F-1/A 1 ea120158-f1a3_chinaliberal.htm AMENDMENT NO. 3 TO FORM F-1

As filed with the U.S. Securities and Exchange Commission on March 30, 2020

Registration No. 333-233016

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 3 to

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

China Liberal Education Holdings Limited

(Exact Name of Registrant as Specified in Its Charter)

 

Cayman Islands   8200   N/A
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

Jianxin Zhang, Chief Executive Officer

China Liberal Education Holdings Limited

Huateng Century Park Headquarters,

Building A, Level 2

Beijing, PRC

+86-10-6597-8118

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Hunter Taubman Fischer & Li LLC

1450 Broadway, 26th Floor

New York, NY 10018

(212) 530-2206

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

Copies to:

 

Ying Li, Esq.

Guillaume de Sampigny, Esq.

Hunter Taubman Fischer & Li LLC

1450 Broadway, 26th Floor

New York, NY 10018

(212) 530-2206

 

Elizabeth F. Chen, Esq.

Pryor Cashman LLP

7 Times Square

New York, NY 10036

(212) 326-0199

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date hereof.

 

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, please 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 standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

Class of Securities to be Registered  Amount
to be
Registered
   Proposed
Maximum
Offering
Price per
Share
   Proposed
Maximum
Aggregate
Offering
Price
   Amount of
Registration
Fee
 
Ordinary Shares, par value $0.001 per share (1)(2)   1,533,333   $6.00   $9,200,000   $1,115.04 
Ordinary Shares, par value $0.001 per share (4)   66,666   $6.00   $399,996   $48.48 
Underwriter Warrants (2)(3)   107,333    -    -    - 
Ordinary Shares underlying Underwriter Warrants (3)   107,333   $6.00   $644,000   $83.59 
Total            $10,243,996   $1,329.67(5)

 

(1)Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended (the “Securities Act”). There is no current market for the securities or price at which the shares are being offered. Includes up to 200,000 Ordinary Shares subject to Boustead Securities, LLC’s (the “Underwriter”) over-allotment allowance.

 

(2)Pursuant to Rule 416 under the Securities Act, there is also being registered hereby such indeterminate number of additional Ordinary Shares of the Registrant as may be issued or issuable because of stock splits, stock dividends, stock distributions, and similar transactions.

 

(3) We have agreed to issue to the Underwriter warrants to purchase the number of ordinary shares (the “Underwriter Warrants”) in the aggregate equal to seven percent (7%) of the shares sold at closing of the offering. The Underwriter Warrants will be exercisable at any time, and from time to time within five (5) years from the effective date of this registration statement, in whole or in part, but may not be transferred nor may the shares underlying the warrants be sold until 180 days from the effective date of the offering. The exercise price of the Underwriter Warrants is equal to the public offering price per share in the offering. The Underwriter Warrants are with a cashless provision and shall be non-callable and non-cancelable with immediate piggy-back registration rights. Includes warrants to purchase up to additional 14,000 Ordinary Shares subject to the Underwriter’s over-allotment allowance.

 

(4)This Registration Statement also covers the resale under a separate resale prospectus (the “Resale Prospectus”) by a selling shareholder of the Registrant of up to 66,666 Ordinary Shares issued to the selling shareholder as named in the Resale Prospectus.

 

(5) Previously paid.

 

The Registrant hereby amends this 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 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

EXPLANATORY NOTE

 

This Registration Statement contains two prospectuses, as set forth below.

 

  Public Offering Prospectus. A prospectus to be used for the public offering of 1,333,333(1) shares of ordinary shares of the Registrant (the “Public Offering Prospectus”) through the underwriter named on the cover page of the Public Offering Prospectus.
     
  Resale Prospectus. A prospectus to be used for the resale by the selling shareholder set forth therein of 66,666 shares of ordinary shares of the Registrant (the “Resale Prospectus”).

 

The Resale Prospectus is substantively identical to the Public Offering Prospectus, except for the following principal points:

 

  they contain different outside and inside front covers and back covers;
     
  they contain different Offering sections in the Prospectus Summary section beginning on page 1;
     
  they contain different Use of Proceeds sections on page 36;
     
  a Selling Shareholder section is included in the Resale Prospectus;
     
  a Selling Shareholder Plan of Distribution is included in the Resale Prospectus; and
     
  the Legal Matters section in the Resale Prospectus deletes the reference to counsel for the underwriter.

 

The Registrant has included in this Registration Statement a set of alternate pages after the back cover page of the Public Offering Prospectus (the “Alternate Pages”) to reflect the foregoing differences in the Resale Prospectus as compared to the Public Offering Prospectus. The Public Offering Prospectus will exclude the Alternate Pages and will be used for the public offering by the Registrant. The Resale Prospectus will be substantively identical to the Public Offering Prospectus except for the addition or substitution of the Alternate Pages and will be used for the resale offering by the selling shareholder.

 

(1) Assumes the underwriter’s over-allotment option has not been exercised.

