Part
I
Item
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
Applicable.
Item
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not
Applicable.
Item
3. KEY INFORMATION
A.
Selected Financial Data
The
following table sets forth selected historical statements of operations for the years ended December 31, 2018, 2017 and 2016,
and balance sheet data as of December 31, 2018 and 2017, which have been derived from our audited consolidated financial statements
included elsewhere in this annual report. The consolidated financial statements are prepared and presented in accordance with
GAAP. Historical results are not necessarily indicative of the results for any future periods.
The
following table presents our summary consolidated statements of income and comprehensive income for the fiscal years ended December
31, 2018 and 2017, respectively.
Selected
Consolidated Statement of Income and Comprehensive Income
*
The shares and per share data are presented on a retroactive basis to reflect the nominal share issuance.
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For the Years Ended
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December 31,
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2018
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2017
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2016
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Revenues
|
|
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23,152,267
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|
|
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21,628,554
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|
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21,174,801
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Cost of revenues
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15,318,661
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|
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13,539,829
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13,646,569
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Gross profit
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7,833,606
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8,088,725
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7,528,232
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|
|
|
|
|
|
|
|
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Operating expenses:
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Sales and marketing
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2,144,588
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1,614,237
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1,516,126
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General and administrative
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2,684,183
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1,462,901
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1,324,485
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Research and development
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1,992,228
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1,151,985
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947,506
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Total operating expenses
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6,820,999
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4,229,123
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3,788,117
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Operating income from operations
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1,012,607
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3,859,602
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3,740,115
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Other income
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584,209
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553,475
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250,249
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Income before income taxes
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1,596,816
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4,413,077
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3,990,364
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Provision for income taxes
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43,190
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434,882
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536,387
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Net income
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1,553,626
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3,978,195
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3,453,977
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Less: Income (loss) attributable to non-controlling interests
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7,336
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(6,671
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)
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-
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Net income attributable to Powerbridge’s shareholders
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1,546,290
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3,984,866
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3,453,977
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Comprehensive income
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1,214,388
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4,199,327
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3,464,421
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Basic earnings per common share*
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$
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0.22
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$
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0.58
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$
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0.50
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*
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The shares and per share data are presented on a retroactive
basis to reflect the nominal share issuance.
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The
following table presents our summary consolidated balance sheet data as of December 31, 2018 and 2017.
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As of December 31,
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2018
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2017
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Cash and cash equivalents
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$
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4,348,635
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$
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2,958,674
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Total Current Assets
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$
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22,107,482
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$
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17,608,882
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Total Assets
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$
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27,767,508
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$
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21,784,791
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Total Liabilities
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$
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21,341,628
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$
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16,573,299
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Total Powerbirdge’s Shareholders’ Equity
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$
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6,425,880
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$
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5,218,420
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Non-controlling Interests
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$
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-
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$
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(6,928
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)
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Total Shareholders’ Equity
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$
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6,425,880
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$
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5,211,492
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Total Liabilities and Shareholders’ Equity
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$
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27,767,508
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$
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21,784,791
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Exchange
Rate Information
The
following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.
On April 19, 2019, the buying rate announced by the Federal Reserve Statistical Release was RMB 6.7032 to $1.00.
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Spot Exchange Rate
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Period
Ended
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Average
(1)
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Low
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High
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Period
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(RMB per US$1.00)
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2017
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6.9430
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6.6400
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6.9580
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6.9580
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2018
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6.5063
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6.7569
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6.9575
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6.9575
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2019
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6.8755
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6.6080
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|
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6.9737
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|
|
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6.9737
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January
|
|
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6.6958
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|
|
|
6.7863
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|
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6.6958
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|
|
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6.8708
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February
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|
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6.6912
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6.7367
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6.6822
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|
|
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6.7907
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March
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|
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6.7112
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6.7119
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|
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6.6916
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|
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6.7381
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April 19, 2019
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6.7039
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6.7106
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6.6870
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6.7223
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Source:
https://www.federalreserve.gov/releases/h10/hist/default.htm.
(1)
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Annual
averages, lows, and highs are calculated from month-end rates. Monthly averages, lows, and highs are calculated using the
average of the daily rates during the relevant period.
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B.
Capitalization and Indebtedness
Not
applicable.
C.
Reasons for the Offer and Use of Proceeds
Not
applicable.
D.
Risk Factors
You
should carefully consider the following risk factors, together with all of the other information included in this Annual Report.
Investment in our securities involves a high degree of risk. You should carefully consider the risks described below together
with all of the other information included in this Annual Report before making an investment decision. The risks and uncertainties
described below represent our known material risks to our business. If any of the following risks actually occurs, our business,
financial condition or results of operations could suffer. In that case, you may lose all or part of your investment.
Risks
Related to Our Business
The
growth and success of our business depends on our ability to develop new services and enhance existing services in order to keep
pace with rapid changes in technology.
The
market for our services is characterized by rapid technological change, evolving industry standards, changing customer preferences
and new product and service introductions. Our future growth and success depends significantly on our ability to anticipate developments
in technologies, and develop and offer new services to meet our customers’ evolving needs. We may not be successful in anticipating
or responding to these developments in a timely manner, or if we do respond, the services or technologies we develop may not be
successful in the marketplace. The development of some of the services and technologies may involve significant upfront investments
and the failure of these services and technologies may result in our being unable to recover these investments, in part or in
full. Further, services or technologies that are developed by our competitors may render our services uncompetitive or obsolete.
In addition, new technologies may be developed that allow our customers to more cost-effectively perform the services that we
provide, thereby reducing demand for our services. Should we fail to adapt to the rapidly changing technologies or if we fail
to develop suitable services to meet the evolving and increasingly sophisticated requirements of our customers in a timely manner,
our business and results of operations could be materially and adversely affected.
If
we do not succeed in attracting new customers for our services and or growing revenues from existing customers, we may not achieve
our revenue growth goals.
We
plan to significantly expand the number of customers we serve to diversify our customer base and grow our revenues. Obtaining
new customers is important for us to achieve rapid revenue growth. We also plan to grow revenues from our existing customers by
identifying and selling additional services to them. Our ability to attract new customers, as well as our ability to grow revenues
from existing customers, depends on a number of factors, including our ability to offer high quality services at competitive prices,
the strength of our competitors and the capabilities of our sales and marketing teams. If we are not able to continue to attract
new customers or to grow revenues from our existing customers, we may not be able to grow our revenues as quickly as we anticipate
or at all.
We
may be unable to effectively manage our expansion for the anticipated growth, which could place significant strain on our management
personnel, systems and resources. We may not be able to achieve anticipated growth, which could materially and adversely affect
our business and prospects.
We
have expanded our operations recently for the anticipated growth. The number of our total employees grew from 154 in fiscal 2016
to 168 in fiscal 2017 and further to 299 in fiscal 2018. As of the date of this Annual Report, we have 299 full-time employees.
We maintain five branches, of which are located in China (Beijing, Changsha, Wuhan, Nanning, and Hangzhou) to serve different
customers in various geographic locations. In order to pursue existing and potential market opportunities, we plan to expand our
business including (i) establishing new offices and expanding our current offices in China; (ii) exploring and expanding into
international markets; and (iii) upgrading our existing services and introducing new services. We are facing the following challenges
with respect to our planned expansion:
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recruiting,
training, developing and retaining sufficient industry and technology talents and management personnel;
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creating
and capitalizing upon economies of scale;
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managing
a larger number of customers in a greater number of locations;
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maintaining
effective oversight of personnel and offices;
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coordinating
work among offices and project teams and maintaining high resource utilization rates;
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integrating
new personnel and expanded operations while preserving our culture and core values;
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developing
and improving our internal administrative infrastructure, particularly our financial, operational, human resources, communications
and other internal systems, procedures and controls; and
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adhering
to and further improving our service quality and process execution standards and maintaining high levels of customer satisfaction.
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Moreover,
as we introduce new services or enter into new markets, we may face new market, technological and operational risks and challenges
with which we are unfamiliar, and it may require substantial management efforts and skills to mitigate these risks and challenges.
As a result of any of these problems associated with expansion, our business, results of operations and financial condition could
be materially and adversely affected. Furthermore, we may not be able to achieve anticipated growth, which could materially and
adversely affect our business and prospects.
We
face risks associated with having an extended selling and implementation cycle for our services that require us to make significant
resource commitments prior to realizing revenues for those services.
We
have an extended selling cycle for certain of our software applications and technology services, which requires significant investment
of capital, human resources and time by both our customers and us. Before committing to use our services, potential customers
require us to expend substantial time and resources educating them on the value of our services and our ability to meet their
requirements. Therefore, our selling cycle is subject to many risks and delays over which we have little or no control, including
our customers’ decision to choose alternatives to our services (such as other providers or in-house resources) and the timing
of our customers’ budget cycles and approval processes. Implementing our services, particularly for our application development
services also involves a significant commitment of resources over an extended period of time ranging from three months to three
years from both our customers and us. Our customers may experience delays in obtaining internal approvals or delays associated
with our services, thereby further delaying the implementation process. Our current and future customers may not be willing or
able to invest the time and resources necessary to implement our services, and we may fail to close sales with potential customers
to which we have devoted significant time and resources, which could have a material adverse effect on our business, results of
operations, financial condition and cash flows.
Adverse
changes in the economic environment, either in China or globally, could reduce our customers’ purchases from us and increase
pricing pressure, which could materially and adversely affect our revenues and results of operations.
The
software application and technology service industry is particularly sensitive to the economic environment, both in China and
globally, and tends to decline during general economic downturns. Accordingly, our results of operations, financial condition
and prospects are subject to a significant degree to the economic environment, especially for regions in which we and our customers
operate. During an economic downturn, our customers may cancel, reduce or defer their technology spending or change their technology
strategy, and reduce their purchases from us. The recent global economic slowdown, any future economic slowdown, and the resulting
diminution in technology spending, could also lead to increased pricing pressure from our customers. The trade war between the
U.S. and China which may lead to higher percentage of tariff to be placed on Chinese and American goods and services could also
lead to a reduction of import and export volume for some of our customers resulting in reduced purchases of our services from
these customers. The occurrence of any of these events could materially and adversely affect our revenues and results of operations.
We
generate a significant portion of our revenues from a relatively small number of major customers and loss of business from these
customers could reduce our revenues and significantly harm our business.
We
believe that in the foreseeable future we will continue to derive a significant portion of our revenues from a small number of
major customers. For the year ended December 31, 2018, no customer accounted for more than 10% of the Company’s total revenues.
For the year ended December 31, 2017, two customers accounted for 17.2% and 13.1% of the Company’s total revenues. For the
year ended December 31, 2016, three customers accounted for 16.0%, 12.2%, and 10.0% of the Company’s revenues.
Our
ability to maintain close relationships with major customers is essential to the growth and profitability of our business. However,
the volume of work performed for a specific customer is likely to vary from year to year, especially since we are generally not
our customers’ exclusive technology services provider and we do not have long-term commitments from any of our customer
to purchase our services. A major customer in one year may not provide the same level of revenues for us in any subsequent year.
The services we provide to our customers, and the revenues and income from those services, may decline or vary as the type and
quantity of services we provide changes over time. In addition, our reliance on any individual customer for a significant portion
of our revenues may give that customer a certain degree of pricing leverage against us when negotiating contracts and terms of
service. In addition, a number of factors other than our performance could cause the loss of or reduction in business or revenues
from a customers, and these factors are not predictable. These factors may include organization restructuring, pricing pressure,
changes to its technology strategy, switching to another services provider or returning work in-house. The loss of any of our
major customers could adversely affect our financial condition and results of operations.
We
may be forced to reduce the prices of our services due to increased competition and reduced bargaining power with our customers,
which could lead to reduced revenues and profitability.
The
software application and technology service industry in China is developing rapidly and related technology trends are constantly
evolving. This results in the frequent introduction of new services and significant price competition from our competitors. We
may be unable to offset the effect of declining average sales prices through increased sales volumes and or reductions in our
costs. Furthermore, we may be forced to reduce the prices of our services in response to offerings made by our competitors. Finally,
we may not have the same level of bargaining power we have enjoyed in the past when it comes to negotiating for the prices of
our services, all of which could lead to reduced revenues and profitability.
A
portion of our income is generated, and will in the future continue to be generated, on a project basis with a fixed price; we
may not be able to accurately estimate costs and determine resource requirements in relation to our projects, which would reduce
our margins and profitability.
A
portion of our income is generated, and will continue to be generated, from fees we receive for our projects at a fixed price.
Our projects often involve complex technologies, utilizing workforces with different skill sets and competencies, and must be
completed within compressed timeframes and meet customer requirements that are subject to changes and increasingly stringent.
In addition, some of our fixed-price projects are multi-year projects that require us to undertake significant projections and
planning related to resource utilization and costs. If we fail to accurately assess the time and resources required for completing
projects and to price our projects profitably, our business, results of operations and financial condition could be adversely
affected.
Our
revenues and results of operations are affected by seasonal trends.
Our
business is affected by seasonal trends. In particular, our revenues are typically progressively higher in the second, third and
fourth quarters of each year compared to the first quarter of each year due to seasonal trends, such as: (i) a general slowdown
in business activities and a reduced number of working days during the first quarter of each year as a result of the Chinese New
Year holiday period, and (ii) our customers in general tend to spend their technology and software budgets in the second half
of the year and in particular the fourth quarter. Other factors that may cause our quarterly operating results to fluctuate include,
among others, changes in general economic conditions in China and the impact of unforeseen events. We believe that our revenues
will continue to be affected in the future by seasonal trends. As a result, you may not be able to rely on period to period comparisons
of our operating results as an indication of our future performance, and we believe it is more meaningful to evaluate our business
on an annual basis.
If
we are unable to collect our receivables from our existing customers, our results of operations and cash flows could be adversely
affected.
Our
business depends on our ability to successfully obtain payment from our customers of the amounts they owe us for our services.
As of December 31, 2018 and 2017, our accounts receivable balance, net of allowance, amounted to approximately $15,479,437 million
and $13,071,065 million, respectively. As of December 31, 2018, two customers accounted for 12.2% and 10.7% of the Company’s
accounts receivable. As of December 31, 2017, four customers accounted for 18.7%, 15.9%, 13.5%, and 10.8% of our accounts receivable,
respectively. The significant outstanding accounts receivable balance was mainly related to certain projects for our government
customers such as government agencies, authorities and state-owned enterprises. Due to multiple levels of the government approval
process for payments, it could take extra time for us to collect the full proceeds from our government customers. In addition,
since we generally do not require collateral or other security from our customers, we establish an allowance for doubtful accounts
based upon estimates, historical experience and other factors surrounding the credit risk of specific customers. However, actual
losses on customer receivables balance could differ from those that we anticipate and as a result we might need to adjust our
allowance. There is no guarantee that we will accurately assess the creditworthiness of our customers. Macroeconomic conditions,
including related turmoil in the global financial system, could also result in financial difficulties for our customers, including
limited access to the credit markets, insolvency or bankruptcy, and as a result could cause customers to delay payments to us,
request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations
to us. As a result, an extended delay or default in payment relating to a significant account will have a material and adverse
effect on the aging schedule and turnover days of our accounts receivable. If we are unable to collect our receivables from our
customers in accordance with the contracts with our customers, our results of operations and cash flows could be adversely affected.
We
face a number of risks in our strategy to target larger organizations for sales of our services, and if we do not manage these
efforts effectively, our business and results of operations could be adversely affected.
A
portion of our sales and marketing efforts is focusing on larger corporate and government organizations. As a result, we face
a number of risks with respect to this strategy. For example, we expect to incur higher costs and longer sales cycles for larger
organizations, and we may be less effective at predicting when we will complete these sales. In our industry, the decision to
invest in our services may require a great number of product evaluations and multiple approvals within a potential customer’s
organization, which may require us to invest more time educating these potential customers. In addition, larger organizations
may demand more features and professional services. As a result, these sales opportunities would likely lengthen our typical sales
cycle and may require us to devote greater research and development, sales, support, and professional services resources to individual
customers. This could strain our resources and result in increased costs. Moreover, larger customers may demand discounts in pricing,
which could lower the amount of revenue we generate from any particular service we offer. If an expected transaction is delayed
until a subsequent period, or if we are unable to close one or more expected significant transactions with larger customers or
potential new customers in a particular period, our results of operations for that period, and for any future periods in which
revenue from such transaction would otherwise have been recognized, may be adversely affected. Our investments in marketing and
selling to large organizations may not be successful, which could harm our results of operations and our overall ability to grow
our customer base.
Our
business depends, in part, on services to the public sector, and significant changes in the contracting or fiscal policies of
the public sector could have an adverse effect on our business.
We
derive a large portion of our revenue from our services to government organizations, and we believe that the success and growth
of our business will continue to depend in part on our successful procurement of government contracts. Factors that could impede
our ability to maintain or increase the amount of revenue derived from government contracts, include:
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changes
in fiscal or contracting policies;
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decreases
in available government funding;
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|
changes
in government programs or applicable requirements;
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|
●
|
the
adoption of new laws or regulations or changes to existing laws or regulations; and
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|
●
|
potential
delays or changes in the government appropriations or other funding authorization processes.
|
The
occurrence of any of the foregoing could cause governmental organizations to delay or refrain from purchasing our services in
the future or otherwise have an adverse effect on our business, results of operations and financial condition.
Any
failure to offer high-quality customer support may adversely affect our relationships with our customers.
Our
ability to retain existing customers and attract new customers depends on our ability to maintain a consistently high level of
customer service and technical support. Our customers depend on our service support team to assist them in utilizing our services
effectively and to help them to resolve issues quickly and to provide ongoing support. If we are unable to hire and train sufficient
support resources or are otherwise unsuccessful in assisting our customers effectively, it could adversely affect our ability
to retain existing customers and could prevent prospective customers from adopting to our services. We may be unable to respond
quickly enough to accommodate short-term increases in demand for customer support. We also may be unable to modify the nature,
scope and delivery of our customer support to compete with changes in the support services provided by our competitors. Increased
demand for customer support, without corresponding revenue, could increase our costs and adversely affect our business, results
of operations and financial condition. Our sales are highly dependent on our business reputation and on positive recommendations
from customers. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality
customer support, could adversely affect our reputation, business, results of operations and financial condition.
Incorrect
or improper implementation or use of our services could result in customer dissatisfaction and negatively affect our business,
results of operations, financial condition, and growth prospects.
Our
services are deployed in a wide variety of increasingly complex technology environments, including on premises, in the cloud or
in hybrid environments. We believe our future success will depend on our ability to increase sales of our services for use in
such deployments. We must often assist our customers in achieving successful implementations of our services, which we do through
our professional consulting and technical support services. If our customers are unable to implement our services successfully,
or unable to do so in a timely manner, customer perceptions of our services may be harmed, our reputation and brand may suffer,
and customers may choose to cease usage of our services or not to expand their use of our services. Our customers may need training
in the proper use of and the variety of benefits that can be derived from our services to maximize their benefits. If our services
are not effectively implemented or used correctly or as intended, or if we fail to adequately train customers on how to efficiently
and effectively use our services, our customers may not be able to achieve satisfactory outcomes. This could result in negative
publicity and legal claims against us, which may cause us to generate fewer sales to new customers and reductions in renewals
or expansions of the use of our services with existing customers, any of which would harm our business and results of operations.
Failure
to adhere to regulations that govern our customers’ businesses could result in breaches of contracts with our customers.
Failure to adhere to the regulations that govern our business could result in our being unable to effectively perform our services.
Our
customers’ business operations are subject to certain rules and regulations in China or elsewhere. Our customers may contractually
require that we perform our services in a manner that would enable them to comply with such rules and regulations. Failure to
perform our services in such manner could result in breaches of contract with our customers and, in some limited circumstances,
civil fines and criminal penalties for us. In addition, we are required under various Chinese laws to obtain and maintain permits
and licenses to conduct our business. If we do not maintain our licenses or other qualifications to provide our services, we may
not be able to provide services to existing customers or be able to attract new customers and could lose revenues, which could
have a material adverse effect on our business and results of operations.
If
our new enhancements to our services do not achieve sufficient market acceptance, our financial results and competitive position
will suffer.
We
spend substantial amounts of time and money to research and develop new enhancements of our services to incorporate additional
features, improve functionality or other enhancements in order to meet our customers’ rapidly evolving demands. When we
develop an enhancement to our services, we typically incur expenses and expend resources upfront to develop, market and promote
the new enhancements. Therefore, when we develop and introduce new enhancements to our services, they must achieve high levels
of market acceptance in order to justify the amount of our investment in developing and bringing them to market. If our new enhancements
to our services do not garner widespread market adoption and implementation, our growth prospects, future financial results and
competitive position could suffer.
If
we cause disruptions to our customers’ businesses or provide inadequate service, our customers may have claims for substantial
damages against us, and as a result our profits may be substantially reduced.
If
we make errors in the course of delivering services to our customers or fail to consistently meet service requirements of a customer,
these errors or failures could disrupt the customer’s business, which could result in a reduction in our net revenues or
a claim for substantial damages against us. In addition, a failure or inability to meet a contractual requirement could seriously
damage our reputation and affect our ability to attract new business.
The
services we provide are often critical to our customers’ businesses. We generally provide customer support after our customized
application is delivered. Certain of our customer contracts require us to comply with security obligations including maintaining
system security, ensuring our system is virus-free, maintaining business continuity procedures, and verifying the integrity of
employees that work with our customers by conducting background checks. Any failure in a customer’s system or breach of
security relating to the services we provide to the customer could damage our reputation or result in a claim for substantial
damages against us. Any significant failure of our systems could impede our ability to provide services to our customers, have
a negative impact on our reputation, cause us to lose customers, reduce our revenues and harm our business.
Unauthorized
disclosure, destruction or modification of data, through cybersecurity breaches, computer viruses or otherwise or disruption of
our services could expose us to liability, protracted and costly litigation and damage our reputation.
Our
business involves the collection, storage, processing and transmission of customers’ business data. An increasing number
of organizations, including large merchants and businesses, other large technology companies, financial institutions and government
institutions, have disclosed breaches of their information technology systems, some of which have involved sophisticated and highly
targeted attacks, including on portions of their websites or infrastructure. We could also be subject to breaches of security
by hackers. Threats may derive from human error, fraud or malice on the part of employees or third parties, or may result from
accidental technological failure. Concerns about security are increased when we transmit information. Electronic transmissions
can be subject to attack, interception or loss. Also, computer viruses and malware can be distributed and spread rapidly over
the internet and could infiltrate our systems or those of our associated participants, which can impact the confidentiality, integrity
and availability of information, and the integrity and availability of our products, services and systems, among other effects.
Denial of service or other attacks could be launched against us for a variety of purposes, including interfering with our services
or creating a diversion for other malicious activities. These types of actions and attacks could disrupt our delivery of products
and services or make them unavailable, which could damage our reputation, force us to incur significant expenses in remediating
the resulting impacts, expose us to uninsured liability, subject us to lawsuits, fines or sanctions, distract our management or
increase our costs of doing business.
Our
encryption of data and other protective measures may not prevent unauthorized access or use of sensitive data. A breach of our
system or that of one of our associated participants may subject us to material losses or liability. A misuse of such data or
a cybersecurity breach could harm our reputation and deter customers from using our products and services, thus reducing our revenue.
In addition, any such misuse or breach could cause us to incur costs to correct the breaches or failures, expose us to uninsured
liability, increase our risk of regulatory scrutiny, subject us to lawsuits, result in the imposition of material penalties and
fines under applying laws or regulations.
We
cannot assure that there are written agreements in place with every associated participant or that such written agreements will
prevent the unauthorized use, modification, destruction or disclosure of data or enable us or our customers to obtain reimbursement
in the event we should suffer incidents resulting in unauthorized use, modification, destruction or disclosure of data. Any unauthorized
use, modification, destruction or disclosure of data could result in protracted and costly litigation, which could have a material
adverse effect on our business, financial condition and results of operations.
Cybersecurity
incidents are increasing in frequency and evolving in nature and include, but are not limited to, installation of malicious software,
unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release
of confidential or otherwise protected information and the corruption of data. Given the unpredictability of the timing, nature
and scope of information technology disruptions, there can be no assurance that the procedures and controls we employ will be
sufficient to prevent security breaches from occurring and we could be subject to manipulation or improper use of our systems
and networks or financial losses from remedial actions, any of which could have a material adverse effect on our business, financial
condition and results of operations.
Interruptions
or performance problems associated with our technology and infrastructure may adversely affect our business, results of operations,
and financial condition.
Our
continued growth depends in part on the ability of our existing customers and new customers to access our SaaS services, at any
time and within an acceptable amount of time. We may in the future experience, service disruptions, outages and other performance
problems due to a variety of factors, including infrastructure changes, human or software errors or capacity constraints. In some
instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time.
It may become increasingly difficult to maintain and improve our performance as our SaaS services become more complex. If our
services are unavailable or if our customers are unable to access features of our services within a reasonable amount of time
or at all, our business would be negatively affected.
We
currently provide our SaaS services via designated data centers and we intend to outsource our cloud infrastructure to commercial
available cloud infrastructure as a service providers (“IaaS”), which can host our services. Our customers need to
be able to access our services at any time, without interruption or degradation of performance. IaaS providers run their own platforms
that we access, and we are, therefore, vulnerable to service interruptions. We expect that in the future we may experience interruptions,
delays and outages in service and availability from time to time due to a variety of factors, including infrastructure changes,
human or software errors, website hosting disruptions and capacity constraints. Capacity constraints could be due to a number
of potential causes including technical failures, natural disasters, fraud or security attacks. In addition, if our security,
or that of IaaS providers, is compromised, our services are unavailable or our customers are unable to use our services within
a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely affected.
In some instances, we expect that we may not be able to identify the cause or causes of these performance problems within a period
of time acceptable to our customers. It may become increasingly difficult to maintain and improve our service performance, especially
during peak usage times, as the features of our services become more complex and the usage of our services increases. Any of the
above circumstances or events may harm our reputation, cause customers to stop using our services, impair our ability to increase
revenue from existing customers, impair our ability to grow our customer base and otherwise harm our business, results of operations,
and financial condition.
The
market for our BaaS (blockchain-as-a-service) services is new and unproven, which could result in limited customer adoption of
our services, limited customer retention, or weaker customer expansion.
We
recently introduced our BaaS services as pilot projects on a limited basis to selected customers. While we believe that, over
time, the concept of a BaaS services will become fundamental to an organization’s core operations involving global trade,
the market for BaaS services is largely unproven and is subject to a number of risks and uncertainties.
The
market for BaaS services is new and less mature than traditional on-premises software applications, and the adoption rate for
BaaS services may be slower among customers with business practices requiring highly customizable application software. Our success
with BaaS services will depend to a substantial extent on the widespread adoption of BaaS services in general, but we cannot be
certain that the trend of adoption of BaaS services will continue in the future. In particular, many organizations have invested
substantial personnel and financial resources in integrating traditional software into their businesses over time, and some may
be reluctant or unwilling to migrate to BaaS. It is difficult to predict customer adoption rates and demand for our BaaS services,
the future growth rate and size of the BaaS services market or the entry of competitive applications. The expansion of the BaaS
services market depends on a number of factors, including the cost, performance and perceived value associated with BaaS. Our
current cost for BaaS’s research and development is approximately $700,000 per annum. If BaaS services do not continue to
achieve market acceptance, or there is a reduction in demand for BaaS services caused by a lack of customer acceptance, technological
challenges, weakening economic conditions, data security or privacy concerns, governmental regulation, competing technologies
and services or decreases in information technology spending, it would result in decreased revenues and our business would be
adversely affected.
It
is difficult to predict our future operating results.
Our
ability to accurately forecast our future operating results is limited and subject to a number of uncertainties, including planning
for and modeling future growth. We have encountered, and will continue to encounter, risks, and uncertainties frequently experienced
by growing companies in rapidly changing industries. If our assumptions regarding these risks and uncertainties, which we use
to plan our business, are incorrect or change due to industry or market developments, or if we do not address these risks successfully,
our operating results could differ materially from our expectations and our business could suffer.
If
we have overestimated the size of our total addressable market, our future growth rate may be limited.
We
have estimated the size of our total addressable market based on data published by third parties and internally generated data
and assumptions. We have not independently verified any third-party information and cannot be assure of its accuracy or completeness.
While we believe our market size estimates are reasonable, such information is inherently imprecise. In addition, our projections,
assumptions and estimates of opportunities within our market are necessarily subject to a high degree of uncertainty and risk
due to a variety of factors, including but not limited to those described in this Annual Report. If this third-party or internally
generated data prove to be inaccurate or we make errors in our assumptions based on that data, our actual market may be more limited
than our estimates. In addition, these inaccuracies or errors may cause us to misallocate capital and other critical business
resources, which could harm our business.
Even
if our total addressable market meets our size estimates and experiences growth, we may not continue to grow our share of the
market. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to
many risks and uncertainties. Accordingly, the estimates of our total addressable market included in this Annual Report should
not be taken as indicative of our ability to grow our business. For more information regarding the estimates of market opportunity
and the forecasts of market growth included in this Annual Report, see the sections titled “Industry Background” and
“Business—Our Opportunity.”
We
face intense competition from onshore and offshore software application and technology service providers, and, if we are unable
to compete effectively, we may lose customers and our revenues may decline.
The
market for software application and technology services is highly competitive and we expect competition to persist and intensify.
We believe that the principal competitive factors in our markets are domain knowledge and industry expertise, breadth and depth
of service offerings, quality of the services offered, reputation and track record, marketing and selling skills, scalability
of technology infrastructure and price. In the software application and technology services market, customers tend to engage multiple
service providers instead of using an exclusive service provider, which could reduce our revenues to the extent that customers
obtain services from other competing providers. Our ability to compete also depends in part on a number of factors beyond our
control, including the ability of our competitors to recruit, train, develop and retain highly skilled professionals, the price
at which our competitors offer comparable services and our competitors’ responsiveness to customer needs. Therefore, we
cannot assure you that we will be able to retain our customers while competing against such competitors. Increased competition,
our inability to compete successfully against competitors, pricing pressures or loss of market share could harm our business,
financial condition and results of operations.
Our
corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation,
creativity and teamwork fostered by our culture, which could harm our business.
We
believe that our culture has been and will continue to be a key contributor to our success. Since December 31, 2018, we have increased
the size of our workforce to 299 employees, and we expect to continue to hire as we expand. If we do not continue to maintain
our corporate culture as we grow, we may be unable to foster the innovation, creativity, and teamwork we believe we need to support
our growth. Our substantial anticipated headcount growth and our transition from a private company to a public company may result
in a change to our corporate culture, which could harm our business.
Our
success depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may
be severely disrupted if we lose their services.
Our
future success heavily depends upon the continued services of our senior executives and other key employees. If one or more of
our senior executives or key employees are unable or unwilling to continue in their present positions, it could disrupt our business
operations, and we may not be able to replace them easily or at all. In addition, competition for senior executives and key personnel
in our industry is intense, and we may be unable to retain our senior executives and key personnel or attract and retain new senior
executive and key personnel in the future, in which case our business may be severely disrupted, and our financial condition and
results of operations may be materially and adversely affected. If any of our senior executives or key personnel joins a competitor
or forms a competing company, we may lose customers, suppliers, know-how and key professionals and staff members to them. Also,
if any of our business development managers, who generally keep a close relationship with our customers, joins a competitor or
forms a competing company, we may lose customers, and our revenues may be materially and adversely affected. Additionally, there
could be unauthorized disclosure or use of our technical knowledge, practices or procedures by such personnel. All of our executives
and key personnel have entered into employment agreements with us that contain non-competition provisions, non-solicitation and
nondisclosure covenants. However, if any dispute arises between our executive officers and key personnel and us, such non-competition,
non-solicitation and nondisclosure provisions might not provide effective protection to us, especially in China, where most of
these executive officers and key employees reside, in light of the uncertainties with China’s legal system.
Due
to intense competition for highly skilled personnel, we may fail to attract and retain enough sufficiently trained personnel to
support our operations; as a result, our ability to generate new business may be negatively affected and our revenues could decline.
The
software application and technology service industry relies on skilled personnel, and our success depends to a significant extent
on our ability to recruit, train, develop and retain qualified personnel, especially experienced middle and senior level management.
There is significant competition for skilled personnel, especially experienced middle and senior level management, with the skills
necessary to perform the services we offer to our customers. Increased competition for these personnel, in the software application
and technology service industry or otherwise, could have an adverse effect on us. We have established certain programs to increase
our human capital and employee loyalty, however, a significant increase in our attrition rate could decrease our operating efficiency
and productivity and could lead to a decline in demand for our services. Additionally, failure to recruit, train, develop and
retain personnel with the qualifications necessary to fulfill the needs of our existing and future customers or to assimilate
new personnel successfully could have a material adverse effect on our business, financial condition and results of operations.
Failure to retain our key personnel on customer projects or find suitable replacements for key personnel upon their departure
may lead to termination of some of our customer contracts or cancellation of some of our projects, which could materially and
adversely affect our business.
Our
profitability will suffer if we are not able to maintain our resource utilization levels and continue to improve our productivity
levels.
Our
gross margin and profitability are significantly impacted by our utilization levels of human resources as well as our ability
to increase our productivity levels. We have expanded our operations in recent years through organic growth, which has resulted
in a significant increase in our headcount and fixed overhead costs. We may face difficulties maintaining high levels of utilization.
Although we try to use all commercially reasonable efforts to accurately estimate service and resource requirements from our customers,
we may overestimate or underestimate, which may result in unexpected cost and strain or redundancy of our human capital and adversely
impact our utilization levels. In addition, some of our professionals are specially trained to work for specific customers or
on specific projects and some of our sales are dedicated to specific customers or specific projects. Our ability to continually
increase our productivity levels depends significantly on our ability to recruit, train, develop and retain high-performing professionals
and project staffs appropriately and optimize our mix of services and delivery methods. If we experience a slowdown or stoppage
of service for any customer or on any project for which we have dedicated professionals or project staffs, we may not be able
to efficiently reallocate these professionals and project staffs to other customers and projects to keep their utilization and
productivity levels high. If we are not able to maintain high resource utilization levels without corresponding cost reductions
or price increases, our profitability will suffer.
If
we are not able to maintain a strong brand for our services and increase market awareness of our company and our services, then
our business, results of operations and financial condition may be adversely affected.
We
believe that we have a strong brand in our industry and the continuing success of our services will depend in part on our ability
to develop and sustain a strong brand identity for our services and to increase the market awareness of our services and their
capabilities. The successful promotion of our brand will depend largely on our continued marketing efforts and our ability to
offer high quality services to our customers. Our brand promotion activities may not be successful or produce increased revenue.
In addition, independent industry analysts may provide reviews of our services and of competing products and services, which may
significantly influence the perception of our services in the marketplace. If these reviews are negative or not as positive as
reviews of our competitors’ products and services, then our brand may be harmed.
The
promotion of our brand also requires us to make substantial expenditures, and we anticipate that these expenditures will increase
as our industry becomes more competitive and as we seek to expand into new markets. These higher expenditures may not result in
any increased revenue or incremental revenue that is sufficient to offset the higher expense levels. If we do not successfully
maintain and enhance our brand, then our business may not grow, we may see our pricing power reduced relative to competitors and
we may lose customers, all of which would adversely affect our business, results of operations and financial condition.
We
may be unsuccessful in entering into strategic alliances or identifying and acquiring suitable acquisition candidates, which could
impede our growth and negatively affect our revenues and net income.
We
have pursued strategic alliances and intend to pursue strategic acquisition opportunities to increase our scale and geographic
presence, expand our service offerings and capabilities and enhance our industry and technical expertise. However, it is possible
that in the future we may not succeed in identifying suitable alliances or acquisition candidates. Even if we identify suitable
candidates, we may not be able to consummate these arrangements on terms commercially acceptable to us or to obtain necessary
regulatory approvals in the case of acquisitions. Challenges we face in the potential acquisition and integration process include:
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integrating
operations, services and personnel in a timely and efficient manner;
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unforeseen
or undisclosed liabilities;
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generating
sufficient revenue and net income to offset acquisition costs;
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potential
loss of, or harm to, employee or customer relationships;
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properly
structuring our acquisition consideration and any related post-acquisition earn-outs and successfully monitoring any earn-out
calculations and payments;
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retaining
key senior management and key sales and marketing and research and development personnel;
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potential
incompatibility of solutions, services and technology or corporate cultures;
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consolidating
and rationalizing corporate, information technology and administrative infrastructures;
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integrating
and documenting processes and controls;
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entry
into unfamiliar markets; and
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increased
complexity from potentially operating additional geographically dispersed sites, particularly if we acquire a company or business
with facilities or operations outside of China.
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Furthermore,
many of our competitors are likely to be seeking to enter into similar arrangements or acquire the same targets that we are looking
to enter into or acquire. Such competitors may have substantially greater financial resources than we do and may be more attractive
to our strategic partners or be able to outbid us for the acquisition targets. In addition, we may also be unable to timely deploy
our existing cash balances to effect a potential acquisition, as use of cash balances located onshore in China may require specific
governmental approvals or result in withholding and other tax payments. If we are unable to enter into suitable strategic alliances
or complete suitable acquisitions, our growth strategy may be impeded and our revenues and net income could be negatively affected.
Some
of our technology incorporates “open source” software, which could negatively affect our ability to sell our services
and subject us to possible litigation.
Some
aspects of our technology platforms from which we develop our services, are built using open source software, and we intend to
continue to use open source software in the future. The terms of certain open source licenses to which we are subject have not
been interpreted by U.S., China or foreign courts, and there is a risk that open source software licenses could be construed in
a manner that imposes unanticipated conditions or restrictions on our ability to monetize our services. Additionally, we may from
time to time face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative
works that we developed using such software, which could include our proprietary source code, or otherwise seeking to enforce
the terms of the applicable open source license. These claims could result in litigation and could require us to make our software
source code freely available, purchase a costly license or cease offering the implicated services unless and until we can re-engineer
them to avoid infringement. This re-engineering process could require significant additional research and development resources,
and we may not be able to complete it successfully. In addition to risks related to license requirements, use of certain open
source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not
provide warranties or controls on the origin of software. Any of these risks could be difficult to eliminate or manage, and if
not addressed, could have a negative effect on our business, results of operations and financial condition.
