to access global capital, since January 2013. Mr. Shi has also served as a director of Seven Stars Cloud Group, Inc. (NASDAQ: SSC), a premium video on demand service provider, since January 2014, and joined the audit committee of its board of directors in March 2016. He also served as a director and member of the audit committee of Pingtan Marine Enterprise, Ltd. (NASDAQ: PME), a marine enterprise group primarily engaged in ocean fishing through its subsidiaries. Mr. Shi received an EMBA degree from the Guanghua Management School of Beijing University, and a Bachelor’s degree of science in Chemical Engineering from Tianjin University.

 

Jiming Ha was appointed as a director of the Company following the consummation of the asset exchange agreement, and has also served as a senior research fellow for the China Finance 40 Forum since March 1, 2018, and previously served as a managing director of Goldman Sachs from January 2017 to April 2017. Mr. Ha served as a vice chairman and chief investment strategist of the Investment Strategy Group for Private Wealth Management at Goldman Sachs from 2010 to January 2017. Mr. Ha holds a PhD in Economics from the University of Kansas and Master’s and Bachelor’s degrees of science from Fudan University.

 

Zhihao Xu was appointed as a director of the Company following the consummation of the asset exchange transactions. Mr. Xu has served as the chief executive officer of Geely Group Co., Ltd., in Hangzhou, China, since December 2017, and previously served as the chairman and chief executive officer of Beijing Dingchengrenhe Investment Co., Ltd., a funds management company, from January 2017 to December 2017. Mr. Xu served as the chairman of president of HNA USOLV CO., LTD., and the chief innovation officer of HNA Logistics Group from January 2014 to December 2016, and prior to that as the chairman of Gopay Innovation Technology Co. Ltd., an online payment system operator supporting online money transfers, from April 2012 to January 2014. Mr. Xu graduated from the Business School of Renmin University of China and from the Wudaokou Finance College of Tsinghua University with a fund qualification certificate and securities qualification certificate.

  

B.  COMPENSATION.

 

Compensation of Directors and Executive Officers

 

For the nine-month transition period ended September 30, 2018 and the fiscal year ended December 31, 2017, we did not pay any cash compensation to our executive officers of LK Technology Ltd. and a to our directors for serving on our board of directors of LK Technology Ltd.

 

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Other than non-employee directors, we do not intend to compensate directors for serving on our board of directors or any of its committees. We do, however, intend to reimburse each member of our board of directors for out-of-pocket expenses incurred by each director in connection with attending meetings of the board of directors and its committees.

 

Administration

 

The Incentive Plan is administered by our board of directors, or at the discretion of the board, by our compensation committee. Our board of directors has delegated authority to our compensation committee to administer the Incentive Plan. Subject to the terms of the Incentive Plan, the compensation committee may select participants to receive awards, determine the types of awards and terms and conditions of awards, and interpret provisions of the Incentive Plan.

 

The ordinary shares issued or to be issued under the Incentive Plan consist of authorized but unissued shares. If any ordinary shares covered by an award are not purchased or are forfeited, or if an award otherwise terminates without delivery of any ordinary shares, then the number of ordinary shares counted against the aggregate number of ordinary shares available under the plan with respect to the award will, to the extent of any such forfeiture or termination, again be available for making awards under the Incentive Plan.

 

Eligibility

 

Awards may be made under the Incentive Plan to our employees, officers, directors, consultants or advisers or to any of our affiliates, and to any other individual whose participation in the Incentive Plan is determined to be in our best interests by our board of directors.

 

Amendment or Termination of the Plan

 

Our board of directors may terminate or amend the Incentive Plan at any time and for any reason. No amendment, however, may adversely impair the rights of grantees with respect to outstanding awards. The Incentive Plan has a term of ten years. Amendments will be submitted for shareholder approval to the extent required by applicable stock exchange listing requirements or other applicable laws.

 

Options

 

The Incentive Plan permits the granting of options to purchase ordinary shares intended to qualify as incentive share options under the Internal Revenue Code and share options that do not qualify as incentive share options, or non-qualified share options.

 

The exercise price of each share option may not be less than 100% of the fair market value of our ADSs representing ordinary shares on the date of grant. In the case of certain 10% shareholders who receive incentive share options, the exercise price may not be less than 110% of the fair market value of our ADSs representing ordinary shares on the date of grant. An exception to these requirements is made for options that we grant in substitution for options held by employees of companies that we acquire. In such a case the exercise price is adjusted to preserve the economic value of the employee’s share option from his or her former employer.

 

The term of each share option is fixed by the compensation committee and may not exceed ten years from the date of grant. The compensation committee determines at what time or times each option may be exercised and the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised.

 

Options may be made exercisable in installments. The award agreement provides the vesting of the options. Exercisability of options may be accelerated by the compensation committee.

 

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In general, an optionee may pay the exercise price of an option by (1) cash or check (in U.S. dollars or Renminbi or other local currency as approved by the compensation committee), (2) ordinary shares held for such period of time as may be required by the compensation committee, (3) delivery of a notice of a market order with a broker with respect to ordinary shares then issuable upon exercise of an option, and that the broker has been directed to pay us a sufficient portion of net proceeds of the sale in satisfaction of the exercise price, provided that payment of such proceeds is then made to us upon settlement of such sale, (4) other property acceptable to the compensation committee with a fair market value equal to the exercise price, (5) cashless exercise or (6) any combination of the foregoing.

 

Share options granted under the Incentive Plan may not be sold, transferred, pledged, or assigned other than by will or under applicable laws of descent and distribution. However, we may permit limited transfers of non-qualified options for the benefit of immediate family members of grantees to help with estate planning concerns or pursuant to a domestic relations order in settlement of marital property rights.

 

Other Awards

 

The compensation committee may also award under the Incentive Plan:

 

  1. ordinary shares subject to restrictions;
     
  2. deferred ordinary shares, credited as deferred ordinary share units, but ultimately payable in the form of unrestricted ordinary shares in accordance with the terms of the grant or with the participant’s deferral election;
     
  3. ordinary share units subject to restrictions;
     
  4. unrestricted ordinary shares, which are ordinary shares issued at no cost or for a purchase price determined by the compensation committee which are free from any restrictions under the 2011 Omnibus Incentive Plan;
     
  5. dividend equivalent rights entitling the grantee to receive credits for dividends that would be paid if the grantee had held a specified number of ordinary shares; or

 

  6. a right to receive a number of ordinary shares or, in the discretion of the compensation committee, an amount in cash or a combination of ordinary shares and cash, based on the increase in the fair market value of the ADSs representing ordinary shares underlying the right during a stated period specified by the compensation committee.

 

Effect of Certain Corporate Transactions

 

Certain change of control transactions involving us may cause awards granted under the Incentive Plan to vest, unless the awards are continued or substituted for by the surviving company in connection with the corporate transaction.

 

Unless otherwise provided in the appropriate option agreement on the date of grant or provided by our board of directors thereafter with the consent of the grantee, options granted under the Incentive Plan become exercisable in full following (1) a dissolution of our company or a merger, consolidation or reorganization of our company with one or more other entities in which we are not the surviving entity, (2) a sale of substantially all of our assets to another person or entity, or (3) any transaction (including without limitation a merger or reorganization in which we are the surviving entity) which results in any person or entity owning 50% or more of the combined voting power of all classes of our shares.

 

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Adjustments for Dividends and Similar Events

 

The compensation committee will make appropriate adjustments in outstanding awards and the number of ordinary shares available for issuance under the Incentive Plan, including the individual limitations on awards, to reflect ordinary share dividends, stock splits and other similar events.

 

C.  BOARD PRACTICES.

 

Board of Directors

 

Our board of directors consists of six members being Messrs. Xuesong Song, Kegang Peng, Dennis Galgano, Jin Shi, Jiming Ha and Zhiaho Xu. Our directors hold office until our annual meeting of shareholders, where their successors will be duly elected and qualified, or until the directors’ death, resignation or removal, whichever is earlier. Our directors are not subject to a term of office and hold office until their resignation, death or incapacity or until their respective successors have been elected and qualified in accordance with our fourth amended and restated memorandum of association and articles of association. A director will be removed from office if, among other things, the director (1) becomes bankrupt, (2) dies or becomes of unsound mind, or (3) is absent from meetings of our board of directors for six consecutive months without leave and our board of directors resolves that the office is vacated. A director is not entitled to any special benefits upon termination of service with the company.

 

Director Independence

 

Our board of directors consists of six members; Messrs. Dennis Galgano, Jin Shi, Jiming Ha and Zhihao Xu have been determined by us to be independent directors within the meaning of the independent director guidelines of the NASDAQ Corporate Governance Rules (the “NASDAQ Rules”).

 

Committees of Our Board of Directors

 

To enhance our corporate governance, we established three committees under our board of directors: an audit committee, a compensation committee, and a nominating and corporate governance committee. We have adopted a charter for each of these committees. The committees have the following functions and members.

 

Audit Committee

 

Our audit committee reports to our board of directors regarding the appointment of our independent public accountants, the scope and results of our annual audits, compliance with our accounting and financial policies and management’s procedures and policies relating to the adequacy of our internal accounting controls. Our audit committee consists of Messrs. Dennis Galgano, Jin Shi, and Jiming Ha. Mr. Galgano, having accounting and financial management expertise, serves as the chairman of the audit committee and is an “audit committee financial expert” as defined by the rules and regulations of the SEC. Our board of directors has determined that each of these persons meet the definition of an “independent director” under the applicable NASDAQ Rules and under Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

Our audit committee is responsible for, among other things:

 

  the appointment, evaluation, compensation, oversight and termination of the work of our independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting);

 

  an annual performance evaluation of the audit committee;

 

  establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls, auditing matters or potential violations of law, and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters or potential violations of law;

 

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  ensuring that it receives an transition report from our independent auditor describing our internal control procedures and any steps taken to deal with material control deficiencies and attesting to the auditor’s independence and describing all relationships between the auditor and us;

 

  reviewing our annual audited financial statements and quarterly financial statements with management and our independent auditor;

 

  reviewing and approving all proposed related party transactions;

  

  reviewing our policies with respect to risk assessment and risk management;

 

  meeting separately and periodically with management and our independent auditor; and

 

  reporting regularly to our board of directors.

 

Compensation Committee

 

Our compensation committee assists the board of directors in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. In addition, the compensation committee reviews share compensation arrangements for all of our other employees. Members of the compensation committee are not prohibited from direct involvement in determining their own compensation. Our chief executive officer is not permitted to be present at any committee meeting during which his or her compensation is deliberated. Our compensation committee consists of Dennis Galgano and Jin Shi, with Mr. Shi serving as the chairman of the compensation committee. Our board of directors has determined that each of these persons meet the definition of “independent director” under the applicable requirements of the NASDAQ Rules.

 

Our compensation committee is responsible for, among other things:

 

  reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives and setting the compensation level of our chief executive officer based on this evaluation;

 

  reviewing and making recommendations to the board with respect to the compensation of our executives, incentive compensation and equity-based plans that are subject to board approval; and

 

  providing annual performance evaluations of the compensation committee.

 

Nominating and Corporate Governance Committee

 

Our nominating and corporate governance committee assists the board of directors in identifying and selecting or recommending individuals qualified to become our directors, developing and recommending corporate governance principles and overseeing the evaluation of our board of directors and management. Our nominating and corporate governance committee consists of Jiming Ha and Zhihao Xue, with Mr. Ha serving as the chairman of the nominating and corporate governance committee. Our board of directors has determined that each of these persons meet the definition of “independent director” under the applicable requirements of the NASDAQ Rules.

 

Our nominating and corporate governance committee is responsible for, among other things:

 

  selecting and recommending to our board nominees for election or re-election to our board, or for appointment to fill any vacancy;

 

  reviewing annually with our board the current composition of the board of directors with regards to characteristics such as independence, age, skills, experience and availability of service to us;

 

  selecting and recommending to our board the names of directors to serve as members of the audit committee and the compensation committee, as well as the nominating and corporate governance committee itself; advising our board of directors periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to our board of directors on all matters of corporate governance and on any remedial action to be taken; and

 

  monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

 

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Code of Business Conduct and Ethics

 

Our board of directors adopted a code of business conduct and ethics applicable to our directors, officers and employees.

 

Duties of Directors

 

Under British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum of association and articles of association. We have the right to seek damages if a duty owed by our directors is breached.

  

The functions and powers of our board of directors include, among others:

 

  appointing officers and determining the term of office of the officers;

 

  authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable;

 

  exercising the borrowing powers of the company and mortgaging the property of the company;

 

  executing cheques, promissory notes and other negotiable instruments on behalf of the company; and

 

  maintaining or registering a register of mortgages, charges or other encumbrances of the company.