 

 

 

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 Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

  

SUBJECT TO COMPLETION,

PRELIMINARY PROSPECTUS DATED MARCH 30, 2020

 

1,333,333 Ordinary Shares

 

China Liberal Education Holdings Limited

 

 

This is an initial public offering of our ordinary shares. We are offering our ordinary shares, US$0.001 par value per share (“Ordinary Shares”). Prior to this offering, there has been no public market for our Ordinary Shares. We expect the initial public offering price will be $6.00 per Ordinary Share. We have reserved the symbol “CLEU” for purposes of listing our Ordinary Shares on the Nasdaq Capital Market (“NASDAQ”) and plan to apply to list our Ordinary Shares on NASDAQ. There is no guarantee or assurance that our Ordinary Shares will be approved for listing on NASDAQ.

 

Investing in our Ordinary Shares involves a high degree of risk, including the risk of losing your entire investment. See “Risk Factors” beginning on page 10 to read about factors you should consider before buying our Ordinary Shares.

 

We are an “emerging growth company” as defined under the federal securities laws and will be subject to reduced public company reporting requirements. Please read the disclosures beginning on page 3 of this prospectus for more information.

   PER SHARE  

TOTAL

WITHOUT OVER-ALLOTMENT OPTION

  

TOTAL

WITH OVER-

ALLOTMENT

OPTION

 
Initial public offering price  $6.00   $8,000,000   9,200,000 
Underwriting discounts and commissions(1)  $0.42   $560,000   644,000 
Proceeds, before expenses, to us  $5.58   $7,440,000   8,556,000 

 

(1) We have agreed to issue, on the closing date of this offering, underwriter’s warrants to the Underwriter in an amount equal to 7% of the aggregate number of ordinary shares sold by us in this offering. For a description of other terms of the Underwriter’s warrants and a description of the other compensation to be received by the Underwriter, see “Underwriting” beginning on page 133.

 

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body 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.

 

You should not assume that the information contained in the registration statement to which this prospectus is a part is accurate as of any date other than the date hereof, regardless of the time of delivery of this prospectus or of any sale of the Ordinary Shares being registered in that registration statement of which this prospectus forms a part.

 

No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this Offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful.

 

This offering is being conducted on a firm commitment basis. The underwriter, Boustead Securities, LLC, is obligated to take and pay for all of the shares if any such shares are taken. We have granted the Underwriter an option for a period of 45 days from the date of this prospectus to purchase up to 15% of the total number of our ordinary shares to be offered by us pursuant to this offering (excluding shares subject to this option), solely for the purpose of covering over-allotments, at the initial public offering price less the underwriting discount. If the underwriter exercises the option in full, the total underwriting discounts and commissions payable will be $644,000 based on an assumed offering price of $6.00 per ordinary share, and the total gross proceeds to us, before underwriting discounts and commissions and expenses, will be $9,200,000. If we complete this offering, net proceeds will be delivered to us on the closing date. We will not be able to use such proceeds in China, however, until we complete capital contribution procedures which require prior approvals, registration or filings, i.e., making a filing with the local branch of China’s Ministry of Commerce, and registering with the local branch of the State Administration for Market Regulation, and the approval of and registration with a local bank authorized by the State Administration of Foreign Exchange. See remittance procedures in the section titled “Use of Proceeds” beginning on page 36.

The Underwriter expects to deliver the Ordinary Shares against payment as set forth under “Underwriting”, on or about [●], 2020.

 

 

The date of this prospectus is [           ], 2020. 

 

 

About this Prospectus

 

This prospectus is part of a registration statement we filed with the SEC. We and the Underwriter have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by us or on our behalf or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted or where the person making the offer or sale is not qualified to do so or to any person to whom it is not permitted to make such offer or sale. The information contained in this prospectus is current only as of the date on the front cover of the prospectus. You should not assume that the information contained in this prospectus, any prospectus supplement or the documents incorporated by reference are accurate as of any date other than their respective dates, regardless of the time of delivery of this prospectus or of any sale of the Ordinary Shares. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Unless otherwise indicated or the context requires otherwise, references in this prospectus to:

 

“Affiliated Entities” are to our subsidiaries;

 

“Boya Hong Kong” are to China Boya Education Group Co., Limited, a Hong Kong limited liability company;

 

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

 

  “China Liberal” are to China Liberal Education Holdings Limited, a Cayman Islands exempted company;

 

  “China Liberal Beijing” or “PRC Subsidiary” are to China Liberal (Beijing) Education Technology Co., Ltd., a PRC limited liability company and our operating subsidiary;

 

“Company,” “we” and “us” are to one or more of China Liberal Education Holdings Limited, and its Affiliated Entities, as the case may be;

 

“EAP” are to Australia English for Academic Purposes, which prepares international students for vocational or tertiary-level study in Australia and other contexts where English is the language of instruction, and it aims to develop student awareness, knowledge and skills in the use of English as the language of teaching and learning in a vocational and/or university environment; 

   
 

