HKIT 20-F
Biddance AI Systems, Inc. (HKIT)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
OR
For the fiscal year ended
OR
For the transition period from _________ to _________.
OR
Date of event requiring this shell company report:
Commission file number:
(Exact name of Registrant as Specified in its Charter)
N/A
(Translation of Registrant’s Name into English)
(Jurisdiction of Incorporation or Organization)
+86 592-5395967
(Address of Principal Executive Offices)
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange On Which Registered | ||
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
An aggregate of
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐
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Yes ☐
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| Large accelerated filer ☐ | Accelerated filer ☐ | Emerging growth company |
If an emerging growth company that prepares its
financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange
Act.
| † | The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. |
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has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report.
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of an error to previously issued financial statements.
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| ☒ | ☐ | International Financial Reporting Standards as issued by the International Accounting Standards Board | ☐ | Other |
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Item 17 ☐ Item 18 ☐
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(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
☐ Yes ☐ No
TABLE OF CONTENTS
i
INTRODUCTORY NOTES
Except as otherwise indicated by the context and for the purposes of this annual report only, references in this annual report to:
| ● | “affiliated entities” are to our subsidiaries and variable interest entities (“VIE”); |
| ● | “China” or the “PRC” are to the People’s Republic of China, excluding Taiwan for the purposes of this annual report only; | |
| ● | “Class A Ordinary Shares” are to the Class A Ordinary Shares of Hitek Global Inc., par value $0.0001 per share. | |
| ● | “Class B Ordinary Shares” are to the Class B Ordinary Shares of Hitek Global Inc., par value $0.0001 per share. |
| ● | "Companies Act" are to the Companies Act (As Revised) of the Cayman Islands. |
| ● | “Haitian Weilai” are to Xiamen Haitian Weilai Technology Co., Ltd., a limited liability company organized under the laws of the PRC that is fully owned by WFOE; |
| ● | “HiTek HK” are to the Company’s wholly owned subsidiary, HiTek Hong Kong Ltd., a Hong Kong corporation; |
| ● | “HiTek”, or “VIE entity”, are to Xiamen Hengda HiTek Computer Network Co., Ltd., a limited liability company organized under the laws of the PRC, that we control via a series of contractual arrangements between WFOE and HiTek; |
| ● | “Huasheng” are to Xiamen Huasheng HiTek Computer Network Co., Ltd., a limited liability company organized under the laws of the PRC that function as HiTek’s operating subsidiary; |
| ● | “Ordinary Shares” are to the Class A Ordinary Shares and Class B Ordinary Shares. |
| ● | “we”, “us” or the “Company” are to Hitek Global Inc.; |
| ● | “WFOE” are to Tian Dahai (Xiamen) Information Technology Co. Ltd.,a limited liability company organized under the laws of the People’s Republic of China (the “PRC”), which is wholly-owned by us through HiTek HK; and |
Our business is conducted via HiTek, a VIE entity in the PRC, using RMB, the currency of China. Our consolidated financial statements are presented in United States dollars (“USD”). In this annual report, we refer to assets, obligations, commitments and liabilities in our consolidated financial statements (“CFS”) in USD. These dollar references are based on the exchange rate of RMB to USD, determined as of a specific date or for a specific period. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of USD which may result in an increase or decrease in the amount of our obligations (expressed in dollars) and the value of our assets.
ii
FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains forward-looking statements that reflect our current expectations and views of future events. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to:
| ● | our goals and strategies; |
| ● | our future business development, financial condition and results of operations; |
| ● | our expectations regarding the market for our concrete products; |
| ● | our expectations regarding demand for and market acceptance of our nutraceutical and dietary supplements products; |
| ● | our plans to establish partnerships and develop new businesses; |
| ● | our plans to invest in our business; |
| ● | our relationships with our partners; |
| ● | our future business development, results of operations and financial condition; |
| ● | market conditions affecting our equity capital; |
| ● | change in macroeconomic conditions; |
| ● | competition in our industry; and |
| ● | relevant government policies and regulations relating to our industry. |
We would like to caution you not to place undue reliance on these forward-looking statements and you should read these statements in conjunction with the risk factors disclosed in “Item 3. Key Information—D. Key Information—Risk Factors.” Those risks are not exhaustive. We operate in an evolving environment. New risks emerge from time to time and it is impossible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in any forward-looking statement. We do not undertake any obligation to update or revise the forward-looking statements except as required under applicable law. You should read this annual report and the documents that we reference in this annual report completely and with the understanding that our actual future results may be materially different from what we expect.
iii
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
Our Corporate Structure
We are an offshore holding company incorporated in the Cayman Islands. As a holding company with no material operations, our operations were conducted in China by (i) Haitian Weilai, our indirect subsidiary, (ii) the VIE entity and the VIE entity’s subsidiary, Huasheng. Neither we nor our subsidiaries own any equity interests in the VIE entity. WFOE, the VIE entity and the shareholders of the VIE entity entered into a series of contractual arrangements, also known as the “VIE Agreements”, pursuant to which we are able to consolidate the financial results of the VIE entity in our consolidated financial statements because we are deemed as the primary beneficial of the VIE under generally accepted accounting principles in the U.S. (“U.S. GAAP”), and this structure involves unique risks to investors.
The following diagram illustrates our corporate structure as of the date of this annual report. All percentages in the following diagram related to our shareholders reflect the voting ownership interests instead of the equity interests held by each of our shareholders given that each holder of our Class B Ordinary Shares is entitled to 15 votes per one Class B Ordinary Share and each holder of our Class A Ordinary Shares is entitled to one vote per one Class A Ordinary Share:
| (1) | The equity of HiTek is 56.29% owned by Xiaoyang Huang, our Chief Executive Officer; 36.78% owned by Shenping Yin, our Chairman of the Board; 2.35% owned by Bo Shi, our Chief Technology Officer; 0.78% owned by Zhishuang Wang; 0.78% owned by Liuqing Huang; 3.02% owned by Jingru Li. |
1
The VIE Agreements
The VIE Agreements by and among Tian Dahai (Xiamen) Information Technology Co. Ltd. (the “WFOE”), HiTek, and HiTek’s shareholders include (i) certain power of attorney agreements and equity interest pledge agreement, pursuant to which shareholders of HiTek pledged all of their equity interests in HiTek to WFOE guarantee the performance of HiTek’s obligations under the exclusive technical consulting and service agreement; (ii) an exclusive technical consulting and service agreement which allows WFOE to receive substantially all of the economic benefits from HiTek; and (iii) certain exclusive equity interest purchase agreements which provide WFOE with an exclusive option to purchase all or part of the equity interests in and/or assets of HiTek when and to the extent permitted by PRC laws. Through the VIE Agreements among WFOE, HiTek and HiTek’s shareholders, we are deemed to have a controlling financial interest in, and be the primary beneficiary of, the VIE for accounting purposes only and must consolidate the VIE because it met the conditions under U.S. GAAP to consolidate the VIE.
Each of the VIE Agreements is described in detail below:
Exclusive Technical Consulting and Service Agreement
Pursuant to the Exclusive Technical Consulting and Service Agreement between HiTek and WFOE, WFOE provides HiTek with technical support, consulting services and other management services relating to its day-to-day business operations and management, on an exclusive basis. The Exclusive Technical Consulting and Service Agreement came into effect as of March 31, 2018. For services rendered to HiTek by WFOE under this agreement, WFOE is entitled to collect a service fee that shall be paid per quarter of 100% of HiTek’s quarterly profit. The term of the Exclusive Technical Consulting and Service Agreement is ten years unless it is terminated by WFOE with 30-day prior notice.
Equity Interest Pledge Agreement
WFOE, HiTek and HiTek shareholders entered into an Equity Interest Pledge Agreement, pursuant to which HiTek shareholders pledged all of their equity interests in HiTek to WFOE in order to guarantee the performance of HiTek’s obligations under the Exclusive Technical Consulting and Service Agreement as described above. The Equity Interest Pledge Agreement came into effect as of March 31, 2018. During the term of the pledge, WFOE is entitled to receive any dividends declared on the pledged equity interests of HiTek. The Equity Interest Pledge Agreement ends when all contractual obligations under the Exclusive Technical Consulting and Service Agreement have been fully performed.
Exclusive Equity Interests Purchase Agreement
Under the Exclusive Equity Interests Purchase Agreement, the HiTek Shareholders granted WFOE (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, part or all of their equity interests in HiTek. The option price is equal to the capital paid in by the HiTek Shareholders subject to any appraisal or restrictions required by applicable PRC laws and regulations. The Exclusive Equity Interests Purchase Agreement remains effective for a term of ten years and may be extended for another ten years at WFOE’s election.
Power of Attorney
Pursuant to the Power of Attorney, each HiTek Shareholder authorizes WFOE to act on their behalf as their exclusive agent and attorney with respect to all rights as shareholders, including but not limited to: (a) the attendance of the shareholder’s meeting and the execution of relative shareholder resolution(s) of HiTek; (b) exercising all the shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the articles of association, including but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders the legal representative, the executive director, supervisor, the chief executive officer and other senior management members of HiTek.
Although it is not explicitly stipulated in the Powers of Attorney, the term of the Powers of Attorney shall be the same as the term of that of the Exclusive Equity Interests Purchase Agreement.
The Powers of Attorney are coupled with an interest and shall be irrevocable and continuously valid from the date of their execution, so long as the relevant HiTek Shareholder is a shareholder of Company.
2
Risks Associated with Our Corporate Structure, Doing Business in China and the VIE Agreements
The Company is not a Chinese operating company, but a Cayman Islands holding company with operations mainly conducted by its subsidiaries based in mainland China.
We face various legal and operational risks and uncertainties associated with being based in and having the majority of our operations in mainland China and the complex and evolving mainland China laws and regulations. For example, we face risks associated with the fact that the PRC government has significant authority in regulating our operations and may influence or intervene in our operations at any time, regulatory approvals on offerings conducted overseas by, and foreign investment in, China-based issuers, anti-monopoly regulatory actions, and oversight on data security, which may impact our ability to conduct certain businesses, accept foreign investments, or continue to list on a United States exchange. These risks could result in a material adverse change in our operations and the value of our shares, significantly limit or hinder our ability to offer or continue to offer securities to investors, or cause the value of such securities to significantly decline or become worthless.
The Corporate Structure
The VIE structure cannot completely replicate a foreign investment in China-based companies, as the shareholders will not and may never hold equity interests in the Chinese operating entities. Instead, the VIE structure provides contractual exposure to foreign investment in us. Because we do not hold equity interests in the VIE, we are subject to risks due to uncertainty of the interpretation and the application of the PRC laws and regulations, including but not limited to limitation on foreign ownership of internet technology companies, regulatory review of oversea listing of PRC companies through a special purpose vehicle, and the validity and enforcement of the VIE Agreements as they have not been tested in a court of law. The VIE Agreements may not be effective in providing control over HiTek. See “Risk Factors — Risks Relating to Our Corporate Structure” starting on page 14 of this annual report, “Risk Factors — Risks Relating to Doing Business in the PRC” starting on page 20 of this annual report for more information.
We are subject to the risks of uncertainty about any future actions of the PRC government in this regard that could disallow the VIE structure, which would likely result in a material change in our operations and the value of Class A Ordinary Shares may depreciate significantly or become worthless. We are also subject to certain legal and operational risks associated with the VIE’s operations in China. PRC laws and regulations governing our current business operations are sometimes vague and uncertain, and therefore, these risks may result in a material change in the VIE’s operations, significant depreciation of the value of our Class A Ordinary Shares, or a complete hindrance of our ability to continue to offer our securities to investors. Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement.
Permission or Approval Required from the PRC Authorities for The VIE’s Operation
To operate our business in China, the consolidated VIE is required to obtain a business license from the State Administration for Market Regulation (“SAMR”). HiTek has a valid business license from the SAMR, and no application for any such license was denied.
We are aware, however, recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement.
On July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the Opinions. The Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems will be taken to deal with the risks and incidents of China-concept overseas listed companies, and cybersecurity and data privacy protection requirements and similar matters. The Opinions and any related implementing rules to be enacted may subject us to compliance requirement in the future. Given the current regulatory environment in the PRC, we are still subject to the uncertainty of different interpretation and enforcement of the rules and regulations in the PRC adverse to us, which may take place quickly with little advance notice
3
Additionally, pursuant to the PRC Cybersecurity Law, which was promulgated by the Standing Committee of the National People’s Congress on November 7, 2016 and took effect on June 1, 2017, personal information and important data collected and generated by a critical information infrastructure operator in the course of its operations in China must be stored in China, and if a critical information infrastructure operator purchases internet products and services that affects or may affect national security, it should be subject to cybersecurity review by the Cyberspace Administration of China (“CAC”). On July 30, 2021, the State Council issued Regulation on Protecting the Security of Critical Information Infrastructure, clarifying the definition of critical information infrastructure as “any of network facilities and information systems in important industries and fields—such as public communication and information services, energy, transportation, water conservancy, finance, public services, e-government, and science, technology and industry for national defense—that may seriously endanger national security, national economy and people's livelihood, and public interests in the event that they are damaged or lose their functions or their data are leaked.” On December 28, 2021, the CAC and other relevant PRC governmental authorities jointly promulgated the Cybersecurity Review Measures (the “CAC Revised Measures”) to replace the original Cybersecurity Review Measures. The CAC Revised Measures took effect on February 15, 2022. Pursuant to the CAC Revised Measures, if critical information infrastructure operators purchase network products and services, or network platform operators conduct data processing activities that affect or may affect national security, they will be subject to cybersecurity review. On November 14, 2021, CAC published the Administration Measures for Cyber Data Security (Draft for Public Comments), or the “Cyber Data Security Measure (Draft)”, which requires cyberspace operators with personal information of more than 1 million users who want to list abroad to file a cybersecurity review with the Office of Cybersecurity Review. The cybersecurity review will evaluate, among others, the risk of critical information infrastructure, core data, important data, or a large amount of personal information being influenced, controlled or maliciously used by foreign governments and risk of network data security after going public overseas. As confirmed by our PRC counsel, Jingtian & Gongcheng, we are not subject to cybersecurity review with the CAC in accordance with the CAC Revised Measures, because (i) we are not in possession of or otherwise holding personal information of over one million users and it is also very unlikely that it will reach such threshold in the near future; (ii) as of the date of this annual report, we have not received any notice or determination from applicable PRC governmental authorities identifying us as a critical information infrastructure operator; and (iii) we have not received any notification of cybersecurity review from relevant governmental authorities due to our impact or potential impact on national security. However, since these statements and regulatory actions are new, it is uncertain how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our daily business operation, the ability to accept foreign investments and list on an U.S. exchange. See “Risk Factors — Risks Relating to Doing Business in the PRC” starting on page 20 of this annual report for more information.
Furthermore, the PRC government initiated a series of regulatory actions and statements to regulate activities in the overseas securities listing in China, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using a variable interest entity structure. On February 17, 2023, the China Securities Regulatory Commission (“CSRC”) promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Trial Measures, and five supporting guidelines, which came into effect on March 31, 2023.
The Trial Measures regulate both direct and indirect overseas offering and listing by PRC domestic companies by adopting a filing-based regulatory regime. Pursuant to the Trial Measures, domestic companies that seek to offer or list securities overseas, both directly and indirectly, shall complete filing procedures with the CSRC pursuant to the requirements of the Trial Measures within three working days following its submission of initial public offerings or listing application. If a PRC company fails to complete required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such PRC company may be subject to administrative penalties, such as order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines. In addition, on February 24, 2023, the CSRC, together with Ministry of Finance of the PRC, National Administration of State Secrets Protection and National Archives Administration of China, revised the Provisions on Strengthening Confidentiality and Archives Administration for Overseas Securities Offering and Listing which was issued by the CSRC, National Administration of State Secrets Protection and National Archives Administration of China in 2009, or the Provisions. The revised Provisions was issued under the title the Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies, and came into effect on March 31, 2023 together with the Trial Measures. One of the major revisions to the revised Provisions is expanding its application to cover indirect overseas offering and listing, as is consistent with the Trial Measures. The revised Provisions require that, including but not limited to (a) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals or entities including securities companies, securities service providers and overseas regulators, any documents and materials that contain state secrets or working secrets of government agencies, shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level; and (b) domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals and entities including securities companies, securities service providers and overseas regulators, any other documents and materials that, if leaked, will be detrimental to national security or public interest, shall strictly fulfil relevant procedures stipulated by applicable national regulations. As of the date of this annual report, as advised by Jingtian& Gongcheng, our PRC counsel, as our post-effective amendment to the registration statement on Form F-1 relating to our initial public offering (“IPO”) was declared effective on March 30, 2023 and we completed our initial public offering and listing prior to September 30, 2023, we are not required to complete the filing procedures pursuant to the Trial Measures for our IPO. If in the future we are going to conduct any offering or financing in the U.S., we will complete filing procedures with the CSRC pursuant to the requirements of the Trial Measures. In addition, we have not received any formal inquiry, notice, warning, sanction, or objection from the CSRC with respect our listing on the Nasdaq Capital Market. However, since the Trial Measures were newly promulgated, there remains uncertainty as to the enactment, interpretation and implementation of regulatory requirements related to overseas securities offerings and other capital markets activities. If the filing procedure with the CSRC under the Trial Measures is required for any future offerings or any other capital raising activities, it is uncertain whether it would be possible for us to complete the filing, or how long it will take us to do so. Any failure or perceived failure of us to fully comply with such new regulatory requirements on a timely basis could significantly limit or completely hinder our ability to continue to offer securities to investors, cause significant disruption to our business operations, and severely damage our reputation, which could materially and adversely affect our financial condition and results of operations and could cause the value of our securities to significantly decline or be worthless. See “Risk Factors — Risks Relating to Doing Business in the PRC” starting on page 20 of this annual report for more information.
4
The Holding Foreign Companies Accountable Act
Our Ordinary Shares may be prohibited from trading on a national exchange or “over-the-counter” markets under the Holding Foreign Companies Accountable Act (the “HFCAA”) if the Public Company Accounting Oversight Board (“PCAOB”) determines it is unable to inspect or fully investigate our auditor and as a result the exchange where our securities are traded may delist our securities. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), which was signed into law on December 29, 2022, amending the HFCAA and requiring the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchange if its auditor is not subject to PCAOB inspections for two consecutive instead of three consecutive years. Pursuant to the HFCAA, the PCAOB issued a Determination Report on December 16, 2021, which found it was unable to inspect or investigate completely certain named registered public accounting firms headquartered in mainland China and Hong Kong. Our independent registered public accounting firm, Wei, Wei & Co., LLP, is headquartered in the United States and has been inspected by the PCAOB on a regular basis and as such, it is not affected by or subject to the PCAOB’s Determination Report. On August 26, 2022, the SEC issued a statement announcing that the PCAOB signed a Statement of Protocol with the CSRC and the Ministry of Finance of the PRC governing inspections and investigations of audit firms based in China and Hong Kong. On December 15, 2022, the PCAOB announced that it secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate the 2021 Determination Report to the contrary. However, whether the PCAOB will continue to satisfactorily conduct inspections of PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong is subject to uncertainties and depends on a number of factors out of our and our auditor’s control. The PCAOB continues to demand complete access in mainland China and Hong Kong moving forward and is making plans to resume regular inspections in early 2023 and beyond, as well as to continue pursuing ongoing investigations and initiate new investigations as needed. The PCAOB also indicated it will act immediately to consider the need to issue new determinations with the HFCAA if needed. See “Risk Factors — Risks Relating to Doing Business in the PRC” starting on page 20 of this annual report for more information.
Dividend Distributions or Assets Transfer among the Holding Company, its Subsidiaries and the VIE entity
Our management monitors the cash position of each entity within our organization regularly and prepare budgets on a monthly basis to ensure each entity has the necessary funds to fulfil its obligation for the foreseeable future and to ensure adequate liquidity. As a holding company, we may rely on dividends and other distributions on equity paid by Hitek HK, and HiTek, for our cash and financing requirements. According to the Companies Ordinance of Hong Kong, a Hong Kong company may only make a distribution out of profits available for distribution. In order for us to pay dividends to our shareholders, we will rely on payments made from HiTek to WFOE, pursuant to VIE Agreements between them, and the distribution of such payments to HiTek HK as dividends from WFOE. Certain payments from our HiTek to WFOE are subject to PRC taxes, including business taxes and VAT.
We intend to keep any future earnings to re-invest in and finance the expansion of our business, and we do not anticipate that any cash dividends will be paid or any assets will be transferred in the foreseeable future. As of the date of this annual report, there has been no distribution of dividends or assets among the holding company, the subsidiary or the consolidated VIE. In the future, cash proceeds raised from overseas financing activities may be transferred by us to the consolidated VIE via capital contributions or shareholder loans, as the case may be. Other than the above, we did not adopt or maintain any cash management policies and procedures as of the date of this annual report.
Under Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts due in the ordinary course of business. If we determine to pay dividends on any of our Class A Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our Hong Kong subsidiary, HiTek HK.
5
Current PRC regulations permit our indirect PRC subsidiaries to pay dividends to the Company only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.
The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations through the current VIE Agreements, we may be unable to pay dividends on our Class A Ordinary Shares.
Cash dividends, if any, on our Class A Ordinary Shares will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10.0%.
Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC project. However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong project must be the beneficial owner of the relevant dividends; and (b) the Hong Kong project must directly hold no less than 25% share ownership in the PRC project during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong project must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiary to its immediate holding company, HiTek HK. As of the date of this annual report, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. HiTek HK intends to apply for the tax resident certificate when WFOE plans to declare and pay dividends to HiTek HK. See “Risk Factors - There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our PRC subsidiary to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.”
A. [RESERVED]
B. Capitalization and indebtedness.
Not applicable.
C. Reasons for the offer and use of proceeds.
Not applicable.
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D. Risk factors.
An investment in our Class A Ordinary Shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all other information contained in this annual report, including the matters discussed under the headings “Forward-Looking Statements” and “Operating and Financial Review and Prospects” before you decide to invest in our Class A Ordinary Shares. We are a holding company with substantial operations in China and are subject to a legal and regulatory environment that in many respects differs from the United States. If any of the following risks, or any other risks and uncertainties that are not presently foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects could be materially and adversely affected.
Summary Risk Factor
Risks Related to Our Business Operations
Risks and uncertainties related to our business include, but are not limited to, the following:
| ● | We face risks related to health epidemics such as the COVID-19, and other outbreaks, which could significantly disrupt our operations and adversely affect our business, financial condition and results of operations. |
| ● | Our future revenues and growth prospects depend on the ACTCS pricing model mandated by the PRC government. If the PRC government continues to reduce the annual fee per user we are allowed to charge, our operations and revenues may be negatively impacted. |
| ● | Our future revenues and growth prospects depend on the growth of new business entities in the Xiamen metropolitan areas, which is not within our control and the growth rate may decrease. As such, our operations and revenues may be negatively impacted. |
| ● | Increased use of electronic invoice will reduce the number of customers using our ACTCS services. |
| ● | Our IT services and hardware and software sales rely on evolving information technologies to maintain our competitiveness, and any failure to adapt to technological developments or industry trends could harm our business. |
| ● | A significant portion of our revenue is concentrated on a few large customers, and we do not have long-term service agreements with our key customers and rely upon our longstanding relationship with them. If we lose one or more of our customers, our results of operations may be adversely and materially impacted. |
| ● | Extended payment terms may cause deferred payments or bad debts, which could negatively affect our business operations. |
| ● | We source our retail hardware primarily from a limited number of suppliers. If we lose one or more of the suppliers, our operation may be disrupted, and our results of operations may be adversely and materially impacted. |
| ● | We may not be able to adequately protect our intellectual property rights, and our competitors may be able to offer similar products and services, which would harm our competitive position. |
| ● | We have engaged in transactions with related parties, and such transactions present possible conflicts of interest that could have an adverse effect on our business and results of operations. |
| ● | There may be changes in the regulations of PRC government bodies and agencies relating to VAT collection procedure and ACTCS business |
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Risks Relating to Our Corporate Structure
We are also subject to risks and uncertainties related to our corporate structure, including, but are not limited to, the following:
| ● | We do not have direct ownership of our operating entities in China, but have control rights and the rights to the assets, property, and revenue of HiTek and its subsidiary through VIE Agreements, which may not be effective in providing control over HiTek. |
| ● | Because we are an offshore holding company and our business was conducted through VIE Agreements with HiTek, the VIE in China, if we fail to comply with applicable PRC law, we could be subject to severe penalties and our business could be adversely affected. |
| ● | We may have difficulty in enforcing any rights we may have under the VIE Agreements in PRC. |
| ● | The approval of the China Securities Regulatory Commission and other compliance procedures may be required in connection with the offering of our securities in the U.S., and, if required, we cannot predict whether we will be able to obtain such approval. As a result, both you and we face uncertainty about future actions by PRC regulatory authorities that could significantly affect the operating company’s financial performance and the enforceability of the VIE Agreements. |
| ● | PRC laws and regulations governing our current business operations are sometimes vague and uncertain and any changes in such laws and regulations may impair our ability to operate profitable. |
| ● | Regulations relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies and could adversely affect our business. |
| ● | Uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations. |
Risks Relating to Doing Business in the PRC
We are based in China and having the majority of our operations in China, and therefore, we face risks and uncertainties relating to doing business in the PRC in general, including, but not limited to, the following:
| ● | Although the audit report included in this annual report is prepared by U.S. auditors which are currently inspected by the PCAOB, there is no guarantee that future audit reports will be prepared by auditors inspected by the PCAOB and, as such, in the future investors may be deprived of the benefits of such inspection. Furthermore, trading in our securities may be prohibited under the HFCA Act, as Amended, if the SEC subsequently determines our audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely for two consecutive years, and as a result, U.S. national securities exchanges, such as the Nasdaq, may determine to delist our securities. |
| ● | Nasdaq may apply additional and more stringent criteria for our continued listing because we completed a small public offering and our insiders hold a large portion of our listed securities. |
| ● | It may be difficult for overseas shareholders and/or regulators to conduct investigation or collect evidence within China. |
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| ● | China’s economic, political and social conditions, laws and regulations, as well as possible interventions and influences of any government policies and actions are uncertain and could have a material adverse effect on our business and the value of our Class A Ordinary Shares. |
| ● | Because our business is dependent upon government policies that encourage a market-based economy, change in the political or economic climate in the PRC may impair our ability to operate profitably, if at all. |
| ● | In light of recent events indicating greater oversight by the Cyberspace Administration of China, or CAC, over data security, particularly for companies seeking to list on a foreign exchange, we are subject to a variety of laws and other obligations regarding cybersecurity and data protection, and any failure to comply with applicable laws and obligations could have a material and adverse effect on our business, our listing on Nasdaq, financial condition, results of operations, and the offering. |
| ● | The Chinese government exerts substantial influence over the manner in which we must conduct our business activities. Any actions by Chinese government, including any decision to intervene or influence our operations or to exert control over any offering of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to our operation, may limit or completely hinder our ability to offer or continue to offer securities to investors, and may cause the value of such securities to significantly decline or be worthless. |
| ● | We face exposure to foreign currency exchange rate fluctuations, and such fluctuations could adversely affect our business, results of operations and financial condition. |
Risks Relating Our Class A Ordinary Shares
In addition to the risks described above, we are subject to general risks and uncertainties relating our Class A Ordinary Shares, including, but not limited to, the following:
| ● | We do not intend to pay dividends for the foreseeable future. |
| ● | The market price of our Class A Ordinary Shares may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price. |
| ● | The dual-class structure of our ordinary shares has the effect of concentrating voting control with our Chairman and our chief executive officer (who together hold 100% of our issued Class B Ordinary Shares), and their interest may not be aligned with the interests of our other shareholders. |
| ● | The dual-class structure of our ordinary shares may adversely affect the trading market for our Class A Ordinary Shares. |
| ● | Our management has broad discretion to determine how to use the funds raised in the offering and may use them in ways that may not enhance our results of operations or the price of our Class A Ordinary Shares. |
| ● | Our lack of effective internal controls over financial reporting may affect our ability to accurately report our financial results or prevent fraud which may affect the market for and price of our Class A Ordinary Share. |
| ● | Because we are an “emerging growth company,” we may not be subject to requirements that other public companies are subject to, which could affect investor confidence in us and our Class A Ordinary Shares. |
| ● | Since Mr. Shenping Yin, Chairman of the Board, and his wife, Ms. Xiaoyang Huang, chief executive officer, are able to exercise more than 85% of the total voting power of our issued and outstanding share capital, Mr. Yin will have the ability to elect directors and approve matters requiring shareholder approval. |
| ● | We are a “controlled company” within the meaning of the NASDAQ Stock Market Rules and, as a result, may rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies. |
Risks Related to Our Business Operations
We face risks related to health epidemics such as the COVID-19, and other outbreaks, which could significantly disrupt our operations and adversely affect our business, financial condition and results of operations.
Our business could be materially and adversely affected by health epidemics such as the COVID-19 and other outbreaks affecting the PRC. Health epidemics may give rise to severe interruptions to public transportation and usual business operations, which could severely disrupt our operations. Our business operations depend on the overall economy and demand for IT consulting and solutions service in Xiamen area, which could be disrupted by health epidemics.
In 2020, outbreaks of COVID-19 resulted in the temporary closure of many corporate offices, retail stores, and manufacturing facilities. Normal economic life was curtailed. We took a series of measures to protect our employees, including temporarily closing our offices. For our tax devices and Services sector, we had to collect the service fee on-site from those customers who have not used our online payment platform.
The extent to which our operating and financial results may be affected by future unforeseen pandemics and health crises will depend on various factors and consequences beyond our control, such as the emergence of more contagious and harmful variants of viruses, the duration and scope of any pandemic or similar crises, additional actions by businesses and governments in response, and the speed and effectiveness of responses to combat such events.
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Our future revenues and growth prospects depend on the ACTCS pricing model mandated by the PRC government. If the PRC government continues to reduce the annual fee per user we are allowed to charge, our operations and revenues may be negatively impacted.
We sell ACTCS tax devices and provide ACTCS supporting services to our clients. The prices of GTD and annual service fees are regulated and subject to the State Tax Administration’s pricing mandates. In the past 20 years, the annual service fee has undergone three major adjustments -- from RMB 450 per year per user to RMB 370 per year per user, and then further reduced to RMB 330 per year per user. Most recently, the ACTCS annual service fee was again reduced to RMB 280 per year per user, according to the “Notice of the National Development and Reform Commission on Relevant Issues Concerning the Reduction of ACTCS Products and Maintenance Service Fee” (Development and Reform Commission Case [2017] No. 1243). According to relevant notice, the small-scale taxpayers for which sales amount did not exceed RMB 100,000 ($14,000) for each month are exempt from ACTCS or GTD technical service fee since 2019. Besides, the Company provides tax invoicing management services and charges service fee on an annual basis. The tax invoicing management service period is usually one year for RMB299. Tax invoicing management services is to host customers’ tax devices, provide training service on using Nuonuo, complete tax declaration automatically and back up data online. Since we do not control the pricing of the ACTCS services, we cannot guarantee our profit margin will be stable or we will make a profit on such services at all. We cannot guarantee that the annual service fee will not be further reduced, and therefore our revenues to be derived from ACTCS supporting services may be subject to significant fluctuation.
Our future revenues and growth prospects depend on the growth of new business entities in the Xiamen metropolitan areas, which is not within our control and the growth rate may decrease. As such, our operations and revenues may be negatively impacted.
The willingness of people to establish business entities in the Xiamen metropolitan areas is beyond our control. There are multiple reasons people may find appealing to establish a particular business in the Xiamen metropolitan areas, such as people’s personal belief and volatility in the Chinese capital markets. To the extent that people are unwilling to establish new businesses in the Xiamen metropolitan area either due to political or economic climate, we will not be able to acquire new customers to our ACTCS services. Thus, our ability to generate revenue or operate profitably may be negatively impacted.
Increased use of electronic invoice will reduce the number of customers using our ACTCS services.
Since 2018, the Chinese tax regulators have been rolling out the electronic invoicing system. Currently, electronic invoices are mostly used by businesses in the Fast Moving Consumer Goods (“FMCG”) industry such as fast food restaurants and coffee shops. The electronic invoices enable FMCG companies to apply for, issue, transfer and check the invoices through the unified online electronic invoice management system of Chinese tax authorities. Electronic invoices are very useful in helping business entities reduce operating costs and streamline service process, since they do not involve printing, storage and postage procedures. Businesses who use electronic invoices still need to purchase tax reporting devices such as GTD. But they will not need maintenance services. Currently, approximately 1.5% of our SME clients are FMCG business entities. According to relevant notice, small-scale taxpayers with sales amount not in excess of RMB 100,000 for each month are exempt from ACTCS or GTD technical service fee since 2019. Since January 2021, new taxpayers in Xiamen could receive free tax Ukeys from the Tax authorities. The increased use of electronic invoices, the exemption of ACTCS technical service fee for small-scale taxpayers and free tax Ukeys for new tax payers will reduce our annual service fee revenue and thus negatively affect our total revenue.
Future inflation in China may inhibit our ability to conduct business in China.
During the past ten years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been as high as 3.3% and as low as 1.1%. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.
The war in Ukraine and the Israel-Hamas war could materially and adversely affect our business and results of operations.
The war in Ukraine and the Israel-Hamas war have already affected global economic markets, including a dramatic increase in the price of oil and gas, and the uncertain resolution of this conflict could result in protracted and/or severe damage to the global economy. Russia’s war in Ukraine and the Israel-Hamas war have led to, and may lead to, additional sanctions being levied by the United States, European Union and other countries against Russia and the Hamas-aligned fundraising network. Russia’s military incursion, the escalation of the Israel-Hamas war and the resulting sanctions could adversely affect global energy and financial markets and thus could affect our customers’ businesses and our business, even though we do not have any direct exposure to Russia, Israel, Palestine or the adjoining geographic regions. The extent and duration of the wars, sanctions and resulting market disruptions are impossible to predict, but could be substantial. Any such disruptions caused by these wars or resulting sanctions may magnify the impact of other risks described herein. We cannot predict the progress or outcome of the situation in Ukraine, Israel, Palestine or the adjoining geographic regions, as the conflicts and governmental reactions are rapidly developing and beyond their control. Prolonged unrest, intensified military activities or more extensive sanctions impacting these regions could have a material adverse effect on the global economy, and such effect could in turn have a material adverse effect on our business, financial condition, results of operations and prospects.
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Increasing competition within our industry could have an impact on our business prospects.
While the VAT reporting service industry in China is a heavily regulated industry where new players must obtain approval by the relevant PRC government agencies before entering this industry, it is still highly possible that new competitors will enter into the market and have significantly greater financial and other resources than we have and may offer services that is more attractive and more advanced that we can provide for large business companies and SMEs. Thus, we anticipate increasing competition, which may have a negative impact on both our revenues and our profit margins.
Our IT services and hardware and software sales rely on evolving information technologies to maintain our competitiveness, and any failure to adapt to technological developments or industry trends could harm our business.
We depend upon the use of sophisticated information technologies and systems, including technologies and systems utilized for communications, procurement and administrative systems. As our operations grow in both size and scope, we continuously need to improve and upgrade our systems and infrastructure to offer an increasing number of clients enhanced products, services, features and functionality, while maintaining the reliability and integrity of our systems and infrastructure. Our future success in IT services and hardware and software sales also depends on our ability to adapt to rapidly changing technologies, particularly the increasing use of internet-based products and services, to change our services and infrastructure so they address evolving industry standards and to improve the performance, features and reliability of our services in response to competitive service and product offerings in the Chinese software markets and the evolving demands of the IT service markets. If there are technological impediments to introducing new technological products or maintaining current technologies or other products and services, or if these products and services do not meet the requirements of our clients’ evolving needs, our business, financial condition or results of operations may be adversely affected.
In addition, the emergence of competitors which may be able to optimize products, services or strategies that use advanced computing such as cloud computing, as well as other technological changes and developing technologies, such as machine learning and artificial intelligence, have, and will mandate us to make new and costly investments. Transitioning to new technologies may be disruptive to resources and the services we provide, and may increase our reliance on third party service providers. We may not be successful, or may be less successful than our current or new competitors, in developing technology that operates effectively across multiple devices and platforms and that is appealing to our customers, either of which would negatively affect our business and financial performance.
It is possible that, if we are not able to maintain existing systems, obtain new technologies and systems, or replace or introduce new technologies and systems as quickly as our competitors or in a cost-effective manner, our business and operations could be materially adversely affected. Also, we may not achieve the benefits anticipated or required from any new technology or system, or be able to devote financial resources to new technologies and systems in the future.
We are dependent upon software, equipment and services provided by third parties.
We are dependent upon software, equipment and services provided and/or managed by third parties in the operation of our business. In the event that the performance of such software, equipment or services provided and/or managed by third parties deteriorates or our arrangements with any of these third parties related to the provision and/or management of software, equipment or services are terminated, we may not be able to find alternative services, equipment or software on a timely basis or on commercially reasonable terms, or at all, or be able to do so without significant cost or disruptions to our business, and our relationships with our customers may be adversely impacted.
A significant portion of our revenue is concentrated on a few large customers, and we do not have long-term service agreements with our key customers and rely upon our longstanding relationship with them. If we lose one or more of our customers, our results of operations may be adversely and materially impacted.
For the year ended December 31, 2024, two customers collectively accounted for 29% of total the Company’s revenues. For the year ended December 31, 2023, one customer accounted for 18% of total the Company’s revenues. Since we do not have long-term customer supply agreements with such large customers and rely primarily upon our goodwill and reputation to sustain the business relationship, our results of operations may be adversely and materially impacted if one or more of these customers stop purchasing from us.
Extended payment terms may cause deferred payments or bad debts, which could negatively affect our business operations.
The Company generally gives a two-year credit period to large customers such as large-scale oil and coal mining groups. Their collection period is usually longer than other medium or small-sized companies. An extended credit period will have a potential risk of causing deferred payments or bad debts, which could negatively affect our business operations.
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We source our retail hardware primarily from a limited number of suppliers. If we lose one or more of the suppliers, our operation may be disrupted, and our results of operations may be adversely and materially impacted.
For the year ended December 31, 2024, two suppliers accounted for 40% of the total purchases. For the year ended December 31, 2023, one supplier accounted for 12% of the total purchases. If we lose suppliers and are unable to swiftly engage new suppliers, our operations may be disrupted or suspended, and we may not be able to deliver hardware products to our customers on time. We may also have to pay a higher price to source from a different supplier on short notice. While we are actively searching for and negotiating with new suppliers, there is no guarantee that we will be able to locate appropriate new suppliers or supplier merger targets in our desired timeline. As such, our results of operations may be adversely and materially impacted.
We face the risk that a third party borrower may not repay the loans we made to it. An event of default could have a material adverse effect on our cash flow, results of operations and financial condition.
On January 21, 2022, March 28, 2022, and June 14, 2022, Hitek and HiTek, Beijing Baihengda Petroleum Technology Co., Ltd. (“Beijing Baihengda,” together with HiTek, the “Lenders”) and Guangxi Beihengda Mining Co., Ltd. (“Guangxi Beihengda,” or the “Borrower”) entered into three loan agreements with similar terms, pursuant to which the Lenders loaned RMB 40 million (approximately US$5.98 million with an exchange rate of 0.1494 as of June 30, 2022) (collectively, the “Loans”) to the Borrower at monthly interest of 1%. Each of HiTek and Baihengda funded RMB 20 million of the Loans (approximately US$2.99 million with an exchange rate of 0.1494 as of June 30, 2022). As of the date of this annual report, the outstanding principal amount of the Loans was RMB 37 million (approximately US $5.1 million with an exchange rate of 0.1370 as of December 31, 2024). All of the Loans had a two-year term commencing from their respective issuance dates. During 2024, the lenders and the borrower signed a supplementary agreement under which the maturity date of the Loans was extended to December 2028. The Borrower could pre-pay the outstanding loan amount after 12 months without penalty. Pursuant to a mining right pledge agreement dated August 5, 2022 between HiTek, as representative of the Lenders, and the Borrower, the Loans are secured by the Borrower’s coal mining permit, issued by Bobai County Natural Resources Bureau, which grants the Borrower a 20-year mining rights for certain building granite mine in Daguang Village, Shuiming Town, Bobai County, Guangxi Province, for a production of 1.306 million cubic meters per year.
In the event the Borrower is unable to make full and timely payments of interest and principal on the Loans when due, our cash flow, results of operations and financial conditions may be adversely affected. In addition, there is risk that the mining property may decrease in value during the term of the Loans. In the event the underlying collateral value is less than the loan amount at the time of default, we will suffer a loss.
We may need additional capital to fund our future operations and, if it is not available when needed, we may need to reduce our planned expansion and marketing efforts, which may reduce our revenue.
We believe our existing working capital and cash available from operations will enable us to meet our working capital requirements for at least the next 12 months. However, if cash from future operations is insufficient, or if cash is used for acquisitions or other currently unanticipated uses, we may need additional capital. As a result, we could be required to raise additional capital. To the extent we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution of the shares held by existing shareholders. If additional funds are raised through the issuance of debt or equity securities, such securities may provide the holders certain rights, preferences, and privileges senior to those of shareholders holding Class A Ordinary Shares, and the terms of any such debt securities could impose restrictions on our operations. We cannot assure you that additional capital, if required, will be available on acceptable terms, or at all. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned product development and marketing efforts, which could harm our business, financial condition and operating results.
If we are unable to manage our anticipated growth effectively, our business could be adversely affected.
