F-1 1 ff12019_powerbridgetech.htm REGISTRATION STATEMENT

As filed with the Securities and Exchange Commission on January 3, 2019

 

Registration No. 333-[●]

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM F-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

   

Powerbridge Technologies Co., Ltd.

 

Cayman Islands   7371   Not applicable
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

1st Floor, Building D2, Southern Software Park

Tangjia Bay, Zhuhai, Guangdong 519080, China

Tel: +86-756-339-5666

(Address, including zip code, and telephone number, including area code, of principal executive offices)

 

Hunter Taubman Fischer & Li LLC
1450 Broadway, 26th Floor
New York, NY 10018
(917) 512-0827

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Louis Taubman, Esq.
Arila Zhou, Esq.
Hunter Taubman Fischer & Li LLC
1450 Broadway, 26th Floor
New York, NY 10018
Tel: 917-512-0827
  Barry I. Grossman, Esq.
Sarah E. Williams, Esq.
Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas
New York, New York 10105
Phone: (212) 370-1300
Fax: (212) 370-7889

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.    

 

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 standards1 provided pursuant to Section 7(a)(2)(B) of the Securities Act  ☐

   

 

 

 

1 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.

 

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Class of Securities to be Registered   Amount to Be 
Registered(1)
    Proposed 
Maximum 
Offering Price 
per Share(2)
    Proposed 
Maximum 
Aggregate 
Offering 
Price(2)(3)
    Amount of 
Registration Fee
 
Ordinary Shares, par value $0.001 per share sold by the Registrant     [●]       [●]       [●]       [●]  
Underwriters’ compensation warrants (4)                                
Ordinary Shares underlying underwriter’s compensation warrants     [●]       [●]       [●]       [●]  
Total     [●]       [●]     $ 15,000,000     $

1,818

 

 

(1) Includes [●] Ordinary Shares subject to the underwriter’s option to purchase additional shares.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3) Includes the Offering Price (defined as below) of any additional Ordinary Shares that the underwriter has the option to purchase.
(4) We have agreed to issue upon the closing of this Offering, compensation warrants to Maxim Group LLC and The Benchmark Company, LLC, as representatives of the underwriters, entitling them to purchase up to 7.0% of the aggregate Ordinary shares being sold in this Offering. The exercise price of the compensation warrants is equal to 110% of the offering price of the Ordinary Shares offered hereby. Assuming a maximum placement and an exercise price of $[●] per share, we would receive, in the aggregate, $[●] upon exercise of the compensation warrants, of which there can be no guarantee.  The compensation warrants are exercisable for a five-year period, commencing six (6) months after the date of effectiveness of the Registration Statement of which this prospectus forms a part. An underwriting discount or spread equal to 7.0% of the aggregate offering price will also be provided to underwriters. The Registration Statement of which this prospectus is a part also covers the Ordinary Shares issuable upon the exercise thereof. For additional information regarding our arrangement with the underwriters, please see “Underwriting” beginning on page 117.

 

The registrant hereby amends this Registration Statement on Form F-1 (the “Registration Statement”) on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended (the “Securities Act”) or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission (the “SEC”) acting pursuant to said Section 8(a) may determine.

 

 

 

 

 

 

EXPLANATORY NOTE

 

On August 18, 2018, we effectuated a reverse split at a ratio of 10-for-1 to reduce our authorized capital shares from 500,000,000 ordinary shares with a par value of $0.0001 per share to 50,000,000 ordinary shares with a par value of $0.001 per share (the “Reverse Split”). All share numbers, stock option numbers, warrant numbers, other derivative security numbers and exercise prices appearing in this registration statement have been adjusted to give effect to the Reverse Split, unless otherwise indicated or unless the context suggests otherwise.

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the SEC is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.  

SUBJECT TO COMPLETION, DATED [●], 2019 

PRELIMINARY PROSPECTUS

 

Powerbridge Technologies Co., Ltd. 

[●] Ordinary Shares 

This is the initial public offering (the “Offering”) of Powerbridge Technologies Co., Ltd, a Cayman Islands exempted company with limited liability whose principal place of business is in Zhuhai, China. We are offering on a firm commitment basis, [●] ordinary shares, par value $0.001 per share (the “Ordinary Shares”). 

No public market currently exists for our Ordinary Shares. We have applied for listing on the NASDAQ Capital Market under the symbol “PBTS” for the Ordinary Shares we are offering. We expect that the initial public offering price (the “Offering Price”) will be between $[●] and $[●] per Ordinary Share. We believe that upon the completion of the Offering, we will meet the standards for listing on the NASDAQ Capital Market. 

As the date hereof, our authorized share capital is 50,000,000 Ordinary Shares. As of the date hereof, we have 11,508,747 Ordinary Shares issued and outstanding. 

We are an “emerging growth company” as defined in the Jumpstart Our Business Act of 2012, as amended, and, as such, are eligible for to reduced public company reporting requirements. 

We anticipate that following the completion of this Offering, our Chairman and Chief Executive Office, Ban Lor and our CFO, Stewart Lor, will beneficially own aggregate [●]% of the Company’s then issued and outstanding Ordinary Shares. While under NASDAQ Marketplace Rules 5615(c), we may be deemed a “controlled company,” we do not intend to avail ourselves of the corporate governance exemptions afforded to a “controlled company” under the NASDAQ Marketplace Rules. 

An investment in our securities is highly speculative, involves a high degree of risk and should be considered only by persons who can afford the loss of their entire investment. See “Risk Factors” beginning on page 11 of this prospectus.  

Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. 

This prospectus does not constitute, and there will not be, an offering of securities to the public in the Cayman Islands. 

    Per share     Total  
Offering Price   $ [●]     $ [●]  
Underwriting discounts and commissions (1)(2)   $ [●]     $ [●]  
Proceeds to us, before expenses   $ [●]     $ [●]  

 

(1) Represents underwriting discount and commissions equal to 7.0% per share (or $[●] per share), which is the underwriting discount we have agreed to pay on all investors in this Offering.
(2) Does not include expense allowance, payable the underwriters, or the reimbursement of certain expenses of the underwriters. See “Underwriting” beginning on page 117 of this prospectus for additional information regarding total underwriter compensation.

 

In addition to the underwriting discounts listed above and the expense allowance described in the footnote, we have agreed to issue upon the closing of this Offering, compensation warrants to Maxim Group LLC and The Benchmark Company, LLC, as representative of the underwriters, entitling them to purchase up to 7.0% of the total number of Ordinary shares being sold in this Offering. The exercise price of the compensation warrants is equal to 110% of the Offering Price of the Ordinary Shares offered hereby. Assuming a maximum placement and an exercise price of $[●] per share, we would receive, in the aggregate, $[●] upon exercise of the compensation warrants, of which there can be no guarantee. The compensation warrants are exercisable for a five-year period, commencing six (6) months after the date of effectiveness of the Registration Statement of which this prospectus forms a part. An underwriting discount or spread equal to 7.0% of the Offering Price will also be provided to underwriters. The Registration Statement of which this prospectus is a part also covers the Ordinary Shares issuable upon the exercise thereof. For additional information regarding our arrangement with the underwriters, please see “Underwriting” beginning on page 117. 

We have granted the representative an option, exercisable for 45 days from the date of this prospectus, to purchase up to an additional 15.0% of the Ordinary shares on the same terms as the other shares being purchased by the underwriters from us. 

The underwriter expects to deliver the Ordinary Shares to purchasers in the Offering on or about [●], 2019.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

Maxim Group LLC The Benchmark Company

 

The date of this prospectus is [●], 2019 

 

 

 

TABLE OF CONTENTS

 

Prospectus Summary 1
Risk Factors 11
Forward-Looking Statements 38
Use of Proceeds 39
Dividend Policy 40
Exchange Rate Information 40
Selected Historical Financial and Operating Data 41
Capitalization 42
Dilution 42
Post-Offering Ownership 43
Management’s Discussion and Analysis of Financial Condition and Results of Operations 44
Our Business 62
Management 95
Related Party Transactions 103
Principal Stockholders 104
Description of Share Capital 105
Shares Eligible for Future Sale 109
Taxation 110
Enforceability of Civil Liabilities 116
Underwriting 117
Legal Matters 121
Experts 121
Where You Can Find More Information 121
Financial Statements F-1

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. Neither we, nor the underwriters have authorized anyone to provide you with different information. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus, or any free writing prospectus, as the case may be, or any sale of shares in the Company.

 

For investors outside the United States: Neither we, nor the underwriters have done anything that would permit this Offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the Ordinary Shares and the distribution of this prospectus outside the United States.

 

This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, you are cautioned not to give undue weight to this information.

 

All references in this prospectus to “$,” “U.S.$,” “U.S. dollars,” “dollars” and “USD” mean U.S. dollars and all references to “RMB” mean Renminbi, unless otherwise noted. All references to “PRC” or “China” in this prospectus refer to the People’s Republic of China. All references to the “United States,” “U.S.” or “US” refer to the United States of America.

 

i

 

COMMONLY USED DEFINED TERMS

 

  Depending on the context, the terms “we,” “us,” “our company,” “our”, “Powerbridge” and “Powerbridge Cayman” refer to Powerbridge Technologies Co., Ltd., a Cayman Islands company, and its subsidiaries and affiliated companies.

 

  “Powerbridge HK” refers to Powerbridge Technologies Co., Limited, a Hong Kong company.

 

  “Powerbridge Zhuhai” refers to Zhuhai Powerbridge Technology Co., Ltd., a PRC company.

 

  “Powerbridge Beijing” refers to Beijing Powerbridge Technology Co., Ltd., a PRC company.

 

  “AIC” refers to Administration for Industry and Commerce in China;

 

  “Controlling Shareholders” refers to collectively Ban Lor and Stewart Lor;

 

  “Shares” and “Ordinary Shares” refer to our ordinary shares, $0.001par value per share;

 

  “China” and “PRC” refer to the People’s Republic of China, excluding, for the purposes of this prospectus only, Macau, Taiwan and Hong Kong; and

 

  All references to “RMB,” “yuan” and “Renminbi” are to the legal currency of China, all references to “HKD” is to the legal currency of Hong Kong, and all references to “USD,” and “U.S. dollars” are to the legal currency of the United States.

 

ii

 

PROSPECTUS SUMMARY

 

This summary highlights information that we present more fully in the rest of this prospectus. This summary does not contain all of the information you should consider before buying Ordinary Shares in this Offering. This summary contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could,” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements. You should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and the notes to those statements. Unless otherwise stated, all references to “us,” “our,” “Powerbridge,” “we,” “the Company,” and similar designations refer to Powerbridge Technologies Co., Ltd, a Cayman Islands Company, and its consolidated subsidiaries. See Note 1 to our consolidated financial statements as of and for the fiscal years ended December 31, 2017 and 2016 included elsewhere in this prospectus.

 

Our Business

 

We are a provider of software application and technology solutions and services to corporate and government customers primarily located in China. We introduced global trade software applications when we launched our operations in 1997 with a vision to make global trade operations easier for our customers. Since our inception, we have continued to innovate by developing technologies that enable us to successfully deliver a series of solutions and services that address the evolving and changing needs of our corporate and government customers. Our mission is to make global trade easier by empowering all players in the ecosystem.

 

Our customers are corporate and government organizations engaged in global trade. Our corporate customers are import and export companies, manufacturers engaged in international trade, as well as logistics and other service providers. Our government customers include customs and other government agencies that oversee the flow of goods and services across borders, as well as government authorities and organizations that manage and operate free trade and bonded trade zones, ports and terminals, and other international trade facilities.

 

Global trade involves complicated and cumbersome processing, manual handling of voluminous documents, extended and complex cross-organization workflows as well as a great number of business and government players in the global trade ecosystem. We estimated that a typical process for an export shipment in China may involve 1 exporter, 8 government agencies and authorities and 12 various logistics and financial service providers with more than 60 persons engaged in 13 different work processes that generate more than 55 regulatory compliance and trade logistics documents as well as 150 information or message exchanges.

 

Our customers are facing increasing challenges as the world’s trade ecosystems continue to grow in size and complexity. Costs associated with global trade, such as logistics performance, border control and international connectivity remain high. Potential savings from more collaborative and efficient trade processes could reduce the costs of global trade significantly. The need for greater efficiency and cost savings are driving the transformative shift for participants in global trade to become more connected and collaborative.

 

Our comprehensive and robust solutions and services include Powerbridge System Solutions and Powerbridge SaaS Services with more than 15 solutions and services deployable on premise and in the cloud. Leveraging our deep domain knowledge and strong industry experience, we provide a series of differentiated and robust solutions and services that address the mission critical needs of our corporate and government customers, enabling them to handle and simplify the complexities of global trade operations, logistics and compliance.

 

1

 

We provide Powerbridge System Solutions to our corporate and government customers engaged in global trade, including businesses and manufacturers across a broad range of industries, government agencies and regulatory authorities, as well as global trade logistics and other service providers. Powerbridge System Solutions consists of Trade Enterprise Solutions and Trade Compliance Solutions which have been in service for nearly twenty years and Import & Export Loan and Insurance Processing which have recently been introduced to a selected group of customers. We believe Powerbridge System Solutions provide the following core benefits to our customers:

 

  Import and export businesses and manufacturers in diverse vertical industries use our Trade Enterprise Solutions to manage business operations, simplify trade processes, reduce document handling, minimize operational cost and increase overall efficiency and productivity.

 

  Our Trade Compliance Solutions enable government agencies and regulatory authorities greater control and security, better use of resources, higher duty collection, less processing time and higher compliance efficiency in servicing global trade businesses and logistics service providers.

 

  Our newly introduced Import & Export Loan and Insurance Processing is designed to facilitate and streamline global trade related loan and insurance processes, enabling businesses, financial and insurance service providers involved in global trade to reduce workflow complexity, processing time and operational cost while increase processing efficiency.

 

We began offering our Powerbridge SaaS Services (software-as-a-service) in 2016 and are continually developing and expanding our software-as-a-service applications (“SaaS”) services that provide our corporate and government customers with significant benefits, including better use of resources, lower cost of operations, easier document handling, less processing time as well as higher logistics and compliance connectivity and efficiency. Powerbridge SaaS Services include Logistics Service Cloud, Trade Zone Operations Cloud, Inward Processed Manufacturing Cloud, Cross-Border eCommerce Cloud and Import & Export Loan and Insurance Processing Service Cloud. We believe Powerbridge SaaS Services encompass the following core advantages:

 

  Lower total cost of ownership. Unlike the traditional software model, our on-demand services enable our customers to have access anytime and anywhere without the upfront spending in software and hardware.

 

  Rapid deployment and configuration. Our services are designed to be deployed and configured rapidly through our application programming interfaces.

 

  Flexible and scalable. Our flexible and extensible architecture enables us to offer services that are scalable and adjustable to quickly address the different needs of our diverse group of customers.

 

  Reliable and secure. Our multi-tenant and microservice technology architectures allow us to design our services to provide our customers with a high level of performance, reliability and security.

 

  Intuitive and ease of use. Our services are designed be intuitive and easy to use with interfaces that are simple and user friendly. Our users are able to learn and begin using our services without specialized training.

 

We are currently designing and developing our cloud-based Powerbridge BaaS Services (blockchain-as-a-service) that is intended for all players in the global trade ecosystem. Blockchain technology is emerging as a major disruptive force across many industries, including those involved in global trade. We believe that blockchain technology could allow our customers to conduct business in more synchronized and collaborative ways to substantially increase operational efficiency and reduce trade costs across the global trade supply chain. Powerbridge BaaS Services, which we expect to roll-out as pilot projects on a limited basis to selective customers in the first quarter of 2019, will include Compliance Blockchain Services, Logistics Blockchain Services, Supply Chain Blockchain Services, and Import & Export Loan and Insurance Processing Blockchain Services (See, “Our BaaS Services” in Our Business below).

 

Our solutions and services are built from our multiple proprietary technology platforms which are developed based on industry leading open source infrastructure technologies. Our technology platforms include Powerbridge System Platform and Powerbridge SaaS Platform, which are designed for high-performance reliability, flexibility and scalability, allowing us to expand our solutions and services rapidly and efficiently to consistently address the needs of our corporate and government customers.

 

We currently derive our revenues from three sources: (1) revenue from application development services generated from Powerbridge System Solutions, which require us to perform services including project planning, project design, application development and system integration based on customers’ specific needs. These services also require significant production and customization; (2) revenue from consulting and technical support services primarily generated from Powerbridge System Solutions, and (3) revenue from subscription services generated from Powerbridge SaaS Services. We currently generate most of our revenues from application development services, which represented 89.5% and 90.4% of total revenue in fiscal 2017 and 2016, respectively. Revenue from consulting and technical support services represented 6.6% and 5.2% of total revenue in fiscal 2017 and 2016, respectively. Revenue from subscription services represented 3.9% and 4.4% of total revenue in fiscal 2017 and 2016, respectively. For the six months ended June 30, 2018 and 2017, revenue from application development services represented 81.1% and 85.4% of total revenue, respectively, revenue from consulting and technical support services represented 14.8% and 6.9% of total revenue, respectively, and revenue from subscription services represented 4.1% and 7.7% of total revenue in 2018 and 2017, respectively.

 

2

 

For the fiscal years ending December 31, 2016 and 2017, our revenues were US$21.2 million and US$21.6 million, respectively. Our net profit grew from US$3.5 million in 2016 to US$4.0 million in 2017. For the six months ended June 30, 2017 and 2018, our revenues were US$6.6 million and US$7.9 million, respectively, and our net profit was US$1.5 million and US$1.3 million, respectively.

 

Our corporate and government customers include (i) international trade businesses and manufacturers, (ii) government agencies and regulatory authorities, and (iii) logistics and other various service providers. For the fiscal year ended December 31, 2016, we generated revenue from a total of 1,757 customers, of which 1,010 are international trade businesses and manufacturers, 55 are government agencies and authorities, and 692 are logistics and other service providers. For the fiscal year ended December 31, 2017, we generated revenue from a total of 1,633 customers, of which 936 are international trade businesses and manufacturers, 70 are government agencies and authorities, and 627 are logistics and other service providers. For the six months ended June 30, 2018, we generated revenue from a total of 739 customers, of which 257 are international trade businesses and manufacturers, 67 are government agencies and authorities, and 415 are logistics and other service providers.

 

We generate a significant portion of our revenues  from a relatively small number of major customers. For the year ended December 31, 2017, two government customers accounted for 17.2% and 13.1% of our total revenues, respectively. For the year ended December 31, 2016, three government customers accounted for 16.0%, 12.2%, and 10.0% of our total revenues, respectively. For the six months ended June 30, 2018, one government customer accounted for 16.7% of our total revenues.

 

As of the date of this prospectus, we had a total of 231 full-time employees, of which 82 are in research and development, 37 are in sales and marketing, 89 are in technical and customer services, and 23 are in general and administration.

 

Our Opportunity

 

We believe the need for global trade software application and technology services will continue to grow, driven by the continuing growth in China’s global trade volume and the rapid advancement of the Belt & Road Initiative (“B&R”). The convergence of disruptive technologies and emergence of blockchain technology will accelerate the drive for organizations engaged in global trade to increasingly adapt at scale to new technologies as they mature and become more widely available.

 

We intend to address the subsets of three technology markets: the traditional enterprise software market in China which we have been servicing since our inception, the SaaS application market in China which we began servicing in 2016, and the blockchain applications market for which we are designing and developing a series of BaaS services to target both China and the international markets.

 

According to iResearch, an industry research and consulting firm in China, the traditional enterprise software market in China is expected to grow from US$4.4 billion (approximately RMB28.5 billion) in 2017 to US$5.2 billion (approximately RMB33.8 billion) in 2020 and the SaaS application market in China is expected to reach US$7.3 billion (approximately RMB47.3 billion) in 20202.

 

According to the market report entitled “Global Blockchain Market Size Analysis and Industry Opportunity 2018-2028” published in April 2018 by Bekryl Market Analysts, a capital market research and consulting service firm, the global blockchain market size is estimated at US$702.3 million in 2018 and will reach US$16.3 billion by 2025, registering a CAGR of 56.7% to create high revenue opportunity for industry players during 2018 to 20283.

 

Our Competitive Strengths

 

We believe that the following competitive strengths contribute to our success and differentiate us from our competitors:

 

  Global Trade Software Application Pioneer. We introduced software applications for international trade companies when we launched our operations in 1997. Since our inception, we have continued to innovate by developing technologies that enable us to consistently  and successfully deliver a series of solutions and services that address the evolving and changing needs of our customers.

 

  Deep Domain Knowledge and Industry Expertise. We have gained and developed deep domain knowledge and industry expertise from over twenty years of experience in service, which is built into and will continue to contribute to the robust and differentiated capabilities of our solutions and services. We believe domain knowledge and industry expertise is a significant competitive barrier due to the complex nature of global trade.

 

  Solid and Diversified Customer Base. Our corporate and government customers include global trade businesses and manufacturers across a broad range of industries, government agencies and authorities, as well as logistics and other service providers. Our solid customer base enables us to continually cross sell our solutions and services and to expand our market share.

 

  Comprehensive and Robust Service Portfolio. Our proven track-record with our customers demonstrates the strengths in our comprehensive and robust solution and service portfolio that is built to handle the complexities of global trade business. We continue to leverage disruptive technologies to expand the breadth and adaptability of our portfolio of offerings to service a wider range of customers.

  

 

2 http://report.iresearch.cn/report_pdf.aspx?id=3122

 

3 https://bekryl.com/industry-trends/blockchain-market-size-analysis

3

 

  Mission-Critical System That is Difficult to Replace. Because our solutions and services address the mission-critical needs in global trade, our customers depend on our solutions and services for managing their regulatory compliance and trade logistics operations. Once deployed, our solutions and services become a mission-critical system that is often deeply entrenched into their core technology and operational infrastructures.

 

  Extensive Experience for the Belt & Road. China’s B&R has catalyzed substantial development for improving regulatory compliance and trade logistics in China. We have been providing our solutions and services to help our customers achieve their objectives in this regard. We believe that our extensive experience will enable us to efficiently expand into international markets which we intend to target as B&R accelerates in these markets.

 

  Strong Brand Recognition and Industry Resources. We have built a trusted brand with a long history and a proven track record of delivering value to our customers. We believe our brand, reputation and scale, as well as our extensive network of industry and government resources will enable us to achieve substantial growth as our corporate and government customers continue to grow and evolve.

 

  Solid Foundation for Developing Blockchain Applications. Blockchain technology is promising for business but its adoption is challenging. It requires not only technology and product expertise but also the ability to integrate and bring all players to adapt and participate. We believe we are capable of utilizing blockchain technology for global trade by leveraging our strong domain knowledge, product expertise and industry resources.

 

  Scalable Business Model with a Prudent Approach. Our solutions and services are highly adaptable, scalable and supported by our flexible technology infrastructures, enabling us to efficiently expand our customer base. In addition, we are taking a prudent approach by combining traditional technologies and disruptive technologies because we believe the adoption and transformative impact of new technologies will take considerable time and effort.

 

  Experienced and Visionary Management Team. Our success is attributable to the deep industry expertise and proven track record of our experienced management. We were founded twenty years ago with a vision to make global trade operations easier for our customers, and since then, we have successfully demonstrated our abilities. We believe our management’s execution capability will be critical for us to support and sustain our expansion and growth.

 

Our Growth Strategy

 

We plan to grow and expand our business by pursuing the following growth strategies:

 

  Increase Revenue with Existing Customers. We have a large number of corporate and government customers that currently utilize our global trade software application and technology services. We intend to increase our revenue through leveraging and broadening our relationships with existing customers by helping them identify new use cases for our existing solutions and services; and solving more problems for them by providing new solutions and services.

 

  Accelerate Research and Development. We plan to use a portion of the proceeds from this Offering into our research and development to accelerate the development of disruptive technology-enabled global trade software applications and technology solutions and services. We believe our SaaS and BaaS services will enable us to capture significant market share in China and abroad in the foreseeable future.

 

  Expand Our Solution and Service Offerings. Global trade involves complex and cumbersome processes in trade operations, trade logistics and regulatory compliance with many players in the global trade ecosystem. Each player is operating in different settings and with different objectives. Our solutions and services will focus on recognition of those different settings and objectives so that our customers can better connect and collaborate based on their needs in global trade.

 

  Increase Market Penetration. We plan to increase our market penetration with a deeper market coverage and a broader geographical reach in China. In this aspect, we plan to continually strengthen our sales and marketing capabilities and build strategic partnerships with government and corporate organizations to further drive sales.

 

4

 

  Expand into International Markets. China’s B&R has brought significant opportunities for Chinese organizations such as infrastructure builders and logistics services providers. We plan to expand into international markets by “piggybacking” on these organizations as they bring their products and services to the B&R countries. We believe this approach will mitigate risk, reduce cost and minimize time-to-market for entering new markets.

 

  Strategic Acquisitions and Investments. We plan to pursue strategic acquisitions and investments in selective technologies and businesses that will enhance our technology capabilities, expand our offerings and increase our market penetration. We believe our strategic acquisition and investment strategy is critical for us to accelerate our growth and strengthen our competitive position.

 

Risks and Challenges

 

Our prospects should be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by similar companies. Our ability to realize our business objectives and execute our strategies is subject to risks and uncertainties, including, among others, the following:

 

  we may be unable to effectively manage our growth, which could place significant strain on our management personnel, systems and resources;

 

  if we do not succeed in attracting new customers for our services and or growing revenues from existing customers, we may not achieve our revenue growth goals;

 

  the growth and success of our business depends on our ability to develop new services and enhance existing services in order to keep pace with rapid changes in technology;

 

  due to intense competition for highly skilled personnel, we may fail to attract and retain enough sufficiently trained personnel to support our operations;

 

  we face intense competition from onshore and offshore software application and technology service providers, and, if we are unable to compete effectively, we may lose customers and our revenues may decline;

 

  the market for our Powerbridge BaaS Services (blockchain-as-a-service) is new and unproven, which could result in limited customer adoption of our services, limited customer retention, or weaker customer expansion;

 

  we may be unsuccessful in entering into strategic alliances or identifying and acquiring suitable acquisition candidates, which could impede our growth and negatively affect our revenues and net income; and

 

  as we plan to expand internationally, our business will become more susceptible to risks associated with international operations.

 

In addition, we face other risks and uncertainties that may materially affect our business prospects, financial condition, and results of operations. You should consider the risks discussed in “Risk Factors” and elsewhere in this prospectus before investing in our Ordinary Shares.

 

Corporate Information

 

Our principle executive offices are located at 1st Floor, Building D2, Southern Software Park, Tangjia Bay, Zhuhai, Guangdong 519080, China. Our telephone number is +86-756-339-5666. Our principle website address is www.powerbridge.com. The information on, or accessible through, any of our websites is not a part of this prospectus, nor is such content incorporated by reference herein, and should not be relied upon in determining whether to make an investment in our Ordinary Shares.

 

5

 

Our Corporate Structure

 

The following diagram illustrates our corporate structure as of the date of this prospectus. For more detail on our corporate history please refer to “Corporate History and Background” appearing on page 65 of this prospectus.

 

 

 

Controlled Company

 

Prior to the completion of this Offering, and as long as our officers and directors, either individually or in the aggregate, own at least 50% of the voting power of our Company, we are a “controlled company” as defined under NASDAQ Marketplace Rules.

 

For so 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.

 

Although we do not intend to rely on the “controlled company” exemption under the NASDAQ listing rules, we could elect to rely on this exemption in the future. If we elect to rely on the “controlled company” exemption, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. (See – Risk Factor “As a “controlled company” under the rules of the NASDAQ Capital Market, we may choose to exempt our company from certain corporate governance requirements that could have an adverse effect on our public shareholders.”)

 

Compliance with Foreign Investment

 

All limited liability companies formed and operating in the PRC are governed by the Company Law of the People's Republic of China, or the Company Law, which was amended and promulgated by the Standing Committee of the National People's Congress on October 26, 2018 and came into effect on the same day. Foreign invested enterprises must also comply with the Company Law, with exceptions as specified in the relevant foreign investment laws. Under our corporate structure as of the date of this prospectus, 100% of the equity interests of Powerbridge Zhuhai are entirely and indirectly held by our company through Powerbridge HK. Therefore, Powerbridge Zhuhai, a wholly foreign-owned enterprise (“WFOE”) of Powerbridge HK, should be regarded as a foreign-invested enterprise and comply with both the Company Law and other applicable foreign investment laws.

 

6

 

With respect to the establishment and operation of WFOEs, the MOFCOM, and the National Development and Reform Commission, or NDRC, promulgated the Catalogue of Industries for Guiding Foreign Investment, or the Catalogue (2017 Version), as amended on June 28, 2017, which came into effect on August 28, 2017. The Catalogue divides industries for foreign investment into three categories: encouraged, restricted and prohibited. Those industries not set out in the Catalogue shall be classified as industries permitted for foreign investment. The Catalogue serves as the main basis for management and guidance for the MOFCOM to manage and supervise foreign investments to PRC. In addition, in June 2018, MOFCOM and NDRC promulgated the Special Management Measures (Negative List) for the Access of Foreign Investment, or the Negative List, effective July 2018. The Negative List expands the scope of permitted industries by foreign investment by reducing the number of industries that fall within the Negative List where restrictions on the shareholding percentage or requirements on the composition of board or senior management still exists. According to the Catalogue and the Negative List, IT services, the main business that our PRC subsidiary presently conduct, are neither restricted nor prohibited.

 

Emerging Growth Company Status

 

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012, and may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

  being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in our SEC filings;

 

  not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;

 

  reduced disclosure obligations regarding executive compensation in periodic reports, proxy statements and registration statements; and

 

  exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended. However, if certain events occur before the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion or we issue more than $1.00 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company before the end of such five-year period.

 

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We have elected to take advantage of the extended transition period for complying with new or revised accounting standards and acknowledge such election is irrevocable pursuant to Section 107 of the JOBS Act.