 

Remuneration and Borrowing

 

The directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to be repaid or prepaid all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors.

 

Our board of directors may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.

 

Qualification

 

A director is not required to hold shares as a qualification to office.

 

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Limitation on Liability and Other Indemnification Matters

 

British Virgin Islands law does not limit the extent to which a company’s memorandum of association and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.

 

Under our memorandum of association and articles of association, we may indemnify our directors, officers and liquidators against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with a view to the best interest of the company and, in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct was unlawful.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of our compensation committee is an officer or employee of our company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

 

Employment Agreements

 

On August 19, 2018, the Company entered into an Employment Agreement (the “Song Agreement”) with Mr. Xuesong Song, to serve as the Chief Executive Officer of the Company for a four-year term, subject to renewal. Under the terms of the Song Agreement, Mr. Song will receive no salary for his services but will be eligible for an annual cash bonus in the Board’s sole discretion.

 

On August 19, 2018, the Company entered into an Employment Agreement (the “Yu Agreement”) with Mr. Jie Yu, to serve as the Chief Financial Officer of the Company for a four-year term, subject to renewal. Under the terms of the Yu Agreement, Mr. Yu will receive an annual salary of RMB700,000, and will be eligible for an annual cash bonus in the Board’s sole discretion.

 

D.  EMPLOYEES.

 

As of September 30, 2018 and December 31, 2017, we had a total of 107 and 37 full-time employees, including 48 and 13 in research and development, 9 and 2 in sales and marketing and the rest in a variety of other divisions, respectively. All of our employees are full-time employees. None of our employees is currently represented by a union and/or collective bargaining agreements. We believe that we have good relations with our employees and since our inception we have had no history of work stoppages or union organizing campaigns.

  

E.  SHARE OWNERSHIP.

 

The following table provides information as to the beneficial ownership of our ordinary shares as of October 10, 2018, by the persons listed. Beneficial ownership of shares is determined under the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. For purposes of the following table, a person is deemed to have beneficial ownership of any ordinary shares if such person has the right to acquire such shares within 60 days of October 10, 2018. For purposes of computing the percentage of outstanding shares held by each person, any shares that such person has the right to acquire within 60 days after of October 10, 2018 are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as otherwise noted, the persons named in the table have sole voting and investment power with respect to all of the ordinary shares beneficially owned by them. Unless otherwise indicated, the address of each person listed is c/o Luokung Technologies, LAB 32, SOHO 3Q, No 9, Guanghua Road, Chaoyang District, Beijing, People’s Republic of China.

 

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Percentage ownership in the following table is based on 199,317,558 ordinary shares outstanding on October 10, 2018.

 

    Number of shares     Percent of class  
Directors and named executive officers            
Charm Dragon International Limited (1)     4,030,882       2.03 %
Xuesong Song, Chairman, Chief Executive Officer and Director(2)     38,156,430       19.30 %
Kegang Peng, Vice President and Director (3)     17,231,955       8.71 %
Dennis Galgano, Director     75,796       * %
Jin Shi, Director     -       -  
Jiming Ha, Director     -       -  
Zhihao Xu, Director (4)     7,579,184       3.83 %
Dongpu Zhang, President (5)     2,321,792       1.17 %
Chuang Tao, Director (6)     1,221,996       * %
Directors and executive officers as a group (10 persons)     66,587,152       33.69 %

 

(1) Charm Dragon International Limited is a British Virgin Islands company controlled by Mr. Xuesong Song.

 

(2) Consists of (i) 4,030,882 shares owned directly by Charm Dragon International Limited, a British Virgin Islands company and (ii) 22,624,793 shares owned directly by Bravo First Development Limited, a British Virgin Islands company. Mr. Xuesong Song is the controlling shareholder of Bravo First Development Limited. Mr. Xuesong Song is the sole director of Charm Dragon International Limited.

 

(3) Consists of 17,231,955 shares owned directly by Plenty Prestige Enterprises Limited, a British Virgin Islands company. Mr. Kegang Peng is the sole director of Plenty Prestige Enterprises Limited.

 

(4) Consists of 7,579,184 shares directly owned by Geely Group Limited., a Chinese company. Mr. Zhihao Xu is the Chief Executive Officer of Geely Group Limited.

 

(5) Consists of 2,321,792 shares owned directly by Genoa Peak Limited, a British Virgin Islands company. Mr. Dongpu Zhang controls Genoa Peak Limited.

 

(6) Consists of 1,221,996 shares owned directly by Globalearth Holdings Limited, a British Virgin Islands company. Mr. Chuang Tao controls Globalearth Holdings Limited.

 

* Represents less than 1% of shares outstanding

 

ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

 

A.  MAJOR SHAREHOLDERS

 

Please refer to Item 6.E “Directors, Senior Management and Employees — Share Ownership.”

 

To our knowledge, (A) we are not directly or indirectly owned or controlled by (i) another corporation or (ii) any foreign government and (B) there are no arrangements (including any announced or expected takeover bid), the operation of which may at a subsequent date result in a change in our control.

 

The voting rights of our major shareholders do not differ from the voting rights of other holders of the same class of shares.

 

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B.  RELATED PARTY TRANSACTIONS.  BUSINESS RELATIONSHIPS.

 

Our subsidiaries, consolidated affiliated entities, and the subsidiaries of the consolidated affiliated entities have engaged, during the ordinary course of business, in a number of customary transactions with each other. All of these inter-company balances have been eliminated in consolidation.

 

As of December 31, 2017, we had amounts due from related parties, C Media Limited and Ya Tuo Ji International Consultancy (Beijing) Limited, in the amounts of $11.8 million and $0.2 million, respectively. These amounts due from related parties are short term in nature, non-interest bearing, unsecured and repayable on demand.

 

As of December 31, 2017, we had amounts due to related parties, Mr. Xuesong Song, our chairman and chief executive officer, Thumb Beijing Branch and Thumb Shenzhen Branch, in the amounts of $2.9 million, $0.6 million and $0.03 million, respectively. These amounts due to related parties are short term in nature, non-interest bearing, unsecured and payable on demand.

 

We are party to a series of control agreements with Beijing Zhong Chuan Shi Xun. In addition, our chief executive officer, Mr. Xuesong Song, serves as and officer of Beijing Zhong Chuan Shi Xun and is a shareholder of Beijing Zhong Chuan Shi Xun. The following table sets forth the relationship of Mr. Song with Beijing Zhong Chuan Shi Xun:

 

Name  

Relationship with

Luokung Technology

 

Relationship with

Beijing Zhong Chuan Shi Xun

 

Percentage

Ownership Interest in

Beijing Zhong Chuan Shi Xun

 
Xuesong Song   Chief Executive Officer   Chief Executive Officer     61.83 %

 

C.  INTERESTS OF EXPERTS AND COUNSEL.

 

None.

 

ITEM 8.  FINANCIAL INFORMATION.

 

A.  CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.

 

See “Item 18.  Financial Statements.”

 

Legal Proceedings

 

To our knowledge, other than as described below there are no material legal proceedings threatened against us. From time to time, we may be subject to various claims and legal actions arising in the ordinary course of business. Following the consummation of the AEA, we became successor in interest to the legal proceedings described below.

 

Litigation with Shanghai Fusheng Weier Intelligent Control Technology Co., Ltd.

 

On January 22, 2016, Zhong Chuan Rui You and Shanghai Fusheng Weier Intelligent Control Technology Co., Ltd. (“Fusheng Weier”) signed a contract for equipment of $1,652,842 (RMB10,800,000). Since Zhong Chuan Rui You did not make the payments of $1,126,381 (RMB7,360,000) on the due dates, Fusheng Weier filed a lawsuit against Zhong Chuan Rui You in Shanghai Xuhui District People's Court on October 8, 2016. On March 9, 2017, Xuhui District People's Court issued the verdict requiring Zhong Chuan Rui You to pay the overdue debts. In August 2017, C Media Limited made the payment of $512,075 (RMB3,346,000). The remaining balance has been accrued in accounts payable. The payment schedule for the remaining balance is being negotiated by the two parties.  On February 5, 2018, a hearing was held adding Zhong Chuan Shi Xun as a defendant. The Group plans to settle the remaining balance within one year.

 

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Lawsuit with Gansu Jinlun Culture Media Co., Ltd.

 

On August 22, 2014, Zhong Chuan Rui You and Gansu Jinlun Culture Media Co., Ltd. (“Gansu Jinlun”) signed a “Lanzhou Railway Bureau Air-conditioned Train Wi-Fi Network System Advertising Operation Rights Agreement” for advertising on 72 trains of $1,467,880 (RMB9,604,633). Due to the dispute on the project implementation, Zhong Chuan Rui You did not pay the advertising fee. On August 23, 2017, Gansu Jinlun filed a lawsuit with Gansu Intermediate People's Court. On December 19, 2017, Gansu Intermediate People's Court issued a verdict, ruling that Zhong Chuan Rui You settle the overdue advertising fee. Since only 18 out of 72 trains have been installed with Wifi network system, Zhong Chuan Rui You disputed and appealed to the verdict. The next court trial date has not yet been determined.

 

 C Media and Gansu Jinlun are  negotiating a potential settlement to resume the contract. According to the legal counsel, it is probable that the settlement will amount to approximately $459,000 (RMB3,000,000); therefore, this amount has been accrued in accounts payable as at December 31, 2017.

 

Litigation with Shenzhen Hua Xun Fang Zhou Technology Co., Ltd.

 

On June 16, 2015, Zhong Chuan Rui You signed a cooperation agreement with Shenzhen Hua Xun Fang Zhou Technology Co., Ltd. (“Shenzhen Hua Xun”) and Xuesong Song, a major shareholder of C Media Limited. Pursuant to this agreement, Zhong Chuan Rui You procures equipment from Shenzhen Hua Xun. Xuesong Song acts as a joint liability guarantor for the entire debts of Zhong Chuan Rui You under this agreement. As Zhong Chuan Rui You did not make the payments on the due dates, Shenzhen Hua Xun filed a lawsuit with Shenzhen Baoan District People's Court on May 31, 2016. On November 1, 2016, Zhong Chuan Rui You, Xuesong Song and Shenzhen Hua Xun reached a settlement in Shenzhen Baoan District People's Court to settle $1,735,389 (RMB11,355,000) in four instalments. On December 30, 2017, the debt was assigned to C Media Limited.

  

Dividend Policy

 

We currently intend to retain all of our available funds and future earnings for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Under the terms of our Amended and Restated Memorandum and Articles of Association the declaration and payment of any dividends in the future will be determined by our board of directors, in its discretion, and will depend on a number of factors, including our earnings, capital requirements and overall financial condition and our ability to receive dividends from our subsidiaries. If we pay any dividends, we will pay our ADS holders’ dividends with respect to their underlying shares to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

Our ability to receive dividends from our subsidiaries may limit our ability to pay dividends on our ordinary shares.  See Risk Factors – Risks Related to Doing Business in China – Our holding company structure may limit the payment of dividends” and “Item 10.  Additional Information – D. Exchange Controls – Dividend Distribution”.

 

B.  SIGNIFICANT CHANGES.

 

N/A

 

ITEM 9.  THE OFFER AND LISTING

 

A. OFFER AND LISTING DETAILS.

 

Markets and Share Price History

 

Our ordinary shares are not currently listed on any trading market. Our American Depository Shares (“ADSs”) were voluntarily delisted from the NASDAQ Capital Market on September 19, 2018. We have applied to NASDAQ for the listing of our ordinary shares on the NASDAQ Capital Market and received an approval for listing of Ordinary Shares on August 6, 2018, and as of the date of this transition report, that application and approval are currently under review.

 

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The table below sets forth the high and low reported sales prices in dollars of our ordinary shares, which are represented by ADSs, as reported by NASDAQ in the periods as indicated:

 

    ADS  
    High     Low  
Annual Highs and Lows (as of the fiscal year end 09/30 for the five most recent full financial years)*            
2017     5.59       2.67  
2016     10.2       1.62  
                 
Quarterly Highs and Lows (for the two most recent full financial years and any subsequent period, based on calendar quarter end)*                
                 
2018                
Third Quarter     8.00       6.30  
Second Quarter     8.82       4.25  
First Quarter     6.40       3.70  
                 
2017                
Fourth Quarter     5.59       2.91  
Third Quarter     3.99       2.67  
Second Quarter     4.06       3.07  
First Quarter     5.15       2.83  
                 
2016                
Fourth Quarter     6.59       4.20  
Third Quarter     10.20       1.62  
Second Quarter     3.10       1.97  
First Quarter     3.60       2.12  
                 
Monthly Highs and Lows (for the most recent six months)                
September 2018     8.00       6.41  
August 2018     7.70       6.63  
July  2018     7.50       6.30  
June 2018     8.82       7.55  
May 2018     7.80       5.92  
April 2018     7.45       4.25  

 

* The Company effected a 1-for-10 reverse stock split of its ordinary shares on November 6, 2012 (the “Reverse Split”). The ratio between each American Depositary Share (“ADS”) and its underlying ordinary share post-Reverse Split remains the same, namely, one ADR remains to represent one ordinary share post the Reverse Split. The price listed here after November 6, 2012 reflected the effect from the Reverse Split.