To develop our business, we need to hire and retain key managers and executives in all areas of our operations. Our future operating results depend to a large extent on our ability to develop and manage expansion and growth successfully. For us to manage such growth, we must put in place legal and accounting systems, and implement human resource management and other tools. We have taken preliminary steps to put this structure in place. However, there is no assurance that we will be able to expand our business or successfully manage any growth that may result. Failure to expand our operations or manage our growth effectively could materially and adversely affect our ability to market our services in multiple venues.
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Because we rely upon a third party to perform the payment processing for our clients, the failure or inability of the third party to provide these services could impair our ability to operate.
Because we do not possess an internal payment method, all payments by participants or customers are processed by third parties such as Alipay and WeChat Pay. The payment processing business is highly regulated, and it is subject to a number of risks that could materially and adversely affect their abilities to provide payment processing and escrow services to us, including:
| ● | increased regulatory focus and the requirement that it comply with numerous complex and evolving laws, rules and regulations; | |
| ● | increases in the costs to the third party, including fees charged by banks to process funds through the third parties, which could result in increased costs to us and to our participants; | |
| ● | dissatisfaction with the third parties’ services; | |
| ● | a decline in the use of the third parties’ services generally which could result in increases in costs to users such as us and our participants; | |
| ● | the ability of the third parties to maintain adequate security procedures to prevent the hacking or other unauthorized access to account and other information provided by us and the participants who use the system; | |
| ● | system failures or failure to effectively scale the system to handle large and growing transaction volumes; | |
| ● | the failure or inability of the third parties to manage funds accurately or the loss of funds by the third parties, whether due to employee fraud, security breaches, technical errors or otherwise; and | |
| ● | the failure or inability of these third parties to adequately manage business and regulatory risks. |
We rely on the convenience and ease of use that third party’s payment methods provide to our users. If the quality, utility, convenience or attractiveness of these payment services declines for any reason, the attractiveness of our services could be materially impaired. If we need to migrate to other third-party payment services for any reason, the transition could require considerable time and management resources, and the third-party payment services may not be as effective, efficient or well-received by our clients. Further, our clients may be reluctant to use a different payment system.
Our success depends substantially on the continued retention of certain key personnel and our ability to hire and retain qualified personnel in the future to support our growth and execute our business strategy.
If one or more of our senior executives or other key personnel are unable or unwilling to continue in their present positions, our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. While we depend on the abilities and participation of our current management team generally, we rely particularly upon Mr. Shenping Yin, Chairman of the Board and Ms. Xiaoyang Huang, our Chief Executive Officer who is responsible for the development and implementation of our business plan. The loss of the services of Mr. Yin for any reason could significantly adversely impact our business and results of operations. Competition for senior management and senior technology personnel in the PRC is intense and the pool of qualified candidates is very limited. We cannot assure you that the services of our senior executives and other key personnel will continue to be available to us, or that we will be able to find a suitable replacement for them if they were to leave.
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We may not be able to adequately protect our intellectual property rights, and our competitors may be able to offer similar products and services, which would harm our competitive position.
Our success depends in part upon our intellectual property rights. We rely primarily on copyright, trade secret laws, confidentiality procedures, license agreements and contractual provisions to establish and protect our proprietary rights over our products, procedures and services. Other persons could copy or otherwise obtain and use our technology without authorization, or develop similar IP independently. We may also pursue the registration of our domain names, trademarks, and service marks in other jurisdictions, including the United States. However, the intellectual property laws in China are not considered as strong as comparable laws in the United States or the European Union. We cannot assure you that we will be able to protect our proprietary rights. Further, our competitors may be able to independently develop similar or more advanced technology, duplicate our products and services or design around any intellectual property rights we hold. Further, our intellectual property rights may be subject to termination or expirations. The loss of intellectual property protections or the inability to timely regain intellectual property protections could harm our business and ability to compete.
We have engaged in transactions with related parties, and such transactions present possible conflicts of interest that could have an adverse effect on our business and results of operations.
We entered into a number of transactions with related parties, including our significant shareholder and director. For example, we entered into several transactions with Beijing Zhongzhe Yuantong Technology Co., Ltd. which is under common control with one minority shareholder of HiTek or business entities affiliated with or owned by Chairman, Shenping Yin, where we have sales revenues or have advances from these entities. See “Related Party Transactions”. We may in the future enter into additional transactions with entities in which members of our board of directors and other related parties hold ownership interests.
Transactions with related parties present potential for conflicts of interest, as the interests of related party may not align with the interests of our shareholders. Although we believe these transactions were in our best interests, we cannot assure you that these transactions were entered into on terms as favorable to us as those that could have been obtained in an arms-length transaction. We may also engage in transactions with related parties in the future. Conflicts of interests arise when we transact business with related parties. These transactions, individually or in the aggregate, may have an adverse effect on our business and results of operations or may result in government enforcement actions or other litigation.
Risks Relating to Our Corporate Structure
We do not have direct ownership of our operating entities in China, but have control rights and the rights to the assets, property, and revenue of HiTek and its Subsidiary through VIE Agreements, which may not be effective in providing control over HiTek.
We do not have direct ownership of our operating entities in China, but have control rights and the rights to the assets, property, and revenue of HiTek and its Subsidiary through VIE Agreements. All of our current revenue and net income is derived from HiTek, the VIE in China. Foreign ownership of internet technology businesses, such as distribution of online information, is subject to restrictions under current PRC laws and regulations. For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider (except e-commerce) and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2020 Version) promulgated on June 23, 2020 and effective on July 23, 2020, respectively, and other applicable laws and regulations.
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To comply with PRC laws and regulations, we do not intend to have an equity ownership interest in HiTek but rely on VIE Agreements with HiTek to control and operate its business. However, as discussed above, these VIE Agreements may not be effective under PRC laws in providing us with the necessary control over HiTek and its operations. Any deficiency in these VIE Agreements may result in our loss of control over the management and operations of HiTek, which will result in a significant loss in the value of an investment in our company. Because of the practical restrictions on direct foreign equity ownership imposed by the Fujian provincial government authorities, we must rely on contractual rights through the VIE structure to effect control over and management of HiTek, which exposes us to the risk of potential breach of contract by the shareholders of HiTek. In addition, as our Chairman of the Board Mr. Yin and his wife Ms. Xiaoyang Huang, our Chief Executive Officer, holds 29.83% and 44.74% of HiTek’s outstanding equity, it may be difficult for us to change our corporate structure if such shareholders refuse to cooperate with us.
Because we are an offshore holding company and our business was conducted through VIE Agreements with HiTek, the VIE in China, if we fail to comply with applicable PRC law, we could be subject to severe penalties and our business could be adversely affected.
We are an offshore holding company incorporated in the Cayman Islands. As a holding company with no material operations, our operations were conducted in China by our subsidiaries and through VIE Agreements with HiTek, the VIE in China, the equity of which is owned by Xiaoyang Huang, Shenping Yin, Bo Shi, Zhishuang Wang, Liuqing Huang and Jingru Li, through VIE Agreements, as a result of which, under United States generally accepted accounting principles, the assets and liabilities of HiTek are treated as our assets and liabilities and the results of operations of HiTek are treated in all respects as if they were the results of our operations. There are uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of the VIE Agreements between WFOE and HiTek.
The Provisions Regarding Mergers and Acquisitions of Domestic Projects by Foreign Investors (the “M&A Rules”) requires an overseas special purpose vehicle that are controlled by PRC companies or individuals formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies using shares of such special purpose vehicle or held by its shareholders as considerations to obtain the approval of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. However, the application of the M&A Rules remains unclear. If CSRC approval is required for future public offerings in the U.S., it is uncertain whether it would be possible for us to obtain such approval. Any failure to obtain or delay in obtaining CSRC approval for future public offerings in the U.S. would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.
Furthermore, regulatory requirements on cybersecurity, data security and data privacy in China are evolving and are subject to varying interpretations or significant changes, resulting in uncertainties about the scope of HiTek’s responsibilities in that regard. On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Data Security Law, which took effect September 1, 2021. The Data Security Law provides for a security review procedure for the data activities that may affect national security. Furthermore, Measures for Cybersecurity Review, which became effective on June 1, 2020, set forth the cybersecurity review mechanism for critical information infrastructure operators, and provided that critical information infrastructure operators who intend to purchase internet products and services that affect or may affect national security shall be subject to a cybersecurity review. On December 28, 2021, the CAC published the CAC Revised Measures which further restates and expands the applicable scope of the cybersecurity review. The CAC Revised Measures took effect on February 15, 2022. Pursuant to the CAC Revised Measures, if a network platform operator holding personal information of over one million users seeks for “foreign” listing, it must apply for the cybersecurity review, and operators of critical information infrastructure purchasing network products and services are also obligated to apply for the cybersecurity review for such purchasing activities. In July 2022, the CAC promulgated the Measures on Security Assessment of Cross-border Data Transfer, which became effective on September 1, 2022. These measures outline the requirements and procedures for security assessments on export of Important Data or personal information collected or generated within the territory of mainland China. Furthermore, these measures provide the security assessment shall combine pre-assessment and continuous supervision, and risk self-assessment and security assessment to prevent data export security risks. Specifically, security assessment is required before any cross-border data can be transferred out of mainland China if: (i) the data transferred out of mainland China is Important Data; (ii) the data processor is a critical information infrastructure operator or data processor that processes personal information of more than one million individuals; (iii) cross-border data transfer of personal information by a data processor who has made cross-border transfer of aggregately more than 100,000 individuals’ personal information or more than 10,000 individuals’ sensitive personal information since January 1st of the previous year; or (iv) otherwise required by the CAC.
Although the CAC Revised Measures provides no further explanation on the extent of “network platform operator” and “foreign” listing, we do not believe we are obligated to apply for a cybersecurity review pursuant to the CAC Revised Measures and security assessment for outbound data, considering that (i) we are not in possession of or otherwise holding any Important Data; (ii) we are not in possession of or otherwise holding personal information of over one million users and it is also very unlikely that we will reach such threshold in the near future; and (iii) as of the date of this prospectus, we have not received any notice or determination from applicable PRC governmental authorities identifying it as a critical information infrastructure operator. That being said, considering that the CAC Revised Measures empowers the cybersecurity review office to initiate cybersecurity review when they believe any particular data processing activities “affect or may affect national security”, and it is uncertain whether the competent government authorities will deem that Hitek’s data processing activities may affect national security and thus initiating the cybersecurity review against Hitek’s businesses. Failure of cybersecurity, data privacy and data security compliance could subject Hitek to penalties, damage its reputation and brand, and harm its business and results of operations
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If WFOE, HiTek or their ownership structure or the VIE Agreements are determined to be in violation of any existing or future PRC laws, rules or regulations, or WFOE or HiTek fails to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:
| ● | revoking the business and operating licenses of WFOE or HiTek; |
| ● | discontinuing or restricting the operations of WFOE or HiTek; |
| ● | imposing conditions or requirements with which we, WFOE, or HiTek may not be able to comply; |
| ● | requiring us, WFOE, or HiTek to restructure the relevant ownership structure or operations which may significantly impair the rights of the holders of our Class A Ordinary Shares in the equity of HiTek; |
| ● | restricting or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; and |
| ● | imposing fines. |
We cannot assure you that the PRC courts or regulatory authorities may not determine that our corporate structure and VIE Agreements violate PRC laws, rules or regulations. If the PRC courts or regulatory authorities determine that our contractual arrangements are in violation of applicable PRC laws, rules or regulations, the VIE Agreements will become invalid or unenforceable, and HiTek will not be treated as a VIE entity and we will not be entitled to treat HiTek’s assets, liabilities and results of operations as our assets, liabilities and results of operations, which could effectively eliminate the assets, revenue and net income of HiTek from our balance sheet, which would most likely require us to cease conducting our business and would result in the delisting of our Class A Ordinary Shares from Nasdaq Capital Market and a significant impairment in the market value of our Class A Ordinary Shares.
We may have difficulty in enforcing any rights we may have under the VIE Agreements in PRC.
As all of the VIE Agreements with HiTek are governed by the PRC laws and provide for the resolution of disputes through arbitration in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in the United States. As a result, uncertainties in the PRC legal system could further limit our ability to enforce these VIE Agreements. Furthermore, these VIE Agreements may not be enforceable in China if PRC government authorities or courts take a view that such VIE Agreements contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event we are unable to enforce these VIE Agreements, we may not be able to exert effective control over HiTek, and our ability to conduct our business may be materially and adversely affected.
The approval of the China Securities Regulatory Commission and other compliance procedures may be required in connection with the offering of our securities in the U.S., and, if required, we cannot predict whether we will be able to obtain such approval. As a result, both you and we face uncertainty about future actions by PRC regulatory authorities that could significantly affect the operating company’s financial performance and the enforceability of the VIE Agreements.
The Provisions Regarding Mergers and Acquisitions of Domestic Projects by Foreign Investors (the “M&A Rules”) require an overseas special purpose vehicle that are controlled by PRC companies or individuals formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies using shares of such special purpose vehicle or held by its shareholders as considerations to obtain the approval of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. However, the application of the M&A Rules remains unclear. If CSRC approval is required for any of our future offerings in the U.S., it is uncertain whether it would be possible for us to obtain the approval. Any failure to obtain or delay in obtaining CSRC approval for our future offerings in the U.S. would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.
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The General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Severe and Lawful Crackdown on Illegal Securities Activities, which was available to the public on July 6, 2021. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies. These opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity and data privacy protection. The aforementioned policies and any related implementation rules to be enacted may subject us to additional compliance requirement in the future. As of the date of this annual report, we have not received or denied any permission from the PRC authorities regarding our listing on the Nasdaq Capital Market. As these opinions were recently issued, official guidance and interpretation of the opinions remain unclear in several respects at this time. Therefore, we cannot assure you that we will remain fully compliant with all new regulatory requirements of these opinions or any future implementation rules on a timely basis, or at all. We face uncertainty about future actions by the PRC government that could significantly affect the operating company’s financial performance and the enforceability of the VIE Agreements.
On February 17, 2023, the CSRC promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Trial Measures, and five supporting guidelines, which came into effect on March 31, 2023. Pursuant to the Trial Measures, domestic companies that seek to offer or list securities overseas, both directly and indirectly, shall complete filing procedures with the CSRC pursuant to the requirements of the Trial Measures within three working days following its submission of initial public offerings or listing application. If a domestic company fails to complete required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such domestic company may be subject to administrative penalties, such as order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines. See “Regulations—M&A Rules and Overseas Listings.”
On February 24, 2023, the CSRC, together with Ministry of Finance of the PRC, National Administration of State Secrets Protection and National Archives Administration of China, revised the Provisions on Strengthening Confidentiality and Archives Administration for Overseas Securities Offering and Listing which was issued by the CSRC, National Administration of State Secrets Protection and National Archives Administration of China in 2009, or the Provisions. The revised Provisions is issued under the title the Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies, and came into effect on March 31, 2023 together with the Trial Measures. One of the major revisions to the revised Provisions is expanding its application to cover indirect overseas offering and listing, as is consistent with the Trial Measures. The revised Provisions require that, including but not limited to (a) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals or entities including securities companies, securities service providers and overseas regulators, any documents and materials that contain state secrets or working secrets of government agencies, shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level; and (b) domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals and entities including securities companies, securities service providers and overseas regulators, any other documents and materials that, if leaked, will be detrimental to national security or public interest, shall strictly fulfil relevant procedures stipulated by applicable national regulations.
Any failure or perceived failure by the Company, the Company’s subsidiaries in China or the VIE to comply with the above confidentiality and archives administration requirements under the revised Provisions and other PRC laws and regulations may result in that the relevant entities would be held legally liable by competent authorities, and referred to the judicial organ to be investigated for criminal liability if suspected of committing a crime. As there are still uncertainties regarding the interpretation and implementation of such regulatory guidance, we cannot assure you that we will be able to comply with new regulatory requirements relating to our future overseas capital-raising activities. Notwithstanding the foregoing, as of the date of this annual report, we are not aware of any Chinese laws or regulations in effect requiring that we obtain permission from any Chinese authority to issue securities to foreign investors, and we have not received any inquiry, notice, warning, sanction or any regulatory objection to our initial public offering from the CSRC.
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As advised by Jingtian & Gongcheng, our PRC counsel, as our post-effective amendment to the registration statement on Form F-1 for our initial public offering was declared effective on March 30, 2023 and we completed our initial public offering and listing prior to September 30, 2023, we were not required to complete the filing procedures pursuant to the Trial Measures for our initial public offering. If in the future we are going to conduct any offering or financing in the U.S., we will be required to complete filing procedures with the CSRC pursuant to the requirements of the Trial Measures. Based on the above and our understanding of the Chinese laws and regulations currently in effect as of the date of this annual report, we are not aware of any PRC laws or regulations in effect requiring that we obtain permission or approval from any PRC authorities for our subsidiaries or the VIE’s operations and to issue securities to foreign investors, and we have not received any inquiry, notice, warning, sanction, or any regulatory objection to our offerings from the CSRC, the CAC, or any other PRC authorities that have jurisdiction over our operations. However, there remains uncertainty as to the enactment, interpretation and implementation of regulatory requirements related to overseas securities offerings and other capital markets activities. Any failure to obtain or delay in obtaining such approval, complete required filing or procedures, or a rescission of any such approval or filing obtained by us, would subject us to sanctions by the CSRC or other PRC regulatory authorities. These regulatory agencies may impose fines and penalties on our operations in mainland China, limit our ability to pay dividends outside of China, limit our operations in China, delay or restrict the repatriation of the proceeds from our initial public offering into mainland China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the Class A Ordinary Shares. In addition, if the CSRC, or other regulatory agencies later promulgate new rules requiring that we obtain their approvals for our initial public offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such an approval requirement could have a material adverse effect on the trading price of the Class A Ordinary Shares.
PRC laws and regulations governing our current business operations are sometimes vague and uncertain and any changes in such laws and regulations may impair our ability to operate profitable.
There are uncertainties regarding the interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations governing our business and the enforcement and performance of our arrangements with customers in certain circumstances. The laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness and interpretation of newly enacted laws or regulations, including amendments to existing laws and regulations, may be delayed, and our business may be affected if we rely on laws and regulations which are subsequently adopted or interpreted in a manner different from our understanding of these laws and regulations. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.
On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued a document to crack down on illegal activities in the securities market and promote the high-quality development of the capital market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws. Since this document is relatively new, uncertainties still exist in relation to how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on companies like us.
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Regulations relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies and could adversely affect our business.
In July 2014, State Administration of Foreign Exchange, or SAFE, promulgated the Circular on Issues Concerning Foreign Exchange Administration Over the Overseas Investment and Financing and Roundtrip Investment by Domestic Residents Via Special Purpose Vehicles, or Circular 37, which replaced Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment through Offshore Special Purpose Vehicles, or Circular 75. Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, referred to in Circular 37 as a “special purpose vehicle” for the purpose of holding domestic or offshore assets or interests. Circular 37 further requires amendment to a PRC resident’s registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease in the capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. Under these regulations, PRC residents’ failure to comply with specified registration procedures may result in restrictions being imposed on the foreign exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent, as well as restrictions on capital inflows from the offshore entity to the PRC entity, including restrictions on its ability to contribute additional capital to Company’s subsidiaries in China or the VIE. Further, failure to comply with the SAFE registration requirements could result in penalties under PRC law for evasion of foreign exchange regulations.
Mr. Shenping Yin and Ms. Xiaoyang Huang, together with ten other PRC residents, who are our beneficial owners, filed applications for Circular 37 registration, and our PRC counsel believes there is no substantial legal impediment to the registration of the aforementioned beneficial owners’ Circular 37 registration. As the promulgation of Circular 37 is relatively recent, it is unclear how these regulations will be interpreted and implemented. We cannot assure you that our ultimate shareholders who are PRC residents will in the future provide sufficient supporting documents required by the SAFE or complete the required registration with the SAFE in a timely manner, or at all. Any failure by any of our shareholders who is a PRC resident, or is controlled by a PRC resident, to comply with relevant requirements under these regulations could subject us to fines or sanctions imposed by the PRC government, including restrictions on our overseas or cross-border investment activities, restrictions on WFOE’s ability to pay dividends or make distributions to us and on our ability to increase our investment in WFOE.
Although we believe that our agreements relating to our structure are in compliance with current PRC regulations, we cannot assure you that the PRC government would agree that these VIE Agreements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future.
Uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.
On March 15, 2019, the National People’s Congress approved the Foreign Investment Law (“FIL”), which came into effect on January 1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The FIL embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties exist in relation to its interpretation and implementation. For instance, under the FIL, “foreign investment’’ refers to the investment activities directly or indirectly conducted by foreign individuals, companies or other entities in China. Though it does not explicitly classify VIE Agreements as a form of foreign investment, there is no assurance that operations conducted by foreign investors or foreign-invested companies via contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the Stale Council to provide for VIE Agreements as a form of foreign investment. In any of these cases, it will be uncertain whether the VIE Agreements will be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing VIE Agreements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, corporate governance and business operations
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Risks Relating to Doing Business in the PRC
Although the audit report included in this annual report is prepared by U.S. auditors which are currently inspected by the PCAOB, there is no guarantee that future audit reports will be prepared by auditors inspected by the PCAOB and, as such, in the future investors may be deprived of the benefits of such inspection. Furthermore, trading in our securities may be prohibited under the HFCA Act, as Amended, if the SEC subsequently determines our audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely for two consecutive years, and as a result, U.S. national securities exchanges, such as the Nasdaq, may determine to delist our securities.
As an auditor of companies that are registered with the SEC and publicly traded in the U.S. and a firm registered with the PCAOB, our auditor is required under the laws of the U.S. to undergo regular inspections by the PCAOB to assess their compliance with the laws of the U.S. and professional standards.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the U.S. and a firm registered with the PCAOB, is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is currently subject to PCAOB inspections and PCAOB is able to inspect our auditor. However, we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements
On May 20, 2020, the U.S. Senate passed the HFCA Act, which includes requirements for the SEC to identify issuers whose audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction. The U.S. House of Representatives passed the HFCA Act on December 2, 2020, and the HFCA Act was signed into law on December 18, 2020.
On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. We would be required to comply with these rules if the SEC identifies us as having a “non-inspection” year (as defined in the interim final rules) under a process to be subsequently established by the SEC. The SEC was assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above.
On September 22, 2021, the PCAOB adopted a final rule implementing the HFCA Act, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act, whether the Board is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction.
On December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm located in a foreign jurisdiction and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions.
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On December 16, 2021, SEC announced that the PCAOB designated China and Hong Kong as the jurisdictions where the PCAOB is not allowed to conduct full and complete audit inspections as mandated under the HFCA Act.
On August 26, 2022, the CSRC, the MOF, and the PCAOB signed the Protocol, governing inspections and investigations of audit firms based
in mainland China and Hong Kong, taking the first step toward opening access for the PCAOB to inspect and investigate registered public
accounting firms headquartered in mainland China and Hong Kong. Pursuant to the fact sheet with respect to the Protocol disclosed by
the SEC the PCAOB shall have independent discretion to select any issuer audits for inspection or investigation and has the unfettered
ability to transfer information to the SEC.
On December 15, 2022, the PCAOB Board determined the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary.
On December 29, 2022, the Consolidated Appropriations Act was signed into law by President Biden, which amended the HFCA Act by requiring the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three, thus reducing the time period for triggering the prohibition on trading.
However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB Board will consider the need to issue a new determination. Delisting of our Class A Ordinary Shares would force holders of our Class A Ordinary Shares to sell their Class A Ordinary Shares. The market price of our Class A Ordinary Shares could be adversely affected as a result of anticipated negative impacts of these executive or legislative actions upon, as well as negative investor sentiment towards, companies with significant operations in China that are listed in the U.S., regardless of whether these executive or legislative actions are implemented and regardless of our actual operating performance.
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If we become subject to the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve such matters, which could harm our business operations, stock price and reputation.
U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and U.S. regulatory agencies. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities, lack of effective internal controls over financial reporting (“ICFR”), inadequate corporate governance policies and, in many cases, allegations of fraudulent activities. As a result of the scrutiny, criticism and negative publicity, the publicly traded stocks of many U.S. listed Chinese companies have experienced and may experience in the future high volatility in trading prices and market value and, in some cases, may be subject to the delisting procedures from the national stock exchanges. Some of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our business and stock prices when listed on a national stock exchange. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or false, we will have to expend significant capital and time to investigate such allegations and defend our company. If such allegations are proven to have merit, we and our business operations could be severely affected and you could sustain a significant loss in your investment in our Ordinary Shares.
Nasdaq may apply additional and more stringent criteria for our continued listing because we completed a small public offering and our insiders hold a large portion of our listed securities.
Nasdaq Listing Rule 5101 provides Nasdaq with broad discretionary authority over the initial and continued listing of securities in Nasdaq and Nasdaq may use such discretion to deny initial listing, apply additional or more stringent criteria for the initial or continued listing of particular securities, or suspend or delist particular securities based on any event, condition, or circumstance that exists or occurs that makes initial or continued listing of the securities on Nasdaq inadvisable or unwarranted in the opinion of Nasdaq, even though the securities meet all enumerated criteria for initial or continued listing on Nasdaq. In addition, Nasdaq has used its discretion to deny initial or continued listing or to apply additional and more stringent criteria in the instances, including but not limited to: (i) where the company engaged an auditor that has not been subject to an inspection by PCAOB, an auditor that PCAOB cannot inspect, or an auditor that has not demonstrated sufficient resources, geographic reach, or experience to adequately perform the company’s audit; (ii) where the company planned a small public offering, which would result in insiders holding a large portion of the company’s listed securities. Nasdaq was concerned that the offering size was insufficient to establish the company’s initial valuation, and there would not be sufficient liquidity to support a public market for the company; and (iii) where the company did not demonstrate sufficient nexus to the U.S. capital market, including having no U.S. shareholders, operations, or members of the board of directors or management. Our public float is relatively small and the insiders of our Company hold a large portion of the company’s listed securities. Therefore, we may be subject to the additional and more stringent criteria of Nasdaq for our continued listing.
It may be difficult for overseas shareholders and/or regulators to conduct investigation or collect evidence within China.
Shareholder claims or regulatory investigation that are common in the U.S. generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the U.S. may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests.
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Our principal business operation is conducted in the PRC. If U.S. regulators carry out an investigation of us and there is a need to conduct investigation or collect evidence within the territory of the PRC, the U.S. regulators may not be able to carry out such investigation or evidence collection directly in the PRC under the PRC laws. The U.S. regulators may consider cross-border cooperation with securities regulatory authority of the PRC by way of judicial assistance, diplomatic channels or regulatory cooperation mechanism established with the securities regulatory authority of the PRC.
It may be difficult for overseas shareholders and/or regulators to conduct investigations or collect evidence within Hong Kong.
The Securities and Futures Commission of Hong Kong (“SFC”) is a signatory to the International Organisation of Securities Commissions Multilateral Memorandum of Understanding (“MMOU”), which provides for mutual investigatory and other assistance and exchange of information between securities regulators around the world, including the SEC. This is also reflected in section 186 of the Securities and Futures Ordinance (“SFO”) which empowers the SFC to exercise its investigatory powers to obtain information and documents requested by non-Hong Kong regulators, and section 378 of the SFO which allows the SFC to share confidential information and documents in its possession with such regulators. However, there is no assurance that such cooperation will materialize, or if it does, whether it will adequately address any efforts to investigate or collect evidence to the extent that may be sought by U.S. regulators.
Because we are a Cayman Islands exempted company and all of our business is conducted in the PRC, you may be unable to bring an action against us or our officers and directors or to enforce any judgment you may obtain.
We are a company incorporated under the laws of the Cayman Islands, we conduct substantially all of our operations in China, and substantially all of our assets are located in China. In addition, all our senior executive officers reside within China for a significant portion of the time and are all PRC nationals. As a result, it may be difficult for our shareholders to effect service of process upon us or those persons in the Cayman Islands or in China. In addition, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible. See “Enforceability of Civil Liabilities.”
Shareholder claims that are common in the U.S. including securities law class actions and fraud claims, generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities. Although the local authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such regulatory cooperation with the securities regulatory authorities in the Unities States have not been efficient in the absence of mutual and practical cooperation mechanism. According to Article 177 of the PRC Securities Law which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC.
In addition, our corporate affairs are governed by our amended and restated memorandum and articles of association, the Companies Act or the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the decisions of whose courts are of persuasive authority, but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are different from statutes or judicial precedent in some jurisdictions in the U.S. In particular, the Cayman Islands has a different body of securities laws as compared to the U.S.. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a Federal court of the U.S.
We have been advised by our Cayman Islands legal counsel, Maples and Calder (Cayman) LLP, that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments of courts of the U.S. predicated upon the civil liability provisions of the federal securities laws of the U.S. or any state; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the civil liability provisions of the federal securities laws of the U.S. or any state, so far as the liabilities imposed by those provisions are penal in nature. In those circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the U.S., the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company.
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Economic conditions in China could impact our business and results of operations in both lines of our business
The VIE entity and its subsidiary’s business and operating results are impacted by Chinese economic conditions, such as a potential general reduction in net disposable income as a result of fiscal measures adopted by Chinese government to address high levels of budgetary indebtedness, which may adversely affect our business, results of operations and financial condition. The most recent global financial crisis and recession resulted in large-scale business failures and tightened credit markets in China, which directly impacts the Chinese IT service market and VAT reporting service industry. Future adverse economic developments in areas such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs and other matters could reduce discretionary spending and cause the industries where we operate to contract.
There may be changes in the regulations of PRC government bodies and agencies relating to VAT collection procedure and ACTCS business
PRC laws, regulations and policies concerning VAT collection procedures and ACTCS business are evolving and the PRC government authorities may promulgate new laws, regulations and policies in the future. We cannot assure you that our practices would not be deemed to violate any PRC laws, regulations or policies either now or in the future.
Moreover, developments in the ACTCS service industry may lead to changes in PRC laws, regulations and policies or in the interpretation and application of existing laws, regulations and policies, which may limit or restrict the ACTCS hardware and services we offer. Furthermore, we cannot rule out the possibility that the PRC government will institute a new licensing regime covering services we provide in the future. If such a licensing regime were introduced, we cannot assure you that we would be able to obtain any newly required license in a timely manner, or at all, which could materially and adversely affect our business and impede our ability to continue our operations.
Changes in the policies of the PRC government could have a significant impact upon our ability to operate profitably in the PRC.
We conduct all of our operations and all of our revenue is generated in the PRC. Accordingly, economic, political and legal developments in the PRC will significantly affect our business, financial condition, results of operations and prospects. Policies of the PRC government can have significant effects on economic conditions in the PRC and the ability of businesses to operate profitably. Our ability to operate profitably in the PRC may be adversely affected by changes in policies by the PRC government, including changes in laws, regulations or their interpretation, particularly those dealing with the Internet, including censorship and other restriction on material which can be transmitted over the Internet, security, intellectual property, money laundering, taxation and other laws that affect our ability to operate our website.
China’s economic, political and social conditions, laws and regulations, as well as possible interventions and influences of any government policies and actions are uncertain and could have a material adverse effect on our business and the value of our Class A Ordinary Shares.
China’s economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past two to three decades, growth has been uneven, both geographically and among various sectors of the economy. Although China’s economy has been transitioning from a planned economy to a more market oriented economy since the late 1970s, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through allocating resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Changes in any of these policies, laws and regulations could adversely affect the economy in China and could have a material adverse effect on our business.
The PRC government has implemented various measures to encourage foreign investment and sustainable economic growth and to guide the allocation of financial and other resources. However, we cannot assure you that the PRC government will not repeal or alter these measures or introduce new measures that will have a negative effect on us, or more specifically, we cannot assure you that the PRC government will not initiate possible governmental actions or scrutiny to us, which could substantially affect our operation and the value of our Class A Ordinary Shares may depreciate quickly. China’s economic, political and social conditions, as well as interventions and influences of any government policies, laws and regulations are uncertain and could have a material adverse effect on our business.
The PRC Foreign Investment Law may impact the viability of our current corporate structure and operations.
Laws regulating foreign investment in China include the PRC Foreign Investment Law, or the PRC FIL, effective from January 1, 2020, and the Regulation on Implementing the PRC Foreign Investment Law, or the Implementation Regulations, effective from January 1, 2020. The PRC FIL specifies that foreign investments shall be conducted in line with the “negative list” to be issued or approved to be issued by the State Council. While we do not operate in an industry that is currently subject to foreign investment restrictions or prohibition in China, it is uncertain whether our industry will be named in an updated “negative list” to be issued in the future. If our industry is added to the “negative list” or if the PRC regulatory authorities otherwise decide to limit foreign ownership in our industry, there could be a risk that we would be unable to do business in China as we are currently structured. If any new laws and/or regulations on foreign investments in China are promulgated and implemented, such changes could have a significant impact on our current corporate structure, which in turn could have a material adverse impact on our business and operations, our ability to raise capital and the market price of our shares. In such event, despite our efforts to restructure to comply with the then applicable PRC laws and regulations in order to continue our operations in China, we may experience material changes in our business and results of operations, our attempts may prove to be futile due to factors beyond our control, and the value of the shares you invest in may significantly decline or become worthless.
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Because our business is dependent upon government policies that encourage a market-based economy, change in the political or economic climate in the PRC may impair our ability to operate profitably, if at all.
Although the PRC government has been pursuing a number of economic reform policies for more than two decades, the PRC government continues to exercise significant control over economic growth in the PRC. Because of the nature of our business, we are dependent upon the PRC government pursuing policies that encourage private ownership of businesses. Restrictions on private ownership of businesses would affect the VAT filing and collection in general and businesses using ACTCS in particular. We cannot assure you that the PRC government will pursue policies favoring a market-oriented economy or that existing policies will not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting political, economic and social life in the PRC.
Because our business is conducted in RMB and the price of our Class A Ordinary Shares is quoted in United States dollars, changes in currency conversion rates may affect the value of your investments.
Our business is conducted in the PRC, our books and records are maintained in RMB, which is the currency of the PRC, and the financial statements that we file with the SEC and provide to our shareholders are presented in USD. Changes in the exchange rate between the RMB and dollar affect the value of our assets and the results of our operations in USD. The value of the RMB against the USD and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions and perceived changes in the economy of the PRC and the U.S.. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenue and financial condition. Further, since our Class A Ordinary Shares to be offered by our potential future financing activities will be offered in USD, we will need to convert the net proceeds we receive into RMB in order to use the funds for our business. Changes in the conversion rate between the U.S. dollar and the RMB will affect that amount of proceeds we will have available for our business.
We may be affected by the currency conversion system.
The PRC government imposes regulation and limitation on the conversion of the RMB into foreign currencies and the remittance of currencies out of mainland PRC. Our PRC subsidiaries receive substantially all of their revenue in RMB. Under our current corporate structure, to fund any cash and financing requirements the Company may have, the Company may rely on dividend payments from its subsidiaries. As such we may convert a portion of the subsidiaries’ revenue into other currencies to meet the foreign currency obligations, such as payments of dividends, if any. Shortages in the availability of foreign currency may restrict the ability of the subsidiaries to remit sufficient foreign currency to pay dividends or other payments to the Company. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore, the subsidiaries are able to pay dividends in foreign currencies to the Company without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the mainland PRC complies with certain procedures under PRC foreign exchange regulations. Approval from or registration with appropriate government authorities is, however, required where the RMB is to be converted into foreign currency and remitted out of mainland China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion regulate access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents the subsidiaries from obtaining sufficient foreign currencies to satisfy its foreign currency demand, the subsidiaries may not be able to pay dividends in foreign currencies to the Company shareholders. In addition, the PRC Enterprise Income Tax Law and its implementation rules provide that a withholding tax at a rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC resident enterprises, unless reduced under treaties or arrangements between the PRC central government and the governments of other countries or regions where the non-PRC resident enterprises are tax resident.
Under the PRC Enterprise Income Tax Law, or the EIT Law, we may be classified as a “resident enterprise” of China, which could result in unfavorable tax consequences to us and our non-PRC shareholders.
The EIT Law and its implementing rules provide that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” under PRC tax laws. The implementing rules promulgated under the EIT Law define the term “de facto management bodies” as a management body which substantially manages, or has control over the business, personnel, finance and assets of an enterprise. In April 2009, the State Administration of Taxation, or SAT, issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management bodies” of a PRC-controlled enterprise that is incorporated offshore is located in China. However, there are no further detailed rules or precedents governing the procedures and specific criteria for determining “de facto management body.” Although our board of directors and management are located in the PRC, it is unclear if the PRC tax authorities would determine that we should be classified as a PRC “resident enterprise.”
If we are deemed a PRC “resident enterprise,” we will be subject to PRC enterprise income tax on our worldwide income at a uniform tax rate of 25%, although dividends distributed to us from our existing subsidiaries in China or the VIE and any other subsidiaries in China or the VIE which we may establish from time to time could be exempt from the PRC dividend withholding tax due to our PRC “resident recipient” status. This could have a material and adverse effect on our overall effective tax rate, our income tax expenses and our net income. Furthermore, dividends, if any, paid to our shareholders may be decreased as a result of the decrease in distributable profits. In addition, if we were considered a PRC “resident enterprise”, any dividends we pay to our non-PRC investors, and the gains realized from the transfer of our Class A Ordinary Shares may be considered income derived from sources within the PRC and be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty). It is unclear whether holders of our Class A Ordinary Shares would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. This could have a material and adverse effect on the value of your investment in us and the price of our Class A Ordinary Shares.
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There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our PRC subsidiary to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.
Under the PRC EIT Law and its implementation rules, the profits of a foreign invested enterprise generated through operations, which are distributed to its immediate holding company outside the PRC, will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong Kong and the PRC, such rate may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity interest in the PRC company. Our PRC subsidiary is wholly-owned by our Hong Kong subsidiary. Moreover, under the Notice of the State Administration of Taxation on Issues regarding the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009, the taxpayer needs to satisfy certain conditions to enjoy the benefits under a tax treaty. These conditions include: (1) the taxpayer must be the beneficial owner of the relevant dividends, and (2) the corporate shareholder to receive dividends from the PRC subsidiary must have continuously met the direct ownership thresholds during the 12 consecutive months preceding the receipt of the dividends. Further, the State Administration of Taxation promulgated the Notice on How to Understand and Recognize the “Beneficial Owner” in Tax Treaties on October 27, 2009, which limits the “beneficial owner” to individuals, projects or other organizations normally engaged in substantive operations, and sets forth certain detailed factors in determining the “beneficial owner” status. In current practice, a Hong Kong enterprise must obtain a tax resident certificate from the relevant Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority. As of the date of this annual report, we have not commenced the application process for a Hong Kong tax resident certificate from the relevant Hong Kong tax authority, and there is no assurance that we will be granted such a Hong Kong tax resident certificate.
Even after we obtain the Hong Kong tax resident certificate, we are required by applicable tax laws and regulations to file required forms and materials with relevant PRC tax authorities to prove we can enjoy the 5% lower PRC withholding tax rate. HiTek HK intends to obtain the required materials and file with the relevant tax authorities when it plans to declare and pay dividends, but there is no assurance that the PRC tax authorities will approve the 5% withholding tax rate on dividends received from HiTek HK.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by CSRC, a PRC regulator that is responsible for oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of us, our SEC reports, other filings or any of our other public pronouncements.
We operate in an emerging and evolving market. If our market does not grow as we expect, or if we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations, and changing customer needs, requirements or preferences, our products and solutions may become less competitive.
There are uncertainties over the size and rate at which the IT service market will grow, as well as whether our solutions and products will be widely adopted. Moreover, the ACTCS industry is subject to rapid technological change, evolving industry standards, changing regulations, as well as changing customer needs, requirements and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on a timely basis. If we are unable to develop new solutions and products that satisfy our customers and provide enhancements and new features for our existing products that keep pace with rapid technological and industry change, our business, results of operations and financial condition could be adversely affected. If new technologies emerge that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete effectively.
Our platform must also integrate with a variety of network, hardware, software platforms and technologies, and we need to continuously modify and enhance our products and platform to adapt to changes and innovation. For example, if customers adopt new software platforms or infrastructure, we may be required to develop new versions of our products to be compatible with those new software platforms or infrastructure. This development effort may require significant resources, which would adversely affect our business, results of operations and financial condition. Any failure of our products and platform to operate effectively with evolving or new software platforms and technologies could reduce the demand for our products. If we are unable to respond to these changes in a cost-effective manner, our products may become less marketable and less competitive or obsolete, and our business, results of operations and financial condition could be adversely affected.
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In light of recent events indicating greater oversight by the Cyberspace Administration of China, or CAC, over data security, particularly for companies seeking to list on a foreign exchange, we are subject to a variety of laws and other obligations regarding cybersecurity and data protection, and any failure to comply with applicable laws and obligations could have a material and adverse effect on our business, our listing on Nasdaq, financial condition, results of operations, and the offering.
We are subject to various risks and costs associated with to the collection, use, sharing, retention, security, and transfer of confidential and private information, such as personal information and other data. This data is wide ranging and relates to our investors, employees, contractors and other counterparties and third parties. Our compliance obligations include those relating to the Data Protection Act (As Revised) of the Cayman Islands and the relevant PRC laws in this regard. These PRC laws apply not only to third-party transactions, but also to transfers of information between us, our WFOE, the VIE, and the VIE’s subsidiary, and among us, our WFOE, the VIE, and the VIE’s subsidiary, and other parties with which we have commercial relations. These laws continue to develop, and the PRC government may adopt other rules and restrictions in the future. Non-compliance could result in penalties or other significant legal liabilities.