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 services we
provide. Under the terms of our customer contracts, we are required to keep such information strictly confidential. We use system
and network security technologies and other methods to protect sensitive and confidential customer data. We also require our employees
and subcontractors to enter into confidentiality agreements to limit access to and distribution of our customers’ sensitive
and confidential information as well as 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 or our subcontractors or their employees, in violation of any applicable confidentiality agreements or otherwise,
our customers may consider us liable for those acts and seek damages and compensation from us. Any such acts could cause us to
lose existing and future business and damage our reputation in the market. In addition, we currently do not have any insurance
coverage for mismanagement or misappropriation of such information by our subcontractors or employees. Any litigation with respect
to unauthorized disclosure of sensitive and confidential information might result in substantial costs and diversion of resources
and management attention.
We
may not be able to prevent others from unauthorized use of our intellectual property, which could cause a loss of customers, reduce
our revenues and harm our competitive position.
We
rely on a combination of patent, copyright, trademark, software registration, anti-unfair competition and trade secret laws, as
well as confidentiality agreements and other methods to protect our intellectual property rights. To protect our trade secrets
and other proprietary information, employees, customers, subcontractors, consultants, advisors and collaborators are required
to enter into confidentiality agreements. These agreements might not provide effective protection for the trade secrets, know-how
or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how
or other proprietary information. Implementation of intellectual property-related laws in China has historically been lacking,
primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and
confidentiality protections in China may not be as effective as those in the United States or other developed countries, and infringement
of intellectual property rights continues to pose a serious risk of doing business in China. Our patent applications may not issue
as patents or may not issue as patents that provide meaningful protection against third parties. Policing unauthorized use of
proprietary technology is difficult and expensive. The steps we have taken may be inadequate to prevent the misappropriation of
our proprietary technology. Reverse engineering, unauthorized copying, other misappropriation, or negligent or accidental leakage
of our proprietary technologies could enable third parties to benefit from our technologies without obtaining our consent or paying
us for doing so, which could harm our business and competitive position. Though we are not currently involved in any litigation
with respect to intellectual property, we may need to enforce our intellectual property rights through litigation. Litigation
relating to our intellectual property may not prove successful and might result in substantial costs and diversion of resources
and management attention.
We
may face intellectual property infringement claims that could be time-consuming and costly to defend. If we fail to defend ourselves
against such claims, we may lose significant intellectual property rights and may be unable to continue providing our existing
services.
Our
success largely depends on our ability to use and develop our technology and services without infringing the intellectual property
rights of third parties, including copyrights, trade secrets and trademarks. We may be subject to litigation involving claims
of violation of other intellectual property rights of third parties. The holders of other intellectual property rights potentially
relevant to our service offerings may make it difficult for us to acquire a license on commercially acceptable terms. 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. There may also be technologies licensed to and relied on by us that are subject to infringement
or other corresponding allegations or claims by third parties which may damage our ability to rely on such technologies. We are
subject to additional risks as a result of our recent and proposed acquisitions and the hiring of new employees who may misappropriate
intellectual property from their former employers. Parties making infringement claims may be able to obtain an injunction to prevent
us from delivering our services or using technology involving the allegedly infringing intellectual property. 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. Any intellectual property claim or litigation in this area, whether we ultimately win or lose, could damage our reputation
and have a material adverse effect on our business, results of operations or financial condition.
We
use third-party licensed software in or with our services, and the inability to maintain these licenses or errors in the software
services we provide could result in increased costs or reduced service levels, which would adversely affect our business.
Our
services incorporate certain third-party software obtained under licenses from other companies. We anticipate that we will continue
to rely on such third-party software and development tools in the future. Such third-party companies may discontinue their products,
go out of business or otherwise cease to make support available for such third-party software. Although we believe that there
are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or
it may be difficult or costly to replace. In addition, integration of the software used in our services with new third-party software
may require significant work and substantial investment of our time and resources. Also, to the extent that our services depends
upon the successful operation of third-party software in conjunction with our software, any undetected errors or defects in such
third-party software could prevent the deployment or impair the functionality of our services, delay new feature introductions,
result in a failure of our services and injure our reputation. Our use of additional or alternative third-party software would
require us to enter into license agreements with third parties. In the event that we are not able to maintain our licenses to
third-party software, or cannot obtain licenses to new software as needed to enhance our services, our business and results of
operations may be adversely affected.
We
may need additional capital and any failure by us to raise additional capital on terms favorable to us, or at all, could limit
our ability to grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges.
We
believe that our current cash and cash flow from operations would be sufficient to meet our anticipated cash needs for at least
the next 12 months from the date of this Annual Report. However, in order to capitalize on the growing needs of global trade software
applications and technology services as a result of the growth in China’s global trade and rapid advancement of the B&R,
we intend to expand to capture additional market shares. Thus, we may however, require additional cash resources for our research
and development, sales and market and potential strategic alliances and acquisitions. If these cash resources are insufficient
to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale
of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased
debt service obligations and could require us to agree to operating and financing covenants that would restrict our operations.
Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
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investors’
perception of, and demand for, securities of technology services outsourcing companies;
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conditions
of the U.S. and other global markets in which we may seek to raise funds;
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our
future results of operations and financial condition;
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PRC
government regulation of foreign investment in China;
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economic,
political and other conditions in China; and
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PRC
government policies relating to the borrowing and remittance outside China of foreign currency.
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In
the event that we are in need of additional financing, such financing may not be available in amounts or on terms acceptable to
us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to grow
our business and develop or enhance our solution and service offerings to respond to market demand or competitive challenges.
Failure
to comply with anti-bribery, anti-corruption, and anti-money laundering laws could subject us to penalties and other adverse consequences.
We
are subject to anti-corruption, anti-bribery and anti-money laundering laws in China and various other jurisdictions. From time
to time, we leverage third party partners and intermediaries, including channel partners, to sell our services. We and our third-party
intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or
affiliated organizations and may be held liable for the corrupt or other illegal activities of these third-party business partners
and intermediaries, our employees, representatives, contractors, channel partners, and agents, even if we do not explicitly authorize
such activities. While we have policies and procedure to address compliance with such laws, we cannot assure you that all of our
employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held
responsible. Any violation of the applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in
whistleblower complaints, adverse media coverage, investigations, severe criminal or civil sanctions, or suspension or debarment
from government contracts, all of which may have an adverse effect on our reputation, business, operating results and prospects.
We
may incur losses resulting from business interruptions resulting from occurrence of natural disasters, health epidemics and other
outbreaks or events.
Our
operational facilities may be damaged in natural disasters such as earthquakes, floods, heavy rains, sand storms, tsunamis and
cyclones, or other events such as fires. Such natural disasters or other events may lead to disruption of information systems
and telephone service for sustained periods. Damage or destruction that interrupts our provision of services could damage our
relationships with our customers and may cause us to incur substantial additional expenses to repair or replace damaged equipment
or facilities. We may also be liable to our customers for disruption in service resulting from such damage or destruction. Prolonged
disruption of our services as a result of natural disasters or other events may also entitle our customers to terminate their
contracts with us. We currently do not have insurance against business interruptions.
Fluctuation
in the value of the Renminbi and other currencies may have a material adverse effect on the value of your investment.
Our
financial statements are expressed in U.S. dollars. However, a majority of our revenues and expenses are denominated in Renminbi.
Our exposure to foreign exchange risk primarily relates to the limited cash denominated in currencies other than the functional
currencies of each entity. We do not believe that we currently have any significant direct foreign exchange risk and have not
hedged exposures denominated in foreign currencies or any other derivative financial instruments. However, the value of your investment
in our Ordinary Shares will be affected by the foreign exchange rate between U.S. dollars and RMB because the primary value of
our business is effectively denominated in RMB, while the Ordinary Shares will be traded in U.S. dollars.
The
value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political
and economic conditions and China’s foreign exchange policies. The People’s Bank of China regularly intervenes in
the foreign exchange market to limit fluctuations in RMB exchange rate and achieve certain exchange rate targets, and through
such intervention kept the U.S. dollar-RMB exchange rate relatively stable.
As
we may rely on dividends paid to us by our PRC subsidiary and branches, any significant revaluation of the RMB may have a material
adverse effect on our revenues and financial condition, and the value of any dividends payable on our Ordinary Shares in foreign
currency terms. For example, to the extent that we need to convert U.S. dollars we received from the IPO into for our operations,
appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we received from the conversion.
Conversely, 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. Furthermore, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would
affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results
of operations. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net
foreign exchange losses in the future. In addition, our foreign currency exchange losses may be magnified by PRC exchange control
regulations that restrict our ability to convert into foreign currencies.
As
we plan to expand internationally, our business will become more susceptible to risks associated with international operations.
Historically,
we have generated all of our revenue from customers in PRC. We plan to expand our market coverage internationally, with a focus
on B&R countries, including countries in Asia and Eastern Europe, Middle East, Africa and South America. Conducting international
operations subjects us to risks that we have not generally faced in the PRC. These risks include:
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challenges
caused by distance, language, cultural and ethical differences and the competitive environment;
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heightened
risks of unethical, unfair or corrupt business practices, actual or claimed, in certain geographies and of improper or fraudulent
sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements;
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application
of multiple and conflicting laws and regulations, including complications due to unexpected changes in foreign laws and regulatory
requirements;
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risks
associated with trade restrictions and foreign import requirements, including the importation, certification and localization
of our solutions required in foreign countries, as well as changes in trade, tariffs, restrictions or requirements;
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new
and different sources of competition;
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potentially
different pricing environments, longer sales cycles and longer accounts receivable payment cycles and collections issues;
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management
communication and integration problems resulting from cultural differences and geographic dispersion;
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greater
difficulty in enforcing contracts, accounts receivable collection and longer collection periods;
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the
uncertainty and limitation of protection for intellectual property rights in some countries;
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increased
financial accounting and reporting burdens and complexities;
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lack
of familiarity with locals laws, customs and practices, and laws and business practices favoring local competitors or partners;
and
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political,
social and economic instability abroad, terrorist attacks and security concerns in general.
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Any
of these risks could adversely affect our business. For example, compliance with laws and regulations applicable to our international
operations increases our cost of doing business in foreign jurisdictions. We may be unable to keep current with changes in government
requirements as they change from time to time. Failure to comply with these regulations could have adverse effects on our business.
In addition, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal
policies and procedures or applicable PRC laws and regulations. As we grow, we continue to implement compliance procedures designed
to prevent violations of these laws and regulations. There can be no assurance that all of our employees, contractors, resellers,
and agents will comply with the formal policies we will implement, or applicable laws and regulations. Violations of laws or key
control policies by our employees, contractors, resellers, or agents could result in delays in revenue recognition, financial
reporting misstatements, fines, penalties, or the prohibition of the import or export of our software and services, and could
have a material adverse effect on our business and results of operations.
Further,
our limited experience in operating our business internationally increases the risk that any potential future expansion efforts
that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations
and are unable to do so successfully, or in a timely manner, our business and results of operations will suffer.
Our
international operations may subject us to potential adverse tax consequences.
We
plan to expand our international operations and staff to better support our growth into international markets. Our corporate structure
and associated transfer pricing policies contemplate future growth into the international markets, and consider the functions,
risks and assets of the various entities involved in the intercompany transactions. The amount of taxes we pay in different
countries and jurisdictions may depend on the application of the tax laws of the various countries and jurisdictions, including
the United States, to our international business activities, changes in tax rates, new or revised tax laws or interpretations
of existing tax laws and policies and our ability to operate our business in a manner consistent with our corporate structure
and intercompany arrangements. The taxing authorities of the countries and jurisdictions in which we operate may challenge our
methodologies for pricing intercompany transactions pursuant to our intercompany arrangements or disagree with our determinations
as to the income and expenses attributable to specific jurisdictions. If such a challenge or disagreement were to occur, and our
position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time
tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Our financial statements
could fail to reflect adequate reserves to cover such a contingency.
Risks
Relating to Our Corporate Structure
We
are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman
Islands law than under U.S. law, shareholders may have less protection for their shareholder rights than they would under U.S.
law.
Our
corporate affairs are governed by our Third Amended and Restated Memorandum and Articles of Association, the Cayman Islands Companies
Law (Revised) (the “Companies Law”) and the common law of the Cayman Islands. The rights of shareholders to take action
against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman
Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived
in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has
persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities
of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent
in some jurisdictions in the United States. In particular, the Cayman Islands has a different body of securities laws than the
United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of
corporate law than the Cayman Islands. There is no statutory recognition in the Cayman Islands of judgments obtained in the United
States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of
a foreign court of competent jurisdiction without retrial on the merits. As a result of all of the above, public shareholders
may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors
or controlling shareholders than they would as shareholders of a U.S. public company.
Judgments
obtained against us by our shareholders may not be enforceable.
We
are a Cayman Islands company and all of our assets are located outside of the United States. Our current operations are based
in China. In addition, the majority of our current directors and executive officers are nationals and residents of countries other
than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it
may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the
event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even
if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to
enforce a judgment against our assets or the assets of our directors and officers.
We
may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
The
determination of our status as a foreign private issuer is made annually on the last business day of our most recently completed
second fiscal quarter and, accordingly, the next determination will be made with respect to us on or after June 30, 2019. We would
lose our foreign private issuer status if (1) a majority of our outstanding voting securities are directly or indirectly held
of record by U.S. residents, and (2) a majority of our shareholders or a majority of our directors or management are U.S. citizens
or residents, a majority of our assets are located in the United States, or our business is administered principally in the United
States. If we were to lose our foreign private issuer status, the regulatory and compliance costs to us under U.S. securities
laws as a U.S. domestic issuer may be significantly higher. We may also be required to modify certain of our policies to comply
with corporate governance practices associated with U.S. domestic issuers, which would involve additional costs.
Our
disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Our
disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports
we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC.
We
believe that any disclosure controls and procedures, or internal controls and procedures, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These
inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control
system, misstatements due to error or fraud may occur and not be detected, which
would
likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital
markets, harm our results of operations, and lead to a decline in the trading price of our Ordinary Shares. Additionally, ineffective
internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject
us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.
We may also be required to restate our financial statements from prior periods
.
If
we fail to establish and maintain proper internal financial reporting controls, our ability to produce accurate financial statements
or comply with applicable regulations could be impaired.
Pursuant
to Section 404 of the Sarbanes-Oxley Act, we are required to file a report by our management on our internal control over financial
reporting, including an attestation report on internal control over financial reporting issued by our independent registered public
accounting firm. However, while we remain an emerging growth company, we will not be required to include an attestation report
on internal control over financial reporting issued by our independent registered public accounting firm and due to a transition
period established by rules of the SEC for newly public companies, we are not required to include a report of management’s
assessment regarding internal control over financial reporting in this annual report. The presence of material weaknesses in internal
control over financial reporting could result in financial statement errors which, in turn, could lead to errors in our financial
reports and/or delays in our financial reporting, which could require us to restate our operating results. In connection with
the audit of our financial statements for the years ended December 31, 2018 and 2017, we and our independent registered public
accounting firm identified one material weakness in our internal control over financial reporting, as defined in the standards
established by the Public Company Accounting Oversight Board of the United States, as of December 31, 2018. The material weakness
identified was the lack of dedicated resources to take responsibility for the finance and accounting functions and the preparation
of financial statements in compliance with generally accepted accounting principles in the United States, or U.S. GAAP.
We
have already taken some steps and have continued to implement measures to remediate the material weakness identified, including
but not limited to providing trainings to staff, changing to a new and well-established accounting system, and continuing to monitor
the internal control over financial reporting. However, we cannot assure you that we will not identify additional material weaknesses
or significant deficiencies in the future.
Due
to the material weakness in our internal controls over financial reporting, we conclude that our internal controls over financial
reporting are ineffective and therefore investors may lose confidence in our operating results, the price of the Ordinary Shares
could decline and we may be subject to litigation or regulatory enforcement actions. In addition, if we are unable to meet the
requirements of Section 404 of the Sarbanes-Oxley Act, the Ordinary Shares may not be able to remain listed on the NASDAQ Global
Market.
We
will likely not pay dividends in the foreseeable future.
Dividend
policy is subject to the discretion of our board of directors and will depend on, among other things, our earnings, financial
condition, capital requirements and other factors. We have never declared a dividend. There is no assurance that our board of
directors will declare dividends even if we are profitable. The payment of dividends by entities organized in China is subject
to limitations as described herein. Under Cayman Islands law, we may only pay dividends from profits of the Company, or credits
standing in the Company’s share premium account, and we must be solvent before and after the dividend payment in the sense
that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value
of assets of our Company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books
of account, and our capital. Pursuant to the Chinese enterprise income tax law, dividends payable by a foreign investment entity
to its foreign investors are subject to a withholding tax of 10%. Similarly, dividends payable by a foreign investment entity
to its Hong Kong investor who owns 25% or more of the equity of the foreign investment entity is subject to a withholding tax
of 5%. The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations
in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards
and regulations in China. The transfer to this reserve must be made before distribution of any dividend to shareholders.
Our
business may be materially and adversely affected if our Chinese subsidiary declare bankruptcy or become subject to a dissolution
or liquidation proceeding.
The
Enterprise Bankruptcy Law of China provides that an enterprise may be liquidated if the enterprise fails to settle its debts as
and when they fall due and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts. Our Chinese
subsidiary holds certain assets that are important to our business operations. If our Chinese subsidiary undergo a voluntary or
involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering
our ability to operate our business, which could materially and adversely affect our business, financial condition and results
of operations.
As
a “controlled company” under the rules of the NASDAQ Capital Market, we may choose to exempt our company from certain
corporate governance requirements that could have an adverse effect on our public shareholders.
Prior
to the completion of the IPO, our directors and officers beneficially own a majority of the voting power of our outstanding Ordinary
Shares. Even if the over-allotment option is exercised in full, we may continue to be a “controlled company.” Under
the Rule 4350(c) of the NASDAQ Capital Market, a company of which more than 50% of the voting power is held by an individual,
group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements,
including the requirement that a majority of our directors be independent, as defined in the NASDAQ Capital Market Rules, and
the requirement that our compensation and nominating and corporate governance committees consist entirely of independent directors.
Although we do not intend to rely on the “controlled company” exemption under the NASDAQ listing rules, we could elect
to rely on this exemption in the future. If we elect to rely on the “controlled company” exemption, a majority of
the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation
committees might not consist entirely of independent directors. Accordingly, during any time while we remain a controlled company
relying on the exemption and during any transition period following a time when we are no longer a controlled company, you would
not have the same protections afforded to shareholders of companies that are subject to all of the NASDAQ Capital Market corporate
governance requirements. Our status as a controlled company could cause our Ordinary Share to look less attractive to certain
investors or otherwise harm our trading price.
Risks
Related to Doing Business in China
Adverse
changes in political, economic and other policies of the Chinese government could have a material adverse effect on the overall
economic growth of China, which could materially and adversely affect the growth of our business and our competitive position.
Currently,
all of our business operations are conducted in China. Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal developments in China. Although the PRC economy has been
transitioning from a planned economy to a more market-oriented economy since the late 1970s, 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 the Renminbi and foreign currencies, and regulate the growth of the general or specific market. While
the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically
and among various sectors of the economy. Furthermore, the current global economic crisis is adversely affecting economies throughout
the world. As the PRC economy has become increasingly linked with the global economy, China is affected in various respects by
downturns and recessions of major economies around the world. The various economic and policy measures enacted by the PRC government
to forestall economic downturns or bolster China’s economic growth could materially affect our business. Any adverse change
in the economic conditions in China, in policies of the PRC government or in laws and regulations in China could have a material
adverse effect on the overall economic growth of China and market demand for our outsourcing services. Such developments could
adversely affect our businesses, lead to reduction in demand for our services and adversely affect our competitive position.
Uncertainties
with respect to the PRC legal system could have a material adverse effect on us.
The
PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential
value. Since the late 1970s, the PRC government has been building a comprehensive system of laws and regulations governing economic
matters in general. The overall effect has been to significantly enhance the protections afforded to various forms of foreign
investments in China. We conduct our business primarily through our subsidiary established in China. This subsidiary is generally
subject to laws and regulations applicable to foreign investment in China. However, since these laws and regulations are relatively
new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available
to us. In addition, some regulatory requirements issued by certain PRC government authorities may not be consistently applied
by other government authorities (including local government authorities), thus making strict compliance with all regulatory requirements
impractical, or in some circumstances impossible. For example, we may have to resort to administrative and court proceedings to
enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities
have discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome
of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These
uncertainties may impede our ability to enforce the contracts we have entered into with our business partners, customers and suppliers.
In addition, such uncertainties, including any inability to enforce our contracts, together with any development or interpretation
of PRC law that is adverse to us, could materially and adversely affect our business and operations. Furthermore, intellectual
property rights and confidentiality protections in China may not be as effective as in the United States or other more developed
countries. We cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws,
changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws.
These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition,
any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.
U.S.
regulators’ ability to conduct investigations or enforce rules in China is limited.
Currently,
all of our operations conducted outside of the U.S. As a result, it may not be possible for the U.S. regulators to conduct investigations
or inspections, or to effect service of process within the U.S. or elsewhere outside China on us, our subsidiaries, officers,
directors and shareholders, and others, including with respect to matters arising under U.S. federal or state securities laws.
China does not have treaties providing for reciprocal recognition and enforcement of judgments of courts with the U.S. and many
other countries. As a result, recognition and enforcement in China of these judgments in relation to any matter, including U.S.
securities laws and the laws of the Cayman Islands, may be difficult or impossible.
We
face uncertainty regarding the PRC tax reporting obligations and consequences for certain indirect transfers of the stock of our
operating company.
Pursuant
to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued
by the PRC State Administration of Taxation on December 10, 2009, or Circular 698, where a foreign investor transfers the
equity interests of a PRC resident enterprise indirectly by way of the sale of equity interests of an overseas holding company,
or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax
rate less than 12.5% or (ii) does not tax foreign income of its residents, the foreign investor should report such Indirect
Transfer to the competent tax authority of the PRC resident enterprise. The PRC tax authority will examine the true nature of
the Indirect Transfer, and if the tax authority considers that the foreign investor has adopted an abusive arrangement in order
to avoid PRC tax, they will disregard the existence of the overseas holding company and re-characterize the Indirect Transfer
and as a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at the rate of up to 10%. In
addition, the PRC resident enterprise is supposed to provide necessary assistance to support the enforcement of Circular 698.
At present, the PRC tax authorities will neither confirm nor deny that they would enforce Circular 698, in conjunction
with other tax collection and tax withholding rules, to make claims against our PRC subsidiary as being indirectly liable for unpaid
taxes, if any, arising from Indirect Transfers by shareholders who did not obtain their shares in the IPO of our shares.
On
February 3, 2015, the PRC State Administration of Taxation issued a Public Notice Regarding Certain Corporate Income Tax Matters
on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 supersedes the
rules with respect to the Indirect Transfer under SAT Circular 698, but does not touch upon the other provisions of SAT Circular
698, which remain in force. SAT Public Notice 7 has introduced a new tax regime that is significantly different from the previous
one under SAT Circular 698. SAT Public Notice 7 extends its tax jurisdiction to not only Indirect Transfers set forth under SAT
Circular 698 but also transactions involving transfer of other taxable assets through offshore transfer of a foreign intermediate
holding company. In addition, SAT Public Notice 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable
commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through
a public securities market. SAT Public Notice 7 also brings challenges to both foreign transferor and transferee (or other person
who is obligated to pay for the transfer) of taxable assets. Where a non-resident enterprise transfers taxable assets indirectly
by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise
as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer
to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence
of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding
or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and
the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently
at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may
be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We
face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets
are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries or investments. Our company may
be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding
obligations if our company is transferee in such transactions, under SAT Circular 698 and SAT Public Notice 7.For transfer of
shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiary may be requested to assist in the
filing under SAT Circular 698 and SAT Public Notice 7. As a result, we may be required to expend valuable resources to comply
with SAT Circular 698 and SAT Public Notice 7 or to request the relevant transferors from whom we purchase taxable assets to comply
with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse
effect on our financial condition and results of operations.
PRC
regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident
shareholders to personal liability and limit our ability to acquire PRC companies or to inject capital into our PRC subsidiary,
limit our PRC subsidiary ability to distribute profits to us, or otherwise materially and adversely affect us.
In
July 2014, China’s State Administration of Foreign Exchange (“SAFE”) has promulgated the Circular on Relevant
Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment
Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration
for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or SAFE Circular 75,
which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC
individuals and PRC corporate entities) to register with local branches of SAFE in connection with their direct or indirect offshore
investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore
acquisitions that we make in the future.
Under
SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments
in offshore special purpose vehicles, or SPVs, will be required to register such investments with the SAFE or its local branches.
In addition, any PRC resident who is a direct or indirect shareholder of an SPV, is required to update its filed registration
with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiaries of such SPV
in China is required to urge the PRC resident shareholders to update their registration with the local branch of SAFE. If any
PRC shareholder of such SPV fails to make the required registration or to update the previously filed registration, the subsidiaries
of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer
or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contribution into its subsidiary
in China. On February 28, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration
Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for
foreign exchange registration of inbound foreign direct investment and outbound overseas direct investment, including those required
under the SAFE Circular 37, will be filed with qualified banks instead of the SAFE. The qualified banks will directly examine
the applications and accept registrations under the supervision of the SAFE.
Our
controlling shareholders Messrs. Ban Lor and Stewart Lor are not PRC resident, thus, they are not subject to SAFE Circular 37.
We have requested our shareholders that we know are PRC residents and hold direct or indirect interests in us to make the necessary
applications, filings and amendments as required under SAFE Circular 37 and other related rules. As of the date of this Annual
Report, all of those shareholders have completed the Circular 37 registration. However, we may not at all times be fully aware
or informed of the identities of all our beneficial owners who are PRC residents, and we may not always be able to compel our
beneficial owners to comply with the SAFE Circular 37 requirements. As a result, we cannot assure you that all of our shareholders
or beneficial owners who are PRC residents will at all times comply with, or in the future make or obtain any applicable registrations
or approvals required by, SAFE Circular 37 or other related regulations. Failure by any such shareholders or beneficial owners
to comply with SAFE Circular 37 could subject us to fines or legal sanctions, restrict our overseas or cross-border investment
activities, limit our PRC subsidiary’s ability to make distributions or pay dividends or affect our ownership structure,
which could adversely affect our business and prospects.
Furthermore,
as these foreign exchange regulations are still relatively new and their interpretation and implementation has been constantly
evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will
be interpreted, amended and implemented by the relevant governmental authorities. For example, we may be subject to a more stringent
review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated
borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire
a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain
the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This
may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
PRC
regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the
proceeds of the IPO to make loans or additional capital contributions to our PRC subsidiary, which could materially and adversely
affect our liquidity and our ability to fund and expand our business.
In
utilizing the proceeds from the IPO or any future offerings, as an offshore holding company of our PRC subsidiary, we may make
loans to our PRC subsidiary and controlled PRC affiliate, or we may make additional capital contributions to our PRC subsidiary.
Any loans to our PRC subsidiary or controlled PRC affiliate are subject to PRC regulations and approvals. For example, loans by
us to our PRC subsidiary in China, each of which is a foreign-invested enterprise, to finance their activities cannot exceed statutory
limits and must be registered with SAFE or its local counterpart.
We
may also decide to finance our PRC subsidiary through capital contributions. These capital contributions must be approved by the
Ministry of Commerce in China or its local counterpart. We cannot assure you that we will be able to obtain these government registrations
or approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or controlled PRC affiliate
or capital contributions by us to our subsidiaries or any of their respective subsidiaries. If we fail to receive such registrations
or approvals, our ability to use the proceeds of the IPO and to capitalize our PRC operations may be negatively affected, which
could adversely and materially affect our liquidity and our ability to fund and expand our business.
In
2015, SAFE promulgated Circular 19, a notice regulating the conversion by a foreign-invested enterprise of foreign currency into
Renminbi by restricting how the converted Renminbi may be used. Circular 19 requires that Renminbi converted from the foreign
currency-denominated capital of a foreign-invested enterprise 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 in its business scope. In addition, SAFE strengthened its oversight of the flow and use of Renminbi funds converted
from the foreign currency-denominated capital of a foreign-invested enterprise. The use of such Renminbi may not be changed without
approval from SAFE and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used for purposes
within the foreign-invested enterprise’s approved business scope.
We
cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals
on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or controlled PRC affiliate or with respect
to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals,
our ability to use the proceeds we receive from the IPO and to capitalize or otherwise fund our PRC operations may be negatively
affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.
Governmental
control of currency conversion may limit our ability to use our revenues effectively and the ability of our PRC subsidiary to
obtain financing.
The
PRC government imposes control on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance
of currency out of China. We receive a majority of our revenues in Renminbi, which currently is not a freely convertible currency.
Restrictions on currency conversion imposed by the PRC government may limit our ability to use revenues generated in Renminbi
to fund our expenditures denominated in foreign currencies or our business activities outside China. Under China’s existing
foreign exchange regulations, Renminbi may be freely converted into foreign currency for payments relating to current account
transactions, which include among other things dividend payments and payments for the import of goods and services, by complying
with certain procedural requirements. Our PRC subsidiary are able to pay dividends in foreign currencies to us without prior approval
from SAFE, by complying with certain procedural requirements. Our PRC subsidiary may also retain foreign currency in their respective
current account bank accounts for use in payment of international current account transactions. However, we cannot assure you
that the PRC government will not take measures in the future to restrict access to foreign currencies for current account transactions.
Conversion
of Renminbi into foreign currencies, and of foreign currencies into Renminbi, for payments relating to capital account transactions,
which principally includes investments and loans, generally requires the approval of SAFE and other relevant PRC governmental
authorities. Restrictions on the convertibility of the Renminbi for capital account transactions could affect the ability of our
PRC subsidiary to make investments overseas or to obtain foreign currency through debt or equity financing, including by means
of loans or capital contributions from us.
We
may be classified as a “resident enterprise” for PRC enterprise income tax purposes; such classification could result
in unfavorable tax consequences to us and our non-PRC shareholders.
The
Enterprise Income Tax Law provides that enterprises established outside of China whose “de facto management bodies”
are located in China are considered PRC tax resident enterprises and will generally be subject to the uniform 25% PRC enterprise
income tax rate on their global income. In addition, a tax circular issued by the State Administration of Taxation on April 22,
2009 regarding the standards used to classify certain Chinese-invested enterprises established outside of China as resident enterprises
clarified that dividends and other income paid by such resident enterprises will be considered to be PRC source income, subject
to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also
subjects such resident enterprises to various reporting requirements with the PRC tax authorities. Under the implementation rules
to the Enterprise Income Tax Law, a de facto management body is defined as a body that has material and overall management and
control over the manufacturing and business operations, personnel and human resources, finances and other assets of an enterprise.
In addition, the tax circular mentioned above details that certain Chinese-invested enterprises will be classified as resident
enterprises if the following are located or resident in China: senior management personnel and departments that are responsible
for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books,
company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors
having voting rights.
Currently,
there are no detailed rules or precedents governing the procedures and specific criteria for determining de facto management bodies
which are applicable to our company or our overseas subsidiaries. We do not believe that Powerbridge meets all of the conditions
required for PRC resident enterprise. The Company is a company incorporated outside the PRC. As a holding company, its key assets
are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of
its board of directors and the resolutions of its shareholders) are maintained, outside the PRC. For the same reasons, we believe
our other entities outside of China are not PRC resident enterprises either. However, the tax resident status of an enterprise
is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term
“de facto management body.” There can be no assurance that the PRC government will ultimately take a view that is
consistent with ours.
However,
if the PRC tax authorities determine that Powerbridge is a PRC resident enterprise for enterprise income tax purposes, we may
be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. Such
10% tax rate could be reduced by applicable tax treaties or similar arrangements between China and the jurisdiction of our shareholders.
For example, for shareholders eligible for the benefits of the tax treaty between China and Hong Kong, the tax rate is reduced
to 5% for dividends if relevant conditions are met. In addition, non-resident enterprise shareholders may be subject to a 10%
PRC tax on gains realized on the sale or other disposition of ordinary shares, if such income is treated as sourced from within
the PRC. It is unclear whether our non-PRC individual shareholders would be subject to any PRC tax on dividends or gains obtained
by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to
apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable
tax treaty. However, it is also unclear whether non-PRC shareholders of the Company would be able to claim the benefits of any
tax treaties between their country of tax residence and the PRC in the event that the Company is treated as a PRC resident enterprise.
Provided
that our Cayman Islands holding company, Powerbridge, is not deemed to be a PRC resident enterprise, our shareholders who are
not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other
disposition of our shares. However, under Circular 7, where a non-resident enterprise conducts an “indirect transfer”
by transferring taxable assets, including, in particular, equity interests in a PRC resident enterprise, indirectly by disposing
of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, or the transferee or
the PRC entity which directly owned such taxable assets may report to the relevant tax authority such indirect transfer. Using
a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company
if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As
a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee would be obligated
to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
We and our non-PRC resident investors may be at risk of being required to file a return and being taxed under Circular 7, and
we may be required to expend valuable resources to comply with Bulletin 37, or to establish that we should not be taxed under
Circular 7 and Bulletin 37.
In
addition to the uncertainty in how the new resident enterprise classification could apply, it is also possible that the rules
may change in the future, possibly with retroactive effect. If we are required under the Enterprise Income Tax law to withhold
PRC income tax on our dividends payable to our foreign shareholders, or if you are required to pay PRC income tax on the transfer
of our shares under the circumstances mentioned above, the value of your investment in our shares may be materially and adversely
affected. These rates may be reduced by an applicable tax treaty, but it is unclear whether, if we are considered a PRC resident
enterprise, holders of our shares would be able to claim the benefit of income tax treaties or agreements entered into between
China and other countries or areas. Any such tax may reduce the returns on your investment in our shares.
The
M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign
investors, which could make it more difficult for us to pursue growth through acquisitions in China.
The
Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory
agencies in August 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through
acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the China Securities
Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an
overseas stock exchange. In September 2006, the CSRC published a notice on its official website specifying documents and
materials required to be submitted to it by a special purpose vehicle seeking CSRC approval of its overseas listings. The application
of the M&A Rules remains unclear. These M&A Rules and some other regulations and rules concerning mergers and acquisitions
established additional procedures and requirements that could make merger and acquisition activities by foreign investors more
time consuming and complex, including requirements in some instances that the China’s Commerce Ministry (“MOC”)
be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise.
Moreover, the Anti-Monopoly Law requires that the MOC shall be notified in advance of any concentration of undertaking if certain
thresholds are triggered. In addition, the security review rules issued by the MOC that became effective in September 2011
specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and
mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national
security” concerns are subject to strict review by the MOC, and the rules prohibit any activities attempting to bypass a
security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we
may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations
and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including
obtaining approval from the MOC or its local counterparts may delay or inhibit our ability to complete such transactions, which
could affect our ability to expand our business or maintain our market share.
Any
failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject
the PRC plan participants or us to fines and other legal or administrative sanctions.
In
February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals
Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, replacing earlier rules promulgated in March 2007.
Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year
who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required
to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company,
and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection
with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and
other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who
are granted options or other awards under the equity incentive plan are subject to these regulations as our company has become
an overseas listed company. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also
limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’ ability to distribute
dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for
our directors, executive officers and employees under PRC law.
Failure
to make adequate contributions to various mandatory social security plans as required by PRC regulations may subject us to penalties.
PRC
laws and regulations require us to pay several statutory social welfare benefits for our employees, including pensions, medical
insurance, work-related injury insurance, unemployment insurance, maternity insurance and housing provident fund contributions.
Local governments usually implement localized requirements as to mandatory social security plans considering differences in economic
development in different regions. Our failure in making contributions to various mandatory social security plans and in complying
with applicable PRC labor-related laws may subject us to late payment penalties. We may be required to make up the contributions
for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee
benefits, our financial condition and results of operations may be adversely affected.
Our
current employment practices may be restricted under the PRC Labor Contract Law and our labor costs may increase as a result.
The
PRC Labor Contract Law and its implementing rules impose requirements concerning contracts entered into between an employer and
its employees and establishes time limits for probationary periods and for how long an employee can be placed in a fixed-term
labor contract. Because there is lack of clarity with respect to the implementation and potential penalties and fines provided
in the Labor Contract Law and tis implementing rules, it is uncertain how it will impact our current employment policies and practices.
We cannot assure you that our employment policies and practices do not, or will not, violate the Labor Contract Law or its implementing
rules and that we will not be subject to related penalties, fines or legal fees. If we are subject to large penalties or fees
related to the Labor Contract Law or its implementing rules, our business, financial condition and results of operations may be
materially and adversely affected. In addition, according to the Labor Contract Law and its implementing rules, if we intend to
enforce the non-compete provision with an employee in a labor contract or non-competition agreement, we have to compensate the
employee on a monthly basis during the term of the restriction period after the termination or ending of the labor contract, which
may cause extra expenses to us. Furthermore, the Labor Contract Law and its implementation rules require certain terminations
to be based upon seniority rather than merit, which significantly affects the cost of reducing workforce for employers. In the
event we decide to significantly change or decrease our workforce in the PRC, the Labor Contract Law could adversely affect our
ability to enact such changes in a manner that is most advantageous to our circumstances or in a timely and cost-effective manner,
thus our results of operations could be adversely affected.
If
the chops of our PRC company and branches are not kept safely, are stolen or are used by unauthorized persons or for unauthorized
purposes, the corporate governance of these entities could be severely and adversely compromised.
In
China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied
by a signature. Each legally registered company in China is required to maintain a company chop, which must be registered with
the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other chops which can
be used for specific purposes. The chops of our PRC subsidiary are generally held securely by personnel designated or approved
by us in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen or are used
by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely
compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped
by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused by unauthorized
persons, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which
could involve significant time and resources to resolve while distracting management from our operations.
Item
4. INFORMATION ON THE COMPANY
A.
History and Development of the Company
Overview
We
are a provider of software application and technology solutions and services to corporate and government customers primarily located
in China. We introduced global trade software applications when we launched our operations in 1997 with a vision to make global
trade operations easier for our customers. Since our inception, we have continued to innovate by developing technologies that
enable us to successfully deliver a series of solutions and services that address the evolving and changing needs of our corporate
and government customers. Our mission is to make global trade easier by empowering all players in the ecosystem.
Our
customers are corporate and government organizations engaged in global trade. Our corporate customers are import and export companies,
manufacturers engaged in international trade, as well as logistics and other service providers. Our government customers include
customs and other government agencies that oversee the flow of goods and services across borders, as well as government authorities
and organizations that manage and operate free trade and bonded trade zones, ports and terminals, and other international trade
facilities.