“FMP” are to Fuzhou Melbourne Polytechnic;

   
 

“FPEC” are to Fujian Preschool Education College;

   
 

“FUT” are to Fujian University of Technology;

   
“IELTS” are to International English Language Testing System, an international standardized test of English language proficiency for non-native English language speakers, and accepted by most Australian, British, Canadian and New Zealand academic institutions;

 

“IGEC” are to International General Education Courses, a Sino-foreign joint education program developed and introduced by the Chinese Service Center for Scholarly Exchange, a public organization under the Ministry of Education of the PRC, in order to improve the overall reform and internationalization of PRC’s higher education;

 

“ISEC” are to International Scholarly Exchange Curriculum, a PRC government sponsored and highly profiled program affiliated with the China Scholarship Council directly under the Ministry of Education in the PRC;
   
 

“NZTC” are to New Zealand Tertiary College;

   
“shares,” “Shares,” or “Ordinary Shares” are to the Ordinary Shares of the Company, par value US$0.001 per share;

 

“Sino-foreign Jointly Managed Academic Programs” are to education programs offered by joint ventures of the PRC and foreign institutions;

 

“TOEFL” are to Test of English as Foreign Language, an international standardized test of English language proficiency for non-native English language speakers, and commonly accepted by American academic institutions; and

 

“Yi Xin BVI” are to Yi Xin International Investment Limited, a company incorporated in the British Virgin Islands.

 

Our business is conducted by China Liberal Beijing in the PRC, using Renminbi, or RMB, the currency of China. Our consolidated financial statements are presented in United States dollars. In this prospectus, we refer to assets, obligations, commitments and liabilities in our consolidated financial statements in United States dollars. These dollar references are based on the exchange rate of RMB to United States dollars, determined as of a specific date or for a specific period. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of United States dollars which may result in an increase or decrease in the amount of our obligations (expressed in dollars) and the value of our assets, including accounts receivable (expressed in dollars).

 

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY 1
SUMMARY FINANCIAL DATA 5
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 9
RISK FACTORS 10

ENFORCEABILITY OF CIVIL LIABILITies

35
USE OF PROCEEDS 36
DIVIDEND POLICY 37
CAPITALIZATION 38
DILUTION 39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 40
INDUSTRY 76
BUSINESS 87
REGULATIONS 102
MANAGEMENT 107
EXECUTIVE COMPENSATION 110
PRINCIPAL SHAREHOLDERS 111
RELATED PARTY TRANSACTIONS 113
DESCRIPTION OF SHARE CAPITAL 114
SHARES ELIGIBLE FOR FUTURE SALE 125
TAXATION 126
UNDERWRITING 133
EXPENSES RELATING TO THIS OFFERING 136
LEGAL MATTERS 137
EXPERTS 137
WHERE YOU CAN FIND MORE INFORMATION 137
INDEX TO FINANCIAL STATEMENTS F-1

  

i

 

 

PROSPECTUS SUMMARY

 

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements included elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our Ordinary Shares, discussed under “Risk Factors,” before deciding whether to buy our Ordinary Shares.

 

Unless otherwise indicated, all dollar amounts included herein are recorded in United States dollars.

 

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented giving effect to a stock split of our Ordinary Shares at a ratio of 1,000-for-1, which occurred on July 8, 2019, and an issuance of 3,999,000 Ordinary Shares on July 15, 2019.

 

Our Business

 

Overview 

 

We are an exempted company incorporated in the Cayman Islands on February 25, 2019. Through our operating company, China Liberal (Beijing) Education Technology Co., Ltd., or China Liberal Beijing, incorporated in the PRC on August 10, 2011, we are an educational service provider operating under the “China Liberal” brand in the PRC. Our mission is to provide China’s students with the tools to excel in a global environment. We strive to meet the needs of the ever growing number of young talents in China.

 

We provide a wide variety of educational services and products intended to address the needs of our partnering schools and our students:

 

  Services provided under Sino-foreign jointly managed academic programs (“Sino-foreign Jointly Managed Academic Programs”), which services represent the core of our business;

Overseas study consulting services (“Overseas Study Consulting Services”);

Technological consulting services provided to targeted Chinese universities to improve their campus information and data management system and to optimize their teaching, operating and management environment, creating a “smart campus”; these consulting services include campus intranet solution buildout, school management software customization, smart devices (mainly Internet of things, or IoT devices, extending the Internet connectivity to physical devices) installation and testing, and school management data collection and analysis, all of which can be specifically tailored to meet a client’s particular needs (“Technological Consulting Services for Smart Campus Solutions”); and

Tailored job readiness training to graduating students (“Integration of Enterprises and Vocational Education”), acting as the key bridge between our partner schools and employers. However, we did not start generating revenue from this line of business until January 2019.

 

We also develop and provide textbooks and other course materials to students enrolled under the Sino-foreign Jointly Managed Academic Programs to ensure the quality of students’ learning outcomes.