Pursuant to the PRC Cybersecurity Law, promulgated by the Standing Committee of the National People’s Congress on November 7, 2016 and took effect on June 1, 2017, personal information and Important Data collected and generated by a critical information infrastructure operator in the course of its operations in China must be stored in China, and if a critical information infrastructure operator purchases internet products and services that affects or may affect national security, it should be subject to cybersecurity review by the CAC. On July 30, 2021, the State Council issued Regulation on Protecting the Security of Critical Information Infrastructure, clarifying the definition of critical information infrastructure as “any of network facilities and information systems in important industries and fields—such as public communication and information services, energy, transportation, water conservancy, finance, public services, e-government, and science, technology and industry for national defense—that may seriously endanger national security, national economy and people’s livelihood, and public interests in the event that they are damaged or lose their functions or their data are leaked.” On December 28, 2021, the CAC published the CAC Revised Measures which further restates and expands the applicable scope of the cybersecurity review. The CAC Revised Measures took effect on February 15, 2022. Pursuant to the CAC Revised Measures, if a network platform operator holding personal information of over one million users seeks for “foreign” listing, it must apply for the cybersecurity review. In addition, operators of critical information infrastructure purchasing network products and services are also obligated to apply for the cybersecurity review for such purchasing activities. Although the CAC Revised Measures provide no further explanation on the extent of “network platform operator” and “foreign” listing, in July 2022, the CAC promulgated the Measures on Security Assessment of Cross-border Data Transfer, which became effective on September 1, 2022. These measures outline the requirements and procedures for security assessments on export of Important Data or personal information collected or generated within the territory of mainland China. Furthermore, these measures provide that the security assessment shall combine pre-assessment and continuous supervision, and risk self-assessment and security assessment to prevent data export security risks. Specifically, security assessment is required before any cross-border data can be transferred out of mainland China if: (i) the data transferred out of mainland China is Important Data; (ii) the data processor is a critical information infrastructure operator or data processor that processes personal information of more than one million individuals; (iii) cross-border data transfer of personal information by a data processor who has made cross-border transfer of aggregately more than 100,000 individuals’ personal information or more than 10,000 individuals’ sensitive personal information since January 1st of the previous year; or (iv) otherwise required by the CAC.
As confirmed by our PRC counsel, Jingtian & Gongcheng, we are not subject to cybersecurity review with the CAC and security assessment for outbound data, because (i) we are not in possession of or otherwise holding any Important Data, (ii) we are not in possession of or otherwise holding personal information of over one million users and it is also very unlikely that it will reach such threshold in the near future; and (iii) as of the date of this annual report, we have not received any notice or determination from applicable PRC governmental authorities identifying it as a critical information infrastructure operator. However, we cannot guarantee that we will not be subject to cybersecurity review in the future as we offer IT services and sell hardware and software in China. During such review, we may be required to suspend our operation experience other disruptions to our operations. Cybersecurity review could also result in negative publicity with respect to our company and diversion of our managerial and financial resources.
Furthermore, if we were found to be in violation of applicable laws and regulations in China during such review, we could be subject to administrative penalties, such as warnings, fines, or service suspension. Therefore, cybersecurity review could materially and adversely affect our business, financial condition, and results of operations.
In addition, the PRC Data Security Law, promulgated by the Standing Committee of the National People’s Congress on June 10, 2021 and took effect on September 1, 2021, requires data collection to be conducted in a legitimate and proper manner, and stipulates that, for the purpose of data protection, data processing activities must be conducted based on data classification and hierarchical protection system for data security. As the Data Security Law was recently promulgated, we may be required to make further adjustments to our business practices to comply with this law. If our data processing activities were found to be not in compliance with this law, we could be ordered to make corrections, and under certain serious circumstances, such as severe data divulgence, we could be subject to penalties, including the revocation of our business licenses or other permits. Furthermore, the recently issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law require (i) speeding up the revision of the provisions on strengthening the confidentiality and archives management relating to overseas issuance and listing of securities and (ii) improving the laws and regulations relating to data security, cross-border data flow, and management of confidential information. As there remain uncertainties regarding the further interpretation and implementation of those laws and regulations, we cannot assure you that we will be compliant such new regulations in all respects, and we may be ordered to rectify and terminate any actions that are deemed illegal by the regulatory authorities and become subject to fines and other sanctions. As a result, we may be required to suspend our relevant businesses, shut down our website, take down our operating applications, or face other penalties, which may materially and adversely affect our business, financial condition, and results of operations.
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On August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection Law of the PRC, or the PIPL, which took effect in November 2021. As the first systematic and comprehensive law specifically for the protection of personal information in the PRC, the PIPL provides, among others, that (i) an individual’s consent shall be obtained to use sensitive personal information, such as biometric characteristics and individual location tracking, (ii) personal information operators using sensitive personal information shall notify individuals of the necessity of such use and impact on the individual’s rights, and (iii) where personal information operators reject an individual’s request to exercise his or her rights, the individual may file a lawsuit with a People’s Court. As uncertainties remain regarding the interpretation and implementation of the PIPL, we cannot assure you that we will comply with the PIPL in all respects, we may become subject to fines and/or other penalties which may have material adverse effect on our business, operations and financial condition.
While we take measures to comply with all applicable data privacy and protection laws and regulations, we cannot guarantee the effectiveness of the measures undertaken by us and our business partners. However, compliance with any additional laws could be expensive, and may place restrictions on our business operations and the manner in which we interact with our users. In addition, any failure to comply with applicable cybersecurity, privacy, and data protection laws and regulations could result in proceedings against us by government authorities or others, including notification for rectification, confiscation of illegal earnings, fines, or other penalties and legal liabilities against us, which could materially and adversely affect our business, financial condition, results of operations and the value of our Class A Ordinary Shares. In addition, any negative publicity on our website or platform’s safety or privacy protection mechanism and policy could harm our public image and reputation and materially and adversely affect our business, financial condition, and results of operations.
We are subject to anti-corruption, anti-bribery, and similar laws, and noncompliance with such laws can subject us to criminal penalties or significant fines and harm our business and reputation.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977, and other anti-corruption, anti-bribery, anti-money laundering, and similar laws in China and the U.S.. Anti-corruption and anti-bribery laws, which have been enforced aggressively and are interpreted broadly, prohibit companies and their employees and agents from promising, authorizing, making, or offering improper payments or other benefits to government officials and others in the public sector. We leverage our business partners, including channel partners, to sell our products and solutions and host many of our facilities for our network. We may also rely on our business partners to conduct our business abroad. We and our business partners may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we may be held liable for the corrupt or other illegal activities of our business partners and intermediaries, our employees, representatives, contractors, channel partners and agents, even if we do not explicitly authorize such activities.
We cannot assure you that all of our employees and agents have complied with, or in the future will comply with, our policies and applicable law. The investigation of possible violations of these laws, including internal investigations and compliance reviews that we may conduct from time to time, could have a material adverse effect on our business. Noncompliance with these laws could subject us to investigations, severe criminal or civil sanctions, settlements, prosecution, loss of export privileges, suspension or debarment from Chinese government contracts and other contracts, other enforcement actions, the appointment of a monitor, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, whistleblower complaints, adverse media coverage and other consequences. Other internal and government investigations, regulatory proceedings, or litigation, including private litigation filed by our shareholders, may also follow as a consequence. Any investigations, actions, or sanctions could materially harm our reputation, business, results of operations, and financial condition. Further, the promulgation of new laws, rules or regulations or new interpretations of current laws, rules or regulations could impact the way we do business in other countries, including requiring us to change certain aspects of our business to ensure compliance, which could reduce revenues, increase costs, or subject us to additional liabilities.
Failure to comply with laws and regulations applicable to our business in China could subject us to fines and penalties and could also cause us to lose customers or otherwise harm our business.
Our business is subject to regulation by various governmental agencies in China, including agencies responsible for monitoring and enforcing compliance with various legal obligations, such as value-added telecommunication laws and regulations, privacy and data protection-related laws and regulations, intellectual property laws, employment and labor laws, workplace safety, environmental laws, consumer protection laws, governmental trade laws, import and export controls, anti-corruption and anti-bribery laws, and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more stringent than in China. These laws and regulations impose added costs on our business. Noncompliance with applicable regulations or requirements could subject us to:
| ● | investigations, enforcement actions, and sanctions; |
| ● | mandatory changes to our network and products; |
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| ● | disgorgement of profits, fines, and damages; |
| ● | civil and criminal penalties or injunctions; |
| ● | claims for damages by our customers or channel partners; |
| ● | termination of contracts; |
| ● | loss of intellectual property rights; |
| ● | failure to obtain, maintain or renew certain licenses, approvals, permits, registrations or filings necessary to conduct our operations; and |
| ● | temporary or permanent debarment from sales to public service organizations. |
If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations, and financial condition could be adversely affected. In addition, responding to any action will likely result in a significant diversion of our management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could materially harm our business, results of operations, and financial condition.
Additionally, companies in the technology industry have recently experienced increased regulatory scrutiny. Any reviews by regulatory agencies or legislatures may result in substantial regulatory fines, changes to our business practices, and other penalties, which could negatively affect our business and results of operations. Changes in social, political, and regulatory conditions or in laws and policies governing a wide range of topics may cause us to change our business practices. Further, our expansion into a variety of new fields also could raise a number of new regulatory issues. These factors could negatively affect our business and results of operations in material ways.
Moreover, we are exposed to the risk of misconduct, errors and failure to functions by our management, employees and parties that we collaborate with, who may from time to time be subject to litigation and regulatory investigations and proceedings or otherwise face potential liability and penalties in relation to noncompliance with applicable laws and regulations, which could harm our reputation and business.
We face exposure to foreign currency exchange rate fluctuations, and such fluctuations could adversely affect our business, results of operations and financial condition.
The conversion of Renminbi into foreign currencies, including the USD, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the USD and other currencies, at times significantly and unpredictably. The value of Renminbi against the USD and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. We cannot assure you that Renminbi will not appreciate or depreciate significantly in value against the USD and other currencies in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and USD in the future.
Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent we need to convert USD we received from our IPO into Renminbi for our operations, appreciation of the Renminbi against the USD would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into USD for the purpose of making payments for dividends on our Class A Ordinary Shares or for other business purposes, appreciation of the USD against the Renminbi would have a negative effect on the USD amount available to us.
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. As of the date of this annual report, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure, or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.
Substantially all of our revenues and costs are denominated in Renminbi. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of Renminbi may materially and adversely affect our results of operations and financial position reported in Renminbi when translated into USD. To the extent that we need to convert USD we received from our IPO into Renminbi for our operations, appreciation of the Renminbi against the USD would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into USD for the purpose of making payments for dividends on our Class A Ordinary Shares or for other business purposes, appreciation of the USD against the Renminbi would have a negative effect on the USD amount.
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Increases in labor costs in the PRC may adversely affect our business and results of operations.
China’s economy has experienced increases in labor costs in recent years. China’s overall economy and the average wage in China are expected to continue to grow. The average wage level for our employees has also increased in recent years. We expect that our staff costs, including wages and employee benefits, will continue to increase. Unless we are able to pass on these increased labor costs to our customers by increasing prices for our products or services, our profitability and results of operations may be materially and adversely affected.
In addition, we have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees and paying various statutory employee benefits, including housing, pension, medical insurance and unemployment insurance programs to designated government agencies for the benefit of our employees. Compared with its predecessors, the current Labor Contract Law of the PRC imposes stricter requirements on employers in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts, further increasing our labor-related costs such as by limiting our ability to terminate some of our employees or otherwise change our employment or labor practices in a cost-effective manner. In addition, as the interpretation and implementation of labor-related laws and regulations are still developing, we cannot assure you that our employment practices have been or will at all times be deemed in compliance with the labor-related laws and regulations in China. If we are subject to severe penalties in connection with labor disputes or government investigations, our business, financial condition and results of operations will be adversely affected.
Failure to make adequate contributions to various employee benefits plans as required by PRC regulations may subject us to penalties.
Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare payment obligations, and contribute to the plans in such amounts in relation to their employees’ salaries, as specified by the local government where the business operations are. Such requirement to contribute to employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. Historically, we did not complete the relevant employee benefit plan registrations for some of our employees in China, and the social insurance and housing fund contributions we paid for certain of our employees may be found inadequate under PRC law. If we fail to make social insurance contributions in full and on time, the relevant administrative authorities may demand us to pay a late payment fee of 0.05% of the outstanding amount for each day of delay. If we fail to make such payment within the deadline, the relevant administrative authorities may impose a fine that equals to one to three times of the outstanding amount. Pursuant to relevant PRC laws and regulations, if we fail to make housing provident fund contributions in full, the housing provident fund management center may demand us to pay and deposit the relevant amount within a stipulated deadline. If we fail to pay and deposit the relevant amount within the deadline, it may apply to a PRC court for compulsory enforcement. As of the date of this annual report, we have not received any notice of warning or been subject to any administrative penalties or other disciplinary actions from the relevant governmental authorities for our historical shortfall in social insurance and housing fund contribution. However, we cannot assure you that local authorities will not impose penalties or other administrative actions on us for our historical noncompliance. If local authorities determine that we failed to make adequate contributions to any employee benefits as required by relevant PRC regulations in the future, we may be subject to penalties and fines and/or catch-up contributions to certain employee benefit plans. A large lump sum payment obligation due to certain labor law violations will likely negatively affect our financial condition and results of operations.
The Chinese government exerts substantial influence over the manner in which we must conduct our business activities. Any actions by Chinese government, including any decision to intervene or influence our operations or to exert control over any offering of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to our operation, may limit or completely hinder our ability to offer or continue to offer securities to investors, and may cause the value of such securities to significantly decline or be worthless.
The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Substantially all of our operations are located in China. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, property and other matters. The central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
As such, our business may be subject to various government and regulatory interference in the provinces in which we operate. We could be subject to regulation by various political and regulatory entities, including various local and municipal agencies and government sub-divisions. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply.
Furthermore, it is uncertain when and whether we will be required to obtain permission from the PRC government to offering securities in the U.S. in the future, and even when such permission is obtained, whether we will be denied or rescinded. Although we are currently not required to obtain permission from any of the PRC regulatory authorities to obtain such permission and has not received any denial regarding our listing on the Nasdaq Capital Market and the entry into the VIE Agreements, our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to our business or industry.
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PRC laws and regulations governing our current business operations are sometimes vague and uncertain and any changes in such laws and regulations may impair our ability to operate profitably.
There are uncertainties regarding the interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations governing our business and the enforcement and performance of our arrangements with customers in certain circumstances. The laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness and interpretation of newly enacted laws or regulations, including amendments to existing laws and regulations, may be delayed, and our business may be affected if we rely on laws and regulations which are subsequently adopted or interpreted in a manner different from our understanding of these laws and regulations. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and the enforcement of these laws, regulations and rules involves uncertainties.
In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.
Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment in China could materially and adversely affect our business and impede our ability to continue our operations.
Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the Opinions, which was made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems will be taken to deal with the risks and incidents of China-concept overseas listed companies, and cybersecurity and data privacy protection requirements and similar matters. The Opinions and any related implementing rules to be enacted may subject us to compliance requirement in the future.
You may be subject to PRC income tax on dividends from us or on any gain realized on the transfer of our Ordinary Shares.
Under the EIT Law and its implementation rules, PRC withholding tax at a rate of 10% is generally applicable to dividends from PRC sources paid to investors that are resident enterprises outside of China and that do not have an establishment or place of business in China, or that have an establishment or place of business in China if the income is not effectively connected with the establishment or place of business. Any gain realized on the transfer of shares by such investors is subject to 10% PRC income tax if this gain is regarded as income derived from sources within China. Under the PRC Individual Income Tax Law and its implementation rules, dividends from sources within China paid to foreign individual investors who are not PRC residents are generally subject to a PRC withholding tax at a rate of 20% and gains from PRC sources realized by these investors on the transfer of shares are generally subject to 20% PRC income tax. Any such PRC tax liability may be reduced by the provisions of an applicable tax treaty.
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Although substantially all of our business operations are in China, it is unclear whether the dividends we pay with respect to our Ordinary Shares, or the gains realized from the transfer of our Ordinary Shares, would be treated as income derived from sources within China and as a result be subject to PRC income tax if we are considered a PRC resident enterprise. If PRC income tax is imposed on gains realized through the transfer of our Ordinary Shares or on dividends paid to our non-resident investors, the value of your investment in our Ordinary Shares may be materially and adversely affected. Furthermore, our shareholders whose jurisdictions of residence have tax treaties or arrangements with China may not qualify for benefits under these tax treaties or arrangements. Non-PRC resident enterprises that are entitled to be taxed at a reduced rate under an applicable income tax treaty may apply to the PRC tax authorities for a refund of any amount withheld in excess of the applicable treaty rate, and payment of such refund will be subject to the PRC tax authorities’ verification.
Evolution with respect to the PRC legal system could adversely affect us.
The PRC legal system is a civil law system based on written statutes, where prior court decisions have limited precedential value.
In particular, PRC laws and regulations concerning the oil equipment industries are evolving. Although we have taken measures to comply with the laws and regulations applicable to our business operations and to avoid conducting any non-compliant activities under these laws and regulations, the PRC governmental authorities may promulgate new laws and regulations regulating internet-related industries. We cannot assure you that our operations would not be deemed to violate any such new PRC laws or regulations. Moreover, developments in the industries may lead to changes in PRC laws, regulations and policies, which in turn may limit or restrict us, and could materially and adversely affect our business and operations.
Risks Relating to Our Class A Ordinary Shares
We do not intend to pay dividends for the foreseeable future.
We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Class A Ordinary Shares if the market price of our Class A Ordinary Shares increases.
If securities or industry analysts do not publish research or reports about our business, or if the publish a negative report regarding our Class A Ordinary Shares, the price of our Class A Ordinary Shares and trading volume could decline.
The trading market for our Class A Ordinary Shares may depend in part on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade us, the price of our Class A Ordinary Shares would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of our Class A Ordinary Shares and the trading volume to decline.
The estimates of market opportunity, forecasts of market growth included in this annual report may prove to be inaccurate, and any real or perceived inaccuracies may harm our reputation and negatively affect our business. Even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.
Market opportunity estimates and growth forecasts included in this annual report are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The variables that go into the calculation of our market opportunities are subject to change over time, and there is no guarantee that any particular number or percentage of addressable companies covered by our market opportunities estimates will purchase our products and solutions at all or generate any particular level of revenues for us. Even if the market in which we compete meets the size estimates and growth forecasted in this annual report, our business could fail to grow for a variety of reasons, including reasons outside of our control, such as competition in our industry.
The market price of our Class A Ordinary Shares may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.
The IPO price for our Class A Ordinary Shares was determined through negotiations between the underwriters and us and may vary from the market price of our Class A Ordinary Shares following our IPO. If you purchase our Class A Ordinary Shares in our IPO, you may not be able to resell those shares at or above the IPO price. We cannot assure you that the IPO price of our Class A Ordinary Shares, or the market price following our IPO, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to our IPO. The market price of our Class A Ordinary Shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
| ● | actual or anticipated fluctuations in our revenue and other operating results; | |
| ● | the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; | |
| ● | actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; | |
| ● | announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments; |
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| ● | price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; | |
| ● | lawsuits threatened or filed against us; and | |
| ● | other events or factors, including those resulting from war or incidents of terrorism, or responses to these events. |
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Share prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, shareholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.
The dual-class structure of our ordinary shares has the effect of concentrating voting control with our Chairman and our chief executive officer, and their interest may not be aligned with the interests of our other shareholders.
We have a dual-class voting structure consisting of Class A Ordinary Shares and Class B Ordinary Shares. Under this structure, holders of Class A Ordinary Shares are entitled to one vote per one Class A Ordinary Share, and holders of Class B Ordinary Shares are entitled to 15 votes per one Class B Ordinary Share, which may cause the holders of Class B Ordinary Shares to have an unbalanced, higher concentration of voting power. As of April 21, 2025, Mr. Shenping Yin, our Chairman of the Board, and his wife, Ms. Xiaoyang Huang, our chief executive officer, beneficially owns 8,192,000, or 100%, of our issued Class B Ordinary Shares, or 85.34% of the voting rights in our Company. As a result, until such time as Mr. Shenping Yin’s and Ms. Xiaoyang Huang’s voting power is below 50%, Mr. Shenping Yin and Ms. Xiaoyang Huang as the controlling shareholders have substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, appointment of directors, and other significant corporate actions. They may take actions that are not in the best interests of us or our other shareholders. These corporate actions may be taken even if they are opposed by our other shareholders. Further, such concentration of voting power may discourage, prevent, or delay the consummation of change of control transactions that shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares. Future issuances of Class B Ordinary Shares may also be dilutive to the holders of Class A Ordinary Shares. As a result, the market price of our Class A Ordinary Shares could be adversely affected.
The dual-class structure of our ordinary shares may adversely affect the trading market for our Class A Ordinary Shares.
Several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual-class structure of our ordinary shares may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A Ordinary Shares.
Our management has broad discretion to determine how to use the funds raised in the offering and may use them in ways that may not enhance our results of operations or the price of our Class A Ordinary Shares.
We anticipate that we will use the net proceeds from the our IPO for working capital and other corporate purposes. Our management will have significant discretion as to the use of the net proceeds to us from the IPO and could spend the proceeds in ways that do not improve our results of operations or enhance the market price of our Class A Ordinary Shares.
Our lack of effective internal controls over financial reporting may affect our ability to accurately report our financial results or prevent fraud which may affect the market for and price of our Class A Ordinary Share.
To implement Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company’s internal control over financial reporting (“ICFR”). We are subject to the requirement that we maintain internal controls and that management perform periodic evaluation of the effectiveness of the internal controls. Effective ICFR is important to prevent fraud. As a result, our business, financial condition, results of operations and prospects, as well as the market for and trading price of our Class A Ordinary Shares, may be materially and adversely affected if we do not have effective internal controls. We do not presently have the financial resources or personnel to develop or implement systems that would provide us with the necessary information on a timely basis so as to be able to implement financial controls. As a result, we may not discover any problems in a timely manner and current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our Class A Ordinary Shares. The absence of internal controls over financial reporting may inhibit investors from purchasing our shares and may make it more difficult for us to raise funds in a debt or equity financing.
Because we are an “emerging growth company,” we may not be subject to requirements that other public companies are subject to, which could affect investor confidence in us and our Class A Ordinary Shares.
As we are an “emerging growth company,” we may not be subject to requirements that other public companies are subject to, which could other requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for so long as we are an emerging growth company and a smaller reporting company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.
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We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”
We became a public company after completion of our IPO and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq Capital Market, impose various requirements on the corporate governance practices of public companies. As an “emerging growth company” pursuant to the JOBS Act, we may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costlier. After we are no longer an “emerging growth company,” we expect to incur significant additional expenses and devote substantial management effort toward ensuring compliance increased disclosure requirements.
Since Mr. Shenping Yin, Chairman of the Board, and his wife, Ms. Xiaoyang Huang, chief executive officer, are able to exercise more than 95% of the total voting power of our issued and outstanding share capital, Mr. Yin will have the ability to elect directors and approve matters requiring shareholder approval.
As of April 21, 2025, Mr. Shenping Yin, our Chairman of the Board, and his wife, Ms. Xiaoyang Huang, the chief executive officer, were the beneficial owners of 8,192,000 Class B Ordinary Shares, or 85.34% of the voting rights in our Company, which are directly held by Fortune Enterprise Holdings Limited, an entity 100% owned by Mr. Yin and Ms. Huang. As a result, Mr. Yin and Ms. Huang are able to exert significant voting influence over fundamental and significant corporate matters and transactions. Depending on the percentage, they may have the power to elect all directors and approve all matters requiring shareholder approval without the votes of any other shareholder. They have significant influence over a decision to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of shareholders, regardless of whether or not our other shareholders believe that such transaction is in our best interests. Such concentration of voting power could have the effect of delaying, deterring, or preventing a change of control or other business combination, which could, in turn, have an adverse effect on the market price of our Class A Ordinary Shares or prevent our shareholders from realizing a premium over the then-prevailing market price for their Class A Ordinary Shares.
We are a “controlled company” within the meaning of the NASDAQ Stock Market Rules and, as a result, may rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.
We are a “controlled company” as defined under the NASDAQ Stock Market Rules because two of our principal shareholders, Shenping Yin, our Chairman of the Board, and Xiaoyang Huang our CEO, who are husband and wife, beneficially own more than 50% of voting power for the appointment of directors. For so long as we are a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules, including:
| ● | an exemption from the rule that a majority of our board of directors must be independent directors; |
| ● | an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent directors; and |
| ● | an exemption from the rule that our director nominees must be selected or recommended solely by independent directors. |
As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.
If we cease to qualify as a foreign private issuer, we would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers, and we would incur significant additional legal, accounting and other expenses that we would not incur as a foreign private issuer.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. domestic issuers, and we are not required to disclose in our periodic reports all of the information that U.S. domestic issuers are required to disclose. While we currently expect to qualify as a foreign private issuer, we may cease to qualify as a foreign private issuer in the future.
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Anti-takeover provisions in our memorandum and articles of association may discourage, delay or prevent a change in control.
Some provisions of our memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including, among other things, the following:
| ● | provisions that authorize our board of directors (“BOD”) to issue shares with preferred, deferred or other special rights or restrictions without any further vote or action by our shareholders; and |
| ● | provisions that restrict the ability of our shareholders to call general meetings and to propose special matters for consideration at general meetings |
You may be unable to present proposals before general meetings or extraordinary general meetings not called by shareholders.
Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our articles of association allow our shareholders holding shares representing in aggregate not less than twenty per cent in par value of the issued Shares which as at that date carry the right to vote at general meetings, to requisition a general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting. Although our articles of association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders, any shareholder may submit a proposal to our board of directors for consideration of inclusion in a proxy statement. Advance notice of at least fifteen calendar days is required for the convening of our annual general meeting and any other general meeting of our shareholders. A quorum required for a general meeting consists of the holders of majority of shares present in person by proxy or duly authorized representative.
If we are classified as a passive foreign investment company, United States taxpayers who own our Class A Ordinary Shares may have adverse United States federal income tax consequences.
A non-U.S. corporation such as ourselves will be classified as a passive foreign investment company, which is known as a PFIC, for any taxable year if, for such year, either
| ● | At least 75% of our gross income for the year is passive income; or |
| ● | The average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income or which are held for the production of passive income is at least 50%. |
Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets.
If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our Class A Ordinary Shares, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.
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Based on our operations and the composition of our assets we do not expect to be treated as a PFIC under the current PFIC rules. We must make a separate determination each year as to whether we are a PFIC, however, and there can be no assurance with respect to our status as a PFIC for our current taxable year or any future taxable year. Although the law in this regard is unclear, we are treating HiTek as being owned by us for U.S. federal income tax purposes, not only because we control their management decisions, but also because we are entitled to the economic benefits associated with HiTek, and as a result, we are treating HiTek as our wholly-owned subsidiary for U.S. federal income tax purposes. For purposes of the PFIC analysis, in general, a non-U.S. corporation is deemed to own its pro rata share of the gross income and assets of any entity in which it is considered to own at least 25% of the equity by value. Therefore, the income and assets of HiTek should be included in the determination of whether or not we are a PFIC in any taxable year.
For a more detailed discussion of the application of the PFIC rules to us and the consequences to U.S. taxpayers if we were determined to be a PFIC, see “Taxation — U.S. Federal Income Taxation — Passive Foreign Investment Company.”
Our Class A Ordinary Shares currently trades under $5.00 per share and thus is a penny stock. Trading in penny stocks has certain restrictions and these restrictions could negatively affect the price and liquidity of our shares.
Our Class A Ordinary Shares currently trade below $5.00 per share. As a result, our Class A Ordinary Shares are known as a “penny stock”, which is subject to various regulations involving disclosures to be given to you prior to the purchase of any penny stock. The SEC has regulations which generally define a “penny stock” to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Depending on market fluctuations, our Class A Ordinary Shares are considered to be “penny stock”. Penny stocks are subject to rules that impose additional sales practice requirements on broker/dealers who sell these securities to persons other than established members and accredited investors. For transactions covered by these rules, the broker/dealer must make a special suitability determination for the purchase of these securities. In addition, the broker/dealer must receive the purchaser’s written consent to the transaction prior to the purchase. The broker/dealer must also provide certain written disclosures to the purchaser. Consequently, the “penny stock” rules may restrict the ability of broker/dealers to sell our securities, and may negatively affect the ability of holders of our Class A Ordinary Shares to resell them. These disclosures require you to acknowledge that you understand the risks associated with buying penny stocks and that you can absorb the loss of your entire investment. Penny stocks generally do not have a very high trading volume. Consequently, the price of the stock is often volatile and you may not be able to buy or sell the stock when you want to.
Item 4. INFORMATION ON THE COMPANY
A. History and development of the Company
We were incorporated in the Cayman Islands on November 3, 2017. HiTek Hong Kong Limited (“HiTek HK”), our wholly-owned subsidiary, was incorporated in Hong Kong on November 20, 2017. Tian Dahai (Xiamen) Information Technology Co. Ltd. (“WFOE”), HiTek HK’s wholly owned subsidiary, was organized pursuant to PRC laws on March 15, 2018. In April 2021, Xiamen Haitian Weilai Technology Co., Ltd. (“Haitian Weilai”), a wholly-owned subsidiary of WFOE was incorporated under the laws of the PRC. The variable interest entity, Xiamen Hengda HiTek Computer Network Co., Ltd., which we refer to as HiTek, was established on January 18, 1996 in Xiamen, Fujian Province, PRC pursuant to PRC laws. HiTek’s shareholders include certain PRC residents and corporate entities controlled by PRC residents.
Our Ordinary Shares started to trade on the Nasdaq Capital Market under the ticker symbol “HKIT” on March 31, 2023 and on April 4, 2023, the Company completed its IPO of 3,200,000 Ordinary Shares at $5.00 per share. The total net proceeds to the Company from the IPO, after deducting discounts, expense allowance, and expenses, were $13,523,140.
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On February 5, 2024, our shareholders approved the re-designation and re-classification of Ordinary Shares of the Company beneficially held by Mr. Shenping Yin, our Chairman of the Board, and his wife, Ms. Xiaoyang Huang, our chief executive officer, into 8,192,000 Class B Ordinary Shares, each with 15 votes per share, and the Ordinary Shares held by other shareholders into 6,200,364 Class A Ordinary Shares, each with one vote per share, on a one for one basis.
Our current registered office in Cayman Islands is at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our principal executive offices are located at Unit 304, No. 30 Guanri Road, Siming District, Xiamen City, Fujian Province, PRC, and our phone number is +86 592-5395967. We maintain a corporate website at http://www.xmhitek.com/. The information contained in, or accessible from, our website or any other website does not constitute a part of this annual report. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC and state the address of that site (http://www.sec.gov).
Selected Condensed Consolidating Financial Statements of Parent, Subsidiaries, VIE entity and its Subsidiaries
The following tables present Selected condensed consolidating financial data of the Parent (HiTek Global Inc.), HiTek HK (HiTek Hong Kong Limited), WFOE and its subsidiaries (Tian Dahai (Xiamen) Information Technology Co. Ltd. and Xiamen Haitian Weilai Technology Co., Ltd.), the VIE entity (Xiamen Hengda HiTek Computer Network Co., Ltd.) and its subsidiaries (Xiamen Huasheng HiTek Computer Network Co., Ltd and the former subsidiary, Huoerguosi Hengda Information Technology Co., Ltd). Such financial data include condensed consolidating balance sheets data as of December 31, 2024 and 2023 and the related condensed consolidating statements of operations and cash flows data for the years ended December 31, 2024, 2023 and 2022. The Parent records its investments in its subsidiaries under the equity method of accounting. Such investments are presented in the selected condensed consolidating balance sheets of the Parent as “investments in non-VIE subsidiaries” and net assets of the VIE entity and its subsidiaries through the VIE agreements” and the profit of the subsidiaries is presented as “Income for Non-VIE subsidiaries” and “Income for VIE and its subsidiaries” in the selected condensed consolidating statements of operations.
SELECTED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
| For the Year Ended December 31, 2024 | ||||||||||||||||||||||||
| Parent | HiTek HK | WFOE and its Subsidiaries | VIE entity and its Subsidiary | Eliminations | Consolidated | |||||||||||||||||||
| Revenues | $ | - | $ | - | $ | 13,267 | $ | 2,891,683 | $ | - | $ | 2,904,950 | ||||||||||||
| Cost of revenues | $ | - | $ | - | $ | (25,471 | ) | $ | (1,873,594 | ) | $ | - | $ | (1,899,065 | ) | |||||||||
| Loss for Non-VIE subsidiaries | $ | (117,367 | ) | $ | (115,507 | ) | $ | - | $ | - | $ | 232,874 | $ | - | ||||||||||
| Loss for VIE and its subsidiary (1) | $ | - | $ | - | $ | (91,812 | ) | $ | - | $ | 91,812 | $ | - | |||||||||||
| Net loss | $ | (896,690 | ) | $ | (117,367 | ) | $ | (115,507 | ) | $ | (91,812 | ) | $ | 324,686 | $ | (896,690 | ) | |||||||
| Comprehensive loss | $ | (896,690 | ) | $ | (117,367 | ) | $ | (120,073 | ) | $ | (453,222 | ) | $ | 324,686 | $ | (1,262,666 | ) | |||||||
| For the Year Ended December 31, 2023 | ||||||||||||||||||||||||
| Parent | HiTek HK | WFOE and its Subsidiaries | VIE entity and its Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
| Revenues | $ | 36,402 | $ | - | $ | 191,738 | $ | 4,335,591 | $ | - | $ | 4,563,731 | ||||||||||||
| Cost of revenues | $ | - | $ | - | $ | (46,768 | ) | $ | (2,595,723 | ) | $ | - | $ | (2,642,491 | ) | |||||||||
| Income for Non-VIE subsidiaries | $ | 1,222,415 | $ | 1,224,590 | $ | - | $ | - | $ | (2,447,005 | ) | $ | - | |||||||||||
| Income for VIE and its subsidiaries (1) | $ | - | $ | - | $ | 1,098,946 | $ | - | $ | (1,098,946 | ) | $ | - | |||||||||||
| Net income | $ | 1,047,641 | $ | 1,222,415 | $ | 1,224,590 | $ | 1,098,946 | $ | (3,545,951 | ) | $ | 1,047,641 | |||||||||||
| Comprehensive income | $ | 1,047,641 | $ | 1,222,415 | $ | 1,222,759 | $ | 770,661 | $ | (3,545,951 | ) | $ | 717,525 | |||||||||||
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| For the Year Ended December 31, 2022 | ||||||||||||||||||||||||
| Parent | HiTek HK | WFOE and its Subsidiaries | VIE entity and its Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
| Revenues | $ | - | $ | - | $ | 353,836 | $ | 6,228,595 | $ | (153,823 | ) | $ | 6,428,608 | |||||||||||
| Cost of revenues | $ | - | $ | - | $ | (212,995 | ) | $ | (2,832,393 | ) | $ | 153,823 | $ | (2,891,565 | ) | |||||||||
| Income for Non-VIE subsidiaries | $ | 1,798,894 | $ | 1,801,042 | $ | - | $ | - | $ | (3,599,936 | ) | $ | - | |||||||||||
| Income for VIE and its subsidiaries (1) | $ | - | $ | - | $ | 1,684,992 | $ | - | $ | (1,684,992 | ) | $ | - | |||||||||||
| Net income | $ | 1,415,745 | $ | 1,798,894 | $ | 1,801,042 | $ | 1,684,992 | $ | (5,284,928 | ) | $ | 1,415,745 | |||||||||||
| Comprehensive income | $ | 1,415,745 | $ | 1,798,894 | $ | 1,803,198 | $ | 667,389 | $ | (5,284,928 | ) | $ | 400,298 | |||||||||||
Note:
| (1) | It represents the technical consultation and service (“Consulting Fees”) income received from the VIE and its subsidiaries pursuant to the Exclusive Technical Consulting and Service (the “Agreement”). |
SELECTED CONDENSED CONSOLIDATING BALANCE SHEETS
| As of December 31, 2024 | ||||||||||||||||||||||||
| Parent | HiTek HK | WFOE and its Subsidiaries | VIE entity and its Subsidiary | Eliminations |
Consolidated | |||||||||||||||||||
| Cash | $ | 6,489,424 | $ | 2,422 | $ | 18,440 | $ | 726,512 | $ | - | $ | 7,236,798 | ||||||||||||
| Due from inter companies (1) | - | 9,656,017 | - | (9,656,017 | ) | - | ||||||||||||||||||
| Total current assets | $ | 22,498,317 | $ | 2,422 | $ | 206,458 | $ | 13,362,125 | $ | (1,883,144 | ) | $ | 34,186,178 | |||||||||||
| Investments in non-VIE subsidiaries | $ | 14,138,600 | $ | 14,165,412 | $ | - | $ | - | $ | (28,304,012 | ) | $ | - | |||||||||||
| Net assets of the VIE and its subsidiaries through the VIE Agreements | $ | - | $ | - | $ | 14,016,761 | $ | - | $ | (14,016,761 | ) | $ | - | |||||||||||
| Total non-current assets | $ | 14,138,600 | $ | 14,165,412 | $ | 14,016,473 | $ | 7,356,012 | $ | (42,320,485 | ) | $ | 7,356,012 | |||||||||||
| Total Assets | $ | 36,636,917 | $ | 14,167,834 | $ | 14,222,931 | $ | 20,718,137 | $ | (44,203,629 | ) | $ | 41,542,190 | |||||||||||
| Due to inter companies (1) | - | - | - | 9,656,017 | (9,656,017 | ) | - | |||||||||||||||||
| Total Liabilities | $ | 1,361,997 | $ | 20,000 | $ | 57,519 | $ | 6,701,376 | $ | (1,873,622 | ) | $ | 6,267,270 | |||||||||||
| Total Shareholders’ Equity | $ | 35,274,920 | $ | 14,147,834 | $ | 14,165,412 | $ | 14,016,761 | $ | (42,330,007 | ) | $ | 35,274,920 | |||||||||||
| Total Liabilities and Shareholders’ Equity | $ | 36,636,917 | $ | 14,167,834 | $ | 14,222,931 | $ | 20,718,137 | $ | (44,203,629 | ) | $ | 41,542,190 | |||||||||||
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| As of December 31, 2023 | ||||||||||||||||||||||||
| Parent | HiTek HK | WFOE and its Subsidiaries | VIE entity and its Subsidiaries | Eliminations |
Consolidated | |||||||||||||||||||
| Cash | $ | 8,236,065 | $ | 4,282 | $ | 29,281 | $ | 1,041,909 | $ | - | $ | 9,311,537 | ||||||||||||
| Due from inter companies (1) | - | - | 10,846,775 | - | (10,846,775 | ) | - | |||||||||||||||||
| Total current assets | $ | 14,077,640 | $ | 4,282 | $ | 147,902 | $ | 11,941,416 | $ | (1,384,641 | ) | $ | 24,786,599 | |||||||||||
| Investments in non-VIE subsidiaries | $ | 14,621,943 | $ | 14,686,108 | $ | - | $ | - | $ | (29,308,051 | ) | $ | - | |||||||||||
| Net assets of the VIE and its subsidiaries through the VIE Agreements | $ | - | $ | - | $ | 14,509,197 | $ | - | $ | (14,509,197 | ) | $ | - | |||||||||||
| Total non-current assets | $ | 15,621,943 | $ | 14,686,108 | $ | 14,509,493 | $ | 9,641,441 | $ | (43,817,544 | ) | $ | 10,641,441 | |||||||||||
| Total Assets | $ | 29,699,583 | $ | 14,690,390 | $ | 14,657,395 | $ | 21,582,857 | $ | (45,202,185 | ) | $ | 35,428,040 | |||||||||||
| Due to inter companies (1) | - | - | - | 10,846,775 | (10,846,775 | ) | - | |||||||||||||||||
| Total Liabilities | $ | 1,361,997 | $ | 20,000 | $ | (28,713 | ) | $ | 7,073,660 | $ | (1,336,490 | ) | $ | 7,090,454 | ||||||||||
| Total Shareholders’ Equity | $ | 28,337,586 | $ | 14,670,390 | $ | 14,686,108 | $ | 14,509,197 | $ | (43,865,695 | ) | $ | 28,337,586 | |||||||||||
| Total Liabilities and Shareholders’ Equity | $ | 29,699,583 | $ | 14,690,390 | $ | 14,657,395 | $ | 21,582,857 | $ | (45,202,185 | ) | $ | 35,428,040 | |||||||||||
Note:
| (1) |
As of December 31, 2024 and 2023, VIE entity and its subsidiaries owed WFOE and its subsidiaries technical consulting and service fees of $9,656,017 and $10,846,775, respectively. For the years ended December 31, 2024, 2023 and 2022, VIE entity and its subsidiaries owed WFOE and its subsidiaries Consulting Fees of $91,812, $1,098,946 and $1,684,992, respectively. The Consulting Fees have not been paid since 2018, and are planned to be paid in 2025. |
SELECTED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
| For the Year Ended December 31, 2024 | ||||||||||||||||||||||||
| Parent | HiTek HK | WFOE and its Subsidiaries | VIE entity and its Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (954,277 | ) | $ | (1,860 | ) | $ | 61,397 | $ | 277,772 | $ | (71,570 | ) | $ | (688,538 | ) | ||||||||
| Net cash used in investing activities | $ | (8,992,364 | ) | $ | - | $ | - | $ | (568,432 | ) | $ | - | $ | (9,560,796 | ) | |||||||||
| Net cash provided by financing activities | $ | 8,200,000 | $ | - | $ | - | $ | - | $ | - | $ | 8,200,000 | ||||||||||||
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| For the Year Ended December 31, 2023 | ||||||||||||||||||||||||
| Parent | HiTek HK | WFOE and its Subsidiaries | VIE entity and its Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (862,825 | ) | $ | (2,175 | ) | $ | (94,106 | ) | $ | 897,257 | $ | (63 | ) | $ | (61,912 | ) | |||||||
| Net cash used in investing activities | $ | (6,270,591 | ) | $ | - | $ | - | $ | (675,964 | ) | $ | - | $ | (6,946,555 | ) | |||||||||
| Net cash provided by financing activities | $ | 15,142,902 | $ | - | $ | - | $ | - | $ | - | $ | 15,142,902 | ||||||||||||
| For the Year Ended December 31, 2022 | ||||||||||||||||||||||||
| Parent | HiTek HK | WFOE and its Subsidiaries | VIE entity and its Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (283,149 | ) | $ | (2,148 | ) | $ | 47,909 | $ | 4,061,438 | $ | - | $ | 3,824,050 | ||||||||||
| Net cash (used in) provided by investing activities | $ | - | $ | - | $ | - | $ | (7,349,231 | ) | $ | - | $ | (7,349,231 | ) | ||||||||||
| Net cash provided by financing activities | $ | - | $ | - | $ | - | $ | 2,749,498 | $ | - | $ | 2,749,498 | ||||||||||||
For the years ended December 31, 2024, 2023 and 2022, net cash provided by financing activities of HiTek Global Inc., or the “parent”, was $8,200,000, $15,142,902 and $nil, which was mainly because that parent received fund from private placement, issuance of ordinary shares and sales collection dominated in USD on behalf of the VIE entity and its subsidiaries.