Global
trade involves complicated and cumbersome processing, manual handling of voluminous documents, extended and complex cross-organization
workflows as well as a great number of business and government players in the global trade ecosystem. We estimated that a typical
process for an export shipment in China may involve 1 exporter, 8 government agencies and authorities and 12 various logistics
and financial service providers with more than 60 persons engaged in 13 different work processes that generate more than 55 regulatory
compliance and trade logistics documents and 150 information or message exchanges.
Our
customers are facing increasing challenges as the world’s trade ecosystems continue to grow in size and complexity. Costs
associated with global trade, such as logistics performance, border control and international connectivity remain high. Potential
savings from more collaborative and efficient trade processes could reduce the costs of global trade significantly. The need for
greater efficiency and cost savings are driving the transformative shift for participants in global trade to become more connected
and collaborative.
Our
comprehensive and robust solutions and services include
Powerbridge System Solutions
and
Powerbridge SaaS Services
with more than 15 solutions and services deployable on premise and in the cloud. Leveraging our deep domain knowledge and strong
industry experience, we provide a series of differentiated and robust solutions and services that address the mission critical
needs of our corporate and government customers, enabling them to handle and simplify the complexities of global trade operations,
logistics and compliance.
We
provide
Powerbridge System Solutions
to our corporate and government customers engaged in global trade, including businesses
and manufacturers across a broad range of industries, government agencies and regulatory authorities, as well as global trade
logistics and other service providers.
Powerbridge System Solutions
enable our customers to streamline their trade operations,
trade logistics and regulatory compliance, consisting of
Trade Enterprise Solutions
and
Trade Compliance Solutions
which have been in service since our first introduction twenty years ago and
Import & Export Loan and Insurance Processing
which have recently been introduced to a selected group of customers.
We
began offering our
Powerbridge SaaS Services
(software-as-a-service) in 2016 and are continually developing and expanding
our SaaS services that provide our corporate and government customers with significant benefits, including better use of resources,
a lower cost of operations, easier document handling, faster processing time as well as higher logistics and compliance connectivity
and efficiency.
Powerbridge SaaS Services
include
Logistics Service Cloud
and
Trade Zone Operations Cloud
which
are in service, and
Inward Processed Manufacturing Cloud, Cross-Border eCommerce Cloud
and
Import & Export Loan
and Insurance Processing Service Cloud
which are in development.
We
are currently designing and developing our cloud-based
Powerbridge BaaS Services
(blockchain-as-a-service) that is intended
for all players in the global trade ecosystem. Blockchain technology is emerging as a major disruptive force across many industries,
including those involved in global trade. We believe that blockchain technology could allow our customers to conduct business
in more synchronized and collaborative ways to substantially increase operational efficiency and reduce trade costs across the
global trade supply chain.
Powerbridge BaaS Service
will include
Compliance Blockchain Services, Logistics Blockchain
Services, Supply Chain Blockchain Services,
and
Import & Export Loan and Insurance Processing Blockchain Services
.
Our
solutions and services are built from our multiple proprietary technology platforms which are developed based on industry leading
open source infrastructure technologies. Our technology platforms include
Powerbridge System Platform
and
Powerbridge
SaaS Platform
, which are designed for high-performance reliability, flexibility and scalability, allowing us to expand our
solutions and services rapidly and efficiently to consistently address the needs of our corporate and government customers. Our
Powerbridge BaaS Platform
is in development.
Powerbridge
System Platform
consists of modular technology and business components that enable us to provide mission critical applications
and solutions in trade operations, trade logistics and regulatory compliance to our corporate and government customers.
Powerbridge
SaaS Platform
is the technology infrastructure upon which we are developing our SaaS services designed to provide on-demand
services in trade operations, trade logistics and regulatory compliance with a multi-tenant and microservice architecture.
Our
BaaS services will be built on top of our
Powerbridge Blockchain Platform
that is designed to provide high scalability
and performance characteristics, consisting of multiple technology engines that support the various business component models
specific for trade transaction, trade logistics and regulatory compliance in global trade.
We
intend to continue leveraging our industry expertise and product knowledge with the best use of emerging and disruptive technologies
such as big data, artificial intelligence and Internet of Things to enhance our core technology capabilities and continually increase
the scope of our solutions and services to our customers.
We
currently derive our revenues from three sources: (1) revenue from application development services generated from
Powerbridge
System Solutions,
which require us to perform services including project planning, project design, application development
and system integration based on customers’ specific needs. These services also require significant production and customization;
(2) revenue from consulting and technical support services primarily generated from
Powerbridge System Solutions
, and (3)
revenue from subscription services generated from
Powerbridge SaaS Services
. We currently generate most of our revenues
from application development services, which represented 86.5% and 89.5% of total revenue in fiscal 2018 and 2017, respectively.
Revenue from consulting and technical support services represented 10.3% and 6.6% of total revenue in fiscal 2018 and 2017, respectively.
Revenue from subscription services represented 3.1% and 3.9% of total revenue in fiscal 2018 and 2017, respectively. For the fiscal
years ending December 31, 2018 and 2017, our revenues were US$23.2 million and US$21.6 million, respectively.
Our
corporate and government customers include (i) international trade businesses and manufacturers, (ii) government agencies and
authorities, and (iii) logistics and other various service providers. For the fiscal year ended December 31, 2017, we generated
revenue from a total of 1,633 customers, of which 936 are international trade businesses and manufacturers, 70 are government
agencies and authorities, and 627 are logistics and other service providers. For the fiscal year ended December 31, 2018, we generated
revenue from a total of 1,683 customers, of which 1,012 are international trade businesses and manufacturers, 36 are government
agencies and authorities, and 635 are logistics and other service providers.
We
generate a significant portion of our revenues from a relatively small number of major customers. For the year ended December
31, 2018, none of individual government customer represented over 10% of our total revenue. For the year ended December 31, 2017,
two government customers accounted for 17.2% and 13.1% of our total revenues, respectively.
As
of the date of this Annual Report, we had a total of 299 full-time employees, of which 111 are in research and development, 51
are in sales and marketing, 109 are in technical and customer services, and 28 are in general and administration.
Corporate
History and Background
Powerbridge
is a company that was established under the laws of the Cayman Islands on July 27, 2018 as a holding company. The Company, through
its subsidiaries, is a provider of software application and technology services to corporate and government customers engaged
in global trade.
For
the purpose of the IPO and listing on the NASDAQ Capital Market, a reorganization of the Company’s legal structure was completed
on August 27, 2018. The reorganization involved the incorporation of Powerbridge, a Cayman Islands holding company, and its wholly
owned subsidiary, Powerbridge HK, a holding company incorporated on July 27, 2018 under the laws of Hong Kong; and the transfer
of all equity ownership of Powerbridge Zhuhai to Powerbridge HK from the former shareholders of Powerbridge Zhuhai through an
investment holding company.
Prior
to the reorganization, Powerbridge Zhuhai’s equity interests were held by the former shareholders through an investment
holding company. Powerbridge Zhuhai was incorporated on October 30, 1997 in Zhuhai, Guangdong province under the laws of the People’s
Republic of China. Powerbridge Zhuhai is an operating subsidiary that provides global trade software application and technology
services to corporate and government customers located in China. Powerbridge Beijing, a company conducting engineering and IT
research and development activities, was incorporated on September 28, 2017 in Beijing under the laws of PRC, with Powerbridge
Zhuhai owning 55% and Mr. Tianfei Feng owning 45% of equity interest. Since inception, Powerbridge Zhuhai and Mr. Tianfei Feng
have only made nominal investments in Powerbridge Beijing and no substantial business operations have occurred; as a result, Powerbridge
Zhuhai and Mr. Tianfei Feng agreed to deregister the entity. Mr. Tianfei Feng later became the Company’s Chief Research
and Development Officer and the technology research and development activities originally conducted in Powerbridge Beijing are
now conducted through the Beijing branch of Powerbridge Zhuhai. Powerbridge Beijing was deregistered on October 25, 2018.
On
August 7, 2018, the former shareholders transferred their 100% ownership interest in Powerbridge Zhuhai to Powerbridge HK, which
is 100% owned by Powerbridge. After the reorganization, Powerbridge owns 100% equity interests of Powerbridge HK and Powerbridge
Zhuhai. All shareholders have the same ownership interest in Powerbridge as in Powerbridge Zhuhai prior to the reorganization.
As
of the date of this Annual Report, Powerbridge Zhuhai has five branch offices located in Beijing, Changsha, Wuhan, Nanning, and
Hangzhou in China.
Corporate
Information
Our
principle executive offices are located at 1st Floor, Building D2, Southern Software Park, Tangjia Bay, Zhuhai, Guangdong 519080,
China. Our telephone number is +86-756-339-5666. Our principle website address is www.powerbridge.com. The information on our
website is not part of this Annual Report.
The
following diagram illustrates our corporate structure as of the date of this Annual Report.
Controlled
Company
As
long as our officers and directors, either individually or in the aggregate, own at least 50% of the voting power of our Company,
we will be a “controlled company” as defined under NASDAQ Marketplace Rules.
For
so long as we are a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions
from corporate governance rules, including:
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an
exemption from the rule that a majority of our board of directors must be independent directors;
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an
exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent
directors; and
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an
exemption from the rule that our director nominees must be selected or recommended solely by independent directors.
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As
a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance
requirements.
Although
we do not intend to rely on the “controlled company” exemption under the NASDAQ listing rules, we could elect to rely
on this exemption in the future. If we elect to rely on the “controlled company” exemption, a majority of the members
of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees
might not consist entirely of independent directors. (See – Risk Factor “As a “controlled company” under
the rules of the NASDAQ Capital Market, we may choose to exempt our company from certain corporate governance requirements that
could have an adverse effect on our public shareholders.”)
Compliance
with Foreign Investment
All
limited liability companies formed and operating in the PRC are governed by the Company Law of the People’s Republic of
China, or the Company Law, which was amended and promulgated by the Standing Committee of the National People’s Congress
on October 26, 2018 and came into effect on the same day. Foreign invested enterprises must also comply with the Company Law,
with exceptions as specified in the relevant foreign investment laws. Under our corporate structure as of the date of this Annual
Report, 100% of the equity interests of Powerbridge Zhuhai are entirely and indirectly held by our company through Powerbridge
HK. Therefore, Powerbridge Zhuhai, a wholly foreign-owned enterprise (“WFOE”) of Powerbridge HK, should be regarded
as a foreign-invested enterprise and comply with both the Company Law and other applicable foreign investment laws.
With
respect to the establishment and operation of WFOEs, the MOFCOM, and the National Development and Reform Commission, or NDRC,
promulgated the Catalogue of Industries for Guiding Foreign Investment, or the Catalogue (2017 Version), as amended on June 28,
2017, which came into effect on August 28, 2017. The Catalogue divides industries for foreign investment into three categories:
encouraged, restricted and prohibited. Those industries not set out in the Catalogue shall be classified as industries permitted
for foreign investment. The Catalogue serves as the main basis for management and guidance for the MOFCOM to manage and supervise
foreign investments to PRC. In addition, in June 2018, MOFCOM and NDRC promulgated the Special Management Measures (Negative List)
for the Access of Foreign Investment, or the Negative List, effective July 2018. The Negative List expands the scope of permitted
industries by foreign investment by reducing the number of industries that fall within the Negative List where restrictions on
the shareholding percentage or requirements on the composition of board or senior management still exists. According to the Catalogue
and the Negative List, IT services, the main business that our PRC subsidiary presently conduct, are neither restricted nor prohibited.
Emerging
Growth Company Status
As
a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company”
as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012, and may take advantage of reduced reporting
requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:
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being
permitted to present only two years of audited financial statements and only two years of related Management’s Discussion
and Analysis of Financial Condition and Results of Operations in our SEC filings;
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not
being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
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reduced
disclosure obligations regarding executive compensation in periodic reports, proxy statements and registration statements;
and
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exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved.
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We
may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the
first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as
amended. However, if certain events occur before the end of such five-year period, including if we become a “large accelerated
filer,” our annual gross revenues exceed $1.07 billion or we issue more than $1.00 billion of non-convertible debt in any
three-year period, we will cease to be an emerging growth company before the end of such five-year period.
In
addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.
We have elected to take advantage of the extended transition period for complying with new or revised accounting standards and
acknowledge such election is irrevocable pursuant to Section 107 of the JOBS Act.
Foreign
Private Issuer Status
We
are incorporated in the Cayman Islands. More than 50% of our outstanding voting securities are held by U.S. residents and none
of the following three circumstances applies: the majority of our executive officers or directors are U.S. citizens or residents;
more than 50% of our assets are located in the United States; or our business is administered principally in the United States.
Therefore, we are a “foreign private issuer,” as defined in Rule 405 under the Securities Act and Rule 3b-4(c) under
the Securities Exchange Act of 1934, as amended (“Exchange Act”). As a result, we are not subject to the same requirements
as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient
and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports
or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore,
our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will
not be subject to the insider short-swing profit disclosure and recovery regime.
The
Initial Public Offering
On
April 4, 2019, the Company completed its initial public offering of 1,750,000 Ordinary Shares, $0.00166667 par value per share.
The Ordinary Shares were sold at an offering price of $5.00 per share, generating gross proceeds of approximately $8.75 million,
and net proceeds of approximately $7.8 million . The registration statement relating to the IPO also covered the underwriters’
common stock purchase warrants and the Ordinary Shares issuable upon the exercise thereof in the total amount of 122,500 Ordinary
Shares. Each five-year warrant entitles the warrant holder to purchase the Company’s shares at the exercise price of $5.50
per share and is not be exercisable for a period of 180 days from March 28, 2019. Our Ordinary Shares began trading on the NASDAQ
Capital Market on April 2, 2019 under the ticker symbol “PBTS”.
B.
Business Overview
Overview
We
are a provider of software application and technology solutions and services to corporate and government customers primarily located
in China. We introduced global trade software applications when we launched our operations in 1997 with a vision to make global
trade operations easier for our customers. Since our inception, we have continued to innovate by developing technologies that
enable us to successfully deliver a series of solutions and services that address the evolving and changing needs of our corporate
and government customers. Our mission is to make global trade easier by empowering all players in the ecosystem.
Our
customers are corporate and government organizations engaged in global trade. Our corporate customers are import and export companies,
manufacturers engaged in international trade, as well as logistics and other service providers. Our government customers include
customs and other government agencies that oversee the flow of goods and services across borders, as well as government authorities
and organizations that manage and operate free trade and bonded trade zones, ports and terminals, and other international trade
facilities.
Global
trade involves complicated and cumbersome processing, manual handling of voluminous documents, extended and complex cross-organization
workflows as well as a great number of business and government players in the global trade ecosystem. We estimated that a typical
process for an export shipment in China may involve 1 exporter, 8 government agencies and authorities and 12 various logistics
and financial service providers with more than 60 persons engaged in 13 different work processes that generate more than 55 regulatory
compliance and trade logistics documents and 150 information or message exchanges.
Our
customers are facing increasing challenges as the world’s trade ecosystems continue to grow in size and complexity. Costs
associated with global trade, such as logistics performance, border control and international connectivity remain high. Potential
savings from more collaborative and efficient trade processes could reduce the costs of global trade significantly. The need for
greater efficiency and cost savings are driving the transformative shift for participants in global trade to become more connected
and collaborative.
Our
comprehensive and robust solutions and services include
Powerbridge System Solutions
and
Powerbridge
SaaS Services
with more than 15 solutions and services deployable on premise and in the cloud. Leveraging our deep domain
knowledge and strong industry experience, we provide a series of differentiated and robust solutions and services that address
the mission critical needs of our corporate and government customers, enabling them to handle and simplify the complexities of
global trade operations, logistics and compliance.
We
provide
Powerbridge System Solutions
to our corporate and government customers engaged in global trade, including
businesses and manufacturers across a broad range of industries, government agencies and regulatory authorities, as well as global
trade logistics and other service providers.
Powerbridge System Solutions
enable our customers to streamline
their trade operations, trade logistics and regulatory compliance, consisting of
Trade Enterprise Solutions
and
Trade
Compliance Solutions
which have been in service since our first introduction twenty years ago and
Import &
Export Loan and Insurance Processing
which have recently been introduced to a selected group of customers.
We
began offering our
Powerbridge SaaS Services
(software-as-a-service) in 2016 and are continually developing and
expanding our SaaS services that provide our corporate and government customers with significant benefits, including better use
of resources, a lower cost of operations, easier document handling, faster processing time as well as higher logistics and compliance
connectivity and efficiency.
Powerbridge SaaS Services
include
Logistics Service Cloud
and
Trade
Zone Operations Cloud
which are in service, and
Inward Processed Manufacturing Cloud, Cross-Border eCommerce
Cloud
and
Import & Export Loan and Insurance Processing Service Cloud
which are in development.
We
are currently designing and developing our cloud-based
Powerbridge BaaS Services
(blockchain-as-a-service) that
is intended for all players in the global trade ecosystem. Blockchain technology is emerging as a major disruptive force across
many industries, including those involved in global trade. We believe that blockchain technology could allow our customers to
conduct business in more synchronized and collaborative ways to substantially increase operational efficiency and reduce trade
costs across the global trade supply chain.
Powerbridge BaaS Service
will include
Compliance Blockchain
Services, Logistics Blockchain Services, Supply Chain Blockchain Services,
and
Import & Export Loan and Insurance
Processing Blockchain Services
.
Our
solutions and services are built from our multiple proprietary technology platforms which are developed based on industry leading
open source infrastructure technologies. Our technology platforms include
Powerbridge System Platform
and
Powerbridge
SaaS Platform
, which are designed for high-performance reliability, flexibility and scalability, allowing us to expand our
solutions and services rapidly and efficiently to consistently address the needs of our corporate and government customers. Our
Powerbridge
BaaS Platform
is in development.
Powerbridge
System Platform
consists of modular technology and business components that enable us to provide mission critical applications
and solutions in trade operations, trade logistics and regulatory compliance to our corporate and government customers.
Powerbridge
SaaS Platform
is the technology infrastructure upon which we are developing our SaaS services designed to provide on-demand
services in trade operations, trade logistics and regulatory compliance with a multi-tenant and microservice architecture.
Our
BaaS services will be built on top of our
Powerbridge Blockchain Platform
that is designed to provide high scalability
and performance characteristics, consisting of multiple technology engines that support the various business component models
specific for trade transaction, trade logistics and regulatory compliance in global trade.
We
intend to continue leveraging our industry expertise and product knowledge with the best use of emerging and disruptive technologies
such as big data, artificial intelligence and Internet of Things to enhance our core technology capabilities and continually increase
the scope of our solutions and services to our customers.
Industry
Background
China’s
Global Trade is Growing Driven by the Belt & Road Initiative
According
to China Customs, China’s import and export or global trade volume continues to grow at a rapid pace. China’s global
trade volume was US$4.41 trillion (approximately RMB27.79 trillion) in 2017, representing an increase of 14.2% over 2016. China’s
trade volume with EU countries, USA, and ASEAN countries increased in 2017 from 2016 by 15.5%, 15.2% and 16.6%, respectively,
and with Russia, Poland, and other Eastern European countries increased by 23.9%, 23.4% and 40.7%, respectively
1
.
According to Prospective Industry Research Institute, an industry research firm, cross-border eCommerce trade volume for consumer-packaged
merchandise showed the largest increase in 2017, accounted for 27.3% of the total trade with an increase of 20.6% over 2016
2
.
1
General Administration
of Customs of The People’s Republic of China,
http://fangtan.customs.gov.cn/tabid/539/InterviewID/119/Default.aspx
,
January 12, 2018, Press Conference of General Administration of Customs on Import and Export in 2017
2
https://bg.qianzhan.com/report/detail/459/180503-71bff72f.html
The
B&R is a China-based initiative to increase cooperation and development with partnering countries for unimpeded trade, facility
connectivity and financial integration as well as other bilateral exchanges. Since its inception in 2015, more than 70 countries
around the world have joined the B&R. According to China Customs, import and export volume with the B&R countries which
includes substantially all of Asian and Eastern European countries as well as several African and Latin American countries
3
,
was US$1.17 trillion (approximately RMB7.4 trillion) in 2017 with an increase of 17.8% over 2016, direct investment by Chinese
organizations in the B&R countries was US$14.4 billion in 2017
4
, and the total infrastructure and other project
contracts amounted to US$144.3 billion in 2017
5
. The B&R trade and direct investment are expected to grow at
an even faster pace in the next few years.
As
a continuing effort to support global trade and the B&R, the Chinese government has introduced and implemented a series of
significant policies and initiatives to further enhance the business and operations environments, as evidenced in the massive
development of trade related infrastructures in recent years in China. According to China Customs, there are currently a total
of 12 free trade zones
6
and 122 regulated trade zones such as bonded trade zones around the country with more
in development
7
. These trade zones have driven and contributed significantly to the growth of imports and exports
as well as B&R trade volumes. In addition, as of 2017, China has signed free trade agreements with over 20 B&R countries
and has built or are building more than 75 international trade infrastructures
8
including trade facilities and trade
zones in these countries.
The
B&R has brought an unprecedented opportunity for Chinese organizations such as infrastructure builders, logistics service
providers and financial institutions. These organizations directly benefit from the B&R as they continue to bring their expertise,
products and services to the B&R markets. For examples, the infrastructure builders are building ports, railways, highways
and free trade zones while the logistics firms are offering transportation and logistics services and the financial institutions
are providing loans and setting up banking operations. Technology service companies from China are following the paths of these
Chinese organizations to enter the B&R markets to address the information technology need for supporting and managing the
trade infrastructures, trade logistics and finance processing.
Disruptive
Technologies are Enabling the Global Trade Organizations
Global
trade is a process that involves complicated and cumbersome processing, manual handling of voluminous documents, extended and
complex cross-organization workflows and a great number of business and government participants in the global trade ecosystem.
Corporate and government organizations engaged in global trade today are facing increasing challenges as the world’s trade
ecosystems continue to grow in size and complexity. Costs associated with global trade such as logistics performance, border control,
and international connectivity remains high. We believe potential savings from more collaborative and efficient trade processes
could reduce the costs of global trade significantly.
The
need for better efficiency and lower cost is driving the transformative shift for participants in global trade to become more
connected and collaborative. In this regard, governments are implementing a series of initiatives to enhance trade collaboration
such as building smart ports and integrating the single window operations. China Customs has established collaborative partnerships
with customs authorities in over 50 countries to facilitate compliance synchronization, information exchange and enforcement cooperation,
aiming to reduce customs processing time and cost. Global trade businesses, logistics and other service providers are increasingly
embracing and adapting to the collaborative model to become more productive and efficient.
The
convergence of disruptive technologies such as big data, artificial intelligence, Internet of Things, and cloud computing is disrupting
the global trade industry and driving organizations to capitalize on the opportunity. Businesses and government authorities involved
in global trade are investing heavily and increasingly adapting to these new technologies in order to streamline regulatory compliance
processes, reduce workflow complexities and processing time, maximize use of insightful data for better decision makings, increase
service reliability at lower costs, and even create entirely new business models. This has created an exciting opportunity to
the technology service providers to leverage disruptive technologies to offer a broader product and service portfolio.
3
https://www.yidaiyilu.gov.cn/wcm.files/upload/CMSydylgw/201805/201805080457024.pdf
4
http://fangtan.customs.gov.cn/tabid/539/InterviewID/119/Default.aspx
5
http://www.mofcom.gov.cn/article/tongjiziliao/dgzz/201801/20180102699459.shtml
6
http://finance.ifeng.com/a/20180414/16070649_0.shtml
7
http://www.customs.gov.cn/publish/portal0/tab49564/info773027.htm
8
http://www.mofcom.gov.cn/article/zt_qmcyzd/zyjs/bdpl/201801/20180102705424.shtml
In
addition, blockchain technology is rapidly emerging and is regarded as a major disruptive force to government authorities and
business organizations across many industries. Blockchain technology is still new but the impact on global trade could be immense.
It has the potential to enable corporate and government organizations to operate in a more synchronized and collaborative way
to significantly reduce trade cost and increase transaction efficiency. Global trade blockchain applications are currently being
developed and piloted with limited use cases to increase transparency and visibility across the supply chain, automate document
exchange and processing, prove authenticity and origin of import and export goods, and accelerate flow of goods and cargos across
international borders.
Our
Opportunity
We
believe the need for global trade software application and technology services will continue to grow, driven by the continuing
growth in China’s global trade volume and the rapid advancement of the Belt & Road Initiative (“B&R”).
The convergence of disruptive technologies and emergence of blockchain technology will accelerate the drive for organizations
engaged in global trade to increasingly adapt at scale to new technologies as they mature and become more widely available.
We
intend to address the subsets of three technology markets: the traditional enterprise software market in China which we have been
servicing since our inception, the SaaS application market in China which we began servicing in 2016, and the blockchain applications
market for which we are designing and developing a series of BaaS services to target both China and the international markets.
According
to iResearch, an industry research and consulting firm in China, the traditional enterprise software market in China is expected
to grow from US$4.4 billion (approximately RMB28.5 billion) in 2017 to US$5.2 billion (approximately RMB33.8 billion) in 2020
and the SaaS application market in China is expected to reach US$7.3 billion (approximately RMB47.3 billion) in 2020
9
.
According
to the market report entitled “Global Blockchain Market Size Analysis and Industry Opportunity 2018-2028” published
in April 2018 by Bekryl Market Analysts, a capital market research and consulting service firm, the global blockchain market size
is estimated at US$702.3 million in 2018 and will reach US$16.3 billion by 2025, registering a CAGR of 56.7% to create high revenue
opportunity for industry players during 2018 to 2028
10
.
Our
Competitive Strengths
We
believe that the following competitive strengths contribute to our success and differentiate us from our competitors:
|
●
|
Global
Trade Software Application Pioneer
. We introduced software applications for international trade companies when we
launched our operations in 1997. Since our inception, we have continued to innovate by developing technologies that enable
us to consistently and successfully deliver a series of solutions and services that address the evolving and changing needs
of our customers.
|
|
●
|
Deep
Domain Knowledge and Industry Expertise.
We have gained and developed deep domain knowledge and industry expertise
from over twenty years of experience in service, which is built into and will continue to contribute to the robust and differentiated
capabilities of our solutions and services. We believe domain knowledge and industry expertise is a significant competitive
barrier due to the complex nature of global trade.
|
|
●
|
Solid
and Diversified Customer Base
. Our corporate and government customers include global trade businesses and manufacturers
across a broad range of industries, government agencies and authorities as well as logistics and other service providers.
Our solid customer base enables us to continually cross sell our solutions and services and to expand our market share.
|
|
●
|
Comprehensive
and Robust Product Portfolio
. Our proven track record with our customers demonstrates the strengths in our comprehensive
and robust solution and service portfolio that is built to handle the complexities of global trade business. We continue to
leverage disruptive technologies to expand the breadth and adaptability of our portfolio of offerings to service a wider range
of customers.
|
|
●
|
Mission-Critical
System That is Difficult to Replace
. Because our solutions and services address the mission-critical needs in global
trade, our customers depend on our solutions and services for managing their regulatory compliance and trade logistics operations.
Once deployed, our solutions and services become a mission-critical system that is often deeply entrenched into their core
technology and operational infrastructures.
|
9
http://report.iresearch.cn/report_pdf.aspx?id=3122
10
https://bekryl.com/industry-trends/blockchain-market-size-analysis
|
●
|
Extensive
Experience for the Belt
&
Road
. The B&R has catalyzed substantial development for improving
regulatory compliance and trade logistics in China. We have been providing our solutions and services to help our customers
achieve their objectives in this regard. Our extensive experience will enable us to efficiently expand into international
markets which we intend to target as B&R accelerates in these markets
11
.
|
|
●
|
Strong
Brand Recognition and Industry Resources.
We have built a trusted brand with a long history and a proven track
record of delivering value to our customers. We believe our brand, reputation and scale as well as our extensive network of
industry and government resources enable us to capture substantial growth potential as our corporate and government customers
continue to grow and evolve.
|
|
●
|
Solid
Foundation for Developing Blockchain Applications.
Blockchain technology is promising for business but its adoption
is challenging. It requires not only technology and product expertise but also the ability to integrate and bring all players
to adapt and participate. We believe we are capable of utilizing blockchain for global trade by leveraging our strong domain
knowledge, product expertise and industry resources.
|
|
●
|
Scalable
Business Model with a Prudent Approach
. Our solutions and services are highly adaptable, scalable and supported by
our flexible technology infrastructures, enabling us to efficiently expand our customer base. In addition, we are taking a
prudent approach by combining traditional technologies and disruptive technologies because we believe the adoption and transformation
of new technologies will take considerable time and effort.
|
|
●
|
Experienced
and Visionary Management Team
. Our success is attributable to the deep industry expertise and proven track-record
of our experienced management. We were founded twenty years ago with a vision to make global trade operations easier, and
since then, we have successfully demonstrated our abilities. We believe our management’s strong execution capability
is among the best in our industry.
|
Our
Growth Strategy
We
plan to grow and expand our business by pursuing the following growth strategies:
|
●
|
Increase
Revenue with Existing Customers
. We have a large number of corporate and government customers that currently utilize
our global trade software application and technology services. We intend to increase our revenue by leveraging and broadening
our relationships with existing customers by helping them identify new use cases for our existing solutions and services;
and solving more problems for them by providing new solutions and services.
|
|
●
|
Accelerate
Research and Development.
We used a portion of the proceeds from the IPO towards our research and development
to accelerate the development of disruptive technology-enabled global trade software application and technology solutions
and services. We believe disruptive technology-enabled applications such as SaaS and BaaS services will enable us to capture
significant market share in China and abroad.
|
|
●
|
Expand
Our Solution and Service Offerings.
Global trade involves complex and cumbersome processes in trade operations,
trade logistics and regulatory compliance with many players in the global trade ecosystem. Each player is operating in different
settings and with different objectives. We plan to expand our offerings and focus on solutions and services that enable our
customers to better connect and collaborate.
|
|
●
|
Increase
Market Penetration.
We plan to leverage our deep domain knowledge, industry experience and product expertise
to increase our market penetration with a deeper market coverage and a broader geographical reach in China. We intend to continually
strengthen our sales and marketing capabilities and build strategic partnerships with government and corporate organizations
to further drive sales.
|
|
●
|
Expand
into International Markets
. China’s B&R has brought significant opportunities for Chinese organizations
such as infrastructure builders and logistics service providers. We plan to expand into international markets by “piggybacking”
on these organizations as they bring their products and services to the B&R countries. We believe this approach will mitigate
risk, reduce cost and minimize time-to-market for entering new markets.
|
|
●
|
Pursue
Strategic Acquisitions and Investments.
We plan to pursue strategic acquisitions and investments in selective
technologies and businesses that will enhance our technology capabilities, expand our offerings and increase our market penetration.
We believe our strategic acquisition and investment strategy is critical for us to accelerate our growth and strengthen our
competitive position.
|
11
Belt
and Road Portal,
https://eng.yidaiyilu.gov.cn
Our
Solutions
We
provide software applications and technology solutions and services to corporate and government organizations involved in global
trade. We introduced our first global trade software application in 1998 and have since substantially expanded the scope of our
solutions and services to address deeper and broader customer needs.
Our
solutions and services currently include
Powerbridge System Solutions
and
Powerbridge SaaS Services;
we are
also designing and developing
Powerbridge BaaS Services
.
We
have been servicing our corporate and government customers with
Powerbridge System Solutions
since our introduction
of this solution series twenty years ago. Our comprehensive solutions and services address the mission critical needs in global
trade for our customers, enabling them to optimize and streamline their trade operations, trade logistics and regulatory compliance.
In
2016, we introduced
Powerbridge SaaS Services
and are continually expanding the scope our SaaS services.
Powerbridge
SaaS Services
is a software-as-a-service designed to enable businesses and government organizations with significant
benefits, including better use of resources, lower cost of operations, easier documentation handling, faster processing time as
well as higher logistics and compliance and connectivity and efficiency.
We
are currently continuing to designing and developing
Powerbridge Baas Services
and recently introduced our BaaS
services as pilot projects on a limited bases to selective customers.
Powerbridge BaaS Services
is a cloud-based
blockchain-as-a-service designed for all players in the global trade ecosystem, empowering them to conduct business in more synchronized
and collaborative ways to substantially increase operational efficiency and reduce trade cost across the global trade supply chain.
Our
solutions and services are built from our multiple proprietary technology platforms:
Powerbridge System Platform
and
Powerbridge
SaaS Platform
, which are designed for high-performance reliability, flexibility and scalability, allowing us to expand our
solutions and services rapidly and efficiently to consistently address the needs of our corporate and government customers. Our
Powerbridge
BaaS Platform
is in development.
Powerbridge
System Solutions
Overview
of Powerbridge System Solutions
We
provide
Powerbridge System Solutions
to our corporate and government customers engaged in global trade, including
import and export businesses, manufacturers, government agencies and regulatory authorities, as well as trade logistics and other
service providers.
Powerbridge
System Solutions
include
Trade Compliance Solutions
and
Trade Enterprise Solutions
which
have been in service since our first introduction twenty years ago and
Import & Export Loan and Insurance Processing
which
have recently been introduced to a selected group of customers.
Trade
Compliance Solutions
and
Trade Enterprise Solutions
are implemented and deployed on premises largely
as customized services capable of integrating with applications, systems, equipment and facilities from customers and third-party
providers.
Import
& Export Loan and Insurance Processing
are deployed on browser/server and client/server environments.
Strengths
of Powerbridge System Solutions:
We
believe
Powerbridge System Solutions
provide the following core benefits for our customers:
|
●
|
Our
Trade
Compliance Solutions
enable government agencies and regulatory authorities greater control and security, better use
of resources, higher duty collection, faster processing time and higher compliance efficiency in servicing global trade businesses
and logistics service providers.
|
|
●
|
Import
and export businesses and manufacturers in diverse vertical industries use our
Trade Enterprise Solutions
to
manage business operations, simplify trade processes, reduce document handling, minimize operational cost and increase overall
productivity.
|
|
●
|
Our
newly introduced
Import & Export Loan and Insurance Processing
is designed to facilitate and streamline
global trade related loan and insurance processes. It enables businesses, financial and insurance service involved in global
trade to reduce workflow complexity, processing time and operational cost while increase processing efficiency.
|
Trade
Compliance Solutions
Trade
Compliance Solutions
are a series of regulatory compliance solutions and services for government agencies and regulatory
authorities for managing trade zones, optimizing port control, streamlining customs clearance, accelerating cross-border processing,
and expanding Chinaport services, which include the following:
Trade
Zone Compliance.
We provide
Trade Zone Compliance
to government agencies and authorities such as customs
for regulating cross-border flow of goods and services and trade facility authorities for managing the trade zones, including
bonded traded zones, free trade zones and other regulated trade zones. Our solution allows our government customers to streamline
compliance and business processes and automate document processing and exchange as well as manage and regulate all operational
activities in the trade zones, including goods and cargo flows, logistics and warehousing, and inward processing manufacturing.
Port
Compliance & Logistics.
Import and export ports include ocean, air, rail, river, highway and cross-border ports.
Port operations involve complex and cumbersome processes with many players involved, including port and terminal authorities,
customs and other government agencies, import and export businesses and cargo owners, transport vessels and vehicle operators,
customs and forwarding agents and various logistics service providers. We provide
Port Compliance
&
Logistics
to
all players to streamline compliance and logistics processes, which enables rapid and efficient handling of goods and documents.
Customs
Clearance
. We provide
Customs Clearance
to customs and other government agencies such as customs and inspections
to regulate cross-border flow of goods and services for regulatory compliance operations and control. Our solution enables our
government customers to streamline customs clearance processes, increase fraud detection capabilities, and enhance duty collections,
with featured applications including single window operations, clearance compliance and processing, import and export goods inspection,
inward processed manufactured goods clearance, cross-border clearance as well as risk and security control and duty processing.
Cross-Border
Processing
. We provide
Cross Border Processing
to the customs agency, quarantine and inspection agency and
other government agencies and authorities for managing and regulating commodity and merchandise trades at designated trade markets
or areas at cross-borders between China and its neighboring countries. Our solution enables government agencies and authorities
to effectively and efficiently manage all cross-border trade operations, including trader registration, merchandise inspection,
customs processing, vehicle control and checkpoint operations.
Chinaport
Services
. Chinaport is an import and export technology and data platform supported by sixteen major government ministries
and bureaus, including China Customs, MOC, Ministry of Industry and Information Technology, Ministry of Transportation and State
Administration of Foreign Exchange. Chinaport provides services to port authorities for data sharing and online verifications
and to trade businesses for import and export processing. We offer customized solutions and services to Chinaport organizations
at national and local levels, engaging in project designing and planning, system and platform development, system maintenance
and customer service for multiple Chinaport strategic initiatives and programs.
Smart
Command.
Government agencies and authorities such as customs and trade facility authorities use
Smart Command
for
more effective managing and regulating trade compliance and trade logistics activities under their supervision. Our smart command
dashboard integrates key performance data from structured and unstructured data sources. Our visualization applications enable
data display in real time on a single large multi-screen interface with three-dimensional features. Our solution provides intelligent
data in an intuitive and timely manner to enable the operators and decision makers to make informed decisions.
Trade
Enterprise Solutions
We
provide
Trade Enterprise Solutions
to businesses, manufacturers and inward processed manufacturing companies
involved in global trade. Our solutions provides a suite of enterprise management applications that allow our customers to streamline
their global trade business and operations with features and functionalities including business and process operations, inventory
and warehousing control, project execution and management, customs clearance processing and all other compliance and logistics
processing.
Inward
processed manufacturing companies use imported raw materials, components and parts, packing and other materials to produce finished
products for exporting. Inward processed manufacturing is a complicated and extended process that is highly regulated. We provide
a series of applications specific to inward processed manufacturing companies to help streamline and automate their operations
with features and functionalities including bonded goods verification, bonded logistics record keeping, digital manual processing
and customs data management.
Import
& Export Loan and Insurance Processing
We
are introducing
Loan Processing Service
to import and export businesses, financial institutions such as commercial
banks and technology-enabled financial service providers to facilitate and expedite the transaction and execution process for
trade related loans. Our service are designed for document handling, loan application and approval, contract management, lending
and repayment processing, and collateralized asset processing. The various types of loan processing services include trade credit
loans, factoring loans, bonded goods loans, and duty refund loans.
Our
Insurance
Processing Service
is newly introduced to facilitate and streamline the import and export related insurance processing
and executing process for businesses and trade insurance providers involved in global trade. Our service facilitates the processing
for insurance selection, insurance estimation, application processing and approval, customs declaration verification, insurance
policy issuance, and policy modification and cancellation for a variety of global trade insurance policies including trade duty
guarantee insurance, export risk insurance, transportation and logistics insurance.