 

We started generating revenue in the year ended December 31, 2012 through our services provided under certain Sino-foreign Jointly Managed Academic Programs. We continued to maintain and expand this core business throughout the years, giving us revenues stream of $2,821,602, $2,410,781 and $1,240,856 for the years ended December 31, 2017 and 2018, and the six months ended June 30, 2019, respectively, representing 72.6%, 50.11% and 66.0% of our net revenues for those respective periods. A vast majority of these revenues derives from our two major partners, Fuzhou Melbourne Polytechnic, or FMP and Minjiang University. Additionally, since we started our Overseas Study Consulting Services in 2017, this line of business has been a source of growing revenue. We generated $60,947 and $547,521 in revenues from our Overseas Study Consulting Services for the years ended December 31, 2017 and 2018, respectively, representing a sharp increase from 2% to 11% of our total revenue of that respective year. For the six months ended June 30, 2019, we did not report revenue from providing overseas study consulting services, because we recruited 55 students in May and June 2019 and expect to complete the consulting services between October and November 2019, at which point, we may generate revenue of approximately $384,604 when our performance obligations are fulfilled. We also started generating revenues from our Technological Consulting Services for Smart Campus Solutions business in 2017, with revenues of $950,992, $1,820,974 and $625,896, representing 25%, 38% and 33.3% for the years ended December 31, 2017 and 2018, and the six months ended June 30, 2019, respectively. We did not generate any revenue during the years ended December 2017 and 2018 from our Integration of Enterprises and Vocational Education business because this line of business was newly added in December 2018. For the six months ended June 30, 2019, the revenue generated from this line of business was immaterial.

 

We started our operations in Beijing where our headquarters are located. We established our first branch in Fujian Province in 2011 and subsequently expanded to various locations in the PRC, covering the cities of Hangzhou, Fuzhou and Ji’nan on the east coast of China.

 

As of the date of this prospectus, there is no public trading market for our Ordinary Shares and there is no assurance that a trading market for our Ordinary Shares will ever develop.

 

Competitive Strengths

 

We believe that the following competitive strengths enhance our position in the PRC market:

 

  Innovative and visionary management team with a proven track record;
  Innovative, flexible and cost-effective smart campus solutions; and
  Strong and experienced sales team with a focus on art students.

  

1

 

 

Business Strategy

 

We intend to continue to generate revenue from our core businesses, while expanding to related territories maximizing our existing resources, as well as striving to meet the needs of our clients. We intend to diversify our income model in the coming years by growing our four lines of business simultaneously. We are dedicated to enabling our students to capture life-changing opportunities by delivering transformative education services and by working with our partners. Our goal is to become a nationally recognized education services company that offers modernized and internationalized higher education solutions to students, with a focus on academic areas of art and computer science. We intend to achieve our goal by pursuing the following strategies:

 

  Continue to invest in technology and leverage our intellectual property;
  Offer our smart campus solutions to a growing number of partnering schools;
  Expand our focus to include computer science major;
  Continue to invest in sales and marketing activities to recruit art students for our one-on-one consulting services;
  Expand classroom-based pre-session training services based on our current proven one-on-one consulting model; and
  Establish our own-branded schools.

 

Our History and Corporate Structure

 

China Liberal Education Holdings Limited, or China Liberal, was incorporated in the Cayman Islands on February 25, 2019.

 

On July 8, 2019, our shareholders approved a stock split of our outstanding Ordinary Shares at a ratio of 1,000-for-1, which became effective immediately. All references to Ordinary Shares, options to purchase Ordinary Shares, share data, per share data, and related information have been retroactively adjusted, where applicable, in this prospectus to reflect the split of our Ordinary Shares as if it had occurred at the beginning of the earlier period presented.

 

On July 15, 2019, our sole director approved a stock issuance increasing our Ordinary Shares by 3,999,000 to 5,000,000, effective immediately. All references to Ordinary Shares, options to purchase Ordinary Shares, share data, per share data, and related information have been retroactively adjusted, where applicable, in this prospectus to reflect the split of our Ordinary Shares as if it had occurred at the beginning of the earlier period presented.

 

As of the date of this prospectus, our authorized share capital is $50,000 divided into 50,000,000 ordinary shares. We directly hold 100% of the equity interests of Yi Xin International Investment Limited, a company incorporated in the British Virgin Islands (“Yi Xin BVI”), which in turn holds 100% of China Boya Education Group Co., Limited, a Hong Kong limited liability company (“Boya Hong Kong”). Boya Hong Kong originally holds 91.1772% equity interests of China Liberal Beijing, our PRC operating entity. On February 1, 2019, Boya Hong Kong entered into share transfer agreements with each of the non-controlling shareholders of China Liberal Beijing and completed the acquisition of the 8.8228% non-controlling interest in China Liberal Beijing. After these transactions, Boya Hong Kong owns 100% interest of China Liberal Beijing.

 

We commenced our operations in August 2011 through China Liberal Beijing.