LONG-TERM INVESTMENTS ROLL-FORWARD
| Investments in Non-VIE subsidiaries and VIE entity and its subsidiaries | ||||
| As of December 31, 2021 | $ | 13,515,589 | ||
| Equity pick-up during the year | 1,798,894 | |||
| Foreign currency translation adjustment | (1,015,447 | ) | ||
| As of December 31, 2022 | 14,299,036 | |||
| Equity pick-up during the year | 1,222,415 | |||
| Deferred offering cost | (569,392 | ) | ||
| Foreign currency translation adjustment | (330,116 | ) | ||
| As of December 31, 2023 | 14,621,943 | |||
| Equity pick-up during the period | (117,367 | ) | ||
| Foreign currency translation adjustment | (365,976 | ) | ||
| As of December 31, 2024 | $ | 14,138,600 | ||
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B. Business Overview
We are an information technology (“IT”) consulting and solutions service provider focusing on delivering services to business in various industry sectors in China. As of the date of this annual report, we have two lines of businesses— 1) services to small and medium businesses (“SMEs”), which consists of Anti-Counterfeiting Tax Control System (“ACTCS”) tax devices, including Golden Tax Disk (“GTD”) and printers, ACTCS services, and IT services, and 2) services to large businesses, which consists of hardware sales and software sales. We expect to actively develop our system integration services and online service platform in the near future. Our vision is to become a one-stop consulting destination for holistic IT and other business consulting services in China.
Value added tax (“VAT”) reporting is mandatory for all business companies in China. The ACTCS is one of the two major VAT control systems that a business entity may choose to comply with the VAT reporting requirements. Developed by the PRC government, ACTCS was intended to effectively eliminate counterfeit invoices, providing accurate and complete tax information for the regional and national audit system. We provide our customers with the necessary ACTCS for their value added tax (“VAT”) reporting, collection and processing. The VIE entity, HiTek, is authorized to carry out the sales of GTD. We are authorized by the State Taxation Bureau, Xiamen Branch, as one of the first ACTCS service providers in the Xiamen metropolitan area. GTD is an ACTCS device necessary for normal operation of ACTCS software. The purchase of GTD is allowed only in conjunction with the use of the ACTCS software and its supporting services. Currently, there are three ACTCS services providers for Xiamen business companies, and we are one of them.
While we are confident that our competitive strengths will continue improving our business, we are aware of the challenges that our business faces, especially the challenges in our services to SMEs which are exempted from the ACTCS services. The services provided to the SMEs are restricted in the Xiamen metropolitan areas since authorization by the State Taxation Bureau, Xiamen Branch to provide ACTCS services is required. Prices of GTD and ACTCS annual service fees are regulated and subject to the State Tax Administration’s pricing mandates. We are not able to adjust to such pricing and as such our profit margin is limited. The Chinese tax regulators have been rolling out electronic invoicing starting from 2018. The electronic invoices enable companies to apply for, issue, transfer and check the invoices through the unified online electronic invoice management system of the Chinese Tax authority. Electronic invoices are very useful in helping business entities reduce operating costs and streamline service process, since they do not involve printing, storage and postage procedures. From January 21, 2021, new taxpayers can receive electronic tax control ukey for free from the Tax authority. Increased use of electronic invoices and the free distribution of GTD will reduce our annual service fee revenue and thus negatively affect our total revenue. Our client base growth may be limited in spite of our marketing efforts, since it is beyond our control how many new SMEs will open each year in the Xiamen metropolitan area.
Complementing our physical service center, we started our developing online service platform in 2018 to enable businesses in the Xiamen metropolitan area to securely process VAT reporting and payment from their desktop virtually anytime and anywhere. Currently, our customers range from small, medium to large companies across industries in the Xiamen metropolitan area. We plan to offer business management service, such as agent accounting services and online IT outsourcing services, to the SME clients using our ACTCS services. We also plan to expand our service to large businesses to other geographic regions.
In April 2021, WFOE established a wholly-owned subsidiary, Haitian Weilai under the laws of the PRC to integrate tax invoicing management services from Hitek to Haitian Weilai.
As part of the services provided to large businesses, HiTek currently sells Communication Interface System (“CIS”), its self-developed software which provides embedded system interface solutions for large businesses. CIS is a universal embedded interface system used in petrochemical and coal businesses to collect industrial, electricity, facility pressure and temperature statistics and convert to readable format for analytical purposes.
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As part of our services to large businesses, Huasheng sold hardware such as laptops, printers, desktop computers and associated accessories, together with certain internet servers, cameras and monitors. After we launched CIS sales, we also introduced our hardware products to our CIS users. Our major business strategy in the market is to connect and source through exclusive relationships with manufacturers so that Huasheng can offer competitively priced hardware. From the beginning of 2022, Huasheng transferred the above business to the VIE. We plan to market large scale hardware integration systems such as router for commercial use, industrial switch, server, large internet firewall etc. in the future. We established the online support system in the beginning of 2018. The online system further enhances our customer experience, which is complemented by highly trained professionals and attractive physical store environment.
Services
For the year ended December 31, 2024, HiTek’s two business lines operated three revenue streams. The first business line, services to large businesses, include hardware sales, representing 57.9% of total revenue, and the software sales, representing 28.4% of total revenue; and the second business line, ACTCS devices and services, represented 13.7% of total revenue.
For the year ended December 31, 2023, HiTek’s two business lines operated three revenue streams. The first business line, services to large businesses, include hardware sales, representing 53.2% of total revenue, and the software sales, representing 16.6% of total revenue; and the second business line, ACTCS devices and services, represented 30.2% of total revenue.
In recent years, the Chinese tax regulators have been rolling out an electronic invoicing system. Electronic invoices enable companies to apply for, issue, transfer and check invoices through the unified online electronic invoice management system of Chinese Tax authority. Electronic invoices are very useful in helping business entities reduce operating costs and streamline service process, since they do not involve printing, storage and postage procedures. Since January 21, 2021, new taxpayers can receive electronic tax control ukey for free from the Tax authority. Increased use of electronic invoices and the free distribution of GTD will reduce our annual service fee revenue and thus negatively affect our total revenue. Our client base growth may be limited in spite of our diligent marketing efforts, since it is beyond our control how many new SMEs will open each year in the Xiamen metropolitan area.
ACTCS Device and Services
For ACTCS supporting services, we charge fees on a yearly basis. This service guarantees smooth functions of ACTCS software covers any technical breakdowns related to the ACTCS software. For tax control system risk investigation service, we charge a one-time service charge for each investigation request.
Our ACTCS device consist primarily of selling GTD. For ACTCS devices sales, we charge one a piece-by-piece basis.
Revenue generated from our ACTCS device and services was 30.2% and 13.7%, respectively, of the total revenue derived from our businesses for the fiscal years ended December 31, 2023 and 2024.
In January 2019, we began to operate new service areas such as online agent accounting platforms and online IT outsourcing platforms. We intend to actively grow such general business management services.
Software Sales
For our software sales, we sell our self-developed Communication Interface System (“CIS”). This software provides embedded system interface solutions for large businesses. CIS is a universal embedded interface system used in petrochemical and coal businesses to collect industrial, electricity, facility pressure and temperature statistics and convert to readable format for analytical purposes. Currently, almost all of the software sales revenue comes from sales of CIS. We do not resell any software developed by any third party.
Revenue generated from our software sales was 16.6% and 28.4%, respectively, of total revenue derived from our businesses for the years ended December 31, 2023 and 2024.
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Hardware Sales
We also generate revenue from our hardware sales, which includes sales of computer hardware such as laptops, printers, desktop computers and associated accessories, together with certain internet servers, cameras and monitors. We have established a carefully designed sales network in the Xiamen metropolitan area that combines online platforms developed in the beginning of 2018 and our retail storefront. We have developed our hardware sale client base over time via our marketing from our physical store. After we launched CIS sales, we also introduced our hardware products to our CIS users. We plan to market large scale hardware integration systems such as router for commercial use, industrial switch, server, large internet firewall etc. to large businesses in the future.
Revenue generated from our hardware sales was 53.2% and 57.9%, respectively, of total revenue derived from our businesses for the years ended December 31, 2023 and 2024.
Our Technology
We provide effective information technology services and secured tax solutions to business companies across a variety of monetization models. We have a dedicated team of three highly skilled in-house IT specialists, which includes three full-time IT professionals responsible for research and development. The following is a list of our self-developed software.
| Technology | Completion Date | Certificate Date | General Functions | |||
| Mobile Invoice System (“MIS”) | October 15, 2013 | June 15, 2015 | MIS enables our clients to generate invoices anywhere, anytime. | |||
| Micro Service System (“MSS”) | July 30, 2014 | June 16, 2015 | MSS resolves service issues between service providers and our customers. | |||
| Secured Coordination System (“SCS”) | April 10, 2013 | June 16, 2015 | SCS provides real-time backup for the invoicing information generated by the users. | |||
| Communication Interface System (“CIS”) | April 17, 2014 | June 15, 2015 | CIS is based on LINUX, which is a general embedded interface system used in petrochemical and coal companies. The system can be used to communicate the RCTX-X module and collect data from work diagrams, electricity diagrams, pressure diagrams and temperature diagrams. It can generate the data from the txt, and then copy and import it to the software of the windows platform to display analysis. | |||
| Universal Invoice System (“UIS”) | February 13, 2014 | June 16, 2015 | AIS facilitates data transmission between users’ management and financial systems and ACTCS software. | |||
| Invoice Query Management System (“IQMS”) | October 30, 2013 | June 15, 2015 | IQMS facilitates users’ invoice inquiries and verification process. | |||
| Micro-App System (“MAS”) | August 10, 2017 | December 1, 2017 | MAS diagnoses and resolves user-end application issues. | |||
| WeChat Cloud Business System (“WCBS”) | May 10, 2017 | December 1, 2017 | WCBS facilitates online transactions between the Company and its clients. | |||
| Collaborative Management System (“CMS”) | October 10, 2017 | December 1, 2017 | CMS facilitates our clients’ business and data management process amongst multiple operating systems. | |||
| HiTek APP application software | November 25, 2018 | December 10, 2018 | It is another name of “enterprise service platform”. It worked as HiTek’s online service platform, including IT services, sales and financial and tax services, etc. | |||
| HiTek network background management system | November 25, 2018 | December 10, 2018 | It is used for backstage unified management of HiTek’s app and HiTek online service platform. | |||
| Remote monitoring system | October 19, 2018 | October 19, 2018 | It is used for remote monitoring, debugging and early warning of the App. |
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Customers
We rely upon several of our large customers from whom we generated substantial revenue each year, and the composition of our largest customers has changed from year to year. For the year ended December 31, 2024, two customers accounted for 29% of total the Company’s revenues, the largest of which was 15%. For the year ended December 31, 2023, one customer accounted for 18% of total the Company’s revenues. We anticipate that our customer base will continue to expand and that in the future we will be less dependent on major customers.
Suppliers
Aside from a set number of suppliers from whom we purchase general hardware for our resale business, we are required by the government to purchase our ACTCS devices from specific suppliers. For the year ended December 31, 2024, two suppliers accounted for 40% of the total purchases made by us. For the year ended December 31, 2023, one supplier accounted for 12% of the total purchases made by us.
We enter into procurement agreements in the ordinary course of business with our suppliers, pursuant to a form of supply order typically on a “deal by deal” basis.
Marketing and Sales
Since inception, our user base in both the services to large businesses and service to SMEs has grown primarily through word of mouth recommendations, digital advertising, and social media advertising. We accumulated a loyal customer base to our hardware sales via our physical store. In general, we focus on delivering a superior user experience through better products and services, which we believe can expand our user base and enhance our brand. We do not have a specific budget for advertising since we have built our brand with very low marketing costs.
While we have benefited from the effects of word of mouth recommendation, digital advertising, and social media advertising, we are considering cooperating with professional advertising companies to initiate campaigns designed to further promote our brand and services.
With respect to the services to SMEs, given the geographic limitation of our ACTCS services, we plan to focus on marketing and promotion of the business management service, which will include agent accounting services, online IT outsourcing services, IT internet operation and maintenance service and equipment purchasing and delivery Door-to-Door service to the SMEs. On the services to large business side, we plan to focus on marketing and promotion of hardware integration system going forward.
Intellectual Property
Protection of our intellectual property is a strategic priority for our business. We rely on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements, to establish and protect our proprietary rights. Except for Chinese government developed ACTCS software used in connection with our day-to-day operations, we generally do not rely on third-party licenses of intellectual property for use in our business.
Our research and development activities (“R&D”) are project based and the number of projects we work on varies annually. As of December 31, 2024, we had 2 full-time R&D professionals. We were successful in developing 12 software products and had obtained 6 Registration of Computer Software Copyright Certificates (the “Certificates”) in 2015, 3 Certificates in 2017 and 3 Certificates in 2018. Our Certificates last indefinitely. In the beginning of 2018, we established 3 joint IT research collaborative syndicates with other Internet technology companies for innovative Internet service projects such as the Tax Service Mobile APP, WeChat Cloud Charging System and Remote monitoring system. In addition to the foregoing protections, we generally control access to and use of our proprietary and other confidential information through the use of internal and external controls, such as use of confidentiality agreements with our employees and outside consultants.
Regulations
This section sets forth a summary of the principal PRC laws and regulations relevant to our business and operations in China.
Regulations on Company Establishment and Foreign Investment
The PRC Company Law, which was promulgated by the SCNPC and further amended in December 1999, August 2004, October 2005, December 2013, October 2018 and December 2023, applies to the establishment, operation and management of both PRC domestic companies and foreign invested enterprises. According to the PRC Company Law, where there are otherwise provisions in the laws relating to foreign investment, such provisions shall prevail.
The Foreign Investment Law of the PRC (the “FIL”), which was promulgated by the National People’s Congress (the “NPC”) on March 15, 2019, and came into effect on January 1, 2020, provides that the “foreign investment” refers to the investment activities in China carried out directly or indirectly by foreign individuals, enterprises or other organizations (the “Foreign Investors”), including the following: (1) Foreign Investors establishing foreign-invested enterprises in China alone or collectively with other investors; (2) Foreign Investors acquiring shares, equities, properties or other similar rights of Chinese domestic enterprises; (3) Foreign Investors investing in new projects in China alone or collectively with other investors; and (4) Foreign Investors investing through other ways prescribed by laws and regulations or the State Council. The FIL further adopts the management system of pre-establishment national treatment and negative list for foreign investment. The “pre-establishment national treatment” refers to granting to foreign investors and their investments, in the stage of investment access, the treatment no less favorable than that granted to domestic investors and their investments; the “negative list” refers to special administrative measures for access of foreign investment in specific fields as stipulated by the State. The FIL granted national treatment to foreign investments outside the negative list. The negative list will be released by or upon approval of the State Council. In December 2019, the State Council promulgated the Regulations on Implementing the Foreign Investment Law.
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Regulation for Implementing the Foreign Investment Law of the PRC (the “Implementation Rules”) came into effect in January 2020. The Implementation Rules further clarified that the state shall encourage and promote foreign investment, protect the lawful rights and interests in foreign investments, regulate foreign investment administration, continue to optimize foreign investment environment, and advances a higher-level opening.
Investment activities in the PRC by foreign investors were principally governed by the Special Administrative Measures (Negative List) for Access of Foreign Investment (2021 version) (the “Negative List”), and the Catalogue of Industries for Encouraging Foreign Investment (the “Encouraging List”) promulgated by the MOFCOM and the NDRC in October 2022. The Negative List, which came into effect on January 1, 2022, sets out special administrative measures (restricted or prohibited) in respect of the access of foreign investments in a centralized manner, and the Encouraging List, which came into effect on January 1, 2023, sets out the encouraged industries for foreign investment. The Negative Lists cover 12 industries, and any field not falling in the Negative Lists shall be administered under the principle of equal treatment for domestic and foreign investment. Our business as currently conducted does not fall within the confines of the Negative List and is not subject to special administrative measures.
The Measures on Reporting of Foreign Investment Information was released by the MOFCOM and the State Administration for Market Regulation (the “SAMR”) on December 30, 2019, and became effective on January 1, 2020. Foreign investors directly or indirectly conducting investment activities within the territory of China shall submit the investment information through submission of initial reports, change reports, deregistration reports, annual reports etc. to the competent commerce authorities in accordance with The Measures on Reporting of Foreign Investment Information. When submitting an annual report, a foreign-invested enterprise shall submit the basic information on the enterprise, the information on the investors and their actual controlling party, the enterprise’s operation and asset and liabilities information etc, and where the foreign investment admission special administrative measures are involved, the foreign investment enterprise shall also submit the relevant industry licensing information.
Regulations on Intellectual Property Rights
Regulations on Copyright
On September 7, 1990, the SCNPC promulgated the Copyright Law of the PRC, or the Copyright Law, effective on June 1, 1991 and amended on October 27, 2001, February 26, 2010, and November 11, 2020, respectively. The amended Copyright Law extends copyright protection to internet activities, products disseminated over the Internet and software products. In addition, there is a voluntary registration system administered by the Copyright Protection Center of China.
Under the Regulations on the Protection of the Right to Network Dissemination of Information that took effect on July 1, 2006 and was amended on January 30, 2013, it is further provided that an Internet information service provider may be held liable under various situations, including that if it knows or should reasonably have known a copyright infringement through the Internet and the service provider fails to take measures to remove or block or disconnect links to the relevant content, or, although not aware of the infringement, the Internet information service provider fails to take such measures upon receipt of the copyright holder’s notice of such infringement.
To further implement the Regulations on Computer Software Protection, promulgated by the State Council on December 20, 2001 and amended on January 8, 2011 and January 30, 2013, respectively, the National Copyright Administration issued the Measures for the Registration of Computer Software Copyright on February 20, 2002, which specify detailed procedures and requirements with respect to the registration of software copyrights.
Regulations on Trademarks
According to the Trademark Law of the PRC promulgated by the SCNPC on August 23, 1982, and amended on February 22, 1993, October 27, 2001, August 30, 2013 and April 23, 2019 respectively, the Trademark Office of the SAIC is responsible for the registration and administration of trademarks in China. The SAIC under the State Council has established a Trademark Review and Adjudication Board for resolving trademark disputes. Registered trademarks are valid for ten years from the date the registration is approved. A registrant may apply to renew a registration within twelve months before the expiration date of the registration. If the registrant fails to apply in a timely manner, a grace period of six months may be granted. If the registrant fails to apply before the grace period expires, the registered trademark shall be deregistered. Renewed registrations are valid for another ten years. On April 29, 2014, the State Council issued the revised Regulation on the Implementation of the Trademark Law of the PRC, which specified the requirements of applying for trademark registration and renewal. According to this law, using a trademark that is identical to or similar to a registered trademark in connection with the same or similar goods without the authorization of the owner of the registered trademark constitutes an infringement of the exclusive right to use a registered trademark. The infringer shall, in accordance with the regulations, undertake to cease the infringement, take remedial action, and pay damages.
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Regulations on Patents
According to the Patent Law of the PRC, or the Patent Law, promulgated by the SCNPC on March 12, 1984 and amended on September 4, 1992, August 25, 2000, December 27, 2008, and October 17, 2020, respectively, and the Detailed Rules for the Implementation of the Patent Law of the PRC, or the Implementation Rules of the Patent Law, promulgated by the State Council on December 21, 1992, and revised on June 15, 2001, December 28, 2002 and January 9, 2010, the patent administrative department under the State Council is responsible for the administration of patent-related work nationwide. The patent administration departments of provincial or autonomous regions or municipal governments are responsible for administering patents within their respective administrative areas. The Patent Law and Implementation Rules of the Patent Law provide for three types of patents, namely “inventions,” “utility models,” and “designs.” Invention patents are valid for 20 years, while utility model patents are valid for ten years, and design patents are valid for fifteen years from the date of application. The Chinese patent system adopts a “first-come, first file” principle, which means that where more than one person files a patent application for the same invention, a patent will be granted to the person who files the application first. An invention or a utility model must possess novelty, inventiveness, and practical applicability to be patentable. Third Parties must obtain consent or a proper license from the patent owner to use the patent. Otherwise, the unauthorized use constitutes an infringement on the patent rights.
Regulations on Domain Names
The Ministry of Industry and Information Technology of the PRC, or the MIIT, promulgated the Measures on Administration of Internet Domain Names, or the Domain Name Measures, on August 24, 2017, which took effect on November 1, 2017 and replaced the Measures for the Administration of Internet Domain Names of China promulgated by the MIIT on November 5, 2004. According to the Domain Name Measures, the MIIT is in charge of the administration of PRC internet domain names. The domain name registration follows a first-to-file principle. Applicants for registration of domain names shall provide true, accurate and complete information of their identities to the domain name registration service institutions. The applicant will become the holder of such domain names upon completion of the registration procedure.
Regulations on M&A Rules and Overseas Listing
The MOFCOM adopted the Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and was last amended on June 22, 2009. Foreign investors shall comply with the M&A Rules when they purchase equity interests in a domestic company or subscribe the increased capital of a domestic company, and thus changing the nature of the domestic company into a foreign-invested enterprise; or when the foreign investors establish a foreign-invested enterprise in China, and purchase the assets of a domestic company and operate the assets; or when the foreign investors purchase the asset of a domestic company, and establish a foreign-invested enterprise by injecting such assets and operate the assets. The M&A Rules purport, among other things, to require offshore special purpose vehicles formed for overseas listing purposes through acquisitions of Chinese domestic companies and controlled by Chinese companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. However, the Foreign Investment Law has partly replaced the M&A Rules in terms of its rules on equity or assets acquisition of a non-related domestic company by a foreign investor. The equity and assets acquisition of a related domestic company by a foreign investor shall still be subject to the M&A Rules. As of the date of this annual report, as advised by Jingtian & Gongcheng, our PRC counsel, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC under the M&A Rules for the approval of the listing and trading of our shares on Nasdaq because we established our PRC VIEs by means of contractual agreements and not through a merger or acquisition of the equity or assets of a “PRC domestic company” as such term is defined under the M&A Rules. However, our PRC legal counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering, and its opinions summarized above are subject to any new laws, rules, regulations, or detailed implementations and interpretations in any form relating to the M&A Rules.
On February 17, 2023, CSRC published the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Overseas Listing Trial Measures”), which came into effect on March 31, 2023, together with five relevant guidelines (together with the Overseas Listing Trial Measures, collectively referred to as the “New Regulations on Filing”). Under New Regulations on Filing, the PRC domestic companies that seek to offer and list securities in overseas markets, either in direct or indirect means, are required to fulfill the filing procedure with the CSRC and report relevant information.
According to the Notice on the Administrative Arrangements for the Filing of the Overseas Securities Offering and Listing by Domestic Companies (the “Notice”) published by the CSRC on February 17, 2023 and effective on the same date, the domestic companies that were listed overseas before March 31, 2023 shall be deemed as existing issuer (the “Existing Issuers”). Existing Issuers are not required to go through filing immediately but shall be required to do so if they involve in re-financing and other filing matters in the future. Further, domestic companies that have obtained the approval documents issued by the CSRC for overseas offering and listing (including new issuance) by joint-stock companies may continue their overseas offering and listing during the valid term of the approval documents. If they fail to complete overseas offering and listing upon expiry of the said term, they shall go through filing as per relevant regulations. As of the date of this annual report, as advised by Jingtian & Gongcheng, our PRC counsel, as our post-effective amendment to the registration statement on Form F-1 relating to our initial public offering (“IPO”) was declared effective on March 30, 2023 and we completed our initial public offering and listing prior to September 30, 2023, we are not required to complete the filing procedures pursuant to the Trial Measures for our IPO. If in the future we are going to conduct any offering or financing in the U.S., we will complete filing procedures with the CSRC pursuant to the requirements of the Trial Measures. In addition, we have not received any formal inquiry, notice, warning, sanction, or objection from the CSRC with respect to our listing on the Nasdaq Capital Market.
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According to the Provisions on Strengthening Confidentiality and Archives Administration in Respect of Overseas Issuance and Listing of Securities by Domestic Enterprises, which were issued by the CSRC, Ministry of Finance of China, National Administration of State Secrets Protection, National Archives Administration of China on February 24, 2023 and came into effect on March 31, 2023, where a domestic company provides or publicly discloses to the relevant securities companies, securities service institutions, overseas regulatory authorities and other entities and individuals, or provides or publicly discloses through its overseas listing subjects, documents and materials involving state secrets and working secrets of state organs, shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level. Domestic company providing accounting archives or copies thereof to entities and individuals concerned such as securities companies, securities service institutions and overseas regulatory authorities shall perform the corresponding procedures in compliance with applicable national regulations.
Regulations on Employment and Social Welfare
According to the Labor Law of the PRC, which was promulgated by SCNPC on July 5, 1994, became effective on January 1, 1995, and was most recently amended on December 29, 2018, an employer shall develop and improve its rules and regulations to safeguard the rights of its employees, and shall develop and improve its labor safety and health system, stringently implement national protocols and standards on labor safety and health, conduct labor safety and health education for workers, guard against labor accidents and reduce occupational hazards.
The Labor Contract Law of the PRC, or the Labor Contract Law, which was promulgated on June 29, 2007 and amended on December 28, 2012, is primarily aimed at regulating the rights and obligations of employers and employees, including the establishment, performance and termination of such relationship. Pursuant to the Labor Contract Law, labor contracts shall be concluded in writing if labor relationships are to be or have been established between employers and the employees. Employers are prohibited from forcing employees to work above certain time limit and employers shall pay employees for overtime work in accordance with certain national regulations. In addition, employee wages shall be no lower than local standards on minimum wages and shall be paid to employees timely.
According to the Social Insurance Law of the PRC effective as of July 1, 2011, and as amended on December 29, 2018, the Regulations on Occupational Injury Insurance effective as of January 1, 2004 and as amended on December 20, 2010, the Interim Measures concerning the Maternity Insurance for Enterprise Employees effective as of January 1, 1995, the Unemployment Insurance Regulations effective as of January 22, 1999, the Interim Regulations concerning the Levy of Social Insurance effective as of January 22, 1999 and most recently amended on March 24, 2019, enterprises and institutions in the PRC shall provide their employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, occupational injury insurance and medical insurance.
An enterprise must provide social insurance by processing social insurance registration with local social insurance agencies, and shall pay or withhold relevant social insurance premiums for or on behalf of employees. If an employer does not pay the full amount of social insurance premiums as required by law, the social insurance premium collection institution shall order the employer to make the payment or make up the difference within the stipulated period and impose a daily surcharge equivalent to 0.05% of the overdue payment from the date on which the payment is overdue. If such overdue payment is not made within the stipulated period, the relevant administration government department shall impose a fine from one to three times the amount of overdue payment.
According to the Regulation on the Administration of Housing Accumulation Funds, which were promulgated and became effective on April 3, 1999, and were most recently amended on March 24, 2019, the employer shall timely pay up and deposit housing provident fund contributions in full amount and late or insufficient payments shall be prohibited. The employer shall process housing provident fund payment and deposit registrations with the housing provident fund administration center.
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With respect to companies which violate the above regulations and fail to process housing provident fund payment and deposit registrations or open housing provident fund accounts for their employees, such companies shall be ordered by the housing provident fund administration center to complete such procedures within a designated period. Those who fail to process their registrations within the designated period shall be subject to a fine from RMB10,000 (US$1,400) to RMB50,000 (US$7,000). When companies violate these regulations and fail to pay housing provident fund contributions in full as due, the housing provident fund administration center shall order such companies to pay within a designated period, and may further apply to the People’s Court for mandatory enforcement against those still fail to comply after the expiration of such period.
Regulations on Unfair Competition and Anti-monopoly
Pursuant to the Anti-Unfair Competition Law, which was promulgated by SCNPC on September 2, 1993, effective on December 1, 1993, and was most recently amended on April 23, 2019, where the legitimate rights and interests of a business operator are harmed by unfair competition, the business operator may file a lawsuit with a People’s Court. The compensation for a business operator which suffers damages due to unfair competition shall be determined in accordance with the actual losses suffered as a result of the infringement; where it is hard to ascertain the actual losses, the compensation shall be determined in accordance with the gains made by the infringer from the infringement. For business operators who infringe upon commercial secrets maliciously and if the case is serious, the compensation amount may be determined in accordance with one to five times the amount determined using the aforesaid method. The compensation amount shall also include reasonable expenses paid by the business operator to stop the infringement.
On May 11, 2024, the SAMR published the Interim Measures on Online Anti-unfair Competition, which will come into effect on September 1, 2024, which regulate that business operators shall not carry out or help carry out acts of unfair competition on the Internet, disrupt the order of market competition, affect fair market transactions, or directly or indirectly damage the legitimate rights and interests of other operators or consumers.
According to the Anti-Monopoly Law which was promulgated by SCNPC on August 30, 2007, became effective on August 1, 2008 and most recently amended on June 24, 2022 and came into effect on August 1, 2022, the prohibited monopolistic acts include monopolistic agreements, abuse of a dominant market position and concentration of businesses that may have the effect to eliminate or restrict competition. Pursuant to the Anti-Monopoly Law, a business operator that possesses a dominant market position is prohibited from abusing its dominant market position, including conducting the following acts: (i) selling commodities at unfairly high prices or buying commodities at unfairly low prices; (ii) without justifiable reasons, selling commodities at prices below cost; (iii) without justifiable reasons, refusing to enter into transactions with their trading counterparts; (iv) without justifiable reasons, allowing trading counterparts to make transactions exclusively with itself or with the business operators designated by it; (v) without justifiable reasons, tying commodities or imposing unreasonable trading conditions to transactions; (vi) without justifiable reasons, applying differential prices and other transaction terms among their trading counterparts who are on an equal footing; and (vii) other acts determined as abuse of dominant market position by the relevant governmental authorities.
Pursuant to the Provisions on Prohibition of the Abuse of Market Dominance, which were issued by SAMR on March 10, 2023, an abuse of market dominance determined by the SAMR shall simultaneously satisfy all the following criteria: (i) the business operator is dominating the market; (ii) the business operator has eliminated or restricted competition; (iii) the business operator has no legitimate reason to implement such acts; and (iv) such acts by the business operator have an impact on elimination or restriction of market competition.
In addition, pursuant to the Provisions on Prohibition of Monopoly Agreements, which were issued by SAMR on March 10, 2023, entering into monopolistic agreements, which means agreements or concerted practices to eliminate or restrict competition, is prohibited, unless such agreements satisfy the specific exemptions prescribed in the Anti-Monopoly Law, such as improving technologies or increasing the efficiency and competitiveness of small and medium-sized undertakings. If business operators fail to comply with the Anti-Monopoly Law or other relevant regulations, the anti-monopoly agency is empowered to cease the relevant activities, unwind the transactions, and confiscate illegal gains and fines.
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Regulation Related to Foreign Exchange and Dividend Distribution
Regulation on Foreign Currency Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations which took effect April 1, 1996 and were last amended August 5, 2008. Under PRC foreign exchange regulations, payments of current account items, such as profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the SAFE, by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities outside of China.
SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which took effect December 17, 2012 and was last amended on December 30, 2019. The Circular substantially amends and simplifies the foreign exchange procedure. Pursuant to the Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of Renminbi proceeds derived by foreign investors in China, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, which took effect June 1, 2015 and was last amended December 30, 2019. Instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals may apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of SAFE, may directly review the applications and conduct the registration.
Besides, the PRC governmental authorities have gradually relaxed restrictions on the settlement of the foreign exchange capitals of foreign-invested enterprises in recent years. In March 30, 2015, SAFE promulgated the Circular of the SAFE on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise, which expands a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises nationwide. The Circular of the SAFE on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise, replaced both the Circular of the SAFE on Issues Relating to the Improvement of Business Operations with Respect to the Administration of Foreign Exchange Capital Payment and Settlement of Foreign-invested Enterprises, and the Circular of the SAFE on Issues concerning the Pilot Reform of the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises in Certain Areas. The Circular of the SAFE on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise allows all foreign-invested enterprises in the PRC to settle their foreign exchange capital on a discretionary basis according to the actual needs of their business operation, provides the procedures for foreign invested companies to use Renminbi converted from foreign currency-denominated capital for equity investments and removes certain other restrictions that had been provided in the Circular of the SAFE on Issues Relating to the Improvement of Business Operations with Respect to the Administration of Foreign Exchange Capital Payment and Settlement of Foreign-invested Enterprises. However, the Circular of the SAFE on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise continues to prohibit foreign-invested enterprises from, among other things, using Renminbi funds converted from their foreign exchange capital for expenditure beyond their business scope and providing entrusted loans or repaying loans between non-financial enterprises. SAFE promulgated the Notice of the SAFE on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, effective June 9, 2016, which reiterates some of the rules set forth in the Circular of the SAFE on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise The Notice of the SAFE on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account provides that discretionary foreign exchange settlement applies to foreign exchange capital, foreign debt offering proceeds and remitted foreign listing proceeds, and the corresponding Renminbi capital converted from foreign exchange may be used to extend loans to related parties or repay inter-company loans (including advances by third parties). On October 23, 2019, SAFE further issued the Circular of the SAFE on Further Promoting the Facilitation of Cross-border Trade and Investment, which took effect on the same day. The Circular of the SAFE on Further Promoting the Facilitation of Cross-border Trade and Investment allows non-investment foreign-invested enterprises to use their capital funds to make equity investments in China as long as such investments do not violate the Negative List and the target investment projects are genuine and in compliance with laws. In addition, the Circular of the SAFE on Further Promoting the Facilitation of Cross-border Trade and Investment stipulates that qualified enterprises in certain pilot areas may use their capital income from registered capital, foreign debt and overseas listing, for the purpose of domestic payments without providing authenticity certifications to the relevant banks in advance for those domestic payments. On April 10, 2020, the SAFE issued the Notice of the SAFE on Optimizing Foreign Exchange Administration to Support the Development of Foreign-related Business, or the SAFE Circular 8. The SAFE Circular 8 provides that under the condition that the use of the funds is genuine and compliant with current administrative provisions on the use of income relating to capital accounts, enterprises are allowed to use income under capital accounts such as capital funds, foreign debts, and overseas listings for domestic payment, without submission to the bank prior to each transaction of materials evidencing the veracity of such payment. The bank in charge shall review and examine the transactions after they have been completed post spot checking in accordance with the relevant requirements.
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Regulation on Dividend Distribution
The principal laws and regulations regulating the dividend distribution of dividends by foreign-invested enterprises in the PRC include the Company Law of the PRC, as recently amended on December 29, 2023 and became effective on July 1, 2024, and the Foreign Investment Law promulgated by SCNPC on March 15, 2019 and became effective on January 1, 2020.
Wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises may not pay dividends unless they set aside at least 10% of their respective accumulated profits after tax each year, if any, to fund certain reserve funds, until such time as the accumulative amount of such fund reaches 50% of the enterprise’s registered capital. These reserves are not distributable as cash dividends. A PRC company shall not distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year. In addition, these companies also may allocate a portion of their after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion.
Regulation on Foreign Exchange Registration of Overseas Investment by PRC Residents
SAFE issued the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, which became effective July 4, 2014, replacing the Circular on Issues Concerning the Regulation of Foreign Exchange in Equity Finance and Return Investments by Domestic Residents through Offshore Special Purpose Vehicles (“SPVs”). The Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through SPVs regulates foreign exchange matters in relation to the use of special purpose vehicles by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Under the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through SPVs, a “SPV” refers to an offshore entity established or controlled, directly or indirectly, by Chinese residents or entities to seek offshore financing or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment” refers to direct investment in China by Chinese residents or entities through SPVs, namely, establishing foreign-invested enterprises to obtain ownership, control rights and management rights. The Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through SPVs provides that, before making a contribution into a SPV, Chinese residents or entities are required to complete foreign exchange registration with SAFE or its local branch.
On February 13, 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, which has amended the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through SPVs by requiring Chinese residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. Chinese residents or entities who had contributed legitimate onshore or offshore interests or assets to special purpose vehicles but had not registered as required before the implementation of the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through SPVs must register their ownership interests or control in the special purpose vehicles with qualified banks. An amendment to the registration is required if there is a material change with respect to the special purpose vehicle registered, such as any change of basic information (including change of the Chinese residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures set forth in the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through SPVs and the subsequent notice, or making misrepresentations or failing to disclose the control of the foreign-invested enterprise that is established through round-trip investment, may result in restrictions being imposed on the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant Chinese residents or entities to penalties under PRC foreign exchange administration regulations.
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Regulation Related to Stock Incentive Plans
On February 15, 2012, SAFE promulgated the Notice on Foreign Exchange Administration of PRC Residents Participating in Share Incentive Plans of Offshore Listed Companies, or the Stock Option Rules, replacing the previous rules issued by SAFE. Under the Stock Option Rules and other relevant rules and regulations, domestic individuals, which means the Chinese residents and non-Chinese citizens residing in China for a continuous period of not less than one year, subject to a few exceptions, who participate in a stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who are Chinese residents must retain a qualified PRC agent, which could be a Chinese subsidiary of the overseas publicly-listed company or another qualified institution selected by the Chinese subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. The participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. The PRC agents must, on behalf of the Chinese residents who have the right to exercise the employee share options, apply to SAFE or its local branches for an annual quota for the payment of foreign currencies in connection with the Chinese residents’ exercise of the employee share options. The foreign exchange proceeds received by the Chinese residents from the sale of shares under the stock incentive plans granted and dividends distributed by the overseas listed companies must be remitted into the bank accounts in China opened by the PRC agents before distribution to such Chinese residents. In addition, the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles provides that Chinese residents who participate in a share incentive plan of an overseas unlisted special purpose company may register with SAFE or its local branches before exercising rights.
Regulations on Tax
Corporate Income Tax
Pursuant to the EIT Law of the PRC effective January 1, 2008 and amended December 29, 2018 and the Regulation on the Implementation of the EIT Law of the PRC effective April 23, 2019, companies are classified into resident companies and non-resident companies. Corporate Income Tax rate is 25%, or 20% for non-resident company which hasn’t set up an organization or an operating site, or its income from established organization or operating side is not connected to such organization or site, judging by the source of its income within the PRC territory. High and new technology companies encouraged by the government shall be accorded with 15% income tax.
Pursuant to the Announcement on Issues Regarding Implementation of Preferential Income Tax Policy for High and New Technology Companies released on June 19, 2017 by State Administration of Taxation or the SAT, company qualified as high or new technology company shall enjoy preferential tax from the year indicated on the certificate for high and new technology company, and file for registration with taxation agency of jurisdiction according to relevant provisions. On expiration of the qualification as high and new technology company, income tax shall be temporarily levied pursuant to a preferential tax rate of 15% before renewal of the qualification; if such qualification is not obtained before the end of the year, the difference between the preferential tax rate and the regular tax rate should be paid according to applicable provisions.
On February 3, 2015, the SAT issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers or Assets by Non-PRC Resident Enterprises, or SAT Bulletin 7, which extends its tax jurisdiction to transactions involving the transfer of taxable assets through offshore transfer of a foreign intermediate holding company. Pursuant to SAT Bulletin 7, where a non-resident enterprise indirectly transfers properties such as equity in PRC resident enterprises without any justifiable business purposes and aiming to avoid the payment of enterprise income tax, such indirect transfer must be reclassified as a direct transfer of equity in PRC resident enterprise. To assess whether an indirect transfer of PRC taxable properties has reasonable commercial purposes, all arrangements related to the indirect transfer must be considered comprehensively and factors set forth in SAT Bulletin 7 must be comprehensively analyzed in light of the actual circumstances. In addition, SAT Bulletin 7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity securities through a public securities market.
Withholding Income Tax
Pursuant to the Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Double Tax Avoidance Arrangement”) promulgated August 21, 2006 and last amended December 6, 2019, where a Hong Kong resident enterprise that holds more than a 25% equity interest in a PRC resident enterprise at any time within 12 consecutive months before receiving the dividend, the competent PRC tax authority may determine the Hong Kong resident enterprise to have satisfied the relevant conditions and requirements under such Double Tax Avoidance Arrangement, and the withholding tax rate on the dividends the Hong Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5% from 10% applicable under the EIT Law.