 

Foreign Private Issuer Status

 

We are incorporated in the Cayman Islands. More than 50% of our outstanding voting securities are held by U.S. residents and none of the following three circumstances applies: the majority of our executive officers or directors are U.S. citizens or residents; more than 50% of our assets are located in the United States; or our business is administered principally in the United States. Therefore, we are a “foreign private issuer,” as defined in Rule 405 under the Securities Act and Rule 3b-4(c) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). As a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

 

7

 

Notes on Prospectus Presentation

 

Numerical figures included in this prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them. Certain market data and other statistical information contained in this prospectus are based on information from independent industry organizations, publications, surveys and forecasts. Some market data and statistical information contained in this prospectus are also based on management’s estimates and calculations, which are derived from our review and interpretation of the independent sources listed above, our internal research and our knowledge of the PRC information technology industry. While we believe such information is reliable, we have not independently verified any third-party information and our internal data has not been verified by any independent source.

 

For the sake of clarity, this prospectus follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English.

 

Unless otherwise noted, all currency figures in this filing are in U.S. dollars. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

 

Our reporting currency is U.S. dollar and our functional currency is Renminbi. This prospectus contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Other than in accordance with relevant accounting rules and as otherwise stated, all translations of Renminbi into U.S. dollars in this prospectus were made at the rate of RMB[●] to USD1.00, the buying rate on [●], as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. Where we make period-on-period comparisons of operational metrics, such calculations are based on the Renminbi amount and not the translated U.S. dollar equivalent. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.

 

8

 

The Offering

 

Issuer:   Powerbridge Technologies, Co., Ltd.
     
Securities being Offered:   [●] Ordinary Shares, par value $0.001 per share
     
Over-Allotment:   We have granted to the underwriters the option, exercisable for 45 days from the date of this prospectus, to purchase up to [●] additional Ordinary Shares.
     
Price per Share:   The purchase price will be between $[●] and $[●].
     
Ordinary Shares Outstanding before the Offering   11,508,747
     
Ordinary Shares  Outstanding following the consummation of the Offering:   [●]
     
Symbol:   We plan to apply to list our Ordinary Shares on the NASDAQ Capital Market under the symbol “PBTS”
     
Use of Proceeds   We estimate that we will receive net proceeds from this Offering of up to $[●] million, based on an assumed price to the public in this Offering of $[●], the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses and assuming no exercise of the overallotment. We currently intend to allocate the net proceeds as follows: 35% for research and development; 25% for sales and marketing; 20% reserved for strategic alliances and acquisitions and 20% for working capital and general corporate purpose. See “Use of Proceeds” for additional information.
     
Underwriters’ Warrants   Upon the closing of this Offering, we will issue to Maxim Group LLC and The Benchmark Company LLC, as representatives of the underwriters, warrants entitling the representatives to purchase 7.0% of the aggregate number of shares issued in this offering. The warrants shall be exercisable for a period of five years from the effective date of the Registration Statement of which this prospectus forms a part.
     
Risk Factors   Investing in our Ordinary Shares involves a high degree of risk and purchasers of our Ordinary Shares may lose part or all of their investment. See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our Ordinary Shares beginning on Page 11.
     
Lock-Up   We, our directors, executive officers and our existing shareholders holding 5% or more of the outstanding Ordinary Shares are expected to enter into a lock-up agreement with the underwriters not to sell, transfer or dispose of any Ordinary Shares for a period of 180 days after this offering is completed. See “Shares Eligible for Future Sales” and “Underwriting.”
     
Dividend Policy:   We have no present plans to declare dividends and plan to retain our earnings to continue to grow our business.

 

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Summary Financial Data

 

The following summary consolidated statements of operations and cash flow data for the years ended December 31, 2017 and 2016 and six months ended June 30, 2018 and 2017 and the summary consolidated balance sheet data as of December 31, 2017 and 2016 and June 30, 2018 have been derived from our consolidated financial statements included elsewhere in this prospectus. You should read the summary consolidated financial data in conjunction with those financial statements and the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP, our consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented. 

 

Our management believes that the assumptions underlying our financial statements and the above allocations are reasonable. Our financial statements, however, may not necessarily reflect our results of operations, financial position and cash flows as if we had operated as a separate, stand-alone company during the periods presented. You should not view our historical results as an indicator of our future performance.

 

The following table presents our summary consolidated statements of income and comprehensive income for the fiscal years ended December 31, 2017 and 2016 and for the six months ended June 30, 2018 and 2017:

 

  For the Years Ended   For the Six Months Ended 
   December 31,   June 30, 
Selected Consolidated Statement of Income and Comprehensive Income   2017    2016   2018   2017 
REVENUES:          (Unaudited)   (Unaudited) 
Application development services  $19,362,813   $19,133,676   $6,405,918   $5,669,835 
Consulting and technical support services   1,418,110    1,095,457    1,166,130    456,248 
Subscription services   847,631    945,668    322,278    513,464 
Total revenues   21,628,554    21,174,801    7,894,326    6,639,547 
                     
COST AND EXPENSES:                    
Cost of revenues:                    
Cost of application development services   13,206,606    12,865,280    3,077,406    3,758,455 
Cost of consulting and technical support services   236,154    361,294    385,525    91,287 
Cost of subscription services   97,069    419,995    20,177    57,223 
Total cost of revenues   13,539,829    13,646,569    3,483,108    3,906,965 
                     
GROSS PROFIT   8,088,725    7,528,232    4,411,218    2,732,582 
                     
Operating expenses:                    
Sales and marketing   1,614,237    1,516,126    824,036    508,820 
General and administrative   1,462,901    1,324,485    1,278,663    515,721 
Research and development   1,151,985    947,506    1,064,673    442,930 
Total operating expenses   4,229,123    3,788,117    3,167,372    1,467,471 
                     
OPERATING INCOME FROM OPERATIONS   3,859,602    3,740,115    1,243,846    1,265,111 
                     
OTHER EXPENSE (INCOME)                    
Interest (income) expense   (20,740)   18,201    6,645    4,170 
Other income   (540,149)   (272,812)   (201,103)   (353,056)
Other expense   7,414    4,362         1,178 
Total other income, net   (553,475)   (250,249)   (194,458)   (347,708)
                     
INCOME BEFORE INCOME TAXES   4,413,077    3,990,364    1,438,304    1,612,819 
                     
PROVISION FOR INCOME TAXES   434,882    536,387    109,528    128,062 
                     
NET INCOME   3,978,195    3,453,977    1,328,776    1,484,757 
                     
OTHER COMPREHENSIVE INCOME                    
Foreign currency translation adjustment   221,132    10,444    (139,019)   10,444 
COMPREHENSIVE INCOME   4,199,327    3,464,421    1,189,757    1,495,201 

 

  December 31,   December 31,   June 30, 
 Selected Consolidated Balance Sheet Data  2017   2016   2018 
           (Unaudited) 
             
Cash  $2,958,674   $4,299,734   $570,627 
Total Current Assets   17,608,882    10,253,357    17,305,934 
Total Assets  $21,784,791   $13,066,830   $22,072,856 
Total Liabilities   16,573,299    12,054,665    15,671,607 
Total Powerbridge Technologies Co., Ltd.’s Shareholders’ Equity   5,218,420    1,012,165    6,476,720 
Non-controlling interest   (6,928)   -    (75,471)
Total Equity   5,211,492    1,012,165    6,401,249 
Total Liabilities and Equity  $21,784,791   $13,066,830   $22,072,856 

 

10

 

RISK FACTORS

 

Investment in our securities involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below represent our known material risks to our business. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, you may lose all or part of your investment. You should not invest in this Offering unless you can afford to lose your entire investment.

 

Risks Related to Our Business

 

The growth and success of our business depends on our ability to develop new services and enhance existing services in order to keep pace with rapid changes in technology.

 

The market for our services is characterized by rapid technological change, evolving industry standards, changing customer preferences and new product and service introductions. Our future growth and success depends significantly on our ability to anticipate developments in technologies, and develop and offer new services to meet our customers’ evolving needs. We may not be successful in anticipating or responding to these developments in a timely manner, or if we do respond, the services or technologies we develop may not be successful in the marketplace. The development of some of the services and technologies may involve significant upfront investments and the failure of these services and technologies may result in our being unable to recover these investments, in part or in full. Further, services or technologies that are developed by our competitors may render our services uncompetitive or obsolete. In addition, new technologies may be developed that allow our customers to more cost-effectively perform the services that we provide, thereby reducing demand for our services. Should we fail to adapt to the rapidly changing technologies or if we fail to develop suitable services to meet the evolving and increasingly sophisticated requirements of our customers in a timely manner, our business and results of operations could be materially and adversely affected.

 

If we do not succeed in attracting new customers for our services and or growing revenues from existing customers, we may not achieve our revenue growth goals.

 

We plan to significantly expand the number of customers we serve to diversify our customer base and grow our revenues. Obtaining new customers is important for us to achieve rapid revenue growth. We also plan to grow revenues from our existing customers by identifying and selling additional services to them. Our ability to attract new customers, as well as our ability to grow revenues from existing customers, depends on a number of factors, including our ability to offer high quality services at competitive prices, the strength of our competitors and the capabilities of our sales and marketing teams. If we are not able to continue to attract new customers or to grow revenues from our existing customers, we may not be able to grow our revenues as quickly as we anticipate or at all.

 

We may be unable to effectively manage our expansion for the anticipated growth, which could place significant strain on our management personnel, systems and resources. We may not be able to achieve anticipated growth, which could materially and adversely affect our business and prospects.

 

We have expanded our operations recently for the anticipated growth. The number of our total employees grew from 154 in fiscal 2016 to 168 in fiscal 2017. As of the date of this prospectus, we have 231 full-time employees. We maintain five branches, of which are located in China (Beijing, Changsha, Wuhan, Nanning, and Hangzhou) to serve different customers in various geographic locations. In order to pursue existing and potential market opportunities, we plan to expand our business including (i) establishing new offices and expanding our current offices in China; (ii) exploring and expanding into international markets; and (iii) upgrading our existing services and introducing new services. We are facing the following challenges with respect to our planned expansion:

 

  recruiting, training, developing and retaining sufficient industry and technology talents and management personnel;

 

  creating and capitalizing upon economies of scale;

 

  managing a larger number of customers in a greater number of locations;

 

  maintaining effective oversight of personnel and offices;

 

11

 

  coordinating work among offices and project teams and maintaining high resource utilization rates;

 

  integrating new personnel and expanded operations while preserving our culture and core values;

 

  developing and improving our internal administrative infrastructure, particularly our financial, operational, human resources, communications and other internal systems, procedures and controls; and

 

  adhering to and further improving our service quality and process execution standards and maintaining high levels of customer satisfaction.

 

Moreover, as we introduce new services or enter into new markets, we may face new market, technological and operational risks and challenges with which we are unfamiliar, and it may require substantial management efforts and skills to mitigate these risks and challenges. As a result of any of these problems associated with expansion, our business, results of operations and financial condition could be materially and adversely affected. Furthermore, we may not be able to achieve anticipated growth, which could materially and adversely affect our business and prospects.

 

We face risks associated with having an extended selling and implementation cycle for our services that require us to make significant resource commitments prior to realizing revenues for those services.

 

We have an extended selling cycle for certain of our software applications and technology services, which requires significant investment of capital, human resources and time by both our customers and us. Before committing to use our services, potential customers require us to expend substantial time and resources educating them on the value of our services and our ability to meet their requirements. Therefore, our selling cycle is subject to many risks and delays over which we have little or no control, including our customers’ decision to choose alternatives to our services (such as other providers or in-house resources) and the timing of our customers’ budget cycles and approval processes. Implementing our services, particularly for our application development services also involves a significant commitment of resources over an extended period of time ranging from three months to three years from both our customers and us. Our customers may experience delays in obtaining internal approvals or delays associated with our services, thereby further delaying the implementation process. Our current and future customers may not be willing or able to invest the time and resources necessary to implement our services, and we may fail to close sales with potential customers to which we have devoted significant time and resources, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

Adverse changes in the economic environment, either in China or globally, could reduce our customers’ purchases from us and increase pricing pressure, which could materially and adversely affect our revenues and results of operations.   

 

The software application and technology service industry is particularly sensitive to the economic environment, both in China and globally, and tends to decline during general economic downturns. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to the economic environment, especially for regions in which we and our customers operate. During an economic downturn, our customers may cancel, reduce or defer their technology spending or change their technology strategy, and reduce their purchases from us. The recent global economic slowdown, any future economic slowdown, and the resulting diminution in technology spending, could also lead to increased pricing pressure from our customers. The trade war between the U.S. and China which may lead to higher percentage of tariff to be placed on Chinese and American goods and services could also lead to a reduction of import and export volume for some of our customers resulting in reduced purchases of our services from these customers. The occurrence of any of these events could materially and adversely affect our revenues and results of operations.

 

12

 

We generate a significant portion of our revenues from a relatively small number of major customers and loss of business from these customers could reduce our revenues and significantly harm our business.

 

We believe that in the foreseeable future we will continue to derive a significant portion of our revenues from a small number of major customers. For the year ended December 31, 2017, two major customers accounted for 17.2% and 13.1% of our total revenues, respectively. For the year ended December 31, 2016, three major customers accounted for 16.0%, 12.2%, and 10.0% of our total revenues, respectively. For the six months ended June 30, 2018, one major customer accounted for 16.7% of our total revenues. For the six months ended June 30, 2017, two major customers accounted for 29.8% and 18.7% of our total revenues, respectively.

 

Our ability to maintain close relationships with major customers is essential to the growth and profitability of our business. However, the volume of work performed for a specific customer is likely to vary from year to year, especially since we are generally not our customers’ exclusive technology services provider and we do not have long-term commitments from any of our customer to purchase our services. A major customer in one year may not provide the same level of revenues for us in any subsequent year. The services we provide to our customers, and the revenues and income from those services, may decline or vary as the type and quantity of services we provide changes over time. In addition, our reliance on any individual customer for a significant portion of our revenues may give that customer a certain degree of pricing leverage against us when negotiating contracts and terms of service. In addition, a number of factors other than our performance could cause the loss of or reduction in business or revenues from a customers, and these factors are not predictable. These factors may include organization restructuring, pricing pressure, changes to its technology strategy, switching to another services provider or returning work in-house. The loss of any of our major customers could adversely affect our financial condition and results of operations.

 

We may be forced to reduce the prices of our services due to increased competition and reduced bargaining power with our customers, which could lead to reduced revenues and profitability.

 

The software application and technology service industry in China is developing rapidly and related technology trends are constantly evolving. This results in the frequent introduction of new services and significant price competition from our competitors. We may be unable to offset the effect of declining average sales prices through increased sales volumes and or reductions in our costs. Furthermore, we may be forced to reduce the prices of our services in response to offerings made by our competitors. Finally, we may not have the same level of bargaining power we have enjoyed in the past when it comes to negotiating for the prices of our services, all of which could lead to reduced revenues and profitability.

 

A portion of our income is generated, and will in the future continue to be generated, on a project basis with a fixed price; we may not be able to accurately estimate costs and determine resource requirements in relation to our projects, which would reduce our margins and profitability.

 

A portion of our income is generated, and will continue to be generated, from fees we receive for our projects at a fixed price. Our projects often involve complex technologies, utilizing workforces with different skill sets and competencies, and must be completed within compressed timeframes and meet customer requirements that are subject to changes and increasingly stringent. In addition, some of our fixed-price projects are multi-year projects that require us to undertake significant projections and planning related to resource utilization and costs. If we fail to accurately assess the time and resources required for completing projects and to price our projects profitably, our business, results of operations and financial condition could be adversely affected.

 

Our revenues and results of operations are affected by seasonal trends.

 

Our business is affected by seasonal trends. In particular, our revenues are typically progressively higher in the second, third and fourth quarters of each year compared to the first quarter of each year due to seasonal trends, such as: (i) a general slowdown in business activities and a reduced number of working days during the first quarter of each year as a result of the Chinese New Year holiday period, and (ii) our customers in general tend to spend their technology and software budgets in the second half of the year and in particular the fourth quarter. Other factors that may cause our quarterly operating results to fluctuate include, among others, changes in general economic conditions in China and the impact of unforeseen events. We believe that our revenues will continue to be affected in the future by seasonal trends. As a result, you may not be able to rely on period to period comparisons of our operating results as an indication of our future performance, and we believe it is more meaningful to evaluate our business on an annual basis.

 

13

 

If we are unable to collect our receivables from our existing customers, our results of operations and cash flows could be adversely affected.

 

Our business depends on our ability to successfully obtain payment from our customers of the amounts they owe us for our services. As of June 30, 2018 and December 31, 2017 and 2016, our accounts receivable balance, net of allowance, amounted to approximately $15.1 million, $13.1 million and $5.1 million, respectively. As of June 30, 2018, two customers accounted for 18.1% and 11.2% of the Company’s accounts receivable, respectively. As of December 31, 2017, four customers accounted for 18.7%, 15.9%, 13.5%, and 10.8% of our accounts receivable, respectively. As of December 31, 2016, three customers accounted for 29.7%, 18.2% and 11.2% of our accounts receivables, respectively. The significant outstanding accounts receivable balance was mainly related to certain projects for our government customers such as government agencies, authorities and state-owned enterprises. Due to multiple levels of the government approval process for payments, it could take extra time for us to collect the full proceeds from our government customers. In addition, since we generally do not require collateral or other security from our customers, we establish an allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding the credit risk of specific customers. However, actual losses on customer receivables balance could differ from those that we anticipate and as a result we might need to adjust our allowance. There is no guarantee that we will accurately assess the creditworthiness of our customers. Macroeconomic conditions, including related turmoil in the global financial system, could also result in financial difficulties for our customers, including limited access to the credit markets, insolvency or bankruptcy, and as a result could cause customers to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. As a result, an extended delay or default in payment relating to a significant account will have a material and adverse effect on the aging schedule and turnover days of our accounts receivable. If we are unable to collect our receivables from our customers in accordance with the contracts with our customers, our results of operations and cash flows could be adversely affected.

 

We face a number of risks in our strategy to target larger organizations for sales of our services, and if we do not manage these efforts effectively, our business and results of operations could be adversely affected.

 

A portion of our sales and marketing efforts is focusing on larger corporate and government organizations. As a result, we face a number of risks with respect to this strategy. For example, we expect to incur higher costs and longer sales cycles for larger organizations, and we may be less effective at predicting when we will complete these sales. In our industry, the decision to invest in our services may require a great number of product evaluations and multiple approvals within a potential customer’s organization, which may require us to invest more time educating these potential customers. In addition, larger organizations may demand more features and professional services. As a result, these sales opportunities would likely lengthen our typical sales cycle and may require us to devote greater research and development, sales, support, and professional services resources to individual customers. This could strain our resources and result in increased costs. Moreover, larger customers may demand discounts in pricing, which could lower the amount of revenue we generate from any particular service we offer. If an expected transaction is delayed until a subsequent period, or if we are unable to close one or more expected significant transactions with larger customers or potential new customers in a particular period, our results of operations for that period, and for any future periods in which revenue from such transaction would otherwise have been recognized, may be adversely affected. Our investments in marketing and selling to large organizations may not be successful, which could harm our results of operations and our overall ability to grow our customer base.

 

Our business depends, in part, on services to the public sector, and significant changes in the contracting or fiscal policies of the public sector could have an adverse effect on our business.

 

We derive a large portion of our revenue from our services to government organizations, and we believe that the success and growth of our business will continue to depend in part on our successful procurement of government contracts. Factors that could impede our ability to maintain or increase the amount of revenue derived from government contracts, include:

 

  changes in fiscal or contracting policies;

 

  decreases in available government funding;

 

  changes in government programs or applicable requirements;

 

  the adoption of new laws or regulations or changes to existing laws or regulations; and

 

  potential delays or changes in the government appropriations or other funding authorization processes.

 

The occurrence of any of the foregoing could cause governmental organizations to delay or refrain from purchasing our services in the future or otherwise have an adverse effect on our business, results of operations and financial condition.

 

14

 

Any failure to offer high-quality customer support may adversely affect our relationships with our customers.

 

Our ability to retain existing customers and attract new customers depends on our ability to maintain a consistently high level of customer service and technical support. Our customers depend on our service support team to assist them in utilizing our services effectively and to help them to resolve issues quickly and to provide ongoing support. If we are unable to hire and train sufficient support resources or are otherwise unsuccessful in assisting our customers effectively, it could adversely affect our ability to retain existing customers and could prevent prospective customers from adopting to our services. We may be unable to respond quickly enough to accommodate short-term increases in demand for customer support. We also may be unable to modify the nature, scope and delivery of our customer support to compete with changes in the support services provided by our competitors. Increased demand for customer support, without corresponding revenue, could increase our costs and adversely affect our business, results of operations and financial condition. Our sales are highly dependent on our business reputation and on positive recommendations from customers. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality customer support, could adversely affect our reputation, business, results of operations and financial condition.

 

Incorrect or improper implementation or use of our services could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition, and growth prospects.

 

Our services are deployed in a wide variety of increasingly complex technology environments, including on premises, in the cloud or in hybrid environments. We believe our future success will depend on our ability to increase sales of our services for use in such deployments. We must often assist our customers in achieving successful implementations of our services, which we do through our professional consulting and technical support services. If our customers are unable to implement our services successfully, or unable to do so in a timely manner, customer perceptions of our services may be harmed, our reputation and brand may suffer, and customers may choose to cease usage of our services or not to expand their use of our services. Our customers may need training in the proper use of and the variety of benefits that can be derived from our services to maximize their benefits. If our services are not effectively implemented or used correctly or as intended, or if we fail to adequately train customers on how to efficiently and effectively use our services, our customers may not be able to achieve satisfactory outcomes. This could result in negative publicity and legal claims against us, which may cause us to generate fewer sales to new customers and reductions in renewals or expansions of the use of our services with existing customers, any of which would harm our business and results of operations.

 

Failure to adhere to regulations that govern our customers’ businesses could result in breaches of contracts with our customers. Failure to adhere to the regulations that govern our business could result in our being unable to effectively perform our services.

 

Our customers’ business operations are subject to certain rules and regulations in China or elsewhere. Our customers may contractually require that we perform our services in a manner that would enable them to comply with such rules and regulations. Failure to perform our services in such manner could result in breaches of contract with our customers and, in some limited circumstances, civil fines and criminal penalties for us. In addition, we are required under various Chinese laws to obtain and maintain permits and licenses to conduct our business. If we do not maintain our licenses or other qualifications to provide our services, we may not be able to provide services to existing customers or be able to attract new customers and could lose revenues, which could have a material adverse effect on our business and results of operations.

 

If our new enhancements to our services do not achieve sufficient market acceptance, our financial results and competitive position will suffer.

 

We spend substantial amounts of time and money to research and develop new enhancements of our services to incorporate additional features, improve functionality or other enhancements in order to meet our customers’ rapidly evolving demands. When we develop an enhancement to our services, we typically incur expenses and expend resources upfront to develop, market and promote the new enhancements. Therefore, when we develop and introduce new enhancements to our services, they must achieve high levels of market acceptance in order to justify the amount of our investment in developing and bringing them to market. If our new enhancements to our services do not garner widespread market adoption and implementation, our growth prospects, future financial results and competitive position could suffer.

 

15

 

If we cause disruptions to our customers’ businesses or provide inadequate service, our customers may have claims for substantial damages against us, and as a result our profits may be substantially reduced.

 

If we make errors in the course of delivering services to our customers or fail to consistently meet service requirements of a customer, these errors or failures could disrupt the customer’s business, which could result in a reduction in our net revenues or a claim for substantial damages against us. In addition, a failure or inability to meet a contractual requirement could seriously damage our reputation and affect our ability to attract new business.

 

The services we provide are often critical to our customers’ businesses. We generally provide customer support after our customized application is delivered. Certain of our customer contracts require us to comply with security obligations including maintaining system security, ensuring our system is virus-free, maintaining business continuity procedures, and verifying the integrity of employees that work with our customers by conducting background checks. Any failure in a customer’s system or breach of security relating to the services we provide to the customer could damage our reputation or result in a claim for substantial damages against us. Any significant failure of our systems could impede our ability to provide services to our customers, have a negative impact on our reputation, cause us to lose customers, reduce our revenues and harm our business.

 

Unauthorized disclosure, destruction or modification of data, through cybersecurity breaches, computer viruses or otherwise or disruption of our services could expose us to liability, protracted and costly litigation and damage our reputation.

 

Our business involves the collection, storage, processing and transmission of customers’ business data. An increasing number of organizations, including large merchants and businesses, other large technology companies, financial institutions and government institutions, have disclosed breaches of their information technology systems, some of which have involved sophisticated and highly targeted attacks, including on portions of their websites or infrastructure. We could also be subject to breaches of security by hackers. Threats may derive from human error, fraud or malice on the part of employees or third parties, or may result from accidental technological failure. Concerns about security are increased when we transmit information. Electronic transmissions can be subject to attack, interception or loss. Also, computer viruses and malware can be distributed and spread rapidly over the internet and could infiltrate our systems or those of our associated participants, which can impact the confidentiality, integrity and availability of information, and the integrity and availability of our products, services and systems, among other effects. Denial of service or other attacks could be launched against us for a variety of purposes, including interfering with our services or creating a diversion for other malicious activities. These types of actions and attacks could disrupt our delivery of products and services or make them unavailable, which could damage our reputation, force us to incur significant expenses in remediating the resulting impacts, expose us to uninsured liability, subject us to lawsuits, fines or sanctions, distract our management or increase our costs of doing business.

 

Our encryption of data and other protective measures may not prevent unauthorized access or use of sensitive data. A breach of our system or that of one of our associated participants may subject us to material losses or liability. A misuse of such data or a cybersecurity breach could harm our reputation and deter customers from using our products and services, thus reducing our revenue. In addition, any such misuse or breach could cause us to incur costs to correct the breaches or failures, expose us to uninsured liability, increase our risk of regulatory scrutiny, subject us to lawsuits, result in the imposition of material penalties and fines under applying laws or regulations.

 

We cannot assure that there are written agreements in place with every associated participant or that such written agreements will prevent the unauthorized use, modification, destruction or disclosure of data or enable us or our customers to obtain reimbursement in the event we should suffer incidents resulting in unauthorized use, modification, destruction or disclosure of data. Any unauthorized use, modification, destruction or disclosure of data could result in protracted and costly litigation, which could have a material adverse effect on our business, financial condition and results of operations.

 

Cybersecurity incidents are increasing in frequency and evolving in nature and include, but are not limited to, installation of malicious software, unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. Given the unpredictability of the timing, nature and scope of information technology disruptions, there can be no assurance that the procedures and controls we employ will be sufficient to prevent security breaches from occurring and we could be subject to manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

16

 

Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business, results of operations, and financial condition.

 

Our continued growth depends in part on the ability of our existing customers and new customers to access our SaaS services, at any time and within an acceptable amount of time. We may in the future experience, service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors or capacity constraints. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance as our SaaS services become more complex. If our services are unavailable or if our customers are unable to access features of our services within a reasonable amount of time or at all, our business would be negatively affected.

 

We currently provide our SaaS services via designated data centers and we intend to outsource our cloud infrastructure to commercial available cloud infrastructure as a service providers (“IaaS”), which can host our services. Our customers need to be able to access our services at any time, without interruption or degradation of performance. IaaS providers run their own platforms that we access, and we are, therefore, vulnerable to service interruptions. We expect that in the future we may experience interruptions, delays and outages in service and availability from time to time due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks. In addition, if our security, or that of IaaS providers, is compromised, our services are unavailable or our customers are unable to use our services within a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely affected. In some instances, we expect that we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It may become increasingly difficult to maintain and improve our service performance, especially during peak usage times, as the features of our services become more complex and the usage of our services increases. Any of the above circumstances or events may harm our reputation, cause customers to stop using our services, impair our ability to increase revenue from existing customers, impair our ability to grow our customer base and otherwise harm our business, results of operations, and financial condition.

 

The market for our BaaS (blockchain-as-a-service) services is new and unproven, which could result in limited customer adoption of our services, limited customer retention, or weaker customer expansion.

 

We plan to introduce our BaaS (blockchain-as-a-service) services as pilot projects on a limited basis to selective customers in the first quarter of 2019. While we believe that, over time, the concept of a BaaS services will become fundamental to an organization’s core operations involving global trade, the market for BaaS services is largely unproven and is subject to a number of risks and uncertainties.

 

The market for BaaS services is new and less mature than traditional on-premises software applications, and the adoption rate for BaaS services may be slower among customers with business practices requiring highly customizable application software. Our success with BaaS services will depend to a substantial extent on the widespread adoption of BaaS services in general, but we cannot be certain that the trend of adoption of BaaS services will continue in the future. In particular, many organizations have invested substantial personnel and financial resources in integrating traditional software into their businesses over time, and some may be reluctant or unwilling to migrate to BaaS. It is difficult to predict customer adoption rates and demand for our BaaS services, the future growth rate and size of the BaaS services market or the entry of competitive applications. The expansion of the BaaS services market depends on a number of factors, including the cost, performance and perceived value associated with BaaS. Our current cost for BaaS’s research and development is approximately $700,000 per annum. If BaaS services do not continue to achieve market acceptance, or there is a reduction in demand for BaaS services caused by a lack of customer acceptance, technological challenges, weakening economic conditions, data security or privacy concerns, governmental regulation, competing technologies and services or decreases in information technology spending, it would result in decreased revenues and our business would be adversely affected.

 

17

 

It is difficult to predict our future operating results.

 

Our ability to accurately forecast our future operating results is limited and subject to a number of uncertainties, including planning for and modeling future growth. We have encountered, and will continue to encounter, risks, and uncertainties frequently experienced by growing companies in rapidly changing industries. If our assumptions regarding these risks and uncertainties, which we use to plan our business, are incorrect or change due to industry or market developments, or if we do not address these risks successfully, our operating results could differ materially from our expectations and our business could suffer.

 

If we have overestimated the size of our total addressable market, our future growth rate may be limited.