Powerbridge
SaaS Services
Overview
of Powerbridge SaaS Services
In
2016, we introduced
Powerbridge SaaS Services
(software-as-a-service) designed for corporate and government organizations
involved in global trade, including import and export businesses and manufacturers, government agencies and regulatory authorities,
cross-border eCommerce operators, as well as logistics and other service providers.
Our
services are designed to be deployed rapidly via internet browsers and mobile devices, and can be supported through designated
data centers and commercially available cloud platform services that provide infrastructure as a service for servers, storage,
networking and database.
Strengths
of Powerbridge SaaS Services
We
believe our services encompass the following core advantages:
|
●
|
Lower
total cost of ownership
. Unlike the traditional software model, our on-demand services enable our customers to have access
anytime and anywhere without the upfront spending in software and hardware.
|
|
●
|
Rapid
deployment and configuration
. Our services are designed to be deployed and configured rapidly through our application
programming interfaces.
|
|
●
|
Flexible
and scalable
. Our flexible and extensible architecture enables us to offer services that are scalable and adjustable to
quickly address the different needs of our diverse group of customers.
|
|
●
|
Reliable
and secure.
Our multi-tenant and microservice technology architectures allow us to design our services to provide
our customers with a high level of performance, reliability and security.
|
|
●
|
Intuitive
and ease of use.
Our services are designed be intuitive and easy to use with interfaces that are simple and user
friendly. Our users are able to learn and use our services without specialized training.
|
Logistics
Service Cloud
Logistics
Service Cloud
services are used by import and export logistics service providers such as freight forwarding agent companies
who organize and arrange for air, ocean or land shipments. Our services allow our logistics service customers to minimize paperwork
handling, reduce processing time, simplify workflow and increase performance efficiency by streamlining the import and export
freight forwarding process and by facilitating digital exchange of information and documents among all players engaged in the
freight forwarding process.
Our
services enable our customers to connect and synchronize with the applications and systems of cargo owners, cargo depots and terminals,
transportation and carrier companies and regional customs agencies for rapid exchange and sharing of information and data. Our
customers can complete the freight arrangement process to minimize paper document handling that is often tedious, error-prone
and time consuming. Electronic processing of customs declaration, reporting and approval through our data exchange system further
expedites the freight forwarding process.
We
are continually expanding the features and functionalities of our services to reach a broader range of our logistics service customers.
Our core services provide features and functionalities including digital document exchange and processing among freight forwarders,
cargo owners, cargo terminals, transportation carriers and local customs for a variety of tasks, including transport booking confirmation,
cargo manifests and waybills processing, cargo status reporting at regulated depots and terminals, unloading and loading reporting,
document receipt and message handling.
Trade
Zone Operations Cloud
Our
newly introduced
Trade Zone Operations Cloud
is designed for all businesses operating in regulated bonded and
free trade zones, including importers and exporters, manufacturers engaged in global trade, inward processed manufacturers, cross-border
eCommerce operators and logistics service providers as well as government zone management authorities. Our services are designed
to enable businesses to streamline their operations in the zones and allow authorities to effectively manage the zones. Our services
are integrated with the systems from businesses, government authorities, logistics service providers and other third parties.
Businesses
and logistics service providers use our services to run and manage their daily operational, compliance and logistics activities,
including commodity flows of bonded and non-bonded goods, operations record declaration and verification, goods display and business
transaction, bonded to non-bonded conversion, inward processed operations and materials management, zone in-and-out processing,
cross-border eCommerce operations and compliance as well as customs declaration and clearance processing.
Our
services are provided to government zone management and operating authorities as a supplement to their management and operations
systems for a variety of regulatory and management operations, including checkpoint verification and release, logistics planning
and allocation, contract and settlement management as well as document handling and performance data analysis. We are expanding
our services using artificial intelligence and IoT technologies and applications to enhance the government’s capabilities
in checkpoint and zone security, vehicle monitoring and control, and smart command operations.
Inward
Processed Manufacturing Cloud
We
are developing our
Inward Processed Manufacturing Cloud
services designed for inward processed manufacturing
and trade companies who use imported raw materials, components and parts, packing and other materials to produce finished products
for exporting. Our services are being developed to allow our customers to streamline and optimize their logistics and compliance
operations in bonded or non-bonded environments. Our services are being designed to integrate with the systems from inward processed
businesses, government authorities and agencies, and logistics service providers. Our services have recently been made available
to selected customers.
Inward
processed manufacturing and trade businesses may use our services to perform a variety core logistics and compliance works, including
digital handbook and manual declaration, material and component usage management, customs code revision and update, ledger maintenance,
authorized economic operators services, production related work order based declaration, import and export customs declaration
and processing, bonded goods operations and compliance as well as material and warehousing logistics management.
Our
services are designed to connect and synchronize with regional customs and other authorities through their localized single window
platforms, customs compliance and clearance systems, and Chinaport systems and applications, allowing us not only service our
inward processed and trade businesses effectively, but also offer value-added services to the government authorities by streamlining
the work order based manufacturing data verification process as well as providing insightful inward processed manufacturing related
operational and compliance analytics using big data technologies.
Cross-Border
eCommerce Cloud
Our
Cross
-
Border
eCommerce Cloud
is being developed for cross-border eCommerce operators, logistics service providers and payment and
settlement service providers for rapid and efficient handling of the import and export process for couriered consumer merchandise
and products. Our services are aimed at addressed the unique and challenging logistics, compliance and settlement needs of our
customers, allowing them to reduce workflow complexities, minimize processing time all the while increase customs clearance and
overall productivity. Our services will be available to our customers the second quarter of 2019.
Our
services are being designed to integrate with the platforms, systems and applications from all players involved in the cross-border
eCommerce process, including those from cross-border eCommerce operators, logistics service providers, payment and settlement
service providers as well as government agencies and authorities. Our services should enable the players to exchange and share
information and data for streamlining the cross-border process as well as to derive intelligent insight from the trade data for
better performance and decision making.
Our
services are being designed to encompass all core steps throughout the entire cross-border eCommerce process with features and
functionalities, including identity authentication of eCommerce operators, customs declaration and verification, merchandise inspection
and approval, data verification and exchange, customs clearance declaration and processing, logistics handling and tracking, compliance
status inquiry and notification via mobile devices, duty payment and tariff refund processing, government data analytics as well
as regulatory information announcements.
Import
& Export Loan and Insurance Processing Cloud
Import
& Export Loan and Insurance Processing Cloud
is being designed and developed for import and export businesses, commercial
banks, technology-enabled financial service providers and trade insurance providers. Our services will enable us to facilitate
and simplify the trade related loan and insurance processes as well as optimize the value of matching trade businesses to financial
and insurance products to provide credit and risk assessment services for the financial service providers. We plan to incorporate
the use of big data, artificial intelligence and other technologies into our services.
Global
trade businesses, financial service providers, and trade insurance companies may use our services to streamline the entire loan
and insurance approval and execution process. Our services will enable our customers to save time and effort in handling the complicated
and cumbersome processing tasks for a variety of trade related loans and insurances, with features and functionalities including
identity verification and authentication, document exchange and handling, application and approval, and contract execution and
management, among other tasks.
We
are developing our matching services designed to service businesses by recommending financial products based on the product offerings
and risk appetite of the financial service providers and the credit worthiness and profiles of the businesses engaged in global
trade. We intend to use big data and artificial intelligence technologies to provide analytics from government and trade data
sources. We will provide credit and risk analysis to financial service providers by bringing proof and validation to the assessment
of the trade businesses, which provides critical insights for the financial service providers in making informed loan decisions.
Powerbridge
BaaS Services
Overview
of Powerbridge BaaS Services
We
are currently designing and developing
Powerbridge BaaS Services
as cloud-based blockchain-as-a service designed
for corporate and government organizations engaged in global trade, empowering them to synchronize and collaborate in unprecedented
ways that can make doing business in global trade easier.
Global
trade is generally characterized by its extended workflows with complicated compliance and logistics processes, voluminous documentation
and time-consuming paper handling, cumbersome and costly peer-to-peer messaging and a great number of players from many different
disciplines.
We
estimated that a typical process for an export shipment in China may involve 1 exporter, 8 government agencies and authorities
and 12 various logistics and financial service providers with more than 60 persons involved in 13 different work processes that
generate more than 55 trade compliance and logistics documents and 150 information or message exchanges.
Conventional
and traditional applications have enhanced the functional performance of global trade organizations, but are limited at establishing
trusted relationships, allowing transparency because of inconsistent information sharing, and enabling collaboration across organizational
boundaries among all players.
We
believe blockchain technologies can not only address the shortfalls of conventional and traditional applications, but will disrupt
the global trade industry and change how global trade is conducted with a collaborative model that can drastically enhance overall
efficiency and reduce trade cost for all players in the global trade ecosystem.
Strengths
of Powerbridge BaaS Services
We
are designing and developing our
Powerbridge BaaS Services
to provide corporate and government organizations
involved in global trade with significant improvements in workflow performance, reduction in document handling, optimization of
synchronized peer-to-peer exchange of information, and enhancement of overall productivity and efficiency, with the following
potential core attributes and advantages:
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●
|
Distributed
and shared ledgers
of immutable data and records for transactions are on trusted and secured global trade blockchain
networks that are made accessible only to permissioned trading partners and peers.
|
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●
|
Encoded
smart contract
execution are validated and automated based on pre-defined business rules and contractual conditions
for global trade peer-to-peer transactions or executions that are authenticated and verifiable in real time.
|
|
●
|
End-to-end
visibility
and transparency throughout the global trade supply chain ensures real time exchange of events and documents
among all trading parties and peers in the ecosystem.
|
|
●
|
Provenance
and traceability
are enabled with time-stamped records or documents and immutable provenance records of import and
export goods that ensure accuracy for audit and regulatory compliance purposes.
|
|
●
|
Extensible
and interoperable
capabilities enable the blockchain networks to connect and integrate with multiple other blockchain
networks and with applications and systems of the permissioned members.
|
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●
|
Lower
total cost of ownership
with services offered in the cloud with minimum investment in software and hardware for rapid
deployment as well as intuitive, easy-to-use user interface on the internet and via mobile devices.
|
We
intend to offer our cloud-based BaaS services through commercial cloud platform services that provide infrastructure as a service
for servers, storage, networking and database. We plan to generate our revenue on a subscription basis with single use, group
and enterprise editions and from professional service fees.
We
began designing and developing our
Powerbridge BaaS Services
infrastructure and services in 2017. We have our
own development teams and work with third-party providers of infrastructure technologies. We recently introduced our services
as pilot projects on a limited basis to selected customers.
We
used a portion of the proceeds from the IPO to accelerate our R&D in order to expedite our service offerings to drive product
adoption. We believe our domain knowledge, product expertise and customer relationships will enable us to capture significant
market share with
Powerbridge BaaS Services.
Our
BaaS Services
Corporate
and government organizations involved in global trade are facing increasing challenges with existing available technology and
applications which hinder their productivity and efficiency. Conventional and traditional applications are inadequate and ineffective
in addressing challenges which include:
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●
|
Conventional
and traditional software systems used by each global trade participant is largely disjointed with inefficient integration
and synchronization.
|
|
●
|
Information
across organizational boundaries is inconsistent and not fully transparent with many “blind spots” on the global
trade supply chain.
|
|
●
|
Peer-to-peer
messaging or information exchanges among global trade players are complex, cumbersome, time-consuming and costly.
|
|
●
|
Manual
handling of paper-based global trade documents is time consuming, resource draining and error-prone.
|
|
●
|
Compliance
risk assessment and control are ineffective and costly due to lack of sufficient and credible information.
|
We
believe our
Powerbridge BaaS Services
will address the imminent challenges faced by corporate and government
organizations in global trade. Our services are being developed to offer potential benefits including:
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●
|
Trusted
and secured blockchain networks where all permissioned players in the global trade ecosystem can synchronize and collaborate.
|
|
●
|
End-to-end
visibility and transparency of goods and documents throughout the global trade supply by all permissioned players.
|
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●
|
Synchronized
cross-organizational workflows and secured exchange of transaction events and messages among global trade players.
|
|
●
|
Digitized
and automated exchange of global trade documents in real time with assurance of authenticity and immutability.
|
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●
|
Enhanced
compliance risk assessments with increased level of information transparency and assured provenance of import and export goods
and services.
|
Our
services will be provided as consortium blockchain networks designed for all players in the global trade ecosystem including import
and export businesses and manufacturers, logistics service providers, financial service providers, and government agencies and
authorities with the following potential benefits to each group of players:
|
●
|
Businesses
can benefit from full transparency of a streamlined supply chain that allows for greater predictability, earlier detection
of problems, enhanced inventory management and better overall resources allocation.
|
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●
|
Logistics
service providers can benefit from increased visibility on the supply chain, enhanced document processing and shorter processing
time, improved service reliability and lower cost to trade businesses.
|
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●
|
Financial
service providers can benefit from increased visibility into key trade events which mitigate risks and increase assurances,
and automated document exchange and processing for loan, insurance and settlement services.
|
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●
|
Government
agencies can benefit from enhanced monitoring and control on flow of goods, more effective risk assessments and interventions,
increased sharing of information among agencies, and higher overall compliance efficiency.
|
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●
|
Government
authorities for trade zones and ports can benefit from increased operational efficiency driven by increased transparency,
improved document flow and faster processing time, and higher throughput for goods and cargos.
|
Our
services are designed to be built on an open and extensible blockchain infrastructure. This will enable us to efficiently add
and expand our services over time. We intend to offer our services in sequence starting with regional or functional blockchain
networks with fewer players and gradually expanding to larger ones and eventually covering the entire global trade supply chain.
We
believe this approach of targeting subsets of the global trade ecosystem by leveraging our deep domain knowledge and strong customer
relationships will allow us to continually test and fine-tune our services and incrementally drive product and market adoption
which may take considerable time and effort. We plan to initially offer the following services on a regional or functional basis:
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●
|
Compliance
Blockchain Services
are intended for government agencies including customs, inspections and quarantines, cross-border
control, maritime affairs, foreign exchange, tax and duty, and trade commerce, and government authorities such as free trade
and bonded trade zone authorities, port and terminal authorities and operators, and other trade regulated zone authorities.
Our services will provide multiple government agencies and authorities a single view of trade events and documents on designated
global trade blockchain networks, which allow them to synchronize and streamline their regulatory compliance activities with
enhanced compliance effectiveness and operational efficiency.
|
Government
agencies will be able to use our services to increase the effectiveness of risk assessments and interventions in monitoring and
controlling the flow of goods and documents with increased level of transparency and assurance of provenance. Trade zone and port
authorities will be able to increase their service and operations efficiency with enhanced transparency and visibility, faster
processing time and higher cargo throughput. Our blockchain services will be capable of integrating with the software systems
from government agencies and authorities for real time monitoring and synchronization and from global trade businesses and logistics
service providers for the government agencies and authorities to better service them.
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●
|
Logistics
Blockchain Services
are being designed for businesses and manufactures involved in global trade as well as customs
and freight forwarding service providers. The customs and freight forwarding processes are complicated and cumbersome with
multiple parties involved and many voluminous documents to handle. Customs and freight forwarders represent the businesses
to take on a number of tasks including making import and export declarations with customs and inspection agencies, arranging
for cargo shipments with the shippers and carriers, and handling logistics and compliance works in the regulated trade zones.
These processes generate large sets of documents and require constant communication among the involved parties.
|
Our
services will allow all involved participants operating in the customs and freight forwarding process to better connect and synchronize
on the blockchain networks. Our customers will use our services to streamline cross-organizational workflows and have real time
access to monitor and manage progress throughout the process. Our blockchain networks will be capable of connecting and integrating
with the software systems from permissioned trade businesses and logistics service providers, with features and functionalities
including automated contract execution, expedited service remittance, streamlined document handling, and synchronized information
exchange.
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●
|
Supply
Chain Blockchain Services
are being designed to provide end-to-end visibility and transparency to all stakeholders
or players throughout the cross-border global trade supply chain, including import and export businesses and manufacturers,
logistics service providers, transportation shippers and carriers, financial service providers, insurance companies, settlement
service providers, government agencies and authorities, and all other players. Our services will enable real time sharing
of trade data and events on distributed and trusted blockchain networks for broad synchronization and collaboration among
all players in the global trade ecosystem in which the entire trade process is facilitated and optimized.
|
Our
services will provide secured information and message exchanges on the blockchain networks that enable all players to have real
time access to flows of documents and goods along the supply chain, allowing them to synchronize and collaborate across organizational
boundaries in order to efficiently handle the complicated and cumbersome compliance and logistics processes. Our customers can
use our services to track goods and documents, identity and manage milestone exceptions, trace the provenance of goods, and share
information with their trade partners and customers. We intend to first offer our services in China and subsequently expand to
integrate the international players on the global trade supply chain.
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●
|
Import
& Export Loan and Insurance Processing Blockchain Services
are being designed for businesses and financial service
providers involved in global trade. Our blockchain services will empower businesses with easier and faster processing for
loans, insurance and settlements with lower financing cost. Financial service providers can have improved visibility on key
events on the blockchain-enabled trade supply chain, resulting in better and more assured loan decisions that mitigate financing
risks. Insurance companies and settlement service providers will be able issue trade insurances and provide settlement services
with more streamlined workflows and higher processing efficiency with our blockchain services.
|
Through
our services, transaction events or activities among businesses on the global supply chain, such as sales and invoicing, purchasing
and ordering, and shipping and receiving are programmed or encoded with pre-defined business rules and contractual conditions,
allowing for validated and automated transactions to occur. These transaction events and records on the secured blockchain networks
will be authenticated and time-stamped, thus bringing substantial proof and immutable evidence to the financial service providers
for effective credit and risk assessment when offering their loans and other services to the businesses.
Our
Technology
Our
solutions and services are built from our multiple proprietary technology platforms which are developed based on industry leading
open source infrastructure technologies. Our technology platforms are designed for high performance reliability, flexibility and
scalability, allowing us to expand our solutions and services rapidly and efficiently to consistently address the needs of our
global trade customers.
Our
technology platforms include
Powerbridge System Platform
for our
Powerbridge System Solutions
,
Powerbridge
SaaS Platform
for our
Powerbridge SaaS Services
, and
Powerbridge BaaS Platform
for our
Powerbridge
BaaS Services
.
We
are developing our own technologies as well as working with other third-party technology infrastructure partners to expand the
scope of our solutions and services with the best use of big data, artificial intelligence and Internet of Things.
Powerbridge
System Platform
Powerbridge
System Platform
is our proprietary technology platform from which we develop our
Powerbridge System Solutions
.
Our platform is built on Java Spring and Microsoft .Net frameworks as well as other open source technologies.
Powerbridge
System Platform
consists of modular technology and business components that enable us to provide mission critical applications
and solutions in trade operations, trade logistics and regulatory compliance to our corporate and government customers. Our platform’s
core capabilities include:
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●
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Scalable
Modular Architecture
. Our scalable architecture consists of a robust set of modular technology and business components
that allows for rapid and efficient development and deployment to support complex mission-critical business processes and
transactions in global trade.
|
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●
|
Flexible
Configuration Modeling
. Leveraging our deep domain knowledge, product expertise and customer experience in global trade
applications, we have developed a flexible system configuration modeling that minimize development resources and time without
repetitive coding for common or special business and operations use cases.
|
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Reliable
Enterprise Grade Performance
. Our platform provides the infrastructure for reliable and high performance that can be built
with multiple programing languages, support all commonly used databases, operate with web browser/server or client/server
models, and generate dynamic interactive user interfaces.
|
|
●
|
Diverse
Industry Applications Supported.
Our platform supports product applications and system solutions that are used by
global trade businesses in a wide variety of industries such as automotive, pharmaceutical and consumer goods and involving
different government agencies and authorities.
|
Powerbridge
SaaS Platform
Powerbridge
SaaS Platform
is built based on the open source Spring Cloud and other industry leading technologies for developing,
deploying and operating our software-as-a-service. It is capable of running in multiple designated data centers and cloud environments
on commercially available infrastructure as a service platforms.
Powerbridge
SaaS Platform
is the technology infrastructure upon which we are developing our
Powerbridge SaaS Services
designed
to provide on-demand services in trade operations, trade logistics and regulatory compliance with a multi-tenant and microservice
architecture. Our core technology capabilities include:
|
●
|
Secured
Multi
-
Tenant Architecture
. Our multi-tenant architecture is designed to operate a single instance of a software
application simultaneously for multiple organizations or tenants. Each tenant is operating in virtual isolation from each
other. Our multi-tenancy architecture ensures and maintains data security and integrity for our customers.
|
|
●
|
Scalable
Microservice Architecture
. Our microservice architectural approach allows us to provide scalable and reliable application
services as a suite of independently deployable, modular services in which each service can run a unique business or transaction
process based on a lightweight mechanism with well-defined business rules and logic.
|
|
●
|
Ease
of Integration and Configuration
. We provide a set of application programming interfaces that is designed to enable our
customers to integrate and configure our services quickly and seamlessly with their systems and applications, as well as with
third-party’s systems.
|
|
●
|
Extensible
Technology Platform
. Our application services are built on a single platform that leverages the shared business and technology
components, enabling us to rapidly expand our product features and functionalities without disruption and seamlessly integrate
our services with one another.
|
Powerbridge
BaaS Platform
We
are designing and developing our proprietary
Powerbridge BaaS Platform
based on the open source Hyperledger Fabric
framework and other third-party frameworks that provide the blockchain infrastructure for shared ledger, smart contract, consensus
algorithm, distributed storage, encryption and security, and network operations.
Powerbridge
BaaS Services
are built on top of our blockchain platform that is designed to provide high scalability and performance
characteristics, consisting of multiple technology engines that support the various business component models specific for trade
transaction, trade logistics and regulatory compliance in global trade:
|
●
|
Smart
Contract Engine
is designed to provide a complete and automated blockchain service for the coding, registering, authorizing,
releasing, triggering, executing, updating and cancelling of the business contracts or transactions based on pre-defined contractual
conditions or pre-defined business rules that are encoded into the smart contracts between trading or transactional parties.
|
|
●
|
Member
Service Engine
is intended for authenticating and managing the identity of the blockchain network members or participants
with encrypted public or private key generation and maintenance as well as managing member accounts, maintaining multi-level
permission access control and conducting risk monitoring and compliance auditing on selective member transactions.
|
|
●
|
Network
Service Engine
is designed for managing network connectivity with applications, programing interfaces and structured
query languages, member consensus via consensus algorithms and permission mechanisms, secured and authenticated peer-to-peer
data transmissions and exchanges, and transaction record storage with key value and Merkel hash value on distributed shared
ledgers and/or in cloud-based database environments.
|
|
●
|
Network
Operations Engine
is intended to monitor, manage and maintain the blockchain network operations, including network
configuration, throughput and time consumption, hardware resource and allocation, fraud and emergency situation detection,
network system update and announcement, and other network functions and operations as well as network performance and trend
analysis and reporting.
|
We
are continuing to enhance the technology capabilities of
Powerbridge BaaS Platform
while it is under development.
We believe our platform offers all of the governance and operations benefits derived from blockchain technology with the following
differentiated and distinctive advantages:
|
●
|
Global
Trade Centric Business Components.
We believe our domain knowledge, product expertise and customer experience will
allow us to develop a platform that forms a strong and powerful foundation for continually offering and expanding our services
to drive product adoption with this new and exciting technology.
|
Our
BaaS services will be supported by our business components which are stacked on top of and driven by our technology engines. Our
business components will include trade transaction, trade operations, trade logistics and regulatory compliance, which are designed
to address the mission critical needs of global trade businesses, government agencies and authorities, and logistics and other
service providers with comprehensive services from document handling to customs processing to transaction processing.
|
●
|
Data
Separation Modeling.
Global trade transaction processes typically generate voluminous data to which organizations
have different needs and ways to handle them. Some organizations may choose not to have their sensitive data stored on the
blockchain networks. We are developing a data separation model that can allow data to be recorded and stored on the shared
ledgers, but also have more sensitive data securely stored off the blockchains, which has the added benefit of minimizing
data storage space.
|
We
intend to further separate the smart contract blockchains and workflow blockchains. Smart contract blockchains and the corresponding
contract codes and hash values are recorded and stored on the shared ledgers as the contract codes can be called and used numerous
times. Data generated from the workflow blockchains and the smart contract blockchains can be designated as on or off the shared
ledgers. This further ensures data security and reduce data storage on the blockchains.
Other
Technologies and Applications
We
intend to continue leveraging our industry expertise and product knowledge with the use of disruptive technologies such as big
data, artificial intelligence and Internet of Things to enhance our core technology capabilities and continually increase the
scope of our solutions and services to our customers.
|
●
|
Big
Data
. We are developing our big data technology and applications designed to acquire, store, process, analyze and visualize
large scaled structured and unstructured global trade transaction and compliance data. Our technology is intended to augment
our solutions and services in trade operations, trade logistics and regulatory compliance in global trade, including regulatory
risk control, compliance command operations, cross-border trades and processing, logistics matching services, among others.
|
We
intend to use ETL (extract, transform and load) technologies for acquiring and processing massive volumes of data such as customs
declarations and shipping manifests from various government and commercial sources. We intend to build our big data platform based
on a distributed data warehouse architecture using the open source Hadoop and Spark frameworks, allowing for high performance
in multi-dimensional correlation analytics, real-time complex event processing, and distributed data query and retrieval.
Our
correlation analytics are being designed for multi-dimensional and real-time correlation of large quantities of structured, semi-structured
and unstructured data from different data sources. Our complex event processing technology is designed to monitor and track data
relating to events as they occur in real time and provide data insights based on pre-defined business rules. Our data query and
retrieval is intended to support query and retrieval from multiple data sets and provide multi-dimensional data displays.
Our
data visualization and interactive data mining technologies is designed to provide intuitive and interactive visualization tools
and dashboards that are easy to use and can be customized for displaying critical business performance data or metrics. Our visualization
tools and dashboards are designed to support interactive data mining and a variety of display formats including charts, graphs
and tables as well as three-dimensional displays and geographic information system mappings.
|
●
|
Artificial
Intelligence
. We work with third party artificial intelligence technology providers to enhance our solutions and services
in global trade. Our artificial intelligence applications facilitate and support biometric facial and fingerprint recognitions
as well as object recognition for transportation vehicles and shipping containers. We plan to develop our machine learning
capabilities to provide optimized matching and recommendation services for global trade logistics and processing.
|
Our
biometric face recognition application is used for security and enforcement measures typically at checkpoints of cross-border
trade operations and regulated trade zone facilities for identifying and verifying a person from a digital image or a video frame
by comparing distinct facial features with given facial images extracted from our database. Our applications are designed to support
concurrent processing of multiple persons. Our fingerprint recognition application is also applied for security measures in some
cross-border trade settings.
Our
object recognition application is designed to identify and verify transportation vehicles at ports and terminals, regulated trade
zones and cross-border checkpoints by capturing, processing, and identifying still images and video images. Further, through machine
learning computation, transportation vehicles in these facilities can be automatically directed with optimized routes to their
designated destinations such as a warehouse or a container depot.
We
plan to enhance our technology capabilities in machine learning algorithms that learn from experience, identify patterns and make
predictions driven by a large set of global trade data. We intend to leverage our domain knowledge and industry experience to
design and develop machine learning algorithms and distributed computing that can optimize the efficiency in the matching of trade
logistics services among trade businesses and service providers.
|
●
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Internet
of Things.
Internet of Things or IoT refers to the network of physical objects embedded with sensors, electronics,
and network connectivity that allow these objects to collect and exchange data. We work with third-party technology companies
to provide IoT applications to process, store, and analyze IoT data from trade related trucking vehicles, weighting stations,
and shipping containers. Our applications are integrated with the target object’s IoT systems and software systems of
government authorities.
|
Trucking
vehicles, weighting stations and shipping containers are tightly regulated at ports and terminals, regulated trade facilities
and cross-border facilities. Our IoT applications are used by government authorities to monitor and control these objects. Our
applications are able to authenticate objects, facilitate data exchanges, connect through gateways and application programming
interfaces, and provide event-based IoT data processing, analysis and visualization.
Our
IoT applications allows fast and accurate identification of trucking vehicles as they pass through the checkpoints at regulated
areas with a high throughput capacity and rapid data transmission, which facilitates efficient control and fast checkpoint release.
Our IoT applications can combine with the use of global positioning systems, global system for mobile communication and global
information system to enable government authorities complete monitoring and control of the trucking vehicles.
Our
IoT applications are capable of acquiring and processing a high volume of IoT enabled data from radio frequency identification
and other types of sensor devices installed on intermodal shipping containers operating in many different trade facilities or
settings such as container yards, shipping ports, bonded warehouses and air terminals. Our IoT applications can also process IoT
data from electronic locks on the containers for automated container lock handling.
Our
Customers
Our
customers are international trade businesses and manufacturers, government agencies and authorities, logistics service and other
providers, primarily located in China.
Our
international trade business and manufacturer customers are import and export companies, manufacturers engaged in import and export,
inward processed manufacturers who use imported raw materials, components and parts, packing and other materials to produce finished
products for exporting, and cross-border eCommerce operators who conduct cross-border business for air packaged consumer products.
Our
government customers are provincial and regional government agencies, government authorities and government-owned organizations.
Government agencies include customs, inspection and quarantine, border enforcement, maritime affair, transportation and commerce.
Government authorities include authorities for ports, bonded and free trade zones and government-owned organizations include Chinaport
and other international trade related organizations.
Our
logistics service and other provider customers include freight forwarding and shipping agent firms, customs and inspection brokers,
warehouse operators, transportation companies and other international trade related service organizations as well as financial
and insurance service providers engaged in global trade services.
Our
customers include (i) international trade businesses and manufacturers, (ii) government agencies and authorities, and (iii) logistics
and other various service providers. For the fiscal year ended December 31, 2017, we generated revenue from a total of 1,633 customers,
of which 936 are international trade businesses and manufacturers, 70 are government agencies and authorities, and 627 are logistics
and other service providers. For the fiscal year ended December 31, 2018, we generated revenue from a total of 1,683 customers,
of which 1,012 are international trade businesses and manufacturers, 36 are government agencies and authorities, and 635 are logistics
and other service providers.
We
generate a significant portion of our revenues from a relatively small number of major customers. For the year ended December
31, 2017, two government customers accounted for 17.2% and 13.1% of our total revenues, respectively. For the year ended December
31, 2018, none of our government customer represented over 10% of our total revenues.
We
plan to expand our market coverage to international markets to service customers in different B&R countries. We also intend
to provide our solutions and services to corporate and government customers in the countries or markets we intend to target.
Sales
and Marketing
Our
sales and marketing teams work closely together to drive market awareness, develop and manage leads, and develop and build customer
relationships to increase revenue growth. We sell our solutions and services to corporate and government customers through our
direct sales organization, indirect channel partners and strategic government partners.
Our
sales team is organized by customer type and geography. Our direct sales force is supported by sales engineers and service consultants.
Our indirect channel partners include value added resellers, system integrators, software and application providers, system hardware
providers and other referral partners. As of the date of this Annual Report, our sales teams consisted of 51 full-time sales and
marketing personnel respectively. During years fiscal 2018 and 2017, our sales and marketing expense were approximately $2.1 million
and $1.6 million, respectively, representing 9.3% and 7.5% of our total revenues for fiscal years 2018 and 2017, respectively.
We
generate customer leads, accelerate sales opportunities and build brand awareness through our marketing programs. Our marketing
programs target management and technology executives of global trade businesses, government agencies and authorities, and various
service providers, including user conferences, sponsored events and product promotions.
We
continue to develop strategic partnerships with provincial and local government agencies, technology organizations, trade zone
authorities and other government organizations, i.e., regional customs and commerce agencies, bonded and other trade facilities,
and Chinaport and other state-owned entities, to drive sales by leveraging their strengths and resources in targeted customer
base, strong regional market influence and extensive government and industry resources.
As
part of our overall strategy, we plan to expand into international markets to provide global trade software solutions and services
by “piggybacking” with the infrastructure builders and other Chinese organizations who participate in the B&R’s
development of global trade infrastructures in the B&R partnering countries.
Research
and Development (“R&D”)
Our
R&D organizations consist of dedicated engineering and technology employees, who are responsible for the design, development,
testing and delivery of all aspects of our technologies, solutions and services. As of the date of this Annual Report, our team
consists of 111 full-time R&D personnel. We incurred expenses of $1,151,985 and $1,992,228 in R&D in fiscal year 2017
and 2018, respectively.
The
majority of our R&D team is based in our Zhuhai office and to a lesser degree in our branch offices. Our team is further apportioned
into smaller agile development groups to foster continuous innovation and rapid delivery.
We
believe we have a strong R&D culture that rapidly and consistently delivers high quality products. We plan to continue to
invest substantial resources in R&D to drive core technology innovation and bring new solutions and services to market.
Competition
The
market for global trade software application and system integration services is highly competitive and fragmented. We face intensive
competition. Our main sources of current and potential competition fall into the following categories:
|
●
|
Regional
global trade application providers offering regulatory compliance, trade logistics and trade processing software and systems.
|
|
●
|
Software
vendors providing online or cloud-based single point or single feature functional global trade application products and services.
|
|
●
|
Online
global trade hubs or portals offering specific global trade transactional and processing application products and services.
|
|
●
|
Enterprise
resource planning, supply chain and logistics software application companies offering global trade software, systems and services.
|
|
●
|
Government
organizations providing global trade related regulatory compliance and trade logistics applications and systems.
|
|
●
|
Emerging
blockchain, artificial intelligence and IoT technology providers offering technologies and software for global trade applications.
|
We
believe the following competitive attributes are necessary for us to compete successfully in our industry:
|
●
|
Deep
domain knowledge, industry experience and product expertise in global trade software applications and system integration to
address customer needs.
|
|
●
|
Enablement
of emerging and disruptive technologies to develop and provide global trade software applications and services
|
|
●
|
Enterprise
grade performance level in scalability, reliability and security as well as cost of ownership and ease of deployment.
|
|
●
|
Breadth,
depth and quality of application features and functionalities that are able to operate in multiple infrastructures such as
in cloud, on premises or both.
|
|
●
|
Capability
of technology platforms in integrating and interoperating with legacy and other enterprise infrastructures and third party
applications.
|
|
●
|
Strength
of sales and marketing as well as customer support in service responsiveness and level of customer satisfaction.
|
|
●
|
Brand
awareness and reputation, size of customer base and level of user adoption to new and disruptive technologies and applications.
|
|
●
|
Ability
to capture market share in China and expand into international markets to operate as a global player in servicing multiple
markets and countries.
|
We
believe we compete favorably on the basis of the competitive factors listed above. Some of our competitors have substantially
greater financial, technical and other resources, greater name recognition, larger sales and marketing budgets, broader distribution
channels and larger or more intellectual property portfolios.
Intellectual
Property
The
PRC has domestic laws for the protection of rights in copyrights, trademarks and trade secrets. The PRC is also a signatory to
all of the world’s major intellectual property conventions, including:
|
●
|
Convention
establishing the World Intellectual Property Organization (June 3, 1980);
|
|
●
|
Paris
Convention for the Protection of Industrial Property (March 19, 1985);
|
|
●
|
Patent
Cooperation Treaty (January 1, 1994); and
|
|
●
|
Agreement
on Trade-Related Aspects of Intellectual Property Rights (November 11, 2001).
|
The
PRC Trademark Law, adopted in 1982 and revised in 2013, with its implementation rules adopted in 2014, protects registered trademarks.
The Trademark Office of the State Administration of Industry and Commerce of the PRC, handles trademark registrations and grants
trademark registrations for a term of ten years.
We
rely on a combination of trademark, fair trade practice, copyright and trade secret protection laws and patent protection in China
and other patent jurisdictions, as well as contractual restrictions, to protect our intellectual property. We entered into comprehensive
confidentiality agreements with our management and consultants. We have standard confidentiality terms with all other employees.
We also control access to and distribution of our documentation and other licensed information.
Despite
our efforts to protect our proprietary technology and our intellectual property rights, unauthorized parties may attempt to copy
or obtain and use our technology to develop applications with the same functionality as our products. Policing unauthorized use
of our technology and intellectual property rights is difficult. Our patent applications may not issue as patents, and if they
do issue as patents, they may not provide meaningful protection against competitors. We expect that software in our industry may
be subject to third-party infringement claims as the number of competitors grows and the functionality of applications in different
industry segments overlaps. Any of these third parties might make a claim of infringement against us at any time. We require our
employees to enter into non-disclosure agreements to limit access to and distribution of our proprietary and confidential information.
These agreements generally provide that any confidential or proprietary information developed by us or on our behalf must be kept
confidential. These agreements also provide that any confidential or proprietary information disclosed to third parties in the
course of our business must be kept confidential by such third parties. In the event of trademark infringement, the State Administration
for Industry and Commerce has the authority to fine the infringer and to confiscate or destroy the infringing products.
We
have 28 patent pending applications, 62 registered software copyrights, 5 registered trademarks, and 2 pending trademarks. In
addition to trademark protection, we own five URL designations and domain names, including powerbridge.com, erp-china.com, pbtcloud.com,
pbtyun.com, and pbtco.cn.