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Value-Added Tax
Pursuant to the Provisional Regulations on Value-Added Tax of the PRC last amended November 19, 2017, and its Implementation Rules promulgated by the Ministry of Finance, or the MOF and last amended October 28, 2011, tax payers engaging in sale of goods, provision of processing services, repairs and replacement services, sales of services, intangible assets or real property, or importation of goods within the territory of the PRC shall pay value-added tax, or the VAT.
On November 16, 2011, the MOF and the SAT jointly promulgated the Pilot Plan for Levying Value-Added Tax in lieu of Business Tax. Starting from January 1, 2012, the PRC government has been gradually implementing a pilot program in certain provinces and municipalities, to levy a 6% VAT on revenue generated from modern service industries in lieu of the business tax.
The Measures for the Exemption of Value-Added Tax from Cross-Border Taxable Activities in the Collection of Value-Added Tax in Lieu of Business Tax (for Trial Implementation), which was promulgated May 6, 2016 by the SAT, and revised according to the Notice of SAT on Revising Some Normative Documents on Taxation on June 15, 2018, provides that if a domestic enterprise provides cross-border taxable activities such as professional technology services, technology transfer, software service etc., the above mentioned cross-border taxable activities shall be exempted from the VAT.
On March 23, 2016, the MOF and the SAT jointly issued the Notice of Implementing the Pilot Program of Replacing Business Tax with Value-Added Tax in an All-round Manner which confirms that business tax will be completely replaced by the VAT from May 1, 2016.
Pursuant to the Announcement No. 39 (2019) jointly issued by the MOF, the SAT, and the General Administration of Customs, effective on April 1, 2019, the applicable VAT for VAT-taxable sales activities and imported goods are adjusted respectively from 16% to 13% and from 10% to 9%, respectively.
On December 25, 2024, the Thirteenth Meeting of the Standing Committee of the Fourteenth National People’s Congress adopted the Value Added Tax Law of the PRC (which will come into effect on January 1, 2026), replacing the existing provisional regulations on value-added tax, amended in 2017. In terms of tax rates, the new law maintains the existing rates of 13%, 9% and 6%. It also zero-rates exports of certain goods and services. A simplified method of calculating and paying VAT will be applied at a rate of 3%.
Individual Income Tax
The Measures for the Administration of Individual Income Tax on Equity Transfer Income (Trial), promulgated on December 7, 2014 and took effect January 1, 2015, individual income tax incurred by equity transfer shall be paid by the transferor, with the transferee shall act as the withholding obligor. Additionally, the Tax Collection and Administration Law, which was promulgated September 4, 1992 and amended April 24, 2015, stipulates the units and individuals specified by applicable PRC law and regulations as having tax obligations are taxpayers, and meanwhile the units and individuals designated by applicable PRC law and regulations as having the obligation to withhold and pay taxes on behalf of taxpayers are withholding obligors. Taxpayers and withholding obligors must pay taxes and withhold and pay taxes on behalf of the taxpayers subject to the applicable PRC law and regulations. Provided a withholding obligor fails to withhold taxes that should have been withheld or fails to collect taxes that should have been collected, the tax authorities may recover the taxes from the taxpayer and impose a fine on the withholding obligor of 50% to 300% the amount of tax that should have been withheld but was not, or the tax that should have been collected but was not. Additionally, if a taxpayer fails to file, pays less, or fails to pay taxes due, the tax authorities may recover the unpaid or underpaid tax, late payment penalty, and impose a fine ranging from 50% to 500% of the unpaid or underpaid tax.
Regulation on Data Security, Cyber Security and Data Privacy Protection
Pursuant to the PRC Civil Code promulgated by the NPC May 28, 2020 and effective January 1, 2021, the personal information of a natural person shall be protected by the law. An information processor shall not disclose or tamper with any personal information collected or stored thereby; and without the consent of the natural person, no personal information shall be illegally provided to any other person.
In August 2021, the SCNPC promulgated the Personal Information Protection Law, which became effective November 1, 2021. According to the Personal Information Protection Law of PRC, sensitive personal information means the personal information of which the leakage or illegal use could easily lead to the violation of the personal dignity of a natural person or harm to personal or property safety, including information on biometric identification, religious beliefs, specific identity, health care, financial accounts, and personal whereabouts, and personal information of minors under the age of fourteen. Personal information processors shall bear responsibility for their personal information handling activities and adopt the necessary measures to safeguard the security of the personal information they process. Otherwise, the personal information processors will be ordered to correct or suspend or terminate the provision of services and be subject to confiscation of illegal income, fines or other penalties.
On May 8, 2017, the Supreme People’s Court and the Supreme People’s Procuratorate jointly released the Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in the Handling of Criminal Cases Involving Infringement of Citizens’ Personal Information (the “Interpretations”), which came into effect on June 1, 2017, clarifies several concepts regarding the crime of “infringement of citizens’ personal information” stipulated by Article 253A of the Criminal Law of the PRC, including the “provision of citizens’ personal information” and “illegally obtaining any citizen’s personal information by other methods”. In addition, the Interpretations specify the standards for determining “serious circumstances” and “particularly serious circumstances” of this crime.
The SCNPC promulgated the Cybersecurity Law of the PRC in November 2016, which became effective in June 2017, to protect cyberspace security and order. Pursuant to the Cyber Security Law, any individual or organization using the network must comply with the Constitution and the applicable laws, follow the public order and respect social moralities, and must not endanger cyber security, or engage in activities by making use of the network that endanger the national security, honor and interests, or infringe on the fame, privacy, intellectual property and other legitimate rights and interests of others.
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According to the Article 42 of Cyber Security Law, the network operators must not disclose, distort or damage personal information they collect, without the agreement of the person whose information is collected, and personal information may not be provided to others, except where it has been processed in such a manner that it is impossible to distinguish a particular individual’s information and it cannot be retraced.
According to the Article 31 of Data Security Law of the PRC (the “Data Security Law”), which was promulgated by the SCNPC June 10, 2021 and took effect September 1, 2021, specifies that the provisions of the cybersecurity law of the PRC apply to the outbound security management of important data collected or produced by critical information infrastructure operators operating within the territory of the PRC. Outbound security management measures for other data processors collecting or producing important data within the territory of the PRC are to be jointly formulated by the national cyberspace administration and relevant departments of the State Council. The Data Security Law further provides all regions and departments shall establish a data classification and grading protection system and important data catalogs to enhance the protection of important data. Processors of important data shall specify the person responsible for data security and management agencies to implement data security protection responsibilities. Relevant authorities will establish the measures for the cross-border transfer of important data. If any company violates the Data Security Law of the PRC to provide important data outside China, such company may be punished by administration sanctions, including penalties, fines, and/or suspension of relevant business or revocation of the business license. In addition, the Data Security Law of the PRC provides a national security review procedure for those data activities which affect or may affect national security and imposes export restrictions on certain data and information.
On 28 December 2021, the CAC promulgated the Cybersecurity Review Measures, which came into effect 15 February 2022. According to the Cybersecurity Review Measures, there are two mechanisms to trigger cybersecurity review: (a) review of voluntary declaration by enterprises: applicable to (i) critical information infrastructure operators that intend to purchase network products and services; (ii) a network platform operator that processes the personal information of more than one million people intends to be listed overseas; and (b) initiation of review by regulatory authorities: for any member of the cybersecurity review working mechanism believes that any network product or service or data processing activity affects or is likely to affect national security. In this case, the Office of Cybersecurity Review shall report this circumstance to the Central Cyberspace Affairs Commission for approval, and conduct a review after approval.
On November 14, 2021, the CAC promulgated the Regulation on the Administration of Cyber Data Security (Draft for Comments) (the “Draft Cyber Data Security Regulation”), which provides more detailed guidelines on the current rules on various aspects of data processing, including the processors’ announcement of data processing rules, obtaining consents and separate consents, security of important data and cross-border transfer of data, and further obligations of platform operators.
On July 7, 2022, the CAC promulgated the Measures for Security Assessment for Cross-border Data Transfer (the “Measures”), which took effect September 1, 2022. According to the Measures, a data processor shall apply to the competent cyberspace department for security assessment and clearance of the outbound data under any of the following circumstances: (i) outbound transfer of important data by a data processor; (ii) outbound transfer of personal information by an operator of critical information infrastructure or a data processor which has processed more than one million users’ personal data; (iii) outbound transfer of personal information by a data processor which has made outbound transfers of more than 100,000 users’ personal information or more than 10,000 users’ sensitive personal information cumulatively since January 1 of the previous year, or (iv) such other circumstances where ex-ante security assessment and evaluation of cross-border data transfer is required by the CAC. A data processor shall, before applying for the security assessment of an outbound data transfer, conduct a self-assessment of the risks involved in the outbound data transfer.
Corporate Information
Our principal executive offices are located at Unit 304, No. 30 Guanri Road, Siming District, Xiamen City, Fujian Province, PRC, and our phone number is +86 592-5395967. We maintain a corporate website at http://www.xmhitek.com/. The information contained in, or accessible from, our website or any other website does not constitute a part of this annual report.
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C. Organizational Structure
The following diagram illustrates our corporate structure as of the date of this annual report:
| (1) | The equity of HiTek is 56.29% owned by Xiaoyang Huang, our Chief Executive Officer; 36.78% owned by Shenping Yin, our Chairman of the Board; 2.35% owned by Bo Shi, our Chief Technology Officer; 0.78% owned by Zhishuang Wang; 0.78% owned by Liuqing Huang; 3.02% owned by Jingru Li. |
D. Property
Our headquarters are located at Unit 304, No. 30 Guanri Road, Siming District, Xiamen City, Fujian Province, PRC, where we own the office building with a floor area of 495 square meters. This includes our sales and marketing, communication and business development personnel and our management and operations facilities and customer services.
Item 4A. Unresolved Staff Comments
Not required.
Item 5. Operating and Financial Review and Prospects
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The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes to those statements included in this annual report. In addition to historical financial information, this discussion may contain forward-looking statements reflecting our current plans, estimates, beliefs and expectations that involve risks and uncertainties. As a result of many important factors, including those we describe under “Item 3. Key Information — D. Risk Factors” and elsewhere in this annual report. our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements.
A. Operating Results
The following discussion and analysis should be read in conjunction with our consolidated financial statements (“CFS”) and the related notes.
Overview
We are an offshore holding company incorporated in the Cayman Islands. As a holding company with no material operations, our operations were conducted in China by our subsidiaries and through VIE Agreements, with HiTek and its subsidiary. Neither we nor our subsidiaries own any equity interests in the VIE entity. The VIE Agreements are designed so that the operations of the VIE entity are solely for the benefit of the Company. As such, through the VIE Agreements among WFOE, HiTek and HiTek’s shareholders, we are deemed to have a controlling financial interest in, and be the primary beneficiary of, the VIE entity for accounting purposes only and must consolidate the VIE entity because it met the conditions under U.S. GAAP to consolidate the VIE entity. However, the VIE agreements have not been tested in a court of law, and the VIE structure cannot completely replicate a foreign investment in China-based companies, as the investors will not and may never hold equity interests in the Chinese operating entities. Instead, the VIE structure provides contractual exposure to foreign investment in us.
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We are an IT consulting and solutions service provider focusing on delivering services to business in various industry sectors in China. As of the date of this annual report, we have two lines of businesses— 1) services to small and medium businesses (“SMEs”), which consists of Anti-Counterfeiting Tax Control System (“ACTCS”) tax devices, ACTCS services, and 2) services to large businesses, which consists of hardware sales and software sales. We expect to actively develop our system integration services and online service platform in the near future. Our vision is to become a one-stop consulting destination for holistic IT and other business consulting services in China.
VAT reporting is mandatory for all business companies in China. The ACTCS is one of the two major VAT control systems that a business entity may choose to comply with the VAT reporting requirements. Developed by the government-owned entity China Aerospace Science and Technology Corporation (“CASTC”), ACTCS was intended to effectively eliminate counterfeit invoices, providing accurate and complete tax information for the regional and national audit system. The VIE entity, HiTek, is authorized to carry out the sales of GTD. We provide our customers with the necessary ACTCS for their VAT reporting, collection and processing. We are authorized by the State Taxation Bureau, Xiamen Branch, as one of the first ACTCS service providers in the Xiamen metropolitan area. GTD is an ACTCS hardware necessary for normal operation of ACTCS software. The purchase of GTD is allowed only in conjunction with the use of the ACTCS software and its supporting services. Currently, there are three ACTCS services providers for Xiamen business companies, including us.
While we are confident our competitive strengths will continue improving our business, we are keenly aware of the challenges that our business faces, especially the challenges in our services to SMEs which are stemmed from the ACTCS services. The services provided to the SMEs are restricted in the Xiamen metropolitan areas since authorization by the State Taxation Bureau, Xiamen Branch to provide ACTCS services is required which is the cornerstone of our services to the SMEs. Prices of GTD and ACTCS annual service fees are regulated and subject to the State Tax Administration’s pricing mandates. We are not able to adjust such pricing and as such our profit margin is limited. The Chinese tax regulators have been rolling out the electronic invoicing system starting from 2018. The electronic invoices enable companies to apply for, issue, transfer and check the invoices through the unified online electronic invoice management system of Chinese Tax authority. Electronic invoices are very useful in helping business entities reduce operating costs and streamline service process, since they do not involve printing, storage and postage procedures. From January 21, 2021, new taxpayers can receive electronic tax control ukey for free from the Tax authority. Increased use of electronic invoices and the free distribution of GTD will reduce our annual service fee revenue and thus negatively affect our total revenue. Our client base growth may be limited in spite of our diligent marketing efforts, since it is beyond our control how many new SMEs will open each year in the Xiamen metropolitan area.
Complementing our physical service center, we started developing online service platform in 2018. As of January 2019, the online service platform enables tens of thousands of businesses in the Xiamen metropolitan area to securely process. We plan to offer business management service, such as agent accounting services and online IT outsourcing services, to the SME clients using our ACTCS services. We also plan to expand our service to large businesses to other geographic regions.
In April 2021, WFOE established a wholly-owned subsidiary, Haitian Weilai under the laws of the PRC. The strategy purpose of establishing the new subsidiary is for the integration of tax invoicing management services from Hitek to Haitian Weilai.
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As part of the services to large businesses, HiTek currently sells Communication Interface System (“CIS”), its self-developed software which provides embedded system interface solutions for large businesses. CIS is a universal embedded interface system used in petrochemical and coal businesses to collect industrial, electricity, facility pressure and temperature statistics and convert to readable format for analytical purposes.
As part of our services provided to large businesses, Huasheng sold hardware such as laptops, printers, desktop computers and associated accessories, together with certain internet servers, cameras and monitors. After we launched CIS sales, we also introduced our hardware products to our CIS users. Our major business strategy in the market is to connect and source through exclusive relationships with manufacturers so that Huasheng can offer competitively priced hardware. From the beginning of 2022, Huasheng transferred the above business to the VIE. We plan to market large scale hardware integration systems such as router for commercial use, industrial switch, server, large internet firewall etc. in the future. We have established the online support system in the beginning of 2018. The online system further enhances our customer experience, which is complemented by highly trained professionals and attractive physical store environment.
For the year ended December 31, 2024, HiTek’s two business lines operated three revenue streams. The first business line, services to large businesses, including hardware sales, was 58% of total revenue, and the software sales, was 28% of total revenue; and the second business line, ACTCS devices and services, was 14% of total revenue. For the year ended December 31, 2023, HiTek’s two business lines operated three revenue streams. The first business line, services to large businesses, including hardware sales, was 53% of total revenue, and the software sales, was 17% of total revenue; and the second business line, ACTCS devices and services, was 30% of total revenue.
Holding Company Structure
Overview
We are a holding company with no material operations. We conduct substantially all of our business in China through contractual arrangements with Xiamen Hengda HiTek Computer Network Co., Ltd., the VIE, and its subsidiaries. As of December 31, 2024, the VIE entity and its subsidiaries (the “VIEs”) accounted for 46% and 100% of the Company’s total assets and total liabilities, respectively. As of December 31, 2023, the “VIEs” accounted for 57% and 100% of the Company’s total assets and total liabilities, respectively. As of December 31, 2024 and 2023, $726,512 and $1,041,909 of cash was denominated in RMB, respectively.
Conducting our operations through contractual arrangements with the variable interest entities entails a risk that we may lose the power to direct the activities that most significantly affect the economic performance of the variable interest entities, which may result in our being unable to consolidate their financial results with our results and may impair our access to their cash flow from operations and thereby reduce our liquidity.
In addition, any transfer of funds from us to any of our subsidiaries in China or VIEs, either as a shareholder loan or as an increase in registered capital, is subject to certain statutory limit requirements and registration or approval of the relevant PRC governmental authorities, including the relevant administration of foreign exchange and/or the relevant examining and approval authority. Our subsidiaries in China and VIEs are not permitted under PRC law to directly lend money to one another.
Therefore, it is difficult to change our capital expenditure plans once the relevant funds are remitted from our company to our subsidiaries in China or VIEs. These limitations on the free flow of funds between us and our subsidiaries in China and VIEs could restrict our ability to act in response to changing market conditions and reallocate funds internally in a timely manner.
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Dividend Distributions
We intend to keep any future earnings to re-invest in and finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future. Under Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts due in the ordinary course of business. If we determine to pay dividends on any of our Class A Ordinary Shares or Class B Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our Hong Kong subsidiary, HiTek HK.
Current PRC regulations permit our indirect subsidiaries in China to pay dividends to the Company only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.
The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations through the current VIE Agreements, we may be unable to pay dividends on our Class A Ordinary Shares or Class B Ordinary Shares.
Cash dividends, if any, on our Class A Ordinary Shares or Class B Ordinary Shares will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10.0%.
For us to pay dividends to our shareholders, we will rely on payments made from Hitek to WFOE, pursuant to VIE Agreements between them, and the distribution of such payments to Hitek HK as dividends from WFOE. Certain payments from our Hitek to WFOE are subject to PRC taxes, including business taxes and VAT.
Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC project. However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong project must be the beneficial owner of the relevant dividends; and (b) the Hong Kong project must directly hold no less than 25% share ownership in the PRC project during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong project must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiary to its immediate holding company, HiTek HK. As of the date of this annual report, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. HiTek HK intends to apply for the tax resident certificate when WFOE plans to declare and pay dividends to HiTek HK.
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Risks in relation to the VIE structure
It is possible the Company’s operations and businesses through its VIE could be found by PRC authorities to violate PRC law and regulations prohibiting or restricting foreign ownership of companies that engage in such operations and businesses. While the Company’s management considers the possibility of such a finding by PRC regulatory authorities under current law and regulations to be remote, on January 19, 2015, the Ministry of Commerce of the PRC, or (the “MOFCOM”) released on its Website for public comment a proposed PRC law (the “Draft FIE Law”) that appears to include VIEs within the scope of entities that could be considered foreign invested companies (or “FIEs”) that would be subject to restrictions under existing PRC law on foreign investment in certain categories of industry. Specifically, the Draft FIE Law introduces the concept of “actual control” for determining whether an entity is considered to be an FIE. In addition to control through direct or indirect ownership or equity, the Draft FIE Law includes control through contractual arrangements within the definition of “actual control.” If the Draft FIE Law is passed by the People’s Congress of the PRC and goes into effect in its current form, these provisions regarding control through contractual arrangements could be construed to reach the Company’s VIE arrangements, and as a result, the Company’s VIE could become subject to the current restrictions on foreign investment in certain categories of industry. If a finding were made by PRC authorities, under existing law and regulations or under the Draft FIE Law if it becomes effective, about the Company’s operation of certain of its operations and businesses through its VIEs, regulatory authorities with jurisdiction over the licensing and operation of such operations and businesses would have broad discretion in dealing with such a violation, including levying fines, confiscating the Company’s income, revoking the business or operating licenses of the affected businesses, requiring the Company to restructure its ownership structure or operations, or requiring the Company to discontinue all or any portion of its operations. Any of these actions could cause significant disruption to the Company’s business operations and have a severe adverse impact on the Company’s cash flows, financial position and operating performance.
In addition, it is possible the contracts among WFOE, HiTek and HiTek’s shareholders would not be enforceable in China if PRC government authorities or courts found that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. If the Company was unable to enforce these contractual arrangements, the Company would not be able to exert effective control over the VIEs. Consequently, the VIEs’ results of operations, assets and liabilities would not be included in the Company’s CFS. If such were the case, the Company’s cash flows, financial position, and operating performance would be materially adversely affected. The Company’s contractual arrangements WFOE, HiTek and HiTek’s shareholders are approved and in place. Management believes such contracts are enforceable, and considers the possibility remote that PRC regulatory authorities with jurisdiction over the Company’s operations and contractual relationships would find the contracts to be unenforceable.
The Company’s operations and businesses rely on the operations and businesses of its VIEs, which hold certain recognized revenue-producing assets. The VIEs also have an assembled workforce, focused primarily on R&D, whose costs are expensed as incurred. The Company’s operations and businesses may be adversely impacted if the Company loses the ability to use and enjoy assets held by its VIE.
VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. All VIEs and their subsidiaries of the Company must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
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Summary information regarding consolidated VIEs and their subsidiaries is as follows.
| As of December 31, | ||||||||
| 2024 | 2023 | |||||||
| Total current assets | $ | 13,362,125 | $ | 10,571,775 | ||||
| Total non-current assets | $ | 7,356,012 | $ | 9,641,441 | ||||
| Total Assets | $ | 20,718,137 | $ | 20,213,216 | ||||
| Total Liabilities | $ | 6,701,376 | $ | 7,073,660 | ||||
| Years Ended December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Revenues | $ | 2,891,683 | $ | 4,335,591 | $ | 6,228,595 | ||||||
| Net (loss) income | $ | (91,812 | ) | $ | 1,098,947 | $ | 1,684,991 | |||||
| Years Ended December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Net cash provided by operating activities | $ | 277,772 | $ | 834,596 | $ | 4,016,852 | ||||||
| Net cash used in investing activities | $ | (568,432 | ) | $ | (675,964 | ) | $ | (7,349,231 | ) | |||
| Net cash provided by financing activities | $ | - | $ | - | $ | 2,749,498 | ||||||
Tabular Disclosure of Contractual Obligations
Below is a table setting forth all of our contractual obligations as of December 31, 2024:
| Payment Due by Period | ||||||||||||||||||||
| Less than | More than | |||||||||||||||||||
| Contractual Obligations | Total | 1 year | 1 – 3 years | 3 – 5 years | 5 years | |||||||||||||||
| Operating lease obligations | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Loan Obligations | ||||||||||||||||||||
| Principal | 2,534,490 | 479,498 | - | 2,054,992 | - | |||||||||||||||
| Interest | 763,772 | 270,574 | 493,198 | - | - | |||||||||||||||
| Total | $ | 3,298,262 | $ | 750,072 | $ | 493,198 | $ | 2,054,992 | $ | - | ||||||||||
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Results of Operations
The following consolidated results of operations include the results of operations of the Company, its wholly owned subsidiaries and consolidated VIE entity and its subsidiaries.
Our historical reporting results are not necessarily indicative of the results to be expected for any future period.
Year Ended December 31, 2024 Compared to Year Ended December 31, 2023
Revenues
| Increase / | Percentage | |||||||||||||||
| 2024 | 2023 | (Decrease) | Change | |||||||||||||
| Hardware | $ | 1,683,155 | $ | 2,428,592 | $ | (745,437 | ) | (30.7 | )% | |||||||
| Tax devices and service | 398,048 | 1,376,323 | (978,275 | ) | (71.1 | )% | ||||||||||
| CIS software | 823,747 | 758,816 | 64,931 | 8.6 | % | |||||||||||
| Total revenues | $ | 2,904,950 | $ | 4,563,731 | $ | (1,658,781 | ) | (36.3 | )% | |||||||
We have the following three revenue streams – hardware sales, CIS software sales, and tax devices and services sales. Our total revenues for the year ended December 31, 2024 were $2,904,950, reflecting a decrease of $1,658,781 or 36.3% from $4,563,731 for the year ended December 31, 2023. The decrease was due primarily to the decrease in hardware sales to large customers and decrease in tax devices and services sales, partially offset by an increase in CIS software sales. The decrease in hardware sales was due mainly to the decrease in sales to large customers, for these large customers reduced their procurement and the decrease in our customers’ demands affected by the sluggish economic environment. If these large customers continue to reduce their procurement and economic environment keep sluggish, we expect the hardware sales will continue to decrease. CIS software sales consist of software sales and services. The increase in CIS software sales was due mainly to launch of updated CIS software since March 2024. And we expect it will keep increase in the future. The decrease in tax devices and service sales was due mainly to Xiamen tax authorities implemented the use of electronic invoices system to replace the traditional tax control system since November 30, 2022, and the electronic invoices system was formally implemented nationwide on December 1, 2024. We expect our tax devices and service sales will continue to be negatively affected in the future. The Company expects to increase orders for software sales due to the launch of updated CIS software and is in the process of developing a new invoice system that will be more suitable for enterprises than the free electronic invoice platform currently provided by the tax authorities.
Cost of Revenues and Gross Margin
| Increase / | Percentage | |||||||||||||||
| 2024 | 2023 | (Decrease) | Change | |||||||||||||
| Total revenues | $ | 2,904,950 | $ | 4,563,731 | $ | (1,658,781 | ) | (36.3 | )% | |||||||
| Cost of revenues | 1,899,065 | 2,642,491 | (743,426 | ) | (28.1 | )% | ||||||||||
| Gross profit | $ | 1,005,885 | $ | 1,921,240 | $ | (915,355 | ) | (47.6 | )% | |||||||
| Gross Margin % | 34.6 | % | 42.1 | % | (7.5 | )% | ||||||||||
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Cost of revenue is comprised of (i) the direct cost of our hardware products purchased from third parties; (ii) logistics-related costs, which primarily include product packaging and freight-in charges; (iii) third-party royalties paid to the Golden Tax Devices (“GTD”) (iv) compensation for employees who handle the products and perform Tax invoicing management services and other costs that are necessary for us to provide the services to our customers; and (v) outsourcing costs, which primarily include software outsourcing service cost to third parties.
Cost of revenues decreased to $1,899,065 for the year ended December 31, 2024 from $2,642,491 for 2023, a decrease of $743,426 or 28.1%. This decrease was mainly caused by the decrease in hardware sales and tax devices and service sales.
Gross Profit. Our gross profit decreased to $1,005,885 for the year ended December 31, 2024 from $1,921,240 for 2023. Our gross profit as a percentage of revenue decreased to 34.6% for the year ended December 31, 2024 from 42.1% for 2023. The decrease in profit margin was mainly due to the change in revenue mix, with fewer revenues being generated in 2024 from tax devices and services sales. As revenue generated from tax invoicing management services with higher profit margin decreased with the decreases in tax devices sales, it reduced overall profit margin. The Company expects to focus on projects with high gross profit, such as services for SMEs and software sales, and at the same time, increase the hardware sales to large customers.
Operating Expenses
| Increase / | Percentage | |||||||||||||||
| 2024 | 2023 | (Decrease) | Change | |||||||||||||
| Selling expenses | $ | 1,716 | $ | 648 | $ | 1,068 | 164.8 | % | ||||||||
| General and administrative expenses | 2,751,313 | 1,819,531 | 931,782 | 51.2 | % | |||||||||||
| Operating expenses | $ | 2,753,029 | $ | 1,820,179 | $ | 932,850 | 51.3 | % | ||||||||
Selling Expenses. Selling expenses consist primarily of shipping and handling costs for products sold and advertising and marketing expenses for the promotion of our products. Selling expenses increased by 164.8% or $1,068 to $1,716 for the year ended December 31, 2024 from $648 in 2023. The increase in selling expense was mainly attributable to the increase in one-off program marketing and promotion expense. We plan to continue to conduct marketing activities to attract new purchases from new and existing customers.
General and Administrative Expenses. General and administrative expenses consist primarily of salary and welfare for our general administrative and management staff, facilities costs, depreciation expenses, professional fees, accounting fees, directors and officers’ liability insurance, and other miscellaneous expenses incurred in connection with general operations. General and administrative expenses increased by 51.3% or $931,782 to $2,751,313 for the year ended December 31, 2024 from $1,819,531 in 2023. The increase was mainly due to (1) the increase of professional service fee of $373,531 resulting from financing from private placement and public offering in 2024, (2) the increase of $362,972 in credit losses primarily resulted from a termination of software development project in 2024; and (3) the increase of $138,972 in donation to a third party. The Company expects to decrease the ratio of G&A expenses to revenue in the future for cost-effectiveness consideration.
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Net (Loss) Income
| Increase / | Percentage | |||||||||||||||
| 2024 | 2023 | (Decrease) | Change | |||||||||||||
| Operating (loss) income | $ | (1,747,144 | ) | $ | 101,061 | $ | (1,848,205 | ) | (1,828.8 | )% | ||||||
| Total other income, net | 890,201 | 1,493,465 | (603,264 | ) | (40.4 | )% | ||||||||||
| (Loss) income before income taxes | (856,943 | ) | 1,594,526 | (2,451,469 | ) | (153.7 | )% | |||||||||
| Income tax expense | (39,747 | ) | (546,885 | ) | 507,138 | (92.7 | )% | |||||||||
| Net (loss) income | $ | (896,690 | ) | $ | 1,047,641 | $ | (1,944,331 | ) | (185.6 | )% | ||||||
Operating (loss) income. Operating loss was $1,747,144 for the year ended December 31, 2024, compared to operating income of $101,061 for 2023. The decrease in operating income in 2024 was primarily due to the decrease in revenue and increase in general and administrative expenses.
Other income. Other income includes government subsidy income, net investment income (loss), and interest income and expenses. Other income was $890,201 and $1,493,465 for years ended December 31, 2024 and 2023, respectively. The decrease was primarily due to the decrease of $569,298 in government subsidy income and the recognition of a one-time deregistration cost of $104,127 related to the deregistration of Huoerguosi Hengda Information Technology Co., Ltd, which was a wholly owned subsidiary of HiTek in PRC, to reduce its related operating cost.
Income tax expense. Income tax expense was $39,747 for the year ended December 31, 2024, compared to $546,885 for 2023. The decrease in income tax expense was due primarily to the pre-tax loss in year 2024.
Net (loss) income. As a result of the factors described above, net loss was $896,690 for the year ended December 31, 2024, a decrease of $1,944,331 from net income of $1,047,641 for 2023.
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Revenue
| Increase / | Percentage | |||||||||||||||
| 2023 | 2022 | (Decrease) | Change | |||||||||||||
| Hardware | $ | 2,428,592 | $ | 2,504,426 | $ | (75,834 | ) | (3.0 | )% | |||||||
| CIS software | 758,816 | 2,120,532 | (1,361,716 | ) | (64.2 | )% | ||||||||||
| Tax devices and service | 1,376,323 | 1,803,650 | (427,327 | ) | (23.7 | )% | ||||||||||
| Total revenues | $ | 4,563,731 | $ | 6,428,608 | $ | (1,864,877 | ) | (29.0 | )% | |||||||
We have the following three revenue streams – hardware sales, CIS software sales, and tax devices and services sales. The hardware sales increase was mainly due to the increase in sales to large customers. CIS software sales consist of software sales and services. CIS software sales decreased mainly due to the decrease of software sales to large customers, because these large customers reduced their procurement. Tax devices and service sales decreased due to new policies from January 2021 that new taxpayers in Xiamen could get free tax Ukeys from the Tax authorities. We expect the tax devices and service sales will be affected in the future. Our total revenues for the year ended December 31, 2023 were $4,563,731, reflecting a decrease of $1,864,877 or 29.0% from $6,428,608 for the year ended December 31, 2022. The decrease was due primarily to the Company’s decreased software sales to large customers for their slow repayment.
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Cost and Gross Margin
| Increase / | Percentage | |||||||||||||||
| 2023 | 2022 | (Decrease) | Change | |||||||||||||
| Total revenues | $ | 4,563,731 | $ | 6,428,608 | $ | (1,864,877 | ) | (29.0 | )% | |||||||
| Cost of revenues | 2,642,491 | 2,891,565 | (249,074 | ) | (8.6 | )% | ||||||||||
| Gross profit | $ | 1,921,240 | $ | 3,537,043 | $ | (1,615,803 | ) | (45.7 | )% | |||||||
| Gross Margin % | 42.1 | % | 55.0 | % | (12.9 | )% | ||||||||||
Cost of revenue comprised of (i) the direct cost of our hardware products purchased from third parties; (ii) logistics-related costs, which primarily include product packaging and freight-in charges; (iii) third-party royalties paid related to the Golden Tax Disk (“GTD”), an Anti-Counterfeiting Tax Control System (“ACTCS”) tax device; (iv) compensation for the employees who handle the products and perform Tax invoicing management services and other costs that are necessary for us to provide the services to our customers; and (v) outsourcing costs, which primarily include software outsourcing service cost to the third parties.
Cost of revenues decreased to $2,642,491 for the year ended December 31, 2023 from $2,891,565 for 2022, reflecting a decrease of $249,074 or 8.6%. This decrease was mainly due to the change in revenue mix, with less revenues generated in 2023 from software sales that have a higher gross profit, which resulted in the decrease of cost of sales as a percentage of sales in 2023 compared to 2022.
Gross Profit. Our gross profit decreased to $1,921,240 for the year ended December 31, 2023 from $3,537,043 for 2022. Our gross profit as a percentage of revenue decreased to 42.1% for the year ended December 31, 2023 from 55.0% for 2022. This was mainly due to the change in revenue mix, with fewer revenues being generated in 2023 from CIS software sales that have a higher profit margin. The Company expects to continue to focus on projects with high gross profit, such as services for SMEs, and at the same time, increase the hardware and software sales of large customers.
Operating Expenses
| Increase / | Percentage | |||||||||||||||
| 2023 | 2022 | (Decrease) | Change | |||||||||||||
| Selling expenses | $ | 648 | $ | 437,185 | $ | (436,537 | ) | (99.9 | )% | |||||||
| % of revenue | 0.0 | % | 6.8 | % | (6.8 | )% | - | |||||||||
| General and administrative expenses | 1,819,531 | 1,472,648 | 346,883 | 23.6 | % | |||||||||||
| % of revenue | 39.9 | % | 22.9 | % | 17 | % | - | |||||||||
| Operating expenses | $ | 1,820,179 | $ | 1,909,833 | $ | (89,654 | ) | (4.7 | )% | |||||||
Selling Expenses. Selling expenses consist primarily of shipping and handling costs for products sold and advertising and marketing expenses for the promotion of our products. Selling expenses decreased by 99.9% or $436,537 to $648 for the year ended December 31, 2023 from $437,185 in 2022. The decrease was mainly attributable to the decrease in the Company’s sales commissions to obtain new orders in 2023. Selling expenses were 0.01% of total revenue for the year ended December 31, 2023 and 6.8% of total revenue in 2022.
General and Administrative Expenses. General and administrative expenses consist primarily of salary and welfare for our general administrative and management staff, facilities costs, depreciation expenses, professional fees, accounting fees, directors and officers liability insurance, and other miscellaneous expenses incurred in connection with general operations. General and administrative expenses increased by 23.6% or $346,883 to $1,819,531 for the year ended December 31, 2023 from $1,472,648 in 2022. The increase was mainly due to (1) the increase of professional service fee of $233,458 resulting from financial and legal consulting in 2023, (2) other fees of $36,728 related to the Company’s IPO in March 2023, and (3) rent of $78,246. The increase was offset by a decrease in salary expense of $133,492 resulting from the reduction of employees for cost-effectiveness consideration. General and administrative expenses were 39.9% of total revenue for the year ended December 31, 2023 and 22.9% of total revenue in 2022.
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Net Income
| Increase / | Percentage | |||||||||||||||
| 2023 | 2022 | (Decrease) | Change | |||||||||||||
| Operating income | $ | 101,061 | $ | 1,627,210 | $ | (1,526,149 | ) | (93.8 | )% | |||||||
| Total other income | 1,493,465 | 241,753 | 1,251,712 | 517.8 | % | |||||||||||
| Income before income taxes | 1,594,526 | 1,868,963 | (274,437 | ) | (14.7 | )% | ||||||||||
| Income tax expense | (546,885 | ) | (453,218 | ) | (93,667 | ) | 20.7 | % | ||||||||
| Net income | $ | 1,047,641 | $ | 1,415,745 | $ | (368,104 | ) | (26.0 | )% | |||||||
| Effective tax rate | 34.3 | % | 24.2 | % | (10.1 | )% | ||||||||||
Operating income. Operating income was $101,061 for the year ended December 31, 2023, compared to $1,627,210 for 2022. The decrease in operating income in 2022 was primarily due to the decrease in CIS software sales.
Other income. Other income includes government subsidy income, net investment income (loss), and interest income and expenses. Other income was $1,493,465 and $241,753 for years ended December 31, 2023 and 2022, respectively. The increase was primarily due to the increase in investment income of $349,915, government subsidies of $560,090 and interest income of $366,320.
Income tax expense. Income tax expense was $546,885 for the year ended December 31, 2023, compared to $453,218 for 2022. The increase in income tax expense was due primarily to the increase in deferred tax liability resulting from the increased unbilled revenue from large customers.
Effective tax rate. Effective tax rate was 34.3% for the year ended December 31, 2023, compared to 24.2% for 2022. The increase was due primarily to one PRC subsidiary with a preferential tax policy recording a loss in 2023, whereas it recorded a profit in 2022.
Net income. As a result of the factors described above, net income was $1,047,641 for the year ended December 31, 2023, resulting in a decrease of $368,104 from $1,415,745 for 2022.
Liquidity and Capital Resources
Our principal sources of liquidity come from cash generated from operating activities, equity financing and loans. As of December 31, 2024 and 2023, we had cash of $7,236,798 and $9,311,537, respectively.
Working Capital. Working capital as of December 31, 2024 was $31,572,809 compared to $21,413,847 as of December 31, 2023. The increase was mainly due to an increase in the current portion of short-term investments of $14,095,095, and prepaid expenses and other current assets of $1,153,378, which was offset by a decrease in loans receivable of $2,649,293, accounts receivable of $732,977, advance to suppliers of $326,851 and inventories of $65,034. Current liabilities were $2,613,369 as of December 31, 2024, compared to $3,372,752 as of December 31, 2023. This decrease in liabilities was attributable mainly to a decrease in accounts payable of $276,180, taxes payable of $237,171 and deferred revenue of $111,040, which was offset by an increase in accrued expenses and other current liabilities of $124,440. In addition, in June 2024, the Company received $8.2 million from the private placement. We believe our current cash and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months.
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Capital Resources and Capital Needs. To date, we have financed our operations primarily through cash flows from operations, third-party loans, stock offering and private placement. With the current market, our management believes it is necessary to enhance collection of outstanding accounts and other receivables, and be cautious on operational decisions and project selection. Our management believes our current operations can satisfy our daily working capital needs. We expect to incur additional capital expenditures for research and development of software, recruiting additional employees, and enhancing our information technology system. We intend to fund these planned expenditures with our operating cash flow and our cash balance, as well as net proceeds received from our initial public offering in April 2023 and private placement in July 2024.
In 2023, the Company signed a software upgrade and development contract (Interface System), which obligated the software company to perform certain software upgrade and development activities from May to September 2023. The development is finished and was accepted by the Company in March 2024. The Company capitalized $608,653 as intangible assets.
The Company reviews accounts receivable on a periodic basis and records credit losses when there is doubt as to the collectability of balances. Our management is confident in collecting accounts and other receivables. The current accounts receivable, net was $1,385,761 and $2,118,738 as of December 31, 2024 and 2023, respectively. The decrease in accounts receivable, net was due primarily to lower revenues were generated in 2024.
The Company gives customers different credit periods considering the size of the customer and past credit experience. For large customers such as large-scale oil and coal mine customers, the Company gives a two-year credit period from March 2019 because of these customers’ long repayment cycle. Net balance of the accounts receivable was $3,338,547 as of December 31, 2024, of which $1.0 million was collected as of April 25, 2025.
For IT outsourcing customers, the Company gives an eighteen (18) months credit period. The accounts receivable, net balance was $nil as of December 31, 2024.
For small and medium customers, the Company gives a six (6) months credit period. The accounts receivable, net balance was $274,303 as of December 31, 2024.
Off-Balance Sheet Arrangements.
As of December 31, 2024, we did not enter into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. Furthermore, we did not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity as of the end of fiscal year 2024. Moreover, we did not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development (“R&D”) services with us as of December 31, 2024.
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Cash Flows Analysis
Year Ended December 31, 2024 Compared to Year Ended December 31, 2023
| (a) | Operating Activities |
Net cash used in operating activities was $688,538 for the year ended December 31, 2024. This was an increase of $626,626 compared to net cash used in operating activities of $61,912 in 2023. The net cash used in operating activities for the year ended December 31, 2024 was primarily attributable to (1) a net loss of $896,690 due to the reasons discussed above; reconciled by depreciation and amortization of $259,554, accrued interest income from loans, net of $225,665 net investment gain of $58,130, provision for credit losses of receivables and advances to suppliers of $366,736 and deferred income tax of $39,747; (2) an increase of $2,612,671 in short-term investments; (3) a decrease of $2,990,258 in accounts receivable due to the decrease in sales in 2024; (3) a decrease of $59,802 in inventories due to the decrease in purchase; (4) a decrease of $65,672 in prepaid expenses and other current assets; (5) a decrease of $265,203 in accounts payable due to the decrease in purchase of goods and services; (6) a decrease of $281,961 in taxes payable; and (7) a decrease of $119,063 in accrued expenses and other liabilities.
| (b) | Investing Activities |
Net cash used in investing activities was $9,560,796 for the year ended December 31, 2024. This was an increase of $2,614,241 compared to net cash used in investing activities of $6,946,555 in 2023. The net cash used in investing activities for the year ended December 31, 2024 was primarily attributable to (1) $290,488 in advance payment for software development; (2) $2,899,088 in loans to third parties; (3) $5,338,780 in repayment from third-party loans; (4) $18,200,000 in purchases of held-to-maturity investments; (5) $7,500,000 in redemption of held-to-maturity Investments; and (6) $1,010,000 in deposit for acquisition.
| (c) | Financing Activities |
Net cash provided by financing activities was $8,200,000 for the year ended December 31, 2024. This was a decrease of $6,942,902 compared to net cash used in financing activities of $15,142,902 in 2023. The net cash provided by financing activities for the year ended December 31, 2024 was attributable to a private placement.