 

We have estimated the size of our total addressable market based on data published by third parties and internally generated data and assumptions. We have not independently verified any third-party information and cannot be assure of its accuracy or completeness. While we believe our market size estimates are reasonable, such information is inherently imprecise. In addition, our projections, assumptions and estimates of opportunities within our market are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including but not limited to those described in this prospectus. If this third-party or internally generated data prove to be inaccurate or we make errors in our assumptions based on that data, our actual market may be more limited than our estimates. In addition, these inaccuracies or errors may cause us to misallocate capital and other critical business resources, which could harm our business.

 

Even if our total addressable market meets our size estimates and experiences growth, we may not continue to grow our share of the market. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the estimates of our total addressable market included in this prospectus should not be taken as indicative of our ability to grow our business. For more information regarding the estimates of market opportunity and the forecasts of market growth included in this prospectus, see the sections titled “Industry Background” and “Business—Our Opportunity.”

 

We face intense competition from onshore and offshore software application and technology service providers, and, if we are unable to compete effectively, we may lose customers and our revenues may decline.

 

The market for software application and technology services is highly competitive and we expect competition to persist and intensify. We believe that the principal competitive factors in our markets are domain knowledge and industry expertise, breadth and depth of service offerings, quality of the services offered, reputation and track record, marketing and selling skills, scalability of technology infrastructure and price. In the software application and technology services market, customers tend to engage multiple service providers instead of using an exclusive service provider, which could reduce our revenues to the extent that customers obtain services from other competing providers. Our ability to compete also depends in part on a number of factors beyond our control, including the ability of our competitors to recruit, train, develop and retain highly skilled professionals, the price at which our competitors offer comparable services and our competitors’ responsiveness to customer needs. Therefore, we cannot assure you that we will be able to retain our customers while competing against such competitors. Increased competition, our inability to compete successfully against competitors, pricing pressures or loss of market share could harm our business, financial condition and results of operations.

 

Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, which could harm our business.

 

We believe that our culture has been and will continue to be a key contributor to our success. Since December 31, 2017, we have increased the size of our workforce by over 60 employees, and we expect to continue to hire aggressively as we expand. If we do not continue to maintain our corporate culture as we grow, we may be unable to foster the innovation, creativity, and teamwork we believe we need to support our growth. Our substantial anticipated headcount growth and our transition from a private company to a public company may result in a change to our corporate culture, which could harm our business.

 

18

 

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

 

Our future success heavily depends upon the continued services of our senior executives and other key employees. If one or more of our senior executives or key employees are unable or unwilling to continue in their present positions, it could disrupt our business operations, and we may not be able to replace them easily or at all. In addition, competition for senior executives and key personnel in our industry is intense, and we may be unable to retain our senior executives and key personnel or attract and retain new senior executive and key personnel in the future, in which case our business may be severely disrupted, and our financial condition and results of operations may be materially and adversely affected. If any of our senior executives or key personnel joins a competitor or forms a competing company, we may lose customers, suppliers, know-how and key professionals and staff members to them. Also, if any of our business development managers, who generally keep a close relationship with our customers, joins a competitor or forms a competing company, we may lose customers, and our revenues may be materially and adversely affected. Additionally, there could be unauthorized disclosure or use of our technical knowledge, practices or procedures by such personnel. All of our executives and key personnel have entered into employment agreements with us that contain non-competition provisions, non-solicitation and nondisclosure covenants. However, if any dispute arises between our executive officers and key personnel and us, such non-competition, non-solicitation and nondisclosure provisions might not provide effective protection to us, especially in China, where most of these executive officers and key employees reside, in light of the uncertainties with China’s legal system.

 

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

 

The software application and technology service industry relies on skilled personnel, and our success depends to a significant extent on our ability to recruit, train, develop and retain qualified personnel, especially experienced middle and senior level management. There is significant competition for skilled personnel, especially experienced middle and senior level management, with the skills necessary to perform the services we offer to our customers. Increased competition for these personnel, in the software application and technology service industry or otherwise, could have an adverse effect on us. We have established certain programs to increase our human capital and employee loyalty, however, a significant increase in our attrition rate could decrease our operating efficiency and productivity and could lead to a decline in demand for our services. Additionally, failure to recruit, train, develop and retain personnel with the qualifications necessary to fulfill the needs of our existing and future customers or to assimilate new personnel successfully could have a material adverse effect on our business, financial condition and results of operations. Failure to retain our key personnel on customer projects or find suitable replacements for key personnel upon their departure may lead to termination of some of our customer contracts or cancellation of some of our projects, which could materially and adversely affect our business.

 

Our profitability will suffer if we are not able to maintain our resource utilization levels and continue to improve our productivity levels.

 

Our gross margin and profitability are significantly impacted by our utilization levels of human resources as well as our ability to increase our productivity levels. We have expanded our operations in recent years through organic growth, which has resulted in a significant increase in our headcount and fixed overhead costs. We may face difficulties maintaining high levels of utilization. Although we try to use all commercially reasonable efforts to accurately estimate service and resource requirements from our customers, we may overestimate or underestimate, which may result in unexpected cost and strain or redundancy of our human capital and adversely impact our utilization levels. In addition, some of our professionals are specially trained to work for specific customers or on specific projects and some of our sales are dedicated to specific customers or specific projects. Our ability to continually increase our productivity levels depends significantly on our ability to recruit, train, develop and retain high-performing professionals and project staffs appropriately and optimize our mix of services and delivery methods. If we experience a slowdown or stoppage of service for any customer or on any project for which we have dedicated professionals or project staffs, we may not be able to efficiently reallocate these professionals and project staffs to other customers and projects to keep their utilization and productivity levels high. If we are not able to maintain high resource utilization levels without corresponding cost reductions or price increases, our profitability will suffer.

 

19

 

If we are not able to maintain a strong brand for our services and increase market awareness of our company and our services, then our business, results of operations and financial condition may be adversely affected.

 

We believe that we have a strong brand in our industry and the continuing success of our services will depend in part on our ability to develop and sustain a strong brand identity for our services and to increase the market awareness of our services and their capabilities. The successful promotion of our brand will depend largely on our continued marketing efforts and our ability to offer high quality services to our customers. Our brand promotion activities may not be successful or produce increased revenue. In addition, independent industry analysts may provide reviews of our services and of competing products and services, which may significantly influence the perception of our services in the marketplace. If these reviews are negative or not as positive as reviews of our competitors’ products and services, then our brand may be harmed.

 

The promotion of our brand also requires us to make substantial expenditures, and we anticipate that these expenditures will increase as our industry becomes more competitive and as we seek to expand into new markets. These higher expenditures may not result in any increased revenue or incremental revenue that is sufficient to offset the higher expense levels. If we do not successfully maintain and enhance our brand, then our business may not grow, we may see our pricing power reduced relative to competitors and we may lose customers, all of which would adversely affect our business, results of operations and financial condition.

 

We may be unsuccessful in entering into strategic alliances or identifying and acquiring suitable acquisition candidates, which could impede our growth and negatively affect our revenues and net income.

 

We have pursued strategic alliances and intend to pursue strategic acquisition opportunities to increase our scale and geographic presence, expand our service offerings and capabilities and enhance our industry and technical expertise. However, it is possible that in the future we may not succeed in identifying suitable alliances or acquisition candidates. Even if we identify suitable candidates, we may not be able to consummate these arrangements on terms commercially acceptable to us or to obtain necessary regulatory approvals in the case of acquisitions. Challenges we face in the potential acquisition and integration process include:

 

  integrating operations, services and personnel in a timely and efficient manner;

 

  unforeseen or undisclosed liabilities;

 

  generating sufficient revenue and net income to offset acquisition costs;

 

  potential loss of, or harm to, employee or customer relationships;

 

  properly structuring our acquisition consideration and any related post-acquisition earn-outs and successfully monitoring any earn-out calculations and payments;

 

  retaining key senior management and key sales and marketing and research and development personnel;

 

  potential incompatibility of solutions, services and technology or corporate cultures;

 

  consolidating and rationalizing corporate, information technology and administrative infrastructures;

 

  integrating and documenting processes and controls;

 

  entry into unfamiliar markets; and

 

  increased complexity from potentially operating additional geographically dispersed sites, particularly if we acquire a company or business with facilities or operations outside of China.

 

Furthermore, many of our competitors are likely to be seeking to enter into similar arrangements or acquire the same targets that we are looking to enter into or acquire. Such competitors may have substantially greater financial resources than we do and may be more attractive to our strategic partners or be able to outbid us for the acquisition targets. In addition, we may also be unable to timely deploy our existing cash balances to effect a potential acquisition, as use of cash balances located onshore in China may require specific governmental approvals or result in withholding and other tax payments. If we are unable to enter into suitable strategic alliances or complete suitable acquisitions, our growth strategy may be impeded and our revenues and net income could be negatively affected.  

 

20

 

Some of our technology incorporates “open source” software, which could negatively affect our ability to sell our services and subject us to possible litigation.

 

Some aspects of our technology platforms from which we develop our services, are built using open source software, and we intend to continue to use open source software in the future. The terms of certain open source licenses to which we are subject have not been interpreted by U.S., China or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to monetize our services. Additionally, we may from time to time face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we developed using such software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to make our software source code freely available, purchase a costly license or cease offering the implicated services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources, and we may not be able to complete it successfully. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. Any of these risks could be difficult to eliminate or manage, and if not addressed, could have a negative effect on our business, results of operations and financial condition.

 

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

 

We are typically required to manage, utilize and store sensitive or confidential customer data in connection with the services we provide. Under the terms of our customer contracts, we are required to keep such information strictly confidential. We use system and network security technologies and other methods to protect sensitive and confidential customer data. We also require our employees and subcontractors to enter into confidentiality agreements to limit access to and distribution of our customers’ sensitive and confidential information as well as our own trade secrets. We can give no assurance that the steps taken by us in this regard will be adequate to protect our customers’ confidential information. If our customers’ proprietary rights are misappropriated by our employees or our subcontractors or their employees, in violation of any applicable confidentiality agreements or otherwise, our customers may consider us liable for those acts and seek damages and compensation from us. Any such acts could cause us to lose existing and future business and damage our reputation in the market. In addition, we currently do not have any insurance coverage for mismanagement or misappropriation of such information by our subcontractors or employees. Any litigation with respect to unauthorized disclosure of sensitive and confidential information might result in substantial costs and diversion of resources and management attention.

 

We may not be able to prevent others from unauthorized use of our intellectual property, which could cause a loss of customers, reduce our revenues and harm our competitive position.

 

We rely on a combination of patent, copyright, trademark, software registration, anti-unfair competition and trade secret laws, as well as confidentiality agreements and other methods to protect our intellectual property rights. To protect our trade secrets and other proprietary information, employees, customers, subcontractors, consultants, advisors and collaborators are required to enter into confidentiality agreements. These agreements might not provide effective protection for the trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. Implementation of intellectual property-related laws in China has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as those in the United States or other developed countries, and infringement of intellectual property rights continues to pose a serious risk of doing business in China. Our patent applications may not issue as patents or may not issue as patents that provide meaningful protection against third parties. Policing unauthorized use of proprietary technology is difficult and expensive. The steps we have taken may be inadequate to prevent the misappropriation of our proprietary technology. Reverse engineering, unauthorized copying, other misappropriation, or negligent or accidental leakage of our proprietary technologies could enable third parties to benefit from our technologies without obtaining our consent or paying us for doing so, which could harm our business and competitive position. Though we are not currently involved in any litigation with respect to intellectual property, we may need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual property may not prove successful and might result in substantial costs and diversion of resources and management attention.

 

21

 

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

 

Our success largely depends on our ability to use and develop our technology and services without infringing the intellectual property rights of third parties, including copyrights, trade secrets and trademarks. We may be subject to litigation involving claims of violation of other intellectual property rights of third parties. The holders of other intellectual property rights potentially relevant to our service offerings may make it difficult for us to acquire a license on commercially acceptable terms. Also, we may be unaware of intellectual property registrations or applications relating to our services that may give rise to potential infringement claims against us. There may also be technologies licensed to and relied on by us that are subject to infringement or other corresponding allegations or claims by third parties which may damage our ability to rely on such technologies. We are subject to additional risks as a result of our recent and proposed acquisitions and the hiring of new employees who may misappropriate intellectual property from their former employers. Parties making infringement claims may be able to obtain an injunction to prevent us from delivering our services or using technology involving the allegedly infringing intellectual property. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. A successful infringement claim against us, whether with or without merit, could, among others things, require us to pay substantial damages, develop non-infringing technology, or re-brand our name or enter into royalty or license agreements that may not be available on acceptable terms, if at all, and cease making, licensing or using products that have infringed a third party’s intellectual property rights. Protracted litigation could also result in existing or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation, or could require us to indemnify our customers against infringement claims in certain instances. Any intellectual property claim or litigation in this area, whether we ultimately win or lose, could damage our reputation and have a material adverse effect on our business, results of operations or financial condition.

 

We use third-party licensed software in or with our services, and the inability to maintain these licenses or errors in the software services we provide could result in increased costs or reduced service levels, which would adversely affect our business.

 

Our services incorporate certain third-party software obtained under licenses from other companies. We anticipate that we will continue to rely on such third-party software and development tools in the future. Such third-party companies may discontinue their products, go out of business or otherwise cease to make support available for such third-party software. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. In addition, integration of the software used in our services with new third-party software may require significant work and substantial investment of our time and resources. Also, to the extent that our services depends upon the successful operation of third-party software in conjunction with our software, any undetected errors or defects in such third-party software could prevent the deployment or impair the functionality of our services, delay new feature introductions, result in a failure of our services and injure our reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties. In the event that we are not able to maintain our licenses to third-party software, or cannot obtain licenses to new software as needed to enhance our services, our business and results of operations may be adversely affected.

 

22

 

We may need additional capital and any failure by us to raise additional capital on terms favorable to us, or at all, could limit our ability to grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges.

 

We believe that our current cash and cash flow from operations would be sufficient to meet our anticipated cash needs for at least the next 12 months from the closing of this Offering. However, in order to capitalize on the growing needs of global trade software applications and technology services as a result of the growth in China’s global trade and rapid advancement of the B&R, we intend to expand to capture additional market shares. Thus, we may however, require additional cash resources for our research and development, sales and market and potential strategic alliances and acquisitions, including the proceeds of the Offering. If these cash resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financing covenants that would restrict our operations. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:

 

  investors’ perception of, and demand for, securities of technology services outsourcing companies;

 

  conditions of the U.S. and other global markets in which we may seek to raise funds;

 

  our future results of operations and financial condition;

 

  PRC government regulation of foreign investment in China;

 

  economic, political and other conditions in China; and

 

  PRC government policies relating to the borrowing and remittance outside China of foreign currency.

 

In the event that we are in need of additional financing, such financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to grow our business and develop or enhance our solution and service offerings to respond to market demand or competitive challenges.

 

Failure to comply with anti-bribery, anti-corruption, and anti-money laundering laws could subject us to penalties and other adverse consequences.

 

We are subject to anti-corruption, anti-bribery and anti-money laundering laws in China and various other jurisdictions. From time to time, we leverage third party partners and intermediaries, including channel partners, to sell our services. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated organizations and may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, channel partners, and agents, even if we do not explicitly authorize such activities. While we have policies and procedure to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. Any violation of the applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, severe criminal or civil sanctions, or suspension or debarment from government contracts, all of which may have an adverse effect on our reputation, business, operating results and prospects.

 

We may incur losses resulting from business interruptions resulting from occurrence of natural disasters, health epidemics and other outbreaks or events.

 

Our operational facilities may be damaged in natural disasters such as earthquakes, floods, heavy rains, sand storms, tsunamis and cyclones, or other events such as fires. Such natural disasters or other events may lead to disruption of information systems and telephone service for sustained periods. Damage or destruction that interrupts our provision of services could damage our relationships with our customers and may cause us to incur substantial additional expenses to repair or replace damaged equipment or facilities. We may also be liable to our customers for disruption in service resulting from such damage or destruction. Prolonged disruption of our services as a result of natural disasters or other events may also entitle our customers to terminate their contracts with us. We currently do not have insurance against business interruptions.

 

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Fluctuation in the value of the Renminbi and other currencies may have a material adverse effect on the value of your investment.

 

Our financial statements are expressed in U.S. dollars. However, a majority of our revenues and expenses are denominated in Renminbi. Our exposure to foreign exchange risk primarily relates to the limited cash denominated in currencies other than the functional currencies of each entity. We do not believe that we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. However, the value of your investment in our Ordinary Shares will be affected by the foreign exchange rate between U.S. dollars and RMB because the primary value of our business is effectively denominated in RMB, while the Ordinary Shares will be traded in U.S. dollars.

 

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. The People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rate and achieve certain exchange rate targets, and through such intervention kept the U.S. dollar-RMB exchange rate relatively stable.

 

As we may rely on dividends paid to us by our PRC subsidiary and branches, any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of any dividends payable on our Ordinary Shares in foreign currency terms. For example, to the extent that we need to convert U.S. dollars we receive from this Offering into for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our Ordinary Shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. Furthermore, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign exchange losses in the future. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert into foreign currencies. 

 

As we plan to expand internationally, our business will become more susceptible to risks associated with international operations.

 

Historically, we have generated all of our revenue from customers in PRC. We plan to expand our market coverage internationally, with a focus on B&R countries, including countries in Asia and Eastern Europe, Middle East, Africa and South America. Conducting international operations subjects us to risks that we have not generally faced in the PRC. These risks include:

 

  challenges caused by distance, language, cultural and ethical differences and the competitive environment;

 

  heightened risks of unethical, unfair or corrupt business practices, actual or claimed, in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements;

 

  application of multiple and conflicting laws and regulations, including complications due to unexpected changes in foreign laws and regulatory requirements;

 

  risks associated with trade restrictions and foreign import requirements, including the importation, certification and localization of our solutions required in foreign countries, as well as changes in trade, tariffs, restrictions or requirements;

 

  new and different sources of competition;

 

  potentially different pricing environments, longer sales cycles and longer accounts receivable payment cycles and collections issues;

 

  management communication and integration problems resulting from cultural differences and geographic dispersion;

 

  greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods;

 

  the uncertainty and limitation of protection for intellectual property rights in some countries;

 

  increased financial accounting and reporting burdens and complexities;

 

  lack of familiarity with locals laws, customs and practices, and laws and business practices favoring local competitors or partners; and

 

  political, social and economic instability abroad, terrorist attacks and security concerns in general.

 

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Any of these risks could adversely affect our business. For example, compliance with laws and regulations applicable to our international operations increases our cost of doing business in foreign jurisdictions. We may be unable to keep current with changes in government requirements as they change from time to time. Failure to comply with these regulations could have adverse effects on our business. In addition, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or applicable PRC laws and regulations. As we grow, we continue to implement compliance procedures designed to prevent violations of these laws and regulations. There can be no assurance that all of our employees, contractors, resellers, and agents will comply with the formal policies we will implement, or applicable laws and regulations. Violations of laws or key control policies by our employees, contractors, resellers, or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties, or the prohibition of the import or export of our software and services, and could have a material adverse effect on our business and results of operations.

 

Further, our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully, or in a timely manner, our business and results of operations will suffer.

 

Our international operations may subject us to potential adverse tax consequences.

 

We plan to expand our international operations and staff to better support our growth into international markets. Our corporate structure and associated transfer pricing policies contemplate future growth into the international markets, and consider the functions, risks and assets of the various entities involved in the intercompany transactions. The amount of taxes we pay in different countries and jurisdictions may depend on the application of the tax laws of the various countries and jurisdictions, including the United States, to our international business activities, changes in tax rates, new or revised tax laws or interpretations of existing tax laws and policies and our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the countries and jurisdictions in which we operate may challenge our methodologies for pricing intercompany transactions pursuant to our intercompany arrangements or disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a challenge or disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Our financial statements could fail to reflect adequate reserves to cover such a contingency.

 

Risks Relating to Our Corporate Structure

 

We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, shareholders may have less protection for their shareholder rights than they would under U.S. law.

 

Our corporate affairs are governed by our Second Amended and Restated Memorandum and Articles of Association, the Cayman Islands Companies Law (Revised) (the “Companies Law”) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a different body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as shareholders of a U.S. public company.

 

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Judgments obtained against us by our shareholders may not be enforceable.

 

We are a Cayman Islands company and all of our assets are located outside of the United States. Our current operations are based in China. In addition, the majority of our current directors and executive officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

 

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

 

The determination of our status as a foreign private issuer is made annually on the last business day of our most recently completed second fiscal quarter and, accordingly, the next determination will be made with respect to us on or after [●]. We would lose our foreign private issuer status if (1) a majority of our outstanding voting securities are directly or indirectly held of record by U.S. residents, and (2) a majority of our shareholders or a majority of our directors or management are U.S. citizens or residents, a majority of our assets are located in the United States, or our business is administered principally in the United States. If we were to lose our foreign private issuer status, the regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. We may also be required to modify certain of our policies to comply with corporate governance practices associated with U.S. domestic issuers, which would involve additional costs.

 

We will likely not pay dividends in the foreseeable future.

 

Dividend policy is subject to the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements and other factors. We have never declared a dividend. There is no assurance that our board of directors will declare dividends even if we are profitable. The payment of dividends by entities organized in China is subject to limitations as described herein. Under Cayman Islands law, we may only pay dividends from profits of the Company, or credits standing in the Company’s share premium account, and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our Company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital. Pursuant to the Chinese enterprise income tax law, dividends payable by a foreign investment entity to its foreign investors are subject to a withholding tax of 10%. Similarly, dividends payable by a foreign investment entity to its Hong Kong investor who owns 25% or more of the equity of the foreign investment entity is subject to a withholding tax of 5%. The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. The transfer to this reserve must be made before distribution of any dividend to shareholders.

 

Our business may be materially and adversely affected if our Chinese subsidiary declare bankruptcy or become subject to a dissolution or liquidation proceeding.

 

The Enterprise Bankruptcy Law of China provides that an enterprise may be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts. Our Chinese subsidiary holds certain assets that are important to our business operations. If our Chinese subsidiary undergo a voluntary or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

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As a “controlled company” under the rules of the NASDAQ Capital Market, we may choose to exempt our company from certain corporate governance requirements that could have an adverse effect on our public shareholders.

 

Prior to the completion of this Offering, our directors and officers beneficially own a majority of the voting power of our outstanding Ordinary Shares. Even if we raise the maximum offering amount, we may continue to be a “controlled company.” Under the Rule 4350(c) of the NASDAQ Capital Market, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirement that a majority of our directors be independent, as defined in the NASDAQ Capital Market Rules, and the requirement that our compensation and nominating and corporate governance committees consist entirely of independent directors. Although we do not intend to rely on the “controlled company” exemption under the NASDAQ listing rules, we could elect to rely on this exemption in the future. If we elect to rely on the “controlled company” exemption, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. Accordingly, during any time while we remain a controlled company relying on the exemption and during any transition period following a time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject to all of the NASDAQ Capital Market corporate governance requirements. Our status as a controlled company could cause our Ordinary Share to look less attractive to certain investors or otherwise harm our trading price.

 

Risks Related to Doing Business in China

 

Adverse changes in political, economic and other policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could materially and adversely affect the growth of our business and our competitive position.

 

Currently, all of our business operations are conducted in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. Although the PRC economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between the Renminbi and foreign currencies, and regulate the growth of the general or specific market. While the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically and among various sectors of the economy. Furthermore, the current global economic crisis is adversely affecting economies throughout the world. As the PRC economy has become increasingly linked with the global economy, China is affected in various respects by downturns and recessions of major economies around the world. The various economic and policy measures enacted by the PRC government to forestall economic downturns or bolster China’s economic growth could materially affect our business. Any adverse change in the economic conditions in China, in policies of the PRC government or in laws and regulations in China could have a material adverse effect on the overall economic growth of China and market demand for our outsourcing services. Such developments could adversely affect our businesses, lead to reduction in demand for our services and adversely affect our competitive position.

 

Uncertainties with respect to the PRC legal system could have a material adverse effect on us.

 

The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since the late 1970s, the PRC government has been building a comprehensive system of laws and regulations governing economic matters in general. The overall effect has been to significantly enhance the protections afforded to various forms of foreign investments in China. We conduct our business primarily through our subsidiary established in China. This subsidiary is generally subject to laws and regulations applicable to foreign investment in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us. In addition, some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other government authorities (including local government authorities), thus making strict compliance with all regulatory requirements impractical, or in some circumstances impossible. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into with our business partners, customers and suppliers. In addition, such uncertainties, including any inability to enforce our contracts, together with any development or interpretation of PRC law that is adverse to us, could materially and adversely affect our business and operations. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other more developed countries. We cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.

 

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U.S. regulators’ ability to conduct investigations or enforce rules in China is limited.

 

Currently, all of our operations conducted outside of the U.S. As a result, it may not be possible for the U.S. regulators to conduct investigations or inspections, or to effect service of process within the U.S. or elsewhere outside China on us, our subsidiaries, officers, directors and shareholders, and others, including with respect to matters arising under U.S. federal or state securities laws. China does not have treaties providing for reciprocal recognition and enforcement of judgments of courts with the U.S. and many other countries. As a result, recognition and enforcement in China of these judgments in relation to any matter, including U.S. securities laws and the laws of the Cayman Islands, may be difficult or impossible.

 

We face uncertainty regarding the PRC tax reporting obligations and consequences for certain indirect transfers of the stock of our operating company.

 

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued by the PRC State Administration of Taxation on December 10, 2009, or Circular 698, where a foreign investor transfers the equity interests of a PRC resident enterprise indirectly by way of the sale of equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the foreign investor should report such Indirect Transfer to the competent tax authority of the PRC resident enterprise. The PRC tax authority will examine the true nature of the Indirect Transfer, and if the tax authority considers that the foreign investor has adopted an abusive arrangement in order to avoid PRC tax, they will disregard the existence of the overseas holding company and re-characterize the Indirect Transfer and as a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at the rate of up to 10%. In addition, the PRC resident enterprise is supposed to provide necessary assistance to support the enforcement of Circular 698. At present, the PRC tax authorities will neither confirm nor deny that they would enforce Circular 698, in conjunction with other tax collection and tax withholding rules, to make claims against our PRC subsidiary as being indirectly liable for unpaid taxes, if any, arising from Indirect Transfers by shareholders who did not obtain their shares in the public offering of our shares.

 

On February 3, 2015, the PRC State Administration of Taxation issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 supersedes the rules with respect to the Indirect Transfer under SAT Circular 698, but does not touch upon the other provisions of SAT Circular 698, which remain in force. SAT Public Notice 7 has introduced a new tax regime that is significantly different from the previous one under SAT Circular 698. SAT Public Notice 7 extends its tax jurisdiction to not only Indirect Transfers set forth under SAT Circular 698 but also transactions involving transfer of other taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

 

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries or investments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Circular 698 and SAT Public Notice 7.For transfer of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiary may be requested to assist in the filing under SAT Circular 698 and SAT Public Notice 7. As a result, we may be required to expend valuable resources to comply with SAT Circular 698 and SAT Public Notice 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

 

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

 

In July 2014, China’s State Administration of Foreign Exchange (“SAFE”) has promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future.

 

Under SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments in offshore special purpose vehicles, or SPVs, will be required to register such investments with the SAFE or its local branches. In addition, any PRC resident who is a direct or indirect shareholder of an SPV, is required to update its filed registration with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiaries of such SPV in China is required to urge the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration or to update the previously filed registration, the subsidiaries of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contribution into its subsidiary in China. On February 28, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investment and outbound overseas direct investment, including those required under the SAFE Circular 37, will be filed with qualified banks instead of the SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of the SAFE.

 

Our controlling shareholders Messrs. Ban Lor and Stewart Lor are not PRC resident, thus, they are not subject to SAFE Circular 37. We have requested our shareholders that we know are PRC residents and hold direct or indirect interests in us to make the necessary applications, filings and amendments as required under SAFE Circular 37 and other related rules. However, we cannot guarantee that all or any of those shareholders will complete the 37 registration before the closing of this Offering. In addition, we may not at all times be fully aware or informed of the identities of all our beneficial owners who are PRC residents, and we may not always be able to compel our beneficial owners to comply with the SAFE Circular 37 requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents will at all times comply with, or in the future make or obtain any applicable registrations or approvals required by, SAFE Circular 37 or other related regulations. Failure by any such shareholders or beneficial owners to comply with SAFE Circular 37 could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary’s ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

 

Furthermore, as these foreign exchange regulations are still relatively new and their interpretation and implementation has been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant governmental authorities. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

 

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

 

In utilizing the proceeds from this public offering or any future offerings, as an offshore holding company of our PRC subsidiary, we may make loans to our PRC subsidiary and controlled PRC affiliate, or we may make additional capital contributions to our PRC subsidiary. Any loans to our PRC subsidiary or controlled PRC affiliate are subject to PRC regulations and approvals. For example, loans by us to our PRC subsidiary in China, each of which is a foreign-invested enterprise, to finance their activities cannot exceed statutory limits and must be registered with SAFE or its local counterpart.

 

We may also decide to finance our PRC subsidiary through capital contributions. These capital contributions must be approved by the Ministry of Commerce in China or its local counterpart. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or controlled PRC affiliate or capital contributions by us to our subsidiaries or any of their respective subsidiaries. If we fail to receive such registrations or approvals, our ability to use the proceeds of this Offering and to capitalize our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.

 

In 2015, SAFE promulgated Circular 19, a notice regulating the conversion by a foreign-invested enterprise of foreign currency into Renminbi by restricting how the converted Renminbi may be used. Circular 19 requires that Renminbi converted from the foreign currency-denominated capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise in its business scope. In addition, SAFE strengthened its oversight of the flow and use of Renminbi funds converted from the foreign currency-denominated capital of a foreign-invested enterprise. The use of such Renminbi may not be changed without approval from SAFE and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used for purposes within the foreign-invested enterprise’s approved business scope.

 

We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or controlled PRC affiliate or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we receive from this Offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.

 

Governmental control of currency conversion may limit our ability to use our revenues effectively and the ability of our PRC subsidiary to obtain financing.