 

B.  PLAN OF DISTRIBUTION.

 

Not Applicable.

 

C. MARKETS.

 

Our ordinary shares are not currently listed on any trading market. Our ADSs were voluntarily delisted from the NASDAQ Capital Market on September 19, 2018. We have applied to NASDAQ for the listing of our ordinary shares on the NASDAQ Capital Market and received an approval for listing of Ordinary Shares on August 6, 2018, and as of the date of this transition report, that application and approval are currently under review.

 

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D. SELLING SHAREHOLDERS.

 

Not applicable.

 

E. DILUTION.

 

Not applicable.

 

F. EXPENSES OF THE ISSUE.

 

Not applicable.

 

ITEM 10.  ADDITIONAL INFORMATION.

 

A.  SHARE CAPITAL

 

Not applicable.

  

B.  MEMORANDUM AND ARTICLES OF ASSOCIATION

 

We are a British Virgin Islands company incorporated with limited liability and our affairs are governed by the provisions of our memorandum of association and articles of association, as amended and restated from time to time, and by the provisions of applicable British Virgin Islands law.

 

Our memorandum of association and articles of association authorize the issuance of up to 251,000,000 shares, which are designated into (i) 250,000,000 of ordinary shares of the Company (“ Ordinary Shares ”), and (ii) 1,000,000 preferred shares of the Company (“ Preferred Shares ”), in each case with the rights, preferences and privileges as set out in the memorandum and articles of association of the Company.

 

Please see below for a description of our ADSs under “Item 12. Description of Securities Other Than Equity Securities – D. American Depository Shares.”

 

The following is a summary of the material provisions of our ordinary shares and our memorandum of association and articles of association.

 

Ordinary Shares

 

All of our issued and outstanding ordinary shares are fully paid and non-assessable. Holders of our ordinary shares who are non-residents of the British Virgin Islands may freely hold and vote their shares.

 

Subject to the memorandum and articles of association (and, for greater clarity, without prejudice to any special rights conferred thereby on the holders of any other shares), an Ordinary Share of the Company confers on the holder:

 

(a) the right to one vote per Ordinary Share at a meeting of the members or on any resolution of members;

 

(b) the right to an equal share in any distribution paid by the Company; and

 

(c) the right to an equal share in the distribution of the surplus assets of the Company on a winding up;

 

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Subject to the memorandum and articles of association (and, for greater clarity, without prejudice to any special rights conferred thereby on the holders of any other shares), a Preferred Share of the Company confers on the holder:

 

(a) the right to 399 votes per Preferred Share at a meeting of the members or on any resolution of members;

 

(b) the right to an equal share in any distribution paid by the Company;

 

(c) the right to an equal share in the distribution of the surplus assets of the Company on a winding up;

 

(d) be freely transferable, in whole or in part, by Mr. Xuesong Song to any third party through one or more Private Transactions, subject to Applicable Law; and

 

(e) be freely transferable, in whole or in part, by Mr. Xuesong Song to any third party through one or more Public Transactions, subject to Applicable Law and Automatic Conversion of such Preferred Share(s) into Ordinary Share(s).

 

Each Preferred Share shall be automatically converted at any time after issue and without the payment of any additional sum into an equal number of fully paid Ordinary Shares upon the conclusion of any transfer by Mr. Xuesong Song to any third party through one or more Public Transactions.

 

Limitation on Liability and Indemnification Matters

 

Under British Virgin Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly and in good faith with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Our memorandum of association and articles of association provide that, to the fullest extent permitted by British Virgin Islands law or any other applicable laws, our directors will not be personally liable to us or our shareholders for any acts or omissions in the performance of their duties. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. These provisions will not limit the liability of directors under United States federal securities laws.

 

We may indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings. We may only indemnify a director if he or she acted honestly and in good faith with the view to our best interests and, in the case of criminal proceedings, the director had no reasonable cause to believe that his or her conduct was unlawful. The decision of our board of directors as to whether the director acted honestly and in good faith with a view to our best interests and as to whether the director had no reasonable cause to believe that his or her conduct was unlawful, is in the absence of fraud sufficient for the purposes of indemnification, unless a question of law is involved. The termination of any proceedings by any judgment, order, settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director did not act honestly and in good faith and with a view to our best interests or that the director had reasonable cause to believe that his or her conduct was unlawful. If a director to be indemnified has been successful in defense of any proceedings referred to above, the director is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in connection with the proceedings.

 

We may purchase and maintain insurance in relation to any of our directors or officers against any liability asserted against the directors or officers and incurred by the directors or officers in that capacity, whether or not we have or would have had the power to indemnify the directors or officers against the liability as provided in our memorandum of association and articles of association.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors or officers under the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable as a matter of United States law.

 

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Differences in Corporate Law

 

We were incorporated under, and are governed by, the laws of the British Virgin Islands. The corporate statutes of the State of Delaware and the British Virgin Islands are similar, and the flexibility available under British Virgin Islands law has enabled us to adopt memorandum of association and articles of association that will provide shareholders with rights that do not vary in any material respect from those they would enjoy if we were incorporated under the Delaware General Corporation Law, or Delaware corporate law. Set forth below is a summary of some of the differences between provisions of the BVI Act applicable to us and the laws application to companies incorporated in Delaware and their shareholders.

 

Director’s Fiduciary Duties

 

Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its stockholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to stockholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its stockholders take precedence over any interest possessed by a director, officer or controlling stockholder and not shared by the stockholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.

 

British Virgin Islands law provides that every director of a British Virgin Islands company in exercising his powers or performing his duties shall act honestly and in good faith and in what the director believes to be in the best interests of the company. Additionally, the director shall exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances taking into account the nature of the company, the nature of the decision and the position of the director and his responsibilities. In addition, British Virgin Islands law provides that a director shall exercise his powers as a director for a proper purpose and shall not act, or agree to the company acting, in a manner that contravenes British Virgin Islands law or the memorandum association or articles of association of the company.

 

Amendment of Governing Documents

 

Under Delaware corporate law, with very limited exceptions, a vote of the stockholders is required to amend the certificate of incorporation. Under British Virgin Islands law and our memorandum of association and articles of association, (i) our shareholders may amend our memorandum of association and articles of association by a resolution of shareholders, or (ii) our board of directors may amend our memorandum of association and articles of association by a resolution of directors without a requirement for a resolution of shareholders so long as the amendment does not:

 

  restrict the rights of the shareholders to amend the memorandum of association and articles of association;
     
  change the percentage of shareholders required to pass a resolution of shareholders to amend the memorandum of association and articles of association;
     
  amend the memorandum of association and articles of association in circumstances where the memorandum of association and articles of association cannot be amended by the shareholders; or
     
  amend the provisions of memorandum of association or the articles of association pertaining to “rights attaching to shares,” “rights not varied by the issue of the shares pari passu,” “variation of rights” and “amendment of memorandum and articles”.

 

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Written Consent of Directors

 

Under Delaware corporate law, directors may act by written consent only on the basis of a unanimous vote. Under British Virgin Islands law, directors’ consents need only a majority of directors signing to take effect.

 

Written Consent of Shareholders

 

Under Delaware corporate law, unless otherwise provided in the certificate of incorporation, any action to be taken at any annual or special meeting of stockholders of a corporation, may be taken by written consent of the holders of outstanding stock having not less than the minimum number of votes that would be necessary to take such action at a meeting. As permitted by British Virgin Islands law, shareholders’ consents need only a majority of shareholders signing to take effect. Our memorandum of association and articles of association provide that shareholders may approve corporate matters by way of a resolution consented to at a meeting of shareholders or in writing by a majority of shareholders entitled to vote thereon.

 

Shareholder Proposals

 

Under Delaware corporate law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings. British Virgin Islands law and our memorandum of association and articles of association provide that our directors shall call a meeting of the shareholders if requested in writing to do so by shareholders entitled to exercise at least 30% of the voting rights in respect of the matter for which the meeting is requested.

 

Sale of Assets

 

Under Delaware corporate law, a vote of the stockholders is required to approve the sale of assets only when all or substantially all assets are being sold. In the British Virgin Islands, shareholder approval is required when more than 50% of the company’s total assets by value are being disposed of or sold.

 

Dissolution; Winding Up

 

Under Delaware corporate law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware corporate law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. As permitted by British Virgin Islands law and our memorandum of association and articles of association, we may be voluntarily liquidated under Part XII of the BVI Act by resolution of directors and resolution of shareholders if we have no liabilities and we are able to pay our debts as they fall due.

 

Redemption of Shares

 

Under Delaware corporate law, any stock may be made subject to redemption by the corporation at its option or at the option of the holders of such stock provided there remains outstanding shares with full voting power. Such stock may be made redeemable for cash, property or rights, as specified in the certificate of incorporation or in the resolution of the board of directors providing for the issue of such stock. As permitted by British Virgin Islands law, and our memorandum of association and articles of association, shares may be repurchased, redeemed or otherwise acquired by us. Our directors must determine that immediately following the redemption or repurchase we will be able to satisfy our debts as they fall due and the value of our assets exceeds our liabilities.

 

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Variation of Rights of Shares

 

Under Delaware corporate law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. As permitted by British Virgin Islands law, and our memorandum of association and articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class only with the consent in writing of holders of not less than three-fourths of the issued shares of that class and holders of not less than three-fourths of the issued shares of any other class of shares which may be affected by the variation.

 

Removal of Directors

 

Under Delaware corporate law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate provides otherwise. As permitted by British Virgin Islands law and our memorandum of association and articles of association, directors may be removed by resolution of directors or resolution of shareholders.

 

Mergers

 

Under the BVI Act, two or more companies may merge or consolidate in accordance with the statutory provisions. A merger means the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into a new company. In order to merger or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation which must be authorized by a resolution of shareholders.

 

Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any provision which, if proposed as an amendment to the memorandum association or articles of association, would entitle them to vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.

 

Inspection of Books and Records

 

Under Delaware corporate law, any shareholder of a corporation may for any proper purpose inspect or make copies of the corporation’s stock ledger, list of shareholders and other books and records. Holders of our shares have no general right under British Virgin Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide holders of our shares with annual audited financial statements. See “Where You Can Find Additional Information.”

 

Conflict of Interest

 

The BVI Act provides that a director shall, after becoming aware that he is interested in a transaction entered into or to be entered into by the company, disclose that interest to the board of directors of the company. The failure of a director to disclose that interest does not affect the validity of a transaction entered into by the director or the company, so long as the director’s interest was disclosed to the board prior to the company’s entry into the transaction or was not required to be disclosed (for example where the transaction is between the company and the director himself or is otherwise in the ordinary course of business and on usual terms and conditions). As permitted by British Virgin Islands law and our memorandum of association and articles of association, a director interested in a particular transaction may vote on it, attend meetings at which it is considered, and sign documents on our behalf which relate to the transaction.

 

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Transactions with Interested Shareholders

 

Delaware corporate law contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or group who or that owns or owned 15% or more of the target’s outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction that resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.

 

British Virgin Islands law has no comparable provision. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although British Virgin Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and not with the effect of constituting a fraud on the minority shareholders.

 

Independent Directors

 

There are no provisions under Delaware corporate law or under the BVI Act that require a majority of our directors to be independent.

 

Cumulative Voting

 

Under Delaware corporate law, cumulative voting for elections of directors is not permitted unless the company’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions to cumulative voting under the laws of the British Virgin Islands, but our memorandum of association and articles of association do not provide for cumulative voting

 

Anti-takeover Provisions in Our Memorandum of association and articles of association

 

Some provisions of our memorandum of association and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares.