We
have registered for the following trademarks:
No.
|
|
Current
Owner
|
|
Mark
|
|
Registration
Number
|
|
Status
|
|
|
Class/Description
|
|
Expiration
Date
|
|
Country
of Registration
|
1
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
|
|
32673249
|
|
|
Pending
|
|
|
Class
38: Information transmission; Computer terminal
communication; Computer-aided information and image
transmission; Information transmission equipment rental;
Provide telecommunications link services to connect with
the global computer network; Telecommunications routing and junction services; Provide access service for global computer
network users; Provide database access service;
Digital file transfer; Teleconference call service
|
|
N/A
|
|
|
China
|
2
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
|
|
32670567
|
|
|
Pending
|
|
|
Class
42: Technical research; Research or develop new products for others; Computer programming; Computer software design; Computer
hardware design and development consulting; Computer software rental; Computer software maintenance; Computer system
analysis; Computer software installation; Computer software consulting
|
|
N/A
|
|
|
China
|
The
following is a list of our patent applications:
No.
|
|
Current
Owner
|
|
Patent
Name
|
|
Application
Number
|
|
Status
|
|
Number
of Patent Application
|
|
Registration
Date
|
|
Country
of Registration
|
1
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
method and device for voice activation and logic control of eliminating network reverberation
|
|
201810670524.X
|
|
Pending
|
|
2018062602326070
|
|
June
26, 2018
|
|
China
|
2
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
method and device for automatic inspection of customs clearance data
|
|
201810670525.4
|
|
Pending
|
|
2018062602326160
|
|
June
26, 2018
|
|
China
|
3
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
method and device for decoupling an application’s page from the back end
|
|
201810670907.7
|
|
Pending
|
|
2018062700010540
|
|
June
27, 2018
|
|
China
|
4
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
An
automatic document distribution method and device based on text rules
|
|
201810670929.3
|
|
Pending
|
|
2018062700016140
|
|
June
27, 2018
|
|
China
|
5
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
cross-platform application of generation methods and devices that is based on configuration
|
|
201810671224.3
|
|
Pending
|
|
2018062700050900
|
|
June
27, 2018
|
|
China
|
6
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
method and device for to realize the single table maintenance function
|
|
201810671225.8
|
|
Pending
|
|
2018062700050930
|
|
June
27, 2018
|
|
China
|
7
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
method for quickly generating WEB projects that is based on configuration
|
|
201810680192.3
|
|
Pending
|
|
2018062702332210
|
|
June 27, 2018
|
|
China
|
8
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
method and system for quickly generating HTML code
|
|
201810680847.7
|
|
Pending
|
|
2018062800046630
|
|
June
27 2018
|
|
China
|
9
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
template method and device for describing mobile APP
|
|
201810681493.8
|
|
Pending
|
|
2018062800264320
|
|
June
27 2018
|
|
China
|
10
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
method and device for quickly verifying the identity of residents
|
|
201810681905.8
|
|
Pending
|
|
2018062800486440
|
|
June
27 2018
|
|
China
|
11
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
Authentication
method based on gateway routing and forwarding
|
|
201810644346.3
|
|
Pending
|
|
2018062101730090
|
|
June
21 2018
|
|
China
|
12
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
Real-time
dynamic forwarding method based on gateway infrastructure service
|
|
201810644350.X
|
|
Pending
|
|
2018062101730150
|
|
June
21 2018
|
|
China
|
13
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
An
integrated automatic packaging method based on iOS system
|
|
201810803035.7
|
|
Pending
|
|
2018072001505740
|
|
July
20, 2018
|
|
China
|
14
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
An
invocation method for HTTP dynamic request service
|
|
201810804414.8
|
|
Pending
|
|
2018072001711340
|
|
July
20, 2018
|
|
China
|
15
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
method for single page application which is based on configuration and references to remote page components
|
|
201810805226.7
|
|
Pending
|
|
2018072001829640
|
|
July 20,
2018
|
|
China
|
No.
|
|
Current
Owner
|
|
Patent
Name
|
|
Application
Number
|
|
Status
|
|
Number
of Patent Application
|
|
Registration
Date
|
|
Country
of Registration
|
16
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
method of virtual identity verification
|
|
201810806089.9
|
|
Pending
|
|
2018072001941550
|
|
July
20, 2018
|
|
China
|
17
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
Data
distribution and processing method based on micro-service architecture
|
|
201810806520.X
|
|
Pending
|
|
2018072100042730
|
|
July
21, 2018
|
|
China
|
18
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
An
integrated automatic packaging method based on Android system
|
|
201810806545.X
|
|
Pending
|
|
2018072100044220
|
|
July
21, 2018
|
|
China
|
19
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
micro service architecture service distribution system and mode optimization method
|
|
201810813541.4
|
|
Pending
|
|
2018072301833290
|
|
July
23, 2018
|
|
China
|
20
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
An
inter-service authentication system and optimization method for micro service architecture
|
|
201810814095.9
|
|
Pending
|
|
2018072301929670
|
|
July
23, 2018
|
|
China
|
21
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
Method,
device and system for tracing cargo information
|
|
201810832789.5
|
|
Pending
|
|
2018072601368070
|
|
July
26, 2018
|
|
China
|
22
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
Transmission
method, installation and system of international trade documents
|
|
201810832790.8
|
|
Pending
|
|
2018072601368580
|
|
July
26, 2018
|
|
China
|
23
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
Transaction
data verification methods, devices and systems
|
|
201810832808.4
|
|
Pending
|
|
2018072601378170
|
|
July
26, 2018
|
|
China
|
24
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
blockchain-based trade synergy method and trade synergy system
|
|
201810832809.9
|
|
Pending
|
|
2018072601366890
|
|
July
26, 2018
|
|
China
|
25
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
Blockchain-based
methods and devices for trade supply chain recommendation
|
|
201810832906.8
|
|
Pending
|
|
2018072601380310
|
|
July
26, 2018
|
|
China
|
26
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
blockchain-based method and device for evaluating trade finance
|
|
201810832909.1
|
|
Pending
|
|
2018072601425440
|
|
July
26, 2018
|
|
China
|
27
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
A
blockchain-based method for contract drafting
|
|
201810872545.X
|
|
Pending
|
|
2018080201802660
|
|
August
2, 2018
|
|
China
|
28
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
An
identity authentication method based on blockchain
|
|
201810872552.X
|
|
Pending
|
|
2018080201802710
|
|
August
2, 2018
|
|
China
|
We
do not have applications pending in any jurisdiction other than China. We do not know if these applications will be granted as
patents, and if they are granted as patents whether they will provide meaningful protection against their party competitors.
The
following is a list of our copyrights that have been approved:
No.
|
|
Registration
Number
|
|
Software
Name and
Version
Number
|
|
Copyright
Owner
|
|
Country
of Registration
|
|
Publication
Date
|
|
Registration
Date
|
1
|
|
2004SR01879
|
|
Powerbridge
CRM – Foreign Trade Sales Service System V2.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
May
15, 2003
|
|
March
3, 2004
|
2
|
|
2004SR01989
|
|
Powerbridge
EIP – Enterprise Information Portal V2.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
October
7, 2003
|
|
March
5, 2004
|
3
|
|
2004SR01988
|
|
Powerbridge
eMC/ Enterprise Collaborative Management System
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
September 1,
2003
|
|
March
5, 2004
|
4
|
|
2005SR06176
|
|
Powerbridge
CDS – Customs Data Submission Management System V3.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
March
15, 2003
|
|
June
10, 2005
|
5
|
|
2006SR04098
|
|
Powerbridge
Customs Management System V2.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
January
23, 2006
|
|
April
4, 2006
|
6
|
|
2006SR05090
|
|
Powerbridge
IBS – Foreign Trade Business Management System V4.2
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
March
20, 2000
|
|
April
25, 2006
|
7
|
|
2006SR06093
|
|
Powerbridge
AMS – Foreign Trade Financial Management System V4.2
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
12, 2005
|
|
May
16, 2006
|
8
|
|
2006SR09790
|
|
Powerbridge
ERP – Foreign Trade Enterprise Resource Management System V4.2
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
March
20, 2000
|
|
July
24, 2006
|
9
|
|
2006SR14930
|
|
Powerbridge
CCS – Commodities Pre-classification System [Abbreviation: CCS] V2.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
July
28, 2006
|
|
October
27, 2006
|
10
|
|
2006SR14929
|
|
Powerbridge
eMSP – Enterprise Appliance System Platform [Abbr.: eMSP]
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
August
1, 2006
|
|
October
27, 2006
|
11
|
|
2007SR08385
|
|
Powerbridge
TAS – Foreign Trade Assisting System V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
March
22, 2007
|
|
June
6, 2007
|
12
|
|
2009SR01884
|
|
ZHITSP-SME
Information Service System V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
25, 2007
|
|
January
9, 2009
|
13
|
|
2009SR02664
|
|
Powerbridge
EMA – Foreign Trade Mail Management System V1.2
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
September
10, 2008
|
|
January
13, 2009
|
14
|
|
2009SR03205
|
|
Liquid
Commodities Online Supervision System [Abbr.: LCS] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
May
6, 2008
|
|
January
14, 2009
|
15
|
|
2009SR07351
|
|
Powerbridge
JOB – Human Resource Network System V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
11, 2008
|
|
February
24, 2009
|
No.
|
|
Registration
Number
|
|
Software
Name and
Version
Number
|
|
Copyright
Owner
|
|
Country
of Registration
|
|
Publication
Date
|
|
Registration
Date
|
16
|
|
2009SR027012
|
|
Powerbridge
BLS – Bonded Logistics System [Abbr.: BLS] V2.1
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
May
26, 2009
|
|
July
8, 2009
|
17
|
|
2009SR035903
|
|
Powerbridge
DEP – Data Integration System [Abbr.: DepSYS] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
April
2, 2009
|
|
September
1, 2009
|
18
|
|
2010SR000320
|
|
Powerbridge
PBNET – Technology Development Platform System [Abbr.: PBNET] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
April
1, 2009
|
|
January
5, 2010
|
19
|
|
2010SR061127
|
|
Powerbridge
CMS – Manifest Filing Management System [Abbr.: CMS] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
January
15, 2009
|
|
November
15, 2010
|
20
|
|
2011SR035553
|
|
Powerbridge
Customs Management Software V3.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
February
9, 2010
|
|
June
8, 2011
|
21
|
|
2011SR087837
|
|
Powerbridge
BLD Supply Chain Data Management Software V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
March
15, 2011
|
|
November
28, 2011
|
22
|
|
2012SR000902
|
|
Powerbridge
BW – Bonded Warehouse Management Software [Abbr.: BW] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
September
30, 2011
|
|
January
9, 2012
|
23
|
|
2011SR093904
|
|
Powerbridge
DES – Data Exchange Software [Abbr.: DES] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
January
5, 2011
|
|
December
12, 2011
|
24
|
|
2011SR093894
|
|
Powerbridge
BSNET – Technology Development Software [Abbr.: BSNET] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
April
16, 2011
|
|
December
12, 2011
|
25
|
|
2012SR055413
|
|
Custom
Data Appliance Support Platform V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
September
30, 2011
|
|
June
26, 2012
|
26
|
|
2012SR059673
|
|
Processing
Trade Comprehensive Service Platform V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
November
20, 2011
|
|
July
5, 2012
|
27
|
|
2014SR088676
|
|
Powerbridge
Freight Forwarders Software [Abbr.: FFE] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
May
8, 2014
|
|
July
1, 2014
|
28
|
|
2014SR185065
|
|
Powerbridge
Customs Clearance Comprehensive Service Management Software [Abbr.:CCS] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
September
22, 2014
|
|
December
1, 2014
|
29
|
|
2014SR184333
|
|
Powerbridge
Customs Clearance Data Management Software [Abbr.: CDS] V4.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
October
11, 2014
|
|
November
29, 2014
|
30
|
|
2014SR178366
|
|
Powerbridge
Inspection and Quarantine Supervision Software V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
September
25, 2014
|
|
November
21, 2014
|
31
|
|
2014SR183937
|
|
Powerbridge
Bonded Logistics Management Software [Abbr.: BLS] V3.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
October
13, 2014
|
|
November
29, 2014
|
32
|
|
2015SR056785
|
|
Powerbridge
Manifest Management Software [Abbr.: MMS] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
February
9, 2015
|
|
March
30, 2015
|
No.
|
|
Registration
Number
|
|
Software
Name and
Version
Number
|
|
Copyright
Owner
|
|
Country
of Registration
|
|
Publication
Date
|
|
Registration
Date
|
33
|
|
2015SR056922
|
|
Customs
Uniformly Regulated Logistics Platform [Abbr.: RLP] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
February
6, 2015
|
|
March
30, 2015
|
34
|
|
2015SR064317
|
|
Powerbridge
Comprehensive Bonded Zone Regulation Software [Abbr.: BZR] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
February
11, 2015
|
|
April
17, 2015
|
35
|
|
2015SR068252
|
|
Powerbridge
Border Trade Management Software [Abbr.: BTW] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
February
12, 2015
|
|
April
24, 2015
|
36
|
|
2015SR124592
|
|
Powerbridge
Export Supervised and Bonded Warehouses Reporting Regulation Software [Abbr.: BWR]
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
May
15, 2015
|
|
July
6, 2015
|
37
|
|
2016SR028205
|
|
Powerbridge
Electronic Account Integrated Customs Clearance Management Software [Abbr.: EAD] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
10, 2015
|
|
February
5, 2016
|
38
|
|
2016SR028729
|
|
Powerbridge
Railway Port Management Software [Abbr.: RAW] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
23, 2015
|
|
February
14, 2016
|
39
|
|
2016SR035280
|
|
Powerbridge
Customs Inspection “Three System” Management Software [Abbr.: ILS]
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
31, 2015
|
|
February
22, 2016
|
40
|
|
2016SR035405
|
|
Powerbridge
Bonded Commodities Exhibitions and Trade Management Software [Abbr,: ETC] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
28, 2015
|
|
February
22, 2016
|
41
|
|
2016SR035407
|
|
Powerbridge
Cross-border E-commerce Service Management Software [Abbr.: CEC] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
24, 2015
|
|
February
22, 2016
|
42
|
|
2016SR312081
|
|
Powerbridge
Integrated Foreign Trade Service Platform [Abbr.: ITS]
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
July
20, 2016
|
|
October
31, 2016
|
43
|
|
2016SR332320
|
|
Powerbridge
Enterprise Integrated Service System [Abbr.: EIS] V2.1
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
August
25, 2016
|
|
November
16, 2016
|
44
|
|
2016SR332338
|
|
Powerbridge
Inspection and Quarantine Service System [Abbr.: INQ] V1.6
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
May
6, 2016
|
|
November
16, 2016
|
45
|
|
2016SR332326
|
|
Powerbridge
Campus Management Information System [Abbr.: PDI] V1.5
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
May
20, 2016
|
|
November
16, 2016
|
46
|
|
2016SR332333
|
|
Powerbridge
Customs Aided Management System [Abbr.: CSM] V2.7
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
September
10, 2016
|
|
November
16, 2016
|
47
|
|
2016SR332624
|
|
Powerbridge
Foundational Support Platform [Abbr.: FSP] V1.5
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
September
21, 2016
|
|
November
16, 2016
|
No.
|
|
Registration
Number
|
|
Software
Name and
Version
Number
|
|
Copyright
Owner
|
|
Country
of Registration
|
|
Publication
Date
|
|
Registration
Date
|
48
|
|
2017SR099054
|
|
Powerbridge
Unified Bayonet Management Software [Abbr.: UBM] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
22, 2016
|
|
March
31, 2017
|
49
|
|
2017SR096831
|
|
Powerbridge
Command and Monitor Center Management Software [Abbr.: CMC] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
22, 2016
|
|
March
30, 2017
|
50
|
|
2017SR099053
|
|
Powerbridge
Single Window Management Software [Abbr.: SWM] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
22, 2016
|
|
March
31, 2017
|
51
|
|
2017SR099068
|
|
Powerbridge
Road Port Management Software [Abbr.: RPM] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
22, 2016
|
|
March
31, 2017
|
52
|
|
2017SR099058
|
|
Powerbridge
Bonded Processing Account Management Software [Abbr,: BPA] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December 22,
2016
|
|
March
31, 2017
|
53
|
|
2017SR099066
|
|
Powerbridge
Airport Logistics Service Management Software [Abbr.: APS] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
22, 2016
|
|
March
31, 2017
|
54
|
|
2017SR099043
|
|
Powerbridge
Water Transport Logistics Management Software [Abbr,: WTL] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
22, 2016
|
|
March
31, 2017
|
55
|
|
2017SR428911
|
|
Powerbridge
Cross-border E-commerce Platform [Abbr.: CBEP] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
24, 2015
|
|
August
7, 2017
|
56
|
|
2017SR428901
|
|
Powerbridge
Special Controlled Area Campus Aided Management System [Abbr.: CAS] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
May
10, 2016
|
|
August
7, 2017
|
57
|
|
2018SR094315
|
|
Powerbridge
Electronic Account Management Software [Abbr.: EMS] V3.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
15, 2017
|
|
February
6, 2018
|
58
|
|
2018SR094263
|
|
Powerbridge
Express Package Management Software [Abbr.: EPS] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
15, 2017
|
|
February
6, 2018
|
59
|
|
2018SR122274
|
|
Powerbridge
Special Monitoring Area National Inspection Assistant Management Software [Abbr.: QSIQ] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
December
31, 2017
|
|
February
24, 2018
|
60
|
|
2018SR122298
|
|
Powerbridge
Material Level Check and Write Management Software [Abbr.: SNV] V1.0
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
October
31, 2017
|
|
February
24, 2018
|
61
|
|
2018SR223184
|
|
Powerbridge
Customs Uniform Bonded Supervision Software
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
November
30, 2017
|
|
March
30, 2018
|
62
|
|
2018SR406080
|
|
Powerbridge
Post Declaration Management Software
|
|
Zhuhai
Powerbridge Technology Co., Ltd
|
|
China
|
|
February
28, 2017
|
|
May
31, 2018
|
Facilities
Our
headquarters and executive offices are located in Zhuhai, China and consist of approximately 1,200 square meter of office space
under one lease which will expire in December of 2021. In addition to our headquarters, we lease space in Beijing, Wuhan, Changsha,
Nanning, and Hangzhou. Rent expenses amounted to $183,998 and $331,904 for the years ended December 31, 2017 and 2018, respectively.
We
lease all of our facilities and do not own any real property. We intend to procure additional space as we add employees and expand
geographically. We believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable
additional or alternative space will be available to accommodate any such expansion of our operations.
Facility
|
|
Address
|
|
Space
(㎡)
|
|
|
|
|
|
Beijing
Office
|
|
Suite
415, Lanbao Tower, Shenggu Road Central
Dongcheng, Beijing 100029, China
|
|
650
square meters
|
|
|
|
|
|
Wuhan
Office
|
|
Suite
805, Block 5, Fanhai Central Business District, Soho City
Jianghan, Wuhan, Hubei 430014, China
|
|
388
square meters
|
|
|
|
|
|
Changsha
Office
|
|
Suite
458, 12th Fl, Lanwan International, Shuyan & Nanhu Road
Tianxin, Changsha, Hunan 410015, China
|
|
305
square meters
|
|
|
|
|
|
Nanning
Office
|
|
Suite
2206-2209, 22
nd
Fl, Block 2, 118 Dongge Road
Qingxiu,
Nanning, Guangxi 530012, China
|
|
389
square meters
|
|
|
|
|
|
Hangzhou
Office
|
|
Suite
1301, Building 1, Jiliang Tower, 252 Wantang Road
Xihu, Hangzhou, Zhejiang 310012, China
|
|
86
square meters
|
Employees
As
of the date of this Annual Report, we had a total of 299 full-time employees, of which 111 are in research and development, 51
are in sales and marketing, 109 are in technical and customer services, and 28 are in general administration.
We
have standard employment, comprehensive confidentiality and non-compete agreements with our management and standard confidentiality
and non-compete terms with all other employees. As required by laws and regulations in China, we participate in various social
security plans that are organized by municipal and provincial governments, including pension insurance, medical insurance, unemployment
insurance, maternity insurance, job-related injury insurance and housing fund. We are required by PRC laws to make contributions
to employee social security plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up
to a maximum amount specified by the local government from time to time.
We
believe that we maintain a good working relationship with our employees, and we have not experienced any labor disputes. None
of our employee is represented by a labor union or covered by collective bargaining agreements. We have not experienced any work
stoppages.
Legal
Proceedings
From
time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business.
We are not currently a party to any legal proceedings that in the opinion of the management, if determined adversely to us, would
have a material adverse effect on our business, financial condition, operating results or cash flows. Regardless of the outcome,
litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other
factors.
Government
Regulation
Regulations
Related to Foreign Investment
Investment
activities in China by foreign investors are principally governed by the Catalogue for the Guidance of Foreign Investment Industries,
which was promulgated by MOFCOM and the National Development and Reform Commission, as amended from time to time. Industries listed
in the catalogue are divided into three categories: encouraged, restricted and prohibited. Industries not listed in the catalogue
are generally open to foreign investment unless specifically restricted by other PRC regulations. Establishment of wholly foreign-owned
enterprises is generally allowed in encouraged industries. For some restricted industries, foreign investors can only conduct
investment activities through equity or contractual joint ventures, while in some cases PRC partners are required to hold the
majority interests in such joint ventures. In addition, projects in the restricted category are subject to higher-level governmental
approvals. Foreign investors are not allowed to invest in industries in the prohibited category.
Regulations
Relating to PRC Information Technology Service Industry
According
to the Catalog on Foreign Invested Industries (2017 Revision) issued by the National Development and Reform Commission and the
Ministry of Commerce, IT services fall into the category of industries in which foreign investment is encouraged. In 2018, The
National Development and Reform Commission and the Ministry of Commerce launched Special Administrative Measures for Access of
Foreign Investment (Negative List) (Version 2018)(“the 2018 Negative List”) to replace part of the Catalog on Foreign
Invested Industries (2017 Revision) in respect of the category of industries in which foreign investment is restricted or prohibited,
and foreign investment in IT services is neither restricted nor prohibited according to the 2018 Negative List. The State Council
has promulgated several notices since 2000 to launch favorable policies for IT services, such as preferential tax treatments and
credit support.
Under
rules and regulations promulgated by various Chinese government agencies, enterprises that have met specified criteria and are
recognized as software enterprises by the relevant government authorities in China are entitled to preferential treatment, including
financing support, preferential tax rates, export incentives, discretion and flexibility in determining employees’ welfare
benefits and remuneration. Software enterprise qualifications are subject to annual examination. Enterprises that fail to meet
the annual examination standards will lose the favorable enterprise income tax treatment. Enterprises exporting software or producing
software products that are registered with the relevant government authorities are also entitled to preferential treatment including
governmental financial support, preferential import, export policies and preferential tax rates.
Companies
in China engaging in information systems integration were used to be required to obtain qualification certificates from the Ministry
of Industry and Information Technology. “Information systems integration” means plan, design, development, implementation,
service and safeguard of computer system and network system. Currently the Company does not engage in information system integration
business, therefore the Company is not required to have such qualification certificates. Companies planning to set up computer
information systems may only retain systems integration companies with appropriate qualification certificates. The qualification
certificate is subject to review every two years and is renewable every four years. In June 2015, the China Information Technology
Industry Federation (CITIF) promulgated the Appraisal Condition for Qualification Grade of Information Systems Integration (Provisional)
to elaborate the conditions for appraising each of the four qualification grades of systems integration companies. Companies applying
for qualification are graded depending on the scale of the work they undertake. The grades range from Grade 1 (highest) to Grade
4 (lowest) in the scale of the work the respective companies can undertake.
In
2009, the Ministry of Commerce and the Ministry of Industry and Information Technology jointly promulgated a rule aiming to protect
a fair competition environment in the PRC service outsourcing industry. This rule requires that each of the domestic enterprises
which provides IT and technological BPO services and each of its shareholders, directors, supervisors, managers and employees
should not violate the service outsourcing contract to disclose, use or allow others to use the confidential information of its
customer. Such enterprises are also required to establish an information protection system and take various measures to protect
customers’ confidential information, including causing their employees and third parties who have access to customers’
confidential information to sign confidentiality agreements and or non-competition agreements.
Regulations
Related to Labor and Social Security
Pursuant
to the Labor Law, promulgated by National People’s Congress in January 1995, and the Labor Contract Law, promulgated by
Standing Committee of the National People’s Congress in June 2007 and amended in December 2012, employers must execute written
labor contracts with full-time employees. If an employer fails to enter into a written employment contract with an employee within
one year from the date on which the employment relationship is established, the employer must rectify the situation by entering
into a written employment contract with the employee and pay the employee twice the employee’s salary for the period from
the day following the lapse of one month from the date of establishment of the employment relationship to the day prior to the
execution of the written employment contract. All employers must comply with local minimum wage standards. Violation of the Labor
Law and the Labor Contract Law may result in the imposition of fines and other administrative and criminal liability in the case
of serious violation.
On
December 28, 2012, the PRC Labor Contract Law was amended with effect on July 1, 2013 to impose more stringent requirements on
labor dispatch. Under such law, dispatched workers are entitled to pay equal to that of full-time employees for equal work, but
the number of dispatched workers that an employer hires may not exceed a certain percentage of its total number of employees as
determined by the labor administrative department of the State Council. Additionally, dispatched workers are only permitted to
engage in temporary, auxiliary or substitute work. According to the Interim Provisions on Labor Dispatching promulgated by the
Ministry of Human Resources and Social Security on January 24, 2014, which became effective on March 1, 2014, the number of dispatched
workers hired by an employer shall not exceed 10% of the total number of its employees (including both directly hired employees
and dispatched workers). The Interim Provisions on Labor Dispatching require employers which are not in compliance with the PRC
Labor Contract Law in this regard to reduce the number of its dispatched workers to below 10% of the total number of its employees
prior to March 1, 2016. In addition, an employer is not permitted to hire any new dispatched worker until the number of its dispatched
workers has been reduced to below 10% of the total number of its employees.
Enterprises
in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance
funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and
a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages
of salaries of the employees as specified by the local government from time to time at locations where they operate their businesses
or where they are located. According to the Social Insurance Law, an employer that fails to make social insurance contributions
may be ordered to rectify the noncompliance and pay the required contributions within a stipulated deadline and be subject to
a late fee of up to 0.05% or 0.2% per day, as the case may be. If the employer still fails to rectify the failure to make social
insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three times the amount
overdue. According to the Regulations on Management of Housing Fund, an enterprise that fails to make housing fund contributions
may be ordered to rectify the noncompliance and pay the required contributions within a stipulated deadline; otherwise, an application
may be made to a local court for compulsory enforcement. Our PRC operating entities have not made adequate employee benefit payments
and we may be required to make up the contributions for these plans as well as to pay late fees and fines. See “Risks Related
to Doing Business in China--Failure to make adequate contributions to various mandatory social security plans as required by PRC
regulations may subject us to penalties”.
Regulations
on Intellectual Property Rights
The
PRC Copyright Law, as amended, together with various regulations and rules promulgated by the State Council and the National Copyright
Administration, protect software copyright in China. These laws and regulations establish a voluntary registration system for
software copyrights administered by the Copyright Protection Center of China. Unlike patent and trademark registration, copyrighted
software does not require registration for protection. Although such registration is not mandatory under PRC law, software copyright
owners are encouraged to go through the registration process and registered software may receive better protection. The PRC Trademark
Law, as amended, together with its implementation rules, protect registered trademarks. The Trademark Office of the State Administration
for Industry and Commerce handles trademark registrations and grants a renewable protection term of 10 years to registered trademarks.
Regulation
of Foreign Currency Exchange and Dividend Distribution
Foreign
Currency Exchange.
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration
Regulations, most recently amended in August 2008. Payments of current account items, such as profit distributions and trade and
service-related foreign exchange transactions, can usually be made in foreign currencies without prior approval from the State
Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. By contrast, approval from or
registration with appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans.
On
March 30, 2015, SAFE issued the Circular of the State Administration of Foreign Exchange on Reforming the Management Approach
regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or SAFE Circular 19. Pursuant to SAFE Circular
19, the foreign exchange capital of foreign-invested enterprises is subject to the discretional foreign exchange settlement, which
means the foreign exchange capital in the capital account of foreign-invested enterprises upon the confirmation of rights and
interests of monetary contribution by the local foreign exchange bureau (or the book-entry registration of monetary contribution
by the banks) may be settled at the banks based on the actual operation needs of the enterprises. The proportion of discretionary
settlement of foreign exchange capital of foreign-invested enterprises is currently 100%. SAFE can adjust such proportion in due
time based on the circumstances of international balance of payments.
The
dividends paid by the subsidiaries to its shareholder are deemed shareholder income and are taxable in China. Pursuant to the
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may
purchase or remit foreign exchange, subject to a cap approved by SAFE, for settlement of current account transactions without
the approval of SAFE. Foreign exchange transactions under the capital account are still subject to limitations and require approvals
from, or registration with, SAFE and other relevant PRC governmental authorities.
Dividend
Distribution.
The principal regulations governing the distribution of dividends by foreign holding companies include the Company
Law of the PRC (1993), as amended in 2013, the Foreign Investment assets or interests to a SPV, but failed to complete foreign
exchange registration of overseas investments as required prior Enterprise Law (1986), as amended in 2016, and the Administrative
Rules under the Foreign Investment Enterprise Law (1990), as amended in 2001 and 2014 respectively.
Under
these regulations, wholly foreign-owned investment enterprises in China may pay dividends only out of their retained profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned investment enterprises
in China are required to allocate at least 10% of their respective retained profits each year, if any, to fund certain reserve
funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable
as cash dividends, and a wholly foreign-owned enterprise is not permitted to distribute any profits until losses from prior fiscal
years have been offset.
Circular
37
. On July 4, 2014, SAFE issued Circular 37, which became effective as of July 4, 2014. According to Circular 37, PRC residents
shall apply to SAFE and its branches for going through the procedures for foreign exchange registration of overseas investments
before contributing the domestic assets or interests to a SPV. An amendment to registration or filing with the local SAFE branch
by such PRC resident is also required if the registered overseas SPV’s basic information such as domestic individual resident
shareholder, name, operating period, or major events such as domestic individual resident capital increase, capital reduction,
share transfer or exchange, merger or division has changed. Although the change of overseas funds raised by overseas SPV, overseas
investment exercised by overseas SPV and non-cross-border capital flow are not included in Circular 37, we may be required to
make foreign exchange registration if required by SAFE and its branches.
Moreover,
Circular 37 applies retroactively. As a result, PRC residents who have contributed domestic to implementation of Circular 37,
are required to send a letter to SAFE and its branches for explanation. Under the relevant rules, failure to comply with the registration
procedures set forth in Circular 37 may result in receiving a warning from SAFE and its branches, and may result in a fine of
up to RMB 300,000 for an organization or up to RMB 50,000 for an individual. In the event of failing to register, if capital outflow
occurred, a fine up to 30% of the illegal amount may be assessed. PRC residents who control our company are required to register
with SAFE in connection with their investments in us. If we use our equity interest to purchase the assets or equity interest
of a PRC company owned by PRC residents in the future, such PRC residents will be subject to the registration procedures described
in Circular 37.
New
M&A Regulations and Overseas Listings
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, CSRC and SAFE, jointly
issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which
became effective on September 8, 2006 and was amended on June 22, 2009. This New M&A Rule, among other things, includes provisions
that purport to require that an offshore special purpose vehicle 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 CSRC prior to the listing
and trading of such special purpose vehicle’s securities on an overseas stock exchange.
On
September 21, 2006, 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. 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.
Our
PRC counsel has advised us that, based on their understanding of the current PRC laws and regulations, that the corporate structure
of the Group Companies shall not be deemed as “a foreign investor’s merger and acquisition of a domestic enterprise”
as specified in the Article 2 of the New M&A Rule, so the Company is not required to obtain approval from the CSRC for listing
and trading of its shares. However, uncertainties still exist as to how the New M&A Rule will be interpreted and implemented
and our opinion stated above is subject to any new laws, rules and regulations or detailed implementations and interpretations
in any form relating to the New M&A Rule.
Regulations
on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC subsidiary
An
offshore company may invest equity in a PRC company, which will become the PRC subsidiary of the offshore holding company after
investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested
enterprise in China, which include the Wholly Foreign Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law,
the Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing
rules; the Administrative Provisions on Foreign Exchange in Domestic Direct Investment by Foreign Investors; and the Notice of
the State Administration on Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct
Investment. Under the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested enterprise
is subject to the prior approval by the original approval authority of its establishment. In addition, the increase of registered
capital and total investment amount shall both be registered with SAIC and SAFE. Shareholder loans made by offshore parent holding
companies to their PRC subsidiary are regarded as foreign debts in China for regulatory purpose, which is subject to a number
of PRC laws and regulations, including the PRC Foreign Exchange Administration Regulations, the Interim Measures on Administration
on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts and its implementation rules, and the
Administration Rules on the Settlement, Sale and Payment of Foreign Exchange. Under these regulations, the shareholder loans made
by offshore parent holding companies to their PRC subsidiary shall be registered with SAFE. Furthermore, the total amount of foreign
debts that can be borrowed by such PRC subsidiary, including any shareholder loans, shall not exceed the difference between the
total investment amount and the registered capital amount of the PRC subsidiary, both of which are subject to the governmental
approval.
C.
Our Structure
See
“
Item 4. Information on the Company
– A. History and Development of the
Company.”
Item
4A. UNRESOLVED STAFF COMMENTS
Not
applicable.
Item
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You
should read the following discussion and analysis of our financial condition and results of operations in conjunction with our
consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially
from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk
Factors” and elsewhere in this Annual Report.
Overview
Powerbridge
Technologies Co., Ltd. is a company that was established under the laws of the Cayman Islands on July 27, 2018 as a holding company.
Mr.
Ban Lor, our Chairman of the Board, President, and CEO, together with his brother, Mr. Stewart Lor, our CFO are the Controlling
Shareholders of the Company holding 92.13% of the outstanding shares prior to the IPO.
We
are a provider of software application and technology solutions and services to corporate and government customers engaged in
global trade. All of our customers are located in China. We currently generate most of our revenues from application development
services, which represent 86.5% and 89.5% of total revenue in fiscal 2018 and 2017, respectively. We also generate revenue from
consulting and technical support services, which represent 10.3% and 6.6% of our revenue in fiscal 2018 and 2017, respectively.
Further, we also earn subscription service revenue from customers accessing our SaaS. For the years ended December 31, 2018 and
2017, our revenues were approximately $23.2 million and $21.6 million, respectively.
Reorganization
For
the purpose of the IPO and listing on the NASDAQ Capital market, a reorganization of our legal structure was completed on August
27, 2018 after the 2018 Reverse Split (as defined below) and before the 2019 Reverse Split (as defined below). The reorganization
involved the incorporation of Powerbridge, a Cayman Islands holding company, and its wholly owned subsidiary, Powerbridge HK,
a holding company incorporated on July 27, 2018 under the laws of Hong Kong; and the transfer of all equity ownership of Powerbridge
Zhuhai to Powerbridge HK from the former shareholders of Powerbridge Zhuhai through an investment holding company. In consideration
of the transfer, we issued 11,508,747 (pre-2018 Reverse Split 115,087,470 ordinary shares, par value $0.0001 per share) ordinary
shares, par value $0.001 per share, to the former shareholders of Powerbridge Zhuhai.
Prior
to the reorganization, Powerbridge Zhuhai’s equity interests were held by the former shareholders through an investment
holding company. The Controlling Shareholders owned 84.9% of equity interest of Powerbridge Zhuhai. Powerbridge Zhuhai was incorporated
on October 30, 1997 in Zhuhai, Guangdong province under the laws of PRC. Powerbridge Beijing, a company conducting engineering
and IT research and development activities, was incorporated on September 28, 2017 in Beijing under the laws of PRC, with Powerbridge
Zhuhai owning 55% and Mr. Tianfei Feng owning 45% of equity interest. Since inception, Powerbridge Zhuhai and Mr. Tianfei Feng
have only made nominal investments in Powerbridge Beijing and no substantial business operations have occurred; as a result, Powerbridge
Zhuhai and Mr. Tianfei Feng agreed to deregister the entity. Mr. Tianfei Feng later became the Company’s Chief Research
and Development Officer and the technology research and development activities originally conducted in Powerbridge Beijing are
now conducted through the Beijing branch of Powerbridge Zhuhai. Powerbridge Beijing was deregistered on October 25, 2018.
On
August 7, 2018, the former shareholders of Powerbridge Zhuhai transferred their 100% ownership interest in Powerbridge Zhuhai
to Powerbridge HK, which is 100% owned by Powerbridge. After the reorganization, we own 100% equity interest of Powerbridge HK
and Powerbridge Zhuhai. All shareholders have the same ownership interest in Powerbridge as in Powerbridge Zhuhai prior to the
reorganization.
Since
our businesses are effectively controlled by the same group of the shareholders before and after the reorganization, they are
considered under common control. The above mentioned transactions were accounted for as a recapitalization. The consolidation
of the Company and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned
transactions had become effective as of the beginning of the first period presented in the consolidated financial statements.
Reverse
Split
Our
original authorized number of Ordinary Shares was 500,000,000 shares with a par value of $0.0001 per share. On August 18, 2018,
in order to optimize the Company’s share capital structure, our board of directors approved a reverse stock split of the
Company’s authorized number of shares at a ratio of 10-1 (the “2018 Reverse Split”). After the 2018 Reverse
Split, our authorized number of shares became 50,000,000 shares with par value of $0.001 per share.
On
February 10, 2019, our board of directors approved another reverse stock split of the Company’s authorized number of shares
at a ratio of 0.6-1 (the “2019 Reverse Split”). After the 2019 Reverse Split, our authorized number of Ordinary Shares
became 30,000,000 shares with par value of $0.00166667 per share and the 11,508,747 shares issued and outstanding became 6,905,248
Ordinary Shares. The Company believes it is appropriate to reflect these share issuances as nominal share issuance on a retroactive
basis similar to stock split pursuant to ASC 260. The Company has retroactively adjusted all shares and per share data for all
the periods presented.
Completion
of Initial Public Offering
On
April 4, 2019, the Company consummated its IPO of 1,750,000 Ordinary Shares at a price of $5.00 per share. The gross proceeds
from IPO was approximately $8.8 million. Immediately following the consummation of the IPO, there were an aggregate of 8,655,248
Ordinary Shares issued and outstanding. As a result of the IPO, the Ordinary Shares now trade on the Nasdaq Capital Market under
the symbol “PBTS.”
Key
Factors that Affect Operating Results
We
currently derive a majority of revenues from our application development services, consulting and technical support services,
and subscription services. We intend to continually enhance our services and cross-sell new services to our existing customers
and acquire new customers by increasing our market penetration with a deeper market coverage and a broader geographical reach.
Our ability to maintain and expand our customer base with our application development services significantly affects our operating
results.
We
intend to expand the scope of our offerings to service existing customers and acquire new customers by continually making significant
investments in R&D as well as sales marketing activities to increase our subscription revenue and profit. Our ability to drive
increased customer adoption and usage of our SaaS services affects our operating results.
Our
business of providing global trade software application and technology services requires highly skilled professionals with specialized
domain knowledge and technology expertise in order to develop and perform the services offered to our customers. Our ability to
recruit, train, develop and retain our professionals with the skills and qualifications necessary to fulfill the needs of our
existing and new customers has a significant effect on our operating results.
We
intend to pursue strategic acquisitions and investments in selective technologies and businesses that will enhance our technology
capabilities, expand our offerings and increase our market penetration. We believe our strategic acquisition and investment strategy
is critical for us to accelerate our growth and strengthen our competitive position. Our ability to identify and execute strategic
acquisitions and investments will have an effect on our operating results.
Results
of Operations
For
the years ended December 31, 2018 and 2017
The
following table summarizes the results of our operations for the years ended December 31, 2018 and 2017, respectively, and provides
information regarding the dollar and percentage increase or (decrease) during such periods.