 

The PRC government imposes control on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive a majority of our revenues in Renminbi, which currently is not a freely convertible currency. Restrictions on currency conversion imposed by the PRC government may limit our ability to use revenues generated in Renminbi to fund our expenditures denominated in foreign currencies or our business activities outside China. Under China’s existing foreign exchange regulations, Renminbi may be freely converted into foreign currency for payments relating to current account transactions, which include among other things dividend payments and payments for the import of goods and services, by complying with certain procedural requirements. Our PRC subsidiary are able to pay dividends in foreign currencies to us without prior approval from SAFE, by complying with certain procedural requirements. Our PRC subsidiary may also retain foreign currency in their respective current account bank accounts for use in payment of international current account transactions. However, we cannot assure you that the PRC government will not take measures in the future to restrict access to foreign currencies for current account transactions.

 

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Conversion of Renminbi into foreign currencies, and of foreign currencies into Renminbi, for payments relating to capital account transactions, which principally includes investments and loans, generally requires the approval of SAFE and other relevant PRC governmental authorities. Restrictions on the convertibility of the Renminbi for capital account transactions could affect the ability of our PRC subsidiary to make investments overseas or to obtain foreign currency through debt or equity financing, including by means of loans or capital contributions from us. We cannot assure you that the registration process will not delay or prevent our conversion of Renminbi for use outside of China.

 

We may be classified as a “resident enterprise” for PRC enterprise income tax purposes; such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.

 

The Enterprise Income Tax Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered PRC tax resident enterprises and will generally be subject to the uniform 25% PRC enterprise income tax rate on their global income. In addition, a tax circular issued by the State Administration of Taxation on April 22, 2009 regarding the standards used to classify certain Chinese-invested enterprises established outside of China as resident enterprises clarified that dividends and other income paid by such resident enterprises will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also subjects such resident enterprises to various reporting requirements with the PRC tax authorities. Under the implementation rules to the Enterprise Income Tax Law, a de facto management body is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and other assets of an enterprise. In addition, the tax circular mentioned above details that certain Chinese-invested enterprises will be classified as resident enterprises if the following are located or resident in China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights.

 

Currently, there are no detailed rules or precedents governing the procedures and specific criteria for determining de facto management bodies which are applicable to our company or our overseas subsidiaries. We do not believe that Powerbridge meets all of the conditions required for PRC resident enterprise. The Company is a company incorporated outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside the PRC. For the same reasons, we believe our other entities outside of China are not PRC resident enterprises either. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” There can be no assurance that the PRC government will ultimately take a view that is consistent with ours.

 

However, if the PRC tax authorities determine that Powerbridge is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. Such 10% tax rate could be reduced by applicable tax treaties or similar arrangements between China and the jurisdiction of our shareholders. For example, for shareholders eligible for the benefits of the tax treaty between China and Hong Kong, the tax rate is reduced to 5% for dividends if relevant conditions are met. In addition, non-resident enterprise shareholders may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ordinary shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. However, it is also unclear whether non-PRC shareholders of the Company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that the Company is treated as a PRC resident enterprise.

 

Provided that our Cayman Islands holding company, Powerbridge, is not deemed to be a PRC resident enterprise, our shareholders who are not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other disposition of our shares. However, under Circular 7, where a non-resident enterprise conducts an “indirect transfer” by transferring taxable assets, including, in particular, equity interests in a PRC resident enterprise, indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, or the transferee or the PRC entity which directly owned such taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee would be obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. We and our non-PRC resident investors may be at risk of being required to file a return and being taxed under Circular 7, and we may be required to expend valuable resources to comply with Bulletin 37, or to establish that we should not be taxed under Circular 7 and Bulletin 37.

 

In addition to the uncertainty in how the new resident enterprise classification could apply, it is also possible that the rules may change in the future, possibly with retroactive effect. If we are required under the Enterprise Income Tax law to withhold PRC income tax on our dividends payable to our foreign shareholders, or if you are required to pay PRC income tax on the transfer of our shares under the circumstances mentioned above, the value of your investment in our shares may be materially and adversely affected. These rates may be reduced by an applicable tax treaty, but it is unclear whether, if we are considered a PRC resident enterprise, holders of our shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. Any such tax may reduce the returns on your investment in our shares.

 

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The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

 

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in August 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. In September 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by a special purpose vehicle seeking CSRC approval of its overseas listings. The application of the M&A Rules remains unclear. These M&A Rules and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances that the China’s Commerce Ministry (“MOC”) be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOC shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOC that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOC, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOC or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

 

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who are granted options or other awards under the equity incentive plan will be subject to these regulations when our company becomes an overseas listed company upon the completion of this Offering. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law.

 

Failure to make adequate contributions to various mandatory social security plans as required by PRC regulations may subject us to penalties.

 

PRC laws and regulations require us to pay several statutory social welfare benefits for our employees, including pensions, medical insurance, work-related injury insurance, unemployment insurance, maternity insurance and housing provident fund contributions. Local governments usually implement localized requirements as to mandatory social security plans considering differences in economic development in different regions. Our failure in making contributions to various mandatory social security plans and in complying with applicable PRC labor-related laws may subject us to late payment penalties. We may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

 

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Our current employment practices may be restricted under the PRC Labor Contract Law and our labor costs may increase as a result.

 

The PRC Labor Contract Law and its implementing rules impose requirements concerning contracts entered into between an employer and its employees and establishes time limits for probationary periods and for how long an employee can be placed in a fixed-term labor contract. Because there is lack of clarity with respect to the implementation and potential penalties and fines provided in the Labor Contract Law and tis implementing rules, it is uncertain how it will impact our current employment policies and practices. We cannot assure you that our employment policies and practices do not, or will not, violate the Labor Contract Law or its implementing rules and that we will not be subject to related penalties, fines or legal fees. If we are subject to large penalties or fees related to the Labor Contract Law or its implementing rules, our business, financial condition and results of operations may be materially and adversely affected. In addition, according to the Labor Contract Law and its implementing rules, if we intend to enforce the non-compete provision with an employee in a labor contract or non-competition agreement, we have to compensate the employee on a monthly basis during the term of the restriction period after the termination or ending of the labor contract, which may cause extra expenses to us. Furthermore, the Labor Contract Law and its implementation rules require certain terminations to be based upon seniority rather than merit, which significantly affects the cost of reducing workforce for employers. In the event we decide to significantly change or decrease our workforce in the PRC, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our circumstances or in a timely and cost-effective manner, thus our results of operations could be adversely affected.

 

If the chops of our PRC company and branches are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised.

 

In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes. The chops of our PRC subsidiary are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused by unauthorized persons, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.

 

Risks Associated with this Offering

 

There has been no public market for our Ordinary Shares prior to this Offering, and you may not be able to resell our Ordinary Shares at or above the price you paid, or at all.

 

Prior to this Offering, there has been no public market for our shares. We intend to list our Ordinary Shares on the NASDAQ Capital Market. If an active trading market for our Ordinary Shares does not develop after this Offering, the market price and liquidity of our Ordinary Shares will be materially and adversely affected. Negotiations with the underwriters will determine the Offering Price for our Ordinary Shares which may bear no relationship to their market price after the Offering. We cannot assure you that an active trading market for our Ordinary Shares will develop or that the market price of our Ordinary Shares will not decline below the Offering Price.

 

If we are unable to comply with certain conditions, our Ordinary Shares may not trade on the NASDAQ Capital Market.

 

We intend to apply to list our Ordinary Shares on the NASDAQ Capital Market. However, there is no guarantee that we will be successful in listing our Ordinary Shares on the NASDAQ Capital Market. In addition, we have relied on an exemption to the blue sky registration requirements afforded to “covered securities.” Securities listed on the NASDAQ Capital Market are “covered securities.” If we were unable to obtain approval for listing, then we would be unable to rely on the covered securities exemption to blue sky registration requirements and we would need to register the offering in each state in which we planned to sell shares. Consequently, we will not complete this Offering until we have met the final conditions.

 

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If we are listed on the NASDAQ Capital Market and our financial condition deteriorates, we may not meet continued listing standards on the NASDAQ Capital Market.

 

The NASDAQ Capital Market requires companies to fulfill specific requirements in order for their shares to continue to be listed. Even if our Ordinary Shares are approved for listing on the NASDAQ Capital Market, there is no guarantee that they will continue to be listed on the NASDAQ Capital Market. If our Ordinary Shares are delisted from the NASDAQ Capital Market at some later date, our shareholders could find it difficult to sell our Ordinary Shares. In addition, if our Ordinary Shares are delisted from the NASDAQ Capital Market at some later date, we may apply to have our Ordinary Shares quoted on the OTC Markets or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The OTC Markets and the “pink sheets” are generally considered to be less efficient markets than the NASDAQ Capital Market. In addition, if our Ordinary Shares are not so listed or are delisted at some later date, our Ordinary Shares may be subject to the “penny stock” regulations. These rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our Ordinary Shares might decline. If our Ordinary Shares are not so listed or are delisted from the NASDAQ Capital Market at some later date or become subject to the penny stock regulations, it is likely that the price of our Ordinary Shares would decline and that our shareholders would find it difficult to sell our Ordinary Shares.

 

If a limited number of participants in this Offering purchase a significant percentage of the offering, the effective public float may be smaller than anticipated and the price of our Ordinary Shares may be volatile.

  

As a company conducting a relatively modest public offering, we are subject to the risk that a small number of investors will purchase a high percentage of the Offering. If this were to happen, investors could find our shares to be more volatile than they might otherwise anticipate. Companies that experience such volatility in their stock price may be more likely to be the subject of securities litigation. In addition, if a large portion of our public float were to be held by a few investors, smaller investors may find it more difficult to sell their shares.

 

The market price for our shares may be volatile.

 

The trading prices of our Ordinary Shares are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of technology or other companies based in China that have listed their securities in the United States in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial decline in their trading prices. The trading performances of other Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our Ordinary Shares, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. In addition, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, which may have a material adverse effect on the market price of our shares. In addition to the above factors, the price and trading volume of our Ordinary Shares may be highly volatile due to multiple factors, including the following:

 

  regulatory developments affecting us, our customers, or our industry;

 

  announcements of studies and reports relating to our service offerings or those of our competitors;

 

  actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

 

  changes in financial estimates by securities research analysts;

 

  announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures or capital commitments;

 

  additions to or departures of our senior management;

 

  detrimental negative publicity about us, our management or our industry;

 

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  fluctuations of exchange rates between the RMB and the U.S. dollar;

 

  release or expiry of lock-up or other transfer restrictions on our outstanding Ordinary Shares; and

 

  sales or perceived potential sales of additional Ordinary Shares.

  

We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

 

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime. As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

 

Shares eligible for future sale may adversely affect the market price of our Ordinary Shares, as the future sale of a substantial amount of outstanding Ordinary Shares in the public marketplace could reduce the price of our Ordinary Shares.

 

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our Ordinary Shares. An aggregate of 11,508,747 shares is outstanding before the consummation of this Offering and [●] shares will be outstanding immediately after this Offering. All of the shares sold in the Offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act and/or any lock-up agreements they are subject to.

 

Investors in this Offering will experience immediate and substantial dilution.

 

The Offering Price of our shares is expected to be substantially higher than the pro forma net tangible book value per share of our Ordinary Shares. Assuming the completion of the Offering and an Offering Price of $[●] per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, if you purchase shares in this Offering, you will incur immediate dilution of approximately $[●] or approximately [●]% in the pro forma net tangible book value per share from the price per share that you pay for the shares. Accordingly, if you purchase shares in this Offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

 

We have not finally determined the use of the proceeds from this Offering, and we may use the proceeds in ways with which you may not agree.

 

While we have identified the priorities to which we expect to put the proceeds of this Offering, our management will have considerable discretion in the application of the net proceeds received by us. Specifically, we intend to use the net proceeds from this Offering for expansion and upgrades of our production lines and warehouse facilities, establishment promotion of overseas sales, and working capital and general corporate purposes. We have reserved the right to re-allocate funds currently allocated to that purpose to our general working capital. If that were to happen, then our management would have discretion over even more of the net proceeds to be received by our company in this Offering. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this Offering. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve profitability or increase our stock price. The net proceeds from this Offering may be placed in investments that do not produce profit or increase value. See “Use of Proceeds.”

 

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We will incur increased costs as a result of being a publicly-traded company.

 

As a company with publicly-traded securities, we will incur additional legal, accounting and other expenses not presently incurred. In addition, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as rules promulgated by the SEC and the national securities exchange on which we list, requires us to adopt corporate governance practices applicable to U.S. public companies. These rules and regulations will increase our legal and financial compliance costs.

 

If we fail to implement and maintain an effective system of internal control, we may be unable to accurately report our operating results, meet our reporting obligations or prevent fraud.

 

Prior to this Offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting.

 

Upon completion of this Offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2019. In addition, once we cease to be an “emerging growth company” as such term is defined under the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

 

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Generally, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, and harm our results of operations. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.

 

As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements.

 

As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. We are an emerging growth company until the earliest of:

 

  the last day of the fiscal year during which we have total annual gross revenues of $1.07 billion or more;

 

  the last day of the fiscal year following the fifth anniversary of this Offering;

 

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  the date on which we have, during the previous 3-year period, issued more than $1 billion in non-convertible debt; or

 

  the date on which we are deemed a “large accelerated issuer” as defined under the federal securities laws.

 

For so long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 for up to five fiscal years after the date of this Offering. We cannot predict if investors will find our Ordinary Shares less attractive because we may rely on these exemptions. If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary Shares and the trading price of our Ordinary Shares may be more volatile. In addition, our costs of operating as a public company may increase when we cease to be an emerging growth company.

 

We are an emerging growth company and may take advantage of certain reduced reporting requirements.

 

We are an "emerging growth company," as defined in the JOBS Act, and we may take advantage of certain exemptions from various 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 Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth 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.

 

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We do not plan to "opt out" of such exemptions afforded to an emerging growth company. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective data.

 

We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our Ordinary Shares.

 

Based on the anticipated market price of our Ordinary Shares in this Offering and expected price of our Ordinary Shares following this Offering, and the composition of our income, assets and operations, we do not expect to be treated as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for the current taxable year or in the foreseeable future. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you the U.S. Internal Revenue Service will not take a contrary position. Furthermore, this is a factual determination that must be made annually after the close of each taxable year. If we are a PFIC for any taxable year during which a U.S. holder holds our Ordinary Shares, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder.

  

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our Ordinary Shares and trading volume could decline.

 

The trading market for our Ordinary Shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who cover us downgrade our Ordinary Shares or publish inaccurate or unfavorable research about our business, the market price for our Ordinary Shares would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our Ordinary Shares to decline.

 

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DEFINED TERMS AND CONVENTIONS FORWARD-LOOKING STATEMENTS

 

We have made statements in this prospectus, including under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business” and elsewhere that constitute forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

 

Examples of forward-looking statements include:

 

  the timing of the development of future services;

 

  projections of revenue, earnings, capital structure and other financial items;

 

  the development of future company-owned branches;

 

  statements regarding the capabilities of our business operations;

 

  statements of expected future economic performance;

 

  statements regarding competition in our market; and

 

  assumptions underlying statements regarding us or our business.

 

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under the heading “Risk Factors” above. Many factors could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Consequently, you should not place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

38

 

USE OF PROCEEDS 

We estimate that we will receive net proceeds from the sale of Ordinary Shares of approximately up to $[●] million, based upon an assumed Offering Price of $[●] per share, the midpoint of the range set forth on the cover page of this prospectus, and assuming no exercise of the overallotment and after deducting estimated underwriting discounts and commissions and estimated offering expenses; our net proceeds will increase to $[●] if the overallotment is exercised in full. 

Each $0.25 increase (decrease) in the assumed Offering Price of $[●] per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this Offering by approximately $[●], assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and assuming no exercise of the overallotment and after deducting estimated underwriting discounts and commissions. If the overallotment is exercised in full, each $0.25 increase (decrease) in the assumed Offering Price of $[●] per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this Offering by approximately $[●], assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same after deducting estimated underwriting discounts and commissions. 

We intend to use the net proceeds of this Offering as follows: 

  Approximately 35% for research and development;

 

  Approximately 25% sales and marketing effort;

 

  Approximately 20% reserved for strategic alliances and acquisitions

 

  Approximately 20% for working capital and general corporate purposes.

 

The precise amounts and percentage of proceeds we would devote to particular categories of activity will depend on prevailing market and business conditions as well as particular opportunities that may arise from time to time. This expected use of our net proceeds from this Offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including any unforeseen cash needs. Similarly, the priority of our prospective uses of proceeds will depend on business and market conditions are they develop. Accordingly, our management will have significant flexibility and broad discretion in applying the net proceeds of the offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this Offering differently than as described in this prospectus. 

In utilizing the proceeds of this Offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiary and branches only through loans or capital contributions. None of the proceeds of this Offering can be loaned or contributed to our PRC subsidiary without additional government registration or approval. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans or make additional capital contributions to our PRC subsidiary and branches to fund its capital expenditures or working capital. There is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiary. This is because there are no statutory limits on the amount of registered capital for our PRC subsidiary, and we are allowed to make capital contributions to our PRC subsidiary by subscribing for its initial registered capital and increased registered capital, provided that the PRC subsidiary completes the relevant necessary filing and registration procedures in accordance with the applicable laws and regulations. With respect to loans to the PRC subsidiary by us, (i) if the relevant PRC subsidiary determines to adopt the traditional foreign exchange administration mechanism, or the current foreign debt mechanism, the outstanding amount of the loans shall not exceed the difference between the total investment and the registered capital of the PRC subsidiary and there is, in effect, no statutory limits on the amount of loans that we can make to our PRC subsidiary under this circumstance since we can increase the registered capital of our PRC subsidiary by making capital contributions to them, subject to the completion of relevant registrations, and the difference between the total investment and the registered capital will increase accordingly; and (ii) if the relevant PRC subsidiary determines to adopt the foreign exchange administration mechanism as provided in the Notice of the People's Bank of China (“PBOC”) on Full-coverage Macro-prudent Management of Cross-border Financing (the “PBOC Notice No. 9”), the risk-weighted outstanding amount of the loans, which shall be calculated based on the formula provided in the PBOC Notice No. 9, shall not exceed 200% of the net asset of the relevant PRC subsidiary. According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of the PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of the PBOC Notice No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiary.

 

According to the relevant PRC laws and regulations, in terms of capital contributions, it typically takes about eight weeks to complete the relevant filings and registrations. In terms of loans, the SAFE registration process typically takes about four weeks to complete, provided that all the necessary procedures could be successfully consummated by the relevant PRC subsidiary, as case may be, and/or our company. While we currently see no material obstacles to completing the filing and registration procedures with respect to future capital contributions and loans to our PRC subsidiary, we cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Doing Business in China—We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or controlled PRC affiliate or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we receive from this Offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business”, and “Risk Factors—Risks Related to Doing Business in China—However, we cannot assure you that the PRC government will not take measures in the future to restrict access to foreign currencies for current account transactions.” It is likely that we will need to convert some of our net proceeds in U.S. dollars into Renminbi in order to use as proceeds as contemplated in this section. For details of PRC regulations governing foreign currency conversion, see “Government Regulation—Regulation of Foreign Currency Exchange and Dividend Distribution.” 

39

 

Pending remitting the Offering proceeds to the PRC, we intend to invest our net proceeds in short-term, interest bearing, investment-grade obligations. 

Although we may use a portion of the proceeds for the acquisition of, or investment in, companies, technologies, products or assets that complement our business, we have no present understandings, commitments or agreements to enter into any acquisitions or make any investments. We cannot assure you that we will make any acquisitions or investments in the future. 

DIVIDEND POLICY 

The holders of our Ordinary Shares are entitled to dividends out of funds legally available when and as declared by our board of directors. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future. Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiaries may, from time to time, be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. In the event of our liquidation, dissolution or winding up, holders of our Ordinary Shares are entitled to receive, ratably, the net assets available to shareholders after payment of all creditors.  

Under Cayman Islands law, dividends may be declared and paid only out of funds legally available therefor, namely out of either profit or our share premium account, and provided further that a dividend may not be paid if this would result in our Company being unable to pay its debts as they fall due in the ordinary course of business. 

If we determine to pay dividends on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our Hong Kong subsidiary, Powerbridge HK. 

Current PRC regulations permit our indirect PRC subsidiary to pay dividends to Powerbridge HK only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our subsidiary in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve funds until the accumulative amount of such funds 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 such entity. 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 subsidiary and affiliates 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, we may be unable to pay dividends on our Ordinary Shares. 

Cash dividends, if any, on our Ordinary Shares will be paid in U.S. dollars. Powerbridge HK may be considered a non-resident enterprise for tax purposes, so that any dividends Powerbridge Zhuhai pay to Powerbridge HK 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 the PRC enterprise. However, pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong enterprise must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (b) the Hong Kong enterprise must have directly owned no less than 25% equity interests in the PRC resident enterprise during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong enterprise 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, Powerbridge HK. As of the date of this prospectus, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. Powerbridge HK intends to apply for the tax resident certificate when Powerbridge Zhuhai plans to declare and pay dividends to Powerbridge HK. 

EXCHANGE RATE INFORMATION 

Our business is conducted in China and all of our revenues are denominated in RMB. Capital accounts of our financial statements are translated into U.S. dollars from RMB at their historical exchange rates when the capital transactions occurred. RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation. The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. Assets and liabilities are translated at the exchange rates as of the balance sheet date. 

Balance sheet items, except for equity accounts 

June 30,

2018

   December 31,
2017
   December 31,
2016
 
USD:RMB   6.6198    6.5074    6.9448 

 

Items in the statements of operations and comprehensive loss, and statements cash flows are translated at the average exchange rate of the period.

 

40

 

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

 

The following table presents our selected historical financial data for the periods presented and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statement and notes thereto included elsewhere in this prospectus.

 

The following selected consolidated financial and operating data for the fiscal years ended December 31, 2017 and 2016 and for the six months ended June 30, 2018 and 2017, and the consolidated balance sheet data as of December 31, 2017 and 2016 and June 30, 2018, have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

 

The following table presents our summary consolidated statements of income and comprehensive income for the fiscal years ended December 31, 2017 and 2016 and for the six months ended June 30, 2018 and 2017.

 

Selected Consolidated Statement of Income and  Comprehensive Income  For the Years Ended   For the Six Months Ended 
   December 31,   June 30, 
   2017   2016   2018   2017 
           (Unaudited)   (Unaudited) 
                     
Revenues   21,628,554    21,174,801    7,894,326    6,639,547 
Less: Cost of revenues   13,539,829    13,646,569    3,483,108    3,906,965 
Gross profit   8,088,725    7,528,232    4,411,218    2,732,582 
                     
   Operating expenses:                    
      Sales and marketing   1,614,237    1,516,126    824,036    508,820 
      General and administrative   1,462,901    1,324,485    1,278,663    515,721 
      Research and development   1,151,985    947,506    1,064,673    442,930 
        Total operating expenses   4,229,123    3,788,117    3,167,372    1,467,471 
                     
Income from operations   3,859,602    3,740,115    1,243,846    1,265,111 
Total other income, net   (553,475)   (250,249)   (194,458)   (347,708)
                     
INCOME BEFORE INCOME TAXES   4,413,077    3,990,364    1,438,304    1,612,819 
                     
PROVISION FOR INCOME TAXES   434,882    536,387    109,528    128,062 
                     
NET INCOME   3,978,195    3,453,977    1,328,776    1,484,757 
                     
Less: loss attributable to non-controlling interests   (6,671)   -    (71,375)     
NET INCOME ATTRIBUTABLE TO POWERBRIDGE   3,984,866    3,453,977    1,400,151    1,484,757 
                     
OTHER COMPREHENSIVE INCOME                    
Foreign currency translation adjustment   221,132    10,444    (139,019)   10,444 
COMPREHENSIVE INCOME   4,199,327    3,464,421    1,189,757    1,495,201 
Less: Comprehensive loss attributable to non-controlling interest   (6,928)   -    (68,543)   - 
COMPREHENSIVE INCOME ATTRIBUTABLE TO POWERBRIDGE  $4,206,255   $3,464,421    1,258,300    1,495,201 

 

Selected Consolidated Balance Sheet Data  December 31,   December 31,   June 30, 
   2017   2016   2018 
           (Unaudited) 
             
             
Cash  $2,958,674   $4,299,734   $570,627 
Total Current Assets   17,608,882    10,253,357    17,305,934 
Total Assets  $21,784,791   $13,066,830   $22,072,856 
Total Liabilities   16,573,299    12,054,665    15,671,607 
Total Powerbridge Technologies Co., Ltd.’s Shareholders’ Equity   5,218,420    1,012,165    6,476,720 
Non-controlling interest   (6,928)   -    (75,471)
Total Equity   5,211,492    1,012,165    6,401,249 
Total Liabilities and Equity  $21,784,791   $13,066,830   $22,072,856 

 

41

 

CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2018:

 

On an actual basis; and

 

On a pro forma basis to give effect to the sale of up to [●] Ordinary Shares by us in this Offering at the assumed Offering Price of $[●] per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting the estimated underwriting commissions and estimated offering expenses and assuming that the underwriters do not exercise their over-allotment option.

 

You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.” You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.”

 

As of June 30, 2018

 

    As Reported     Pro Forma
Adjusted
for the Offering
 
             
Ordinary Shares   $ 11,509     $        [●]  
Share subscription receivable   (11,509 )     [●]  
Additional Paid-In Capital   $ 5,519,507     $ [●]  
Retained earnings   $ 659,863     $  [●]  
Accumulated Other Comprehensive Income   $ 297,350     $  [●]  
Total Powerbridge Technologies Co., Ltd.’s Shareholders’ Equity   $ 6,476,720     $ [●]  
Non-controlling interest   $ (75,471)     $ [●]  
Total   $ 6,401,249     $  [●]  

 

DILUTION

 

If you invest in our shares, your interest will be diluted to the extent of the difference between the Offering Price per Ordinary Shares and the pro forma net tangible book value per Ordinary Shares after the offering. Our pro forma net tangible book value as of [●] was $[●], or $[●] per share. Our pro forma net tangible book value per share set forth below represents our total tangible assets less total liabilities, divided by the number of shares of our share stock outstanding.

 

Dilution results from the fact that the per Ordinary Shares Offering Price is substantially in excess of the book value per Ordinary Shares attributable to the existing shareholders for our presently outstanding Ordinary Shares. After giving effect to our issuance and sale of [●] shares in this Offering at an assumed Offering Price of $[●] per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, assuming no exercise of overallotment and after deducting the estimated underwriting discounts and offering expenses payable by us, the pro forma as adjusted net tangible book value as of [●] would have been $[●], or $[●] per share. This represents an immediate increase in net tangible book value to existing shareholders of $[●] per share. The Offering Price per share will significantly exceed the net tangible book value per share. Accordingly, new investors who purchase shares in this Offering will suffer an immediate dilution of their investment of $[●] per share. The following table illustrates this per share dilution to the new investors purchasing shares in this Offering:

 

    Offering(1)     Full Overallotment Post-offering  
Assumed Offering Price per Ordinary Shares   $ [●]                                  
Net tangible book value per Ordinary Shares as of [●]   $ [●]          
Increase per Ordinary Shares attributable to this Offering   $ [●]          
Pro forma net tangible book value per Ordinary Shares after the offering   $ [●]          
Dilution per Ordinary Shares to new investors   $ [●]          

 

42

 

 

A $1.00 increase (decrease) in the assumed Offering Price of $[●] per share would increase (decrease) the pro forma net tangible book value by $[●], the pro forma net tangible book value per share after this Offering by $[●] per share and the dilution in pro forma net tangible book value per share to investors in this Offering by $[●] per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.

 

  (1) Assumes that the underwriters’ over-allotment option has not been exercised.

 

POST-OFFERING OWNERSHIP

 

The following charts illustrate our pro forma proportionate ownership, upon completion of this Offering by present shareholders and investors in this Offering, compared to the relative amounts paid by each. The charts reflect payment by present shareholders as of the date the consideration was received and by investors in this Offering at the assumed Offering Price without deduction of commissions or expenses. The charts further assume no changes in net tangible book value other than those resulting from the offering.

 

    Shares Purchased     Total Consideration     Average Price  
    Amount (#)     Percent (%)     Amount ($)     Percent (%)     Per Share ($)  
Existing shareholders     [●]       [●] %     [●]       [●] %   $ [●]  
New investors           [●]       [●] %     [●]       [●] %   $        [●]  
Total           [●]        100.0 %     [●]        100.0 %   $  [●]  

 

43

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

Powerbridge Technologies Co., Ltd. is a company that was established under the laws of the Cayman Islands on July 27, 2018 as a holding company.

 

Mr. Ban Lor, our Chairman of the Board, President, and CEO, together with his brother, Mr. Stewart Lor, our CFO are the Controlling Shareholders of the Company holding 92.13% of the outstanding shares prior to the Offering.

 

We are a provider of software application and technology solutions and services to corporate and government customers engaged in global trade. All of our customers are located in China. We currently generate most of our revenues from application development services, which represent 89.5% and 90.4% of total revenue in fiscal 2017 and 2016, respectively. For the six months ended June 30, 2018, our revenue from application development service represented 81.1% and 85.4% of total revenue, respectively. We also generate revenue from consulting and technical support services, which represent 6.6% and 5.2% of our revenue in fiscal 2017 and 2016, respectively. For the six months ended June 30, 2018 and 2017, our revenue from consulting and technical support service represented 14.8% and 6.9% of total revenue, respectively. Further, we also earn subscription service revenue from customers accessing our SaaS. For the years ended December 31, 2017 and 2016, our revenues were approximately $21.6 million and $21.2 million, respectively. For the six months ended June 30, 2018 and 2017, our revenue from subscription service represented 4.1% and 7.7% of total revenue, respectively. In fiscal 2017 and 2016, we had a net income of $4.0 million and $3.5 million, respectively. For the six months ended June 30, 2018 and 2017, our total revenues were approximately $7.9 million and $6.6 million, respectively. For the six months ended June 30, 2018 and 2017, we had a net income of $1.3 million and $1.5 million, respectively.