 

The following diagram illustrates our corporate structure as of the date of this prospectus and upon completion of the Offering based on 1,333,333 Ordinary Shares being offered:

 

 

2

 

 

Corporate Information

 

Our principal executive office is located at Huateng Century Park Headquarters, Building A, Level 2, Beijing, PRC, and our phone number is +86-10-6597-8118. We maintain a corporate website at http://www.chinaliberal.com. The information contained in, or accessible from, our website or any other website does not constitute a part of this prospectus.

 

Implications of Being an “Emerging Growth Company”

 

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 of 2012, or the JOBS Act. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise generally applicable to public companies. In particular, as an emerging growth company, we:

 

may 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, or MD&A;
are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives, which is commonly referred to as “compensation discussion and analysis”;
are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
are not required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on frequency” and “say-on-golden-parachute” votes);
are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act; and
will not be required to conduct an evaluation of our internal control over financial reporting until our second annual report on Form 20-F following the effectiveness of our initial public offering.

 

We intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.

 

Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act, or such earlier time that we no longer meet the definition of an emerging growth company. The JOBS Act provides that we would cease to be an “emerging growth company” if we have more than $1.07 billion in annual revenues, have more than $700 million in market value of our Ordinary Share held by non-affiliates, or issue more than $1 billion in principal amount of non-convertible debt over a three-year period.

 

3

 

 

THE OFFERING

 

Following is a brief summary of this Offering.

 

Ordinary Shares outstanding prior to the completion of this Offering   5,000,000 Ordinary Shares
     
Ordinary Shares offered by us   1,333,333(1) Ordinary Shares
     
Ordinary Shares Outstanding Immediately After the Offering  

6,333,333 Ordinary Shares assuming no exercise of the Underwriter’s over-allotment option and excluding 93,333(1) ordinary shares underlying the Underwriter’s warrants.

     
Price per Ordinary Shares  

We currently estimate that the initial public offering price will be $6.00 per ordinary share.

     
Use of proceeds   We intend to use the proceeds from this offering for working capital and general corporate purposes, including investment in smart campus solutions, research and development, integration of enterprises and vocation education and establishment of big data calculation training school. See “Use of Proceeds” for more information.
     
Proposed Nasdaq Symbol   “CLEU”
     
Transfer Agent   Transhare Corporation
     
Risk Factors   An investment in the Ordinary Shares is subject to a number of risks. You should carefully consider the information set forth in the “Risk Factors” section below and the other sections of this Prospectus, in addition to the documents included in and/or incorporated by reference in the registration statement to which this Prospectus forms a part.

 

(1)The Underwriter has been granted an over-allotment option pursuant to which we may sell an additional 200,000 Ordinary Shares. We assume no exercise of the Underwriter’s over-allotment option herein.

4

 

 

SUMMARY FINANCIAL DATA

 

The following table sets forth selected historical statements of operations for the years ended December 31, 2018 and 2017, and balance sheet data as of December 31, 2018 and 2017, which have been derived from our consolidated audited financial statements included elsewhere in this prospectus. The following summary consolidated financial data for the six months ended June 30, 2019 and 2018 and as of June 30, 2019 have been derived from our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in the prospectus. 

Selected Statements of Operations Information:

 

   For the six months ended
June 30,
 
   2019   2018 
   (Unaudited)   (Unaudited) 
REVENUE, NET  $1,880,068   $1,447,787 
COST OF REVENUE   1,022,655    701,653 
GROSS PROFIT   857,413    746,134 
           
OPERATING EXPENSES          
Selling expenses   156,061    234,580 
General and administrative expenses   511,024    286,672 
Total operating expenses   667,085    521,252 
           
INCOME FROM OPERATIONS   190,328    224,882 
           
OTHER INCOME          
Interest income   3,617    48,526 
Other income (expense), net   (2,179)   10,729 
Total other income, net   1,438    59,255 
           
INCOME BEFORE INCOME TAXES   191,766    284,137 
           
INCOME TAX PROVISION   52,756    43,709 
           
NET INCOME   139,010    240,428 
Less: net income attributable to non-controlling interest   -    21,214 
NET INCOME ATTRIBUTABLE TO THE COMPANY  $139,010   $219,214 

 

5

 

 

 

   For the years ended
December 31,
 
   2018   2017 
         
REVENUE, NET  $4,808,993   $3,885,886 
COST OF REVENUE   2,702,297    2,161,322 
GROSS PROFIT   2,106,696    1,724,564 
           
OPERATING EXPENSES          
Selling expenses   704,060    541,424 
General and administrative expenses   579,500    408,762 
Total operating expenses   1,283,560    950,186 
           
INCOME FROM OPERATIONS   823,136    774,378 
           
OTHER INCOME          
Interest income   88,926    70,743 
Other income, net   180,191    187,794 
Total other income, net   269,117    258,537 
           
INCOME BEFORE INCOME TAXES   1,092,253    1,032,915 
           
INCOME TAX PROVISION   167,813    158,109 
           
NET INCOME   924,440    874,806 
Less: net income attributable to non-controlling interest   81,779    5,800 
NET INCOME ATTRIBUTABLE TO THE COMPANY  $842,661   $869,006 