 

C. MATERIAL CONTRACTS.

 

On January 25, 2018, the Company executed an Asset Exchange Agreement (“AEA”) with C Media Limited, a corporation organized under the laws of the Cayman Islands (“C Media”), whereby the Company agreed to purchase all the capital stock and equity interests of LK Technology Ltd, together with its wholly-owned subsidiaries MMB Limited and Mobile Media (China) Limited and all respective subsidiaries from C Media in exchange for (i) 185,412,599 ordinary shares of the Company, par value $0.01 per share (“Ordinary Shares”), (ii) 1,000,000 preferred shares of Kingtone (“Preferred Shares”) and (iii) all issued and outstanding capital stock or equity interests of the Company’s subsidiary, Topsky Info-Tech Holdings Pte Ltd., and its wholly-owned subsidiary Xi’an Softech Co., Ltd., including all entities effectively controlled by Xi’an Softech Co., Ltd. through contractual arrangements and variable business entities.

 

To consummate the contemplated transactions described above, the Company obtained shareholder consent at a special meeting held on May 20, 2018, (i) to authorize 1,000,000 Preferred Shares, (ii) to authorize additional Ordinary Shares so that total authorized Ordinary Shares is equal to 250,000,000 shares, (iii) to list such Ordinary Shares on NASDAQ, and (iv) to approve the transactions contemplated in the Asset Exchange Agreement. Additionally, NASDAQ needed to approve the contemplated transactions prior to consummation thereof. C Media had the right to terminate the AEA if the closing had not occurred (other than through the failure of C Media to comply fully with its obligations under the AEA) on or before July 31, 2018. The transactions contemplated by the AEA were consummated on August 17, 2018.

 

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On January 25, 2018, five shareholders of the Company including its largest shareholder and its Chief Executive Officer executed a Securities Purchase Agreement, whereby such shareholders agreed to sell a total of 617,988 Ordinary Shares and 282,694 American Depository Shares of the Company to Redstone YYL Management Limited, a company incorporated in the British Virgin Islands, in exchange for an aggregate purchase price of $1,897,860.09.

 

On August 25, 2018, LK Technology entered into a Stock Purchase Agreement (the “Agreement”) with the shareholders (“Shareholders”) of Superengine Holdings Limited, a limited liability company organized under the laws of the British Virgin Islands (the “Superengine”), pursuant to which LK Technology acquired all of the issued and outstanding capital stock of Superengine for an aggregate purchase price of US$60 million (the “Purchase Price”), which are paid by the issuance of our Ordinary Shares in an amount equal to the quotient of (x) the Purchase Price divided by (y) the average of the closing prices of the Ordinary Shares on the NASDAQ Capital Market over the 12 months period preceding July 31, 2018. We are a party to the Agreement in connection with the issuance of the Ordinary Shares and certain other limited purposes.

 

D.  EXCHANGE CONTROLS.

 

This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China or our shareholders’ right to receive dividends and other distributions from us.

 

Regulations on Internet Content Providers

 

The Administrative Measures on Internet Information Services, or the Internet Content Measures, which was promulgated by the State Council on September 25, 2000 and amended on January 8, 2011, set out guidelines on the provision of internet information services. The Internet Content Measures specifies that internet information services regarding news, publications, education, medical and health care, pharmacy and medical appliances, among other things, are required to be examined, approved and regulated by the relevant authorities. Internet information providers are prohibited from providing services beyond those included in the scope of their licenses or filings. Furthermore, the Internet Content Measures specifies a list of prohibited content. Internet information providers are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory to others or that infringes the legal rights of others. Internet information providers that violate such prohibition may face criminal charges or administrative sanctions. Internet information providers must monitor and control the information posted on their websites. If any prohibited content is found, they must remove the content immediately, keep a record of such content and report to the relevant authorities.

 

The Internet Content Measures classifies internet information services into commercial internet information services and non-commercial internet information services. Commercial internet information services refer to services that provide information or services to internet users with charge. A provider of commercial internet information services must obtain an ICP License.

 

Regulations on Internet Audio-video Program Services

 

On December 20, 2007, the MII and the State Administration of Press, Publication, Radio, Film and Television, or the SAPPRFT, jointly issued the Administrative Provisions for the Internet Audio-Video Program Service, or the Audio-video Program Provisions, which came into effect on January 31, 2008 and was amended on August 28, 2015. The Audio-video Program Provisions defines “internet audio-video program services” as producing, editing and integrating of audio-video programs, supplying audio-video programs to the public via the internet, and providing audio-video programs uploading and transmission services to a third party. Entities providing internet audio-video programs services must obtain an internet audiovideo program transmission license. Applicants for such licenses shall be state-owned or state-controlled entities unless an internet audio-video program transmission license has been obtained prior to the effectiveness of the Audio-video Program Provisions in accordance with the then-in-effect laws and regulations. In addition, foreign-invested enterprises are not allowed to engage in the above-mentioned services. According to the Audiovideo Program Provisions and other relevant laws and regulations, audio-video programs provided by the entities supplying Internet audio-video program services shall not contain any illegal content or other content prohibited by the laws and regulations, such as any content against the basic principles in the PRC Constitution, any content that damages the sovereignty of the country or national security, and any content that disturbs social order or undermine social stability. An audio-video program that has already been broadcast shall be retained in full for at least 60 days. Movies, television programs and other media content used as Internet audio-video programs shall comply with relevant administrative regulations on programs broadcasts through radio, movie and television channels. Entities providing services related to Internet audio-video programs shall immediately delete the audio-video programs violating laws and regulations, keep relevant records, report relevant authorities and implement other regulatory requirements.

 

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The Categories of the Internet Audio-Video Program Services, or the Audio-video Program Categories, promulgated by SAPPRFT on March 10, 2017, classifies internet audio/video programs into four categories: (I) Category I internet audio/video program service, which is carried out with a form of radio station or television station; (II) Category II internet audio/video program service, including (a) re-broadcasting service of current political news audio/video programs; (b) hosting, interviewing, reporting and commenting service of arts, entertainment, technology, finance and economics, sports, education and other specialized audio/video programs; (c) producing (interviewing not included) and broadcasting service of arts, entertainment, technology, finance and economics, sports, education and other specialized audio/video programs; (d) producing and broadcasting service of internet films/dramas; (e) aggregating and broadcasting service of films, television dramas and cartoons; (f) aggregating and broadcasting service of arts, entertainment, technology, finance and economics, sports, education and other specialized audio/video programs; and (g) live audio/video broadcasting service of cultural activities of common social organizations, sport events or other organization activities; and (III) Category III internet audio/video program service, including (a) aggregating service of online audio/video contents, and (b) re-broadcasting service of the audio/video programs uploaded by internet users; and (IV) Category III internet audio/video program service, including (a) re-broadcasting of the radio/television program channels; and (b) re-broadcasting of internet audio/video program channels.

 

On May 27, 2016, the SAPPRFT issued the Notice on Relevant Issues concerning Implementing the Approval Works of Upgrading Mobile Internet Audio-Video Program Service, or the Mobile Audio-Video Program Notice. The Mobile Audio-Video Program Notice provides that the mobile Internet audio-video program services shall be deemed Internet audio-video program service. Entities which have obtained the approvals to provide the Internet audio-video program services may use mobile WAP websites or mobile applications to provide audio-video program services. Entities with regulatory approvals may operate mobile applications to provide the audio-video program services The types of the programs shall be within the permitted scope as provided in the licenses and such mobile applications shall be filed with the SAPPRFT.

 

Regulations on Production and Operation of Radio/Television Programs

 

On July 19, 2004, the SAPPRFT promulgated the Administrative Measures on the Production and Operation of Radio and Television Programs, or the Radio and Television Program Production Measures, which came into effect on August 20, 2004 and was amended on August 28, 2015. The Radio and Television Program Production Measures provides that any business that produces or operates radio or television programs must first obtain a Radio and Television Program Production and Operation Permit. Entities holding such permits shall conduct their business within the permitted scope as provided in their permits. In addition, foreign-invested enterprises are not allowed to engage in the above-mentioned services.

Regulations on Online Advertising Services

 

On April 24, 2015, the Standing Committee of the National People’s Congress enacted the Advertising Law of the People’s Republic of China, or the New Advertising Law, effective on September 1, 2015. The New Advertising Law increases the potential legal liability of advertising services providers and strengthens regulations of false advertising. On July 4, 2016, the State Administration for Industry and Commerce, or the SAIC, issued the Interim Measures of the Administration of Online Advertising, or the SAIC Interim Measures, effective on September 1, 2016. The New Advertising Law and the SAIC Interim Measures require that online advertisements may not affect users’ normal internet use and internet pop-up ads must display a “close” sign prominently and ensure one-key closing of the pop-up windows. The SAIC Interim Measures provides that all online advertisements must be marked “Advertisement” so that viewers can easily identify them as such. Moreover, the SAIC Interim Measures treats paid search results as advertisements that are subject to PRC advertisement laws, and requires that paid search results be conspicuously identified on search result pages as advertisements. The New Advertising Law and SAIC Interim Measures require us to conduct more stringent examination and monitoring of our advertisers and the content of their advertisements.

 

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Regulations on Online Games

 

In September 2009, the GAPP (currently known as the SAPPRFT), together with the National Copyright Administration, and the National Office of Combating Pornography and Illegal Publications jointly issued the Notice on Further Strengthening on the Administration of Pre-examination and Approval of Online Game and the Examination and Approval of Imported Online Game, or the Circular 13. The Circular 13 states that foreign investors are not permitted to invest in online game operating businesses in the PRC via wholly foreign-owned entities, Sino-foreign equity joint ventures or cooperative joint ventures or to exercise control over or participate in the operation of domestic online game businesses through indirect means, such as other joint venture companies or contractual or technical arrangements. If the our contractual arrangements were deemed under the Circular 13 to be an “indirect means” for foreign investors to exercise control over or participate in the operation of a domestic online game business, our contractual arrangements might be challenged by the SAPPRFT. We are not aware of any online game companies which use the same or similar contractual arrangements having been challenged by the SAPPRFT as using those contractual arrangements as an “indirect means” for foreign investors to exercise control over or participate in the operation of a domestic online game business or having been penalized or ordered to terminate operations since the Circular 13 became effective. However it is unclear whether and how the Circular 13 might be interpreted or implemented in the future. See “Risk Factors—If the PRC government finds that the agreements that establish the structure for operating certain of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.”

 

The Interim Measures for the Administration of Online Games, or the Online Game Measures, issued by the MOC, which took effect on August 1, 2010 and amended on December 15, 2017, regulates a broad range of activities related to the online games business, including the development, production and operation of online games, the issuance of virtual currencies used for online games, and the provision of virtual currency trading services. The Online Game Measures provides that any entity that is engaged in online game operations must obtain an Network Cultural Business Permit, and require the content of an imported online game to be examined and approved by the MOC prior to the game’s launch and require a domestic online game to be filed with the MOC within 30 days after its launch. The Notice of the Ministry of Culture on the Implementation of the Interim Measures for the Administration of Online Games, which was issued by the MOC on July 29, 2010 to implement the Online Game Measures, (i) requires online game operators to protect the interests of online game users and specifies that certain terms that must be included in service agreements between online game operators and the users of their online games, (ii) requires content review of imported online games and filing procedures for domestic online games, (iii) emphasizes the protection of minors playing online games, and (iv) requests online game operators to promote real-name registration by their game users.

 

Regulations on Information Security, Censorship and Privacy

 

The Standing Committee of the National People’s Congress, China’s national legislative body, enacted the Decisions on the Maintenance of Internet Security on December 28, 2000 that may subject persons to criminal liabilities in China for any attempt to use the internet to: (i) gain improper entry to a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information or (v) infringe upon intellectual property rights. In 1997, the Ministry of Public Security issued the Administration Measures on the Security Protection of Computer Information Network with International Connections which prohibits using the internet to leak state secrets or to spread socially destabilizing materials. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites. Pursuant to the Ninth Amendment to the Criminal Law issued by the Standing Committee of the National People’s Congress on August 29, 2015, effective on November 1, 2015, any ICP provider that fails to fulfill the obligations related to internet information security as required by applicable laws and refuses to take corrective measures, will be subject to criminal liability for (i) any large-scale dissemination of illegal information; (ii) any severe effect due to the leakage of users’ personal information; (iii) any serious loss of evidence of criminal activities; or (iv) other severe situations, and any individual or entity that (i) sells or provides personal information to others unlawfully or (ii) steals or illegally obtains any personal information will be subject to criminal liability in severe situations.