 

Reorganization

 

For the purpose of this Offering and listing on the NASDAQ Capital market, a reorganization of our legal structure was completed on August 27, 2018. The reorganization involved the incorporation of Powerbridge, a Cayman Islands holding company, and its wholly owned subsidiary, Powerbridge HK, a holding company incorporated on July 27, 2018 under the laws of Hong Kong; and the transfer of all equity ownership of Powerbridge Zhuhai to Powerbridge HK from the former shareholders of Powerbridge Zhuhai through an investment holding company. In consideration of the transfer, we issued 11,508,747 Ordinary Shares to the former shareholders of Powerbridge Zhuhai.

 

Prior to the reorganization, Powerbridge Zhuhai’s equity interests were held by the former shareholders through an investment holding company. The Controlling Shareholders owned 84.9% of equity interest of Powerbridge Zhuhai. Powerbridge Zhuhai was incorporated on October 30, 1997 in Zhuhai, Guangdong province under the laws of PRC. Powerbridge Beijing, a company conducting engineering and IT research and development activities, was incorporated on September 28, 2017 in Beijing under the laws of PRC, with Powerbridge Zhuhai owning 55% and Mr. Tianfei Feng owning 45% of equity interest. Since inception, Powerbridge Zhuhai and Mr. Tianfei Feng have only made nominal investments in Powerbridge Beijing and no substantial business operations have occurred; as a result, Powerbridge Zhuhai and Mr. Tianfei Feng agreed to deregister the entity. Mr. Tianfei Feng later became the Company’s Chief Research and Development Officer and the technology research and development activities originally conducted in Powerbridge Beijing are now conducted through the Beijing branch of Powerbridge Zhuhai. Powerbridge Beijing was deregistered on October 25, 2018.

  

On August 7, 2018, the former shareholders of Powerbridge Zhuhai transferred their 100% ownership interest in Powerbridge Zhuhai to Powerbridge HK, which is 100% owned by Powerbridge. After the reorganization, we own 100% equity interest of Powerbridge HK and Powerbridge Zhuhai. All shareholders have the same ownership interest in Powerbridge as in Powerbridge Zhuhai prior to the reorganization.

 

Since our businesses are effectively controlled by the same group of the shareholders before and after the reorganization, they are considered under common control. The above mentioned transactions were accounted for as a recapitalization. The consolidation of the Company and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the consolidated financial statements.

 

Reverse Split

 

Our original authorized number of Ordinary Shares was 500,000,000 shares with a par value of $0.0001 per share. On August 18, 2018, in order to optimize the Company’s share capital structure, our board of directors approved a reverse stock split of the Company’s authorized number of Ordinary Shares at a ratio of 10-1. After the Reverse Split, our authorized number of Ordinary Shares became 50,000,000 shares with par value of $0.001 per share. 

 

44

 

Key Factors that Affect Operating Results

 

We currently derive a majority of revenues from our application development services, consulting and technical support services, and subscription services. We intend to continually enhance our services and cross-sell new services to our existing customers and acquire new customers by increasing our market penetration with a deeper market coverage and a broader geographical reach. Our ability to maintain and expand our customer base with our application development services significantly affects our operating results.

 

We introduced our SaaS services in 2016. We intend to expand the scope of our offerings to service existing customers and acquire new customers by continually making significant investments in R&D as well as sales marketing activities to increase our subscription revenue and profit. Our ability to drive increased customer adoption and usage of our SaaS services affects our operating results.

 

Our business of providing global trade software application and technology services requires highly skilled professionals with specialized domain knowledge and technology expertise in order to develop and perform the services offered to our customers. Our ability to recruit, train, develop and retain our professionals with the skills and qualifications necessary to fulfill the needs of our existing and new customers has a significant effect on our operating results.

 

We intend to pursue strategic acquisitions and investments in selective technologies and businesses that will enhance our technology capabilities, expand our offerings and increase our market penetration. We believe our strategic acquisition and investment strategy is critical for us to accelerate our growth and strengthen our competitive position. Our ability to identify and execute strategic acquisitions and investments will have an effect on our operating results.

 

Results of Operations

 

For the years ended December 31, 2017 and 2016.

 

The following table summarizes the results of our operations for the years ended December 31, 2017 and 2016, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

   For the Years Ended         
   December 31,         
   2017   2016   Change   % Change 
                 
REVENUE:                
Application development services  $19,362,813   $19,133,676   $229,137    1.2%
Consulting and technical support services   1,418,110    1,095,457    322,653    29.5%
Subscription services   847,631    945,668    (98,037)   (10.4)%
Total revenue   21,628,554    21,174,801    453,753    2.1%
                     
COST OF REVENUE:                    
Application development services   13,206,606    12,865,280    341,326    2.7%
Consulting and technical support services   236,154    361,294    (125,140)   (34.6)%
Subscription services   97,069    419,995    (322,926)   (76.9)%
Total cost of revenue   13,539,829    13,646,569    (106,740)   (0.8)%
                     
GROSS PROFIT   8,088,725    7,528,232    560,493    7.4%
                     
OPERATING EXPENSES:                    
Selling and marketing   1,614,237    1,516,126    98,111    6.5%
General and administrative   1,462,901    1,324,485    138,416    10.5%
Research and development   1,151,985    947,506    204,479    21.6%
Total operating expenses   4,229,123    3,788,117    441,006    11.6%
OPERATING INCOME FROM OPERATIONS   3,859,602    3,740,115    119,487    3.2%
                     
OTHER INCOME   553,475    250,249    303,226    121.2%
                     
INCOME BEFORE INCOME TAXES   4,413,077    3,990,364    422,713    10.6%
                     
PROVISION FOR INCOME TAXES   434,882    536,387    (101,505)   (18.9)%
                     
NET INCOME  $3,978,195   $3,453,977   $524,218    15.2%

 

45

 

Revenues

 

We derive revenues from three sources: (1) revenue from application development services, (2) revenue from consulting and technical support services, and (3) revenue from subscription services. Please refer to the Revenue portion of the table above for the dollar and percentage increase or (decrease) of our revenues by our service lines ended December 31, 2017 and 2016, respectively.

 

For the year ended December 31, 2017, our total revenue was approximately $21.6 million as compared to $21.2 million for the year ended December 31, 2016. Total revenue increased by approximately $0.5 million, or 2.1%. The overall increase in total revenue was primarily attributable to $0.3 million increase in revenue from consulting and technical support services and $0.2 million increase in revenue from customized application development services, but offset by 10.4% decrease in subscription revenue.

 

Revenue from application development services

 

The Company’s application development service contracts are primarily on a fixed-price basis, which require the Company to perform services including project planning, project design, application development and system integration based on customers’ specific needs. These services also require significant production and customization. Revenue from application development service is recognized as the service is performed using the percentage of completion method of accounting.

 

For the year ended December 31, 2017, our application development service revenue was approximately $19.4 million as compared to $19.1 million for the year ended December 31, 2016. The increase in application development service revenue was approximately $0.2 million or 1.2%, which was primarily because of the stable demand from our corporate and government customers.

 

46

 

Revenue from consulting and Technical Support Services

 

Revenue from consulting and technical support services is primarily comprised of fixed-fee contracts, which require the Company to provide professional consulting and technical support services over contract terms beginning on the commencement date of each contract, which is the date our service is made available to customers. Revenue is recognized on a straight-line basis as earned over the terms of the respective contracts, which is typically 12 to 24 months.

 

For the year ended December 31, 2017, our consulting and technical support service revenue was approximately $1.4 million as compared to $1.1 million for the year ended December 31, 2016, representing an increase of $0.3 million or 29.5%, which was due to the increased number of consulting and technical support service contracts from 390 service contracts in fiscal 2016 to 475 service contract in fiscal 2017. In addition, by providing application development services, we gain extensive understanding and knowledge of each customer’s unique business needs, often resulting in opportunities for us to cross-sell our consulting and technical support services.

 

Revenue from subscription services

 

Revenue from subscription services is comprised of subscription fees from customers accessing the Company’s SaaS applications. The Company’s monthly or quarterly billing to customer is on the basis of number of uses by the customers. Revenue from subscription services is recognized in the period in which they are earned.

 

For the year ended December 31, 2017, our subscription service revenue was approximately $0.8 million as compared to $0.9 million for the year ended December 31, 2016. The decrease in subscription revenue was approximately $0.1 million, or 10%. We introduced our SaaS services in fiscal 2016 and focus on improving the functionality our SaaS applications in fiscal 2017 with limited marketing efforts, which resulted in lower revenue in fiscal 2017. As we continue to expand the scope of our services and enhance the features and functionalities of our applications and improve our marketing efforts, we expect our subscription service revenue will grow with an expanded offering and increased market awareness.

 

Cost of Revenues

 

Our cost of revenues mainly consists of compensation benefit expenses for our professionals, material cost and travel expenses related to revenue contracts. Please refer to the Cost of Revenue portion of the table above for the dollar and percentage increase or (decrease) of our cost of revenues ended December 31, 2017 and 2016, respectively.

 

Our cost of revenues decreased by $0.1 million or 0.8% to approximately $13.5 million in fiscal 2017 from approximately $13.6 million in fiscal 2016, which was mainly attributable to a decrease of $0.1 million in cost of revenue from consulting and technical support services and a decrease of $0.3 million cost of revenue from subscription services, offset by an increase of $0.3 million cost of revenue from application development services.

 

Our cost of revenue from application development services was approximately $13.2 million in fiscal 2017 as compared to $12.9 million in fiscal 2016, primarily as a result of more headcount, expanded office facilities and increase of depreciation and amortization expenses to enable and match the growth of our business.

 

Our cost of revenue from consulting and technical support services was approximately $0.2 million in fiscal 2017, representing a decrease of $0.1 million from $0.4 million in fiscal 2016. The decrease was primarily due to improved operational efficiency and less material cost incurred for the consulting and technical support contracts.

 

Our cost of revenue from subscription services was approximately $0.1 million in fiscal 2017, representing a decrease of $0.3 million from $0.4 million in fiscal 2016. We outsourced certain workload of our services to a third party provider in fiscal year 2016, while we fully utilized our own staff instead of outsourcing in providing our services in fiscal 2017, which resulted in less subcontract cost incurred.

 

47

 

Gross profit

 

   For the Years Ended 
   December 31, 
   2017   2016 
GROSS PROFIT  Gross Profit   Gross Margin   Gross Profit   Gross Margin 
Application development services  $6,156,207    31.8%  $6,268,396    32.8%
Consulting and technical support services   1,181,956    83.3%   734,163    67.0%
Subscription services   750,562    88.5%   525,673    55.6%
Total gross profits  $8,088,725    37.4%  $7,528,232    35.6%

 

Our gross profits increased by $0.6 million or 7.4% from $7.5 million in 2016 to $8.1 million in fiscal 2017. Gross margin as a percent of overall revenue for fiscal 2017 and 2016 was 37.4% and 35.6%, respectively. The increase in gross margin was primarily attributable to the improved development efficiency and less outsourced subcontract cost in providing our consulting and technical support services and SaaS services.

 

Operating Expenses

 

   For the Years Ended         
   December 31,         
   2017   2016   Change   % Change 
OPERATING EXPENSES:                
Selling and marketing  $1,614,237   $1,516,126   $98,111    6.5%
General and administrative   1,462,901    1,324,485    138,416    10.5%
Research and development   1,151,985    947,506    204,479    21.6%
Total operating expenses  $4,229,123   $3,788,117   $441,006    11.6%

 

Our operating expenses consist of selling and marketing, general and administrative, and research and development (“R&D”) expenses. Operating expenses increased by approximately $0.4 million, or 11.6%, from approximately $3.8 million for the year ended December 31, 2016 to $4.2 million for the year ended December 31, 2017. The increase in our operating expenses was primarily due to $0.2 million increase in R&D expense and $0.1 million increase in general and administrative expense.

 

Selling and marketing expenses primarily consisted of salary and compensation expenses relating to our sales and marketing personnel, and also included entertainment, travel and transportation, and other expenses relating to our sales and marketing activities. Sales and marketing expenses increased by $0.1 million or 6.5% from $1.5 million in fiscal 2016 to $1.6 million in fiscal 2017. The increase was primarily attributable to our expansion of the pre-sales and marketing teams to support our operations.

 

General and administrative expenses primarily consisted of salary and compensation expenses relating to our accounting, human resources and executive office personnel, and included rental expenses, depreciation and amortization expenses, office overhead, professional service fees and travel and transportation costs. General and administrative expenses increased by $0.1 million or 10.5% from approximately $1.3 million in fiscal 2016 to approximately $1.5 million in fiscal 2017, substantially all of which is attributable to the increasing headcount and related staff costs. As a percentage of revenues, general and administrative expenses were 6.8% and 6.3% of our total revenue in fiscal 2017 and 2016, respectively.

 

R&D expenses primarily consisted of compensation and benefit expenses relating to our R&D personnel as well as office overhead and other expenses relating to our R&D activities. Our R&D expenses increased by $0.2 million from $0.9 million in fiscal 2016 to $1.2 million in fiscal 2017, representing 5.3% and 4.5% of our total revenues for fiscal 2017 and 2016, respectively. We expect to continue to invest in R&D. We expect that our ability to effectively utilize our R&D capabilities significantly affect our results of operations in the future.

 

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Other Income (Expense)

 

Other income (expense) primarily consists of government subsidy income, interest income net of interest expense and other expenses. Our net other income was approximately $0.6 million in fiscal 2017, an increase of approximately $0.3 million, or approximately 121.2%, as compared to approximately $0.3 million in fiscal 2016, which was primarily due to $0.3 million increase in value added tax exemption income and government subsidy income received during fiscal 2017.

 

Provision for Income Taxes

 

Our provision for income tax was approximately $0.4 million in fiscal 2017, decreased by $0.1 million comparing to approximately $0.5 million in fiscal 2016. Under the Income Tax Laws of the PRC, companies are generally subject to income tax at a rate of 25%. However, we obtained the “high-tech enterprise” tax status in 2015, which reduced its statutory income tax rate to 15%. In fiscal 2017, we obtained the PRC Software Association’s “Key Software Enterprise” status and further reduced our income tax rate to 10% in fiscal 2017, which resulted in lower provision for income taxes in fiscal 2017.

 

Net Income

 

As a result of the foregoing, net income increased by approximately $0.5 million, or 15.2%, to approximately $4.0 million for fiscal 2017, from approximately $3.5 million for fiscal 2016.

 

Other comprehensive income

 

Foreign currency translation adjustments amounted to a gain of approximately $0.2 million and $10,000 for the years ended December 31, 2017 and 2016, respectively. The balance sheet amounts with the exception of equity as of December 31, 2017 were translated at RMB6.5074 to USD1.00 as compared to RMB6.9448 to USD1.00 as of December 31, 2016. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the years ended December 31, 2017 and 2016 were RMB6.7578 to USD1.00 and RMB6.6441 to USD1.00, respectively. The change in the value of the RMB relative to the U.S. dollar may affect our financial results reported in the U.S, dollar terms without giving effect to any underlying change in our business or results of operation.

 

49

 

For the six months ended June 30, 2018 and 2017

 

The following table summarizes the results of our operations for the six months ended June 30, 2018 and 2017, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

   For the Six Months Ended         
   June 30,         
   2018   2017       
   (Unaudited)   (Unaudited)   Change   % Change 
                 
NET REVENUE:                
Application development services  $6,405,918   $5,669,835   736,083    13.0%
Consulting and technical support services   1,166,130    456,248    709,882    155.6%
Subscription services   322,278    513,464    (191,186)   (37.2)%
Total net revenue   7,894,326    6,639,547    1,254,779    18.9%
                     
COST AND EXPENSES:                    
Cost of revenue:                    
Application development services   3,077,406    3,758,455    (681,049)   (18.1)%
Consulting and technical support services   385,525    91,287    294,238    322.3%
Subscription services   20,177    57,223    (37,046)   (64.7)%
TOTAL COST OF REVENUES   3,483,108    3,906,965    (423,857)   (10.8)%
                     
GROSS PROFIT   4,411,218    2,732,582    1,678,636    61.4%
                     
OPERATING EXPENSES:                    
Sales and marketing   824,036    508,820    315,216    62.0%
General and administrative   1,278,663    515,721    762,942    147.9%
Research and development   1,064,673    442,930    621,743    140.4%
Total costs and expenses   3,167,372    1,467,471    1,699,901    115.8%
                     
OPERATING INCOME FROM OPERATIONS   1,243,846    1,265,111    (21,265)   (1.7)%
                     
OTHER INCOME   194,458    347,708    (153,250)   (44.1)%
                     
INCOME BEFORE INCOME TAXES   1,438,304    1,612,819    (174,515)   (10.8)%
PROVISION FOR INCOME TAXES   109,528    128,062    18,534    (14.5)%
                     
NET INCOME  $1,328,776   $1,484,757    (155,981)   (10.5)%

 

Revenues

 

We derive revenues from three sources: (1) revenue from application development services, (2) revenue from consulting and technical support services, and (3) revenue from subscription services. Please refer to the Revenue portion of the table above for the dollar and percentage increase or (decrease) of our revenues by our service lines ended June 30, 2018, respectively.

 

For the six months ended June 30, 2018, our total revenue was approximately $7.9 million as compared to $6.6 million for the six months ended June 30, 2017. Total revenue increased by approximately $1.3 million, or 18.9%. The overall increase in total revenue was primarily attributable to $0.7 million increase in revenue from consulting and technical support services and $0.7 million increase in revenue from customized application development services, but offset by 37.2% decrease in subscription revenue.

 

Revenue from application development services

 

For the six months ended June 30, 2018, our application development service revenue was approximately $6.4 million as compared to $5.7 million for the six months ended June 30, 2017. The increase in application development service revenue was approximately $0.7 million or 13.0%, which was primarily because of the stable demand from our corporate and government customers.

 

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Revenue from consulting and technical Support Services

 

For the six months ended June 30, 2018, our consulting and technical support service revenue was approximately $1.2 million as compared to $0.5 million for the six months ended June 30, 2017, representing an increase of $0.7 million or 155.6%, which was primarily because we signed four major large new contracts in 2018. In addition, by providing application development services, we gain extensive understanding and knowledge of each customer’s unique business needs, often resulting in opportunities for us to cross-sell our consulting and technical support services.

 

Revenue from subscription services

 

For the six months ended June 30, 2018, our subscription service revenue was approximately $0.3 million as compared to $0.5 million for the six months ended June 30, 2017. The decrease in subscription revenue was approximately $0.2 million. We focused more on expanding our application development services business and improving the functionality our SaaS applications in the first six months in fiscal 2018 with limited marketing efforts, which resulted in lower revenue in fiscal 2018. As we continue to expand the scope of our services, enhance the feature and functionalities of our applications and improve our marketing efforts, we expect our subscription service revenue will grow with an expanded offering and increased market awareness.

 

Cost of Revenues

 

Our cost of revenues decreased by $0.4 million or 10.8% to approximately $3.5 million for the six months ended June 30, 2018 from approximately $3.9 million for the six months ended June 30, 2017, which was mainly attributable to a decrease of $0.7 million in cost of revenue from application development services and a decrease of approximately $37,000 cost of revenue from subscription services, offset by an increase of $0.3 million cost of revenue from consulting and technical support services.

 

Our cost of revenue from application development services was approximately $3.1 million for the six months ended June 30, 2018 as compared to $3.8 million for the six months ended June 30, 2017, primarily due to more material costs incurred for certain contracts in the first half of fiscal 2017, which resulted into higher cost of revenue in providing application development service during the first half of fiscal 2017.

 

Our cost of revenue from consulting and technical support services was approximately $0.4 million for the six months ended June 30, 2018, representing an increase of $0.3 million from $0.1 million for the six months ended June 30, 2017. The higher cost of revenue from consulting and technical support service was consistent with the increase in the related revenue of $0.7 million during the first half of fiscal 2018. We also incurred additional third party service charges in the first half of fiscal 2018 to support the growth of our consulting and technical support service.

 

Our cost of revenue from subscription services was approximately $20,000 for the six months ended June 30, 2018, representing a decrease of $37,000 from approximately $57,000 for the six months ended June 30, 2017. In the first six months of 2017, We outsourced a small portion of our workload of our services to a third party provider, while we fully utilized our own staff instead of outsourcing in providing our services in the same period of 2018, which resulted in less subcontract cost incurred.

 

Gross profit

 

   For the Six Months Ended June 30, 
   2018   2017 
   (Unaudited)   (Unaudited) 
GROSS PROFIT  Gross Profit   Gross Margin   Gross Profit   Gross Margin 
Application development services  $3,328,512    52.0%  $1,911,380    33.7%
Consulting and technical support services   780,605    66.9%   364,961    80.0%
Subscription services   302,101    93.7%   456,241    88.9%
Total gross profits  $4,411,218    55.9%  $2,732,582    41.2%

 

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Our gross profits increased by $1.7 million or 61.4% from $2.7 million for the six months ended June 30, 2017 to $4.4 million for the six months ended June 30, 2018. Gross margin as a percent of overall revenue for the six months ended June 30, 2018 and 2017 was 55.9% and 41.2%, respectively.

 

Our gross margin in application development service increased from 33.7% in the six months ended June 30, 2017 to 52% in the same period of fiscal 2018 primarily due to less material component required in the customer’s contracts, which significantly reduced our cost. Our gross margin for the consulting and technical support services decreased from 80.0% in the six months ended June 30, 2017 to 66.9% in the same period of fiscal 2018 because the Company incurred additional third party service charges to support the growth of revenue . Our gross margin from subscription service improved from 88.9% in the six months ended June 30, 2017 to 93.7% in the first half of fiscal 2018 due to the improved development efficiency and less outsourced subcontract cost in providing our SaaS services.

 

Operating Expenses

 

 
 
 
 
For the Six Months Ended June 30,
2018
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   (Unaudited)   (Unaudited)   Change   % Change 
OPERATING EXPENSES:                
Sales and marketing  $824,036   $508,820   $315,216    62.0%
General and administrative   1,278,663    515,721    762,942    147.9%
Research and development   1,064,673    442,930    621,743    140.4%
Total costs and expenses  $3,167,372   $1,467,471   $1,699,901    115.8%

 

Operating expenses increased by approximately $1.7 million, or 115.8%, from approximately $1.5 million for the six months ended June 30, 2017 to $3.2 million for the six months ended June 30, 2018. The increase in our operating expenses was primarily due to $0.6 million increase in research and development expense, $0.8 million increase in general and administrative expense and $0.3 million in sales and marketing expense.

 

Sales and marketing expenses increased by $0.3 million or 62.0% from $0.5 million for the six months ended June 30, 2017 to $0.8 million for the six months ended June 30, 2018. The increase was primarily attributable to our expansion of the pre-sales and marketing teams to support our operations in the first half of fiscal 2018.

 

General and administrative expenses increased by $0.8 million or 147.9% from approximately $0.5 million for the six months ended June 30, to approximately $1.3 million for the six months ended June 30, 2018, the increase was primarily due to higher compensation cost to newly hired senior officers and increased headcount and more the professional and consulting fees incurred to preparation of going public during the first half of fiscal 2018. As a percentage of revenues, general and administrative expenses were 16.2% and 7.8% of our total revenue for the six months ended June 30, 2018 and 2017, respectively.

 

Our R&D expenses increased by $0.6 million from $0.4 million for the six months ended June 30, 2017 to $1.0 million for the six months ended June 30, 2018, representing 13.5% and 6.7% of our total revenues for the six months ended June 30, 2018 and 2017, respectively. During the first half of fiscal 2018, the size of our R&D team was more than doubled comparing to the same period of last year. We initiated more SaaS and BaaS related research and development projects in fiscal 2018 and we expect to continue to invest in research and development. We believe that our ability to effectively utilize our research and development capabilities significantly affect our results of operations in the future.

  

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Other Income (Expense)

 

Our net other income was approximately $0.2 million for the six months ended June 30, 2018, a decrease of approximately $0.2 million, or approximately 44.1%, as compared to approximately $0.3 million for the six months ended June 30, 2017, which was primarily due to $0.1 million decrease in value added tax exemption income and government subsidy income received for the six months ended June 30, 2018.

 

Provision for Income Taxes

 

Our provision for income tax was approximately $0.1 million for the six months ended June 30, 2018, decreased by 14.5% from the same period of last year. The decrease in provision for income taxes was due to the lower income before income taxes for the first half of fiscal 2018.

 

Net Income

 

As a result of the foregoing, net income decreased by approximately $0.2 million, or 10.5%, to approximately $1.3 million for the six months ended June 30, 2018, from approximately $1.5 million for the six months ended June 30, 2017. The lower net income was primarily due to significantly increased general administrative expense and R&D expense as explained above  .

 

Other comprehensive income

 

Foreign currency translation adjustments amounted to a loss of approximately $0.1 million and a gain of $46,403 for the six months ended June 30, 2018 and 2017, respectively. The balance sheet amounts with the exception of equity as of June 30, 2018 were translated at RMB6.6198 to USD1.00 as compared to RMB6.7774 to USD1.00 as of June 30, 2017. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the six months ended June 30, 2018 and 2017 were RMB6.3681 to USD1.00 and RMB6.8752 to USD1.00, respectively. The change in the value of the RMB relative to the U.S. dollar may affect our financial results reported in the U.S, dollar terms without giving effect to any underlying change in our business or results of operation.

 

Liquidity and Capital Resources

 

Substantially all of our operations are conducted in China and all of our revenue, expenses, and cash are denominated in RMB. RMB is subject to the exchange control regulation in China, and, as a result, we may have difficulty distributing any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars. As of June 30, 2018, cash of approximately $0.6 million were fully held by the Company and its subsidiary in mainland PRC.

 

The Cayman holding company is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiary in China. As a result, the Company's ability to pay dividends depends upon dividends paid by our subsidiary. Our subsidiary in China are permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, our subsidiary is required to set aside at least 10% of its after-tax profits each year based on PRC accounting standards, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. The statutory reserve funds are not distributable as cash dividends. Remittance of dividends by our subsidiary out of China is subject to examination by the banks designated by SAFE. Our subsidiary has not paid dividends and will not be able to pay dividends until it generates accumulated profits and meet the requirements for statutory reserve funds. In addition, we would need to accrue and pay withholding taxes if we were to distribute funds from our subsidiary in China to us. We do not intend to repatriate such funds in the foreseeable future, as we plan to use existing cash balance in PRC for general corporate purposes.

 

In assessing our liquidity, we monitor and analyze our cash on hand, our ability to generate sufficient revenue sources in the future and our operating and capital expenditure commitments. As of June 30, 2018, we had cash of approximately $0.6 million. Our current assets were approximately $17.3 million, and our current liabilities were approximately $15.7 million. As of December 31, 2017, we had cash of approximately $3.0 million. Our current assets were approximately $17.6 million, and our current liabilities were approximately $16.6 million. For years ended December 31, 2017 and 2016, our operating cash flow was positive. Our operation cash flow was negative for the six months ended June 30, 2018 and 2017, because most of our collections are completed in the second half of the year. As a general practice, our government customers usually approve and settle the outstanding balance during the second half of each calendar year due to municipal administration on budget and payment practices. To support our working capital, on October 8, 2018, our subsidiary Powerbridge Zhuhai entered into a loan agreement with China Bank of Communication to obtain a loan of $302,124 for a term of one year and at a fixed annual interest rate of 5.4%.  We have historically funded our working capital needs primarily from operations, bank loans, advance payments from customers and shareholders. Our working capital requirements are affected by the efficiency of our operations, the numerical volume and dollar value of our revenue contracts, the progress or execution on our customer contracts, and the timing of accounts receivable collections. Our management believes that current levels of cash and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months from the date of this prospectus. However, it may need additional cash resources in the future if it experiences changed business conditions or other developments, and may also need additional cash resources in the future if it wishes to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If it is determined that the cash requirements exceed our amounts of cash on hand, we may seek to issue debt or equity securities or obtain a credit facility.

  

53

 

The following summarizes the key components of our cash flows for the years ended December 31, 2017 and 2016 and for the six months ended June 30, 2018 and 2017.

 

   For the Years Ended   For the Six Months Ended 
   December 31,   June 30, 
   2017*   2016*   2018   2017 
           (Unaudited)   (Unaudited) 
                 
Net cash provided (used) by operating activities  $1,332,254   $5,130,647   $(1,911,110)  $(1,600,469)
Net cash (used) provided by in investing activities   (2,221,182)   (1,413,839)   81,209    (836,591)
Net cash used in financing activities   (530,129)   (735,310)   (600,305)   (354,901)
Effect of exchange rate change on cash   175,873    (229,889)   40,497    65,859 
Net increase (decrease) in cash  $(1,243,184)  $2,751,609   $(2,389,709)  $(2,726,102)

 

* On January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flow on a retrospective basis and have applied the changes to the consolidated statement of cash flows starting from the year ended December 31, 2016.

   

Operating Activities

 

Net cash provided by operating activities was approximately $1.2 million for the year ended December 31, 2017, as compared to approximately $5.2 million for the same period in 2016. Cash provided by operating activities for the year ended December 31, 2017 mainly consisted of approximately $4.0 million of net income, the collection of approximately $0.3 million of prepayments, deposits and other assets, the increase of approximately $4.0 million of accounts payable, $0.4 million of tax payable, and $0.3 million of deferred revenue offset by the increase of approximately $7.3 million in accounts receivable due to increase of revenue, and decrease of approximately $0.8 million of advanced payments from customers.

 

Net Cash provided by operating activities for the year ended December 31, 2016 mainly consisted of an approximately of $3.5 million of net income, the collection of approximately $0.2 million of prepayments, deposits and other assets, the increase of approximately $4.1 million of accounts payable, $0.7 million of tax payable offset by the increase of approximately of $3.1 million of accounts receivable and the decrease of approximately $0.2 million of customer deposits.