 

6

 

 

Selected Balance Sheet Information:

  

   As of, 
   June 30,
2019 (Unaudited)
   December 31,
2018
 
ASSETS        
CURRENT ASSETS        
Cash  $1,992,487   $2,077,166 
Accounts receivable, net   925,730    833,174 
Contract receivable, net   1,072,266    960,237 
Advance to suppliers   355,365    19,885 
Deferred initial public offering costs   321,005    - 
Due from a related party   -    72,700 
Prepaid expenses and other current assets   793,943    286,052 
TOTAL CURRENT ASSETS   5,460,796    4,249,214 
           
Property and equipment, net   94,156    101,205 
Contract receivable, net   1,214,797    1,617,186 
TOTAL NONCURRENT ASSETS   1,308,953    1,718,391 
           
TOTAL ASSETS  $6,769,749   $5,967,605 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Accounts payable  $188,302   $121,558 
Deferred revenue   614,641    149,560 
Taxes payable   334,046    244,142 
Due to related parties   504,040    22,591 
Accrued expenses and other current liabilities   187,553    178,175 
TOTAL CURRENT LIABILITIES   1,828,582    716,026 
           
COMMITMENTS AND CONTINGENCIES          
           
SHAREHOLDERS’ EQUITY          
Ordinary shares, $0.001 par value, 50,000,000 shares authorized; 5,000,000 shares issued and outstanding*   5,000    5,000 
Additional paid in capital   4,579,116    4,579,116 
Statutory reserve   322,770    294,158 
Retained earnings   286,603    88,967 
Accumulated other comprehensive income (loss)   (252,322)   (234,237)
Total China Liberal’s equity   4,941,167    4,733,004 
Non-controlling interest   -    518,575 
Total shareholders’ equity   4,941,167    5,251,579 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $6,769,749   $5,967,605 

 

7

 

   As of December 31, 
   2018   2017 
ASSETS        
CURRENT ASSETS        
Cash  $2,077,166   $7,970 
Accounts receivable, net   833,174    632,724 
Contract receivable, net   960,237    160,270 
Advance to suppliers   19,885    1,529,865 
Loan receivable   -    1,997,726 
Due from a related party   72,700    - 
Prepaid expenses and other current assets   286,052    169,864 
TOTAL CURRENT ASSETS   4,249,214    4,498,419 
           
Property and equipment, net   101,205    68,155 
Contract receivable, net   1,617,186    684,780 
TOTAL NONCURRENT ASSETS   1,718,391    752,935 
           
TOTAL ASSETS  $5,967,605   $5,251,354 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Accounts payable  $121,558   $171,976 
Deferred revenue   149,560    104,181 
Taxes payable   244,142    177,722 
Due to related parties   22,591    14,956 
Accrued expenses and other current liabilities   178,175    171,526 
TOTAL CURRENT LIABILITIES   716,026    640,361 
           
COMMITMENTS AND CONTINGENCIES          
           
SHAREHOLDERS’ EQUITY          
Ordinary shares, $0.001 par value, 50,000,000 shares authorized; 5,000,000 shares issued and outstanding*   5,000    5,000 
Additional paid in capital   4,579,116    1,643,527 
Statutory reserve   294,158    201,468 
Retained earnings   88,967    2,274,585 
Accumulated other comprehensive income (loss)   (234,237)   26,746 
Total China Liberal’s equity   4,733,004    4,151,326 
Non-controlling interest   518,575    459,667 
Total shareholders’ equity   5,251,579    4,610,993 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $5,967,605   $5,251,354 

  

* The Company issued 5,000,000 ordinary shares in the aggregate in July 2019. These shares are presented on a retroactive basis to reflect the nominal share issuance.

8

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus, including sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and “Business,” contains forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

implementation of our business strategy;

 

our anticipated capital requirements and future operating performance; and

 

our use of the net proceeds from this Offering.

 

Any statements that relate to future events or conditions, including, without limitation, the statements included in this prospectus that are not historical facts, that relate to industry prospects and that concern our prospective results of operations or financial position, may be deemed to be forward-looking statements. Often, however, our uses of the words “believe,” “anticipate,” “plan,” “expect,” “intend” and similar expressions will identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Although we believe that the expectations reflected in the forward-looking statements contained in this prospectus are reasonable, these statements represent our current expectations and are inherently uncertain. The factors discussed above under “Risk Factors,” among others, could cause actual results, levels of activity, performance or achievements to differ materially from those indicated by these forward-looking statements. Forward-looking statements represent our views as of the date of this prospectus. While we may elect to update these forward-looking statements in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. For all of these reasons, you should not unduly rely on any forward-looking statements.

 

9

 

 

RISK FACTORS

 

You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below and our consolidated financial statements and related notes, before making an investment in our Ordinary Shares. Any of the following risks and uncertainties could have a material adverse effect on our business, financial condition, results of operations and prospects. The market price of our Ordinary Shares could decline significantly as a result of any of these risks and uncertainties, and you may lose all or part of your investment.