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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
| (a) | Operating Activities |
| (1) | Net cash used in operating activities was $61,912 for the year ended December 31, 2023, while net cash provided by operating activities was $3,824,050 for the year ended December 31, 2022. The increase of $3,885,962 in net cash used in operating activities for the year ended December 31, 2023 was mainly due to (1) an increase of $4,115,220 in cash used in short-term investments in 2023; (2) an increase of $1,048,918 in cash used in deferred revenue, for the tax devices and service sales decreased due to the new policies carried from January 2021 that the new taxpayers in Xiamen could get free tax Ukeys from the Tax authorization. The deferred revenue from after-sales supporting services and tax invoicing management service decreased correspondingly; (3) an increase of $504,017 in cash used in accrued expenses and other liabilities, for the Company paid annual bonus of previous years; (4) an increase of $371,840 in cash used in accounts payable, for the Company paid to our vendors timely; (5) an increase of $190,134 in cash used in deferred offering cost, for the Company paid offering expenses in 2023; and (6) an increase of $102,611 in cash used in prepaid expenses and other current assets. These were partially offset by (1) an increase of $3,058,205 in cash provided by accounts receivable; (2) an increase of $252,771 in cash provided by inventory; (3) a decrease of $196,841 in cash provided by taxes payable; and (4) a decrease of $109,736 in cash provided by accounts receivable from related parties. |
| (b) | Investing Activities |
| (2) |
Net cash used in investing activities was $6,946,555 and $7,349,231 for the years ended December 31, 2023 and 2022, respectively. The increase of $402,676 in net cash used in investing activities for the year ended December 31, 2023 was mainly due to (1) an increase of $9,067,920 in purchase of held-to-maturity investments; (2) an increase of $5,761,545 in loans lent to third parties; (3) an increase of $221,692 in advance payment for software development, (4) an increase of $186,499 for purchases of property, plant and equipment, and (5) an increase of $150,156 for office renovation. These were partially offset by an increase of $8,631,470 in repayment from third-party loans.
On January 21, 2022, March 28, 2022 and June 14, 2022, the Company made three loans of RMB30,000,000 ($4,272,079), RMB3,000,000 ($422,708) and RMB7,000,000 ($986,318) to a third party, which were restricted for its operating activities, carrying interest at 12%. The RMB30,000,000 loan is extended for one year and will mature on January 21, 2025. The RMB7,000,000 will mature on June 13, 2024. The RMB3,000,000 loan was repaid in August 2022 with an interest of RMB120,000 ($17,368). The change in the carrying value of these outstanding loans from $5,355,257 in 2022 to $5,213,397 in 2023 was due mainly to currency translation. Pursuant to a mining right pledge agreement dated August 5, 2022 between HiTek, as representative of the Lenders, and the Borrower, these three loans are secured by the Borrower’s coal mining permit issued by Bobai County Natural Resources Bureau, which grants the Borrower a 20-year mining right for certain building granite mine in Daguang Village, Shuiming Town, Bobai County, Guangxi Province, for production of 1.306 million cubic meters per year.
In 2023, the Company provided loans with interest of 1.5% per month to another third party for its operating activities. The loans are secured by their respective pledge contracts using their underlying assets. Such loans will mature within nine months from the date of issue, with loan principal, interest, and handling fees to be settled immediately after the maturity date. From April to December 2023, total loans to such a third party were $9.8 million, of which $7.3 million of the principal was repaid prior to December 31, 2023. |
| (c) | Financing Activities |
Net cash provided by financing activities was $15,142,902 and $2,749,498 for the years ended December 31, 2023 and 2022, respectively. For the year ended December 31, 2023, we had $15,142,902 cash inflow from insurance of Ordinary Shares. For the year ended December 31, 2022, we had $2,749,498 cash inflow from borrowing from third parties.
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Research and Development, Patents and Licenses, etc.
We have a dedicated team of three highly skilled full-time in-house IT specialists, who are responsible for controlling the direction of outsourced R&D projects. Among all the software we have developed, CIS is the only software product we are currently marketing and generating revenue.
Trend information.
Other than as disclosed elsewhere in this annual report, we are not aware of any material recent trends in production, sales and inventory, the state of the order book and costs and selling prices since our last fiscal year. We are also unaware of any known trends, uncertainties, demands, commitments or events for the year ended December 31, 2024 that are reasonably likely to have a material adverse effect on our revenues, net income, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial conditions.
Impact of Recently Issued Accounting Standards
A list of recently issued accounting pronouncements that are relevant to us is included in Note 2 to our CFS included elsewhere in this annual report.
Critical Accounting Estimates
Our CFS are prepared in accordance with accounting principles generally accepted in the U.S., which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities. On an ongoing basis, we evaluate our estimates, including those estimates that may have a significant effect on our financial condition and results of operations. Our significant accounting policies are disclosed in Note 2 to our CFS. We base our estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We consider an accounting estimate to be critical if:
| (a) | the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and |
| (b) | the impact of the estimate on financial condition or operating performance is material. |
There are other items within our financial statements that require estimation but are not deemed critical, as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.
For a detailed description of our significant accounting policies and related judgments, please see Note 2. You should read the following description of critical accounting estimates in conjunction with our CFS and other disclosures included in this annual report.
Expected Credit Losses
Nature of estimate: Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” requires us to record the full amount of expected credit losses for the life of a financial asset at the time it is originated or acquired, adjusted for subsequent changes in expected lifetime credit losses.
Assumptions: The Company assesses collectability by reviewing receivables on a collective basis where similar characteristics exist, primarily based on the size and nature of specific customers’ receivables. In determining the amount of the allowance for credit losses, the Company considers historical collectability based on past due status, the age of the receivable balances, credit quality of the Company’s customers based on ongoing credit evaluations, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the Company’s ability to collect from customers. Our allowance for credit losses is based on its assumptions regarding the probability of default. The expected probability of payment and time to default, which include assumptions about macroeconomic factors and customers’ performance. We recognized $366,736 and reversed $2,325 credit losses of receivables and advances to suppliers for the years ended December 31, 2024 and 2023, respectively.
Our estimate of the key assumptions did not change significantly throughout the periods presented.
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Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Our directors and executive officers are as follows:
| Name | Age | Position(s) | ||
| Shenping Yin | 55 | Chairman of the Board | ||
| Xiaoyang Huang | 56 | Chief Executive Officer and Director | ||
| Tianyu Xia | 35 | Chief Financial Officer | ||
| Bo Shi | 51 | Chief Technology Officer | ||
| Weijun Wang | 53 | Independent Director | ||
| Shuiqing Huang | 60 | Independent Director | ||
| Lawrence Venick | 52 | Independent Director |
Below is a summary of the business experience of each of our executive officers and directors:
Shenping Yin
Mr. Shenping Yin has been our Chairman since our inception. Mr. Yin has been the Chief Executive Officer and a director of Recon Technology, Ltd. (NASDAQ: RCON) since 2007. In 2003, Mr. Yin founded Nanjing Recon, a Chinese company that provides services to automate and enhance the extraction of petroleum in China, and has been the Chief Executive Officer since that time. Mr. Yin has founded and operated a number of companies engaged in the IT industry including: Xiamen Hengda Haitian Computer Network Co., Ltd. (1994), Baotou Hengda Haitian Computer Network Co., Ltd. (1997), Beijing Jingke Haitian Electronic Technology Development Co., Ltd. (1999), and Jingsu Huasheng Information Technology Co., Ltd. (2000). Mr. Yin received his bachelor’s degree in 1991 from Nanjing Agricultural University in Information Systems.
Xiaoyang Huang
Ms. Xiaoyang Huang has been our CEO since our inception. Ms. Huang was appointed as our director upon closing of our initial public offering on April 4, 2023. She has been the Chief Executive Officer of HiTek, the VIE since 2000. Ms. Huang graduated from Nanjing Agricultural University and majored in Agricultural Information. She also went through a one-year accounting program in Renmin University of China from 2010 to 2011.
Tianyu Xia
Ms. Tianyu Xia has been our CFO since August 15, 2018. From April 2014 to December 2015, she worked as an Investor Relations Manager at Recon Technology Ltd. From December 2015 to October 2017, she worked as an Investor Relations Manager at Smartisan Technology Co., Ltd. Ms. Xia graduated from Saint Louis University, John Cook School of Business in 2012 and received her bachelor’s degree in Accounting. She also minored in Information Technology Management. Ms. Xia received her Master’s degree in Investor Relations from Fordham University, Graduate School of Business in 2013. She received her Master’s degree in Business Administration from Cheung Kong Graduate School of Business in 2018.
Bo Shi
Mr. Bo Shi has been our CTO since our inception. From July 1996 to March 1998, he worked as a maintenance engineer at Xiamen Automotive Friction and Sealing Material Co., Ltd. He has been working for HiTek since March 1998 and has undertaken various responsibilities such as maintenance engineer, technical manager, technical director, deputy general manager and general manager. He is now the general manager of HiTek. Mr. Shi graduated from Wuhan University of Technology (formerly known as “Wuhan Automotive University”) in July 1996, with a bachelor’s degree in Computer Science and Application.
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Weijun Wang
Mr. Weijun Wang has served as the vice general manager of Shanghai UDH Technologies Co., Ltd since May 2022. He worked for GOLDTECH Group Company for more than eight years, including working as a technical engineer, the director of the Nanchang and Wuhan office, and the vice general manager of the Fuzhou branch from May 1994 to July 2002. From August 2002 to August 2003, he served as the manager of the marketing and sales department of Shanghai ShiWei Network System Engineering Co., Ltd. From September 2003 to October 2007, he served as the account manager of Cisco Systems (China) Research & Development Co Ltd., Shanghai branch. From November 2007 to April 2009, he served as the development business manager of Shanghai Kingsway Co., Ltd. From May 2009 to July 2016, he served as the account manager of Cisco Systems (China) Research & Development Co Ltd., Shanghai and Fuzhou branch. From August 2016 to April 2022, he served as the manager of different departments of Cisco China Company, Limited. Mr. Wang holds a bachelor’s degree in Agriculture Information at Nanjing Agricultural University.
Shuiqing Huang
Mr. Shuiqing Huang has been working at Nanjing Agricultural University for more than 35 years, including working as an associate professor and professor of the Department of Information Management, the director of the Department of Humanities and Social Sciences, the dean of the School of Information Technology, and a doctoral supervisor, since February 1988. Mr. Huang holds a bachelor’s degree in Literature and a master’s Degree in Science at Peking University.
Lawrence Venick
Mr. Lawrence Venick has been our independent director since April 4, 2023. Mr. Venick has been a Partner at Loeb & Loeb LLP since 2007. He is a corporate and securities lawyer focusing his practice on United States capital market transactions and corporate governance matters involving U.S. listed companies. Over the course of his career, Mr. Venick has represented a number of publicly traded companies listed on NASDAQ and The NYSE. Mr. Venick currently splits his time between Loeb & Loeb LLP’s Hong Kong and Beijing offices. He serves as the Managing Partner of the Hong Kong office and is the Chief Legal Representative of the Beijing office. From 2004 to 2012, Mr. Venick worked as a corporate lawyer in Loeb & Loeb LLP’s Los Angeles office. Prior to that time, Mr. Venick worked as a corporate lawyer in Wilson Sonsini Goodrich & Rosati PC’s Palo Alto office. Mr. Venick holds a B.A. from the University of California at Santa Barbra and a J.D. from Loyola Law School.
B. Compensation
Executive Compensation
The following table shows compensation earned by our executive officers in the years ended December 31, 2024 and 2023:
Summary Compensation Table
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Share Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation | Deferred Compensation Earnings | Other | Total ($) | |||||||||||||||||||||||||||
| Xiaoyang Huang, | 2024 | 168,358 | 50,000 | - | - | - | - | - | 218,358 | |||||||||||||||||||||||||||
| Chief Executive Officer | 2023 | 102,335 | 10,145 | - | - | - | - | - | 112,480 | |||||||||||||||||||||||||||
| Bo Shi, | 2024 | 26,701 | - | - | - | - | - | - | 26,701 | |||||||||||||||||||||||||||
| Chief Technology Officer | 2023 | 26,779 | 5,072 | - | - | - | - | - | 31,851 | |||||||||||||||||||||||||||
| Tianyu Xia, | 2024 | 80,000 | 20,000 | - | - | - | - | - | 100,000 | |||||||||||||||||||||||||||
| Chief Financial Officer | 2023 | 65,481 | - | - | - | - | - | - | 65,481 | |||||||||||||||||||||||||||
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Grants of Plan Based Awards
None.
Employment Agreements
We entered into employment agreements with our CEO and CTO on July 1, 2018, and with our CFO on September 2, 2018. Each of our executive officers is employed for a specified time period, which will be renewed upon both parties’ agreement thirty days before the end of the current employment term. We may terminate the employment for cause, at any time, without notice or remuneration, for certain acts of the executive officer, including but not limited to the commitments of any serious or persistent breach or non-observance of the terms and conditions of the employment, conviction of a criminal offense, willful disobedience of a lawful and reasonable order, fraud or dishonesty, receipt of bribery, or severe neglect of his or her duties. An executive officer may terminate his or her employment at any time with a one-month prior written notice. Each executive officer has agreed to hold, both during and after the employment agreement expires, in strict confidence and not to use or disclose to any person, corporation or other entity without written consent, any confidential information. In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his employment and for one year following termination of the employment.
Our employment agreement with Xiaoyang Huang, our CEO, provides her term of one year with an annual salary of $70,000. Unless terminated pursuant to the terms thereof, the employment agreement will be renewed automatically for an additional one-year term. As of the date of this annual report, the employment agreement with Xiaoyang Huang has been renewed and is currently in effect.
Our employment agreement with Bo Shi, our CTO, provides his term of one year with an annual salary of $55,000. Unless terminated pursuant to the terms thereof, the employment agreement will be renewed automatically for an additional one-year term. As of the date of this annual report, the employment agreement with Bo Shi has been renewed and is currently in effect.
Our employment agreement with Tianyu Xia, our CFO, provides her term of three years with an annual salary of $60,000. Unless terminated pursuant to the terms thereof, the employment agreement will be renewed automatically for an additional one-year term. As of the date of this annual report, the employment agreement with Tianyu Xia has been renewed and is currently in effect.
Outstanding Equity Awards at Fiscal Year-End; Option Exercises and Stock Vested
None.
Pension Benefits
None of the named executives currently participates in or has account balances in qualified or nonqualified defined benefit plans sponsored by us.
Nonqualified Deferred Compensation
None of the named executives currently participates in or has account balances in nonqualified defined contribution plans or other deferred compensation plans maintained by us.
Other than as disclosed above, we have not entered into any agreements or arrangements with our executive officers or directors, and have not made any agreements to provide benefits upon termination of employment.
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C. Board Practices
Board of Directors
Our Board of Directors (“BOD”) consists of five directors. A director is not required to hold any shares in our company to qualify to serve as a director. A director may vote with respect to any contract, proposed contract, or arrangement in which he or she is materially interested. The directors may exercise all the powers of the Company to borrow money, mortgage its business, property and uncalled capital and issue debentures or other securities whenever money is borrowed or as security for any obligation of the company or of any third party.
Committees of the Board of Directors.
We have three committees under the BOD: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. Even though we are exempted from corporate governance standards because we are a Foreign Private Issuer (“FPI”), we have voluntarily adopted a charter for each of the three committees. Each committee’s members and functions are described below.
Audit Committee. Our audit committee consists of Mr. Weijun Wang, Mr. Shuiqing Huang and Mr. Lawrence Venick. Mr. Weijun Wang is the chairman of our audit committee. We determined that Mr. Wang, Mr. Huang and Mr. Venick satisfy the “independence” requirements of Section 5605(a)(2) of the Nasdaq Listing Rules and Rule 10A-3 under the Securities Exchange Act. Our board also determined that Mr. Wang qualifies as an audit committee financial expert within the meaning of the SEC rules or possesses financial sophistication within the meaning of the Nasdaq Listing Rules. The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:
| ● | appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors; |
| ● | reviewing with the independent auditors any audit problems or difficulties and management’s response; |
| ● | discussing the annual audited financial statements with management and the independent auditors; |
| ● | reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures; |
| ● | reviewing and approving all proposed related party transactions; |
| ● | meeting separately and periodically with management and the independent auditors; and |
| ● | monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
Compensation Committee. Our compensation committee consists of Mr. Weijun Wang, Mr. Shuiqing Huang and Mr. Lawrence Venick. Mr. Huang is the chairman of our compensation committee. We determined that Mr. Wang, Mr. Huang and Mr. Venick satisfy the “independence” requirements of Section 5605(a)(2) of the NASDAQ Listing Rules and Rule 10A-3 under the Securities Exchange Act. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:
| ● | reviewing and approving to the board with respect to the total compensation package for our most senior executive officers; |
| ● | approving and overseeing the total compensation package for our executives other than the most senior executive officers; |
| ● | reviewing and recommending to the board with respect to the compensation of our directors; |
| ● | reviewing periodically and approving any long-term incentive compensation or equity plans; |
| ● | selecting compensation consultants, legal counsel or other advisors after taking into consideration all factors relevant to that person’s independence from management; and |
| ● | programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans. |
Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of Mr. Weijun Wang, Mr. Shuiqing Huang and Mr. Lawrence Venick upon the effectiveness of their appointments. Mr. Venick is the chairperson of our nominating and corporate governance committee. Mr. Wang, Mr. Huang and Mr. Venick satisfy the “independence” requirements of Section 5605(a)(2) of the NASDAQ Listing Rules and Rule 10A-3 under the Securities Exchange Act. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things:
| ● | identifying and recommending nominees for election or re-election to our BOD or for appointment to fill any vacancy; |
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| ● | reviewing annually with our BOD its current composition in light of the characteristics of independence, age, skills, experience and availability of service to us; |
| ● | identifying and recommending to our BOD to serve as members of committees; |
| ● | advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to our BOD on all matters of corporate governance and on any corrective action to be taken; and |
| ● | monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
Family Relationships
Shenping Yin, our Chairman of the Board, and Xiaoyang Huang, our Chief Executive Officer and Director, are husband and wife.
Compensation Recovery Policy
We have a compensation recovery policy to provide for the recovery of erroneously-awarded incentive compensation, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, final SEC rules, and applicable listing standards.
D. Employees
We had 30, 48, and 60 employees as of December 31, 2024, 2023, and 2022, respectively. The following table sets forth the numbers of our employees categorized by function as of December 31, 2024:
| Function: | ||||
| Management Department (HiTek) | 8 | |||
| Financial Department (HiTek) | 6 | |||
| Technical Service Department (HiTek) | 2 | |||
| Sales Training Department (HiTek) | 5 | |||
| Hotline Service Department (HiTek) | 3 | |||
| Research and Development Department (HiTek) | 4 | |||
| Operation and Maintenance Department (HiTek) | 1 | |||
| Technical Service Department (weilai) | 1 | |||
| Total | 30 | |||
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As of December 31, 2024, our employees were located in Xiamen, Fujian province and Huoerguosi, Xinjiang, China.
As required by PRC laws and regulations, we participate in various employee social security plans that are organized by municipal and provincial governments, including housing, pension, medical insurance and unemployment insurance programs. We are required under Chinese law to make contributions to employee benefit 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.
E. Share ownership
The following table sets forth information regarding the beneficial of our Class A Ordinary Shares and Class B Ordinary Shares as of April 21, 2025 for:
| ● | each person known by us to be the beneficial owner of more than 5% of our outstanding Class A Ordinary Shares or Class B Ordinary Shares; |
| ● | each of our executive officers and directors; and |
| ● | all our executive officers and directors as a group. |
Beneficial ownership includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all Class A Ordinary Shares or Class B Ordinary Shares shown as beneficially owned by them. Percentage of beneficial ownership of each listed person is based on 21,107,364 Class A Ordinary Shares outstanding, and 8,192,000 Class B Ordinary Shares outstanding as of April 21, 2025.
The beneficial ownership of Class A Ordinary Shares or Class B Ordinary Shares is determined in accordance with the rules of the SEC and generally includes any Class A Ordinary Shares or Class B Ordinary Shares over which a person exercises sole or shared voting or investment power. For purposes of the table below, we deem shares subject to options, warrants or other exercisable or convertible securities that are exercisable or convertible currently or within 60 days of the date of this annual report, to be outstanding and to be beneficially owned by the person holding the options, warrants or other currently exercisable or convertible securities for the purposes of computing the percentage ownership of that person but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated below, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares, except to the extent authority is shared by spouses under community property laws.
| Class A Number | Class B Number | Percent of Class A | Percentage of Class B | Percent of Total Voting Power* | ||||||||||||||||
| Directors And Executive Officers: | ||||||||||||||||||||
| Shenping Yin | — | 8,192,000 | (1)(2) | — | 100 | % | 85.34 | % | ||||||||||||
| Xiaoyang Huang | — | 8,192,000 | (1)(2) | — | 100 | % | 85.34 | % | ||||||||||||
| Tianyu Xia | — | — | — | — | — | |||||||||||||||
| Bo Shi | — | — | — | — | — | |||||||||||||||
| Weijun Wang | — | — | — | — | — | |||||||||||||||
| Shuiqing Huang | — | — | — | — | — | |||||||||||||||
| Lawrence Venick | — | — | — | — | — | |||||||||||||||
| Directors and Executive Officers as a group (7 individuals): | — | 8,192,000 | — | 100 | % | 85.34 | % | |||||||||||||
| 5% Shareholders: | ||||||||||||||||||||
| Fortune Enterprise Holdings Limited | — | 8,192,000 | (1)(2) | — | 100 | % | 85.34 | % | ||||||||||||
| Apex Management Limited (3) | 4,000,000 | 17.31 | % | 2.73 | % | |||||||||||||||
| Canaan International Ltd. (4) | 3.636,000 | 15.86 | % | 2.49 | % | |||||||||||||||
| Gold ray Ventures Limited (5) | 4,000,000 | 17.31 | % | 2.73 | % | |||||||||||||||
| Rapid Proceed Limited (6) | 3,436,000 | 14.98 | % | 2.35 | % | |||||||||||||||
| HK Red Sun Co., Limited (7) | 1,818,000 | 7.93 | % | 1.24 | % | |||||||||||||||
| Grand Bright International Holdings Limited (8) | 2,180,000 | 9.36 | % | 1.49 | % | |||||||||||||||
| Fairview Eastern International Holdings Limited (9) | 2,000,000 | 8.65 | % | 1.36 | % | |||||||||||||||
| Yong Lin (10) | 1,237,000 | 5.53 | % | 0.85 | % | |||||||||||||||
| * | Holders of Class A Ordinary Shares are entitled to one vote per one Class A Ordinary Share. Holders of Class B Ordinary Shares are entitled to 15 votes per one Class B Ordinary Share. |
| (1) | These Class B Ordinary Shares are deemed as beneficially owned by Shenping Yin and Xiaoyang Huang as they are husband and wife. |
| (2) | These Class B Ordinary Shares are held by Fortune Enterprise Holdings Limited, a British Virgin Islands (“BVI”) company. Since Mr. Yin and Ms. Huang are the shareholders and directors of Fortune Enterprise Holdings Limited, they are deemed as the beneficial owners of these securities. |
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| (3) | Based on Schedule 13G that was filed with the SEC on January 10, 2025. On July 29, 2024, Apex Management Limited, a BVI company, purchased 2,000,000 shares of Class A Ordinary Shares and warrants to purchase 2,000,000 additional shares of Class A Ordinary Shares in a private placement. The total beneficial ownership reflected above includes both the Class A Ordinary Shares purchased and 2,000,000 Class A Ordinary Shares underlying the warrants. The percentage ownership referenced above above is based upon the 21,107,364 Class A ordinary shares issued and outstanding and assumes full exercise of the warrants that are exercisable by Apex Management Limited. Li Jian Hui, as Chief Executive Officer and Director of Apex Management Limited, may be deemed to beneficially own (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) the Issuer's securities described herein. Li Jian Hui disclaims beneficial ownership of these securities for all other purposes. |
| (4) | Based on Schedule 13G that was filed with the SEC on January 10, 2025. On July 29, 2024, Canaan International Ltd., a Cayman Island company, purchased 1,818,000 shares of Class A Ordinary Shares and warrants to purchase 1,818,000 additional shares of Class A Ordinary Shares in a private placement. The total beneficial ownership reflected above includes both the Class A Ordinary Shares purchased and 1,818,000 Class A Ordinary Shares underlying the warrants. The percentage ownership referenced above is based upon the 21,107,364 Class A ordinary shares issued and outstanding and assumes full exercise of the warrants that are exercisable by Canaan International Ltd. Yuanqiu Gao, as Director of Canaan International Ltd., may be deemed to beneficially own (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) the securities described herein. Yuanqiu Gao disclaims beneficial ownership of these securities for all other purposes |
| (5) | Based on Schedule 13G that was filed with the SEC on January 15, 2025. On July 29, 2024, Gold Ray Ventures Limited, a BVI company, purchased 2,000,000 shares of Class A Ordinary Shares and warrants to purchase 2,000,000 additional shares of Class A Ordinary Shares in a private placement. The total beneficial ownership reflected above includes both the Class A Ordinary Shares purchased and 2,000,000 Class A Ordinary Shares underlying the warrants. The percentage ownership referenced above is based upon the 21,107,364 Class A ordinary shares issued and outstanding and assumes full exercise of the warrants that are exercisable by Gold Ray Ventures Limited. Lin Li, as Director of Gold Ray Ventures Limited, may be deemed to beneficially own (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) the Issuer's securities described herein. Lin Li disclaims beneficial ownership of these securities for all other purposes. |
| (6) | Based on Schedule 13G that was filed with the SEC on January 10, 2025. On July 29, 2024, Rapid Proceed Limited, a BVI company, purchased 1,818,000 shares of Class A Ordinary Shares and warrants to purchase 1,818,000 additional shares of Class A Ordinary Shares in a private placement. The total beneficial ownership reflected above includes both 1,618,000 Class A Ordinary Shares held by Rapid Proceed Limited as of April 21, 2025, and 1,818,000 Class A Ordinary Shares underlying the warrants. The percentage ownership referenced above is based upon the 21,107,364 Class A ordinary shares issued and outstanding and assumes full exercise of the warrants that are exercisable by Rapid Proceed Limited. Huoyuan Chen, as Chairman and Director of Rapid Proceed Limited, may be deemed to beneficially own (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) the Issuer's securities described herein. Huan Liu disclaims beneficial ownership of these securities for all other purposes.. |
|
(7) |
Based on Schedule 13G that was filed with the SEC on January 15, 2025. On July 29, 2024, HK Red Sun Co., Limited, an Hong Kong company, purchased 1,818,000 shares of Class A Ordinary Shares and warrants to purchase 1,818,000 additional shares of Class A Ordinary Shares in a private placement. The total beneficial ownership reflected above includes 1,818,000 Class A Ordinary Shares underlying the warrants as HK Red Sun Co., is not holding any Ordinary Shares as of April 21, 2025. The percentage ownership referenced above is based upon the 21,107,364 Class A ordinary shares issued and outstanding and assumes full exercise of the warrants that are exercisable by HK Red Sun Co., Limited. Hongfei Wang, as Director of HK Red Sun Co., Limited, may be deemed to beneficially own (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) the securities described herein. Huan Liu disclaims beneficial ownership of these securities for all other purposes. |
| (7) | Based on Schedule 13G that was filed with the SEC on January 10, 2025. On July 29, 2024, Grand Bright International Holdings Limited, a BVI company, purchased 2,180,000 shares of Class A Ordinary Shares and warrants to purchase 2,180,000 additional shares of Class A Ordinary Shares in a private placement. The total beneficial ownership reflected above includes 2,180,000 Class A Ordinary Shares underlying the warrants as Grand Bright International Holdings Limited is not holding any Ordinary Shares as of April 21, 2025. The percentage ownership referenced above is based upon the 21,107,364 Class A ordinary shares issued and outstanding and assumes full exercise of the warrants that are exercisable by Grand Bright International Holdings Limited. Ying Chang Yuan, as Director of Grand Bright International Holdings Limited, may be deemed to beneficially own (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) the Issuer's securities described herein. Li Jian Hui disclaims beneficial ownership of these securities for all other purposes. |
| (9) | Based on Schedule 13G that was filed with the SEC on January 10, 2025. On July 29, 2024, Fairview Eastern International Holdings Limited, a BVI company, purchased 2,000,000 shares of Class A Ordinary Shares and warrants to purchase 2,000,000 additional shares of Class A Ordinary Shares in a private placement. The total beneficial ownership reflected above includes 2,000,000 Class A Ordinary Shares underlying the warrants as Fairview Eastern International Holdings Limited is not holding any Ordinary Shares as of April 21, 2025. The percentage ownership referenced above is based upon the 21,107,364 Class A ordinary shares issued and outstanding and assumes full exercise of the warrants that are exercisable by Fairview Eastern International Holdings Limited. Hongfei Huan Liu, as Director of Fairview Eastern International Holdings Limited, may be deemed to beneficially own (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) the Issuer's securities described herein. Huan Liu disclaims beneficial ownership of these securities for all other purposes. |
| (10) | Based on Schedule 13G that was filed with the SEC on January 10, 2025. On July 29, 2024, Yong Lin purchased 1,237,000 shares of Class A Ordinary Shares and warrants to purchase 1,237,000 additional shares of Class A Ordinary Shares in a private placement. The total beneficial ownership reflected above includes 1,237,000 Class A Ordinary Shares underlying the warrants as Yong Lin is not holding any Ordinary Shares as of April 21, 2025. The percentage ownership referenced above is based upon the 21,107,364 Class A ordinary shares issued and outstanding and assumes full exercise of the warrants that are exercisable by Yong Lin. |
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F. Disclosure of A Registrant’s Action to Recover Erroneously Awarded Compensation
None.
Item 7. Major Shareholders and Related Party Transaction
A. Major shareholder
Please refer to Item 6 “Directors, Senior Management and Employees—E. Share Ownership.”
B. Related Party Transactions.
Contractual Arrangements with WFOE, HiTek and Its Shareholders
To comply with PRC laws restricting foreign ownership in the IT business in China, we conduct our IT business through HiTek, a VIE entity that we control through a series of contractual arrangements between our PRC subsidiary WFOE, HiTek and its shareholders, Xiaoyang Huang, Shenping Yin, Bo Shi, Zhishuang Wang, Liuqing Huang, Jingru Li, Mian Tang, Ce Tian, Xianfeng Lin, Inner Mongolia Guangxin Investment Co., Ltd. and Baotou Zhongzhe Hengtong Technology Co., Ltd. Such contractual arrangements provide us (i) the power over HiTek, (ii) the exposure or rights to variable returns from our involvement with HiTek, and (iii) the ability to affect those returns through use of our power over HiTek to affect the amount of our returns. Therefore, we control HiTek. For a description of these contractual arrangements, see “Business — Our History and Corporate Structure”.
Employment Agreements
See “Item 6.B — Compensation — Employment Agreements”.
C. Interests of experts and counsel.
Not applicable.
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ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
Financial Statements
We have appended CFS filed as part of this annual report. See Item 18 “Financial Statements.”
Legal Proceedings
We are currently not a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.
Dividends
We have not paid dividends on our Class A Ordinary Shares or Class B Ordinary Shares and do not anticipate paying such dividends in the foreseeable future.
B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited CFS included in this annual report.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Our Class A Ordinary Shares are listed on the Nasdaq Capital Market under the symbol “HKIT”.
B. Plan of Distributions
Not applicable.
C. Markets
Our Class A Ordinary Shares are listed on the Nasdaq Capital Market under the symbol “HKIT”.
D. Selling Shareholders
Not applicable.
E. Dilution
Note applicable.
F. Expenses of the Issue.
Note applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
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B. Memorandum and Articles of Association
The following description of our memorandum and articles of association, as amended and restated from time to time, are summaries and do not purport to be complete.
As of the date of this annual report, our authorized share capital consists of $50,000 divided into 500,000,000 shares, par value US$0.0001 per share, comprised of 431,808,000 Class A Ordinary Shares, 58,192,000 Class B Ordinary Shares, and 10,000,000 preference shares.
Our directors may, in their absolute discretion and without the approval of our shareholders, create and designate out of the unissued preference shares of our company one or more classes or series of preference shares, comprising such number of preference shares, and having such designations, powers, preferences, privileges and other rights, including dividend rights, voting rights, conversion rights, terms of redemption and liquidation preferences, as our directors may determine. As of the date hereof, there are 21,107,364 Class A Ordinary Shares and 8,192,000 Class B Ordinary Shares issued and outstanding. The following are summaries of material provisions of our amended and restated memorandum and articles of association and the Companies Act insofar as they relate to the material terms of our Class A Ordinary Shares and Class B Ordinary Shares.
Ordinary shares
Dividends. Subject to any rights and restrictions of any other class or series of shares, our board of directors may, from time to time, declare dividends on the shares issued and authorize payment of the dividends out of our lawfully available funds. No dividends shall be declared by the board out of our company except the following:
| ● | profits; or |
| ● | “share premium account,” which represents the excess of the price paid to our company on issue of its shares over the par or “nominal” value of those shares, which is similar to the U.S. concept of additional paid in capital. |
However, no dividend shall bear interest against the Company.
Voting Rights. Holders of Class A Ordinary Shares and Class B Ordinary Shares have the same rights except for voting and conversion rights as set forth in our memorandum and articles of association. In respect of matters requiring a vote of all shareholders, each holder of Class A Ordinary Shares will be entitled to one vote per one Class A Ordinary Share and each holder of Class B Ordinary Shares will be entitled to 15 votes per one Class B Ordinary Share. The Class B Ordinary Shares are convertible into Class A Ordinary Shares at any time after issuance at the option of the holder on a one-to-one basis.
On a show of hands, every shareholder who is present in person and every person representing a shareholder by proxy shall have one vote for each Class A Ordinary Share and 15 votes for each Class B Ordinary Share of which he or the person represented by proxy is the holder. On a poll, a Class A Ordinary shareholder shall have one vote for each Class A Ordinary Share he holds whereas a Class B Ordinary shareholder shall have 15 votes for each Class B Ordinary Share he holds, unless any share carries special voting rights. In addition, all shareholders holding shares of a particular class are entitled to vote at a meeting of the holders of that class of shares. Votes may be given either personally or by proxy.
Any ordinary resolution to be approved by the shareholders requires the affirmative vote of a simple majority of the votes cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast.
Under Cayman Islands law, some matters, such as amending the memorandum and articles of association, changing the name or resolving to be registered by way of continuation in a jurisdiction outside the Cayman Islands, require approval of shareholders by a special resolution.
There are no limitations on non-residents or foreign shareholders in the memorandum and articles of association to hold or exercise voting rights on the Class A Ordinary Shares or Class B Ordinary Shares imposed by foreign law or by the charter or other constituent document of our company. However, no person will be entitled to vote at any general meeting or at any separate meeting of the holders of the Class A Ordinary Shares or Class B Ordinary Shares unless the person is registered as of the record date for such meeting and unless all calls or other sums presently payable by the person in respect of Class A Ordinary Shares or Class B Ordinary Shares in the Company have been paid.
Winding Up; Liquidation. Upon the winding up of our company, after the full amount that holders of any issued shares ranking senior to the Class A Ordinary Shares or Class B Ordinary Shares as to distribution on liquidation or winding up are entitled to receive has been paid or set aside for payment, the holders of our Class A Ordinary Shares or Class B Ordinary Shares are entitled to receive any remaining assets of the Company available for distribution as determined by the liquidator. The assets received by the holders of our Class A Ordinary Shares or Class B Ordinary Shares in a liquidation may consist in whole or in part of property, which is not required to be of the same kind for all shareholders.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their Class A Ordinary Shares or Class B Ordinary Shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. Any Class A Ordinary Shares or Class B Ordinary Shares that have been called upon and remain unpaid are subject to forfeiture.
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Redemption of Ordinary Shares. We may issue shares that are, or at its option or at the option of the holders are, subject to redemption on such terms and in such manner as it may, before the issue of the shares, determine. Under the Companies Act, shares of a Cayman Islands company may be redeemed or repurchased out of profits of the company, out of the proceeds of a fresh issue of shares made for that purpose or out of capital, provided the memorandum and articles of association authorize this and it has the ability to pay its debts as they come due in the ordinary course of business.
No Preemptive Rights. Holders of Class A Ordinary Shares or Class B Ordinary Shares will have no preemptive or preferential right to purchase any securities of our company.
Variation of Rights Attaching to Shares. If at any time the share capital is divided into different classes of shares, the rights attaching to any class (unless otherwise provided by the terms of issue of the shares of that class) may, subject to the memorandum and articles of association, be varied or abrogated with the consent in writing of the holders of three-fourth of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.
Anti-Takeover Provisions. Some provisions of our current memorandum and articles of association may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our shareholders.
Exempted Company. We are an exempted company with limited liability under the Companies Act. The Companies Act distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except that an exempted company:
| ● | does not have to file an annual return of its shareholders with the Registrar of Companies; | |
| ● | is not required to open its register of members for inspection; | |
| ● | does not have to hold an annual general meeting; | |
| ● | may issue shares with no par value; | |
| ● | may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 or 30 years in the first instance); | |
| ● | may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; | |
| ● | may register as a limited duration company; and | |
| ● | may register as a segregated portfolio company. |
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil).
Register of Members
Under Cayman Islands law, we must keep a register of members and there shall be entered therein:
| (a) |
the names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed to be considered as paid, on the shares of each member and the voting rights attaching to shares; |
| (b) | the date on which the name of any person was entered on the register as a member; and |
| (c) | the date on which any person ceased to be a member. |
Under Cayman Islands law, the register of members of our company is prima facie evidence of the matters set out therein (i.e. the register of members will raise a presumption of fact on the matters referred to above unless rebutted) and a member registered in the register of members shall be deemed as a matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members. Upon the closing of this public offering, the register of members shall be immediately updated to reflect the issue of shares by us. Once our register of members has been updated, the shareholders recorded in the register of members shall be deemed to have legal title to the shares set against their name.
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However, there are certain limited circumstances where an application may be made to a Cayman Islands court for a determination on whether the register of members reflects the correct legal position. Further, the Cayman Islands court has the power to order that the register of members maintained by a company should be rectified where it considers that the register of members does not reflect the correct legal position. If an application for an order for rectification of the register of members were made in respect of our Class A Ordinary Shares or Class B Ordinary Shares, then the validity of such shares may be subject to re-examination by a Cayman Islands court.
Preference shares
Our amended and restated memorandum and articles of association authorizes the issuance of 10,000,000 preference shares with such designation, rights and preferences as may be determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without shareholder approval, to issue preference shares with dividend, liquidation, redemption, voting or other rights which could adversely affect the voting power or other rights of the holders of our Class A Ordinary Shares and Class B Ordinary Shares. We may issue some or all of the preference shares to effect a business combination. In addition, the preference shares could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any preference shares, we cannot assure you that we will not do so in the future.
Certain Differences in Corporate Law
Cayman Islands companies are governed by the Companies Act. The Companies Act is modeled on English Law but does not follow recent English Law statutory enactments, and differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the material differences between the provisions of the Companies Act applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.
Mergers and Similar Arrangements.
In certain circumstances, the Companies Act allows for mergers or consolidations between two Cayman Islands companies, or between a Cayman Islands company and a company incorporated in another jurisdiction (provided that is facilitated by the laws of that other jurisdiction).
Where the merger or consolidation is between two Cayman Islands companies, the directors of each company must approve a written plan of merger or consolidation containing certain prescribed information. That plan or merger or consolidation must then be authorized by either (a) a special resolution (usually a majority of 66.6% in value) of the shareholders of each company; or (b) such other authorization, if any, as may be specified in such constituent company’s articles of association. No shareholder resolution is required for a merger between a parent company (i.e., a company that owns at least 90% of the issued shares of each class in a subsidiary company) and its subsidiary company. The consent of each holder of a fixed or floating security interest of a constituent company must be obtained, unless the court waives such requirement. If the Cayman Islands Registrar of Companies is satisfied that the requirements of the Companies Act (which includes certain other formalities) have been complied with, the Registrar of Companies will register the plan of merger or consolidation.
Where the merger or consolidation involves a foreign company, the procedure is similar, save that with respect to the foreign company, the director of the Cayman Islands company is required to make a declaration to the effect that, having made due enquiry, he is of the opinion that the requirements set out below have been met: (i) that the merger or consolidation is permitted or not prohibited by the constitutional documents of the foreign company and by the laws of the jurisdiction in which the foreign company is incorporated, and that those laws and any requirements of those constitutional documents have been or will be complied with; (ii) that no petition or other similar proceeding has been filed and remains outstanding or order made or resolution adopted to wind up or liquidate the foreign company in any jurisdictions; (iii) that no receiver, trustee, administrator or other similar person has been appointed in any jurisdiction and is acting in respect of the foreign company, its affairs or its property or any part thereof; (iv) that no scheme, order, compromise or other similar arrangement has been entered into or made in any jurisdiction whereby the rights of creditors of the foreign company are and continue to be suspended or restricted.