 

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The Cybersecurity Law of the PRC, or the Cybersecurity Law, which was promulgated on November 7, 2016 by the Standing Committee of the National People’s Congress and came into effect on June 1, 2017, provides that network operators shall meet their cyber security obligations and shall take technical measures and other necessary measures to protect the safety and stability of their networks. Under the Cybersecurity Law, network operators are subject to various security protection-related obligations, including: (i) network operators shall comply with certain obligations regarding maintenance of the security of internet systems; (ii) network operators shall verify users’ identities before signing agreements or providing certain services such as information publishing or real-time communication services; (iii) when collecting or using personal information, network operators shall clearly indicate the purposes, methods and scope of the information collection, the use of information collection, and obtain the consent of those from whom the information is collected; (iv) network operators shall strictly preserve the privacy of user information they collect, and establish and maintain systems to protect user privacy; (v) network operators shall strengthen management of information published by users, and when they discover information prohibited by laws and regulations from publication or dissemination, they shall immediately stop dissemination of that information, including taking measures such as deleting the information, preventing the information from spreading, saving relevant records, and reporting to the relevant governmental agencies.

 

Regulations on Intellectual Property Rights

 

Regulations on Copyright

 

The Copyright Law of the PRC, or the Copyright Law, which took effect on June 1, 1991 and was amended in 2001 and in 2010, provides that Chinese citizens, legal persons, or other organizations shall, whether published or not, own copyright in their copyrightable works, which include, among others, works of literature, art, natural science, social science, engineering technology and computer software. Copyright owners enjoy certain legal rights, including right of publication, right of authorship and right of reproduction. The Copyright Law as revised in 2010 extends copyright protection to Internet activities, products disseminated over the Internet and software products. In addition, Copyright Law provides for a voluntary registration system administered by the China Copyright Protection Center, or the CPCC. According to the Copyright Law, an infringer of the copyrights shall be subject to various civil liabilities, which include ceasing infringement activities, apologizing to the copyright owners and compensating the loss of copyright owner. Infringers of copyright may also subject to fines and/or administrative or criminal liabilities in severe situations.

 

The Computer Software Copyright Registration Measures, or the Software Copyright Measures, promulgated by the State Council on December 20, 2001 and amended on January 30, 2013, regulates registrations of software copyright, exclusive licensing contracts for software copyright and assignment agreements. The National Copyright Administration, or the NCA administers software copyright registration and the CPCC, is designated as the software registration authority. The CPCC shall grant registration certificates to the Computer Software Copyrights applicants which meet the requirements of both the Software Copyright Measures and the Computer Software Protection Regulations (Revised in 2013).

 

The Provisions of the Supreme People’s Court on Certain Issues Related to the Application of Law in the Trial of Civil Cases Involving Disputes on Infringement of the Information Network Dissemination Rights specifies that disseminating works, performances or audio-video products by the internet users or the internet service providers via the internet without the permission of the copyright owners shall be deemed to have infringed the right of dissemination of the copyright owner.

 

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The Measures for Administrative Protection of Copyright Related to Internet, which was jointly promulgated by the NCA and the MIIT on April 29, 2005 and became effective on May 30, 2005, provides that upon receipt of an infringement notice from a legitimate copyright holder, an ICP operator must take remedial actions immediately by removing or disabling access to the infringing content. If an ICP operator knowingly transmits infringing content or fails to take remedial actions after receipt of a notice of infringement that harms public interest, the ICP operator could be subject to administrative penalties, including an order to cease infringing activities, confiscation by the authorities of all income derived from the infringement activities, or payment of fines.

 

On May 18, 2006, the State Council promulgated the Regulations on the Protection of the Right to Network Dissemination of Information (as amended in 2013). Under these regulations, an owner of the network dissemination rights with respect to written works or audio or video recordings who believes that information storage, search or link services provided by an Internet service provider infringe his or her rights may require that the Internet service provider delete, or disconnect the links to, such works or recordings.

 

Patent Laws

 

According to the Patent Law of the PRC (Revised in 2008), the State Intellectual Property Office is responsible for administering patent law in the PRC. The patent administration departments of provincial, autonomous region or municipal governments are responsible for administering patent law within their respective jurisdictions. The Chinese patent system adopts a first-to-file principle, which means that when more than one person file different patent applications for the same invention, only the person who files the application first is entitled to obtain a patent of the invention. To be patentable, an invention or a utility model must meet three criteria: novelty, inventiveness and practicability. A patent is valid for twenty years in the case of an invention and ten years in the case of utility models and designs.

 

Trademark Laws

 

Trademarks are protected by the Trademark Law of the PRC (Revised in 2013) which was adopted in 1982 and subsequently amended in 1993, 2001 and 2013 respectively as well as by the Implementation Regulations of the PRC Trademark Law adopted by the State Council in 2002 and as most recently amended on April 29, 2014. The Trademark Office under the SAIC handles trademark registrations. The Trademark Office grants a ten-year term to registered trademarks and the term may be renewed for another ten-year period upon request by the trademark owner. A trademark registrant may license its registered trademarks to another party by entering into trademark license agreements, which must be filed with the Trademark Office for its record. As with patents, the Trademark Law has adopted a first-to-file principle with respect to trademark registration. If a trademark applied for is identical or similar to another trademark which has already been registered or subject to a preliminary examination and approval for use on the same or similar kinds of products or services, such trademark application may be rejected. Any person applying for the registration of a trademark may not injure existing trademark rights first obtained by others, nor may any person register in advance a trademark that has already been used by another party and has already gained a “sufficient degree of reputation” through such party’s use.

 

Regulations on Domain Names

 

The MIIT promulgated the Measures on Administration of Internet Domain Names, or the Domain Name Measures, on August 24, 2017, which took effect on November 1, 2017 and replaced the Administrative Measures on China Internet Domain Name promulgated by MII on November 5, 2004. According to the Domain Name Measures, the MIIT is in charge of the administration of PRC internet domain names. The domain name registration follows a first-to-file principle. Applicants for registration of domain names shall provide the true, accurate and complete information of their identities to domain name registration service institutions. The applicants will become the holder of such domain names upon the completion of the registration procedure.

 

Relevant Regulations of the High-tech Enterprise

 

The Ministry of Information Industry, the Ministry of Science and Technology and the State Tax Bureau collectively promulgated and issued the “Certifying Standard and Managing Measures for High-tech Enterprises” and “the High-tech Areas of Main National Support” on April 14, 2008 to certify the High-tech enterprise and encourage and support the development of the Chinese High-tech enterprises. Under the High-tech Enterprises Measures, the enterprise can enjoy the favorable tax policy when it is certified as a High-tech enterprise by the Ministry of Information Industry, the Ministry of Science and Technology and the State Tax Bureau or with its provincial branch according to the stipulated standard. The software and computer and network technology are recognized as the main national supported High-tech field. Kingtone Information is a High-tech enterprise and enjoys a favorable income tax rate of 15%.

 

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Laws and Regulations of Intellectual Property Rights

 

China has adopted legislation governing intellectual property rights, including patents, copyrights and trademarks. China is a signatory to the main international conventions on intellectual property rights and became a member of the Agreement on Trade Related Aspects of Intellectual Property Rights upon its accession to the WTO in December 2001.

 

Patents

 

The “Patent Law of the People’s Republic of China” promulgated by the Standing Committee of the National People's Congress, adopted in 1985 and revised in 1992, 2001 and 2008, protects registered patents. The State Intellectual Property Office of PRC handles granting patent rights, providing for a twenty-year patent term for inventions and a ten-year patent term for utility models and designs. As we disclosed in Item 4, of this transition report on Form 20-F, through Kingtone Information, we have been granted one invention patent “wireless video transmission system based on BREW platform” by the State Intellectual Property Office (“SIPO”) of PRC on September 23, 2009 and therefore such invention is entitled to all the protections provided under the Patent Law for twenty years.

 

Computer Software Copyright and Administration  

 

On December 20, 2001, the State Council of PRC issued the “Regulation for Computer Software Protection of the People’s Republic of China” (the “Regulation for Computer Software Protection”) which became effective on January 1, 2002 to protect the interests of copyright owners, to promote the research and application and to encourage the development of the Chinese software industry. Under the Regulation for Computer Software Protection, natural persons, legal persons or any other organizations shall have a copyright on the software developed by such persons no matter whether such software has been published. The protection period of software copyrights owned by the legal person or other organization is fifty years and expires on December 31 of the fiftieth year from the initial publication date of such computer software. Currently, Kingtone Information has twelve registration certificates for software copyrights.

 

Trademarks

 

The “Trademark Law of the People’s Republic of China” promulgated by the State Council of PRC, adopted in 1982 and revised in 1993 and 2001, protects registered trademarks. The Trademark Office under the Chinese State Administration for Industry and Commerce handles trademark registrations and grants a term of ten years to registered trademarks which are renewable for another ten years after the application to the Trademark Office by the owners of the trademarks. Trademark license agreements must be filed with the Trademark Office for record. China has a “first-to-register” system that requires no evidence of prior use or ownership. Kingtone Information has its registered trademarks as described in Item 4 of this transition report on Form 20-F. Accordingly, such trademarks are entitled to the protection under the Trademark Law.

  

Foreign Currency Exchange

 

On August 29, 2008, the SAFE issued the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-funded Enterprises, or Circular 142. Pursuant to Circular 142, RMB converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise. The use of such Renminbi capital may not be changed without SAFE’s approval and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used.

 

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See “Risk Factors — Risks Related to Doing Business in China — PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our initial public offering to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business”.

 

Dividend Distribution

 

We are a British Virgin Islands holding company and substantially all of our operations are conducted through LK Technology. We rely on dividends and other distributions from our LK Technology and its subsidiaries to provide us with our cash flow and allow us to pay dividends on the shares underlying our ADSs and meet our other obligations. The principal regulations governing distribution of dividends paid by wholly foreign-owned enterprises include:

 

  1. Wholly Foreign-Owned Enterprise Law (1986), as amended; and
     
  2. Implementation Rules on Wholly Foreign-Owned Enterprise Law (1990), as amended.

 

Under these regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a FIE has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.

 

Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions

 

In October 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Notice 75, which became effective as of November 1, 2005, and was further supplemented by two implementation notices issued by the SAFE on November 24, 2005 and May 29, 2007, respectively. Under Circular 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise located in the PRC. An amendment to the registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore company or overseas funds raised by such offshore company, or any other material change with respect to the offshore company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment, debt investment, or creation of any security interest over any assets located in the PRC.

  

Under SAFE Notice 75, PRC residents are further required to repatriate into the PRC all of their dividends, profits or capital gains obtained from their shareholdings in the offshore entity within 180 days of their receipt of such dividends, profits or capital gains. The registration and filing procedures under SAFE Notice 75 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investments or shareholders loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds, or the return of funds upon a capital reduction. Therefore, failure to comply with such registration may subject us to certain restrictions on, including but not limited to, the increase of the registered capital of our PRC subsidiary, making loans to our PRC subsidiary, and making distributions to us from our on-shore companies.

 

Regulations of Overseas Investments and Listings

 

On August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and the SAFE, jointly adopted the New M&A Rule, which became effective on September 8, 2006. This regulation, among other things, includes provisions that purport to require that an offshore SPV formed for purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange.

 

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On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by SPVs. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several months to complete the approval process.

 

The application of the New M&A Rule with respect to overseas listings of SPVs remains unclear with no consensus currently existing among the leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement.

 

We believe that, based on our understanding of the current PRC laws, regulations and rules and the procedures announced on September 21, 2006, there is no requirement in this regulation that would require an application to be submitted to the MOFCOM or the CSRC for the approval of the listing and trading of our ADSs on the NASDAQ Capital Market.

 

See “Risk Factors — Risks Related to Doing Business in China — If we were required to obtain the prior approval of the China Securities Regulatory Commission, or CSRC, of the listing and trading of our ADSs on the NASDAQ Capital Market, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies.”

 

E.  TAXATION

 

The following discussion sets forth the material British Virgin Islands, PRC and U.S. federal income tax consequences of an investment in our ADSs and the ordinary shares represented by our ADSs, sometimes referred to collectively as the “securities”. It is based upon laws and relevant interpretations thereof in effect as of the date of this report, all of which are subject to change. This discussion does not deal with all possible tax consequences relating to an investment in the securities, such as the tax consequences under state, local and other tax laws. As used in this discussion, “we,” “our” and “us” refers only to Luokung Technology Ltd.

 

British Virgin Islands Taxation

 

Under the law of the British Virgin Islands as currently in effect, a holder of the securities who is not a resident of the British Virgin Islands is not liable for British Virgin Islands tax on dividends paid with respect to the securities and all holders of the securities are not liable to the British Virgin Islands for tax on gains realized during that year on the sale or disposal of such ordinary shares. The British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the BVI Act.

 

There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated under the BVI Act. In addition, shares of companies incorporated under the BVI Act are not subject to transfer taxes, stamp duties or similar charges.

 

There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands or between China and the British Virgin Islands.