 

Risks Related to Our Business

 

We partner with a limited number of Chinese host universities for certain Sino-foreign Jointly Managed Academic Programs and our revenues are concentrated from a limited number of major partners. If we are not able to continue to secure agreements with some or all of our existing partners, or secure new agreements with additional partners, our results of operations and financial condition may be materially and adversely affected.

 

Our revenues generated under Sino-foreign Jointly Managed Academic Programs represented 72.6%, 50.11% and 66.0% of our net revenues for the years ended December 31, 2017 and 2018, and the six months ended June 30, 2019, respectively. Although we continue to introduce new projects and to diversify our core business, the Sino-foreign Jointly Managed Academic Programs we actively service still generated a majority of our net revenues. In addition, for 2017 and 2018, and for the six months ended June 30, 2019, we generated a vast majority of our Sino-foreign Jointly Managed Academic Program revenues from our major partners, Fuzhou Melbourne Polytechnic, or FMP and Minjiang University. We expect that this line of business will continue to generate approximately one-third of our annual net revenue in the next three years. During the years ended December 31, 2017 and 2018, we operated five such programs with four universities. However, we have ceased to provide services in connection with two of the existing programs because we assessed that these two programs are not profitable. More specifically, we have ceased to offer our courses under the International Scholarly Exchange Curriculum program with Fujian University of Technology, or the FUT ISEC Program, after the then existing students graduated in July 2018. We also have ceased to offer our courses under the New Zealand Tertiary College Program with Fujian Preschool Education College, or the NZTC Program, after the then existing students graduated in July 2019. Despite our long term working relationships with FMP and Minjiang University, one or more of these universities may decide to terminate their agreements with us and discontinue our cooperation for reasons such as expiration of Sino-foreign program permits, a change or expiration of programs, students’ inability to achieve the targeted level of language proficiency, undersubscription of students due to a global economic down-turn or otherwise, or simply decline to renew the agreements upon their expiration. If any of these situations occur, we cannot assure you that we will be able to timely secure other cooperation agreements with other programs, if at all, and therefore, our results of operations and financial condition may be materially and adversely affected. 

The services we provide under the Sino-foreign Jointly Managed Academic Programs may be subject to regulatory and policy changes, as well as the continuous approval of and supervision by relevant PRC authorities.

 

We provide services to Sino-foreign Jointly Managed Academic Programs offered by our partner schools. According to PRC laws and regulations, schools offering Sino-foreign Jointly Managed Academic Programs are required to obtain permits to operate schools from the relevant education authorities or the authorities that regulate labor and social welfare in the PRC, depending on the type of diploma or degrees granted. The Sino-foreign Jointly Managed Academic Programs we service are subject to approvals by the Ministry of Education, or MOE. Additionally, these programs are subject to continuous supervision by relevant PRC authorities, including the MOE, the Ministry of Human Resources and Social Security and their local counterparts. Such supervision may include a verification system for the foreign degrees/diplomas awarded by Sino-foreign Jointly Managed Academic Programs, and an annual report system and periodic evaluation system for those Sino-foreign institutions and programs that offer undergraduate or higher degrees.

 

In 2018, the MOE approved the termination of certain Sino-foreign Jointly Managed Academic Programs as a move to improve quality, tighten regulatory control, and promote reforms in China’s educational systems. Such actions were taken because problems had appeared in institutions and projects (none of which we service) that were previously approved by the relevant authorities. These problems included insufficient utilization of high quality educational resources, low instructional quality, weak specialized capabilities in academic departments, lack of content-based development mechanisms, low student satisfaction and poor attractiveness of programs. These problems made it difficult for those institutions and projects to continue operating and they were therefore closed down. This action by the MOE was taken to close down institutions and projects that were originally approved but at the time of termination did not have enrolled students any more. Thus, this action was also taken to improve the overall quality of the industry. In light of this, Fujian Province, the province where all of the Sino-foreign Jointly Managed Academic Programs we service are located, set a minimum score for English (as a subject) for those students who are applying for any four-year Sino-foreign joint programs that offer undergraduate degrees. As a result of these new regulatory controls and policy adjustments, even though none of the programs we service were terminated by MOE, overall student recruiting and enrollment under our Sino-foreign joint education programs was negatively impacted, because some potential candidates could not meet the minimum score for English. For example, student enrollments under our joint education programs with Strait College of Minjiang University actually decreased by 300 students from 2017 to 2018 and by 109 students from 1,712 students in the six months ended June 30, 2018 to 1,603 students in the six months ended June 30, 2019 due to the higher eligibility requirements for students to enroll in any Sino-foreign joint education programs in Fujian Province. We cannot assure you that the local government in Fujian Province or the MOE will not set an even higher eligibility standard for students to enroll in these joint education programs in the future, in which case our student enrollment numbers, result of operations and financial conditions may be negatively impacted.