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Application development services
|
|
$
|
20,037,861
|
|
|
$
|
19,362,813
|
|
|
$
|
675,048
|
|
|
|
3.5
|
%
|
Consulting and technical support services
|
|
|
2,390,948
|
|
|
|
1,418,110
|
|
|
|
972,838
|
|
|
|
68.6
|
%
|
Subscription services
|
|
|
723,458
|
|
|
|
847,631
|
|
|
|
(124,173
|
)
|
|
|
(14.6
|
)%
|
Total revenue
|
|
|
23,152,267
|
|
|
|
21,628,554
|
|
|
|
1,523,713
|
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application development services
|
|
|
14,140,094
|
|
|
|
13,206,606
|
|
|
|
933,488
|
|
|
|
7.1
|
%
|
Consulting and technical support services
|
|
|
1,093,631
|
|
|
|
236,154
|
|
|
|
857,477
|
|
|
|
363.1
|
%
|
Subscription services
|
|
|
84,936
|
|
|
|
97,069
|
|
|
|
(12,133
|
)
|
|
|
(12.5
|
)%
|
Total cost of revenue
|
|
|
15,318,661
|
|
|
|
13,539,829
|
|
|
|
1,778,832
|
|
|
|
13.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
7,833,606
|
|
|
|
8,088,725
|
|
|
|
(255,119
|
)
|
|
|
(3.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
2,144,588
|
|
|
|
1,614,237
|
|
|
|
530,351
|
|
|
|
32.9
|
%
|
General and administrative
|
|
|
2,684,183
|
|
|
|
1,462,901
|
|
|
|
1,221,282
|
|
|
|
83.5
|
%
|
Research and development
|
|
|
1,992,228
|
|
|
|
1,151,985
|
|
|
|
840,243
|
|
|
|
72.9
|
%
|
Total operating expenses
|
|
|
6,820,999
|
|
|
|
4,229,123
|
|
|
|
2,591,876
|
|
|
|
61.3
|
%
|
OPERATING INCOME FROM OPERATIONS
|
|
|
1,012,607
|
|
|
|
3,859,602
|
|
|
|
(2,846,995
|
)
|
|
|
(73.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME
|
|
|
584,209
|
|
|
|
553,475
|
|
|
|
30,734
|
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
1,596,816
|
|
|
|
4,413,077
|
|
|
|
(2,816,261
|
)
|
|
|
(63.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
43,190
|
|
|
|
434,882
|
|
|
|
(391,692
|
)
|
|
|
(90.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
1,553,626
|
|
|
$
|
3,978,195
|
|
|
$
|
(2,424,569
|
)
|
|
|
(60.9
|
)%
|
Revenues
We
derive revenues from three sources: (1) revenue from application development services, (2) revenue from consulting and technical
support services, and (3) revenue from subscription services. Please refer to the Revenue portion of the table above for the dollar
and percentage increase or (decrease) of our revenues by our service lines ended December 31, 2018 and 2017, respectively.
The
Company is focusing on developing global trade applications and solutions equipped with the Company’s new technology in
SaaS platform, Big Data, AI and IoT applications and BaaS platform. The Company believes these new technology development is the
key driver for the Company’s future growth. In fiscal 2018, our revenue related to deploying our new technology including
SaaS and big data analysis services accounted for 17.4% of our total revenue (or approximately $4.0 million) compared to only
a few related revenue in fiscal 2017.
For
the year ended December 31, 2018, our total revenue was approximately $23.2 million as compared to $21.6 million for the year
ended December 31, 2017. The Company’s total revenue increased by approximately $1.5 million, or 7.0%. The overall increase
in total revenue was primarily attributable to $1.0 million increase in revenue from consulting and technical support services.
Revenue
from application development services
The
Company’s application development service contracts are primarily on a fixed-price basis, which require the Company to perform
services including project planning, project design, application development and system integration based on customers’
specific needs. These services also require significant production and customization. Revenue from application development service
is recognized as the service is performed using the percentage of completion method of accounting.
For
the year ended December 31, 2018, our application development service revenue was approximately $20.0 million as compared to $19.4
million for the year ended December 31, 2017. The slight increase in application development service revenue was approximately
$0.7 million or 3.5%. For the year ended December 31, 2018, in some application development service arrangements for big data
projects, the Company sold certain IT equipment on standalone basis prior to the delivery of the services. The related revenue
of approximately $8.1 million was included in the application development service revenue for year ended December 31, 2018. Overall,
in fiscal 2018, 15.6% (or approximately $3.1 million) of revenue from application development service were related to SaaS platform
development and big data analysis applications and the Company expects continuous growth for these services.
Revenue
from consulting and Technical Support Services
Revenue
from consulting and technical support services is primarily comprised of fixed-fee contracts, which require the Company to provide
professional consulting and technical support services over contract terms beginning on the commencement date of each contract,
which is the date our service is made available to customers. Revenue is recognized on a straight-line basis as earned over the
terms of the respective contracts, which is typically 12 to 24 months.
For the year ended December
31, 2018, our consulting and technical support service revenue was approximately $2.4 million as compared to $1.4 million for
the year ended December 31, 2017, representing an increase of $1.0 million or 68.6%, which was due to the increased customer demands
for our SaaS and trading platform services. In addition, by providing application development services, we gain extensive understanding
and knowledge of each customer’s unique business needs, often resulting in opportunities for us to cross-sell our consulting
and technical support services.
Revenue
from subscription services
Revenue
from subscription services is comprised of subscription fees from customers accessing the Company’s SaaS applications. The
Company’s monthly or quarterly billing to customer is on the basis of number of uses by the customers. Revenue from subscription
services is recognized in the period in which they are earned.
For
the year ended December 31, 2018, our subscription service revenue was approximately $0.7 million as compared to $0.8 million
for the year ended December 31, 2017. We introduced our SaaS services in fiscal 2016 and continue to expand the scope of our services
and enhance the features and functionalities of our applications and improve our marketing efforts, we expect our subscription
service revenue will grow with an expanded offering and increased market awareness.
Cost
of Revenues
Our
cost of revenues mainly consists of compensation benefit expenses for our professionals, material cost and travel expenses related
to revenue contracts. Please refer to the Cost of Revenue portion of the table above for the dollar and percentage increase or
(decrease) of our cost of revenues ended December 31, 2018 and 2017, respectively.
Our
cost of revenues increased by $1.8 million or 13.1% to approximately $15.3 million in fiscal 2018 from approximately $13.5 million
in fiscal 2017, which was mainly attributable to an increase of $0.9 million in both of cost of revenue from application development
services and cost of consulting and technical support services.
Our
cost of revenue from application development services was approximately $14.1 million in fiscal 2018 as compared to $13.2 million
in fiscal 2017, primarily as a result of more headcount, expanded office facilities and increase of depreciation and amortization
expenses to enable and match the growth of our business.
Our
cost of revenue from consulting and technical support services was approximately $1.1 million in fiscal 2018, representing an
increase of $0.9 million from $0.2 million in fiscal 2017. The increase was primarily due to more headcount in the expanded technical
service team to support the related growth in revenue.
Our
cost of revenue from subscription services was approximately $0.1 million in both fiscal 2018 and 2017. We have established a
stable SaaS development and service team and expect to expand the scope of our services and enhance the features and functionalities
of our applications and improve our marketing efforts.
Gross
profit
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
GROSS PROFIT
|
|
Gross
Profit
|
|
|
Gross Margin
|
|
|
Gross
Profit
|
|
|
Gross Margin
|
|
Application development services
|
|
$
|
5,897,767
|
|
|
|
29.4
|
%
|
|
$
|
6,156,207
|
|
|
|
31.8
|
%
|
Consulting and technical support services
|
|
|
1,297,317
|
|
|
|
54.3
|
%
|
|
|
1,181,956
|
|
|
|
83.3
|
%
|
Subscription services
|
|
|
638,522
|
|
|
|
88.3
|
%
|
|
|
750,562
|
|
|
|
88.5
|
%
|
Total gross profits
|
|
$
|
7,833,606
|
|
|
|
33.8
|
%
|
|
$
|
8,088,725
|
|
|
|
37.4
|
%
|
Our
gross profits decreased by $0.3 million or 3.2% from $8.1 million in 2017 to $7.8 million in fiscal 2018. Gross margin as a percent
of overall revenue for fiscal 2018 and 2017 was 33.8% and 37.4%, respectively. The decrease in gross margin was primarily attributable
to recruiting more experienced software developers and technical support consultants to expand our SaaS and big data related business.
Operating
Expenses
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
% Change
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
$
|
2,144,588
|
|
|
$
|
1,614,237
|
|
|
$
|
530,351
|
|
|
|
32.9
|
%
|
General and administrative
|
|
|
2,684,183
|
|
|
|
1,462,901
|
|
|
|
1,221,282
|
|
|
|
83.5
|
%
|
Research and development
|
|
|
1,992,228
|
|
|
|
1,151,985
|
|
|
|
840,243
|
|
|
|
72.9
|
%
|
Total operating expenses
|
|
$
|
6,820,999
|
|
|
$
|
4,229,123
|
|
|
$
|
2,591,876
|
|
|
|
61.3
|
%
|
Our
operating expenses consist of selling and marketing, general and administrative, and research and development (“R&D”)
expenses. Operating expenses increased by approximately $2.6 million, or 61.3%, from approximately $4.2 million for the year ended
December 31, 2017 to $6.8 million for the year ended December 31, 2018. The increase in our operating expenses was primarily due
to $1.2 million increase in general and administrative expense, $0.8 million increase in R&D expense and $0.5 million increase
in selling and marketing expense.
From
December 31, 2017 to December 31, 2018, the Company had an increase of 131 or 78% in our total number of employees, of which an
increase of 63 or 131% are in research and development, an increase of 21 or 70% are in sales and marketing, an increase of 41
or 60% are in technical and customer services, and an increase of 6 or 27% are in general and administration. We had increased
our personnel headcounts in fiscal year 2018 and resulted in significant increase in operating expenses in anticipation for the
expected growth.
Selling
and marketing expenses primarily consisted of salary and compensation expenses relating to our sales and marketing personnel,
and also included entertainment, travel and transportation, and other expenses relating to our sales and marketing activities.
Sales and marketing expenses increased by $0.5 million or 32.9% from $1.6 million in fiscal 2017 to $2.1 million in fiscal 2018.
The increase was primarily attributable to our expansion of the pre-sales, sales and marketing teams to support our operations.
General
and administrative expenses primarily consisted of salary and compensation expenses relating to our accounting, human resources
and executive office personnel, and included rental expenses, depreciation and amortization expenses, office overhead, professional
service fees and travel and transportation costs. General and administrative expenses increased by $1.2 million or 83.5% from
approximately $1.5 million in fiscal 2017 to approximately $2.7 million in fiscal 2018, substantially all of which is attributable
to the increasing headcount and related staff costs as well as an increase of $0.3 million in bad debt provision. As a percentage
of revenues, general and administrative expenses were 11.6% and 6.8% of our total revenue in fiscal 2018 and 2017, respectively.
R&D
expenses primarily consisted of compensation and benefit expenses relating to our R&D personnel as well as office overhead
and other expenses relating to our R&D activities. Our R&D expenses increased by $0.8 million from $1.2 million in fiscal
2017 to $2.0 million in fiscal 2018, representing 8.6% and 5.3% of our total revenues for fiscal 2018 and 2017, respectively.
We expect to continue to invest in R&D. We expect that our ability to effectively utilize our R&D capabilities significantly
affect our results of operations in the future.
Other
Income (Expense)
Other
income (expense) primarily consists of government subsidy income, interest income net of interest expense and other expenses.
Our net other income was approximately $0.6 million in both fiscal 2018 and fiscal 2017.
Provision
for Income Taxes
Our provision for income
tax was approximately $0.1 million in fiscal 2018, decreased by $0.3 million comparing to approximately $0.4 million in fiscal
2017 due to less income before taxes in fiscal 2018. Under the Income Tax Laws of the PRC, companies are generally subject to
income tax at a rate of 25%. However, we obtained the “high-tech enterprise” tax status in 2015, which reduced its
statutory income tax rate to 15%. In fiscal 2017, we obtained the PRC Software Association’s “Key Software Enterprise”
status and further reduced our income tax rate to 10% in fiscal 2017. For fiscal 2018, the provision for income tax is calculated
based on a reduced statutory income rate of 15%. Due to significant R&D efforts, the Company received more R&D tax credit
in fiscal 2018, which reduced the Company’s effective tax rate to 2.7% in fiscal 2018.
Net
Income
As
a result of the foregoing, net income decreased by approximately $2.4 million, or 60.9%, to approximately $1.6 million for fiscal
2018, from approximately $4.0 million for fiscal 2017.
Other
comprehensive income
Foreign
currency translation adjustments amounted to a loss of approximately $0.3 million and a gain of $0.2 million for the years ended
December 31, 2018 and 2017, respectively. The balance sheet amounts with the exception of equity as of December 31, 2018 were
translated at RMB6.8755 to USD1.00 as compared to RMB6.5074 to USD1.00 as of December 31, 2017. The equity accounts were stated
at their historical rate. The average translation rates applied to the income statements accounts for the years ended December
31, 2018 and 2017 were RMB6.6090 to USD1.00 and RMB6.7578 to USD1.00, respectively. The change in the value of the RMB relative
to the U.S. dollar may affect our financial results reported in the U.S, dollar terms without giving effect to any underlying
change in our business or results of operation.
For
the years ended December 31, 2017 and 2016
The
following table summarizes the results of our operations for the years ended December 31, 2017 and 2016, respectively, and provides
information regarding the dollar and percentage increase or (decrease) during such periods.
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Application development services
|
|
$
|
19,362,813
|
|
|
$
|
19,133,676
|
|
|
$
|
229,137
|
|
|
|
1.2
|
%
|
Consulting and technical support services
|
|
|
1,418,110
|
|
|
|
1,095,457
|
|
|
|
322,653
|
|
|
|
29.5
|
%
|
Subscription services
|
|
|
847,631
|
|
|
|
945,668
|
|
|
|
(98,037
|
)
|
|
|
(10.4
|
)%
|
Total revenue
|
|
|
21,628,554
|
|
|
|
21,174,801
|
|
|
|
453,753
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application development services
|
|
|
13,206,606
|
|
|
|
12,865,280
|
|
|
|
341,326
|
|
|
|
2.7
|
%
|
Consulting and technical support services
|
|
|
236,154
|
|
|
|
361,294
|
|
|
|
(125,140
|
)
|
|
|
(34.6
|
)%
|
Subscription services
|
|
|
97,069
|
|
|
|
419,995
|
|
|
|
(322,926
|
)
|
|
|
(76.9
|
)%
|
Total cost of revenue
|
|
|
13,539,829
|
|
|
|
13,646,569
|
|
|
|
(106,740
|
)
|
|
|
(0.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
8,088,725
|
|
|
|
7,528,232
|
|
|
|
560,493
|
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
1,614,237
|
|
|
|
1,516,126
|
|
|
|
98,111
|
|
|
|
6.5
|
%
|
General and administrative
|
|
|
1,462,901
|
|
|
|
1,324,485
|
|
|
|
138,416
|
|
|
|
10.5
|
%
|
Research and development
|
|
|
1,151,985
|
|
|
|
947,506
|
|
|
|
204,479
|
|
|
|
21.6
|
%
|
Total operating expenses
|
|
|
4,229,123
|
|
|
|
3,788,117
|
|
|
|
441,006
|
|
|
|
11.6
|
%
|
OPERATING INCOME FROM OPERATIONS
|
|
|
3,859,602
|
|
|
|
3,740,115
|
|
|
|
119,487
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME
|
|
|
553,475
|
|
|
|
250,249
|
|
|
|
303,226
|
|
|
|
121.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
4,413,077
|
|
|
|
3,990,364
|
|
|
|
422,713
|
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
434,882
|
|
|
|
536,387
|
|
|
|
(101,505
|
)
|
|
|
(18.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
3,978,195
|
|
|
$
|
3,453,977
|
|
|
$
|
524,218
|
|
|
|
15.2
|
%
|
Revenues
For
the year ended December 31, 2017, our total revenue was approximately $21.6 million as compared to $21.2 million for the year
ended December 31, 2016. Total revenue increased by approximately $0.5 million, or 2.1%. The overall increase in total revenue
was primarily attributable to $0.3 million increase in revenue from consulting and technical support services and $0.2 million
increase in revenue from customized application development services, but offset by 10.4% decrease in subscription revenue.
Revenue
from application development services
For
the year ended December 31, 2017, our application development service revenue was approximately $19.4 million as compared to $19.1
million for the year ended December 31, 2016. The increase in application development service revenue was approximately $0.2 million
or 1.2%, which was primarily because of the stable demand from our corporate and government customers.
Revenue
from consulting and Technical Support Services
For
the year ended December 31, 2017, our consulting and technical support service revenue was approximately $1.4 million as compared
to $1.1 million for the year ended December 31, 2016, representing an increase of $0.3 million or 29.5%, which was due to the
increased number of consulting and technical support service contracts from 390 service contracts in fiscal 2016 to 475 service
contract in fiscal 2017. In addition, by providing application development services, we gain extensive understanding and knowledge
of each customer’s unique business needs, often resulting in opportunities for us to cross-sell our consulting and technical
support services.
Revenue
from subscription services
For
the year ended December 31, 2017, our subscription service revenue was approximately $0.8 million as compared to $0.9 million
for the year ended December 31, 2016. The decrease in subscription revenue was approximately $0.1 million, or 10%. We introduced
our SaaS services in fiscal 2016 and focus on improving the functionality our SaaS applications in fiscal 2017 with limited marketing
efforts, which resulted in lower revenue in fiscal 2017. As we continue to expand the scope of our services and enhance the features
and functionalities of our applications and improve our marketing efforts, we expect our subscription service revenue will grow
with an expanded offering and increased market awareness.
Cost
of Revenues
Our
cost of revenues decreased by $0.1 million or 0.8% to approximately $13.5 million in fiscal 2017 from approximately $13.6 million
in fiscal 2016, which was mainly attributable to a decrease of $0.1 million in cost of revenue from consulting and technical support
services and a decrease of $0.3 million cost of revenue from subscription services, offset by an increase of $0.3 million cost
of revenue from application development services.
Our
cost of revenue from application development services was approximately $13.2 million in fiscal 2017 as compared to $12.9 million
in fiscal 2016, primarily as a result of more headcount, expanded office facilities and increase of depreciation and amortization
expenses to enable and match the growth of our business.
Our
cost of revenue from consulting and technical support services was approximately $0.2 million in fiscal 2017, representing a decrease
of $0.1 million from $0.4 million in fiscal 2016. The decrease was primarily due to improved operational efficiency and less material
cost incurred for the consulting and technical support contracts.
Our
cost of revenue from subscription services was approximately $0.1 million in fiscal 2017, representing a decrease of $0.3 million
from $0.4 million in fiscal 2016. We outsourced certain workload of our services to a third party provider in fiscal year 2016,
while we fully utilized our own staff instead of outsourcing in providing our services in fiscal 2017, which resulted in less
subcontract cost incurred.
Gross
profit
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
GROSS PROFIT
|
|
Gross Profit
|
|
|
Gross Margin
|
|
|
Gross Profit
|
|
|
Gross Margin
|
|
Application development services
|
|
$
|
6,156,207
|
|
|
|
31.8
|
%
|
|
$
|
6,268,396
|
|
|
|
32.8
|
%
|
Consulting and technical support services
|
|
|
1,181,956
|
|
|
|
83.3
|
%
|
|
|
734,163
|
|
|
|
67.0
|
%
|
Subscription services
|
|
|
750,562
|
|
|
|
88.5
|
%
|
|
|
525,673
|
|
|
|
55.6
|
%
|
Total gross profits
|
|
$
|
8,088,725
|
|
|
|
37.4
|
%
|
|
$
|
7,528,232
|
|
|
|
35.6
|
%
|
Our
gross profits increased by $0.6 million or 7.4% from $7.5 million in 2016 to $8.1 million in fiscal 2017. Gross margin as a percent
of overall revenue for fiscal 2017 and 2016 was 37.4% and 35.6%, respectively. The increase in gross margin was primarily attributable
to the improved development efficiency and less outsourced subcontract cost in providing our consulting and technical support
services and SaaS services.
Operating
Expenses
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
% Change
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
$
|
1,614,237
|
|
|
$
|
1,516,126
|
|
|
$
|
98,111
|
|
|
|
6.5
|
%
|
General and administrative
|
|
|
1,462,901
|
|
|
|
1,324,485
|
|
|
|
138,416
|
|
|
|
10.5
|
%
|
Research and development
|
|
|
1,151,985
|
|
|
|
947,506
|
|
|
|
204,479
|
|
|
|
21.6
|
%
|
Total operating expenses
|
|
$
|
4,229,123
|
|
|
$
|
3,788,117
|
|
|
$
|
441,006
|
|
|
|
11.6
|
%
|
Our
operating expenses consist of selling and marketing, general and administrative, and R&D expenses. Operating expenses increased
by approximately $0.4 million, or 11.6%, from approximately $3.8 million for the year ended December 31, 2016 to $4.2 million
for the year ended December 31, 2017. The increase in our operating expenses was primarily due to $0.2 million increase in R&D
expense and $0.1 million increase in general and administrative expense.
Sales
and marketing expenses increased by $0.1 million or 6.5% from $1.5 million in fiscal 2016 to $1.6 million in fiscal 2017. The
increase was primarily attributable to our expansion of the pre-sales and marketing teams to support our operations.
General
and administrative expenses increased by $0.1 million or 10.5% from approximately $1.3 million in fiscal 2016 to approximately
$1.5 million in fiscal 2017, substantially all of which is attributable to the increasing headcount and related staff costs. As
a percentage of revenues, general and administrative expenses were 6.8% and 6.3% of our total revenue in fiscal 2017 and 2016,
respectively.
Our
R&D expenses increased by $0.2 million from $0.9 million in fiscal 2016 to $1.2 million in fiscal 2017, representing 5.3%
and 4.5% of our total revenues for fiscal 2017 and 2016, respectively. We expect to continue to invest in R&D. We expect that
our ability to effectively utilize our R&D capabilities significantly affect our results of operations in the future.
Other
Income (Expense)
Our
net other income was approximately $0.6 million in fiscal 2017, an increase of approximately $0.3 million, or approximately 121.2%,
as compared to approximately $0.3 million in fiscal 2016, which was primarily due to $0.3 million increase in value added tax
exemption income and government subsidy income received during fiscal 2017.
Provision
for Income Taxes
Our provision for income
tax was approximately $0.4 million in fiscal 2017, decreased by $0.1 million comparing to approximately $0.5 million in fiscal
2016. Under the Income Tax Laws of the PRC, companies are generally subject to income tax at a rate of 25%. However, we obtained
the “high-tech enterprise” tax status in 2015, which reduced its statutory income tax rate to 15%. In fiscal 2017,
we obtained the PRC Software Association’s “Key Software Enterprise” status and further reduced our income tax
rate to 10% in fiscal 2017, which resulted in lower provision for income taxes in fiscal 2017.
Net
Income
As
a result of the foregoing, net income increased by approximately $0.5 million, or 15.2%, to approximately $4.0 million for fiscal
2017, from approximately $3.5 million for fiscal 2016.
Other
comprehensive income
Foreign
currency translation adjustments amounted to a gain of approximately $0.2 million and $10,000 for the years ended December 31,
2017 and 2016, respectively. The balance sheet amounts with the exception of equity as of December 31, 2017 were translated at
RMB6.5074 to USD1.00 as compared to RMB6.9448 to USD1.00 as of December 31, 2016. The equity accounts were stated at their historical
rate. The average translation rates applied to the income statements accounts for the years ended December 31, 2017 and 2016 were
RMB6.7578 to USD1.00 and RMB6.6441 to USD1.00, respectively. The change in the value of the RMB relative to the U.S. dollar may
affect our financial results reported in the U.S, dollar terms without giving effect to any underlying change in our business
or results of operation.
Liquidity
and Capital Resources
Substantially
all of our operations are conducted in China and all of our revenue, expenses, and cash are denominated in RMB. RMB is subject
to the exchange control regulation in China, and, as a result, we may have difficulty distributing any dividends outside of China
due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars. As of December 31, 2018, cash
of approximately $4.3 million were fully held by the Company and its subsidiary in mainland PRC.
The
Cayman holding company is a holding company with no material operations of its own. We conduct our operations primarily through
our subsidiary in China. As a result, the Company’s ability to pay dividends depends upon dividends paid by our subsidiary. Our
subsidiary in China are permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance
with PRC accounting standards and regulations. Under PRC law, our subsidiary is required to set aside at least 10% of its after-tax
profits each year based on PRC accounting standards, if any, to fund certain statutory reserve funds until such reserve funds
reach 50% of its registered capital. The statutory reserve funds are not distributable as cash dividends. Remittance of dividends
by our subsidiary out of China is subject to examination by the banks designated by SAFE. Our subsidiary has not paid dividends
and will not be able to pay dividends until it generates accumulated profits and meet the requirements for statutory reserve funds.
In addition, we would need to accrue and pay withholding taxes if we were to distribute funds from our subsidiary in China to
us. We do not intend to repatriate such funds in the foreseeable future, as we plan to use existing cash balance in PRC for general
corporate purposes.
In assessing our liquidity,
we monitor and analyze our cash on hand, our ability to generate sufficient revenue sources in the future and our operating and
capital expenditure commitments. As of December 31, 2018, we had cash of approximately $4.3 million. Our current assets were approximately
$22.0 million, and our current liabilities were approximately $21.3 million. For years ended December 31, 2018 and 2017, our operating
cash flow was positive. To support our working capital, on October 8, 2018, Powerbridge Zhuhai entered into an unsecured loan
agreement with Bank of Communication to obtain a loan of $290,888 for a term of one year and at a fixed annual interest rate of
5.4%. On December 3, 2018, Powerbridge Zhuhai entered into an unsecured loan agreement with Dongguan Bank to obtain a loan of
$290,888 for a term of one year and at a fixed annual interest rate of 7.0%. On December 18, 2018, Powerbridge Zhuhai entered
into a loan agreement with Bank of China to obtain a loan of $727,220 for a term of one year and at a fixed annual interest rate
of 5.2%. The bank loan was guaranteed by Mr. Ban Lor and secured by a restricted cash deposit of $109,083 as of December 31, 2018.
Furthermore, on February 1, 2019, Powerbridge Zhuhai entered into a loan agreement with Bank of China to obtain a loan of $436,332
for a term of one year and at a fixed annual interest rate of 4.8%. The bank loan was guaranteed by Mr. Ban Lor and secured by a
restricted cash deposit of $65,450. On April 17, 2019, the Company obtained a line of credit in the maximum amount of $1,454,440
from Bank of Communication for working capital purpose. The line of credit is available for the period from April 17, 2019 to
April 8, 2020. The interest and payment term will be determined at each individual withdraw. On April 19, 2019, the Company withdrew
$683,957 from the line of credit with interest rate of 5.04% and due on April 18, 2020.
We
have historically funded our working capital needs primarily from operations, bank loans, advance payments from customers and
shareholders. Our working capital requirements are affected by the efficiency of our operations, the numerical volume and dollar
value of our revenue contracts, the progress or execution on our customer contracts, and the timing of accounts receivable collections.
Our management believes that current levels of cash and cash flows from operations will be sufficient to meet our anticipated
cash needs for at least the next 12 months from the date of this Annual Report. However, we may need additional cash resources
in the future if we experience changed business conditions or other developments, and may also need additional cash resources
in the future if we wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions.
If it is determined that the cash requirements exceed our amounts of cash on hand, we may seek to issue debt or equity securities
or obtain a credit facility.
The
following summarizes the key components of our cash flows for the years ended December 31, 2018 and 2017.
|
|
For the Years Ended
|
|
|
|
December
31,
|
|
|
|
2018*
|
|
|
2017*
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
2,773,025
|
|
|
$
|
1,332,254
|
|
Net cash used in investing activities
|
|
|
(1,317,831
|
)
|
|
|
(2,221,182
|
)
|
Net cash provided by (used in) financing activities
|
|
|
755,761
|
|
|
|
(530,129
|
)
|
Effect of exchange rate change on cash and restricted cash
|
|
|
(249,345
|
)
|
|
|
(175,873
|
)
|
Net increase (decrease) in cash and restricted cash
|
|
$
|
1,961,610
|
|
|
$
|
(1,243,184
|
)
|
*
|
On
January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flow on a retrospective basis and have applied the changes
to the consolidated statement of cash flows starting from the year ended December 31, 2017.
|
Operating
Activities
Net
cash provided by operating activities was approximately $2.8 million for the year ended December 31, 2018, as compared to approximately
$1.3 million for the same period in 2017. Cash provided by operating activities for the year ended December 31, 2018 mainly consisted
of approximately $1.6 million of net income, the increase of approximately $4.9 million of accounts payable, offset by the increase
of approximately $3.6 million in accounts receivable due to increase of revenue, the payments of approximately $0.8 million of
prepayments, deposits and other assets.
Cash
provided by operating activities for the year ended December 31, 2017 mainly consisted of approximately $4.0 million of net income,
the collection of approximately $0.3 million of prepayments, deposits and other assets, the increase of approximately $4.0 million
of accounts payable, $0.4 million of tax payable, and $0.3 million of deferred revenue offset by the increase of approximately
$7.3 million in accounts receivable due to increase of revenue, and decrease of approximately $0.8 million of advanced payments
from customers.
Our accounts payable balance
significantly increased from approximately $12.1 million as of December 31, 2017 to $16.2 million as of December 31, 2018. The
increase in accounts payable was mainly due to increase purchase from our suppliers and subcontractors for the ongoing projects
with our customers. 53.4% and 67.8% of our accounts payable balances with suppliers are due when the Company received customer
payment on the projects as of December 31, 2018 and 2017, respectively. Based on the long term relationship, we might be able
to slow down payments based on the Company’s working capital. As of December 31, 2018 and 2017, 88.8% and 98.2% of accounts
payable balance were aged within one year, respectively. We have never entered into any long term financing arrangements with
our suppliers.
The
significant account receivable balances as of December 31, 2018 and 2017 was because of the increasing contract volume and contract
progress for certain large contracts with our customers. During fiscal 2018, the Company recognized revenue from 128 major contracts,
increased by 91.0% from 67 major contracts in fiscal 2017.
Most
of large contracts are government related customized application development service contracts. The Company enters into fixed-fee
arrangements in standard multiple-phase customized application development service contracts with government related agencies
and state-owned companies. The billing term can vary depending on each specific project. Generally speaking, the Company bills
the customer 20% to 30% of total fee upon signing the contract, 20% to 30% of total fee upon completion of developing, implementing
and testing the customized applications and the remaining 30% to 50% of total fee is billed after the customer internally approves
the project and signs off the acceptance form. The Company does not specify the payment term in all contracts with customers,
but, in practice, the Company’s billing term with customers are generally within 90 days. For these large government related
customized application development service contracts, the government’s acceptance and payment process requires multiple
levels of government officials’ approvals, including but not limited to approvals from ten national government bureaus at
national level then final approval from local government level. The timing of receiving the final approval and payment might be
longer than the Company’s expectation. The billing terms are typically agreed by the parties at the inception of the contract,
not subsequently negotiated or modified. In most cases, the Company are entitled to payments for the work performed and such payment
are not conditioned on the final acceptance by our customer while under certain contracts with government related agencies and
stated-owned companies, customer acceptance is a condition to final payments. Nevertheless, in practice, the Company tends to
satisfy customers and is willing to perform additional work to receive a final acceptance from customers. Additional performance
is considered inconsequential or perfunctory, because the Company always implements the customized applications at the customers’
sites and complete the testing prior to the customers’ acceptance. From past experience, the Company has never received
rejections from its customers.
The
Company assesses that its government customers, consisting of government related agencies and state owned companies, generally
have good credit-worthiness and believe that these customers have intention and ability to fulfill the payment obligation at the
point of revenue recognition. From past experience, the Company has never experienced any significant losses on collection nor
experienced any significant bad debts from these customers.
The
aging of accounts receivables are as follows:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
0-90 days
|
|
$
|
5,216,095
|
|
|
$
|
4,168,586
|
|
90-180 days
|
|
|
38,256
|
|
|
|
33,092
|
|
180-360 days
|
|
|
196,957
|
|
|
|
47,331
|
|
over one year
|
|
|
329,988
|
|
|
|
325,142
|
|
Sub total
|
|
|
5,781,296
|
|
|
|
4,574,151
|
|
|
|
|
|
|
|
|
|
|
Current (billed accounts receivable within payment terms)
|
|
|
5,216,095
|
|
|
|
4,168,586
|
|
Past due
|
|
|
565,201
|
|
|
|
405,565
|
|
Sub-total billed accounts receivable
|
|
|
5,781,296
|
|
|
|
4,574,151
|
|
Unbilled accounts receivable
|
|
|
10,090,674
|
|
|
|
8,533,199
|
|
Allowance
|
|
|
(392,533
|
)
|
|
|
(36,285
|
)
|
Total accounts receivable, net
|
|
$
|
15,479,437
|
|
|
$
|
13,071,065
|
|
The
Company has never entered into extended payment terms or concessions with any of its customers for the years ended December 31,
2018 and 2017. From past experience, the Company has never had any significant loss in collection of the contract amount. The
significant outstanding accounts balances were mainly related to certain government customers and considered collectable from
the perspective of the customers’ ability to pay. Due to multiple levels of the government approval process for payments,
it could take extra time for us to collect the full proceeds from government customers. As of December 31, 2018 and 2017, the
unbilled accounts receivable balance related to contracts where customer is past due on their billed accounts receivable approximately
amounted to nil and $1.7 million, respectively. With increasing communication with our customers and improved collection efforts,
we believe we are able to successfully collect the balances.
Those
above customers are mainly comprised of large government organizations and related agencies with good credit history. They generally
negotiated to pay us in three or less phases through the contract term and a significant portion (50%) of contract amount usually
is billed in the last phase upon the completion of the related projects. For the year ended December 31, 2018, the Company had
more contract with government and related agency customers and those projects were under progress. As a result, the Company’s
account receivable balance increased to $15.5 million as of December 31, 2018 from $13.1 million as of December 31, 2017. The
average accounts receivable turnover in days for the years ended December 31, 2018 and 2017 was 225 days and 154 days, respectively.
Our
management reviews the accounts receivable on a periodic basis and makes allowances when there is doubt as to the collectability
of individual balances. In evaluating the collectability of individual accounts receivable balances, we consider several factors,
including the age of the balance, the customer’s payment history, and current credit-worthiness, and current economic trends.
Typically, the Company includes unbilled receivables in accounts receivable for contracts on which revenue has been recognized,
but for which the customer has not yet been billed. As of December 31, 2018 and 2017, the unbilled receivable of $10,090,674 and
$8,533,199 were included in accounts receivable, respectively.
As of April 26, 2019,
approximately $2.4 million (or 15.4%) of total accounts receivable as of December 31, 2018 was collected. It represented 28.9%
of billed accounts receivable balance and 8.0% of unbilled accounts receivable balance as of December 31, 2018 were subsequently
collected, respectively.
Investing
Activities
Net
cash used in investing activities was approximately $1.3 million for fiscal 2018, as compared to approximately $2.2 million for
fiscal 2017. Cash used in investing activities for fiscal 2018 was mainly due to approximately $2.2 million spending on capitalized
development costs and purchase of office equipment and furniture, offset by approximately $0.8 million collection on loan to others.
Cash used in investing activities for fiscal 2017 was mainly due to approximately $1.8 million spending for purchase of office
equipment and furniture and $0.4 million investments in loans to others.
Financing
Activities
Net
cash from financing activities was approximately $0.8 million for fiscal 2018, as compared to approximately $0.5 million net cash
used in financing activities for fiscal 2017. Net cash from financing activities for the year ended December 31, 2018 was mainly
due to proceeds from bank loan of $1.6 million offset by repayment of bank loan of $0.2 million and repayment of related party
advance of $0.6 million. Net cash used in financing activities for fiscal 2017 was mainly due to the repayment of related party
balance of $0.8 million offset by net proceed from bank loan of $0.2 million.
Capital
Expenditures
The
Company made capital expenditures of $2.2 million and $1.8 million for the years ended December 31, 2018 and 2017, respectively.
In these periods, our capital expenditures were mainly used for purchases of office equipment, furniture and payments for capitalized
development cost. The Company will continue to make capital expenditures to meet the expected growth of its business.
Contractual
Obligations
The
Company had an outstanding bank loan of approximately $1.5 million as of December 31, 2018. The Company has also entered into
non-cancellable operating lease agreements for several offices and dormitory spaces for its employees. The leases are expiring
through 2021.
The
following table sets forth our contractual obligations and commercial commitments as of December 31, 2018:
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Less than
1 Year
|
|
|
1 – 3 Years
|
|
|
3 – 5 Years
|
|
|
More than
5 Years
|
|
Operating lease arrangements
|
|
$
|
286,352
|
|
|
$
|
176,204
|
|
|
$
|
110,148
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Bank loan
|
|
|
1,527,162
|
|
|
|
1,527,162
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,813,514
|
|
|
$
|
1,703,366
|
|
|
$
|
110,148
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following table sets forth our contractual obligations and commercial commitments as of December 31, 2017:
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Less than
1 Year
|
|
|
1 – 3 Years
|
|
|
3 – 5 Years
|
|
|
More than
5 Years
|
|
Operating lease arrangements
|
|
$
|
165,155
|
|
|
$
|
132,028
|
|
|
$
|
33,127
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Bank loan
|
|
|
230,507
|
|
|
|
230,507
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
395,662
|
|
|
$
|
362,535
|
|
|
$
|
33,127
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Off-Balance
Sheet Arrangements
There
were no off-balance sheet arrangements for the years ended December 31, 2018 and 2017 that have or that in the opinion of management
are likely to have, a current or future material effect on our financial condition or results of operations.
Critical
Accounting Policies
We
prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and
assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures.
Although there were no material changes made to the accounting estimates and assumptions in the past two years, we continually
evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various
other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component
of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.
We
believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require
us to make significant accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding
and evaluating our consolidated financial condition and results of operations.
Use
of estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant
accounting estimates reflected in the Company’s consolidated financial statements include but not limited to the useful
lives of property and equipment and capitalized development cost, impairment of long-lived assets, valuation of accounts receivables,
revenue recognition, provision for contingent liabilities, and realization of deferred tax assets and uncertain tax positions.
Actual results could differ from these estimates.