 

Net cash used in operating activities for the six months ended June 30, 2018 mainly consisted of an approximately $1.3 million of net income, an increase of approximately $2.4 million in accounts receivables due to increase of revenue, an increase of approximately $1.1 million of prepayments, deposits and other assets, the payments of approximately $0.3 million in salaries and benefits payable, the payments of approximately $0.4 million in taxes payable, offset by an increase of approximately $0.9 million in accounts payable.

 

Net cash used by operating activities for the six months ended June 30, 2017 mainly consisted of approximately $1.5 million of net income, an increase of $2.8 million in accounts receivable, an increase of approximately $0.9 million of prepayments, deposits and other assets, the payments of approximately $0.9 million in salaries and benefits payable, offset by an increase of approximately $0.8 million in accounts payable, and an increase of approximately of $ 0.5 million in customer deposits.

 

Our accounts payable balance significantly increased from approximately $7.4 million as of December 31, 2016 to $12.1 million as of December 31, 2017 and further increased to $12.7 million as of June 30, 2018. The increase in accounts payable was mainly due to increase purchase from our suppliers and subcontractors for the ongoing projects with our customers. 69.3%, 67.8% and 58.6% of our accounts payable balances with suppliers are due when the Company received customer payment on the projects as of June 30, 2018, December 31, 2017 and 2016, respectively. Based on the long term relationship, we might be able to slow down payments based on the Company’s working capital. As of December 31, 2017 and 2016 and for the six months ended June 30, 2018, 98.2%, 98.0% and 74.0% of accounts payable balance were aged within one year, respectively. We have never entered into any long term financing arrangements with our suppliers.

 

The significant account receivable balances as of June 30, 2018, December 31, 2017 and 2016 was because of the increasing contract volume and contract progress for certain large contracts with our customers. During fiscal 2017, the Company recognized revenue from 67 major contracts, increased by 15.5% from 58 major contracts in fiscal 2016. For the six months ended June 30, 2018, the Company recognized revenue from 77 major contracts, increased by 28.3% from 60 major contracts for the same period of last year.

 

Most of large contracts are government related customized application development service contracts. The Company enters into fixed-fee arrangements in standard multiple-phase customized application development service contracts with government related agencies and state-owned companies. The billing term can vary depending on each specific project. Generally speaking, the Company bills the customer 20% to 30% of total fee upon signing the contract, 20% to 30% of total fee upon completion of developing, implementing and testing the customized applications and the remaining 30% to 50% of total fee is billed after the customer internally approves the project and signs off the acceptance form. The Company does not specify the payment term in all contracts with customers, but, in practice, the Company’s billing term with customers are generally within 90 days. For these large government related customized application development service contracts, the government’s acceptance and payment process requires multiple levels of government officials’ approvals, including but not limited to approvals from ten national government bureaus at national level then final approval from local government level. The timing of receiving the final approval and payment might be longer than the Company’s expectation. The billing terms are typically agreed by the parties at the inception of the contract, not subsequently negotiated or modified. In most cases, the Company are entitled to payments for the work performed and such payment are not conditioned on the final acceptance by our customer while under certain contracts with government related agencies and stated-owned companies, customer acceptance is a condition to final payments. Nevertheless, in practice, the Company tends to satisfy customers and is willing to perform additional work to receive a final acceptance from customers. Additional performance is considered inconsequential or perfunctory, because the Company always implements the customized applications at the customers’ sites and complete the testing prior to the customers’ acceptance. From past experience, the Company has never received rejections from its customers.

  

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The Company assesses that its government customers, consisting of government related agencies and state owned companies, generally have good credit-worthiness and believe that these customers have intention and ability to fulfill the payment obligation at the point of revenue recognition. From past experience, the Company has never experienced any significant losses on collection nor experienced any significant bad debts from these customers.

 

As of December 31, 2017, four major customers accounted for in total of 58.9% of the Company’s accounts receivable and 59.4% of unbilled accounts receivable balances. The aggregated revenues from these customers represented 45.6% of total revenue in fiscal 2017. In fiscal 2017, revenue recognized from three of these four customers are related to new application development service contracts entered in fiscal 2017 with percentage completion progress of 87.5%, 92.8% and 100% as of December 31, 2017, respectively. Revenue recognized from one customer is related to a 2016 contract with percentage completion of 92.3% and 58.9% as of December 31, 2017 and 2016, respectively. As of June 30, 2018, two customers accounted for in total of 29.3% of the Company’s accounts receivable and 33.2% of unbilled accounts receivable balances. The aggregated revenues from these customers represented 5.1% of total revenue for the six months ended June 30, 2018 due to major progress on the project have been achieved in fiscal 2017. The significant unbilled accounts receivable due from these four customers were not billed in fiscal 2017 was because the related customers did not sign off on the customer acceptance forms as of December 31, 2017, even though these contracts were substantially completed. As of December 31, 2018, for customer A, we received acceptance from ten national government bureaus for its related projects which is in full acceptance required at the national government level, but are anticipating for the final acceptance from the local government which is expected to be received during the first quarter of 2019. For customer B, we received full acceptance from ten national government bureaus but are anticipating for the final acceptance from the local government which was deferred to fiscal 2019. For customer C, we received full acceptance from ten national government bureaus but are anticipating for the final acceptance from the local government which is expected to be received during the first quarter of 2019. For customer D, we received full acceptance from ten national government bureaus and the final acceptance from the local government. These unbilled receivables will be fully billed and collected prior to the end of the first quarter of 2019.

 

The  aging of accounts receivables are as follows:

 

   December 31,
2017
   December 31,
2016
   June 30,
2018
 
             
0-90 days  $4,168,586   $304,569   $1,822,747 
90-180 days   33,092    13,003    1,826,020 
180-360 days   47,331    333,287    53,694 
over one year   325,142    38,548    318,563 
Sub total   4,574,151    689,407    4,021,024 
                
Current (billed accounts receivable within payment terms)   4,168,586    304,569    1,822,747 
Past due   405,565    384,838    2,198,277 
Sub-total billed accounts receivable   4,574,151    689,407    4,021,024 
Unbilled accounts receivable   8,533,199    4,460,773    11,196,237 
Allowance   (36,285)   (15,083)   (138,701)
Total accounts receivable, net  $13,071,065   $5,135,097   $15,078,560 

 

The Company has never entered into extended payment terms or concessions with any of its customers for the years ended December 31, 2017 and 2016 and for the six months ended June 30, 2018. From past experience, the Company has never had any significant loss in collection of the contract amount. The significant outstanding accounts balances were mainly related to certain government customers and considered collectable from the perspective of the customers’ ability to pay. Due to multiple levels of the government approval process for payments, it could takes extra time for us to collect the full proceeds from government customers, As of December 31, 2017 and 2016 and June 30, 2018, the unbilled accounts receivable balance related to contracts where customer is past due on their billed accounts receivable amounted to $1,070,298, $1,699,641 and $1,885,902, respectively. With increasing communication with our customers and improved collection efforts, we believe we are able to successfully collect the balances.

 

Those above customers are mainly comprised of large government organizations and related agencies with good credit history. They generally negotiated to pay us in three or less phases through the contract term and a significant portion (50%) of contract amount usually is billed in the last phase upon the completion of the related projects. For the year ended December 31, 2017 and six months ended June 30, 2018, the Company had more contract with government and related agency customers and those projects were under progress. As a result, the Company’s account receivable balance increased to $13.1 million as of December 31, 2017 from $5.1 million as of December 31, 2016 and further increased to $15.1 million as of June 30, 2018. The average accounts receivable turnover in days for the years ended December 31, 2017 and 2016 and for the six months ended June 30, 2018 was 154 days and 64 days and 329 days respectively.

 

Our management reviews the accounts receivable on a periodic basis and makes allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual accounts receivable balances, we consider several factors, including the age of the balance, the customer's payment history, and current credit-worthiness, and current economic trends. Typically, the Company includes unbilled receivables in accounts receivable for contracts on which revenue has been recognized, but for which the customer has not yet been billed. As of June 30, 2018, December 31, 2017 and 2016, the unbilled receivable of $11,196,237, $8,533,199 and $4,460,773 were included in accounts receivable, respectively.

   

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As of December 31, 2018, approximately $7.8 million (or 59%) of total accounts receivable balance as of December 31, 2017 was collected, and approximately $8.1 million (or 53%) of total account receivable balance as of June 30, 2018 was collected. It represented that 92% and 83% of billed accounts receivable balance as of December 31, 2017 and June 30, 2018 were collected by December 31, 2018, respectively. In December 2018, the Company reviewed the outstanding accounts receivables with all customers, as a result, 99% of unbilled balance as of December 31, 2017 and 92% of unbilled balance as of June 30, 2018 were expected to be collected prior to March 31, 2019, respectively. With the increasing communication with our customer and improved collection efforts, we believe we are able to successfully collect the remaining balance within one year.

 

Investing Activities

 

Net cash used in investing activities was approximately $2.2 million for fiscal 2017, as compared to approximately $1.4 million for fiscal 2016. Cash used in investing activities for fiscal 2017 was mainly due to approximately $1.1 million purchase of office equipment and furniture and approximately $0.8 million spending for capitalized development cost. Cash used in investing activities for fiscal 2016 was mainly due to approximately $0.8 million spending for capitalized development costs and $0.4 million purchase of office equipment and furniture.

 

Net cash provided by investing activities was approximately $0.1 million for the six months ended June 30, 2018, as compared to net cash used in investing activities approximately $0.8 million for the six months ended June 30, 2017. Cash provided by investing activities for the six months ended June 30, 2018 was mainly due to approximately $0.7 million collection of loans to others and offset by purchase of $0.2 million of office equipment and furniture and approximately $0.4 million spending for capitalized development cost. Cash used in investing activities for the six months ended June 30, 2017 was mainly due to approximately $0.3 million spending for capitalized development costs and $0.5 million purchase of office equipment and furniture.

 

Financing Activities

 

Net cash used in financing activities was approximately $0.5 million for fiscal 2017, as compared to approximately $0.7 million for fiscal 2016. Net cash used in financing activities for the year ended December 31, 2017 was mainly due to the repayment of related party balance of $0.8 million offset by net proceed from bank loan of $0.2 million. Net cash used in financing activities for fiscal 2016 was mainly due to repayment of related party balance of $0.7 million and repayment of bank loan of $0.2 million, offset by proceed received from bank loan of $0.2 million.

 

Net cash used in financing activities was approximately $0.6 million for the six months ended June 30, 2018, as compared to approximately $0.4 million for the six months ended June 30, 2017. Net cash used in financing activities for the six months ended June 30, 2018 was mainly due to the repayment of related party balance of $0.6 million and repayments of bank loan of $0.2 million offset by net proceed from bank loan of $0.2 million. Net cash used in financing activities for the six months ended June 30, 2017 was mainly due to repayment of related party balance of $0.6 million, offset by proceed received from bank loan of $0.2 million. 

 

Capital Expenditures

 

The Company made capital expenditures of $1.8 million and $1.2 million for the years ended December 31, 2017 and 2016, respectively. The Company made capital expenditures of $0.7 million and $0.8 million for the six months ended June 30, 2018 and 2017, respectively. In these periods, our capital expenditures were mainly used for purchases of office equipment, furniture and payments for capitalized development cost. The Company will continue to make capital expenditures to meet the expected growth of its business.

 

Contractual Obligations

 

The Company had an outstanding bank loan of approximately $0.2 million as of June 30, 2018 and December 31, 2017. The Company has also entered into non-cancellable operating lease agreements for several offices and dormitory spaces for its employees. The leases are expiring through 2020.

 

The following table sets forth our contractual obligations and commercial commitments as of June 30, 2018:

 

   Payment Due by Period 
   Total   Less than
1 Year
   1 – 3 Years   3 – 5 Years   More than
5 Years
 
Operating lease arrangements  $253,266   $236,549   $16,717   $     -   $     - 
Bank loan   226,593    226,593    -    -    - 
Total  $479,859   $463,142   $16,717   $-   $- 

 

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2017:

 

   Payment Due by Period 
   Total   Less than
1 Year
   1 – 3 Years   3 – 5 Years   More than
5 Years
 
Operating lease arrangements  $165,155   $132,028   $33,127   $     -   $    - 
Bank loan*   230,507    230,507    -    -    - 
Total  $395,662   $362,535   $33,127   $-   $- 

 

* The loan was fully repaid upon maturity in January 2018. On March 5, 2018, the Company entered into a loan agreement with China Construction Bank to borrow a loan of $0.2 million for a term of one year and at a fixed annual interest rate of 7.4%. The bank loan was unsecured and guaranteed by Ban Lor, CEO of the Company, and his family member.

  

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Off-Balance Sheet Arrangements

 

There were no off-balance sheet arrangements for the years ended December 31, 2017 and 2016 and for the six months ended June 30, 2018 that have or that in the opinion of management are likely to have, a current or future material effect on our financial condition or results of operations.

 

Critical Accounting Policies

 

We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there were no material changes made to the accounting estimates and assumptions in the past two years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.

 

We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.

 

Use of estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s consolidated financial statements include but not limited to the useful lives of property and equipment and capitalized development cost, impairment of long-lived assets, valuation of accounts receivables, revenue recognition, provision for contingent liabilities, and realization of deferred tax assets and uncertain tax positions. Actual results could differ from these estimates.

 

Fair value measurement

 

ASC 825-10 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

  Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

  Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data.

 

  Level 3 — inputs to the valuation methodology are unobservable.

 

Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, prepayments, deposits and other current assets, accounts payable, customer deposits, salaries and benefits payables, and taxes payable approximates their recorded values due to their short-term maturities. The fair value of the long term prepayments, deposits and other assets approximate their carrying amounts because the deposits were paid in cash.

 

Accounts receivable, net

 

Accounts receivable, net, is stated at the original invoiced amount net of write-offs and allowance for doubtful accounts. The Company reviews the accounts receivable on a periodic basis and makes allowances when there is doubt as to the collectability of individual balances. Past-due balances over 90 days are reviewed individually for collectability. In evaluating the collectability of individual accounts receivable balances, the Company considers several factors, including the age of the balance, the customer’s payment history, current credit-worthiness, and current economic trends. Accounts receivable balances are written off after all collection efforts have been exhausted. Typically, the Company includes unbilled receivables in accounts receivable for contracts on which revenue has been recognized, but for which the customer has not yet been billed. Unbilled receivables, substantially all of which are expected to be billed and collected within one year, are stated at their estimated realizable value and consist of costs and fees billable on contract completion or the occurrence of contractual payment phase.

 

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Prepayments, deposit and other assets

 

Prepayment, deposit and other assets primarily consists of advances to suppliers for purchasing goods or services that have not been received or provided; security deposits made to our customers; advances to employees and loan receivables from business partners. Prepayment, deposit and other assets are classified as either current or non-current based on the terms of the respective agreements. These advances are unsecured and are reviewed periodically to determine whether their carrying value has become impaired.

 

Property and equipment, net

 

Property and equipment, net, are mainly comprising furniture and furniture, vehicles, computer and equipment are stated at cost less accumulated depreciation and impairment. Property and equipment are depreciated over the estimated useful lives of the assets on a straight-line basis, after considering the estimated residual value.

 

The estimated useful lives are as follows:

 

    Useful Life  
Office equipment, fixtures, and furniture   5-10 years  
Automobile   5-8 years  
Capitalized development costs   5 years  
Computer equipment   5 years  

 

Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and the related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is charged to the statement of income.

 

Capitalized development costs

 

The Company follows the provisions of Accounting Standards Codification (“ASC”) 350-40, “Internal Use Software.” ASC 350-40 provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the application are capitalized if it is determined that these upgrades or enhancements add additional functionality to the application. The capitalized development cost is amortized on a straight-line basis over the estimated useful life, which is generally five years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

 

Impairment for long-lived assets

 

Long-lived assets, including property, equipment, furniture and fixtures and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When these events occur, the Company measures impairment by comparing the carrying values of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amounts of the assets, the Company would recognize an impairment loss based on the excess of the carrying value over the assessed discounted cash flow amount.

 

Revenue recognition

 

The Company derives its revenues from three sources: (1) revenue from application development services, (2) revenue from consulting and technical support services, and (3) revenue from subscription services.

 

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The Company recognizes revenues when persuasive evidence of an arrangement exists, delivery of goods and service have occurred, the sales price is fixed or determinable, and collectability is reasonably assured. All of the Company’s contracts with customer do not contain cancelable and refund-type provisions.

 

(1) Revenue from application development service

 

The Company’s application development service contracts are primarily on a fixed-price basis, which require the Company to perform services including project planning, project design, application development and system integration based on customers’ specific needs. These services also require significant production and customization. Upon delivery of the services, customer acceptance is generally required. In the same contract, the Company is generally required to provide post-contract customer support (“PCS’) for a period from three months to three years (“PCS period”) after the customized application development services are delivered. The type of services for PCS clause is generally not specified in the contracts or as stand-ready services on when-and-if-available basis.

 

Multiple Deliverable Arrangements

 

The Company generally enters into arrangements with multiple deliverables for customized application development services contracts. If the deliverables have standalone value at contract inception, the Company accounts for each deliverable separately. The Company determines application development service, PCS or specific service, if applicable, as separated deliverables in the fixed-fee application development service contract. The Company allocates contract revenue to the identified separate units based on their relative selling prices. In accordance with ASC 605-25-30, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to the deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of the selling price (“TPE”) and (iii) best estimate of the selling price (“BESP”. The Company uses VSOE of selling price in the selling price allocation in all instances where it exists. VSOE of selling price for products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately. The Company has not established VSOE for application development service and PCS due to lack of pricing consistency and variety of different service provided. In addition, the Company’s customized application differs substantially from that of competitors, it is difficult to obtain the reliable standalone competitive pricing necessary to establish TPE. Accordingly, the Company uses its BESP of application development services, hardware, consulting and technical support services and subscription services, if applicable, as the basis of revenue allocation. The Company determines BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the size and volume of the transactions, the geographic area where services are sold, historical standalone sales and contract prices.

 

Revenue allocated to customized application development services is recognized as the service is performed using the percentage of completion method of accounting, under which the total value of revenue is recognized on the basis of the percentage that total cost to date bears to the total expected costs. The Company considers labor costs and related material costs for the input measurement as the best available indicator of the progress, pattern and timing in which contract obligations are fulfilled. The Company has a long history of providing these services resulting in its ability to reasonably estimate the labor costs and related material costs expected to be incurred and the progress toward completion on each fixed-price customized contract based on the proportion of labor costs and related material costs incurred to date relative to total estimated labor costs and related material costs at completion. Estimated contract costs are based on the budgeted labor costs and related material costs, which are updated based on the progress toward completion on a monthly basis.

 

The Company’s application development service revenues are generated primarily from contracts with PRC government or related agencies and state-owned enterprises. The contracts contain negotiated billing terms which generally include multiple payment phases throughout the contract term and a significant portion of contract amount usually is billed upon the completion of the related projects. Pursuant to the contract terms, the Company has enforceable right on payments for the work performed.  

 

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Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable based on the current contract estimates. In instances where substantive acceptance provisions are specified in customer contracts, revenues are deferred until all acceptance criteria have been met. To date, the Company has not incurred a material loss on any contracts. However, as a policy, provisions for estimated losses on such engagements will be made during the period in which a loss becomes probable and can be reasonably estimated. The fixed-priced application development contracts provide customers with rights to specified PCS or to unspecified PCS that is if and when available.

 

The unspecified PCS is stand-ready service on when-and-if-available basis. It grants the customers on line and telephone access to technical support personnel during the term of the service. Specified PCS includes specified service term in the contract such as training. Revenue allocated to specified PCS or other services is recognized as the related services are rendered. Revenue allocated to unspecified PCS component is deferred and recognized on a straight-line basis over the PCS period.

 

(2) Revenue from consulting and technical support services

 

Revenue from consulting and technical support services is primarily comprised of fixed-fee contracts, which require the Company to provide professional consulting and technical support services over contract terms beginning on the commencement date of each contract, which is the date our service is made available to customers. Revenue is recognized on a straight-line basis as earned over the terms of the respective contracts, which is typically 12 to 24 months.

 

(3) Revenue from subscription services

 

Revenue from subscription services is comprised of subscription fees from customers accessing the Company’s software-as-a-service applications. The Company’s monthly or quarterly billing to customer is on the basis of number of uses by the customers. Revenue from subscription services is recognized in the period when services are occurred. Because our customers purchase the services on a periodic basis and do not have the right to take possession of the software, we consider these arrangements to be service contracts and are not within the scope of Industry Topic 985, Software.

 

Revenue includes reimbursements of travel and out-of-pocket expense, with equivalent amounts of expense recorded in cost of revenue. The Company reports revenues net of value added tax (“VAT”). The Company’s subsidiary in PRC are subject to a 6% to 17% value added tax (“VAT”) and related surcharges on the revenues earned from providing services.

 

Income taxes

 

The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the years ended December 31, 2017 and 2016. All of the tax returns of the Company’s subsidiary in China remain subject to examination by the tax authorities for five years from the date of filing.

 

Recently issued accounting pronouncements

 

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, to simplify the presentation of deferred income taxes. The update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The update applies to all entities that present a classified statement of financial position. For public business entities, the ASU is effective for consolidated financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the ASU is effective for consolidated financial statements issued for annual periods beginning after December 15, 2017, and interim periods with annual periods beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company has elected to early adopt the ASU. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

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In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to improve transparency and comparability across entities regarding leasing arrangements. This ASU requires the recognition of a separate lease liability representing the required discounted lease payments over the lease term and a separate lease asset representing the right to use the underlying asset during the same lease term. Further, this ASU provides clarification regarding the identification of certain components of contracts that would represent a lease as well as requires additional disclosures to the notes of the financial statements. Additionally, in January 2018, the FASB issued ASU No. 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842,” to permit an entity to elect an optional practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under existing accounting guidance. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied under a modified retrospective approach, including the option to apply certain practical expedients. The FASB has continued to issue various updates to clarify and improve specific areas of ASU No. 2016-02. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” to clarify the implementation guidance within ASU No. 2016-02 surrounding narrow aspects of Topic 842, including lessee reassessment of lease classifications, the rate implicit in a lease, lessor reassessment of lease terms and purchase options and variable lease payments that depend on an index or a rate. Also, in July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” to clarify the implementation guidance within ASU No. 2016-02 surrounding comparative period reporting requirements for initial adoption as well as separating lease and non-lease components in a contract and allocating consideration in the contract to the separate components. Like ASU No. 2016-02, this guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied under a modified retrospective approach. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements. Excluding any impact from the clarification of contracts representing a lease, the Company expects to recognize separate lease liabilities for the amounts related to certain facilities under operating lease agreements. Additionally, the Company does not expect to significantly change operating lease agreements prior to adoption.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from Equity Method Investees; (8) Beneficial Interests in Securitization Transactions; and Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. Management does not believe the adoption of this ASU would have a material effect on the Company’s consolidated financial statements.

 

In May 2014, August 2015, April 2016, May 2016 and December 2016, the FASB issued ASU 2014-09 (ASC Topic 606), Revenue from Contracts with Customers, ASU 2015-14 (ASC Topic 606) Revenue from Contracts with Customers, Deferral of the Effective Date, ASU 2016-10 (ASC Topic 606) Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, ASU 2016-12 (ASC Topic 606) Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20 (ASC Topic 606) Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, respectively. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption (“modified retrospective transition approach”). As an “emerging growth company,” or EGC, the Company has elected to take advantage of the extended transition period provided in the Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards applicable to private companies. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2018, including interim periods beginning after December 15, 2019. The Company is in the process of evaluating the impact of adoption of this guidance on its consolidated financial statement utilizing the modified retrospective transition approach.

 

We do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.

 

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OUR BUSINESS

 

Overview

 

We are a provider of software application and technology solutions and services to corporate and government customers primarily located in China. We introduced global trade software applications when we launched our operations in 1997 with a vision to make global trade operations easier for our customers. Since our inception, we have continued to innovate by developing technologies that enable us to successfully deliver a series of solutions and services that address the evolving and changing needs of our corporate and government customers. Our mission is to make global trade easier by empowering all players in the ecosystem.

 

Our customers are corporate and government organizations engaged in global trade. Our corporate customers are import and export companies, manufacturers engaged in international trade, as well as logistics and other service providers. Our government customers include customs and other government agencies that oversee the flow of goods and services across borders, as well as government authorities and organizations that manage and operate free trade and bonded trade zones, ports and terminals, and other international trade facilities.

 

Global trade involves complicated and cumbersome processing, manual handling of voluminous documents, extended and complex cross-organization workflows as well as a great number of business and government players in the global trade ecosystem. We estimated that a typical process for an export shipment in China may involve 1 exporter, 8 government agencies and authorities and 12 various logistics and financial service providers with more than 60 persons engaged in 13 different work processes that generate more than 55 regulatory compliance and trade logistics documents and 150 information or message exchanges.

 

Our customers are facing increasing challenges as the world’s trade ecosystems continue to grow in size and complexity. Costs associated with global trade, such as logistics performance, border control and international connectivity remain high. Potential savings from more collaborative and efficient trade processes could reduce the costs of global trade significantly. The need for greater efficiency and cost savings are driving the transformative shift for participants in global trade to become more connected and collaborative.

 

Our comprehensive and robust solutions and services include Powerbridge System Solutions and Powerbridge SaaS Services with more than 15 solutions and services deployable on premise and in the cloud. Leveraging our deep domain knowledge and strong industry experience, we provide a series of differentiated and robust solutions and services that address the mission critical needs of our corporate and government customers, enabling them to handle and simplify the complexities of global trade operations, logistics and compliance.

 

We provide Powerbridge System Solutions to our corporate and government customers engaged in global trade, including businesses and manufacturers across a broad range of industries, government agencies and regulatory authorities, as well as global trade logistics and other service providers. Powerbridge System Solutions enable our customers to streamline their trade operations, trade logistics and regulatory compliance, consisting of Trade Enterprise Solutions and Trade Compliance Solutions which have been in service since our first introduction twenty years ago and Import & Export Loan and Insurance Processing which have recently been introduced to a selected group of customers.

 

We began offering our Powerbridge SaaS Services (software-as-a-service) in 2016 and are continually developing and expanding our SaaS services that provide our corporate and government customers with significant benefits, including better use of resources, a lower cost of operations, easier document handling, faster processing time as well as higher logistics and compliance connectivity and efficiency. Powerbridge SaaS Services include Logistics Service Cloud and Trade Zone Operations Cloud which are in service, and Inward Processed Manufacturing Cloud, Cross-Border eCommerce Cloud and Import & Export Loan and Insurance Processing Service Cloud which are in development.

 

We are currently designing and developing our cloud-based Powerbridge BaaS Services (blockchain-as-a-service) that is intended for all players in the global trade ecosystem. Blockchain technology is emerging as a major disruptive force across many industries, including those involved in global trade. We believe that blockchain technology could allow our customers to conduct business in more synchronized and collaborative ways to substantially increase operational efficiency and reduce trade costs across the global trade supply chain. Powerbridge BaaS Service will include Compliance Blockchain Services, Logistics Blockchain Services, Supply Chain Blockchain Services, and Import & Export Loan and Insurance Processing Blockchain Services.

 

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Our solutions and services are built from our multiple proprietary technology platforms which are developed based on industry leading open source infrastructure technologies. Our technology platforms include Powerbridge System Platform and Powerbridge SaaS Platform, which are designed for high-performance reliability, flexibility and scalability, allowing us to expand our solutions and services rapidly and efficiently to consistently address the needs of our corporate and government customers. Our Powerbridge BaaS Platform is in development.

 

Powerbridge System Platform consists of modular technology and business components that enable us to provide mission critical applications and solutions in trade operations, trade logistics and regulatory compliance to our corporate and government customers.

 

Powerbridge SaaS Platform is the technology infrastructure upon which we are developing our SaaS services designed to provide on-demand services in trade operations, trade logistics and regulatory compliance with a multi-tenant and microservice architecture.

 

Our BaaS services will be built on top of our Powerbridge Blockchain Platform that is designed to provide high scalability and performance characteristics, consisting of multiple technology engines that support the various business component models specific for trade transaction, trade logistics and regulatory compliance in global trade.

 

We intend to continue leveraging our industry expertise and product knowledge with the best use of emerging and disruptive technologies such as big data, artificial intelligence and Internet of Things to enhance our core technology capabilities and continually increase the scope of our solutions and services to our customers.

  

We currently derive our revenues from three sources: (1) revenue from application development services generated from Powerbridge System Solutions, which require us to perform services including project planning, project design, application development and system integration based on customers’ specific needs. These services also require significant production and customization; (2) revenue from consulting and technical support services primarily generated from Powerbridge System Solutions, and (3) revenue from subscription services generated from Powerbridge SaaS Services. We currently generate most of our revenues from application development services, which represented 89.5%, 90.4%, 81.1% and 85.4% of total revenue in fiscal 2017 and 2016 and for the six months ended June 30, 2018 and 2017, respectively. Revenue from consulting and technical support services represented 6.6%, 5.2%, 14.8% and 6.9% of total revenue in fiscal 2017 and 2016 and for the six months ended June 30, 2018 and 2017, respectively. Revenue from subscription services represented 3.9%, 4.4%, 4.1% and 7.7% of total revenue in fiscal 2017 and 2016 and for the six months ended June 30, 2018 and 2017, respectively. For the fiscal years ending December 31, 2016 and 2017, our revenues were US$21.2 million and US$21.6 million, respectively. Our net profit grew from US$3.5 million in 2016 to US$4.0 million in 2017. For the six months ended June 30, 2017 and 2018, our revenues were US$6.6 million and US$7.9 million, respectively, and our net profit was US$1.5 million and US$1.3 million, respectively.