Where the surviving company is the Cayman Islands company, the director of the Cayman Islands company is further required to make a declaration to the effect that, having made due enquiry, he is of the opinion that the requirements set out below have been met: (i) that the foreign company is able to pay its debts as they fall due and that the merger or consolidated is bona fide and not intended to defraud unsecured creditors of the foreign company; (ii) that in respect of the transfer of any security interest granted by the foreign company to the surviving or consolidated company (a) consent or approval to the transfer has been obtained, released or waived; (b) the transfer is permitted by and has been approved in accordance with the constitutional documents of the foreign company; and (c) the laws of the jurisdiction of the foreign company with respect to the transfer have been or will be complied with; (iii) that the foreign company will, upon the merger or consolidation becoming effective, cease to be incorporated, registered or exist under the laws of the relevant foreign jurisdiction; and (iv) that there is no other reason why it would be against the public interest to permit the merger or consolidation.
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Where the above procedures are adopted, the Companies Act provides for a right of dissenting shareholders to be paid a payment of the fair value of his shares upon their dissenting to the merger or consolidation if they follow a prescribed procedure. In essence, that procedure is as follows (a) the shareholder must give his written objection to the merger or consolidation to the constituent company before the vote on the merger or consolidation, including a statement that the shareholder proposes to demand payment for his shares if the merger or consolidation is authorized by the vote; (b) within 20 days following the date on which the merger or consolidation is approved by the shareholders, the constituent company must give written notice to each shareholder who made a written objection; (c) a shareholder must within 20 days following receipt of such notice from the constituent company, give the constituent company a written notice of his intention to dissent including, among other details, a demand for payment of the fair value of his shares; (d) within seven days following the date of the expiration of the period set out in paragraph (b) above or seven days following the date on which the plan of merger or consolidation is filed, whichever is later, the constituent company, the surviving company or the consolidated company must make a written offer to each dissenting shareholder to purchase his shares at a price that the company determines is the fair value and if the company and the shareholder agree the price within 30 days following the date on which the offer was made, the company must pay the shareholder such amount; (e) if the company and the shareholder fail to agree a price within such 30 day period, within 20 days following the date on which such 30 day period expires, the company (and any dissenting shareholder) must file a petition with the Cayman Islands Grand Court to determine the fair value and such petition must be accompanied by a list of the names and addresses of the dissenting shareholders with whom agreements as to the fair value of their shares have not been reached by the company. At the hearing of that petition, the court has the power to determine the fair value of the shares together with a fair rate of interest, if any, to be paid by the company upon the amount determined to be the fair value. Any dissenting shareholder whose name appears on the list filed by the company may participate fully in all proceedings until the determination of fair value is reached. These rights of a dissenting shareholder are not be available in certain circumstances, for example, to dissenters holding shares of any class in respect of which an open market exists on a recognized stock exchange or recognized interdealer quotation system at the relevant date or where the consideration for such shares to be contributed are shares of any company listed on a national securities exchange or shares of the surviving or consolidated company.
Moreover, Cayman Islands law also has separate statutory provisions that facilitate the reconstruction or amalgamation of companies in certain circumstances, schemes of arrangement will generally be more suited for complex mergers or other transactions involving widely held companies, commonly referred to in the Cayman Islands as a “scheme of arrangement” which may be tantamount to a merger. In the event that a merger was sought pursuant to a scheme of arrangement (the procedure of which are more rigorous and take longer to complete than the procedures typically required to consummate a merger in the United States), the arrangement in question must be approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meeting summoned for that purpose. The convening of the meetings and subsequently the terms of the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder would have the right to express to the court the view that the transaction should not be approved, the court can be expected to approve the arrangement if it satisfies itself that:
| ● | we are not proposing to act illegally or beyond the scope of our corporate authority and the statutory provisions as to majority vote have been complied with; |
| ● | the shareholders have been fairly represented at the meeting in question; |
| ● | the arrangement is such as a businessman would reasonably approve; and |
| ● | the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Act or that would amount to a “fraud on the minority.” |
If a scheme of arrangement or takeover offer (as described below) is approved, any dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
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Squeeze-out Provisions.
When a takeover offer is made and accepted by holders of 90% of the shares to whom the offer relates within four months, the offeror may, within a two-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed unless there is evidence of fraud, bad faith, collusion or inequitable treatment of the shareholders.
Further, transactions similar to a merger, reconstruction and/or an amalgamation may in some circumstances be achieved through other means to these statutory provisions, such as a share capital exchange, asset acquisition or control, through contractual arrangements, of an operating business.
Shareholders’ Suits.
Our Cayman Islands counsel is not aware of any reported class action having been brought in a Cayman Islands court. Derivative actions have been brought in the Cayman Islands courts, and the Cayman Islands courts have confirmed the availability for such actions. In most cases, we will be the proper plaintiff in any claim based on a breach of duty owed to us, and a claim against (for example) our officers or directors usually may not be brought by a shareholder. However, based both on Cayman Islands authorities and on English authorities, which would in all likelihood be of persuasive authority and be applied by a court in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:
| ● | a company is acting, or proposing to act, illegally or beyond the scope of its authority; |
| ● | the act complained of, although not beyond the scope of the authority, could be effected if duly authorized by more than the number of votes which have actually been obtained; or |
| ● | those who control the company are perpetrating a “fraud on the minority.” |
A shareholder may have a direct right of action against us where the individual rights of that shareholder have been infringed or are about to be infringed.
Enforcement of civil liabilities.
The Cayman Islands has a different body of securities laws as compared to the United States and may provide less protection to investors. Additionally, Cayman Islands companies may not have standing to sue before the Federal courts of the United States.
We were advised by our Cayman Islands legal counsel that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments of courts of the U.S. predicated upon the civil liability provisions of the federal securities laws of the U.S. or any state; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the civil liability provisions of the federal securities laws of the U.S. or any state, so far as the liabilities imposed by those provisions are penal in nature. In those circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the U.S., the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
Special Considerations for Exempted Companies.
We are an exempted company with limited liability under the Companies Act. The Companies Act distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except for the exemptions and privileges listed below:
| ● | an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies; |
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| ● | an exempted company’s register of members is not open to inspection; |
| ● | an exempted company does not have to hold an annual general meeting; |
| ● | an exempted company may issue shares or shares with no par value; |
| ● | an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 or 30 years in the first instance); |
| ● | an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; |
| ● | an exempted company may register as a limited duration company; and |
| ● | an exempted company may register as a segregated portfolio company. |
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil).
VStock Transfer, LLC is the transfer agent and registrar for our Class A Ordinary Shares and Class B Ordinary Shares as its principal office at 18 Lafayette Place, Woodmere, New York 11598.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company,” “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” or elsewhere in this annual report on Form 20-F.
D. Exchange Controls
Cayman Islands
There are currently no exchange control regulations in the Cayman Islands applicable to us or our shareholders.
The PRC
China regulates foreign currency exchanges primarily through the following rules and regulations:
| ● | Foreign Currency Administration Rules of 1996, as amended; and |
| ● | Administrative Rules of the Settlement, Sale and Payment of Foreign Exchange of 1996. |
Renminbi is not a freely convertible currency at present. Under the current PRC regulations, conversion of Renminbi is permitted in China for routine current-account foreign exchange transactions, including trade and service related foreign exchange transactions, payment of dividends and service of foreign debts. Conversion of Renminbi for most capital-account items, such as direct investments, investments in PRC securities markets and repatriation of investments, however, is still subject to the approval of SAFE.
Pursuant to the above-mentioned administrative rules, foreign-invested companies may buy, sell and/or remit foreign currencies for current account transactions at banks in China with authority to conduct foreign exchange business by complying with certain procedural requirements, such as presentment of valid commercial documents. For capital-account transactions involving foreign direct investment, foreign debts and outbound investment in securities and derivatives, approval from SAFE is a pre-condition. Capital investments by foreign-invested companies outside China are subject to limitations and requirements in China, such as prior approvals from the PRC Ministry of Commerce or SAFE.
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E. Taxation
The following summary of the material Cayman Islands, PRC and U.S. tax consequences of an investment in our Class A Ordinary Shares is based upon laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect. This summary is not intended to be, nor should it be construed as, legal or tax advice and is not exhaustive of all possible tax considerations. This summary also does not deal with all possible tax consequences relating to an investment in our Class A Ordinary Shares, such as the tax consequences under state, local, non-U.S., non-PRC, and non-Cayman Islands tax laws. Investors should consult their own tax advisors with respect to the tax consequences of the acquisition, ownership and disposition of our Class A Ordinary Shares.
People’s Republic of China Enterprise Taxation
Income Tax and Withholding Tax
The following brief description of Chinese enterprise laws is designed to highlight the enterprise-level taxation on our earnings, which will affect the amount of dividends, if any, we are ultimately able to pay to our shareholders. See “Dividend Policy.”
We are a holding company incorporated in the Cayman Islands and we gain substantial income by way of dividends paid to us from our subsidiaries in China.
Under the EIT Law, an enterprise established outside of China with a “de facto management body” within China is considered a “resident enterprise,” which means that it is treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the EIT Law define “de facto management body” as a managing body that actually, comprehensively manage and control the production and operation, staff, accounting, property and other aspects of an enterprise, the only official guidance for this definition currently available is set forth in the Notice Regarding the Determination of Chinese Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, known as SAT Notice 82 (which issued by the China State Administration of Taxation on April 22, 2009), which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that has a PRC enterprise or enterprise group as its primary controlling shareholder. Although SAT Notice 82 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not offshore enterprises controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises.
According to SAT Notice 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met: (i) the places where senior management and senior management departments that are responsible for daily production, operation and management of the enterprise perform their duties are mainly located within the territory of China; (ii) financial decisions (such as money borrowing, lending, financing and financial risk management) and personnel decisions (such as appointment, dismissal and salary and wages) are decided or need to be decided by organizations or persons located within the territory of China; (iii) main property, accounting books, corporate seal, the board of directors and files of the minutes of shareholders’ meetings of the enterprise are located or preserved within the territory of China; and (iv) one half (or more) of the directors or senior management staff having the right to vote habitually reside within the territory of China.
The Administrative Measures for Enterprise Income Tax of Chinese-Controlled Overseas Incorporated Resident Enterprises (Trial Version), or Bulletin 45, further clarifies certain issues related to the determination of tax resident status. Bulletin 45 also specifies that when provided with a resident Chinese-controlled, offshore-incorporated enterprise’s copy of its recognition of residential status, a payer does not need to withhold a 10% income tax when paying certain PRC-source income, such as dividends, interest and royalties to such Chinese-controlled offshore-incorporated enterprise.
We believe we do not meet some of the conditions outlined in the immediately preceding paragraph. For example, as a holding company, the key assets and records of the Company, including the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our shareholders, are located and maintained outside the PRC. Accordingly, we believe that the Company and its offshore subsidiaries should not be treated as a “resident enterprise” for PRC tax purposes if the criteria for “de facto management body” as set forth in SAT Notice 82 were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body” as applicable to our offshore entities, we will continue to monitor our tax status.
If the Company was to be a non-resident for PRC tax purpose, dividends paid to it out of profits earned by PRC subsidiaries would be subject to 10% withholding tax. In addition, under the current tax treaty between the PRC and Hong Kong, if the foreign investor is incorporated in Hong Kong and qualifies as the beneficial owner, the applicable withholding tax rate may be reduced to 5%, if the investor holds at least 25% in the FIE; or 10%, if the investor holds less than 25% in the FIE. However, if the PRC tax authorities determine that the Company 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. In addition, non-resident enterprise shareholders may be subject to a 10% PRC withholding tax on gains realized on the sale or other disposition of our 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 dividends or gains realized by non-PRC individuals, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty.
According to the Announcement of SAT on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfer by Non-Resident Enterprises, or Circular 7, which was promulgated by the SAT and became effective February 3, 2015, if a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by transfer of the equity interests of an offshore holding company (other than a purchase and sale of shares issued by a PRC resident enterprise in the public securities market) without a reasonable commercial purpose, PRC tax authorities have the power to reassess the nature of the transaction and the indirect equity transfer may be treated as a direct transfer. As a result, the gain derived from such transfer, which means the equity transfer price less the cost of equity, will be subject to PRC withholding tax at a rate of up to 10%.
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The implementation rules of the EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC or (ii) if gains are realized from transferring equity interests of companies domiciled in the PRC, then such dividends or gains are treated as China-sourced income. It is not clear how “domicile” may be interpreted under the EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered as a PRC tax resident enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders which are non-resident companies as well as gains realized by such shareholders from the transfer of our shares may be regarded as China-sourced income and as a result become subject to PRC withholding tax at a rate of up to 10%. We are unable to provide a “will” opinion because Jingtian& Gongcheng, our PRC counsel, believes that it is possible but highly unlikely that the Company and its offshore subsidiaries would be treated as a “resident enterprise” for PRC tax purposes because they do not meet some of the conditions outlined in SAT Notice 82. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that has been deemed a PRC “resident enterprise” by the PRC tax authorities as of the date of this annual report. Therefore, it is possible but highly unlikely that the income received by our overseas shareholders will be regarded as China-sourced income.
Under the terms of Circular 7, a transfer which meets all of the following circumstances shall be directly deemed as having no reasonable commercial purposes if:
| ● | over 75% of the value of the equity interests of the offshore holding company are directly or indirectly derived from PRC taxable properties; |
| ● | at any time during the year before the indirect transfer, over 90% of the total properties of the offshore holding company are investments within PRC territories, or in the year before the indirect transfer, over 90% of the offshore holding company’s revenue is directly or indirectly derived from PRC territories; |
| ● | the function performed and risks assumed by the offshore holding company are insufficient to substantiate its corporate existence; or |
| ● | the foreign income tax imposed on the indirect transfer is lower than the PRC tax imposed on the direct transfer of the PRC taxable properties. |
On October 17, 2017, the SAT issued the Announcement on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or Circular 37, which took effect on December 1, 2017 was amended in June 2018. Circular 37 purports to provide further clarifications by setting forth the definitions of equity transfer income and tax basis, the foreign exchange rate to be used in the calculation of the withholding amount and the date on which the withholding obligation arises.
Specifically, Circular 37 provides that where the transfer income subject to withholding at source is derived by a non-PRC resident enterprise in instalments, the instalments may first be treated as recovery of costs of previous investments. Upon recovery of all costs, the tax amount to be withheld must then be computed and withheld.
There is uncertainty as to the application of Circular 7 and Circular 37. Circular 7 and Circular 37 may be determined by the PRC tax authorities to be applicable to transfers of our shares that involve non-resident investors, if any of such transactions were determined by the tax authorities to lack a reasonable commercial purpose.
As a result, we and our non-resident investors in such transactions may become at risk of being taxed under Circular 7 and Circular 37, and we may be required to comply with Circular 7 and Circular 37 or to establish that we should not be taxed under the general anti-avoidance rule of the EIT Law. This process may be costly and have a material adverse effect on our financial condition and results of operations.
See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Under the PRC Enterprise Income Tax Law, or the EIT Law, we may be classified as a “resident enterprise” of China, which could result in unfavorable tax consequences to us and our non-PRC shareholders.”
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Value-added Tax
According to the Provisional Regulations of the PRC on Business Tax and its implementation regulations, which was promulgated by the State Council on December 13, 1993, amended on November 10, 2008 and subsequently abolished on November 19, 2017, it is generally provided that all entities and individuals engaged in providing taxable services, the transfer of intangible assets or the sales of immovable properties in the PRC shall pay business tax.
Under the Circular on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax to Replace Business Tax, or Circular 36, which was promulgated by the Ministry of Finance and the SAT on March 23, 2016 and became effective on May 1, 2016 and most recently amended in April 2019, entities and individuals engaging in the sale of services, intangible assets or fixed assets within the territory of the PRC are required to pay value added tax, or VAT, instead of business tax.
According to the Circular 36, our PRC subsidiaries are subject to VAT, at a rate of 6% to 17% on proceeds received from customers.
According to the Circular of the Ministry of Finance and the SAT on Adjusting Value-added Tax Rates, where a taxpayer engages in a taxable sales activity for the value-added tax purpose or imports goods, the previous applicable tax rates of 17% and 11% are adjusted to 16% and 10% respectively.
According to the Circular on Policies to Deepen Value-added Tax Reform, where a taxpayer engages in a taxable sales activity for the value-added tax purpose or imports goods, the previous applicable 16% and 10% tax rates are lowered to 13% and 9% respectively.
Cayman Islands Tax Considerations
The following is a discussion on certain Cayman Islands income tax consequences of an investment in the securities of the Company. The discussion is a general summary of present law, which is subject to prospective and retroactive change. It is not intended as tax advice, does not consider any investor’s particular circumstances, and does not consider tax consequences other than those arising under Cayman Islands law.
Under Existing Cayman Islands Laws:
Payments of dividends and capital in respect of our securities will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of the securities nor will gains derived from the disposal of the securities be subject to Cayman Islands income or corporate tax. The Cayman Islands currently has no income, corporate or capital gains tax and no estate duty, inheritance tax or gift tax.
No stamp duty is payable in respect of the issue of the warrants. An instrument of transfer in respect of a warrant is stampable if executed in or brought into the Cayman Islands.
No stamp duty is payable in respect of the issue of our Class A Ordinary Shares or on an instrument of transfer in respect of such shares.
The Company has been incorporated under the laws of the Cayman Islands as an exempted company with limited liability and, as such, has applied for and received an undertaking from the Financial Secretary of the Cayman Islands in the following form:
The Tax Concessions Act (As Revised)
Undertaking as to Tax Concessions
In accordance with the provision of Section 6 of The Tax Concessions Act (As revised), the Financial Secretary undertakes with Hitek Global Inc. (“the Company”):
| 1. | That no law which is hereafter enacted in the Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to the Company or its operations; and |
| 2. | In addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable: |
| a. | On or in respect of the shares, debentures or other obligations of the Company; or |
| b. | by way of the withholding in whole or part, of any relevant payment as defined in Section 6(3) of the Tax Concessions Act (As revised). |
These concessions shall be for a period of twenty years from the date hereof.
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United States Federal Income Taxation
The following does not address the tax consequences to any particular investor or to persons in special tax situations such as:
| ● | banks; | |
| ● | financial institutions; | |
| ● | insurance companies; | |
| ● | regulated investment companies; |
| ● | real estate investment trusts; | |
| ● | broker-dealers; | |
| ● | traders that elect to mark-to-market; | |
| ● | U.S. expatriates; | |
| ● | tax-exempt entities; | |
| ● | persons liable for alternative minimum tax; | |
| ● | persons holding our Class A Ordinary Shares as part of a straddle, hedging, conversion or integrated transaction; | |
| ● | persons that actually or constructively own 10% or more of our voting shares; | |
| ● | persons who acquired our Class A Ordinary Shares pursuant to the exercise of any employee share option or otherwise as consideration; or | |
| ● | persons holding our Class A Ordinary Shares through partnerships or other pass-through entities. |
Prospective purchasers are urged to consult their own tax advisors about the application of the U.S. Federal tax rules to their particular circumstances as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our Class A Ordinary Shares.
Taxation of Dividends and Other Distributions on our Class A Ordinary Shares
Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the Class A Ordinary Shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). With respect to corporate U.S. Holders, the dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.
With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that (1) the Class A Ordinary Shares are readily tradable on an established securities market in the U.S., or we are eligible for the benefits of an approved qualifying income tax treaty with the U.S. that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Under U.S. Internal Revenue Service authority, Class A Ordinary Shares are considered for purpose of clause (1) above to be readily tradable on an established securities market in the U.S. because they are listed on the Nasdaq Capital Market. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our Class A Ordinary Shares, including the effects of any change in law after the date of this annual report.
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Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to our Class A Ordinary Shares will constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”
For the year ended December 31, 2023, we have not declared any dividends on our Class A Ordinary Shares or Class B Ordinary Shares. To the extent the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated first as a tax-free return of your tax basis in your Class A Ordinary Shares, and to the extent the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Class A Ordinary Shares
Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the Class A Ordinary Shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the Class A Ordinary Shares for more than one year, you will be eligible for (a) reduced tax rates of 0% (for individuals in the 10% or 15% tax brackets), (b) higher tax rates of 20% (for individuals in the 39.6% tax bracket) or (c) 15% for all other individuals. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States source income or loss for foreign tax credit limitation purposes.
Passive Foreign Investment Company (PFIC) Consequences
Based on our current and anticipated operations and the composition of our assets, we do not expect to be treated as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our current taxable year. PFIC status is a factual determination for each taxable year which cannot be made until the close of the taxable year. A non-U.S. corporation is considered a PFIC for any taxable year if either:
| ● | at least 75% of its gross income is passive income; or | |
| ● | at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”). |
We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.
We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change from no to yes. In particular, because the value of our assets for purposes of the asset test will generally be determined based on the market price of our Class A Ordinary Shares, our PFIC status will depend in large part on the market price of our Class A Ordinary Shares. Accordingly, fluctuations in the market price of the Class A Ordinary Shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects and the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in our initial public offering. If we are a PFIC for any year during which you hold Class A Ordinary Shares, we will continue to be treated as a PFIC for all succeeding years during which you hold Class A Ordinary Shares. However, if we cease to be a PFIC, you may avoid some of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to the Class A Ordinary Shares.
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If we are a PFIC for any taxable year during which you hold Class A Ordinary Shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the Class A Ordinary Shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the Class A Ordinary Shares will be treated as an excess distribution. Under these special tax rules:
| ● | the excess distribution or gain will be allocated ratably over your holding period for the Class A Ordinary Shares; |
| ● | the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and |
| ● | the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the Class A Ordinary Shares cannot be treated as capital, even if you hold the Class A Ordinary Shares as capital assets.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market election for the Class A Ordinary Shares, you will include in income each year an amount equal to the excess, if any, of the fair market value of the Class A Ordinary Shares as of the close of your taxable year over your adjusted basis in such Class A Ordinary Shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the Class A Ordinary Shares over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the Class A Ordinary Shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the Class A Ordinary Shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the Class A Ordinary Shares, as well as to any loss realized on the actual sale or disposition of the Class A Ordinary Shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such Class A Ordinary Shares. Your basis in the Class A Ordinary Shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “— Taxation of Dividends and Other Distributions on our Class A Ordinary Shares” generally would not apply.
The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations), including the Nasdaq Capital Market. Our Class A Ordinary Shares started trading on the Nasdaq Capital Market on March 31, 2023. If the Class A Ordinary Shares are regularly traded on the Nasdaq Capital Market and if you are a holder of Class A Ordinary Shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold Class A Ordinary Shares in any year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 regarding distributions received on the Class A Ordinary Shares and any gain realized on the disposition of the Class A Ordinary Shares.
You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our Class A Ordinary Shares and the elections discussed above.
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Information Reporting and Backup Withholding
Dividend payments with respect to our Class A Ordinary Shares and proceeds from the sale, exchange or redemption of our Class A Ordinary Shares may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 24%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual shareholders.
Under the Hiring Incentives to Restore Employment Act of 2010, certain U.S. Holders are required to report information relating to Class A Ordinary Shares, subject to certain exceptions (including an exception for Class A Ordinary Shares held in accounts maintained by certain financial institutions), by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they hold Class A Ordinary Shares. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and will file reports, registration statements and other information with the SEC. The Company’s reports, registration statements and other information can be inspected on the SEC’s website at www.sec.gov. You may also visit us on the World Wide Web at http http://www.xmhitek.com/. However, information contained on our website does not constitute a part of this annual report.
I. Subsidiary Information
Not applicable.
J. Annual Report to Security Holders
Not applicable.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We deposit surplus funds with Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. Most of our outstanding debt instruments carry loan prime rates plus basis points of interest. Our operations generally are not directly sensitive to fluctuations in interest rates and we currently do not have any long-term debt outstanding. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.
Foreign Exchange Risk
While our reporting currency is the USD, substantially all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. Substantially all of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between the USD and the RMB. If the RMB depreciates against the USD, the value of our RMB revenues, earnings and assets as expressed in our USD financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of equity. The depreciation of the RMB against the USD in 2023 increased our comprehensive loss to $364,817 based on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of December 31, 2024. As of December 31, 2024. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
The value of RMB against the USD and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign exchange market.
Inflation
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities.
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares.
Not applicable.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
On February 5, 2024, our shareholders approved the re-designation and re-classification of the then issued 14,392,364 Ordinary Shares of the Company into 6,200,364 Class A Ordinary Shares, each with 1 vote per share, and 8,192,000 Class B Ordinary Shares, each with 15 votes per share. According to this approval, the 8,192,000 Ordinary Shares beneficially held by Mr. Shenping Yin, our Chairman of the Board, and his wife, Ms. Xiaoyang Huang, our chief executive officer, were re-designated and re-classified into 8,192,000 Class B Ordinary Shares, each with 15 votes per share, and the 6,200,364 Ordinary Shares held by other shareholders were re-designated and re-classified into 6,200,364 Class A Ordinary Shares, each with one vote per share, on a one for one basis. These matters have previously been disclosed in our current reports on Form 6-K filed with the SEC on January 11, 2024 and February 9, 2024, which are incorporated herein by reference. See “Item 10. Additional Information” for a description of the rights of the securities holders.
Use of Proceeds
The following “Use of Proceeds” information relates to the post-effective amendment to the registration statement on Form F-1, as amended (File Number 333-228498) for our IPO, which was declared effective by the SEC on March 30, 2023 (the “Registration Statement”). In April 2023, we completed our IPO in which we issued and sold 3,200,000 Ordinary Shares, at a price of $5.00 per share for $16 million.
We incurred approximately $2,476,860 in expenses in connection with our IPO, which included approximately $1,360,000 in underwriting discounts, approximately $250,000 in expenses paid to or for underwriters, and approximately $866,860 in other expenses. None of the transaction expenses included payments to directors or officers of our company or their associates, persons owning more than 10% or more of our equity securities or our affiliates. None of the net proceeds we received from the IPO were paid, directly or indirectly, to any of our directors or officers or their associates, persons owning 10% or more of our equity securities or our affiliates.
The net proceeds raised from the IPO were $13,523,140 after deducting underwriting discounts and the offering expenses payable by us. As of December 31, 2023, the Company applied all the net proceeds of the IPO as disclosed in the Registration Statement.
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this annual report, as required by Rule 13a-15(b) under the Exchange Act. Based on the foregoing evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2024, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”), as defined in Rules 13a-15 (f) under the Exchange Act. Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our ICFR based on criteria established in the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the 2013 Framework, our principal executive officer and principal financial officer have concluded that our ICFR was not effective as of December 31, 2024 due to the following material weaknesses:
| ● | We have a small accounting team and it does not have sufficient knowledge of U.S. GAAP and SEC reporting requirements to properly address complex U.S. GAAP accounting issues; |
| ● | We do not have sufficient systems and procedures in place to ensure effective supervision and monitoring of our annual financial statements preparation process; |
A material weakness is a deficiency, or a combination of deficiencies, within the meaning of PCAOB Auditing Standard AS 2201, in ICFR, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We plan to address the weaknesses identified above by implementing the following measures:
| (1) | recruiting qualified professionals with appropriate levels of knowledge and experience to assist in resolving accounting issues in non-routine or complex transactions; |
| (2) | investing in technology infrastructure to support our financial reporting function; and |
| (3) | improving the communication between management, the board of directors and the chief financial officer. |
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Attestation Report of the Registered Public Accounting Firm
Because the Company is a non-accelerated filer and an emerging growth company, this annual report does not include an attestation report of our registered public accounting firm regarding ICFR.
Changes in Internal Control Over Financial Reporting
There were no changes in our ICFR that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our ICFR.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Mr. Weijun Wang qualifies as an “audit committee financial expert” as defined in Item 16A of Form 20-F. Mr. Wang also is an independent director as defined by the rules of the NASDAQ Stock Market as well as qualifies as an audit committee financial expert as defined by the rules of the NASDAQ Stock Market, Inc. and Rule 10A-3 under the Exchange Act.
ITEM 16B. CODE OF ETHICS
On July 9, 2019, we adopted a code of ethics applicable to our directors, officers, and employees in accordance with applicable federal securities law and NASDAQ rules.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Wei, Wei & Co., LLP for the years ended December 31, 2024, 2023 and 2022. We did not pay any other fees to our independent registered public accounting firm during the periods indicated below.
| For the Fiscal Years Ended December 30, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Audit fees(1) | $ | 190,000 | $ | 180,000 | $ | 180,000 | ||||||
| Audit-Related fees(2) | 50,000 | 50,000 | 50,000 | |||||||||
| Tax fees(3) | - | - | - | |||||||||
| All other fees(4) | - | - | - | |||||||||
| Total | $ | 240,000 | $ | 230,000 | $ | 230,000 | ||||||
| (1) | “Audit fees” means the fees billed or to be billed for each of the years for professional services rendered by our principal accountant for the audit of our annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. |
| (2) | “Audit related fees” means the fees billed or to be billed for each of the years for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under paragraph (1). |
| (3) | “Tax Fees” are the fees billed or to be billed in each of the years listed for the professional tax services rendered by our principal auditors. |
| (4) | “All Other Fees” are the fees billed or to be billed in each of the fiscal years listed for services rendered by our principal auditors other than services reported under “Audit fees,” “Audit-related fees” and “Tax fees.” |
The policy of our audit committee and our BOD is to pre-approve all audit and non-audit services provided by our principal auditors, including audit services, audit-related services, and other services as described above, other than those for de minimis services which are approved by the audit committee or our BOD prior to the completion of the services.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
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ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANTS.
On December 2, 2022, UHY LLP (“UHY”) notified the Company of its intention to resign as the Company’s auditor on January 1, 2023. The auditor’s report of UHY on the Company’s CFS as of and for the year ended December 31, 2021 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. Furthermore, during the year ended December 31, 2021, and the subsequent interim period through January 1, 2023, there has been: (1) no disagreement (as described under Item 16F(a)(1)(iv) of Form 20-F and the related instructions thereto) with UHY on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to UHY’s satisfaction, would have caused UHY to make reference to the subject matter of the disagreement in connection with its reports on the Company’s CFS for such years, and (2) no “reportable events” (as defined under Item 16F(a)(1)(v) of the instructions to Form 20-F), except the material weaknesses in the Company’s ICFR previously reported in Item 15 “Controls and Procedures” in the Company’s Annual Reports on Form 20-F for the year ended December 31, 2021. The material weaknesses previously reports were: (i) the Company had insufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to properly address complex U.S. GAAP accounting issues; and (ii) the Company did not have sufficient systems and procedures in place to ensure effective supervision and monitoring of our annual financial statements preparation process.
On February 15, 2023, the Company engaged Wei, Wei & Co., LLP (“WW&C”) to serve as the independent registered public accounting firm of the Company. During the two most recent fiscal years and through the subsequent interim period preceding WW&C’s engagement, the Company has not consulted with WW&C regarding (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report was provided to the Company nor oral advice was provided that WW&C concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue, or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
The Company provided UHY with a copy of the above disclosure and requested that UHY furnish the Company with a letter addressed to the Commission stating whether or not it agrees with the above statement. A copy of UHY’s letter is filed as Exhibit 16.1 to the Form 6-K filed on February 21, 2023, and is incorporated by reference herein.
ITEM 16G. CORPORATE GOVERNANCE
As a Cayman Islands exempted company listed on the Nasdaq Capital Market, we are subject to the Nasdaq Stock Market Rules corporate governance listing standards. However, Nasdaq Stock Market Rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the Nasdaq Stock Market Rules. Other than as described in this section, our corporate governance practices do not differ from those followed by domestic companies listed on the NASDAQ Capital Market.
NASDAQ Listing Rule 5635 generally provides that shareholder approval is required of U.S. domestic companies listed on the NASDAQ Capital Market prior to issuance (or potential issuance) of securities (i) equaling 20% or more of the company’s Ordinary Shares or voting power for less than the greater of market or book value (ii) resulting in a change of control of the company; and (iii) which is being issued pursuant to a stock option or purchase plan to be established or materially amended or other equity compensation arrangement made or materially amended. Notwithstanding this general requirement, NASDAQ Listing Rule 5615(a)(3)(A) permits foreign private issuers to follow their home country practice rather than these shareholder approval requirements. The Cayman Islands does not require shareholder approval prior to any of the foregoing types of issuances. The Company, therefore, is not required to obtain such shareholder approval prior to entering into a transaction with the potential to issue securities as described above. The Board of Directors of the Company has elected to follow the Company’s home country rules in lieu of Nasdaq Rule 5635(a), (c), and (d) and will not be required to seek shareholder approval prior to entering into such a transaction.
Nasdaq Listing Rule 5615(a)(3) provides that a Foreign Private Issuer may follow its home country practice in lieu of the requirements of the Rule 5600 Series, provided, however, that such a Company shall: comply with the Notification of Noncompliance requirement (Rule 5625), the Voting Rights requirement (Rule 5640), have an audit committee that satisfies Rule 5605(c)(3), and ensure that such audit committee's members meet the independence requirement in Rule 5605(c)(2)(A)(ii). The Board of Directors of the Company has elected to follow the Company’s home country rules in lieu of Nasdaq Rule 5605(c)(2)(A), Nasdaq Rule 5605(c)(1), Nasdaq Rule 5605(e)(1) and (2), Nasdaq Rule 5605(d)(1) and (2), Nasdaq Rule 5605(b)(1) and (2), Nasdaq Rule 5620(c), Nasdaq Rule 5610. Nasdaq Listing Rule 5605(b)(1) requires listed companies to have, among other things, a majority of its board members be independent. As a foreign private issuer, however, we are permitted to, and we may follow home country practice in lieu of the above requirements. The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors. Currently, a majority of our board members are independent. However, if we change our board composition such that independent directors do not constitute a majority of our BOD, our shareholders may be afforded less protection than they would otherwise enjoy under Nasdaq’s corporate governance requirements applicable to U.S. domestic issuers.
The Board of Directors of the Company has also elected to follow the Company’s home country rules in lieu of Nasdaq Listing Rule 5255.
95
Pursuant to the home country rule exemption set forth under Nasdaq Listing Rule 5640, we elected to be exempt from the requirement under Nasdaq Listing Rule 5640, which provides that voting rights of existing shareholders cannot be disparately reduced or restricted through any corporate action or issuance. As a result of such exemption, we completed the re-designation and re-classification of Ordinary Shares into Class A Ordinary Shares and Class B Ordinary Shares in February 2024. See “Item 4. Information on the Company—A. History and Development of the Company.”
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
ITEM 16J. INSIDER TRADING POLICIES
Our BOD has insider trading policies and procedures governing the purchase, sale, and other dispositions of our securities by directors, senior management, and employees that are reasonably designed to promote compliance with applicable insider trading laws, rules, and regulations, and any listing standards applicable to us.
Our BOD has also
ITEM 16K. CYBERSECURITY
The Company’s executive
officers oversee the strategic processes to safeguard data and comply with relevant regulations and has overall responsibility for evaluating
cybersecurity risks, as well as related policies and risks in connection with the company’s supply chain, suppliers and other service
providers. The Company does not currently engage any assessors, consultants, auditors, or other
Since the start of its latest
completed fiscal year and up to the date of this Annual Report, the Company is
96
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
Results of Operations and Financial Condition
Following are the audited financial results for the years ended December 31, 2024, 2023 and 2022 of Hitek Global Inc.
97
INDEX TO FINANCIAL STATEMENTS
HITEK GLOBAL INC. AND SUBSIDIARIES
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Hitek Global Inc.
We have audited the accompanying consolidated balance sheets of Hitek Global Inc. and Subsidiaries (the “Company”) as of December 31, 2024 and 2023, and the related consolidated statements of operations and comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
We have served as the Company’s auditor since 2023.
April 25, 2025 |
F-2
HITEK GLOBAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2024 | 2023 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable, net | ||||||||
| Advances to suppliers, net | ||||||||
| Inventories, net | ||||||||
| Loans receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Non-current accounts receivable | ||||||||
| Non-current advance to a third party | ||||||||
| Non-current loan receivable | ||||||||
| Property, equipment and software, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Long-term investments | - | |||||||
| Total non-current assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Advances from customers | ||||||||
| Loan payable | ||||||||
| Deferred revenue | ||||||||
| Taxes payable | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current Liabilities | ||||||||
| Loan payable, non-current | ||||||||
| Deferred income tax liabilities, non-current | ||||||||
| Total non-current liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Shareholders’ Equity | ||||||||
| Ordinary Shares, par value $ | ||||||||
| Class A Ordinary Shares, US$ | ||||||||
| Class B Ordinary Shares, US$ | ||||||||
| Additional paid-in capital | ||||||||
| Statutory reserve | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
HITEK GLOBAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
| Years Ended December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Cost of revenues | ( | ) | ( | ) | ( | ) | ||||||
| Gross profit | ||||||||||||
| Operating expenses: | ||||||||||||
| General and administrative | ||||||||||||
| Selling | ||||||||||||
| Total operating expenses | ||||||||||||
| Operating (loss) income | ( | ) | ||||||||||
| Other income (expense) | ||||||||||||
| Government subsidies | ||||||||||||
| Net investment gain (loss) | ( | ) | ||||||||||
| Interest income | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||
| Deregistration cost | ( | ) | ||||||||||
| Other income (expense), net | ( | ) | ( | ) | ||||||||
| Total other income, net | ||||||||||||
| (Loss) income before provision for income taxes | ( | ) | ||||||||||
| Income tax expense | ||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | |||||||
| Comprehensive (loss) income | ||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | |||||||
| Foreign currency translation loss | ( | ) | ( | ) | ( | ) | ||||||
| Comprehensive (loss) income | $ | ( | ) | $ | $ | |||||||
| (Loss) earnings per ordinary share | ||||||||||||
| – Basic and diluted | $ | ( | ) | $ | $ | |||||||
| Weighted average number of ordinary shares outstanding | ||||||||||||
| – Basic and diluted | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
HITEK GLOBAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2024, 2023 and 2022
| Ordinary Shares | Class A Ordinary Shares |
Class B Ordinary Shares |
Additional | Accumulated other |
Total | |||||||||||||||||||||||||||||||||||||||
| Number of shares |
Amount | Number of shares |
Amount | Number of shares |
Amount | paid-in capital |
Statutory reserve |
Retained earnings |
comprehensive income (loss) |
Shareholders’ Equity | ||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2022 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Appropriation of Statutory reserve | - | - | - | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | ( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||||||||||
| Shares re-designated and re-classified | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock and warrants in private placement | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2024 | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
HITEK GLOBAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | |||||||
| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation | ||||||||||||
| Amortization of right-of-use assets | ||||||||||||
| Loss on disposal of property, plant and equipment | ||||||||||||
| Accrued interest income from loans, net | ( | ) | ( | ) | ( | ) | ||||||
| Net investment (gain) loss | ( | ) | ( | ) | ||||||||
| Provision for (reversal of) expected credit losses of receivables and advances to suppliers | ( | ) | ( | ) | ||||||||
| Provision for obsolete inventories | ||||||||||||
| Deferred income tax | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Short-term investments – trading securities | ( | ) | ( | ) | ||||||||
| Accounts receivable | ( | ) | ||||||||||
| Accounts receivable – related party | ||||||||||||
| Advances to suppliers | ( | ) | ||||||||||
| Deferred offering cost | ( | ) | ||||||||||
| Inventories | ( | ) | ||||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||||||
| Accounts payable | ( | ) | ( | ) | ||||||||
| Advances from customers | ||||||||||||
| Deferred revenue | ( | ) | ( | ) | ||||||||
| Taxes payable | ( | ) | ||||||||||
| Operating lease liabilities | ( | ) | ||||||||||
| Due to related parties | ( | ) | ( | ) | ||||||||
| Accrued expenses and other current liabilities | ( | ) | ( | ) | ||||||||
| Net cash (used in) provided by operating activities | ( | ) | ( | ) | ||||||||
| Cash flows from investing activities | ||||||||||||
| Advance payment for software development | ( | ) | ( | ) | ( | ) | ||||||
| Loans to third parties | ( | ) | ( | ) | ( | ) | ||||||
| Repayment from third-party loans | ||||||||||||
| Prepayment for office renovation | ( | ) | ||||||||||
| Purchases of property and equipment | ( | ) | ||||||||||
| Purchases of held-to-maturity investments | ( | ) | ( | ) | ( | ) | ||||||
| Redemption of held-to-maturity investments | ||||||||||||
| Deposit for acquisition | ( | ) | ||||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Borrowing from third parties | ||||||||||||
| Proceeds from issuance of ordinary shares | ||||||||||||
| Net cash provided by financing activities | ||||||||||||
| Effect of exchange rate changes on cash | ( | ) | ( | ) | ( | ) | ||||||
| Net (decrease) increase in cash | ( | ) | ( | ) | ||||||||
| Cash at beginning of the year | ||||||||||||
| Cash at end of the year | $ | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid for income taxes | $ | $ | $ | |||||||||
| Cash paid for interest | ||||||||||||
| Non-cash transactions: | ||||||||||||
| Deferred offering cost | $ | $ | $ | |||||||||
| Operating right-of-use assets recognized for related operating lease liabilities | $ | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
HITEK GLOBAL INC. AND SUBSIDIARIES
Notes to CONSOLIDATED Financial Statements
December 31, 2024, 2023 and 2022
NOTE 1 – NATURE OF OPERATIONS
Hitek Global Inc. (“HiTek Global”) was incorporated under the laws of the Cayman Islands on November 3, 2017 in anticipation of an initial public offering (“IPO”) that was completed in 2023. HiTek Global, through its subsidiaries, variable interest entity (“VIE”) and VIE’s subsidiaries (collectively, the “Company”) provides hardware sales, software sales, information technology (“IT”) maintenance services and tax devices and services in the People’s Republic of China (the “PRC”).