Fair
value measurement
ASC
825-10 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires
entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used
to measure fair value are as follows:
|
●
|
Level
1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active
markets.
|
|
●
|
Level
2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets,
quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that
are observable and inputs derived from or corroborated by observable market data.
|
|
●
|
Level
3 — inputs to the valuation methodology are unobservable.
|
Unless
otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, prepayments,
deposits and other current assets, accounts payable, customer deposits, salaries and benefits payables, and taxes payable approximates
their recorded values due to their short-term maturities. The fair value of the long term prepayments, deposits and other assets
approximate their carrying amounts because the deposits were paid in cash.
Accounts
receivable, net
Accounts
receivable, net, is stated at the original invoiced amount net of write-offs and allowance for doubtful accounts. The Company
reviews the accounts receivable on a periodic basis and makes allowances when there is doubt as to the collectability of individual
balances. Past-due balances over 90 days are reviewed individually for collectability. In evaluating the collectability of individual
accounts receivable balances, the Company considers several factors, including the age of the balance, the customer’s payment
history, current credit-worthiness, and current economic trends. Accounts receivable balances are written off after all collection
efforts have been exhausted. Typically, the Company includes unbilled receivables in accounts receivable for contracts on which
revenue has been recognized, but for which the customer has not yet been billed. Unbilled receivables, substantially all of which
are expected to be billed and collected within one year, are stated at their estimated realizable value and consist of costs and
fees billable on contract completion or the occurrence of contractual payment phase.
Prepayments,
deposit and other assets, net
Prepayment,
deposit and other assets primarily consists of advances to suppliers for purchasing goods or services that have not been received
or provided; security deposits made to our customers; advances to employees and loan receivables from business partners. Prepayment,
deposit and other assets are classified as either current or non-current based on the terms of the respective agreements. These
advances are unsecured and are reviewed periodically to determine whether their carrying value has become impaired.
Property
and equipment, net
Property
and equipment, net, are mainly comprising furniture and furniture, vehicles, computer and equipment are stated at cost less accumulated
depreciation and impairment. Property and equipment are depreciated over the estimated useful lives of the assets on a straight-line
basis, after considering the estimated residual value.
The
estimated useful lives are as follows:
|
|
Useful Life
|
Office equipment, fixtures, and furniture
|
|
3-10 years
|
Automobiles
|
|
5-8 years
|
Capitalized development costs
|
|
5 years
|
Computer equipment
|
|
5 years
|
Expenditures
for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred.
Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost
and the related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss
is charged to the statement of income.
Capitalized
development costs
The
Company follows the provisions of Accounting Standards Codification (“ASC”) 350-40, “Internal Use Software.”
ASC 350-40 provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal
use. The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes costs incurred
during the application development stage. Costs incurred relating to upgrades and enhancements to the application are capitalized
if it is determined that these upgrades or enhancements add additional functionality to the application. The capitalized development
cost is amortized on a straight-line basis over the estimated useful life, which is generally five years. Management evaluates
the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur
that could impact the recoverability of these assets.
Impairment
for long-lived assets
Long-lived
assets, including property, equipment, furniture and fixtures and intangible assets with finite lives are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When these events
occur, the Company measures impairment by comparing the carrying values of the long-lived assets to the estimated undiscounted
future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted
cash flows is less than the carrying amounts of the assets, the Company would recognize an impairment loss based on the excess
of the carrying value over the assessed discounted cash flow amount.
Revenue
recognition
The
Company derives its revenues from three sources: (1) revenue from application development services, (2) revenue from consulting
and technical support services, and (3) revenue from subscription services.
The
Company recognizes revenues when persuasive evidence of an arrangement exists, delivery of goods and service have occurred, the
sales price is fixed or determinable, and collectability is reasonably assured. All of the Company’s contracts with customer
do not contain cancelable and refund-type provisions.
(1)
Revenue from application development service
The
Company’s application development service contracts are primarily on a fixed-price basis, which require the Company to perform
services including project planning, project design, application development and system integration based on customers’
specific needs. These services also require significant production and customization. Upon delivery of the services, customer
acceptance is generally required. In the same contract, the Company is generally required to provide post-contract customer support
(“PCS’) for a period from three months to three years (“PCS period”) after the customized application
development services are delivered. The type of services for PCS clause is generally not specified in the contracts or as stand-ready
services on when-and-if-available basis.
Multiple
Deliverable Arrangements
The
Company generally enters into arrangements with multiple deliverables for customized application development services contracts.
If the deliverables have standalone value at contract inception, the Company accounts for each deliverable separately. The Company
determines application development service, PCS or specific service, if applicable, as separated deliverables in the fixed-fee
application development service contract. The Company allocates contract revenue to the identified separate units based on their
relative selling prices. In accordance with ASC 605-25-30, the Company uses a hierarchy to determine the selling price to be used
for allocating revenue to the deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party
evidence of the selling price (“TPE”) and (iii) best estimate of the selling price (“BESP”. The Company
uses VSOE of selling price in the selling price allocation in all instances where it exists. VSOE of selling price for products
and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately.
The Company has not established VSOE for application development service and PCS due to lack of pricing consistency and variety
of different service provided. In addition, the Company’s customized application differs substantially from that of competitors,
it is difficult to obtain the reliable standalone competitive pricing necessary to establish TPE. Accordingly, the Company uses
its BESP of application development services, hardware, consulting and technical support services and subscription services, if
applicable, as the basis of revenue allocation. The Company determines BESP by considering its overall pricing objectives and
market conditions. Significant pricing practices taken into consideration include the size and volume of the transactions, the
geographic area where services are sold, historical standalone sales and contract prices.
Revenue
allocated to customized application development services is recognized as the service is performed using the percentage of completion
method of accounting, under which the total value of revenue is recognized on the basis of the percentage that total cost to date
bears to the total expected costs. The Company considers labor costs and related material costs for the input measurement as the
best available indicator of the progress, pattern and timing in which contract obligations are fulfilled. The Company has a long
history of providing these services resulting in its ability to reasonably estimate the labor costs and related material costs
expected to be incurred and the progress toward completion on each fixed-price customized contract based on the proportion of
labor costs and related material costs incurred to date relative to total estimated labor costs and related material costs at
completion. Estimated contract costs are based on the budgeted labor costs and related material costs, which are updated based
on the progress toward completion on a monthly basis.
In
certain application development service arrangements, the Company sells and delivers IT equipment on standalone basis prior to
the delivery of the services. Since sale of equipment can be distinguished, and is separately identifiable from other promises
in the contract and it is distinct within the context of the contract, the sale of equipment is considered a separate unit of
accounting. Accordingly, the revenue from the related IT equipment based on its relative standalone selling price is recognized
upon customer acceptance after delivery.
The
Company’s application development service revenues are generated primarily from contracts with PRC government or related
agencies and state-owned enterprises. The contracts contain negotiated billing terms which generally include multiple payment
phases throughout the contract term and a significant portion of contract amount usually is billed upon the completion of the
related projects. Pursuant to the contract terms, the Company has enforceable right on payments for the work performed.
Provisions
for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable based on
the current contract estimates. In instances where substantive acceptance provisions are specified in customer contracts, revenues
are deferred until all acceptance criteria have been met. To date, the Company has not incurred a material loss on any contracts.
However, as a policy, provisions for estimated losses on such engagements will be made during the period in which a loss becomes
probable and can be reasonably estimated. The fixed-priced application development contracts provide customers with rights to
specified PCS or to unspecified PCS that is if and when available.
The
unspecified PCS is stand-ready service on when-and-if-available basis. It grants the customers on line and telephone access to
technical support personnel during the term of the service. Specified PCS includes specified service term in the contract such
as training. Revenue allocated to specified PCS or other services is recognized as the related services are rendered. Revenue
allocated to unspecified PCS component is deferred and recognized on a straight-line basis over the PCS period.
(2)
Revenue from consulting and technical support services
Revenue
from consulting and technical support services is primarily comprised of fixed-fee contracts, which require the Company to provide
professional consulting and technical support services over contract terms beginning on the commencement date of each contract,
which is the date our service is made available to customers. Revenue is recognized on a straight-line basis as earned over the
terms of the respective contracts, which is typically 12 to 24 months.
(3)
Revenue from subscription services
Revenue
from subscription services is comprised of subscription fees from customers accessing the Company’s software-as-a-service
applications. The Company’s monthly or quarterly billing to customer is on the basis of number of uses by the customers.
Revenue from subscription services is recognized in the period when services are occurred. Because our customers purchase the
services on a periodic basis and do not have the right to take possession of the software, we consider these arrangements to be
service contracts and are not within the scope of Industry Topic 985, Software.
Revenue
includes reimbursements of travel and out-of-pocket expense, with equivalent amounts of expense recorded in cost of revenue. The
Company reports revenues net of value added tax (“VAT”). The Company’s subsidiary in PRC are subject to a 6%
to 17% value added tax (“VAT”) and related surcharges on the revenues earned from providing services.
Income
taxes
The
Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are
recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
An
uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would
be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely
of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period
incurred. No significant penalties or interest relating to income taxes have been incurred during the years ended December 31,
2018 and 2017. All of the tax returns of the Company’s subsidiary in China remain subject to examination by the tax authorities
for five years from the date of filing.
Recently
issued accounting pronouncements
In
May 2014, August 2015, April 2016, May 2016 and December 2016, the FASB issued ASU 2014-09 (ASC Topic 606), Revenue from Contracts
with Customers, ASU 2015-14 (ASC Topic 606) Revenue from Contracts with Customers, Deferral of the Effective Date, ASU 2016-10
(ASC Topic 606) Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, ASU 2016-12 (ASC Topic
606) Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20 (ASC Topic 606)
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, respectively. ASC Topic 606 outlines
a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes
most current revenue recognition guidance, including industry-specific guidance. It also requires entities to disclose both quantitative
and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. This standard may be applied retrospectively to all prior periods
presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption (“modified retrospective
transition approach”). As an “emerging growth company,” or EGC, the Company has elected to take advantage of
the extended transition period provided in the Securities Act Section 7(a)(2)(B) for complying with new or revised accounting
standards applicable to private companies. The amendments in this ASU are effective for annual reporting periods beginning after
December 15, 2018, including interim periods beginning after December 15, 2019. Under ASC 606, an entity recognizes revenue when
its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects
to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines
are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii)
identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price
to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
ASC 606 also impacts certain other areas, such as the accounting for costs to obtain or fulfill a contract. The standard also
requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The Company adopted ASC Topic 606 on January 1, 2019 using the modified retrospective transition method and has evaluated the
impact of ASC 606 and has determined that the Company’s current revenue recognition policies are generally consistent with
the new revenue recognition standards set forth in ASC Topic 606, therefore, the impact of the adoption is immaterial on its consolidated
financial statements and disclosures.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires
an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the entity’s
leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years. A modified retrospective approach is required. In January 2018, the FASB issued ASU 2018-01, Leases: Land
Easement Practical Expedient for Transition. This ASU clarifies the accounting and reporting of land easements. In July 2018,
the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” (“ASU 2018-10”), to clarify
how to apply certain aspects of the new lease accounting standard. The amendments in this update, among other things, better articulates
the requirement for a lessee’s reassessment of lease classification as of the effective date of a modification, clarifies that
a change to an index or rate for variable lease payments does not constitute a resolution of a contingency that would result in
the remeasurement of lease payments, and requires entities that apply Topic 842 retrospectively to each reporting period and do
not adopt the practical expedients to write off any prior unamortized initial direct costs that do not meet the definition under
Topic 842 to equity. The amendments in this update have the same effective date and transition requirements as the new lease standard
summarized above. Also, in July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,”
(“ASU 2018-11”), to provide an additional transition method. An entity can now elect not to present comparative financial
information under Topic 842 if it recognizes a cumulative-effect adjustment to retained earnings upon adoption. The Company intends
to make this election. The amendments in these update are effective for the Company for fiscal years beginning after December
15, 2019, including interim periods within those years, with early adoption permitted. The Company has performed an assessment
of the impact of the adoption of the amendments in these updates on the Company’s consolidated financial position and results
of operations for the Company’s leases, which primarily consist of operating leases for office space and equipment. Based on that
assessment, the Company has established that the adoption of Topic 842 will result in the recognition of a significant increase
to the balance sheet for right-of-use assets and lease liabilities based on the present value of future minimum lease payments.
Also, the impacts from the adoption of Topic 842 to the Company’s accumulated deficit and to consolidated results of operations
are not expected to be material.
In
July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives
and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception. The amendments in ASU 2017-11 change the classification analysis of
certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain
financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity
classification when assessing whether the instrument is indexed to an entity’s own stock. The adoption of ASU 2017-11 which
will become effective for annual periods beginning after December 15, 2018 and for interim periods within those annual periods.
The Company does not expect that the adoption of this guidance will have a material impact on its unaudited condensed consolidated
financial statements.
In
August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework -Changes to the
Disclosure Requirements for Fair Value Measurement
(“ASU No. 2018-13”). The primary focus of ASU 2018-13
is to improve the effectiveness of the disclosure requirements for fair value measurements. ASU No. 2018-13 removes the requirement
to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for the
timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement
to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3
fair value measurements held at the end of the reporting period and to disclose the range and weighted average of significant
unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements. For certain unobservable inputs,
entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would
be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop the Level 3 fair value
measurement. In addition, public entities are required to provide information about the measurement uncertainty of recurring Level
3 fair value measurements from the use of significant unobservable inputs if those inputs reasonably could have been different
at the reporting date. ASU No. 2018-13 is effective for annual periods beginning after December 15, 2019, including interim periods
within those fiscal years. Entities are permitted to early adopt either the entire standard or only the provisions that eliminate
or modify the requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty
should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.
All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company is still
evaluating the impact of adopting ASU No. 2018-13 on its financial statements, but does not expect the adoption of ASU No. 2018-13
to have a material impact on its financial statements.
The
Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a
material effect on the Company’s consolidated balance sheets, statements of income and comprehensive income and statements
of cash flows.
G.
Safe Harbor
This
Annual Report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information
currently available to us. These statements involve known and unknown risks, uncertainties and other factors which 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,”
“potential,” “continue,” “is/are likely to” or other similar expressions. We have based these
forward-looking statements largely on our current expectations and projections about future events and financial trends that we
believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking
statements include, among other things, statements relating to:
|
●
|
the
timing of the development of future services;
|
|
●
|
projections
of revenue, earnings, capital structure and other financial items;
|
|
●
|
the
development of future company-owned branches;
|
|
●
|
statements
regarding the capabilities of our business operations;
|
|
●
|
assumptions
underlying statements regarding us or our business;
|
|
|
|
|
●
|
statements
regarding competition in our market; and
|
|
●
|
statements
of expected future economic performance.
|
You
should thoroughly read this annual report and the documents that we refer to in this annual report with the understanding that
our actual results in the future may be materially different from or worse than what we expect. We qualify all of our forward-looking
statements by these cautionary statements. Other sections of this annual report include additional factors which could adversely
affect 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. Important risks and factors that could cause our
actual results to be materially different from our expectations are generally set forth in “Item 3. Key Information—D.
Risk Factors” and elsewhere in this annual report.
The
forward-looking statements made in this annual report relate only to events or information as of the date on which these statements
are made in this annual report. We undertake no obligation to update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise, after the date of this annual report. You should not rely upon forward-looking
statements as predictions of future events.
Item
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
Below
is a list of our directors, senior management and any employees upon whose work we are dependent as of the date of this Annual
Report, and a brief account of the business experience of each of them. The business address for our directors and officers is
1st Floor, Building D2, Southern Software Park, Tangjia Bay, Zhuhai, Guangdong 519080, China.
Name
|
|
Age
|
|
Position
|
Ban
Lor
|
|
61
|
|
President,
CEO and Chairman of the Board
|
Stewart
Lor
|
|
56
|
|
CFO
and Director
|
Nanfang
Li
|
|
54
|
|
Chief
Strategy Officer
|
Xiuhe
Jiang
|
|
62
|
|
Chief
Product Officer
|
Tianfei
Feng
|
|
44
|
|
Chief
Research and Development Officer
|
Yuping
Ouyang (1) (4)
|
|
45
|
|
Independent
Director
|
Guoquan
Wang (2)
|
|
62
|
|
Independent
Director
|
Bo
Wu (3)
|
|
62
|
|
Independent
Director
|
(1)
|
Chair
of the Audit Committee.
|
(2)
|
Chair
of the Compensation Committee.
|
(3)
|
Chair
of the Nominating Committee.
|
(4)
|
Audit
Committee financial expert.
|
Ban
Lor
is a founder of our Company and Powerbridge Zhuhai. He serves as our President, CEO and Chairman of the Board. Prior
to founding our Company in 1997, Mr. Lor was a founder and served as CEO and Chairman of the Board at Lorons International Corporation,
a global trade and manufacturing company from August 1988 to October 1995. Mr. Lor holds a B.S. in Electrical Engineering from
State University of New York at Stony Brook and a M.B.A in General Management from New York Institute of Technology. We believe
he is qualified to serve on the Board because of the perspective and experience he brings as our CEO as well as his extensive
experience managing global trade application and technology service business.
Stewart
Lor
is a co-founder of our Company and serves on our board of directors and as our CFO since August 2018. Previously,
he served on our board of directors and as our Chief Operating Officer from October 1997 to September 2006. Mr. Lor served as
President of Lorons International Corporation from August 1988 to October 1995. He had served various executive positions at Cmark
Holdings Ltd. and Fanz Co., Ltd. from November 2006 to September 2017. He holds a B.S. in Biochemistry from State University of
New York at Stony Brook. We believe he is qualified to serve on the Board because of the perspective and experience he brings
as our cofounder and CFO.
Nanfang
Li
has been serving as our Chief Strategy Officer since August 2018. Prior to joining us, he served in various executive
and management positions from June 1991 to April 2018, including CEO at SK C&C China, Senior Vice President at SK China, CEO
at Rootnet Technology and Senior Vice President at Capinfo. Mr. Li holds a B.S. in Electrical Engineering from University of Science
and Technology of China and a M.S. in Computer Networks from University of Electronic Science and Technology of China.
Xiuhe
Jiang
has been serving as our Chief Product Officer since August 2018. He joined the company in 1998 and has held various
technology management and product development positions, including Chief System Architect and Vice President of Applications Development.
Prior to joining us, Mr. Jiang served engineering management and development positions in system design and software engineering
in various organizations. He holds a M.S. in Computer Engineering and a B.S. in Computer Science from China Northeastern University.
Tianfei
Feng
has been serving as our Chief Research & Development Officer since August 2018. Prior to joining us, he served
as Vice President of Technology at Digital China Golden Vista and Bangtai United from June 2010 to September 2017, Director of
Technology and Development at Ali Health from November 2008 to May 2010, and Chief System Architect at Chinaport from April 2003
to October 2008. Mr. Feng holds a Ph.D. in Aerospace and Astronavigation Engineering from Beihang University.
Yuping
Ouyang
is an independent director of the Company. Ms. Oyang has been serving as Chief Financial Officer at China Techfaith
Wireless Communication Technology Limited, a NASDAQ listed company (CNTF) from August 2008 to present. She held various financial
and accounting management positions at CNTF from September 2004 to July 2008. Prior to CNTF, she served as an auditor at Guangdong
Kaowick CPAs and an account manager at Guangzhou Metro Corporation. Ms. Oyang is a licensed member of the Certified Public Accountants
of Washington State and a member of the Association of Chartered Certified Accounts. She holds a B.A. in Management from Guangdong
University of Foreign Studies and a MBA from Sun Yet-Sen University.
Guoquan
Wang
is an independent director of the Company. Mr. Wang served various managerial positions including Vice President
of the international trade group of agrichemical and aquatic products at China National Fisheries, an ocean fishery product and
service company operating in multiple countries from December 1994 to July 2017. Previously, he held various operational and managerial
positions for import and export of agrichemical and fishery products at Huanong, a subsidiary of China National Fisheries as well
as chemical and textile products at Sinochem Group and Sinochem (England) from December 1985 to November 1994. Mr. Wu holds a
B.A. in International Trade Management from Liaoning Finance and Trade College.
Bo
Wu
is an independent director of the Company. Mr. Wu served as Vice President at Capinfo, a provider of “digital
and smart city” technology services from September 2008 to September 2017. He served as General Manager at Credit &
Risk Management, a provider of consumer and corporate credit and risk information systems from March 2003 to August 2008. Mr.
Wu held various management positions at Capinfo from October 2000 to February 2003. He holds a B.E. and M.S. in Optical Engineering
from Huazhong University of Science and Technology and a PhD in Optical Instrumentation from a joint Ph.D program by Institute
of Applied Physics at Dalian University of Science and Technology and University of Bonn.
None
of the events listed in Item 401(f) of Regulation S-K has occurred during the past ten years that is material to the evaluation
of the ability or integrity of any of our directors, director nominees or executive officers.
Limitation
on Liability and Other Indemnification Matters
The
Companies Law does not limit the extent to which the Third Amended and Restated Memorandum and Articles of Association may provide
for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts
to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.
Our Third Amended and Restated Memorandum and Articles of Association permit indemnification of officers and directors for losses,
damages, costs and expenses incurred in their capacities as such unless such losses or damages arise from dishonesty of such directors
or officers willful default of fraud. This standard of conduct is generally the same as permitted under the Delaware General Corporation
Law for a Delaware corporation.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling
us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
B.
Compensation of Directors and Executive Officers
Executive
Compensation
Summary
Compensation Table
The
following table sets forth all cash compensation paid by us, as well as certain other compensation paid or accrued, in fiscal
2018 to each of the following named executive officers. The total amount was $0.3 million in 2018. No options were awarded
in 2018.
Name/principal position
|
|
Year
|
|
Salary
|
|
|
Equity
Compensation
|
|
|
All Other
Compensation
|
|
|
Total Paid
|
|
Ban Lor/CEO (1)
|
|
2018
|
|
$
|
151,057
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
151,057
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stewart Lor/CFO (2)
|
|
2018
|
|
$
|
60,423
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
60,423
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nanfang Li/Chief Strategy Officer (3)
|
|
2018
|
|
$
|
40,785
|
|
|
$
|
-
|
|
|
$
|
4,079
|
|
|
$
|
44,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xiuhe Jiang/Chief Product Officer (4)
|
|
2018
|
|
$
|
46,767
|
|
|
$
|
-
|
|
|
$
|
3,474
|
|
|
$
|
50,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianfei Feng/Chief Research and Development Officer (5)
|
|
2018
|
|
$
|
47,704
|
|
|
$
|
-
|
|
|
$
|
5,287
|
|
|
$
|
52,991
|
|
(1)
|
Appointed
Chairman, President and CEO effective as of August 2018.
|
|
|
(2)
|
Appointed
CFO effective as of August 2018.
|
|
|
(3)
|
Appointed
Chief Strategy Officer effective as of August 2018.
|
|
|
(4)
|
Appointed
Chief Product Officer effective as of August 2018.
|
|
|
(5)
|
Appointed
Chief Research and Development Officer as of August 2018.
|
|
|
(6)
|
The
Company will pay $112,405 to Ban Lor after the IPO.
|
|
|
(7)
|
The
Company will pay $173,766 to Stewart Lor after the IPO.
|
Under
Chinese law, we may only terminate employment agreements without cause and without penalty by providing notice of non-renewal
one month prior to the date on which the employment agreement is scheduled to expire. If we fail to provide this notice or if
we wish to terminate an employment agreement in the absence of cause, then we are obligated to pay the employee one month’s
salary for each year we have employed the employee. We are, however, permitted to terminate an employee for cause without notice
or penalty to our company, where the employee has committed a crime or the employee’s actions or inactions have resulted
in a material adverse effect to us.
Employment
Agreements
Ban
Lor Employment Agreement
On
August 18, 2018, we entered into an employment agreement with Ben Lor pursuant to which he agreed to serve as our CEO. The agreement
provides for an annual base salary of RMB1,800,000 (approximately USD$263,462) payable in accordance with the Company’s
ordinary payroll practices. The term of the agreement shall expire on August 17, 2021, which term will automatically extend for
additional 12-month periods unless a party to the agreement terminates it upon 3-months’ notice or proposes to re-negotiate
the terms of the employment with the other party within 3 months prior to the expiration of the applicable term, or unless the
employment is terminated earlier pursuant to the terms of the agreement. If the executive’s employment with the Company
is terminated for any reason, the Company will pay to such executive any unpaid portion of his salary through the date of his
termination, and any unpaid bonus through the date of termination, as well as any unpaid or unused portions of his benefits under
the agreement. If his employment is terminated at our election without cause or by him, the Company shall provide 3-months’
advanced notice or payment of 3-months’ salary in lieu of the notice. Ban Lor has agreed not to compete with us for 2 years
after the termination of his employment; he also executed certain non-solicitation, confidentiality and other covenants customary
for agreements of this nature.
Stewart
Lor Employment Agreement
On
August 18, 2018, we entered into an employment agreement with Stewart Lor pursuant to which he agreed to serve as our CFO. The
agreement provides for an annual base salary of RMB1,600,000 (approximately USD$234,189) payable in accordance with the Company’s
ordinary payroll practices. The term of the agreement shall expire on August 17, 2021, which term will automatically extend for
additional 12-month periods unless a party to the agreement terminates it upon 3-months’ notice or proposes to re-negotiate
the terms of the employment with the other party within 3 months prior to the expiration of the applicable term, or unless the
employment is terminated earlier pursuant to the terms of the agreement. If the executive’s employment with the Company
is terminated for any reason, the Company will pay to such executive any unpaid portion of his salary through the date of his
termination, and any unpaid bonus through the date of termination, as well as any unpaid or unused portions of his benefits under
the agreement. If his employment is terminated at our election without cause or by him, the Company shall provide 3-months’
advanced notice or payment of 3-months’ salary in lieu of the notice. Stewart Lor has agreed not to compete with us for
2 years after the termination of his employment; he also executed certain non-solicitation, confidentiality and other covenants
customary for agreements of this nature.
Nanfang
Li Employment Agreement
On
August 18, 2018, we entered into an employment agreement with Nanfang Li pursuant to which he agreed to serve as our Chief Strategy
Officer. The agreement provides for an annual base salary of RMB540,000 (approximately USD$79,039) payable in accordance with
the Company’s ordinary payroll practices. The term of the agreement shall expire on August 17, 2019, which term will automatically
extend for additional 3-month periods unless a party to the agreement terminates it upon 30-days’ notice or proposes to
re-negotiate the terms of the employment with the other party within 30 days prior to the expiration of the applicable term, or
unless the employment is terminated earlier pursuant to the terms of the agreement. If the executive’s employment with the
Company is terminated for any reason, the Company will pay to such executive any unpaid portion of his salary through the date
of his termination, and any unpaid bonus through the date of termination, as well as any unpaid or unused portions of his benefits
under the agreement. If his employment is terminated at our election without cause or by him, the Company shall provide 30-days’
advanced notice or payment of 1-month’s salary in lieu of the notice. Nanfang Li has agreed not to compete with us for 2
years after the termination of his employment; he also executed certain non-solicitation, confidentiality and other covenants
customary for agreements of this nature.
Xiuhe
Jiang Employment Agreement
On
August 18, 2018, we entered into an employment agreement with Xiuhe Jiang pursuant to which he agreed to serve as our Chief Product
Officer. The agreement provides for an annual base salary of RMB360,000 (approximately USD$52,692) payable in accordance with
the Company’s ordinary payroll practices. The term of the agreement shall expire on August 17, 2019, which term will automatically
extend for additional 3-month periods unless a party to the agreement terminates it upon 30-days’ notice or proposes to
re-negotiate the terms of the employment with the other party within 30 days prior to the expiration of the applicable term, or
unless the employment is terminated earlier pursuant to the terms of the agreement. If the executive’s employment with the
Company is terminated for any reason, the Company will pay to such executive any unpaid portion of his salary through the date
of his termination, and any unpaid bonus through the date of termination, as well as any unpaid or unused portions of his benefits
under the agreement. If his employment is terminated at our election without cause or by him, the Company shall provide 30-days’
advanced notice or payment of 1-month’s salary in lieu of the notice. Xiuhe Jiang has agreed not to compete with us for
2 years after the termination of his employment; he also executed certain non-solicitation, confidentiality and other covenants
customary for agreements of this nature.
Tianfei
Feng Employment Agreement
On
August 18, 2018, we entered into an employment agreement with Tianfei Feng pursuant to which he agreed to serve as our Chief Research
and Development Officer. The agreement provides for an annual base salary of RMB480,000 (approximately USD$70,257) payable in
accordance with the Company’s ordinary payroll practices. The term of the agreement shall expire on August 17, 2019, which
term will automatically extend for additional 3-month periods unless a party to the agreement terminates it upon 30-days’
notice or proposes to re-negotiate the terms of the employment with the other party within 30 days prior to the expiration of
the applicable term, or unless the employment is terminated earlier pursuant to the terms of the agreement. If the executive’s
employment with the Company is terminated for any reason, the Company will pay to such executive any unpaid portion of his salary
through the date of his termination, and any unpaid bonus through the date of termination, as well as any unpaid or unused portions
of his benefits under the agreement. If his employment is terminated at our election without cause or by him, the Company shall
provide 30-days’ advanced notice or payment of 1-month’s salary in lieu of the notice. Tianfei Feng has agreed not
to compete with us for 2 years after the termination of his employment; he also executed certain non-solicitation, confidentiality
and other covenants customary for agreements of this nature.
Director
Compensation
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 for 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 general meetings or separate meetings of any class
of shares or of debenture of the Company or otherwise in connection with the discharge of his or her duties as a director. Employee
directors are entitled to receive $4,500 payable quarterly for their services. Non-employee directors are entitled to receive
stock option to purchase certain amount of Ordinary Shares under Company’s 2018 Stock Option Plan.
2018
Stock Option Plan
We
have adopted a 2018 Stock Option Plan (the “Plan”). The Plan is a stock-based compensation plan that provides for
discretionary grants of stock options to key employees, directors and consultants of the Company. The purpose of the Plan is to
recognize contributions made to our company and its subsidiaries by such individuals and to provide them with additional incentive
to achieve the objectives of our Company. No grants have been made under the plan as of the date hereof. The following is a summary
of the Plan and is qualified by the full text of the Plan.
Administration
.
The Plan will be administered by our board of directors, or, once constituted, the Compensation Committee of the board of directors
(we refer to body administering the Plan as the “Committee”).
Number
of Ordinary Shares.
The number of Ordinary Shares that may be issued under the Plan is the maximum aggregate number of Ordinary
Shares reserved and available pursuant to this Plan shall be the aggregate of (i) 1,035,787 Ordinary Shares, and (ii) on each
January 1, starting with January 1, 2019, an additional number of shares equal to the lesser of (A) 2% of the outstanding number
of Ordinary Shares (on a fully-diluted basis) on the immediately preceding December 31, and (B) such lower number of Ordinary
Shares as may be determined by the Committee. If there is a forfeiture or termination without the delivery of Ordinary Shares
or of other consideration of any option made under the Plan, the Ordinary Shares underlying such option, or the number of Ordinary
Shares otherwise counted against the aggregate number of Ordinary Shares available under the Plan with respect to the option,
to the extent of any such forfeiture or termination, shall again be, or shall become, available for granting options under the
Plan. The number of Ordinary Shares issuable under the Plan is subject to adjustment, in the event in the event of any reorganization,
recapitalization, stock split, stock distribution, merger, consolidation, split-up, spin-off, combination, subdivision, consolidation
or exchange of shares, any change in the capital structure of the company or any similar corporate transaction. Except as the
board of director or the Committee determines, no issuance by the Company of shares of any class, or securities convertible into
shares of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of Shares
subject to an Option. In the event of a spin-off transaction, the board of director or the Committee may in its discretion make
such adjustments and take such other action as it deems appropriate with respect to outstanding Options under the Plan.
Eligibility
.
All persons as the board of directors or the Committee may select from among the employees, directors, and consultants of the
Company.
Stock
Options
. The board of directors or Committee shall determine the provisions, terms, and conditions of each option including,
but not limited to, the option vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of
payment (cash, shares, cashless settlement, or other consideration) upon settlement of the option, payment contingencies and the
exercise price; each option will last for the term stated in the option agreement, provided, however that in the case of an option
that is to qualify as an Incentive Share Option as such term is defined in Section 422 of the Code, the term shall not exceed
ten (10) years. It is intended that stock options qualify as “performance based compensation” under Section 162(m)
of the Code and thus be fully deductible by us for federal income tax purposes, to the extent permitted by law.
Payment
for Stock Options and Withholding Taxes
. The board of directors or Committee may make one or more of the following methods
available for payment of an option, including the exercise price of a stock option, and for payment of the minimum required tax
obligation associated with an award: (i) cash; (ii) cheque; (iii) with respect to options, payment through a broker-dealer
sale and remittance procedure pursuant to which the optionee (A) shall provide written instructions to a Company designated brokerage
firm to effect the immediate sale of some or all of the purchased Ordinary Shares and remit to the Company sufficient funds to
cover the aggregate exercise price payable for the purchased Ordinary Shares and (B) shall provide written directives to the Company
to deliver the certificates for the purchased Ordinary Shares directly to such brokerage firm in order to complete the sale transaction;
(iv) cashless election; or (v) any combination of the foregoing methods of payment.
No
Ordinary Shares shall be delivered under the Plan to any optionee or other person until such optionee or other person has made
arrangements acceptable to the board of directors or Committee for the satisfaction of any national, provincial or local income
and employment tax withholding obligations. Upon exercise of an option the Company shall have the right, but not the obligation
(except as required by applicable law), to withhold or collect from optionee an amount sufficient to satisfy such tax obligations.
The optionee will be solely responsible for his/her own tax obligations.
Amendment
of Award Agreements; Amendment and Termination of the Plan; Term of the Plan
. The board of directors may at any time amend,
suspend or terminate the Plan; provided, however, that no such amendment shall be made without the approval of the Company’s
shareholders to the extent such approval is required by applicable laws, or if such amendment would adversely affect the right
of any participant under any agreement in any material way without the written consent of the participant. No option may be granted
during any suspension of the Plan or after termination of the Plan. No suspension or termination of the Plan shall adversely affect
any rights under options already granted to an optionee. The Plan has become effective on the date of the effectiveness of Company’s
initial public offering. It shall continue in effect for a term of ten (10) years unless sooner terminated or unless renewed for
another period not to exceed ten (10) years pursuant to shareholder approval.
Notwithstanding
the foregoing, neither the Plan nor any outstanding option agreement can be amended in a way that results in the repricing of
a stock option. Repricing is broadly defined to include reducing the exercise price of a stock option or cancelling a stock option
in exchange for cash, other stock options with a lower exercise price or other stock awards. (This prohibition on repricing without
shareholder approval does not apply in case of an equitable adjustment to the awards to reflect changes in the capital structure
of the company or similar events.)
On
April 4, 2019, the Board of Directors approved several restricted stock options grants to the members of executive management
and the Board of the Company pursuant to the terms of the Plan. Specifically, the Company granted an aggregate of 1,050,500 stock
options to key employees and directors under the Plan. No grants were made in fiscal 2018. Stock options granted to key employees
and directors generally have a term of three years, but are subject to earlier termination in connection with termination of continuous
service to the Company. Stock options are valid for a period of 10 years from April 4, 2019 to April 5, 2029. As at the grant
date of April 4, 2019, the weighted-average fair value per share was $5.00 and the estimated total fair value of the restricted
shares granted was $5,252,500.
C.
Board Practices
Composition
of Board; Risk Oversight
Our
board of directors presently consists of five (5) directors. Pursuant to our Third Amended and Restated Memorandum and Articles
of Association, the number of our board shall not be less than two (2). At any one time, at least majority of the board of directors
shall be independent directors. Our shareholders may elect new director either to fill in a vacancy or add additional member to
the board via ordinary resolutions and the directors may appoint any new director to fill a vacancy or as a member to the board
until the next annual meeting of the Company. The directors have been divided into two classes, being the class I directors (the
“Class I Directors”) and the class II directors (the “Class II Directors”) immediately prior to the consummation
of Company’s IPO. The number of directors in each class shall be as nearly equal as possible. The Class I Directors shall
stand elected for a term expiring at the Company’s initial meeting after the adoption of the Third Amended and Restated
Memorandum and Articles of Association and the Class II Directors shall stand elected for a term expiring at the Company’s
third annual general meeting following the initial meeting. Directors elected to succeed those Class I Directors whose terms expire
shall be elected for a term of office to expire at the first annual general meeting following their election and directors elected
to succeed those Class II Directors whose terms expire shall be elected for a term of office to expire at the third annual general
meeting following their election. The initial members of Class I Directors are Yuping Ouyang, Guoquan Wang, and Bo Wu. The initial
members of Class II Directors are Ban Lor and Stewart Lor. A director will be removed from office automatically if, among other
things, the director becomes bankrupt or has a receiving order made against him or suspends payment or compounds with his creditors,
or becomes of unsound mind or dies. Except for the sibling relationship between Mr. Ben Lor and Mr. Stewart Lor, there are no
family relationships between any of our executive officers and directors. Officers are elected by, and serve at the discretion
of, the board of directors. Our Board may meet for the dispatch of business, adjourn and otherwise regulate its meetings as it
considers appropriate.
Under
the NASDAQ rules, we are required to maintain a board of directors comprised of at least 50% independent directors, and an audit
committee of at least three members, comprised solely of independent directors who also meet the requirements of Rule 10A-3 under
the Exchange Act. There are no membership qualifications for directors. Further, there are no share ownership qualifications for
directors unless so fixed by us in a general meeting. There are no other arrangements or understandings pursuant to which our
directors are selected or nominated.
Under
our Third Amended and Restated Memorandum and Articles of Association, we shall hold an annual general meeting in each year other
than the year in which the Third Amended and Restated Memorandum and Articles of Association were adopted and shall specify the
meeting as such in the notices calling it. The annual general meeting shall be held at such time and place as the board of directors
shall appoint.
While
we may be deemed a “controlled company” under the NASDAQ Marketplace Rules (specifically, as defined in Rule 5615(c)),
the Company does not intend to avail itself of the corporate governance exemptions afforded to a controlled company under the
NASDAQ Marketplace Rules. Similarly, we intend to comply with all applicable NASDAQ corporate governance requirements irrespective
of its “foreign private issues” status.
Our
board plays a significant role in our risk oversight. The board makes all relevant company decisions. As such, it is important
for us to have our CEO serve on the board as he plays key roles in the risk oversight or the Company. As a smaller reporting company
with a small board of directors, we believe it is appropriate to have the involvement and input of all of our directors in risk
oversight matters.