 

Our corporate and government customers include (i) international trade businesses and manufacturers, (ii) government agencies and authorities, and (iii) logistics and other various service providers. For the fiscal year ended December 31, 2016, we generated revenue from a total of 1,757 customers, of which 1,010 are international trade businesses and manufacturers, 55 are government agencies and authorities, and 692 are logistics and other service providers. For the fiscal year ended December 31, 2016, we generated revenue from a total of 1,757 customers, of which 1,010 are international trade businesses and manufacturers, 55 are government agencies and authorities, and 692 are logistics and other service providers. For the fiscal year ended December 31, 2017, we generated revenue from a total of 1,633 customers, of which 936 are international trade businesses and manufacturers, 70 are government agencies and authorities, and 627 are logistics and other service providers. For the six months ended June 30, 2018, we generated revenue from a total of 739 customers, of which 257 are international trade businesses and manufacturers, 67 are government agencies and authorities, and 415 are logistics and other service providers.

 

We generate a significant portion of our revenues  from a relatively small number of major customers. For the year ended December 31, 2017, two government customers accounted for 17.2% and 13.1% of our total revenues, respectively. For the year ended December 31, 2016, three government customers accounted for 16.0%, 12.2%, and 10.0% of our total revenues, respectively. For the six months ended June 30, 2018, one government customer accounted for 16.7% of our total revenues.

 

As of the date of this prospectus, we had a total of 231 full-time employees, of which 82 are in research and development, 37 are in sales and marketing, 89 are in technical and customer services, and 23 are in general and administration.

 

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Our Current Corporate Structure

 

The following diagram illustrates our corporate structure as of the date of this prospectus.

 

Controlled Company

 

Prior to the completion of this Offering, and as long as our officers and directors, either individually or in the aggregate, own at least 50% of the voting power of our Company, we will be a “controlled company” as defined under NASDAQ Marketplace Rules.

 

For so long as we are a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules, including:

 

  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.

 

Although we do not intend to rely on the “controlled company” exemption under the NASDAQ listing rules, we could elect to rely on this exemption in the future. If we elect to rely on the “controlled company” exemption, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. (See – Risk Factor “As a “controlled company” under the rules of the NASDAQ Capital Market, we may choose to exempt our company from certain corporate governance requirements that could have an adverse effect on our public shareholders.”)

 

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Corporate History and Background

 

Powerbridge is a company that was established under the laws of the Cayman Islands on July 27, 2018 as a holding company. The Company, through its subsidiaries, is a provider of software application and technology services to corporate and government customers engaged in global trade.

 

For the purpose of this Offering and listing on the NASDAQ Capital Market, a reorganization of the Company’s legal structure was completed on August 27, 2018. The reorganization involved the incorporation of Powerbridge, a Cayman Islands holding company, and its wholly owned subsidiary, Powerbridge HK, a holding company incorporated on July 27, 2018 under the laws of Hong Kong; and the transfer of all equity ownership of Powerbridge Zhuhai to Powerbridge HK from the former shareholders of Powerbridge Zhuhai through an investment holding company.

 

Prior to the reorganization, Powerbridge Zhuhai’s equity interests were held by the former shareholders through an investment holding company. Powerbridge Zhuhai was incorporated on October 30, 1997 in Zhuhai, Guangdong province under the laws of the People’s Republic of China. Powerbridge Zhuhai is an operating subsidiary that provides global trade software application and technology services to corporate and government customers located in China. Powerbridge Beijing, a company conducting engineering and IT research and development activities, was incorporated on September 28, 2017 in Beijing under the laws of PRC, with Powerbridge Zhuhai owning 55% and Mr. Tianfei Feng owning 45% of equity interest. Since inception, Powerbridge Zhuhai and Mr. Tianfei Feng have only made nominal investments in Powerbridge Beijing and no substantial business operations have occurred; as a result, Powerbridge Zhuhai and Mr. Tianfei Feng agreed to deregister the entity. Mr. Tianfei Feng later became the Company’s Chief Research and Development Officer and the technology research and development activities originally conducted in Powerbridge Beijing are now conducted through the Beijing branch of Powerbridge Zhuhai. Powerbridge Beijing was deregistered on October 25, 2018.

 

On August 7, 2018, the former shareholders transferred their 100% ownership interest in Powerbridge Zhuhai to Powerbridge HK, which is 100% owned by Powerbridge. After the reorganization, Powerbridge owns 100% equity interests of Powerbridge HK and Powerbridge Zhuhai. All shareholders have the same ownership interest in Powerbridge as in Powerbridge Zhuhai prior to the reorganization.

 

As of the date of this prospectus, Powerbridge Zhuhai has five branch offices located in Beijing, Changsha, Wuhan, Nanning, and Hangzhou in China.

 

Industry Background

 

China’s Global Trade is Growing Driven by the Belt & Road Initiative

 

According to China Customs, China’s import and export or global trade volume continues to grow at a rapid pace. China’s global trade volume was US$4.41 trillion (approximately RMB27.79 trillion) in 2017, representing an increase of 14.2% over 2016. China’s trade volume with EU countries, USA, and ASEAN countries increased in 2017 from 2016 by 15.5%, 15.2% and 16.6%, respectively, and with Russia, Poland, and other Eastern European countries increased by 23.9%, 23.4% and 40.7%, respectively4. According to Prospective Industry Research Institute, an industry research firm, cross-border eCommerce trade volume for consumer-packaged merchandise showed the largest increase in 2017, accounted for 27.3% of the total trade with an increase of 20.6% over 20165.

 

The B&R is a China-based initiative to increase cooperation and development with partnering countries for unimpeded trade, facility connectivity and financial integration as well as other bilateral exchanges. Since its inception in 2015, more than 70 countries around the world have joined the B&R. According to China Customs, import and export volume with the B&R countries which includes substantially all of Asian and Eastern European countries as well as several African and Latin American countries6, was US$1.17 trillion (approximately RMB7.4 trillion) in 2017 with an increase of 17.8% over 2016, direct investment by Chinese organizations in the B&R countries was US$14.4 billion in 20177, and the total infrastructure and other project contracts amounted to US$144.3 billion in 20178. The B&R trade and direct investment are expected to grow at an even faster pace in the next few years.

 

 

4 General Administration of Customs of The People’s Republic of China, http://fangtan.customs.gov.cn/tabid/539/InterviewID/119/Default.aspx, January 12, 2018, Press Conference of General Administration of Customs on Import and Export in 2017

 

5 https://bg.qianzhan.com/report/detail/459/180503-71bff72f.html

 

6 https://www.yidaiyilu.gov.cn/wcm.files/upload/CMSydylgw/201805/201805080457024.pdf

 

7 http://fangtan.customs.gov.cn/tabid/539/InterviewID/119/Default.aspx

 

8 http://www.mofcom.gov.cn/article/tongjiziliao/dgzz/201801/20180102699459.shtml

 

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As a continuing effort to support global trade and the B&R, the Chinese government has introduced and implemented a series of significant policies and initiatives to further enhance the business and operations environments, as evidenced in the massive development of trade related infrastructures in recent years in China. According to China Customs, there are currently a total of 12 free trade zones9 and 122 regulated trade zones such as bonded trade zones around the country with more in development10. These trade zones have driven and contributed significantly to the growth of imports and exports as well as B&R trade volumes. In addition, as of 2017, China has signed free trade agreements with over 20 B&R countries and has built or are building more than 75 international trade infrastructures11 including trade facilities and trade zones in these countries.

 

The B&R has brought an unprecedented opportunity for Chinese organizations such as infrastructure builders, logistics service providers and financial institutions. These organizations directly benefit from the B&R as they continue to bring their expertise, products and services to the B&R markets. For examples, the infrastructure builders are building ports, railways, highways and free trade zones while the logistics firms are offering transportation and logistics services and the financial institutions are providing loans and setting up banking operations. Technology service companies from China are following the paths of these Chinese organizations to enter the B&R markets to address the information technology need for supporting and managing the trade infrastructures, trade logistics and finance processing.

 

Disruptive Technologies are Enabling the Global Trade Organizations

 

Global trade is a process that involves complicated and cumbersome processing, manual handling of voluminous documents, extended and complex cross-organization workflows and a great number of business and government participants in the global trade ecosystem. Corporate and government organizations engaged in global trade today are facing increasing challenges as the world’s trade ecosystems continue to grow in size and complexity. Costs associated with global trade such as logistics performance, border control, and international connectivity remains high. We believe potential savings from more collaborative and efficient trade processes could reduce the costs of global trade significantly.

 

The need for better efficiency and lower cost is driving the transformative shift for participants in global trade to become more connected and collaborative. In this regard, governments are implementing a series of initiatives to enhance trade collaboration such as building smart ports and integrating the single window operations. China Customs has established collaborative partnerships with customs authorities in over 50 countries to facilitate compliance synchronization, information exchange and enforcement cooperation, aiming to reduce customs processing time and cost. Global trade businesses, logistics and other service providers are increasingly embracing and adapting to the collaborative model to become more productive and efficient.

 

The convergence of disruptive technologies such as big data, artificial intelligence, Internet of Things, and cloud computing is disrupting the global trade industry and driving organizations to capitalize on the opportunity. Businesses and government authorities involved in global trade are investing heavily and increasingly adapting to these new technologies in order to streamline regulatory compliance processes, reduce workflow complexities and processing time, maximize use of insightful data for better decision makings, increase service reliability at lower costs, and even create entirely new business models. This has created an exciting opportunity to the technology service providers to leverage disruptive technologies to offer a broader product and service portfolio.

 

In addition, blockchain technology is rapidly emerging and is regarded as a major disruptive force to government authorities and business organizations across many industries. Blockchain technology is still new but the impact on global trade could be immense. It has the potential to enable corporate and government organizations to operate in a more synchronized and collaborative way to significantly reduce trade cost and increase transaction efficiency. Global trade blockchain applications are currently being developed and piloted with limited use cases to increase transparency and visibility across the supply chain, automate document exchange and processing, prove authenticity and origin of import and export goods, and accelerate flow of goods and cargos across international borders.

 

 

9 http://finance.ifeng.com/a/20180414/16070649_0.shtml

 

10 http://www.customs.gov.cn/publish/portal0/tab49564/info773027.htm

 

11 http://www.mofcom.gov.cn/article/zt_qmcyzd/zyjs/bdpl/201801/20180102705424.shtml

 

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Our Opportunity

 

We believe the need for global trade software application and technology services will continue to grow, driven by the continuing growth in China’s global trade volume and the rapid advancement of the Belt & Road Initiative (“B&R”). The convergence of disruptive technologies and emergence of blockchain technology will accelerate the drive for organizations engaged in global trade to increasingly adapt at scale to new technologies as they mature and become more widely available.

 

We intend to address the subsets of three technology markets: the traditional enterprise software market in China which we have been servicing since our inception, the SaaS application market in China which we began servicing in 2016, and the blockchain applications market for which we are designing and developing a series of BaaS services to target both China and the international markets.

 

According to iResearch, an industry research and consulting firm in China, the traditional enterprise software market in China is expected to grow from US$4.4 billion (approximately RMB28.5 billion) in 2017 to US$5.2 billion (approximately RMB33.8 billion) in 2020 and the SaaS application market in China is expected to reach US$7.3 billion (approximately RMB47.3 billion) in 202012.

 

According to the market report entitled “Global Blockchain Market Size Analysis and Industry Opportunity 2018-2028” published in April 2018 by Bekryl Market Analysts, a capital market research and consulting service firm, the global blockchain market size is estimated at US$702.3 million in 2018 and will reach US$16.3 billion by 2025, registering a CAGR of 56.7% to create high revenue opportunity for industry players during 2018 to 202813.

 

Our Competitive Strengths

 

We believe that the following competitive strengths contribute to our success and differentiate us from our competitors:

 

  Global Trade Software Application Pioneer. We introduced software applications for international trade companies when we launched our operations in 1997. Since our inception, we have continued to innovate by developing technologies that enable us to consistently and successfully deliver a series of solutions and services that address the evolving and changing needs of our customers.

 

  Deep Domain Knowledge and Industry Expertise. We have gained and developed deep domain knowledge and industry expertise from over twenty years of experience in service, which is built into and will continue to contribute to the robust and differentiated capabilities of our solutions and services. We believe domain knowledge and industry expertise is a significant competitive barrier due to the complex nature of global trade.

 

  Solid and Diversified Customer Base. Our corporate and government customers include global trade businesses and manufacturers across a broad range of industries, government agencies and authorities as well as logistics and other service providers. Our solid customer base enables us to continually cross sell our solutions and services and to expand our market share.

 

  Comprehensive and Robust Product Portfolio. Our proven track record with our customers demonstrates the strengths in our comprehensive and robust solution and service portfolio that is built to handle the complexities of global trade business. We continue to leverage disruptive technologies to expand the breadth and adaptability of our portfolio of offerings to service a wider range of customers.

  

 

  12 http://report.iresearch.cn/report_pdf.aspx?id=3122

 

  13 https://bekryl.com/industry-trends/blockchain-market-size-analysis

 

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  Mission-Critical System That is Difficult to Replace. Because our solutions and services address the mission-critical needs in global trade, our customers depend on our solutions and services for managing their regulatory compliance and trade logistics operations. Once deployed, our solutions and services become a mission-critical system that is often deeply entrenched into their core technology and operational infrastructures.

 

  Extensive Experience for the Belt & Road. The B&R has catalyzed substantial development for improving regulatory compliance and trade logistics in China. We have been providing our solutions and services to help our customers achieve their objectives in this regard. Our extensive experience will enable us to efficiently expand into international markets which we intend to target as B&R accelerates in these markets 13.

 

  Strong Brand Recognition and Industry Resources. We have built a trusted brand with a long history and a proven track record of delivering value to our customers. We believe our brand, reputation and scale as well as our extensive network of industry and government resources enable us to capture substantial growth potential as our corporate and government customers continue to grow and evolve.

 

  Solid Foundation for Developing Blockchain Applications. Blockchain technology is promising for business but its adoption is challenging. It requires not only technology and product expertise but also the ability to integrate and bring all players to adapt and participate. We believe we are capable of utilizing blockchain for global trade by leveraging our strong domain knowledge, product expertise and industry resources.

 

  Scalable Business Model with a Prudent Approach. Our solutions and services are highly adaptable, scalable and supported by our flexible technology infrastructures, enabling us to efficiently expand our customer base. In addition, we are taking a prudent approach by combining traditional technologies and disruptive technologies because we believe the adoption and transformation of new technologies will take considerable time and effort.

 

  Experienced and Visionary Management Team. Our success is attributable to the deep industry expertise and proven track-record of our experienced management. We were founded twenty years ago with a vision to make global trade operations easier, and since then, we have successfully demonstrated our abilities. We believe our management’s strong execution capability is among the best in our industry.

 

Our Growth Strategy

 

We plan to grow and expand our business by pursuing the following growth strategies:

 

  Increase Revenue with Existing Customers. We have a large number of corporate and government customers that currently utilize our global trade software application and technology services. We intend to increase our revenue by leveraging and broadening our relationships with existing customers by helping them identify new use cases for our existing solutions and services; and solving more problems for them by providing new solutions and services.

 

  Accelerate Research and Development. We plan to use a portion of the proceeds from this Offering towards our research and development to accelerate the development of disruptive technology-enabled global trade software application and technology solutions and services. We believe disruptive technology-enabled applications such as SaaS and BaaS services will enable us to capture significant market share in China and abroad.

 

  Expand Our Solution and Service Offerings. Global trade involves complex and cumbersome processes in trade operations, trade logistics and regulatory compliance with many players in the global trade ecosystem. Each player is operating in different settings and with different objectives. We plan to expand our offerings and focus on solutions and services that enable our customers to better connect and collaborate.

 

13 Belt and Road Portal, https://eng.yidaiyilu.gov.cn

 

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  Increase Market Penetration. We plan to leverage our deep domain knowledge, industry experience and product expertise to increase our market penetration with a deeper market coverage and a broader geographical reach in China. We intend to continually strengthen our sales and marketing capabilities and build strategic partnerships with government and corporate organizations to further drive sales.

 

  Expand into International Markets. China’s B&R has brought significant opportunities for Chinese organizations such as infrastructure builders and logistics service providers. We plan to expand into international markets by “piggybacking” on these organizations as they bring their products and services to the B&R countries. We believe this approach will mitigate risk, reduce cost and minimize time-to-market for entering new markets.

 

  Pursue Strategic Acquisitions and Investments. We plan to pursue strategic acquisitions and investments in selective technologies and businesses that will enhance our technology capabilities, expand our offerings and increase our market penetration. We believe our strategic acquisition and investment strategy is critical for us to accelerate our growth and strengthen our competitive position.

 

Our Solutions

 

We provide software applications and technology solutions and services to corporate and government organizations involved in global trade. We introduced our first global trade software application in 1998 and have since substantially expanded the scope of our solutions and services to address deeper and broader customer needs.

 

Our solutions and services currently include Powerbridge System Solutions and Powerbridge SaaS Services; we are also designing and developing Powerbridge BaaS Services.

 

We have been servicing our corporate and government customers with Powerbridge System Solutions since our introduction of this solution series twenty years ago. Our comprehensive solutions and services address the mission critical needs in global trade for our customers, enabling them to optimize and streamline their trade operations, trade logistics and regulatory compliance.

 

In 2016, we introduced Powerbridge SaaS Services and are continually expanding the scope our SaaS services. Powerbridge SaaS Services is a software-as-a-service designed to enable businesses and government organizations with significant benefits, including better use of resources, lower cost of operations, easier documentation handling, faster processing time as well as higher logistics and compliance and connectivity and efficiency.

 

We are currently designing and developing Powerbridge Baas Services and plan to introduce our BaaS services as pilot projects on a limited bases to selective customers in the first quarter of 2019. Powerbridge BaaS Services is a cloud-based blockchain-as-a-service designed for all players in the global trade ecosystem, empowering them to conduct business in more synchronized and collaborative ways to substantially increase operational efficiency and reduce trade cost across the global trade supply chain.

 

Our solutions and services are built from our multiple proprietary technology platforms: Powerbridge System Platform and Powerbridge SaaS Platform, which are designed for high-performance reliability, flexibility and scalability, allowing us to expand our solutions and services rapidly and efficiently to consistently address the needs of our corporate and government customers. Our Powerbridge BaaS Platform is in development.

 

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Powerbridge System Solutions

 

Overview of Powerbridge System Solutions

 

We provide Powerbridge System Solutions to our corporate and government customers engaged in global trade, including import and export businesses, manufacturers, government agencies and regulatory authorities, as well as trade logistics and other service providers.

 

Powerbridge System Solutions include Trade Compliance Solutions and Trade Enterprise Solutions which have been in service since our first introduction twenty years ago and Import & Export Loan and Insurance Processing which have recently been introduced to a selected group of customers.

 

Trade Compliance Solutions and Trade Enterprise Solutions are implemented and deployed on premises largely as customized services capable of integrating with applications, systems, equipment and facilities from customers and third-party providers.

 

Import & Export Loan and Insurance Processing are deployed on browser/server and client/server environments.

 

Strengths of Powerbridge System Solutions:

 

We believe Powerbridge System Solutions provide the following core benefits for our customers:

 

  Our Trade Compliance Solutions enable government agencies and regulatory authorities greater control and security, better use of resources, higher duty collection, faster processing time and higher compliance efficiency in servicing global trade businesses and logistics service providers.

 

  Import and export businesses and manufacturers in diverse vertical industries use our Trade Enterprise Solutions to manage business operations, simplify trade processes, reduce document handling, minimize operational cost and increase overall productivity.

 

  Our newly introduced Import & Export Loan and Insurance Processing is designed to facilitate and streamline global trade related loan and insurance processes. It enables businesses, financial and insurance service involved in global trade to reduce workflow complexity, processing time and operational cost while increase processing efficiency.

 

Trade Compliance Solutions

 

Trade Compliance Solutions are a series of regulatory compliance solutions and services for government agencies and regulatory authorities for managing trade zones, optimizing port control, streamlining customs clearance, accelerating cross-border processing, and expanding Chinaport services, which include the followings:

 

Trade Zone Compliance. We provide Trade Zone Compliance to government agencies and authorities such as customs for regulating cross-border flow of goods and services and trade facility authorities for managing the trade zones, including bonded traded zones, free trade zones and other regulated trade zones.. Our solution allows our government customers to streamline compliance and business processes and automate document processing and exchange as well as manage and regulate all operational activities in the trade zones, including goods and cargo flows, logistics and warehousing, and inward processing manufacturing.

 

Port Compliance & Logistics. Import and export ports include ocean, air, rail, river, highway and cross-border ports. Port operations involve complex and cumbersome processes with many players involved, including port and terminal authorities, customs and other government agencies, import and export businesses and cargo owners, transport vessels and vehicle operators, customs and forwarding agents and various logistics service providers. We provide Port Compliance & Logistics to all players to streamline compliance and logistics processes, which enables rapid and efficient handling of goods and documents.

 

Customs Clearance. We provide Customs Clearance to customs and other government agencies such as customs and inspections to regulate cross-border flow of goods and services for regulatory compliance operations and control. Our solution enables our government customers to streamline customs clearance processes, increase fraud detection capabilities, and enhance duty collections, with featured applications including single window operations, clearance compliance and processing, import and export goods inspection, inward processed manufactured goods clearance, cross-border clearance as well as risk and security control and duty processing.

 

Cross-Border Processing. We provide Cross Border Processing to the customs agency, quarantine and inspection agency and other government agencies and authorities for managing and regulating commodity and merchandise trades at designated trade markets or areas at cross-borders between China and its neighboring countries. Our solution enables government agencies and authorities to effectively and efficiently manage all cross-border trade operations, including trader registration, merchandise inspection, customs processing, vehicle control and checkpoint operations.

 

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Chinaport Services. Chinaport is an import and export technology and data platform supported by sixteen major government ministries and bureaus, including China Customs, MOC, Ministry of Industry and Information Technology, Ministry of Transportation and State Administration of Foreign Exchange. Chinaport provides services to port authorities for data sharing and online verifications and to trade businesses for import and export processing. We offer customized solutions and services to Chinaport organizations at national and local levels, engaging in project designing and planning, system and platform development, system maintenance and customer service for multiple Chinaport strategic initiatives and programs.

 

Smart Command. Government agencies and authorities such as customs and trade facility authorities use Smart Command for more effective managing and regulating trade compliance and trade logistics activities under their supervision. Our smart command dashboard integrates key performance data from structured and unstructured data sources. Our visualization applications enable data display in real time on a single large multi-screen interface with three-dimensional features. Our solution provides intelligent data in an intuitive and timely manner to enable the operators and decision makers to make informed decisions.

 

Trade Enterprise Solutions

 

We provide Trade Enterprise Solutions to businesses, manufacturers and inward processed manufacturing companies involved in global trade. Our solutions provides a suite of enterprise management applications that allow our customers to streamline their global trade business and operations with features and functionalities including business and process operations, inventory and warehousing control, project execution and management, customs clearance processing and all other compliance and logistics processing.

 

Inward processed manufacturing companies use imported raw materials, components and parts, packing and other materials to produce finished products for exporting. Inward processed manufacturing is a complicated and extended process that is highly regulated. We provide a series of applications specific to inward processed manufacturing companies to help streamline and automate their operations with features and functionalities including bonded goods verification, bonded logistics record keeping, digital manual processing and customs data management.

 

Import & Export Loan and Insurance Processing

 

We are introducing Loan Processing Service to import and export businesses, financial institutions such as commercial banks and technology-enabled financial service providers to facilitate and expedite the transaction and execution process for trade related loans. Our service are designed for document handling, loan application and approval, contract management, lending and repayment processing, and collateralized asset processing. The various types of loan processing services include trade credit loans, factoring loans, bonded goods loans, and duty refund loans.

 

Our Insurance Processing Service is newly introduced to facilitate and streamline the import and export related insurance processing and executing process for businesses and trade insurance providers involved in global trade. Our service facilitates the processing for insurance selection, insurance estimation, application processing and approval, customs declaration verification, insurance policy issuance, and policy modification and cancellation for a variety of global trade insurance policies including trade duty guarantee insurance, export risk insurance, transportation and logistics insurance.

 

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Powerbridge SaaS Services

 

Overview of Powerbridge SaaS Services

 

In 2016, we introduced Powerbridge SaaS Services (software-as-a-service) designed for corporate and government organizations involved in global trade, including import and export businesses and manufacturers, government agencies and regulatory authorities, cross-border eCommerce operators, as well as logistics and other service providers.

 

Our services are designed to be deployed rapidly via internet browsers and mobile devices, and can be supported through designated data centers and commercially available cloud platform services that provide infrastructure as a service for servers, storage, networking and database.

 

Strengths of Powerbridge SaaS Services

 

We believe our services encompass the following core advantages:

 

  Lower total cost of ownership. Unlike the traditional software model, our on-demand services enable our customers to have access anytime and anywhere without the upfront spending in software and hardware.

 

  Rapid deployment and configuration. Our services are designed to be deployed and configured rapidly through our application programming interfaces.

 

  Flexible and scalable. Our flexible and extensible architecture enables us to offer services that are scalable and adjustable to quickly address the different needs of our diverse group of customers.

 

  Reliable and secure. Our multi-tenant and microservice technology architectures allow us to design our services to provide our customers with a high level of performance, reliability and security.

 

  Intuitive and ease of use. Our services are designed be intuitive and easy to use with interfaces that are simple and user friendly. Our users are able to learn and use our services without specialized training.

 

Logistics Service Cloud

 

Logistics Service Cloud services are used by import and export logistics service providers such as freight forwarding agent companies who organize and arrange for air, ocean or land shipments. Our services allow our logistics service customers to minimize paperwork handling, reduce processing time, simplify workflow and increase performance efficiency by streamlining the import and export freight forwarding process and by facilitating digital exchange of information and documents among all players engaged in the freight forwarding process.

 

Our services enable our customers to connect and synchronize with the applications and systems of cargo owners, cargo depots and terminals, transportation and carrier companies and regional customs agencies for rapid exchange and sharing of information and data. Our customers can complete the freight arrangement process to minimize paper document handling that is often tedious, error-prone and time consuming. Electronic processing of customs declaration, reporting and approval through our data exchange system further expedites the freight forwarding process.

 

We are continually expanding the features and functionalities of our services to reach a broader range of our logistics service customers. Our core services provide features and functionalities including digital document exchange and processing among freight forwarders, cargo owners, cargo terminals, transportation carriers and local customs for a variety of tasks, including transport booking confirmation, cargo manifests and waybills processing, cargo status reporting at regulated depots and terminals, unloading and loading reporting, document receipt and message handling.

 

Trade Zone Operations Cloud

 

Our newly introduced Trade Zone Operations Cloud is designed for all businesses operating in regulated bonded and free trade zones, including importers and exporters, manufacturers engaged in global trade, inward processed manufacturers, cross-border eCommerce operators and logistics service providers as well as government zone management authorities. Our services enable businesses to streamline their operations in the zones and allow authorities to effectively manage the zones. Our services are integrated with the systems from businesses, government authorities, logistics service providers and other third parties.

 

Businesses and logistics service providers use our services to run and manage their daily operational, compliance and logistics activities, including commodity flows of bonded and non-bonded goods, operations record declaration and verification, goods display and business transaction, bonded to non-bonded conversion, inward processed operations and materials management, zone in-and-out processing, cross-border eCommerce operations and compliance as well as customs declaration and clearance processing.

 

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Our services are provided to government zone management and operating authorities as a supplement to their management and operations systems for a variety of regulatory and management operations, including checkpoint verification and release, logistics planning and allocation, contract and settlement management as well as document handling and performance data analysis. We are expanding our services using artificial intelligence and IoT technologies and applications to enhance the government’s capabilities in checkpoint and zone security, vehicle monitoring and control, and smart command operations.

 

Inward Processed Manufacturing Cloud

 

We are developing our Inward Processed Manufacturing Cloud services designed for inward processed manufacturing and trade companies who use imported raw materials, components and parts, packing and other materials to produce finished products for exporting. Our services will allow our customers to streamline and optimize their logistics and compliance operations in bonded or non-bonded environments. Our services will be capable of integrating with the systems from inward processed businesses, government authorities and agencies, and logistics service providers. Our services will be available to our customers the first quarter of 2019.

 

Inward processed manufacturing and trade businesses may use our services to perform a variety core logistics and compliance works, including digital handbook and manual declaration, material and component usage management, customs code revision and update, ledger maintenance, authorized economic operators services, production related work order based declaration, import and export customs declaration and processing, bonded goods operations and compliance as well as material and warehousing logistics management.

 

Our services will connect and synchronize with regional customs and other authorities through their localized single window platforms, customs compliance and clearance systems, and Chinaport systems and applications, allowing us not only service our inward processed and trade businesses effectively, but also offer value-added services to the government authorities by streamlining the work order based manufacturing data verification process as well as providing insightful inward processed manufacturing related operational and compliance analytics using big data technologies.

 

Cross-Border eCommerce Cloud

 

Our Cross-Border eCommerce Cloud is being developed for cross-border eCommerce operators, logistics service providers and payment and settlement service providers for rapid and efficient handling of the import and export process for couriered consumer merchandise and products. Our services will address the unique and challenging logistics, compliance and settlement needs of our customers, allowing them to reduce workflow complexities, minimize processing time all the while increase customs clearance and overall productivity. Our services will be available to our customers the second quarter of 2019.

 

Our services will be capable of integrating with the platforms, systems and applications from all players involved in the cross-border eCommerce process, including those from cross-border eCommerce operators, logistics service providers, payment and settlement service providers as well as government agencies and authorities. Our services enable the players to exchange and share information and data for streamlining the cross-border process as well as to derive intelligent insight from the trade data for better performance and decision making.

 

Our services will encompass all core steps throughout the entire cross-border eCommerce process with features and functionalities, including identity authentication of eCommerce operators, customs declaration and verification, merchandise inspection and approval, data verification and exchange, customs clearance declaration and processing, logistics handling and tracking, compliance status inquiry and notification via mobile devices, duty payment and tariff refund processing, government data analytics as well as regulatory information announcements.

 

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Import & Export Loan and Insurance Processing Cloud

 

Import & Export Loan and Insurance Processing Cloud is being designed and developed for import and export businesses, commercial banks, technology-enabled financial service providers and trade insurance providers. Our services will enable us to facilitate and simplify the trade related loan and insurance processes as well as optimize the value of matching trade businesses to financial and insurance products to provide credit and risk assessment services for the financial service providers. We plan to incorporate the use of big data, artificial intelligence and other technologies into our services.