 

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People’s Republic of China Taxation

 

In 2007, the PRC National People’s Congress enacted the new Enterprise Income Tax Law (the “EIT Law”), which became effective on January 1, 2008. The new EIT Law imposes a single uniform income tax rate of 25% on all Chinese enterprises, including foreign-invested enterprises, and levies a withholding tax rate of 10% on dividends payable by Chinese subsidiaries to their foreign shareholders unless any such foreign shareholders’ jurisdiction of incorporation has a tax treaty with China that provides for a different withholding agreement. Under the new EIT Law, enterprises established outside China but deemed to have a “de facto management body” within the country may be considered “resident enterprises” for Chinese tax purposes and, therefore, may be subject to an enterprise income tax rate of 25% on their worldwide income. Pursuant to the implementation rules of the new EIT Law, a “de facto management body” is defined as a body that has material and overall management control over the business, personnel, accounts and properties of the enterprise. Although substantially all members of our management are located in China, it is unclear whether Chinese tax authorities would require (or permit) us to be treated as PRC resident enterprises. If we are deemed a Chinese tax resident enterprise, we may be subject to an enterprise income tax rate of 25% on our worldwide income, excluding dividends received directly from another Chinese tax resident enterprise, as well as PRC enterprise income tax reporting obligations. If we are not deemed to be a Chinese tax resident enterprise, we may be subject to certain PRC withholding taxes. See “Risk Factors — Risks Related to Doing Business in China — Our holding company structure may limit the payment of dividends.” As a result of such changes, our historical tax rates may not be indicative of our tax rates for future periods and the value of our ADSs or ordinary shares may be adversely affected. If we are deemed a PRC resident enterprise and investors’ gain from the sales of the securities and dividends payable by us are deemed sourced from China, such gains and dividends payable by us may be subject to PRC tax. See “Risk Factors — Risks Related to Doing Business in China — If we were deemed a “resident enterprise” by PRC tax authorities, we could be subject to tax on our global income at the rate of 25% under the New EIT Law and our non-PRC shareholders could be subject to certain PRC taxes.

 

United States Federal Income Taxation

 

General

 

The following is a discussion of the material U.S. federal income tax consequences to an investor of purchasing, owning and disposing of our securities. This discussion does not address any aspects of U.S. federal gift or estate tax or the state, local or non-U.S. tax consequences of an investment in the securities.

 

YOU SHOULD CONSULT YOUR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF THE SECURITIES IN YOUR PARTICULAR SITUATION.

 

This discussion applies only to those investors that purchase the securities in this offering and that hold the securities as capital assets within the meaning of section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”). This section does not apply to holders that may be subject to special tax rules, including but not limited to:

 

  1. dealers in securities or currencies;

 

  2. traders in securities that elect to use a mark-to-market method of accounting;

 

  3. banks, insurance companies or certain financial institutions;

 

  4. tax-exempt organizations;

 

  5. governments or agencies or instrumentalities thereof;

 

  6. partnerships or other entities treated as partnerships or other pass-through entities for U.S. federal income tax purposes or persons holding the securities through such entities;

 

  7. regulated investment companies or real estate investment trusts;

 

  8. holders subject to the alternative minimum tax;

 

  9. holders that actually or constructively own 10% or more of the total combined voting power of all classes of our shares entitled to vote;

 

  10. holders that acquired the securities pursuant to the exercise of employee stock options, in connection with employee stock incentive plans or otherwise as compensation;

 

  11. holders that hold the securities as part of a straddle, hedging or conversion transaction; or

 

  12. holders whose functional currency is not the U.S. dollar.

 

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This section is based on the Code, its legislative history, existing and proposed U.S. Treasury regulations, published rulings and other administrative guidance of the U.S. Internal Revenue Service (the “IRS”) and court decisions, all as in effect on the date hereof. These laws are subject to change or different interpretation by the IRS or a court, possibly on a retroactive basis.

 

We have not sought, and will not seek, a ruling from the IRS as to any U.S. federal income tax consequence described herein. The IRS may disagree with the discussion herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation, regulation, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.

 

The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of the securities that is for U.S. federal income tax purposes:

 

  1. a citizen or resident of the United States;
     
  2. a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or
     
  3. organized) under the laws of the United States, any state thereof or the District of Columbia;
     
  4. an estate whose income is subject to U.S. federal income tax regardless of its source; or
     
  5. a trust if (a) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S.
     
  6. persons are authorized to control all substantial decisions of the trust, or (b) if the trust has a valid election in effect under applicable U.S.

 

Treasury regulations to be treated as a U.S. person.

 

If a beneficial owner of the securities is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences applicable specifically to Non-U.S. Holders are described below under the heading “Tax Consequences to Non-U.S. Holders.”

 

If a partnership (including for this purpose any entity treated as a partnership for U.S. tax purposes) is a beneficial owner of the securities, the U.S. tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership. A holder of the securities that is a partnership or partners in such a partnership should consult their own tax advisors about the U.S. federal income tax consequences of holding and disposing of the securities.

 

This discussion assumes that any distributions made (or deemed made) on the securities and any consideration received by a holder in consideration for the sale or other disposition of the securities will be in U.S. dollars. This discussion also assumes that the representations contained in the Deposit Agreement are true and that the obligations in the Deposit Agreement and any related agreement will be complied with in accordance with their terms. Finally, this discussion assumes that each ADS will only represent ordinary shares in us, and will not represent any other type of security, such as a bond, cash or other property.

 

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For U.S. federal income tax purposes, a holder of an ADS will be treated as the beneficial owner of the shares represented by such ADS and an exchange of an ADS for ordinary shares will not be subject to U.S. federal income tax. The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released, or intermediaries in the chain of ownership between holders of ADSs and the issuer of the securities underlying the ADSs may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S. Holders, including individual U.S. Holders, as described below under “Tax Consequences to U.S. Holders — Taxation of Distributions.” Accordingly, the availability of foreign tax credits or the reduced tax rate for dividends received by certain non-corporate U.S. Holders, including individual U.S. Holders, could be affected by actions taken by parties to whom the ADSs are released, or by future actions by the U.S. Treasury.

 

Tax Consequences to U.S. Holders

 

Taxation of Distributions

 

Subject to the passive foreign investment company, or PFIC, rules discussed below, the gross amount of any cash distributions we make with respect to a U.S. Holder in respect of such U.S. Holder’s ADSs or shares will generally be treated as dividend income if the distributions are made from our current or accumulated earnings and profits, calculated according to U.S. federal income tax principles. Cash dividends will generally be subject to U.S. federal income tax as ordinary income on the day the U.S. Holder actually or constructively receives such income. With respect to non-corporate U.S. Holders for taxable years beginning before January 1, 2011, dividends may be taxed at the lower applicable long-term capital gains rate provided that (a) our ADSs or shares are readily tradable on an established securities market in the United States, or, in the event we are deemed to be a Chinese “resident enterprise” under the EIT Law (as described above under “People’s Republic of China Taxation”), we are eligible for the benefits of the income tax treaty between the United States and the PRC (the “U.S.-PRC Tax Treaty”), (b) we are not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable year, and (c) certain holding period requirements are met. Under published IRS authority, ADSs are considered for purposes of clause (a) above to be readily tradable on an established securities market in the United States only if they are listed on certain exchanges, which presently include the NASDAQ Capital Market. U.S. Holders should consult their own tax advisors regarding the availability of the lower rate for any dividends paid with respect to our ADSs or shares.

 

Dividends will not be eligible for the dividends-received deduction allowed to U.S. corporations in respect of dividends received from other U.S. corporations. Generally, if we distribute non-cash property as a dividend (other than pro rata distributions of our shares) out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes), a U.S. Holder generally will include in income an amount equal to the fair market value of the property, on the date that it is distributed.

 

Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s basis in its shares or ADSs and thereafter as capital gain. However, we do not plan on calculating our earnings and profits in accordance with U.S. federal income tax principles. U.S. holders therefore should generally assume that any distributions paid by us will be treated as dividends for U.S. federal income tax purposes.

 

If PRC taxes apply to dividends paid by us to a U.S. Holder (see “People’s Republic of China Taxation,” above), such taxes may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations), and a U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty. The rules relating to the U.S. foreign tax credit are complex. U.S. Holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.

 

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Taxation of Dispositions of Shares

 

Subject to the PFIC rules discussed below, a U.S. holder that sells or otherwise disposes of its shares will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the amount realized and such U.S. Holder’s tax basis in its shares. Prior to January 1, 2011, capital gains of a non-corporate U.S. holder are generally taxed at a maximum rate of 15% where the property is held for more than one year (and 20% thereafter). The ability to deduct capital losses is subject to limitations.

 

If PRC taxes apply to any gain from the disposition of our shares by a U.S. Holder, such taxes may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations), and a U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.

 

Passive Foreign Investment Company

 

We do not expect to be a PFIC for U.S. federal income tax purposes for our current tax year or in the foreseeable future. The determination of whether or not we are a PFIC in respect of any of our taxable years is a factual determination that cannot be made until the close of the applicable tax year and that is based on the types of income we earn and the value and composition of our assets (including goodwill), all of which are subject to change. Therefore, we can make no assurances that we will not be a PFIC in respect of our current taxable year or in the future.

 

In general, we will be a PFIC in any taxable year if either:

 

  1. at least 75% of our gross income for the taxable year is passive income; or
     
  2. at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income.

 

Passive income includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), the excess of gains over losses from certain types of transactions in commodities, annuities and gains from assets that produce passive income. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.

 

If we are treated as a PFIC in any year during which a U.S. Holder owns the securities, and such U.S. Holder did not make a mark-to-market election, as described below, the U.S. Holder will be subject to special rules with respect to:

 

  1. any gain recognized by the U.S. Holder on the sale or other disposition of its shares; and any excess distribution that we make to the U.S. Holder (generally, the excess of the amount of any distributions to such U.S. Holder during a single taxable year of such U.S. Holder over 125% of the average annual distributions received by such U.S. Holder in respect of the shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder holding period for the shares).
     
    Under these rules:
     
  2. the gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the shares;
     
  3. the amount allocated to the U.S. Holder’s taxable year in which it realized the gain or excess distribution or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we are a PFIC will be taxed as ordinary income;
     
  4. the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest tax rate in effect for that year; and
     
  5.

the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable year of the U.S. Holder.

     
   6. Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.

 

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Alternatively, if a U.S. Holder, at the close of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market election with respect to such shares for such taxable year. Our shares will be “marketable” to the extent that they remain regularly traded on a national securities exchange, such as the NASDAQ Capital Market. If a U.S. Holder makes this election in a timely fashion, it will not be subject to the PFIC rules described above. Instead, in general, the U.S. Holder will include as ordinary income each year the excess, if any, of the fair market value of its shares at the end of the taxable year over its adjusted basis in its shares. Any ordinary income resulting from this election would generally be taxed at ordinary income tax rates and would not be eligible for the reduced rate of tax applicable to qualified dividend income. The U.S. Holder will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of its shares over the fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s basis in the shares will be adjusted to reflect any such income or loss amounts. U.S. Holders should consult their own tax advisor regarding potential advantages and disadvantages of making a mark-to-market election with respect to their shares.

  

Alternatively, a U.S. Holder of stock in a PFIC may avoid the PFIC tax consequences described above in respect to our or shares by making a timely “qualified electing fund” election to include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which our taxable year ends. However, the qualified electing fund election is available only if the PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not intend to furnish the information that a U.S. Holder would need in order to make a qualified electing fund election. Therefore, U.S. Holders will not be able to make or maintain such election with respect to their or shares.

 

If a U.S. Holder owns our shares or during any year that we are a PFIC, such holder must file U.S. Internal Revenue Service Form 8621 regarding such holder’s shares or and the gain realized on the disposition of the shares. The reduced tax rate for dividend income, discussed in “Taxation of Distributions,” is not applicable to dividends paid by a PFIC. U.S. Holders should consult with their own tax advisors regarding reporting requirements with respect to their shares.

 

Tax Consequences to Non-U.S. Holders

 

Dividends paid to a Non-U.S. Holder in respect of our or shares generally will not be subject to U.S. federal income tax, unless the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains in the United States).

 

In addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other disposition of our or shares unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of sale or other disposition and certain other conditions are met (in which case, such gain from United States sources generally is subject to tax at a 30% rate or a lower applicable tax treaty rate).

 

Dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base in the United States) generally will be subject to tax in the same manner as for a U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.