Director
Independence
Our
board has reviewed the independence of our directors, applying the NASDAQ independence standards. Based on this review, the board
determined that each of Yuping Ouyang, Guoquan Wang and Bo Wu are “independent” within the meaning of the NASDAQ rules.
In making this determination, our board considered the relationships that each of these non-employee directors has with us and
all other facts and circumstances our board deemed relevant in determining their independence. As required under applicable NASDAQ
rules, we anticipate that our independent directors will meet on a regular basis as often as necessary to fulfill their responsibilities,
including at least annually in executive session without the presence of non-independent directors and management.
Board
Committees
Currently,
three committees have been established under the board: the Audit Committee, the Compensation Committee and the Nominating Committee.
The
Audit Committee is responsible for overseeing the accounting and financial reporting processes of our company and audits of the
financial statements of our company, including the appointment, compensation and oversight of the work of our independent auditors.
The Compensation Committee of the board of directors reviews and makes recommendations to the board regarding our compensation
policies for our officers and all forms of compensation, and also administers our incentive compensation plans and equity-based
plans (but our board retains the authority to interpret those plans). The Nominating Committee of the board is responsible for
the assessment of the performance of the board, considering and making recommendations to the board with respect to the nominations
or elections of directors and other governance issues. The nominating committee considers diversity of opinion and experience
when nominating directors.
Audit
Committee
The
Audit Committee is responsible for, among other matters:
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appointing,
compensating, retaining, evaluating, terminating, and overseeing our independent registered public accounting firm;
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discussing
with our independent registered public accounting firm the independence of its members from its management;
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reviewing
with our independent registered public accounting firm the scope and results of their audit;
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approving
all audit and permissible non-audit services to be performed by our independent registered public accounting firm;
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overseeing
the financial reporting process and discussing with management and our independent registered public accounting firm the interim
and annual financial statements that we file with the SEC;
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reviewing
and monitoring our accounting principles, accounting policies, financial and accounting controls, and compliance with legal
and regulatory requirements;
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coordinating
the oversight by our board of directors of our code of business conduct and our disclosure controls and procedures
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establishing
procedures for the confidential and or anonymous submission of concerns regarding accounting, internal controls or auditing
matters; and
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reviewing
and approving related-party transactions.
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Our
Audit Committee consists of 3 members, Guoquan Wang, Bo Wu and Yuping Ouyang, with Yuping Ouyang serving as chair of the Audit Committee.
Our board has affirmatively determined that each of the members of the Audit Committee meets the definition of “independent
director” for purposes of serving on an Audit Committee under Rule 10A-3 of the Exchange Act and NASDAQ rules. In addition,
our board has determined that Yuping Ouyang qualifies as an “audit committee financial expert” as such term is currently
defined in Item 407(d)(5) of Regulation S-K and meets the financial sophistication requirements of the NASDAQ rules.
Compensation
Committee
The
Compensation Committee is responsible for, among other matters:
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reviewing
and approving, or recommending to the board of directors to approve the compensation of our CEO and other executive officers
and directors;
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reviewing
key employee compensation goals, policies, plans and programs;
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administering
incentive and equity-based compensation;
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reviewing
and approving employment agreements and other similar arrangements between us and our executive officers; and
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appointing
and overseeing any compensation consultants or advisors.
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Our
Compensation Committee consists of 3 members, Yuping Ouyang, Bo Wu and Guoquan Wang, with Guoquan Wang serving as chair of the
Compensation Committee. Our board has affirmatively determined that each of the members of the Compensation Committee meets the
definition of “independent director” for purposes of serving on Compensation Committee under NASDAQ rules.
Nominating
Committee
The
Nominating Committee is responsible for, among other matters:
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selecting
or recommending for selection candidates for directorships;
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evaluating
the independence of directors and director nominees;
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reviewing
and making recommendations regarding the structure and composition of our board and the board committees;
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developing
and recommending to the board corporate governance principles and practices;
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reviewing
and monitoring the Company’s Code of Business Conduct and Ethics; and
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overseeing
the evaluation of the Company’s management
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Our
Nominating Committee consists of consists of 3 members, Yuping Oyang, Guoquan Wang and Bo Wu, with Bo Wu serving as chair of the Nominating Committee.
Our board has affirmatively determined that each of the members of the Nominating Committee meets the definition of “independent
director” for purposes of serving on a Nominating Committee under NASDAQ rules.
Duties
of Directors
Under
Cayman 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 the 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 Third Amended and Restated Memorandum 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:
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appointing
officers and determining the term of office of the officers;
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giving
to any person the right or option of requiring at a future date that an allotment shall be made to him of any share at par
or at such premium as may be agreed;
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exercising
the borrowing powers of the company and mortgaging the property of the company;
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giving
to any Directors, officers or employees of the Company an interest in any particular business or transaction or participation
in the profits thereof or in the general profits of the Company either in addition to or in substitution for a salary or other
remuneration; and
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resolving
that the Company be deregistered in the Cayman Islands and continued in a named jurisdiction outside the Cayman Islands subject
to the provisions of the Companies Law.
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Interested
Transactions
A
director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which
he or she is interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact
that he or she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the
board or otherwise contained in the minutes of a meeting or a written resolution of the board or any committee of the board that
a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded as interested
in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary
to give special notice relating to any particular transaction.
Remuneration
and Borrowing
The
directors may receive such remuneration as our board of directors may determine from time to time. For the services rendered by
the independent director in any capacity the company will a cash fee in the amount of USD$1,500 per month. Each director is entitled
to be repaid or prepaid for 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.
D.
Employees
As
of the date of this Annual Report, we had a total of 299 full-time employees, of which 111 are in research and development, 51
are in sales and marketing, 109 are in technical and customer services, and 28 are in general administration.
We
have standard employment, comprehensive confidentiality and non-compete agreements with our management and standard confidentiality
and non-compete terms with all other employees. As required by laws and regulations in China, we participate in various social
security plans that are organized by municipal and provincial governments, including pension insurance, medical insurance, unemployment
insurance, maternity insurance, job-related injury insurance and housing fund. We are required by PRC laws to make contributions
to employee social security plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up
to a maximum amount specified by the local government from time to time.
We
believe that we maintain a good working relationship with our employees, and we have not experienced any labor disputes. None
of our employee is represented by a labor union or covered by collective bargaining agreements. We have not experienced any work
stoppages.
E.
Share Ownership
See
Item 7 below.
Item
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
The
following tables set forth certain information with respect to the beneficial ownership of our Ordinary Shares for:
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each
stockholder known by us to be the beneficial owner of more than 5% of our outstanding Ordinary Shares;
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each
of our named executive officers; and
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all
of our directors and executive officers as a group.
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We
have determined beneficial ownership in accordance with the rules of the SEC. Under such rules, beneficial ownership includes
any shares over which the individual has sole or shared voting power or investment power as well as any shares that the individual
has the right to subscribe for within 60 days of the date of this Annual Report through the exercise of any warrants or other
rights. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and
entities named in the table below have sole voting and investment power or the power to receive the economic benefit with respect
to all Ordinary Shares that they beneficially own, subject to applicable community property laws. None of the stockholders listed
in the table are a broker-dealer or an affiliate of a broker dealer. None of the stockholders listed in the table are located
in the United States and none of the Ordinary Shares held by them are located in the United States. Applicable percentage ownership
is based on 6,905,248 Ordinary Shares outstanding as of April 30, 2019. Unless otherwise indicated, the address of each
beneficial owner listed in the table below is c/o Powerbridge, c/o 1
st
Floor, Building D2, Southern Software Park,
Tangjia Bay, Zhuhai, Guangdong 519080, China.
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Beneficial Ownership
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Name of Beneficial Owner
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Ordinary
Shares
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Percentage
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Ban Lor (1)
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5,665,144
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65.45
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%
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Stewart Lor (2)
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696,571
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8.05
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%
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Xiuhe Jiang (1)(3)*
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30,007
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0.35
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%
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Nanfang Li
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0
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-
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Tianfei Feng
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0
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-
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Yuping Ouyang **
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0
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-
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Guoquan Wang **
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0
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-
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Bo Wu **
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0
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-
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All directors and executive officers as a group (5 persons)
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6,361,715
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73.50
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%
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Hybridge Holdings Ltd. (1)
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4,650,981
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53.74
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%
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Hogstream International Ltd. (2)
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696,571
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8.05
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%
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5% or greater beneficial owners as a group
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5,347,552
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61.79
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%
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Less
than 1%.
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**
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Ms.
Yuping Ouyang has been appointed and accepted appointment as our independent director, effective as of October 23, 2018. Messrs.
Gouquan Wang and Bo Wu have been appointed and accepted appointments as our independent directors, effective as of October
22, 2018.
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(1)
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Consists
of 4,650,981 Ordinary Shares held by Hybridge Holding Ltd., a British Virgin Islands company (“Hybridge”) which
is 100% owned by Ban Lor; 339,680 Ordinary Shares held by Sunbrook One Ltd., a British Virgin Islands company (“Sunbrook”)
which Ban Lor, together with his spouse, Mrs. Lor, owns and controls 65.35% equity interest and voting power; 338,082 Ordinary
Shares held by Bitlakes Holdings Ltd., a British Virgin Islands company (“Bitlakes”) which Ban Lor owns and controls
50.75% equity interest and voting power; and 336,401 Ordinary Shares held by Foxbit Holdings Ltd., a British Virgin Islands
company (“Foxbit”) which Ban Lor owns and controls 50.98% equity interest and voting power. The principal office
address for Hybridge, Sunbrook, Bitlakes and Foxbit is Sertus Incorporation (BVI) Limited, Sertus Chambers, P.O. Box 905,
Quastsky Building, Road Town, Tortola, British Virgin Islands.
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Includes
696,571 Ordinary Shares held by Hogstream International Ltd., a British Virgin Islands company wholly-owned by Stewart Lor
(“Hogstream”). Mr. Lor maintains sole voting control over the shares held by Hogstream, the principal office address
of which is at Sertus Incorporation (BVI) Limited, Sertus Chambers, P.O. Box 905, Quastsky Building, Road Town, Tortola, British
Virgin Islands.
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(3)
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Represents
30,007 Ordinary Shares beneficially owned by Xiuhe Jiang through his 8.92% equity interest in Foxbit Holdings Ltd.
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As
of the date of this Annual Report, there were 13 holders of record entered in our share register. The number of individual holders
of record is based exclusively upon our share register and does not address whether a share or shares may be held by the holder
of record on behalf of more than one person or institution who may be deemed to be the beneficial owner of a share or shares in
our company.
To
our knowledge, no other shareholder beneficially owns more than 5% of our shares. Our company is not owned or controlled directly
or indirectly by any government or by any corporation or by any other natural or legal person severally or jointly. Our major
shareholders do not have any special voting rights.
B.
Related Party Transactions
The
following is a description of transactions since 2016, in which the amount involved in the transaction exceeded or will exceed
the lesser of $120,000 or one percent of the average of our total assets as at the year-end for the last two completed fiscal
years, and to which any of our directors, executive officers or beneficial holders of more than 5% of our capital stock, or any
immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect
material interest.
Due
from related party
. From time to time, the Company advances funds to Mr. Stewart Lor, CFO of the Company, for business purposes.
The advance is short term in nature, which are recorded in prepayment, deposits and other current assets. The balance due from
Mr. Stewart Lor was $3,073 and $46,078 as of December 31, 2017 and 2016, respectively. As of August 22, 2018, the balance due
from related party, Mr. Stewart Lor, in the amount of $3,073 had been collected in full by the Company. The advances were not
intended to be loans to Mr. Lor, but for business and other business purposes.
From
time to time, the Company also advances funds to Mr. Ban Lor, Chairman and CEO of the Company, for business purposes. The advance
is short term in nature. The balance due from Mr. Ban Lor was $102,567 as of December 31, 2018. The advances were fully repaid
in April 2019.
For
the year ended December 31, 2018, the Company loaned $51,516 to a related party controlled by Mr. Ban Lor’s family. The
loan is due in September 2019 with annual interest rate of 5.35%, but Mr. Ban Lor fully repaid the loan balance in March 2019.
Due
to related party
. Due to related party mainly represents the unpaid wages and other benefits to Mr. Ban Lor, Chairman, President
and CEO of the Company. The balance of due to Mr. Ban Lor was $615,481 and $1,308,566 as of December 31, 2017 and 2016, respectively,
which is non-interest bearing, non-collateralized and due on demand. As of August 21, 2018, the balance due to related party,
Mr. Ban Lor, in the amount of $615,481 had been paid in full by the Company.
Short
term bank loan
. An outstanding balance of short-term bank loan consisted an unsecured bank loan from China Construction Bank,
in the amount of $230,507 with an interest rate of 6.3% per annum due on January 12, 2018. The unsecured bank loan was guaranteed
by Mr. Ban Lor, Chairman, president and CEO of the Company, and his family member. For the years ended December 31, 2017 and 2016,
the interest expense was $13,111 and $3,665, respectively. The loan was fully repaid upon maturity.
On
March 2, 2018, Powerbridge Zhuhai entered into a loan agreement with China Construction Bank to obtain a loan of $218,166 for
a term of one year and at a fixed annual interest rate of 7.4%. The bank loan was unsecured and guaranteed by Mr. Ban Lor, the
Chairman and CEO of the Company, and his family member.
On
October 8, 2018, Powerbridge Zhuhai entered into a loan agreement with Bank of Communication to obtain a loan of $290,888 for
a term of one year and at a fixed annual interest rate of 5.4%. The bank loan was unsecured and guaranteed by Mr. Ban Lor, the
Chairman and CEO of the Company, and his family member.
On
December 7, 2018, Powerbridge Zhuhai entered into another loan agreement with Bank of China to obtain a loan of $727,220 for a
term of one year and at a fixed annual interest rate of 5.2%. The bank loan was guaranteed by Mr. Ban Lor and secured by a restricted
cash deposit of $109,083 as of December 31, 2018.
On
December 3, 2018, Powerbridge Zhuhai entered into a loan agreement with Dongguan Bank to obtain a loan of $290,888 for a term
of one year and at a fixed annual interest rate of 7.0%. The bank loan was guaranteed by a third party guarantee company and Mr.
Ban Lor and his family.
On
February 1, 2019, Powerbridge Zhuhai entered into a loan agreement with Bank of China to obtain a loan of $436,332 for a term
of one year and at a fixed annual interest rate of 4.8%. The bank loan was guaranteed by Mr. Ban Lor and secured by a restricted
cash deposit of $65,450.
Advisory
Agreement with Tripoint Capital Advisors, LLC
. We entered into an advisory agreement with Tripoint Capital Advisors, LLC (“Advisor”),
dated as of January 18, 2018, and its amendment, dated as of August 16, 2018, pursuant to which, (i) Advisor agrees to represent
us to assist with our current business and corporate development in U.S. capital markets and our contemplated marketing and development
as a U.S. public company; and (ii) we agree to provide a flat fee of US$10,000 per month for Advisor’s services and up to
an aggregate of 300,000 options to purchase shares of the Ordinary Shares upon the fulfillment of certain conditions (the “Tripoint
Options”). The Tripoint Options have a strike price equal to 75% of the offering price of the Ordinary Shares offered in
the IPO. The agreement is for a term of 12 months. Louis Taubman, a partner with our counsel, Hunter Taubman Fischer & Li
LLC, is also an indirect minority owner of Tripoint Capital Advisors.
C.
Interests of Experts and Counsel
Not
applicable.
Item
8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
See
Item 18 for our audited consolidated financial statements.
Legal
Proceedings
From
time to time, we are subject to legal proceedings, investigations and claims incidental to the conduct of our business. We are
not currently a party to any legal proceeding or investigation which, in the opinion of our management, is likely to have a material
adverse effect on our business, financial condition or results of operations.
Dividend
Policy
The
holders of our Ordinary Shares are entitled to dividends out of funds legally available when and as declared by our board of directors.
Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future. Should
we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the
receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating
subsidiaries may, from time to time, be subject to restrictions on their ability to make distributions to us, including as a result
of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard
currency and other regulatory restrictions. In the event of our liquidation, dissolution or winding up, holders of our Ordinary
Shares are entitled to receive, ratably, the net assets available to shareholders after payment of all creditors.
B.
Significant Changes
Except
as disclosed elsewhere in this Annual Report, we have not experienced any significant changes since the date of our audited consolidated
financial statements included in this Annual Report.
Item
9. THE OFFER AND LISTING
A.
Offering and Listing Details.
The
Registration Statement became effective on March 28, 2019. Our Ordinary Shares are currently listed on NASDAQ Capital Market under
the symbol PBTS.
B.
Plan of Distribution
Not
applicable.
C.
Markets
Our
Ordinary Shares are currently listed on NASDAQ Capital Market under the symbol PBTS.
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.
Amended and Restated Memorandum and Articles of Association
The
information required by Item 10.B of Form 20-F is included in the section titled “Description of Share Capital” in
our Registration Statement, which section is incorporated herein by reference. Our Third Amended and Restated Memorandum and Articles
of Association were filed as Exhibit 3.1 to the first amendment to the Registration Statement filed on February 19, 2019 and are
hereby incorporated by reference into this Annual Report.
C.
Material Contracts
The
information required by Item 10.C of Form 20-F is included in the sections titled “Our Business,” “Directors
and Executive Officers,” “Related Party Transactions,” and “Underwriting” in in our Registration
Statement, which sections are incorporated herein by reference.
D.
Exchange Controls
Under
Cayman Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls
or restrictions that affect the remittance of dividends, interest or other payments to nonresident holders of our shares.
E.
Taxation
The
following summary of the material Cayman Islands, PRC and U.S. federal income tax consequences of an investment in our Ordinary
Shares is based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report, all of which are
subject to change. This summary does not deal with all possible tax consequences relating to an investment in our Ordinary Shares,
such as the tax consequences under state, local and other tax laws.
Cayman
Islands Taxation
The
Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciation and there
is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to the Company
levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or
brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable
to any payments made to or by the Company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Material
PRC Income Tax Considerations
Under
the new EIT Law and the Implementing Rules, an enterprise established outside of the PRC with “de facto management bodies”
within the PRC is considered as a resident enterprise and will be subject to a PRC income tax rate of 25% on its global income.
According to the Implementing Rules, “de facto management bodies” refer to “establishments that carry out substantial
and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of
an enterprise.” Accordingly, our holding company may be considered a resident enterprise and may therefore be subject to
a PRC income tax on our global income. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled
Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82,
on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body”
of a Chinese-controlled offshore incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises
controlled by PRC enterprises and not those invested in by individuals or foreign enterprises, the determining criteria set forth
in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management
body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they
are controlled by PRC enterprises or controlled by or invested in by individuals or foreign enterprises. If we are considered
a resident enterprise and earn income other than dividends from our PRC subsidiary, such PRC income tax on our global income could
significantly increase our tax burden and materially and adversely affect our cash flow and profitability.
We
do not believe that Powerbridge meets all of the conditions required for PRC resident enterprise. The Company is a company incorporated
outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are
located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained,
outside the PRC. For the same reasons, we believe our other entities outside of China are not PRC resident enterprises either.
However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain
with respect to the interpretation of the term “de facto management body.” There can be no assurance that the PRC
government will ultimately take a view that is consistent with ours.
However,
if the PRC tax authorities determine that Powerbridge is a PRC resident enterprise for enterprise income tax purposes, we may
be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. Such
10% tax rate could be reduced by applicable tax treaties or similar arrangements between China and the jurisdiction of our shareholders.
For example, for shareholders eligible for the benefits of the tax treaty between China and Hong Kong, the tax rate is reduced
to 5% for dividends if relevant conditions are met. In addition, non-resident enterprise shareholders may be subject to a 10%
PRC tax on gains realized on the sale or other disposition of ordinary shares, if such income is treated as sourced from within
the PRC.
It
is unclear whether our non-PRC individual shareholders would be subject to any PRC tax on dividends or gains obtained by such
non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to
such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax
treaty. However, it is also unclear whether non-PRC shareholders of the Company would be able to claim the benefits of any tax
treaties between their country of tax residence and the PRC in the event that the Company is treated as a PRC resident enterprise.
Provided
that our Cayman Islands holding company, Powerbridge, is not deemed to be a PRC resident enterprise, our shareholders who are
not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other
disposition of our shares. However, under Circular 7, where a non-resident enterprise conducts an “indirect transfer”
by transferring taxable assets, including, in particular, equity interests in a PRC resident enterprise, indirectly by disposing
of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, or the transferee or
the PRC entity which directly owned such taxable assets may report to the relevant tax authority such indirect transfer. Using
a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company
if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As
a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee would be obligated
to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
We and our non-PRC resident investors may be at risk of being required to file a return and being taxed under Circular 7, and
we may be required to expend valuable resources to comply with Bulletin 37, or to establish that we should not be taxed under
Circular 7 and Bulletin 37.
Prospective
investors should consult with their own tax advisors regarding the applicability of any such taxes, the effects of any applicable
income tax treaties, and any available foreign tax credits.
Material
U.S. Tax Considerations
The
following is a summary of the material U.S. federal income tax consequences of owning and disposing of our Ordinary Shares. The
discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of
our shares that is for U.S. federal income tax purposes:
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an
individual citizen or resident of the United States;
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a
corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in
or under the laws of the United States, any state thereof or the District of Columbia;
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an
estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
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a
trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons
are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable
U.S. Treasury regulations to be treated as a U.S. person.
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If
a beneficial owner of our shares is not described as a U.S. Holder in one of the four bullet points above 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 U.S. federal income tax consequences applicable to Non-U.S. Holders is described below under the heading “Tax
Consequences to Non-U.S. Holders of Ordinary Shares.”
This
summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing
Treasury regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities
are subject to change or differing interpretations, possibly on a retroactive basis.
This
discussion does not address all aspects of U.S. federal income taxation that may be relevant to us or to any particular holder
of our shares based on such holder’s individual circumstances. In particular, this discussion considers only holders that
own our shares as capital assets within the meaning of Section 1221 of the Code. This discussion also does not address the potential
application of the alternative minimum tax or the U.S. federal income tax consequences to holders that are subject to special
rules, including:
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financial
institutions or financial services entities;
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broker-dealers;
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taxpayers
who have elected mark-to-market accounting;
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tax-exempt
entities;
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governments
or agencies or instrumentalities thereof;
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insurance
companies;
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regulated
investment companies;
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real
estate investment trusts;
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certain
expatriates or former long-term residents of the United States;
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persons
that actually or constructively own 5% or more of our voting shares;
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persons
that acquired our shares pursuant to the exercise of employee stock options, in connection with employee stock incentive plans
or otherwise as compensation;
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persons
that hold our shares as part of a straddle, constructive sale, hedging, conversion or other integrated transaction; or
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persons
whose functional currency is not the U.S. dollar.
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This
discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or
non-U.S. tax laws. Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities
or persons who hold our securities through such entities. If a partnership (or other entity classified as a partnership for U.S.
federal income tax purposes) is the beneficial owner of our shares, the U.S. federal income tax treatment of a partner in the
partnership will generally depend on the status of the partner and the activities of the partnership. This discussion also assumes
that any distribution made (or deemed made) in respect of our shares and any consideration received (or deemed received) by a
holder in connection with the sale or other disposition of such shares will be in U.S. dollars.
We
have not sought, and will not seek, a ruling from the Internal Revenue Service (or “IRS”), or an opinion of counsel
as to any U.S. federal income tax consequence described herein. The IRS may disagree with one or more aspects of the discussion
herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations,
administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.
BECAUSE
OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY PARTICULAR HOLDER OF OUR SECURITIES MAY BE AFFECTED
BY MATTERS NOT DISCUSSED HEREIN, EACH HOLDER OF OUR SECURITIES IS URGED TO CONSULT WITH ITS TAX ADVISOR WITH RESPECT TO THE SPECIFIC
TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF OUR SECURITIES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND
NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND APPLICABLE TAX TREATIES.
Tax
Consequences to U.S. Holders of Ordinary Shares
Taxation
of Distributions Paid on Ordinary Shares
Subject
to the passive foreign investment company (or “PFIC”), rules discussed below, a U.S. Holder generally will be required
to include in gross income as ordinary income the amount of any cash dividend paid on our Ordinary Shares. A cash distribution
on such shares will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of
our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Any distributions in excess
of such earnings and profits generally will be applied against and reduce the U.S. Holder’s basis in its Ordinary Shares
and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of such Ordinary Shares. With respect
to corporate U.S. Holders, dividends on our shares will not be eligible for the dividends-received deduction generally allowed
to domestic corporations in respect of dividends received from other domestic corporations.
With
respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends on our shares will be taxed at the lower long-term
capital gains rate applicable to qualified dividend income (see “— Taxation on the Disposition of Ordinary Shares”
below), provided that (1) our Ordinary 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, we are eligible for the benefits
of the Agreement between the Government of the United States of America and the Government of the People’s Republic of China
for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, or the “U.S.-PRC
Tax Treaty,” (2) 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 (3) certain holding period requirements are met. Under published IRS authority, shares are considered
for purposes of clause (1) 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 Stock Market. U.S. Holders should consult their own tax advisors
regarding the tax treatment of any dividends paid with respect to our Ordinary Shares, including the effects of any change in
law after the date of this Annual Report.
If
PRC taxes apply to dividends paid to a U.S. Holder on our Ordinary Shares, such U.S. Holder may be entitled to a reduced rate
of PRC tax under the U.S-PRC Tax Treaty. In addition, such PRC taxes may be treated as foreign taxes eligible for credit against
such holder’s U.S. federal income tax liability (subject to certain limitations). U.S. Holders should consult their own
tax advisors regarding the creditability of any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.
Taxation
on the Disposition of Ordinary Shares
Upon
a sale or other taxable disposition of our Ordinary Shares, and subject to the PFIC rules discussed below, a U.S. Holder will
recognize capital gain or loss in an amount equal to the difference between the amount realized in U.S. dollars and the U.S. Holder’s
adjusted tax basis in the Ordinary Shares. Capital gains recognized by U.S. Holders generally are subject to U.S. federal income
tax at the same rate as ordinary income, except that long-term capital gains recognized by non-corporate U.S. Holders are generally
subject to U.S. federal income tax at a maximum rate of 20%. Capital gain or loss will constitute long-term capital gain or loss
if the U.S. Holder’s holding period for the Ordinary Shares exceeds one year. The deductibility of capital losses is subject
to various limitations. If PRC taxes would otherwise apply to any gain from the disposition of our Ordinary Shares by a U.S. Holder,
such U.S. Holder may be entitled to a reduction in or elimination of such taxes under the U.S.-PRC Tax Treaty. Any PRC taxes that
are paid by a U.S. Holder with respect to such gain may be treated as foreign taxes eligible for credit against such holder’s
U.S. federal income tax liability (subject to certain limitations that could reduce or eliminate the available tax credit). 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 Rules
A
foreign (i.e., non-U.S.) corporation will be a PFIC if at least 75% of its gross income in a taxable year of the foreign corporation,
including its pro rata share of the gross income of any corporation in which it is considered to own at least 25% of the shares
by value, is passive income. Alternatively, a foreign corporation will be a PFIC if at least 50% of its assets in a taxable year
of the foreign corporation, ordinarily determined based on fair market value and averaged quarterly over the year, including its
pro rata share of the assets of any corporation in which it is considered to own at least 25% of the shares by value, are held
for the production of, or produce, passive income. Passive income generally includes dividends, interest, rents and royalties
(other than certain rents or royalties derived from the active conduct of a trade or business) and gains from the disposition
of passive assets.
Based
on our current composition and assets, we do not expect to be treated as a PFIC under the current PFIC rules. We must make a separate
determination each year as to whether we are a PFIC. As such, our PFIC status, will not be determinable until after the end of
each taxable year. Accordingly, there can be no assurance with respect to our status as a PFIC for our current taxable year or
any future taxable year. Depending on the amount of cash we raise in the IPO, together with any other assets held for the production
of passive income, it is possible that, for our 2019 taxable year or for any subsequent taxable year, more than 50% of our assets
may be assets held for the production of passive income. We will make this determination following the end of any particular tax
year. If we are determined to be a PFIC and a U.S. Holder did not make either a timely qualified electing fund (or “QEF”),
election for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) Ordinary Shares, or a mark-to-market
election, as described below, such holder generally will be subject to special rules with respect to:
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any
gain recognized by the U.S. Holder on the sale or other disposition of its Ordinary Shares; and
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any
“excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable
year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder in respect
of the Ordinary Shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s
holding period for the Ordinary Shares).
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Under
these rules,
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the
U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for
the Ordinary Shares;
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the
amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the 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;
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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 applicable to the U.S. Holder; and
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the
interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such
year of the U.S. Holder.
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In
general, a U.S. Holder may avoid the PFIC tax consequences described above in respect to our Ordinary Shares by making a timely
QEF 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. There can be no assurance, however, that we will pay current dividends or make other
distributions sufficient for a U.S. Holder who makes a QEF election to satisfy the tax liability attributable to income inclusions
under the QEF rules, and the U.S. Holder may have to pay the resulting tax from its other assets. A U.S. Holder may make a separate
election to defer the payment of taxes on undistributed income inclusions under the QEF rules, but if deferred, any such taxes
will be subject to an interest charge.
The
QEF election is made on a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. A
U.S. Holder generally makes a QEF election by attaching a completed IRS Form 8621 (Information Return by a Shareholder of a Passive
Foreign Investment Company or Qualified Electing Fund), to a timely filed U.S. federal income tax return for the tax year to which
the election relates. Retroactive QEF elections generally may be made only by filing a protective statement with such return and
if certain other conditions are met or with the consent of the IRS. In order to comply with the requirements of a QEF election,
a U.S. Holder must receive certain information from us. Upon request from a U.S. Holder, we will endeavor to provide to the U.S.
Holder no later than 90 days after the request such information as the IRS may require, including a PFIC annual information statement,
in order to enable the U.S. Holder to make and maintain a QEF election. However, there is no assurance that we will have timely
knowledge of our status as a PFIC in the future or of the required information to be provided.
If
a U.S. Holder has made a QEF election with respect to our Ordinary Shares, and the special tax and interest charge rules do not
apply to such shares (because of a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder holds (or
is deemed to hold) such shares), any gain recognized on the appreciation of our Ordinary Shares generally will be taxable as capital
gain and no interest charge will be imposed. As discussed above, U.S. Holders of a QEF are currently taxed on their pro rata shares
of a PFIC’s earnings and profits, whether or not distributed. In such case, a subsequent distribution of such earnings and
profits that were previously included in income generally should not be taxable as a dividend to those U.S. Holders who made a
QEF election. The tax basis of a U.S. Holder’s shares in a QEF will be increased by amounts that are included in income,
and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments apply to property
if by reason of holding such property the U.S. Holder is treated under the applicable attribution rules as owning shares in a
QEF.
Although
a determination as to our PFIC status will be made annually, an initial determination that our company is a PFIC will generally
apply for subsequent years to a U.S. Holder who held Ordinary Shares while we were a PFIC, whether or not we meet the test for
PFIC status in those years. A U.S. Holder who makes the QEF election discussed above for our first taxable year as a PFIC in which
the U.S. Holder holds (or is deemed to hold) our Ordinary Shares, however, will not be subject to the PFIC tax and interest charge
rules discussed above in respect to such shares. In addition, such U.S. Holder will not be subject to the QEF inclusion regime
with respect to such shares for any taxable year of ours that ends within or with a taxable year of the U.S. Holder and in which
we are not a PFIC. On the other hand, if the QEF election is not effective for each of our taxable years in which we are a PFIC
and the U.S. Holder holds (or is deemed to hold) our Ordinary Shares, the PFIC rules discussed above will continue to apply to
such shares unless the holder makes a purging election, and pays the tax and interest charge with respect to the gain inherent
in such shares attributable to the pre-QEF election period.
Alternatively,
if a U.S. Holder, at the close of its taxable year, owns 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. If the U.S. Holder makes a valid mark-to-market
election for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) shares in us and
for which we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect
to its Ordinary Shares. 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 Ordinary Shares at the end of its taxable year over the adjusted basis in its Ordinary Shares. The
U.S. Holder also will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of its Ordinary
Shares over the fair market value of its Ordinary Shares at the end of its 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 its Ordinary Shares
will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition
of the Ordinary Shares will be treated as ordinary income.
The
mark-to-market election is available only for stock that is regularly traded on a national securities exchange that is registered
with the SEC, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure that the market price
represents a legitimate and sound fair market value. U.S. Holders should consult their own tax advisors regarding the availability
and tax consequences of a mark-to-market election in respect to our Ordinary Shares under their particular circumstances.
If
we are a PFIC and, at any time, have a foreign subsidiary that is classified as a PFIC, U.S. Holders generally would be deemed
to own a portion of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest
charge described above if we receive a distribution from, or dispose of all or part of our interest in, the lower-tier PFIC. Upon
request, we will endeavor to cause any lower-tier PFIC to provide to a U.S. Holder no later than 90 days after the request the
information that may be required to make or maintain a QEF election with respect to the lower-tier PFIC. However, there is no
assurance that we will have timely knowledge of the status of any such lower-tier PFIC or will be able to cause the lower-tier
PFIC to provide the required information. U.S. Holders are urged to consult their own tax advisors regarding the tax issues raised
by lower-tier PFICs. If a U.S. Holder owns (or is deemed to own) shares during any year in a PFIC, such holder may have to file
an IRS Form 8621 (whether or not a QEF election or mark-to-market election is made). The rules dealing with PFICs and with the
QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly,
U.S. Holders of our Ordinary Shares should consult their own tax advisors concerning the application of the PFIC rules to our
Ordinary Shares under their particular circumstances.
Tax
Consequences to Non-U.S. Holders of Ordinary Shares
Dividends
paid to a Non-U.S. Holder in respect to its Ordinary 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 Ordinary 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.
Backup
Withholding and Information Reporting
In
general, information reporting for U.S. federal income tax purposes should apply to distributions made on our Ordinary Shares
within the United States to a non-corporate U.S. Holder and to the proceeds from sales and other dispositions of our Ordinary
Shares 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 will be subject to information reporting in limited circumstances. In addition,
backup withholding of United States federal income tax, currently at a rate of 24%, generally will apply to dividends paid on
our Ordinary Shares to a non-corporate U.S. Holder and the proceeds from sales and other dispositions of shares by a non-corporate
U.S. Holder, in each case who (a) fails to provide an accurate taxpayer identification number; (b) is notified by the IRS that
backup withholding is required; or (c) in certain circumstances, fails to comply with applicable certification requirements. 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. Holders are urged to consult their own tax advisors regarding
the application of backup withholding and the availability of and procedure for obtaining an exemption from backup withholding
in their particular circumstances.
Individual
U.S. Holders may be required to report ownership of our Ordinary Shares and certain related information on their individual federal
income tax returns in certain circumstances. Generally, this reporting requirement will apply if (1) the Ordinary Shares are held
in an account of the individual U.S. Holder maintained with a “foreign financial institution” or (2) the Ordinary
Shares are not held in an account maintained with a “financial institution,” as such terms are defined in the Code.
The reporting obligation will not apply to an individual, however, unless the total aggregate value of the individual’s
foreign financial assets exceeds US$50,000 during a taxable year. For avoidance of doubt, this reporting requirement should not
apply to Ordinary Shares held in an account with a U.S. brokerage firm. Failure to comply with this reporting requirement, if
it applies, will result in substantial penalties. In certain circumstances, additional tax and other reporting requirements may
apply, and U.S. Holders of our Ordinary Shares are advised to consult with their own tax advisors concerning all such reporting
requirements.
F.
Dividends and Paying Agents
Not
applicable.
G.
Statement by Experts
Not
applicable.
H.
Documents on Display
We
have previously filed the Registration Statement with the SEC.
Documents
concerning us that are referred to in this document may be inspected at c/o 2nd Floor, Building 18, Shanghai Pudong Software Park,
498 Guoshoujing Road, Pudong, Shanghai 201203, People’s Republic of China. In addition, we file annual reports and other
information with the Securities and Exchange Commission. We file annual reports on Form 20-F and submit other information under
cover of Form 6-K. As a foreign private issuer, we are exempt from the proxy requirements of Section 14 of the Exchange Act and
our officers, directors and principal shareholders are exempt from the insider short-swing disclosure and profit recovery rules
of Section 16 of the Exchange Act. Annual reports and other information we file with the Commission may be inspected at the public
reference facilities maintained by the Commission at Room 1024, 100 F. Street, N.E., Washington, D.C. 20549, and copies of all
or any part thereof may be obtained from such offices upon payment of the prescribed fees. You may call the Commission at 1-800-SEC-0330
for further information on the operation of the public reference rooms and you can request copies of the documents upon payment
of a duplicating fee, by writing to the Commission. In addition, the Commission maintains a web site that contains reports and
other information regarding registrants (including us) that file electronically with the Commission which can be assessed at http://www.sec.gov.
I.
Subsidiary Information
For
a listing of our subsidiaries, see “Item 4. Information on the Company — A. History and Development of the Company.”
Item
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
Our
exposure to interest rate risk primarily relates to interest income generated by excess cash, which is mostly held in interest-bearing
bank deposits. While interest-earning instruments carry a degree of interest rate risk, we have not been exposed, nor do we anticipate
being exposed, to material risks due to changes in market interest rates.
Foreign
Currency Risk
A
majority of the Company’s expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’
assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign
exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by
the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be
processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in
order to affect the remittance.
Our
functional currency is the RMB, and our financial statements are presented in U.S. dollars. The RMB depreciated by 1.7% in fiscal
year 2017 and further depreciated by 5.7% in fiscal year 2018. It is difficult to predict how market forces or PRC or U.S. government
policy may impact the exchange rate between the RMB and the U.S. dollar in the future. The change in the value of the RMB relative
to the U.S. dollar may affect our financial results reported in the U.S. dollar terms without giving effect to any underlying
changes in our business or results of operations. Currently, our assets, liabilities, revenues and costs are denominated in RMB.
To
the extent that the Company needs to convert U.S. dollars into RMB for capital expenditures and working capital and other business
purposes, appreciation of RMB against U.S. dollar would have an adverse effect on the RMB amount the Company would receive from
the conversion. Conversely, if the Company decides to convert RMB into U.S. dollar for the purpose of making payments for dividends,
strategic acquisition or investments or other business purposes, appreciation of U.S. dollar against RMB would have a negative
effect on the U.S. dollar amount available to the Company.
Item
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
With
the exception of Items 12.D.3 and 12.D.4, this Item 12 is not applicable for annual reports on Form 20-F. As to Items 12.D.3 and
12.D.4, this Item 12 is not applicable, as the Company does not have any American Depositary Shares.