On November 20, 2017, HiTek Global formed its wholly-owned subsidiary, HiTek Hong Kong Limited (“HiTek HK”) in Hong Kong. On March 15, 2018, HiTek HK formed its wholly-owned subsidiary, Tian Dahai (Xiamen) Information Technology Co. Ltd. (“WFOE”) in PRC.
Xiamen Hengda HiTek Computer Network Co., Ltd.
(“HiTek”), was established in January 1996 by Shenping Yin, Xiaoyang Huang (the spouse of Shenping Yin) and four other shareholders,
who held
In September 1999, Xiamen Huasheng HiTek Computer Network Co., Ltd (“Huasheng”), a wholly-owned subsidiary of HiTek was incorporated under the laws of the PRC.
In September 2017, Huoerguosi Hengda Information Technology Co., Ltd (“Huoerguosi”), which was a wholly-owned subsidiary of HiTek was established in XinJiang Province, PRC. In August 2024, Huoerguosi was deregistered as part of the Company’s plan to restructure its operations (see Note 18).
In April 2021, Xiamen Haitian Weilai Technology Co., Ltd. (“Haitian Weilai”), a wholly-owned subsidiary of WFOE was incorporated under the laws of the PRC.
F-7
The Company’s current corporate structure is as follows:
As all the above mentioned companies presented were under common control, the series of contractual arrangements between HiTek Global and HiTek in March 2018 constituted a reorganization under common control and was retroactively applied to the consolidated financial statements (“CFS”) at their historical amounts. The CFS are prepared as if the existing corporate structure had been in existence throughout all periods. This includes a retroactive presentation for all equity related disclosures, including share and per share, which were revised to reflect the effects of the reorganization.
NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying CFS and related notes of the Company were prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). All adjustments necessary to present fairly in all material respects the financial position, results of operations and cash flows for all periods presented were made.
Principles of Consolidation
The accompanying CFS include financial information related to the Company and its wholly-owned subsidiaries and those variable interest entities (“VIEs”) where the Company is the ultimate primary beneficiary.
In preparing the CFS, all significant inter-company accounts and transactions were eliminated in consolidation.
The CFS were prepared on a historical cost basis, except for financial assets and financial liabilities which were measured at fair value (“FV”). The determination of functional currency is based on the criteria of Accounting Standard Codifications (“ASC”) as promulgated by the Financial Accounting Standards Board (“FASB”), ASC 830, Foreign Currency Matters (“ASC 830”). The Company uses U.S. dollars (“US$” or “USD”) as its reporting currency.
F-8
VIE Agreements with HiTek
Due to PRC legal restrictions of foreign ownership in certain sectors, neither we nor our subsidiaries own any equity interest in HiTek. Instead, WFOE, HiTek and HiTek’s shareholders entered into a series of contractual arrangements (“VIE Agreements”) on March 31, 2018, which have not been tested in a court of law. The VIE Agreements by and among WFOE, HiTek, and HiTek’s shareholders include (i) certain power of attorney agreements and equity interest pledge agreement, which provide WFOE effective control over HiTek; (ii) an exclusive technical consulting and service agreement which allows WFOE to receive substantially all of the economic benefits from HiTek; and (iii) certain exclusive equity interest purchase agreements which provide WFOE with an exclusive option to purchase all or part of the equity interests in and/or assets of HiTek when and to the extent permitted by PRC laws. Accordingly, the Company is considered the primary beneficiary of VIE for accounting purpose and has consolidated the VIE and the VIE’s subsidiaries’ assets, liabilities, results of operations, and cash flows in the accompanying consolidated financial statements.
Each of the VIE Agreements is described in detail below:
Exclusive Technical Consulting and Service Agreement
Pursuant to the Exclusive Technical Consulting
and Service Agreement between HiTek and WFOE, WFOE provides HiTek with technical support, consulting services and other management services
relating to its day-to-day business operations and management, on an exclusive basis. The Exclusive Technical Consulting and Service Agreement
came into effect as of March 31, 2018. For services rendered to HiTek by WFOE under this agreement, WFOE is entitled to collect a service
fee that shall be paid per quarter of
Equity Interest Pledge Agreement
WFOE, HiTek and HiTek shareholders entered into an Equity Interest Pledge Agreement, pursuant to which HiTek shareholders pledged all of their equity interests in HiTek to WFOE in order to guarantee the performance of HiTek’s obligations under the Exclusive Technical Consulting and Service Agreement as described above. The Equity Interest Pledge Agreement came into effect as of March 31, 2018. During the term of the pledge, WFOE is entitled to receive any dividends declared on the pledged equity interests of HiTek. The Equity Interest Pledge Agreement ends when all contractual obligations under the Exclusive Technical Consulting and Service Agreement have been fully performed.
Exclusive Equity Interests Purchase Agreement
Under the Exclusive Equity Interests Purchase Agreement, the HiTek Shareholders granted WFOE (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, part or all of their equity interests in HiTek. The option price is equal to the capital paid in by the HiTek Shareholders subject to any appraisal or restrictions required by applicable PRC laws and regulations. The Exclusive Equity Interests Purchase Agreement remains effective for a term of ten years and may be renewed at WFOE’s election.
Power of Attorney
Each shareholder of the HiTek executed an irrevocable power of attorney in favor of WFOE. Pursuant to this power of attorney, WFOE has full power and authority to exercise all of such shareholders’ rights with respect to their equity interest in the VIE Companies, including HiTek, Huasheng and Huoerguosi. The power of attorney will remain in force for so long as the shareholder remains a shareholder of HiTek.
As of December 31, 2024, the VIEs accounted for
F-9
Risks in relation to the VIE structure
The Company’s operations and businesses through its VIE could be found by PRC authorities to violate PRC law and regulations prohibiting or restricting foreign ownership of companies that engage in such operations and businesses. While the Company’s management considers the possibility of such a finding by PRC regulatory authorities under current law and regulations to be remote, on January 19, 2015, the Ministry of Commerce of the PRC, or (the “MOFCOM”) released on its Website for public comment a proposed PRC law (the “Draft FIE Law”) that appears to include VIEs within the scope of entities that could be considered foreign invested companies (or “FIEs”) that would be subject to restrictions under existing PRC law on foreign investment in certain industries. Specifically, the Draft FIE Law introduces the concept of “actual control” for determining if an entity is considered to be an FIE. In addition to control through direct or indirect ownership or equity, the Draft FIE Law includes control through contractual arrangements within the definition of “actual control.” If the Draft FIE Law is passed by the People’s Congress of the PRC and goes into effect in its current form, these provisions regarding control through contractual arrangements could be construed to reach the Company’s VIE arrangements, and as a result, the Company’s VIE could become subject to the current restrictions on foreign investment in certain categories of industry. If a finding were made by PRC authorities, under existing law and regulations or under the Draft FIE Law if it becomes effective, about the Company’s operation of certain of its operations and businesses through its VIEs, regulatory authorities with jurisdiction over the licensing and operation of such operations and businesses would have broad discretion in dealing with such a violation, including levying fines, confiscating the Company’s income, revoking the business or operating licenses of the affected businesses, requiring the Company to restructure its ownership structure or operations, or requiring the Company to discontinue all or any portion of its operations. Any of these actions could cause significant disruption to the Company’s business operations and have a severe adverse impact on the Company’s cash flows, financial position and operating performance.
In addition, the contracts among WFOE, HiTek and HiTek’s shareholders would not be enforceable in China if PRC government authorities or courts found that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. If the Company was unable to enforce these contractual arrangements, the Company would not be able to exert effective control over the VIEs. Consequently, the VIEs’ results of operations, assets and liabilities would not be included in the Company’s CFS. If such were the case, the Company’s cash flows, financial position, and operating performance would be materially adversely affected. The Company’s contractual arrangements WFOE, HiTek and HiTek’s shareholders are approved and in place. Management believes such contracts are enforceable, and considers the possibility remote that PRC regulatory authorities with jurisdiction over the Company’s operations and contractual relationships would find the contracts to be unenforceable.
The Company’s operations and businesses are conducted by its VIEs, which hold revenue-producing assets. The VIEs also have an assembled workforce, focused primarily on R&D, whose costs are expensed as incurred. The Company’s operations and businesses may be adversely impacted if the Company loses the ability to use and enjoy assets held by its VIE.
VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. All VIEs and their subsidiaries of the Company must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
Summary information regarding consolidated VIEs and their subsidiaries is as follows.
| As of December 31, | ||||||||
| 2024 | 2023 | |||||||
| Total current assets | $ | $ | ||||||
| Total non-current assets | $ | $ | ||||||
| Total Assets | $ | $ | ||||||
| Total Liabilities | $ | $ | ||||||
| Years Ended December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Net (loss) income | $ | ( | ) | $ | $ | |||||||
| Years Ended December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Net cash provided by operating activities | $ | $ | $ | |||||||||
| Net cash used in investing activities | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net cash provided by financing activities | $ | $ | $ | |||||||||
F-10
Use of Estimates and Assumptions
The preparation of the CFS in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the CFS and the reported amounts of revenues and expenses during the reporting period.
Significant accounting estimates reflected in the Company’s CFS include allowance for expected credit losses, inventory obsolescence, deferred taxes, and the useful lives of property and equipment. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
Fair Values of Financial Instruments
The U.S. GAAP regarding fair value (“FV”) of financial instruments and related FV measurements define FV, establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring FV.
The three levels of inputs are defined 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, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| ● | Level 3 inputs to the valuation methodology are unobservable. |
ASC 825-10 “Financial Instruments”, allows entities to choose to measure certain financial assets and liabilities at FV (FV option). The FV option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the FV option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the FV option to any outstanding instruments.
The carrying amounts in the consolidated balance sheets for cash, short-term investment, accounts receivable, advances to suppliers, inventories, loans receivable, prepaid expenses and other current assets, accounts payable, advances from customers, loan payable, deferred revenue, taxes payable, and accrued expenses and other current liabilities approximate their FV based on the short-term maturity of these instruments.
The Company’s investments measured at FV on a recurring basis consist of trading securities and held-to-maturity securities. The valuation for the Level 1 position is based on quoted prices in active markets. For detailed information, please see “NOTE 3 – INVESTMENTS.”
Earnings (Loss) Per Share (“EPS”)
Basic EPS is computed by dividing net income (loss) by the weighted-average number of ordinary shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted-average number of ordinary shares and dilutive potential ordinary shares outstanding during the year.
F-11
Cash
Cash consists of cash on hand and in banks. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. The Company maintains cash with various financial institutions in the PRC. As of December 31, 2024 and 2023, cash balances held in PRC banks were uninsured. The Company has not experienced any losses in bank accounts during the years ended December 31, 2024, 2023 and 2022.
Concentrations of Credit Risk
Currently, all of the Company’s operations are in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic, and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the United States of America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, short-term investments, trade accounts receivable, and accounts receivable from related parties and advances to suppliers. A portion of the Company’s sales are credit sales which are to the customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
Investments
Short-term investments consist of trading stock and held-to-maturity securities, which include mutual funds and wealth management products issued by commercial banks with maturity within one year. Considering the Company’s short-term investments are highly liquid in nature, changes in the FV and related transactions of short-term investments are presented as operating activities in the Company’s consolidated statements of cash flows. Long-term investments include mutual funds and wealth management products with a maturity of over one year. The Company accounts for investments in accordance with FASB ASC Topic 320 “Investments — Debt and Equity Securities.” Dividend and interest income, including amortization of the premium and discount at acquisition, for all categories of investments in securities is included in Consolidated Statements of Operations. Net realized and unrealized holding gains and losses for investments are included in Consolidated Statements of Operations.
If a security is acquired with the intent of selling it within hours or days, the security is classified as a trading security. The Company classifies investments in trading stock and mutual funds as trading securities. Unrealized holding gains and losses for trading securities are included in earnings.
If the Company has positive intent and ability to hold to maturity, the security is classified as a held-to-maturity security. The Company classifies investments in wealth management products as held-to-maturity securities as the Company intends to hold these investments until maturity. The investments in wealth management products are valued at carrying value, which approximates the amortized cost. For individual securities classified as held-to-maturity securities, the Company evaluates whether a decline in FV below the amortized cost basis is other-than-temporary, in accordance with ASC 320. Other-than-temporary impairment loss is recognized in earnings equal to the entire excess of the debt security’s amortized cost basis over its FV at the balance sheet date of the reporting period for which the assessment is made.
F-12
Expected Credit Losses
The Company maintains an allowance for expected credit losses in accordance with ASC 326 and records it as an offset to related asset such as accounts receivable, etc., and the provision for estimated credit losses is expensed. The Company assesses collectability by reviewing receivables on a collective basis where similar characteristics exist, primarily based on the size and nature of specific customers’ receivables. In determining the amount of the allowance for credit losses, the Company considers historical collectability based on past due status, the age of the receivable balances, credit quality of the Company’s customers based on ongoing credit evaluations, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the Company’s ability to collect from customers. Bad debts are written off as incurred.
Advances to Suppliers
Advances to suppliers are amounts prepaid to suppliers for purchases of inventories and outsourced software services. In evaluating the recoverability of such advances, the Company mainly considers the age of the balance and the ability of the suppliers to perform the related obligations.
Inventories
Inventories are stated at the lower of cost (weighted average basis) or net realizable value. The methods of determining inventory costs are used consistently from year to year. Allowance for inventory obsolescence is provided when the market value of certain inventory items is lower than the cost.
Property, Equipment and Software
Property, equipment and software are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation and amortization are removed from the accounts, and any resulting gains or losses are included in the statement of operations in the year of disposition. The Company examines the possibility of decreases in the value of property, equipment and software, when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Estimated useful lives are as follows, taking into account the assets’ estimated residual value:
| Classification | Estimated useful lives | |
| Furniture and office equipment | ||
| Computer equipment | ||
| Transportation equipment | ||
| Buildings and improvements | ||
| Software |
Impairment of Long-lived Assets
In accordance with ASC Topic 360, the Company
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than
the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated FV and its
book value. The Company recorded an impairment charge of $
Revenue Recognition
The Company follows ASU 2014-09, Topic 606, “Revenue from Contracts with Customers” and its related amendments (collectively referred to as “ASC 606”) for its revenue recognition accounting policy that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In accordance with ASC 606, revenue is recognized when all of the following five steps are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue when (or as) each performance obligation is satisfied.
F-13
The Company generates revenues primarily from three sources: (1) hardware sales, (2) software sales, and (3) tax devices and services. The Company recognizes revenue when performance obligations under the terms of a contract with its customers are satisfied. This occurs when the control of the goods and services have been transferred to the customer.
Hardware sales
Hardware revenues are primarily from the sale of computer and network hardware to end users. The products include computers, printers, internet cables, certain internet servers, cameras and monitors. Sales of hardware have a single performance obligation. The Company recognizes revenue when ownership is transferred to end customers. The Company’s revenue from sales of hardware is reported on a gross basis since the Company is primarily obligated in the transaction, bears inventory and credit risk and has discretion to establish prices.
Software sales
HiTek also makes software sales and focuses on perpetual license sales for a self-developed software Communication Interface System (“CIS”). CIS is based on LINUX, which is a general embedded interface system used by petrochemical and coal companies. The system is used to communicate the RCTX-X module, collect the work diagram, the electricity diagram, the pressure temperature and other measures, and can extract the data and import it to the software of the windows platform to display analysis.
Performance Obligations - Software contracts with customers include multiple performance obligations such as sale of software license, installation of software, operation training service and warranty. The installation and operation training are essential to the functionality of the software which are provided to the clients prior to the acceptance of the software. The Company provides a-year warranty which mainly is for telephone supports. The Company estimates that costs associated with warranty are de minimis to the overall contract. Therefore, the Company does not allocate transaction price.
The Company recognizes revenue from software sales when the software is accepted by the customer.
Tax Devices and Services
Before January 21, 2021, all VAT general taxpayer businesses in China were required to purchase the Anti-Counterfeiting Tax Control System (“ACTCS” or Golden Tax Disk or GTD) tax devices to issue the VAT Invoice and for quarterly VAT filing. HiTek is authorized to carry out the implementation of ACTCS specialty hardware retailing. The price of GTD and related supporting services is determined by the National Development and Reform Commission. From January 21, 2021, new taxpayers can receive electronic tax control Ukey for free from the tax authority. HiTek could provide supporting services to the new taxpayers. In 2023, Xiamen Taxation Bureau implemented the use of electronic invoices to replace the traditional tax control system. Enterprises can use a free electronic invoice platform provided by the tax bureau, which has had a significant impact on the Company’s business. Since June, 2024, the Company cooperated with a third party to popularize an electronic tax control platform to replace electronic invoice platform provided by the tax bureau.
Performance Obligations - Tax devices and services contracts with customers include multiple performance obligations such as delivery of products, installation and after-sales supporting services, tax control system risk investigation service, and tax invoicing management service, such as training service on issuing electronic invoice, complete tax declaration automatically and back up data online.
Revenue from the sales of GTD devices is recognized when ownership is transferred to end customers. The Company provides after-sales supporting services for tax device and tax invoicing management service, charging the service fee on an annual basis because the service period is usually one year. Since June 2024, the Company charged annual service fee from the customers who used the electronic tax control platform popularized by the Company. Revenue from its service is recognized as the services are performed and amounts are earned, using the straight-line method over the term of the related services agreement. The Company also charges a one-time service charge for each investigation request. Revenue from tax control system risk investigation service is recognized when the services are performed. Revenue is recognized based on each performance obligation’s standalone selling price that is sold separately and charged to customers at contract inception.
F-14
The Company’s revenue is reported on a gross
basis since the Company is primarily obligated in the transaction, is subject to inventory and credit risk.
| Years Ended December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Revenues | ||||||||||||
| Hardware | $ | $ | $ | |||||||||
| Tax devices and service | ||||||||||||
| Software | ||||||||||||
| Total revenues | $ | $ | $ | |||||||||
Contract balances
Prepayments from customers prior to the services being performed are recorded as deferred revenue. Deferred revenue consists of annual service fees for GTD and tax invoicing management service. The Company recognizes the service fees as revenue on a straight-line basis in accordance with the service periods.
Practical expedients and exemptions
The Company generally expenses sales commissions as incurred because the amortization period would have been one year or less.
Deferred Revenue
Deferred revenue consists of the annual service
fees for GTD received from customers but the services have not yet been performed. The Company recognizes the service amount as revenue
on a straight-line basis in accordance with the service periods. For 2024, 2023 and 2022, the Company recognized revenue of $
Cost of Revenues
Cost of revenues is comprised of (i) the direct cost of our hardware products purchased from third parties; (ii) logistics-related costs, which include product packaging and freight-in charges; (iii) third-party royalties for the GTD; and (iv) compensation for employees who handle the products and other costs necessary to provide the services to our customers.
Selling Expenses
Selling expenses consists of shipping and handling costs for products sold and advertising and marketing expenses for promotion of our products.
General and Administrative Expenses
General and administrative expenses consist primarily of costs of salary and welfare for our general administrative and management staff, facilities costs, depreciation and amortization expenses, professional fees, accounting fees, meals and entertainment, utilities, additional expenses for public offering, and other miscellaneous expenses incurred in connection with general operations. All depreciation and amortization were recorded in general and administrative expenses because fixed assets are mainly for sales and administrative purposes.
F-15
Government Subsidies
Subsidies are given by the government to mainly support the Company for the increase in production and social insurance compensation for rural laborers. Subsidies are recognized as government subsidies income in the consolidated statements of operations when received.
Income Taxes
The Company is governed by the Income Tax Law of the PRC. The Company accounts for income taxes using the asset/liability method prescribed by ASC 740, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The Company applies ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification related to the process associated with accounting for uncertain tax positions recognized in the Company’s CFS. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period.
Value Added Taxes (“VAT”)
VAT is reported as a deduction of revenue when incurred. Entities that are VAT general taxpayers are allowed to offset qualified input VAT paid to suppliers against their output VAT liabilities. Net VAT balance between input VAT and output VAT is recorded in taxes payable.
Foreign Currency Translation
The functional currency of the Company’s operations in the PRC is the Chinese Yuan or Renminbi (“RMB”). The CFS are translated to U.S. dollars using the period end rates of exchange for assets and liabilities, equity is translated at historical exchange rates, and average rates of exchange (for the period) are used for revenues and expenses and cash flows. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income / loss. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
All of the Company’s revenue transactions are transacted in its functional currency. The Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
The exchange rates as of December 31, 2024 and 2023 and for the years ended December 31, 2024, 2023 and 2022 are as follows:
| December 31, | Years Ended December 31, | |||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | 2022 | ||||||||||||||||
| Foreign currency | Balance Sheet | Balance Sheet | Profit/Loss | Profit/Loss | Profit/Loss | |||||||||||||||
| RMB:1USD | ||||||||||||||||||||
F-16
Comprehensive (Loss) Income
Comprehensive (loss) income is comprised of net (loss) income and all changes to the statements of shareholders’ equity, except those due to investments by shareholders and changes in paid-in capital. For the Company, comprehensive (loss) income for 2024, 2023 and 2022 consisted of net (loss) income and unrealized loss from foreign currency translation adjustment.
Related Parties
A party is considered related to the Company if it directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
Leases
The Company follows ASC 842 in accounting for its operating leases. The Company recognizes right-of-use (“ROU”) assets and lease liabilities on the Company’s consolidated balance sheets for office and warehouse space leases. At the commencement of a lease, the Company recognizes a lease liability for future fixed lease payments and a ROU asset for the right to use the underlying asset during the lease term. The lease liability is initially measured as the present value of the future fixed lease payments that will be made over the lease term. The lease term includes periods for which it’s reasonably certain that the renewal options will be exercised and periods for which it’s reasonably certain the termination options will not be exercised. The future fixed lease payments are discounted using the rate implicit in the lease, if available, or the incremental borrowing rate (“IBR”). The Company will evaluate the carrying value of ROU assets if there are indicators of impairment and review the recoverability of the related asset group. If the carrying value of the asset group is determined to not be recoverable and is in excess of the estimated FV, the Company will record an impairment loss in other expenses in the consolidated statements of operations.
The Company does not record assets and liabilities on its consolidated balance sheet for new or existing lease arrangements with terms of 12 months or less. The Company recognizes lease expenses for such lease on a straight-line basis over the lease term. The Company did not have any operating lease longer than a year as of December 31, 2024.
Segment reporting
In November 2023, FASB issued ASU 2023-07, which amends Segment reporting (Topic 280). This update enhances reportable segment disclosure requirements, primarily by requiring disclosure of the significant segment expenses for each reportable segment that are regularly provided to the Chief Operating Decision Maker, and aligning the segment reporting disclosure requirements in interim and annual reporting periods. This update is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company adopted this guidance in its 2024 CFS.
The Company identifies operating segments as components
of the consolidated operations for which discrete financial information is available and is regularly reviewed by the chief operating
decision maker(“CODM”), in making decisions regarding resource allocation and evaluating financial performance. The Company
defines the term CODM to be its chief executive officer. The Company determined it operates in
The significant segment expenses and other segment items that are provided to the CODM align with expense information that is included in the Company’s consolidated income statement and notes thereto.
The measure of segment assets is reported in the balance sheet as total consolidated assets. The Company’s long-lived assets are located in China.
F-17
Warrants classification
When the Company issues freestanding instruments, it first analyzes the provisions of ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”) in order to determine whether the instrument should be classified as a liability, with subsequent changes in fair value recognized in the statements of comprehensive loss in each period. If the instrument is not within the scope of ASC 480, the Company further analyzes the provisions of ASC Topic 815, Derivatives and Hedging (“ASC 815-40”) in order to determine whether the instrument is considered indexed to the entity’s own stock, and qualifies for classification within equity. If the provisions of ASC 815-40 for equity classification are not met, the instrument will be classified as a liability, with subsequent changes in fair value recognized in the statements of comprehensive loss in each period.
Recent Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which requires disaggregated information about an entity’s effective tax rate reconciliation and additional discloses on income taxes paid. The new requirements are effective for annual periods beginning after December 15, 2024. The guidance is to be applied prospectively, with an option for retrospective application. The Company is currently evaluating the impact of this new guidance on disclosures within its CFS.
In November 2024, the FASB issued ASU 2024-03 on Disaggregation of Income Statement Expenses that enhances disclosure of certain costs and expenses to provide enhanced transparency into the expenses presented in the income statement. The updates are effective for annual periods beginning after December 15, 2026. The Company is still assessing the impact of the disclosure of this standard.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on its CFS.
NOTE 3 – INVESTMENTS
Short-term investments consist of trading stock
and held-to-maturity securities, which include mutual funds and wealth management products issued by commercial banks with maturity within one
year. Long-term investments consist of wealth management products with maturity over one year.
| Quoted | Significant | Significant | ||||||||||||||
| Prices in | Other | Other | ||||||||||||||
| Active | Observable | Unobservable | ||||||||||||||
| December 31, | Markets | Inputs | Inputs | |||||||||||||
| 2024 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Short-term investments | ||||||||||||||||
| Trading securities | $ | $ | $ | $ | ||||||||||||
| Held-to-maturity securities | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Quoted | Significant | Significant | ||||||||||||||
| Prices in | Other | Other | ||||||||||||||
| Active | Observable | Unobservable | ||||||||||||||
| December 31, | Markets | Inputs | Inputs | |||||||||||||
| 2023 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Short-term investments | ||||||||||||||||
| Trading securities | $ | $ | $ | $ | ||||||||||||
| Held-to-maturity securities | ||||||||||||||||
| Long-term investment | ||||||||||||||||
| Held-to-maturity securities | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
F-18
Net investment gain (loss) for the years ended December 31, 2024, 2023 and 2022 consists of the following.
| December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Gain (loss) from sales of short-term investments: | ||||||||||||
| Trading securities | $ | ( | ) | $ | $ | ( | ) | |||||
| Held-to-maturity securities | ||||||||||||
| Unrealized holding gain (loss) from short-term investments: | ||||||||||||
| Trading securities | ( | ) | ||||||||||
| Held-to-maturity securities | ||||||||||||
| Unrealized holding gain from long-term investments: | ||||||||||||
| Held-to-maturity securities | ||||||||||||
| Net investment gain (loss) | $ | $ | $ | ( | ) | |||||||
NOTE 4 – ACCOUNTS RECEIVABLE, NET
As of December 31, 2024 and 2023, accounts receivable, net consisted of the following.
| 2024 | 2023 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for expected credit losses | ( | ) | $ | ( | ) | |||
| Accounts receivable, net | $ | $ | ||||||
| Non-current accounts receivable | $ | $ | ||||||
The following table shows the movements in the allowance for expected credit losses during the years ended December 31, 2024, 2023 and 2022.
| 2024 | 2023 | 2022 | ||||||||||
| Balance at January 1 | $ | $ | $ | |||||||||
| (Reversal of) Provision for expected credit losses | ( | ) | ( | ) | ||||||||
| Foreign exchange difference | ( | ) | ( | ) | ( | ) | ||||||
| Balance at December 31 | $ | $ | $ | |||||||||
The Company reviews the outstanding receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances.
NOTE 5 – ADVANCES TO SUPPLIERS, NET
In 2023, the Company signed a software upgrade
and development contract (“Interface System”), which obligated the software company to perform software upgrade and development
activities from May to September 2023. As of December 31, 2023, the total contract price was $
F-19
NOTE 6 – INVENTORIES, NET
As of December 31, 2024 and 2023, inventories consisted of the following.
| 2024 | 2023 | |||||||
| Purchased goods | $ | $ | ||||||
| Less: reserve for obsolete inventories | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Inventories include computer, network hardware,
and GTDs. The Company reviews its inventories periodically to determine if any reserves are necessary for potential obsolescence or if
a write-down is necessary if the carrying value exceeds net realizable value. The Company established a reserve for
NOTE 7 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of December 31, 2024 and 2023, prepaid expenses and current assets consisted of the following.
| 2024 | 2023 | |||||||
| Interest receivable (1) | $ | $ | ||||||
| Prepaid expenses (2) | ||||||||
| Deposit (3) | ||||||||
| Other receivables, net (4) | ||||||||
| Total | $ | $ | ||||||
| (1) |
| (2) |
| (3) |
| (4) |
NOTE 8 – LOANS RECEIVABLE
As of December 31, 2024 and 2023, loans receivable consisted of the following.
| 2024 | 2023 | |||||||
| Guangxi Beihengda Mining Co., Ltd. (1) | $ | $ | ||||||
| Hongkong Sanyou Petroleum Co., Ltd (2) | ||||||||
| Beijing Liansheng Innovation Technology Co., Ltd (3) | ||||||||
| Total loan receivable | ||||||||
| Less: current portion | ||||||||
| Loan receivable - non current | $ | $ | ||||||
| (1) |
F-20
| (2) |
| (3) |
Interest income for the loans for the years ended
December 31, 2024, 2023 and 2022 was $
NOTE 9 – NON-CURRENT ADVANCE TO A THIRD PARTY
In 2020, the Company signed a software development
contract with a third party software development company to develop a Corporate Full-Service Platform Mobile Application for internal
use. The ownership of the final product belongs to the Company and the copyrights will be shared with the software development company.
In August 2023, the Company signed a supplemental agreement with an external vendor which took over the software development project.
As of June 30, 2024, approximately $
NOTE 10 – PROPERTY, EQUIPMETN AND SOFTWARE, NET
As of December 31, 2024 and 2023, property, equipment and software consisted of the following.
| 2024 | 2023 | |||||||
| Office furniture | $ | $ | ||||||
| Transportation equipment | ||||||||
| Buildings and improvements | ||||||||
| Software | ||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
NOTE 11 – Taxes payable
As of December 31, 2024 and 2023, taxes payable consisted of the following.
| 2024 | 2023 | |||||||
| Value-added | $ | $ | ||||||
| Income | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
F-21
NOTE 12 – RELATED PARTY TRANSACTIONS
The following are related party transactions for the years ended December 31, 2024, 2023 and 2022.
| 2024 | 2023 | 2022 | ||||||||||
| Cost of revenues | ||||||||||||
| Fengqi (Beijing) Zhineng Technology Co., Ltd.(1) | $ | $ | $ | |||||||||
| $ | $ | $ | ||||||||||
| (1) |
NOTE 13 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, 2024 and 2023, accrued expenses and other current liabilities consisted of the following.
| 2024 | 2023 | |||||||
| Payroll | $ | $ | ||||||
| Interest payable(1) | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
| (1) |
NOTE 14 – LOAN PAYABLES
As of December 31, 2024 and 2023, loan payables consisted of the following.
| 2024 | 2023 | |||||||
| Loan payable | $ | $ | ||||||
| Non-current loan payable | ||||||||
| Total | $ | $ | ||||||
On January 21, March 28 and June 14, 2022, the
Company entered into three loans of RMB
The interest expense for the years ended December
31, 2024, 2023 and 2022 was $
F-22
NOTE 15 –ORDINARY SHARES
In April 2023, the Company issued
On February 5, 2024, the 2024 annual general meeting adopted resolutions
that the issued
NOTE 16 –WARRANTS
On July 29, 2024, the Company closed a private
placement of (a)
The summary of warrant activities for the year ended December 31, 2024 was as follows:
| Ordinary Shares Number Outstanding | Weighted Average Exercise Price | Contractual | ||||||||||
| Outstanding as of December 31, 2023 | $ | |||||||||||
| Granted | ||||||||||||
| Exercises | ||||||||||||
| Expired | ||||||||||||
| Warrants Outstanding as of December 31, 2024 | ||||||||||||
| Warrants Exercisable as of December 31, 2024 | $ | |||||||||||
NOTE 17 – INCOME TAXES
The entities within the Company file separate tax returns in the respective tax jurisdictions in which they operate.
Cayman Islands
The Company is a tax-exempt entity incorporated in Cayman Islands.
Hong Kong
HiTek Hong Kong Limited was incorporated in Hong Kong and does not conduct any substantial operations. No provision for Hong Kong profits tax has been made in the CFS as HiTek Hong Kong Limited has no assessable profits for the years ended December 31, 2024, 2023 and 2022.
F-23
PRC
The Company’s PRC operating subsidiary and
VIEs, being incorporated in the PRC, are governed by the income tax law of the PRC and is subject to PRC enterprise income tax (“EIT”).
The EIT rate of PRC is
The Company’s (loss) income before income taxes includes the following for the years ended December 31.
| 2024 | 2023 | 2022 | ||||||||||
| Non-PRC operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| PRC operations | ( | ) | ||||||||||
| Total (loss) income before income taxes | $ | ( | ) | $ | $ | |||||||
Income tax expense was comprised of the following for the years ended December 31.
| 2024 | 2023 | 2022 | ||||||||||
| Current tax expense | $ | $ | $ | |||||||||
| Deferred tax expense | ||||||||||||
| Total income tax expense | $ | $ | $ | |||||||||
Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes.
| 2024 | 2023 | |||||||
| Deferred tax assets | ||||||||
| Net operating loss | $ | $ | ||||||
| Deferred revenue | ||||||||
| Unbilled cost | ||||||||
| Unbilled interest | ||||||||
| Depreciation | ||||||||
| Software amortization | ||||||||
| Allowance for expected credit losses | ||||||||
| Inventories obsolescence | ( | ) | ( | ) | ||||
| Unrealized losses on trading securities | ||||||||
| Accrued Bonus | ||||||||
| Other | ||||||||
| Total deferred tax assets | ||||||||
| Deferred tax liabilities | ||||||||
| Unbilled revenue | ( | ) | ( | ) | ||||
| Unbilled interest income | ( | ) | ( | ) | ||||
| Deferred government subsidy | ( | ) | ( | ) | ||||
| Unrealized gain on short-term investment | ( | ) | ( | ) | ||||
| Other | ( | ) | ( | ) | ||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax liabilities | $ | ( | ) | $ | ( | ) | ||
F-24
Following is a reconciliation of income tax expense at the effective rate to income tax at the calculated statutory rates for the years ended December 31.
| 2024 | 2023 | 2022 | ||||||||||
| PRC statutory tax rate | % | % | % | |||||||||
| Effect of non-PRC entities not subject to PRC tax | ( | )% | % | % | ||||||||
| Effect of deregistration of a subsidiary | ( | )% | % | % | ||||||||
| Permanent difference | ( | )% | % | ( | )% | |||||||
| Tax holiday effect | ( | )% | % | ( | )% | |||||||
| Effective tax rate | ( | )% | % | % | ||||||||
Uncertain Tax Positions
The Company had no significant unrecognized uncertain tax positions or unrecognized liabilities, interest or penalties associated with unrecognized tax benefit as of December 31, 2024 and 2023.
NOTE 18 – DEREGISTRATION COST
Huoerguosi was a wholly owned subsidiary of HiTek
which main business was software sales. From its inception in 2017 to the beginning of 2022, Huoerguosi was exempted from corporate income
tax in the PRC. In 2024, the Company closed down Huoerguosi. In August 2024, the Company ceased operation of Huoerguosi through the deregistration
procedures but continued to run its software sales business through HiTek. The deregistration of Huoerguosi had no material impact on
the Company’s software sales business. In connection with the deregistration of Huoerguosi, the Company recognized deregistration
cost of $
NOTE 19 – CONCENTRATIONS
Major Customers
Details of the Company’s major customers (including those accounting for 10% or more of the Company’s total revenues) are as follows.
| Years Ended December 31, | ||||||||||||||||||||||||
| 2024 | 2023 | 2022 | ||||||||||||||||||||||
| Customer A | $ | % | $ | % | $ | % | ||||||||||||||||||
| Customer B | % | % | % | |||||||||||||||||||||
| Total | $ | % | $ | % | $ | % | ||||||||||||||||||
Details of the Company’s major customers (those accounting for 10% or more of the Company’s accounts receivable are as follows.
| December 31, | ||||||||||||||||||||||||
| 2024 | 2023 | 2022 | ||||||||||||||||||||||
| Customer A | $ | % | $ | % | $ | % | ||||||||||||||||||
| Customer B | % | % | % | |||||||||||||||||||||
| Total | $ | % | $ | % | $ | % | ||||||||||||||||||
F-25
Major Suppliers
Details of the Company’s major suppliers (those accounting for 10% or more of the Company’s total purchases) are as follows.
| Years Ended December 31, | ||||||||||||||||||||||||
| 2024 | 2023 | 2022 | ||||||||||||||||||||||
| Supplier A | $ | % | $ | % | $ | % | ||||||||||||||||||
| Supplier B | - | % | % | % | ||||||||||||||||||||
| Supplier C | - | % | - | % | % | |||||||||||||||||||
| Supplier D | - | % | - | % | % | |||||||||||||||||||
| Supplier E | - | % | % | % | ||||||||||||||||||||
| Supplier F | - | % | % | % | ||||||||||||||||||||
| Supplier K | % | % | % | |||||||||||||||||||||
| Total | $ | % | $ | % | $ | % | ||||||||||||||||||
Details of the Company’s major suppliers (those accounting for 10% or more of the Company’s accounts payable) are as follows.
| December 31, | ||||||||||||||||||||||||
| 2024 | 2023 | 2022 | ||||||||||||||||||||||
| Supplier C | $ | - | % | $ | % | $ | % | |||||||||||||||||
| Supplier E | - | % | % | % | ||||||||||||||||||||
| Supplier G | - | % | % | % | ||||||||||||||||||||
| Supplier H | - | % | - | % | % | |||||||||||||||||||
| Total | $ | - | % | $ | % | $ | % | |||||||||||||||||
NOTE 20 – COMMITMENTS AND CONTINGENCY
Contingencies
The Company may be involved in various legal proceedings, claims and other disputes arising from the commercial operations, projects, employees and other matters which, in general, are subject to uncertainties and in which the outcomes are not predictable. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. As of December 31, 2024, the Company was not aware of any litigation or proceedings against it.
NOTE 21 – SUBSEQUENT EVENTS
The Company performed an evaluation of events and transactions for potential recognition or disclosure through April 25, 2025, the date in which the CFS is released. The Company is not aware of any material subsequent event.
F-26
NOTE 22 - CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Pursuant to Rules 12-04(a), 5-04(c), and 4-08(e)(3)
of Regulation S-X, the condensed financial information of the parent company shall be filed when the restricted net assets of consolidated
subsidiaries exceed
PARENT COMPANY BALANCE SHEETS
| December 31, | ||||||||
| 2024 | 2023 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Short-term investments | ||||||||
| Intercompany receivables | ||||||||
| Loan receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Long-term investments | - | |||||||
| Investments in non-VIE subsidiaries | ||||||||
| Total non-current assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Intercompany payable | $ | $ | ||||||
| Total current liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Shareholders’ Equity | ||||||||
| Ordinary Shares, par value $ | ||||||||
| Class A Ordinary Shares, US$ | ||||||||
| Class B Ordinary Shares, US$ | ||||||||
| Additional paid-in capital | ||||||||
| Statutory reserve | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
F-27
PARENT COMPANY STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
| Years Ended December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Gross profit | ||||||||||||
| Operating expenses: | ||||||||||||
| General and administrative | ||||||||||||
| Total operating expenses | ||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ||||||
| Other income (expense) | ||||||||||||
| Net investment gain | ||||||||||||
| Interest income | ||||||||||||
| Other expense, net | ( | ) | ( | ) | ||||||||
| Total other income (loss) | ( | ) | ||||||||||
| Share of (loss) income from subsidiaries | ( | ) | ||||||||||
| (Loss) Income before provision for income taxes | ( | ) | ||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | |||||||
| Comprehensive (loss) income | ||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | |||||||
| Comprehensive (loss) income | $ | ( | ) | $ | $ | |||||||
| (Loss) earnings per ordinary share | ||||||||||||
| – Basic and diluted | $ | ( | ) | $ | $ | |||||||
| Weighted average number of ordinary shares outstanding | ||||||||||||
| – Basic and diluted | ||||||||||||
F-28
PARENT COMPANY STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net (loss) income | $ | ( | ) | $ | ||||||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||||||
| Accrued interest income from loans | ( | ) | ( | ) | ||||||||
| Net investment loss (gain) | ( | ) | ( | ) | ||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Deferred offering cost | ( | ) | ||||||||||
| Due from intercompany | ( | ) | ||||||||||
| Due to intercompany | ||||||||||||
| Prepaid expenses and other current assets | ||||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash flows from investing activities | ||||||||||||
| Loans to third parties | ( | ) | ( | ) | ||||||||
| Repayment from third-party loans | ||||||||||||
| Purchases of held-to-maturity investments | ( | ) | ( | ) | ||||||||
| Redemption of held-to-maturity investments | ||||||||||||
| Deposit for acquisition | ( | ) | ||||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of ordinary shares | ||||||||||||
| Net cash provided by financing activities | ||||||||||||
| Net (decrease) increase in cash | ( | ) | ( | ) | ||||||||
| Cash at beginning of year | ||||||||||||
| Cash at end of year | $ | $ | ||||||||||
F-29
ITEM 19. EXHIBITS.
EXHIBIT INDEX
| * | Furnished herewith. |
98
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| HiTek Global Inc. | ||
| By: | /s/ Xiaoyang Huang | |
| Name: | Xiaoyang Huang | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| Dated: | April 25, 2025 | |
99