 

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Information Reporting and Backup Withholding

 

    In general, information reporting for U.S. federal income tax purposes generally should apply to distributions made on the securities within the United States to a non-corporate U.S. Holder and to the proceeds from sales and other dispositions of the securities by a non-corporate U.S. Holder to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected at an office) outside the United States generally should be subject to information reporting in limited circumstances.

 

Dividend payments made to U.S. Holders and proceeds paid from the sale or other disposition the securities may be subject to information reporting to the IRS and possible U.S. federal backup withholding at a current rate of 28%. Certain exempt recipients, such as corporations, are not subject to these information reporting requirements. Backup withholding will not apply to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification, or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status must provide a duly executed IRS Form W-9.

 

A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.

 

Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.

 

PROSPECTIVE PURCHASERS OF OUR SECURITIES SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY ADDITIONAL TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF OUR SECURITIES, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR NON-U.S. JURISDICTION, INCLUDING ESTATE, GIFT, AND INHERITANCE LAWS AND APPLICABLE TAX TREATIES.

 

F.  DIVIDENDS AND PAYING AGENTS.

 

Not applicable.

 

G.  STATEMENT BY EXPERTS.

 

None.

 

H.  DOCUMENTS ON DISPLAY.

 

We previously filed a registration statement on Form F-1 (File No. 333-166056) with the SEC relating to our initial public offering in May 2010. This transition report does not contain all of the information in the registration statement and the exhibits and financial statements included with the registration statement. References in this transition report to any of our contracts, agreements or other documents are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contracts, agreements or documents. In addition, we will file transition reports on Form 20-F and submit other information under cover of Form 6-K. As a foreign private issuer, we are exempt from the proxy requirements of Section 14 of the Exchange Act and our officers, directors and principal shareholders will be exempt from the insider short-swing disclosure and profit recovery rules of Section 16 of the Exchange Act. You may read and copy the registration statement, the related exhibits and other materials we file with the SEC at the SEC's public reference room in Washington, D.C. at 100 F Street, Room 1580, N.E., Washington, D.C.20549. You can also request copies of those documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file with the SEC. The website address is http://www.sec.gov . You may also request a copy of these filings, at no cost, by writing us at LAB 32, SOHO 3Q, No 9, Guanghua Road, Chaoyang District, Beijing, People’s Republic of China, 100020 or telephoning us at (86) 10-85866721.

 

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I.  SUBSIDIARY INFORMATION

 

For a listing of our subsidiaries, see “Item 4. Information on the Company – C. Organizational Structure.”

    

ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Interest Rate Risk

 

As of December 31, 2017, we had no short-term or long-term borrowings. If we borrow money in future periods, we may be exposed to interest rate risk. Our exposure to market risk for changes in interest rates relates primarily to the interest income generated by our cash deposits with our banks and held-to-maturity investments. We have not used any derivative financial instruments in our investment portfolio. Interest earnings instruments carry a degree of interest rate risk. We have not been exposed, nor do we anticipate being exposed to material risks due to changes in interest rates. However, our future interest income may fall short of expectations due to changes in interest rates. 

 

Foreign Exchange Risk

 

Translation adjustments amounted to $90,671 and $387,375 gain as of the fiscal year ended December 31, 2017 and 2016, respectively. The Company translated balance sheet amounts with the exception of equity at December 31, 2017 at RMB 6.5342 to $1.00 as compared to RMB 6.9370 to $1.00 at December 31, 2016. The Company stated equity accounts at their historical rate. The average translation rates applied to income statement accounts for the fiscal year ended December 31, 2017 and 2016 were RMB6.7356 and RMB 6.7153 to US$1.00, respectively. So far, the PRC government has been able to manage a stable exchange rate between RMB and the U.S. Dollar. Our future downward translation adjustments may occur and can be significant due to changes in such exchange rate.

 

If we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

 

The PRC government imposes strict restrictions on PRC resident companies regarding converting RMB into foreign currencies and vice versa under capital account transactions, such as receiving equity investments from outside of the PRC, making equity investments outside of the PRC, borrowing money from or lending money outside of the PRC, and repaying debt or remitting liquidated assets and/or accumulated profits outside of the PRC. These transactions have to be approved by the relevant PRC government authorities, including but not limited to the commerce bureau, the tax bureau and the State Administration of Foreign Exchange, or SAFE, and have to be conducted at banks entrusted by the local SAFE branch. As our business continues to grow, we may need to continuously finance our PRC subsidiaries by raising capital from outside of the PRC. The restriction on converting RMB into foreign currencies, and vice versa, may limit our ability to use capital resources from outside of the PRC. Such restrictions may also limit our ability to remit profits from our PRC subsidiaries outside of the PRC, therefore potentially limiting our ability to pay dividends to our shareholders. In addition, such restrictions will limit our ability to freely transfer temporary excess cash in our or our subsidiaries’ bank accounts in and out of the PRC, therefore limiting our ability to conduct cross-border cash management activities to optimize the utilization of our cash.

 

Inflation

 

Although China has experienced an increasing inflation rate, inflation has not had a material impact on our results of operations in recent years. According to the National Bureau of Statistics of China, the change in the consumer price index in China was 0.46%, (0.77%), and 1.16% in 2001, 2002 and 2003, respectively. However, in connection with a 3.9% increase in 2004, the PRC government announced measures to restrict lending and investment in China in order to reduce inflationary pressures in China’s economy. Following the government’s actions, the consumer price index decreased to 1.8% in 2005 and to 1.5% in 2006. In 2007, the consumer price index increased to 4.8%. In response, China’s central bank, the People’s Bank of China, announced that the bank reserve ratio would rise half a percentage point to 15.5% in an effort to reduce inflation pressures. China’s consumer price index growth rate reached 8.7% year over year in 2008. In 2009 and 2010, the change in the consumer price index in China was minus 0.7% and 3.3%.

  

China consumer price index in November 2017 was 3.8% higher than that of the same period in 2016. China consumer price index in December 2016 was 2.4% higher than that of the same period in 2015. China consumer price index in December 2015 was 4.8% higher than that of the same period in 2014. China consumer price index in December 2014 was 3.3% higher than that of the same period in 2013. The results of the PRC government’s actions to combat inflation are difficult to predict. Adverse changes in the Chinese economy, if any, will likely impact the financial performance of a variety of industries in China that use, or would be candidates to use, our software products and services.

 

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ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

 

A. DEBT SECURITIES.

 

Not applicable. 

 

B. WARRANTS AND RIGHTS.

 

Not applicable.

 

C. OTHER SECURITIES.

 

Not applicable.

 

D. AMERICAN DEPOSITARY SHARES.

 

The Bank of New York Mellon, as depositary (the “Depositary”) for the Company’s ADR facility, notified the owners and holders of the Company’s ADSs that the ADS facility will terminate effective at 5:00 p.m. (Eastern Time) on September 19, 2018. Under the terms of the Deposit Agreement among the Company, the Depositary and the owners and holders of ADSs of the Company (the “Deposit Agreement”), owners and holders of the Company’s ADSs have until at least January 21, 2019 to surrender their ADSs to the Depositary for delivery of the underlying ordinary shares of the Company. Subsequent to January 21, 2019, under the terms of the Deposit Agreement, the Depositary may attempt to sell any ordinary shares remaining on deposit with the Depositary. If the Depositary sells such underlying ordinary shares or receives value for such shares, holders must surrender their ADSs to obtain payment of the sale proceeds, net of expenses and applicable tax and charges. We completed the voluntary delisting of our ADSs from the NASDAQ Capital Market on September 19, 2018.

 

You may hold ADSs either (A) directly (i) by having ADSs registered in your name in the Direct Registration System, or (ii) by having an American depositary receipt, also referred to as an ADR, which is a certificate evidencing a specific number of ADSs, registered in your name, or (B) indirectly by holding a security entitlement in ADSs through your broker or other financial institution. If you hold ADSs directly, you are a registered ADS holder, also referred to as an ADS holder. This description assumes you are an ADS holder. If you hold the ADSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADS holders described in this section. You should consult with your broker or financial institution to find out what those procedures are.

 

The Direct Registration System, or DRS, is a system administered by The Depository Trust Company, also referred to as DTC, pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership will be confirmed by periodic statements sent by the depositary to the registered holders of uncertificated ADSs.

 

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As an ADS holder, you will not be treated as one of our registered shareholders and you will not have direct shareholder rights. British Virgin Island’s law governs our direct shareholders’ rights. The depositary will be the holder of the shares underlying your ADSs. As a registered holder of ADSs, you will have ADS holder rights. A Deposit Agreement among us, the depositary and you, as an ADS holder, and all other persons indirectly holding ADSs, sets out ADS holder rights as well as the rights and obligations of the depositary. New York law governs the Deposit Agreement and the ADSs.

 

The following is a summary of the material provisions of the Deposit Agreement. For more complete information, you should read the entire Deposit Agreement and the form of ADS, which contains the terms of the ADSs. The Deposit Agreement is filed as an exhibit to our registration statement filed on Form F-1. You may obtain the registration statement and the attached Deposit Agreement from the SEC’s website at  http://www.sec.gov . You may also obtain a copy of the Deposit Agreement at the SEC’s Public Reference Room, which is located at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330. 

  

Fees and Expenses

 

Persons depositing or withdrawing shares or ADS holders must pay:   For:
     
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)   Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
     
    Cancellation of ADSs for the purpose of withdrawal, including if the Deposit Agreement terminates
     
$.05 (or less) per ADS   Any cash distribution to ADS holders
     
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs   Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders
     
$.05 (or less) per ADSs per calendar year   Depositary services
     
Registration or transfer fees   Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares
     
Expenses of the depositary   Cable, telex and facsimile transmissions (when expressly provided in the Deposit Agreement) converting foreign currency to U.S. dollars
     
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, share transfer taxes, stamp duty or withholding taxes   As necessary
     
Any charges incurred by the depositary or its agents for servicing the deposited securities   As necessary

 

Payment of Taxes

 

Holders of our ADSs are responsible for any taxes or other governmental charges payable on their ADSs or on the deposited securities represented by any of their ADSs. The depositary may refuse to register any transfer of a holder’s ADSs or allow withdrawal of the deposited securities represented by the ADSs until such taxes or other charges are paid. It may apply payments owed to the holder or sell deposited securities represented by the ADSs to pay any taxes owed and the holder will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to ADS holders any proceeds, or send to ADS holders any property, remaining after it has paid the taxes.

 

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PART II

 

ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

 

None.

 

ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.

 

Use of Proceeds.

 

We completed our initial public offering on May 14, 2010 (the “IPO”), which generated net proceeds of approximately $14.6 million. All remaining cash on hand from the proceeds of our IPO was transferred to C Media Limited and its subsidiaries following the completion of the asset exchange transactions on August 17, 2018.

    

ITEM 15.  CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures, which included inquiries made to certain other of our employees. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that, as of December 31, 2017, the Company’s disclosure controls and procedures were not effective due to the material weakness described in the “Management’s Report on Internal Control over Financial Reporting” section below.

  

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

71

 

 

Any system of internal control, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

Management assessed our internal control over financial reporting as of the year ended December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2014 report entitled "Internal Control-Integrated Framework." The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on such assessment, management concluded that its internal control over financial reporting as of December 31, 2017 was not effective because of the following material weakness:

 

Lack of U.S. GAAP expertise. Although our accounting personnel are professional and experienced in accounting requirements and procedures generally accepted in the PRC, they do not have sufficient knowledge, experience and training in maintaining our books and records and preparing financial statements in accordance with U.S. GAAP standards and SEC rules and regulations. The staff needs additional training to become experienced in U.S. GAAP-based reporting, including the skills of U.S. GAAP-based period end closing, consolidation of financial statements, and U.S. GAAP conversion.

 

In order to address the above material weakness, our management plans to take the following steps:

 

We will employ, as needed, outside professionals to provide key accounting personnel ongoing technical trainings to ensure their proper understanding of U.S. GAAP and newly announced accounting standards.

 

The Company believes the foregoing measures will remediate the identified material weakness in future periods. The Company is committed to monitoring the effectiveness of these measures and making any changes that are necessary and appropriate.

 

Notwithstanding the conclusion that its internal control over financial reporting was not effective as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer believe that the financial statements and other information contained in this report present fairly, in all material respects, its business, financial condition and results of operations. Nothing has come to the attention of management that causes them to believe that any material inaccuracies or errors exist in the Company’s financial statements as of December 31, 2017.

 

Attestation report of the registered public accounting firm.

 

This transition report does not include an attestation report of the Company’s registered public accounting firm on internal control over financial reporting because the Company is a non-accelerated filer permanently exempted from section 404(b) of the Sarbanes-Oxley Act.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during our fiscal year ended December 31, 2017 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

ITEM 16. [RESERVED]

  

ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT.