 

Global trade businesses, financial service providers, and trade insurance companies may use our services to streamline the entire loan and insurance approval and execution process. Our services will enable our customers to save time and effort in handling the complicated and cumbersome processing tasks for a variety of trade related loans and insurances, with features and functionalities including identity verification and authentication, document exchange and handling, application and approval, and contract execution and management, among other tasks.

 

We are developing our matching services designed to service businesses by recommending financial products based on the product offerings and risk appetite of the financial service providers and the credit worthiness and profiles of the businesses engaged in global trade. We intend to use big data and artificial intelligence technologies to provide analytics from government and trade data sources. We will provide credit and risk analysis to financial service providers by bringing proof and validation to the assessment of the trade businesses, which provides critical insights for the financial service providers in making informed loan decisions.

 

Powerbridge BaaS Services

 

Overview of Powerbridge BaaS Services

 

We are currently designing and developing Powerbridge BaaS Services as cloud-based blockchain-as-a service designed for corporate and government organizations engaged in global trade, empowering them to synchronize and collaborate in unprecedented ways that can make doing business in global trade easier.

 

Global trade is generally characterized by its extended workflows with complicated compliance and logistics processes, voluminous documentation and time-consuming paper handling, cumbersome and costly peer-to-peer messaging and a great number of players from many different disciplines.

 

We estimated that a typical process for an export shipment in China may involve 1 exporter, 8 government agencies and authorities and 12 various logistics and financial service providers with more than 60 persons involved in 13 different work processes that generate more than 55 trade compliance and logistics documents and 150 information or message exchanges.

 

Conventional and traditional applications have enhanced the functional performance of global trade organizations, but are limited at establishing trusted relationships, allowing transparency because of inconsistent information sharing, and enabling collaboration across organizational boundaries among all players.

 

We believe blockchain technologies can not only address the shortfalls of conventional and traditional applications, but will disrupt the global trade industry and change how global trade is conducted with a collaborative model that can drastically enhance overall efficiency and reduce trade cost for all players in the global trade ecosystem.

 

Strengths of Powerbridge BaaS Services

 

We are designing and developing our Powerbridge BaaS Services to provide corporate and government organizations involved in global trade with significant improvements in workflow performance, reduction in document handling, optimization of synchronized peer-to-peer exchange of information, and enhancement of overall productivity and efficiency, with the following potential core attributes and advantages:

 

  Distributed and shared ledgers of immutable data and records for transactions are on trusted and secured global trade blockchain networks that are made accessible only to permissioned trading partners and peers.

 

  Encoded smart contract execution are validated and automated based on pre-defined business rules and contractual conditions for global trade peer-to-peer transactions or executions that are authenticated and verifiable in real time.

 

  End-to-end visibility and transparency throughout the global trade supply chain ensures real time exchange of events and documents among all trading parties and peers in the ecosystem.

 

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  Provenance and traceability are enabled with time-stamped records or documents and immutable provenance records of import and export goods that ensure accuracy for audit and regulatory compliance purposes.

 

  Extensible and interoperable capabilities enable the blockchain networks to connect and integrate with multiple other blockchain networks and with applications and systems of the permissioned members.

 

  Lower total cost of ownership with services offered in the cloud with minimum investment in software and hardware for rapid deployment as well as intuitive, easy-to-use user interface on the internet and via mobile devices.

 

We intend to offer our cloud-based BaaS services through commercial cloud platform services that provide infrastructure as a service for servers, storage, networking and database. We plan to generate our revenue on a subscription basis with single use, group and enterprise editions and from professional service fees.

 

We began designing and developing our Powerbridge BaaS Services infrastructure and services in 2017. We have our own development teams and work with third-party providers of infrastructure technologies. We plan to introduce our services as pilot projects on a limited basis to selective customers in the first quarter of 2019.

 

We intend to use a portion of the proceeds from this Offering to accelerate our R&D in order to expedite our service offerings to drive product adoption. We believe our domain knowledge, product expertise and customer relationships will enable us to capture significant market share with Powerbridge BaaS Services.

 

Our BaaS Services

 

Corporate and government organizations involved in global trade are facing increasing challenges with existing available technology and applications which hinder their productivity and efficiency. Conventional and traditional applications are inadequate and ineffective in addressing challenges which include:

 

  Conventional and traditional software systems used by each global trade participant is largely disjointed with inefficient integration and synchronization.

 

  Information across organizational boundaries is inconsistent and not fully transparent with many “blind spots” on the global trade supply chain.

 

  Peer-to-peer messaging or information exchanges among global trade players are complex, cumbersome, time-consuming and costly.

 

  Manual handling of paper-based global trade documents is time consuming, resource draining and error-prone.

 

  Compliance risk assessment and control are ineffective and costly due to lack of sufficient and credible information.

 

We believe our Powerbridge BaaS Services will address the imminent challenges faced by corporate and government organizations in global trade. Our services will offer potential benefits including:

 

  Trusted and secured blockchain networks where all permissioned players in the global trade ecosystem can synchronize and collaborate.

 

  End-to-end visibility and transparency of goods and documents throughout the global trade supply by all permissioned players.

 

  Synchronized cross-organizational workflows and secured exchange of transaction events and messages among global trade players.

 

  Digitized and automated exchange of global trade documents in real time with assurance of authenticity and immutability.

 

  Enhanced compliance risk assessments with increased level of information transparency and assured provenance of import and export goods and services.

 

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Our services will be provided as consortium blockchain networks designed for all players in the global trade ecosystem including import and export businesses and manufacturers, logistics service providers, financial service providers, and government agencies and authorities with the following potential benefits to each group of players:

 

  Businesses can benefit from full transparency of a streamlined supply chain that allows for greater predictability, earlier detection of problems, enhanced inventory management and better overall resources allocation.

 

  Logistics service providers can benefit from increased visibility on the supply chain, enhanced document processing and shorter processing time, improved service reliability and lower cost to trade businesses.

 

  Financial service providers can benefit from increased visibility into key trade events which mitigate risks and increase assurances, and automated document exchange and processing for loan, insurance and settlement services.

 

  Government agencies can benefit from enhanced monitoring and control on flow of goods, more effective risk assessments and interventions, increased sharing of information among agencies, and higher overall compliance efficiency.

 

  Government authorities for trade zones and ports can benefit from increased operational efficiency driven by increased transparency, improved document flow and faster processing time, and higher throughput for goods and cargos.

 

Our services are designed to be built on an open and extensible blockchain infrastructure. This will enable us to efficiently add and expand our services over time. We intend to offer our services in sequence starting with regional or functional blockchain networks with fewer players and gradually expanding to larger ones and eventually covering the entire global trade supply chain.

 

We believe this approach of targeting subsets of the global trade ecosystem by leveraging our deep domain knowledge and strong customer relationships will allow us to continually test and fine-tune our services and incrementally drive product and market adoption which may take considerable time and effort. We plan to initially offer the following services on a regional or functional basis:

 

  Compliance Blockchain Services are intended for government agencies including customs, inspections and quarantines, cross-border control, maritime affairs, foreign exchange, tax and duty, and trade commerce, and government authorities such as free trade and bonded trade zone authorities, port and terminal authorities and operators, and other trade regulated zone authorities. Our services will provide multiple government agencies and authorities a single view of trade events and documents on designated global trade blockchain networks, which allow them to synchronize and streamline their regulatory compliance activities with enhanced compliance effectiveness and operational efficiency.

 

Government agencies will be able to use our services to increase the effectiveness of risk assessments and interventions in monitoring and controlling the flow of goods and documents with increased level of transparency and assurance of provenance. Trade zone and port authorities will be able to increase their service and operations efficiency with enhanced transparency and visibility, faster processing time and higher cargo throughput. Our blockchain services will be capable of integrating with the software systems from government agencies and authorities for real time monitoring and synchronization and from global trade businesses and logistics service providers for the government agencies and authorities to better service them.

 

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  Logistics Blockchain Services are being designed for businesses and manufactures involved in global trade as well as customs and freight forwarding service providers. The customs and freight forwarding processes are complicated and cumbersome with multiple parties involved and many voluminous documents to handle. Customs and freight forwarders represent the businesses to take on a number of tasks including making import and export declarations with customs and inspection agencies, arranging for cargo shipments with the shippers and carriers, and handling logistics and compliance works in the regulated trade zones. These processes generate large sets of documents and require constant communication among the involved parties.

 

Our services will allow all involved participants operating in the customs and freight forwarding process to better connect and synchronize on the blockchain networks. Our customers will use our services to streamline cross-organizational workflows and have real time access to monitor and manage progress throughout the process. Our blockchain networks will be capable of connecting and integrating with the software systems from permissioned trade businesses and logistics service providers, with features and functionalities including automated contract execution, expedited service remittance, streamlined document handling, and synchronized information exchange.

 

  Supply Chain Blockchain Services are being designed to provide end-to-end visibility and transparency to all stakeholders or players throughout the cross-border global trade supply chain, including import and export businesses and manufacturers, logistics service providers, transportation shippers and carriers, financial service providers, insurance companies, settlement service providers, government agencies and authorities, and all other players. Our services will enable real time sharing of trade data and events on distributed and trusted blockchain networks for broad synchronization and collaboration among all players in the global trade ecosystem in which the entire trade process is facilitated and optimized.

 

Our services will provide secured information and message exchanges on the blockchain networks that enable all players to have real time access to flows of documents and goods along the supply chain, allowing them to synchronize and collaborate across organizational boundaries in order to efficiently handle the complicated and cumbersome compliance and logistics processes. Our customers can use our services to track goods and documents, identity and manage milestone exceptions, trace the provenance of goods, and share information with their trade partners and customers. We intend to first offer our services in China and subsequently expand to integrate the international players on the global trade supply chain.

 

  Import & Export Loan and Insurance Processing Blockchain Services are being designed for businesses and financial service providers involved in global trade. Our blockchain services will empower businesses with easier and faster processing for loans, insurance and settlements with lower financing cost. Financial service providers can have improved visibility on key events on the blockchain-enabled trade supply chain, resulting in better and more assured loan decisions that mitigate financing risks. Insurance companies and settlement service providers will be able issue trade insurances and provide settlement services with more streamlined workflows and higher processing efficiency with our blockchain services.

 

Through our services, transaction events or activities among businesses on the global supply chain, such as sales and invoicing, purchasing and ordering, and shipping and receiving are programmed or encoded with pre-defined business rules and contractual conditions, allowing for validated and automated transactions to occur. These transaction events and records on the secured blockchain networks will be authenticated and time-stamped, thus bringing substantial proof and immutable evidence to the financial service providers for effective credit and risk assessment when offering their loans and other services to the businesses.

 

Our Technology

 

Our solutions and services are built from our multiple proprietary technology platforms which are developed based on industry leading open source infrastructure technologies. Our technology platforms are designed for high performance reliability, flexibility and scalability, allowing us to expand our solutions and services rapidly and efficiently to consistently address the needs of our global trade customers.

 

Our technology platforms include Powerbridge System Platform for our Powerbridge System Solutions, Powerbridge SaaS Platform for our Powerbridge SaaS Services, and Powerbridge BaaS Platform for our Powerbridge BaaS Services.

 

We are developing our own technologies as well as working with other third-party technology infrastructure partners to expand the scope of our solutions and services with the best use of big data, artificial intelligence and Internet of Things.

 

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Powerbridge System Platform

 

Powerbridge System Platform is our proprietary technology platform from which we develop our Powerbridge System Solutions. Our platform is built on Java Spring and Microsoft .Net frameworks as well as other open source technologies.

 

Powerbridge System Platform consists of modular technology and business components that enable us to provide mission critical applications and solutions in trade operations, trade logistics and regulatory compliance to our corporate and government customers. Our platform’s core capabilities include:

 

  Scalable Modular Architecture. Our scalable architecture consists of a robust set of modular technology and business components that allows for rapid and efficient development and deployment to support complex mission-critical business processes and transactions in global trade.

 

  Flexible Configuration Modeling. Leveraging our deep domain knowledge, product expertise and customer experience in global trade applications, we have developed a flexible system configuration modeling that minimize development resources and time without repetitive coding for common or special business and operations use cases.

 

  Reliable Enterprise Grade Performance. Our platform provides the infrastructure for reliable and high performance that can be built with multiple programing languages, support all commonly used databases, operate with web browser/server or client/server models, and generate dynamic interactive user interfaces.

 

  Diverse Industry Applications Supported. Our platform supports product applications and system solutions that are used by global trade businesses in a wide variety of industries such as automotive, pharmaceutical and consumer goods and involving different government agencies and authorities.

 

Powerbridge SaaS Platform

 

Powerbridge SaaS Platform is built based on the open source Spring Cloud and other industry leading technologies for developing, deploying and operating our software-as-a-service. It is capable of running in multiple designated data centers and cloud environments on commercially available infrastructure as a service platforms.

 

Powerbridge SaaS Platform is the technology infrastructure upon which we are developing our Powerbridge SaaS Services designed to provide on-demand services in trade operations, trade logistics and regulatory compliance with a multi-tenant and microservice architecture. Our core technology capabilities include:

 

  Secured Multi-Tenant Architecture. Our multi-tenant architecture is designed to operate a single instance of a software application simultaneously for multiple organizations or tenants. Each tenant is operating in virtual isolation from each other. Our multi-tenancy architecture ensures and maintains data security and integrity for our customers.

 

  Scalable Microservice Architecture. Our microservice architectural approach allows us to provide scalable and reliable application services as a suite of independently deployable, modular services in which each service can run a unique business or transaction process based on a lightweight mechanism with well-defined business rules and logic.

 

  Ease of Integration and Configuration. We provide a set of application programming interfaces that is designed to enable our customers to integrate and configure our services quickly and seamlessly with their systems and applications, as well as with third-party’s systems.

 

  Extensible Technology Platform. Our application services are built on a single platform that leverages the shared business and technology components, enabling us to rapidly expand our product features and functionalities without disruption and seamlessly integrate our services with one another.

 

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Powerbridge BaaS Platform

 

We are designing and developing our proprietary Powerbridge BaaS Platform based on the open source Hyperledger Fabric framework and other third-party frameworks that provide the blockchain infrastructure for shared ledger, smart contract, consensus algorithm, distributed storage, encryption and security, and network operations.

 

Powerbridge BaaS Services are built on top of our blockchain platform that is designed to provide high scalability and performance characteristics, consisting of multiple technology engines that support the various business component models specific for trade transaction, trade logistics and regulatory compliance in global trade:

 

  Smart Contract Engine is designed to provide a complete and automated blockchain service for the coding, registering, authorizing, releasing, triggering, executing, updating and cancelling of the business contracts or transactions based on pre-defined contractual conditions or pre-defined business rules that are encoded into the smart contracts between trading or transactional parties.

 

  Member Service Engine is intended for authenticating and managing the identity of the blockchain network members or participants with encrypted public or private key generation and maintenance as well as managing member accounts, maintaining multi-level permission access control and conducting risk monitoring and compliance auditing on selective member transactions.

 

  Network Service Engine is designed for managing network connectivity with applications, programing interfaces and structured query languages, member consensus via consensus algorithms and permission mechanisms, secured and authenticated peer-to-peer data transmissions and exchanges, and transaction record storage with key value and Merkel hash value on distributed shared ledgers and/or in cloud-based database environments.

 

  Network Operations Engine is intended to monitor, manage and maintain the blockchain network operations, including network configuration, throughput and time consumption, hardware resource and allocation, fraud and emergency situation detection, network system update and announcement, and other network functions and operations as well as network performance and trend analysis and reporting.

 

We are continuing to enhance the technology capabilities of Powerbridge BaaS Platform while it is under development. We believe our platform offers all of the governance and operations benefits derived from blockchain technology with the following differentiated and distinctive advantages:

 

  Global Trade Centric Business Components. We believe our domain knowledge, product expertise and customer experience will allow us to develop a platform that forms a strong and powerful foundation for continually offering and expanding our services to drive product adoption with this new and exciting technology.

 

Our BaaS services will be supported by our business components which are stacked on top of and driven by our technology engines. Our business components will include trade transaction, trade operations, trade logistics and regulatory compliance, which are designed to address the mission critical needs of global trade businesses, government agencies and authorities, and logistics and other service providers with comprehensive services from document handling to customs processing to transaction processing.

 

  Data Separation Modeling. Global trade transaction processes typically generate voluminous data to which organizations have different needs and ways to handle them. Some organizations may choose not to have their sensitive data stored on the blockchain networks. We are developing a data separation model that can allow data to be recorded and stored on the shared ledgers, but also have more sensitive data securely stored off the blockchains, which has the added benefit of minimizing data storage space.

 

We intend to further separate the smart contract blockchains and workflow blockchains. Smart contract blockchains and the corresponding contract codes and hash values are recorded and stored on the shared ledgers as the contract codes can be called and used numerous times. Data generated from the workflow blockchains and the smart contract blockchains can be designated as on or off the shared ledgers. This further ensures data security and reduce data storage on the blockchains.

 

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Other Technologies and Applications

 

We intend to continue leveraging our industry expertise and product knowledge with the use of disruptive technologies such as big data, artificial intelligence and Internet of Things to enhance our core technology capabilities and continually increase the scope of our solutions and services to our customers.

 

  Big Data. We are developing our big data technology and applications designed to acquire, store, process, analyze and visualize large scaled structured and unstructured global trade transaction and compliance data. Our technology is intended to augment our solutions and services in trade operations, trade logistics and regulatory compliance in global trade, including regulatory risk control, compliance command operations, cross-border trades and processing, logistics matching services, among others.

 

We intend to use ETL (extract, transform and load) technologies for acquiring and processing massive volumes of data such as customs declarations and shipping manifests from various government and commercial sources. We intend to build our big data platform based on a distributed data warehouse architecture using the open source Hadoop and Spark frameworks, allowing for high performance in multi-dimensional correlation analytics, real-time complex event processing, and distributed data query and retrieval.

 

Our correlation analytics are being designed for multi-dimensional and real-time correlation of large quantities of structured, semi-structured and unstructured data from different data sources. Our complex event processing technology is designed to monitor and track data relating to events as they occur in real time and provide data insights based on pre-defined business rules. Our data query and retrieval is intended to support query and retrieval from multiple data sets and provide multi-dimensional data displays.

 

Our data visualization and interactive data mining technologies is designed to provide intuitive and interactive visualization tools and dashboards that are easy to use and can be customized for displaying critical business performance data or metrics. Our visualization tools and dashboards are designed to support interactive data mining and a variety of display formats including charts, graphs and tables as well as three-dimensional displays and geographic information system mappings.

 

  Artificial Intelligence. We work with third party artificial intelligence technology providers to enhance our solutions and services in global trade. Our artificial intelligence applications facilitate and support biometric facial and fingerprint recognitions as well as object recognition for transportation vehicles and shipping containers. We plan to develop our machine learning capabilities to provide optimized matching and recommendation services for global trade logistics and processing.

 

Our biometric face recognition application is used for security and enforcement measures typically at checkpoints of cross-border trade operations and regulated trade zone facilities for identifying and verifying a person from a digital image or a video frame by comparing distinct facial features with given facial images extracted from our database. Our applications are designed to support concurrent processing of multiple persons. Our fingerprint recognition application is also applied for security measures in some cross-border trade settings.

 

Our object recognition application is designed to identify and verify transportation vehicles at ports and terminals, regulated trade zones and cross-border checkpoints by capturing, processing, and identifying still images and video images. Further, through machine learning computation, transportation vehicles in these facilities can be automatically directed with optimized routes to their designated destinations such as a warehouse or a container depot.

 

We plan to enhance our technology capabilities in machine learning algorithms that learn from experience, identify patterns and make predictions driven by a large set of global trade data. We intend to leverage our domain knowledge and industry experience to design and develop machine learning algorithms and distributed computing that can optimize the efficiency in the matching of trade logistics services among trade businesses and service providers.

 

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  Internet of Things. Internet of Things or IoT refers to the network of physical objects embedded with sensors, electronics, and network connectivity that allow these objects to collect and exchange data. We work with third-party technology companies to provide IoT applications to process, store, and analyze IoT data from trade related trucking vehicles, weighting stations, and shipping containers. Our applications are integrated with the target object’s IoT systems and software systems of government authorities.

 

Trucking vehicles, weighting stations and shipping containers are tightly regulated at ports and terminals, regulated trade facilities and cross-border facilities. Our IoT applications are used by government authorities to monitor and control these objects. Our applications are able to authenticate objects, facilitate data exchanges, connect through gateways and application programming interfaces, and provide event-based IoT data processing, analysis and visualization.

 

Our IoT applications allows fast and accurate identification of trucking vehicles as they pass through the checkpoints at regulated areas with a high throughput capacity and rapid data transmission, which facilitates efficient control and fast checkpoint release. Our IoT applications can combine with the use of global positioning systems, global system for mobile communication and global information system to enable government authorities complete monitoring and control of the trucking vehicles.

 

Our IoT applications are capable of acquiring and processing a high volume of IoT enabled data from radio frequency identification and other types of sensor devices installed on intermodal shipping containers operating in many different trade facilities or settings such as container yards, shipping ports, bonded warehouses and air terminals. Our IoT applications can also process IoT data from electronic locks on the containers for automated container lock handling.

 

Our Customers

 

Our customers are international trade businesses and manufacturers, government agencies and authorities, logistics service and other providers, primarily located in China.

 

Our international trade business and manufacturer customers are import and export companies, manufacturers engaged in import and export, inward processed manufacturers who use imported raw materials, components and parts, packing and other materials to produce finished products for exporting, and cross-border eCommerce operators who conduct cross-border business for air packaged consumer products.

 

Our government customers are provincial and regional government agencies, government authorities and government-owned organizations. Government agencies include customs, inspection and quarantine, border enforcement, maritime affair, transportation and commerce. Government authorities include authorities for ports, bonded and free trade zones and government-owned organizations include Chinaport and other international trade related organizations.

 

Our logistics service and other provider customers include freight forwarding and shipping agent firms, customs and inspection brokers, warehouse operators, transportation companies and other international trade related service organizations as well as financial and insurance service providers engaged in global trade services.

 

Our customers include (i) international trade businesses and manufacturers, (ii) government agencies and authorities, and (iii) logistics and other various service providers. For the fiscal year ended December 31, 2016, we generated revenue from a total of 1,757 customers, of which 1,010 are international trade businesses and manufacturers, 55 are government agencies and authorities, and 692 are logistics and other service providers. For the fiscal year ended December 31, 2017, we generated revenue from a total of 1,633 customers, of which 936 are international trade businesses and manufacturers, 70 are government agencies and authorities, and 627 are logistics and other service providers. For the six months ended June 30, 2018, we generated revenue from a total of 739 customers, of which 257 are international trade businesses and manufacturers, 67 are government agencies and authorities, and 415 are logistics and other service providers.

 

We generate a significant portion of our revenues  from a relatively small number of major customers. For the year ended December 31, 2017, two government customers accounted for 17.2% and 13.1% of our total revenues, respectively. For the year ended December 31, 2016, three government customers accounted for 16.0%, 12.2%, and 10.0% of our total revenues, respectively. For the six months ended June 30, 2018, one government customer accounted for 16.7% of our total revenues.

 

We plan to expand our market coverage to international markets to service customers in different  B&R countries. We also intend to provide our solutions and services to corporate and government customers in the countries or markets we intend to target.

 

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Sales and Marketing

 

Our sales and marketing teams work closely together to drive market awareness, develop and manage leads, and develop and build customer relationships to increase revenue growth. We sell our solutions and services to corporate and government customers through our direct sales organization, indirect channel partners and strategic government partners.

 

Our sales team is organized by customer type and geography. Our direct sales force is supported by sales engineers and service consultants. Our indirect channel partners include value added resellers, system integrators, software and application providers, system hardware providers and other referral partners. As of June 30, 2018, our sales teams consisted of 37 full-time sales and marketing personnel. During years fiscal 2017 and 2016, our sales and marketing expense were approximately $1.6 million and $1.5 million, respectively, representing 7.5% and 7.2% of our total revenues for fiscal years 2017 and 2016, respectively. For the six months ended June 30, 2018 and 2017, our sales and marketing expense were approximately $0.8 million and $0.5 million, respectively, representing 10.4% and 7.7% of our total revenues for fiscal years 2017 and 2016, respectively.

 

We generate customer leads, accelerate sales opportunities and build brand awareness through our marketing programs. Our marketing programs target management and technology executives of global trade businesses, government agencies and authorities, and various service providers, including user conferences, sponsored events and product promotions.

 

We continue to develop strategic partnerships with provincial and local government agencies, technology organizations, trade zone authorities and other government organizations, i.e., regional customs and commerce agencies, bonded and other trade facilities, and Chinaport and other state-owned entities, to drive sales by leveraging their strengths and resources in targeted customer base, strong regional market influence and extensive government and industry resources.

 

As part of our overall strategy, we plan to expand into international markets to provide global trade software solutions and services by “piggybacking” with the infrastructure builders and other Chinese organizations who participate in the B&R’s development of global trade infrastructures in the B&R partnering countries.

 

Research and Development (“R&D”)

 

Our R&D organizations consist of dedicated engineering and technology employees, who are responsible for the design, development, testing and delivery of all aspects of our technologies, solutions and services. As of the date of this prospectus, our team consists of 82 full-time R&D personnel. We incurred expenses of $1,151,985 and $947,506 in R&D in fiscal year 2017 and 2016, respectively. The R&D expense for the six months ended June 30, 2018 and 2017 amounted to $1,064,673 and $442,930, respectively.

 

The majority of our R&D team is based in our Zhuhai office and to a lesser degree in our branch offices. Our team is further apportioned into smaller agile development groups to foster continuous innovation and rapid delivery.

 

We believe we have a strong R&D culture that rapidly and consistently delivers high quality products. We plan to continue to invest substantial resources in R&D to drive core technology innovation and bring new solutions and services to market.

 

Competition

 

The market for global trade software application and system integration services is highly competitive and fragmented. We face intensive competition. Our main sources of current and potential competition fall into the following categories:

 

  Regional global trade application providers offering regulatory compliance, trade logistics and trade processing software and systems.

 

  Software vendors providing online or cloud-based single point or single feature functional global trade application products and services.

 

  Online global trade hubs or portals offering specific global trade transactional and processing application products and services.

 

  Enterprise resource planning, supply chain and logistics software application companies offering global trade software, systems and services.

 

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  Government organizations providing global trade related regulatory compliance and trade logistics applications and systems.

 

  Emerging blockchain, artificial intelligence and IoT technology providers offering technologies and software for global trade applications.

 

We believe the following competitive attributes are necessary for us to compete successfully in our industry:

 

  Deep domain knowledge, industry experience and product expertise in global trade software applications and system integration to address customer needs.

 

  Enablement of emerging and disruptive technologies to develop and provide global trade software applications and services

 

  Enterprise grade performance level in scalability, reliability and security as well as cost of ownership and ease of deployment.

 

  Breadth, depth and quality of application features and functionalities that are able to operate in multiple infrastructures such as in cloud, on premises or both.

 

  Capability of technology platforms in integrating and interoperating with legacy and other enterprise infrastructures and third party applications.

 

  Strength of sales and marketing as well as customer support in service responsiveness and level of customer satisfaction.

 

  Brand awareness and reputation, size of customer base and level of user adoption to new and disruptive technologies and applications.

 

  Ability to capture market share in China and expand into international markets to operate as a global player in servicing multiple markets and countries.

 

We believe we compete favorably on the basis of the competitive factors listed above. Some of our competitors have substantially greater financial, technical and other resources, greater name recognition, larger sales and marketing budgets, broader distribution channels and larger or more intellectual property portfolios.

 

Intellectual Property

 

The PRC has domestic laws for the protection of rights in copyrights, trademarks and trade secrets. The PRC is also a signatory to all of the world’s major intellectual property conventions, including:

 

  Convention establishing the World Intellectual Property Organization (June 3, 1980);

 

  Paris Convention for the Protection of Industrial Property (March 19, 1985);

 

  Patent Cooperation Treaty (January 1, 1994); and

 

  Agreement on Trade-Related Aspects of Intellectual Property Rights (November 11, 2001).

 

The PRC Trademark Law, adopted in 1982 and revised in 2013, with its implementation rules adopted in 2014, protects registered trademarks. The Trademark Office of the State Administration of Industry and Commerce of the PRC, handles trademark registrations and grants trademark registrations for a term of ten years.

 

We rely on a combination of trademark, fair trade practice, copyright and trade secret protection laws and patent protection in China and other patent jurisdictions, as well as contractual restrictions, to protect our intellectual property. We entered into comprehensive confidentiality agreements with our management and consultants. We have standard confidentiality terms with all other employees. We also control access to and distribution of our documentation and other licensed information.

 

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Despite our efforts to protect our proprietary technology and our intellectual property rights, unauthorized parties may attempt to copy or obtain and use our technology to develop applications with the same functionality as our products. Policing unauthorized use of our technology and intellectual property rights is difficult. Our patent applications may not issue as patents, and if they do issue as patents, they may not provide meaningful protection against competitors. We expect that software in our industry may be subject to third-party infringement claims as the number of competitors grows and the functionality of applications in different industry segments overlaps. Any of these third parties might make a claim of infringement against us at any time. We require our employees to enter into non-disclosure agreements to limit access to and distribution of our proprietary and confidential information. These agreements generally provide that any confidential or proprietary information developed by us or on our behalf must be kept confidential. These agreements also provide that any confidential or proprietary information disclosed to third parties in the course of our business must be kept confidential by such third parties. In the event of trademark infringement, the State Administration for Industry and Commerce has the authority to fine the infringer and to confiscate or destroy the infringing products.

 

We have 28 patent pending applications, 62 registered software copy rights, 5 registered trademarks, and 2 pending trademarks. In addition to trademark protection, we own five URL designations and domain names, including powerbridge.com, erp-china.com, pbtcloud.com, pbtyun.com, and pbtco.cn.

 

We have registered for the following trademarks:

 

No.   Current Owner   Mark   Registration Number