 

Our board of directors has determined that Mr. Dennis Galgano qualifies as an audit committee financial expert. Our board of directors has determined that Messrs. Dennis Galgano, Jin Shi, Jiming Ha and Zhihao Xu meet the definition of an “independent director” under the applicable NASDAQ Rules and under Rule 10A-3 of the Securities Exchange Act of 1934, as amended.

 

72

 

 

ITEM 16B.  CODE OF ETHICS.

 

Our board of directors has adopted a code of business conduct and ethics applicable to our directors, officers and employees. We have posted the code on our website at http://www.luokung.com.

 

ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

Audit Fees

 

The aggregate fees billed by Moore Stephens CPA Limited for professional services rendered for the audit of our financial information disclosed in this transition report on Form 20-F was $280,000 for the two years ended December 31, 2017 and 2016.

 

The aggregate fees billed by our previous auditor, BDO China Shu Lun Pan Certified Public Accountants LLP for professional services rendered for the audit of our annual financial information included in our annual reports on Form 20-F was $105,500 for each of the fiscal years ended September 30, 2017, 2016 and 2015.

 

Tax Fees

 

We did not engage our principal accountants to provide tax or related services during the last two fiscal years.

 

All Other Fees

 

We did not engage our principal accountants to render services to us during the last two fiscal years, other than as reported above.

 

ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.

 

Not applicable.

 

ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

 

Not applicable.

 

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.

 

Not applicable.

 

ITEM 16G. CORPORATE GOVERNANCE.

 

We are incorporated in the BVI and our corporate governance practices are governed by applicable BVI law as well as our memorandum and articles of association. In addition, because our ADSs are listed on NASDAQ, we are subject to NASDAQ’s corporate governance requirements. NASDAQ Listing Rule 5620(a) requires each issuer to hold an annual meeting of shareholders no later than one year after the end of the issuer’s fiscal year end. However, NASDAQ Listing Rule 5615(a)(3) permits a foreign private issuer like us to follow home country practices in lieu of certain requirements of Listing Rule 5600, provided that such foreign private issuer discloses in its transition report filed with the SEC each requirement of Rule 5600 that it does not follow and describes the home country practice followed in lieu of such requirement. We follow home country practice with respect to annual meetings and did not hold an annual shareholder meeting in the year ended December 31, 2017. We may, however, hold annual shareholder meetings in the future if there are significant issues that require shareholders’ approvals.

 

ITEM 16H. MINE SAFETY DISCLOSURE.

 

Not applicable.

 

73

 

 

PART III

 

ITEM 17.  FINANCIAL STATEMENTS.

 

We have elected to provide financial statements and related information specified in Item 18.

 

ITEM 18.  FINANCIAL STATEMENTS.

 

See “Index to Consolidated Financial Statements” for a list of all financial statements filed as part of this transition report. The Financial Statements are beginning on page F-1.

 

ITEM 19.  EXHIBITS.

 

See the Exhibit Index following the signature page of this report, which is incorporated herein by reference.

 

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SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this transition report on its behalf.

 

  LUOKUNG TECHNOLOGY CORP.
   
  By: /s/ Xuesong Song 
    Xuesong Song
   

Chief Executive Officer

(principal executive officer)

 

October 12, 2018

 

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EXHIBIT INDEX

 

The following documents are filed as part of this transition report on Form 20-F.

 

Exhibit

Number

  Description
     
1.1   Amended and Restated Memorandum of Association and Articles of Association of Luokung Technology Corp., dated August 20, 2018, and as currently in effect.
     
2.1*   Deposit Agreement among the Company, depositary and holders of the American Depositary Receipts.
     
2.2*   Form of American Depositary Receipt.
     
2.3*   English translation of Entrusted Management Agreement dated December 15, 2009 between Xi’an Softech Co., Ltd., Xi’an Kingtone Information Technology Co., Ltd. and the shareholders of Xi’an Kingtone Information Technology Co., Ltd.
     
3.1*   English translation of Shareholder’s Voting Proxy Agreement dated December 15, 2009 between Xi’an Softech Co., Ltd., Xi’an Kingtone Information Technology Co., Ltd. and the shareholders of Xi’an Kingtone Information Technology Co., Ltd.
     
4.1*   English translation of Exclusive Technology Service Agreement dated December 15, 2009 between Xi’an Softech Co., Ltd. and Xi’an Kingtone Information Technology Co., Ltd.
     
4.2*   English translation of Exclusive Option Agreement dated December 15, 2009 between Xi’an Softech Co., Ltd., Xi’an Kingtone Information Technology Co., Ltd. and the shareholders of Xi’an Kingtone Information Technology Co., Ltd.
     
4.3*   English translation of Equity Pledge Agreement dated December 15, 2009 between Xi’an Softech Co., Ltd., Xi’an Kingtone Information Technology Co., Ltd. and the shareholders of Xi’an Kingtone Information Technology Co., Ltd.
     
4.4*   English translation of Loan Agreement dated September 14, 2009 between Xi’an Kingtone Information Technology Co., Ltd. and Xian City Commercial Bank.
     
4.5*   English translation of Mortgage Agreement dated September 14, 2009 between Xi’an Kingtone Information Technology Co., Ltd. and Xian City Commercial Bank.
     
4.6*   English translation of Form of Employment Agreement entered into between the Company and the Company’s executive officers.
     
4.7*   2010 Omnibus Incentive Plan of the Company.
     
4.8**   English translation of Project Construction Contract dated August 10, 2010 between Xi’an Hu County Yuxing Agriculture Science & Technology Co., Ltd. and Xi’an Kingtone Information Technology Co., Ltd.
     
4.9***   Asset Exchange Agreement by and between C Media Limited and the Company dated as of January 25, 2018.
     
4.10***   Securities Purchase Agreement by and among Redstone YYL Management Limited and five shareholders holding majority of the shares of the Company dated as of January 25, 2018.
     
4.15   Exclusive Business Cooperation Agreement by and between Zhongchuan Tianxia Information Technology (Shenzhen) Co., Ltd., and Beijing Mobile Vision Technology Co., Ltd., dated August 31, 2015.

 

76

 

 

4.16   Exclusive Option Agreement by and among Zhongchuan Tianxia Information Technology (Shenzhen) Co., Ltd., Xuesong Song, Weili Chen, Ping Wang, Donglai Liu, and Beijing Mobile Vision Technology Co., Ltd., dated August 31, 2015.
     
4.17   Equity Interest Pledge Agreement by and among Zhongchuan Tianxia Information Technology (Shenzhen) Co., Ltd., Xuesong Song, Weili Chen, Ping Wang, Donglai Liu, and Beijing Mobile Vision Technology Co., Ltd., dated August 31, 2015.
     
4.18   Addendum to Asset Exchange Agreement by and among the Company, Topsky Info-tech Holdings Pte Ltd. and C Media Limited, dated October 3, 2018. Incorporated by reference to the Company’s Current Report on Form 6-K filed on October 4, 2018.
     
4.19   Stock Purchase Agreement, dated August 25, 2018, by and among the Company, LK Technology Ltd., and the shareholders listed therein.  Incorporated by reference to the Company’s Current Report on Form 6-K filed on August 27, 2018.
     
4.20   Power of Attorney by Weili Chen, dated August 31, 2015.
     
4.21   Power of Attorney by Ping Wang, dated August 31, 2015.
     
4.22   Power of Attorney by Donglai Liu, dated August 31, 2015.
     
4.23   Power of Attorney by Xuesong Song, dated August 31, 2015.
     
8.1   List of Subsidiaries and Consolidated Variable Interest Entities
     
10.1   Employment Agreement, dated August 19, 2018, between Luokung Technology Corp. and Xuesong Song.†
     
10.2   Employment Agreement, dated August 19, 2018, by and between Luokung Technology Corp. and Jie Yu.†
     
12.1   Certification of Chief Executive Officer required by Rule 13a-14(a).
     
12.2   Certification of Chief Financial Officer required by Rule 13a-14(a).
     
13.1   Certification of Chief Executive Officer required by Rule 13a-14(a).
     
13.2   Certification of Chief Financial Officer required by Rule 13a-14(a).
     
101.INS   XBRL Instance Document.
     
101.SCH   XBRL Taxonomy Extension Schema Document.
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Previously filed as an exhibit to the Company’s Registration Statement on Form F-1 (Reg. No. 333-166056) filed with the Commission and incorporated herein by reference.

 

** Previously filed as exhibits to the Company’s Transition Report on Form 20-F filed with the Commission on January 20, 2011 and incorporated herein by reference.

 

*** Previously filed as exhibits to the Company’s Annual Report on Form 20-F filed with the Commission on February 9, 2018 and incorporated herein by reference.
   
Indicates management contract or compensatory plan, contract or arrangement.

 

77

 

 

LK Technology Ltd. and Subsidiaries

 

CONSOLIDATED FINANCIAL STATEMENTS

 

TABLE OF CONTENTS

  

  Page(s)
   
Report of Independent Registered Public Accounting Firm F-2
   

Consolidated Financial Statements

 
   
Consolidated Balance Sheets F-3
   
Consolidated Statements of Operations and Comprehensive Loss F-4
   
Consolidated Statements of Changes in Stockholder’s Equity F-5
   
Consolidated Statements of Cash Flows F-6
   
Notes to Consolidated Financial Statements F-7 - F-22

 

F- 1

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholder and the Sole Director of

LK Technology Ltd.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of LK Technology Ltd. and. subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, changes in shareholder’s equity and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

An independent member firm of Moore Stephens International Limited – members in principal cities throughout the world

  

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

Certified Public Accountants

 

We have served as the Company’s auditor since 2018.

 

Hong Kong

 

May 25, 2018

 

F- 2

 

 

LK TECHNOLOGY LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN U.S. DOLLARS)

 

    As of December 31,  
    2017     2016  
Assets            
Current assets:            
Cash and cash equivalents   $ 72,379     $ 83,843  
Accounts receivable, net of allowance for doubtful accounts     9,729,625       1,865,836  
Other receivables and prepayment     2,376,745       2,287,934  
Amounts due from related parties     11,760,692       -  
Total current assets     23,939,441       4,237,613  
Property and equipment, net     5,044,872       7,771,027  
Intangible assets, net     1,154,197       1,682,445  
Goodwill     7,239,936       7,239,936  
Amount due from a related party     204,412       183,811  
                 
TOTAL ASSETS     37,582,858       21,114,832  
Liabilities                
Current liabilities:                
Accounts payable     8,784,518       6,446,584  
Accrued liabilities and other payables     12,962,912       11,329,613  
Amounts due to related parties     3,563,683       16,129,323  
Total current liabilities     25,311,113       33,905,520  
Total liabilities     25,311,113       33,905,520  
                 
Commitments and contingencies                
Shareholder’s Equity (Deficit)                
                 
Share capital                
Common stock, $1 par value per share; 50,000 shares authorized as of December 31, 2017 and 2016, 1 share issued and outstanding as of December 31, 2017 and 2016     1       1  
Additional paid-in capital     41,819,685       10,037,469  
Accumulated deficit     (29,936,158 )     (23,125,704 )
Accumulated other comprehensive income (loss)     388,217       297,546  
                 
Total Shareholder’s Equity (Deficit)     12,271,745       (12,790,688 )
                 
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY (DEFICIT)   $ 37,582,858     $ 21,114,832  

 

F- 3

 

 

LK TECHNOLOGY LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN U.S. DOLLARS)

 

    For the years ended
December 31,
 
    2017     2016  
             
Revenues   $ 26,082,417     $ 5,233,145  
Less: Cost of revenues     5,547,779       6,315,504  
Less: Operating expenses:                
Selling and marketing     23,908,733       6,209,804  
General and administrative     2,451,249       2,108,854  
Research and development     1,046,198       2,882,202  
Total operating expenses     27,406,180       11,200,860  
Loss from operations     (6,871,542 )     (12,283,219 )
Other income (expense):                
Interest expense     (26,611 )     (4,412 )
Foreign exchange gains (losses)     350,679       (298,257 )
Loss from investment     -       (428,571 )
Other income (expense), net     (262,980 )     (34,572 )
Total other income (expense), net     61,088       (765,812 )
Loss before income taxes     (6,810,454 )     (13,049,031 )
Income taxes     -       -  
Net loss   $ (6,810,454 )   $ (13,049,031 )
Other comprehensive income:                
Foreign currency translation adjustment     90,671       387,375  
Total comprehensive loss   $ (6,719,783 )   $ (12,661,656 )

 

F- 4

 

 

LK TECHNOLOGY LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY

(IN U.S. DOLLARS)

 

                            Accumulated
other