10

 

 

Our partnering schools have the ability to withhold our portion of tuition payments in certain circumstances, and to the extent that our portion is withheld, our revenue, results of operations and financial condition may be materially and adversely affected.

 

Our results of operations are directly affected by the level of the tuition we charge to our students. Typically, students pay to the Sino-foreign Joint Managed Academic Programs tuition fees ranging from RMB15,000 (approximately US$2,268) to RMB28,000 (approximately US$4,233) per student per academic school year. Our contracts with host Chinese universities/ colleges are fixed price contracts, pursuant to which, we are to receive a fixed portion of tuition for services rendered. As a result of us servicing our partnering schools, we are entitled to receive approximately 30% to 50% of such student tuitions depending on different jointly managed academic programs. Our contracts with Chinese host universities/colleges provide that (1) the host universities/colleges will withhold the tuition collected from students for one to three months after the academic school year starts in September, and then remit the portion of tuition fees to us after the student headcounts have been finalized, and (2) the portion of tuition fee that we are entitled to receive is calculated based on the final actual number of students retained with the universities/colleges after any student dropout has been adjusted. Accordingly, any tuition refund has already been deducted by host universities/colleges before we receive our portion of the tuition fees. For accounting purposes, at the beginning of each academic school year, we initially accrue the estimated refund based on an historical 1% student dropout rate, and make subsequent true-up adjustments after the final number of students retained with the host universities/colleges is determined. Such adjustments were immaterial for the years ended December 31, 2018 and 2017, and the six months ended June 30, 2019.

However, our ability to receive our portion of tuition fee from Chinese host universities/colleges largely depends on whether Chinese host universities/colleges are satisfied with our teaching services, or whether we can maintain positive communication with Chinese host universities/colleges to resolve any service deficiency on a timely manner. Any extended tuition withholding or delayed tuition payment to us from Chinese host universities/colleges due to our service deficiency, may materially affect our revenue, results of operations and financial condition.

 

We rely heavily on the continuous reputation of our partnering schools in order to attract and maintain a significant number of students enrolled in our courses offered in these schools.

 

We partner with schools to provide courses within Sino-foreign Jointly Managed Academic Programs, including offering language courses and/or major specific courses to their students who intend to study abroad. These schools then pay us directly based on the headcount of the students enrolled in the Sino-foreign Jointly Managed Academic Programs. If these schools experience a decrease in the number of their enrolled students due to student or parent dissatisfaction, negative publicity, poor track records, or other disruption of their reputation out of our control, they may experience withdrawals of currently enrolled students and a decrease in the enrollment of perspective students, which could in turn materially and adversely affect our results of operations and financial condition.

 

If one or more of the Sino-foreign Jointly Managed Academic Programs were to lose their Sino-foreign program permits, our results of operations and financial condition may suffer substantially.

 

Universities or colleges who host Sino-foreign programs in the PRC are required to obtain and maintain Sino-foreign program permits from the appropriate education authorities at the PRC central government, provincial, municipal or local level, depending on the certifications required to offer these programs. We cannot assure you that the Sino-foreign Jointly Managed Academic Programs we service will maintain their permits in good standing within the permit periods, or that these permits will be renewed or extended after the permit periods. If one or more of the Sino-foreign Jointly Managed Academic Programs were to lose their Sino-foreign program permits and we are not able to timely secure new partnering programs, our results of operations and financial condition may suffer substantially.

 

Our track record of successfully assisting students to obtain student visas to study abroad may fall and satisfaction with our consulting services may otherwise decline.

 

The success of our business depends on our students’ ability to obtain student visas for their overseas study. Although almost all of our students were granted student visas in the past, we cannot ensure that our students will be granted student visas and be accepted to overseas schools at rates we have experienced in the past, and parents and students may not be satisfied with our ability to help students gain admission to universities. Any such negative developments could result in a student’s withdrawal or decrease in future enrollment, and therefore, our business, financial condition and results of operations may be materially and adversely affected.

 

Changes to immigration policies in the countries our students plan to attend schools in may negatively affect our results of operations and financial condition.

 

A significant portion of our business relies upon our students’ confidence in, among other things, their ability to obtain student visas from the countries they intend to study in, including Italy and Germany. We cannot assure you that immigration policies of the popular destination countries among our students will remain the same or become friendlier to overseas students, and there is no assurance that our students will be granted visas to study in the countries of their choices. Any such negative developments could result in a student’s withdrawal or decrease in future enrollment, and therefore, our business, financial condition and results of operations may be materially and adversely affected.

 

If we fail to increase student enrollments, our net revenues may decline, and we may not be able to maintain growth.

 

Our growing one-on-one consulting services offered to students (mostly art students) generate revenue from the tuition we collect from these students. It is critical for us to enroll prospective students in a cost-effective manner. Some of the factors, many of which are largely beyond our control, could prevent us from successfully increasing enrollments of new students in a cost-effective manner, or at all. These factors include, among other things, (i) reduced interest in the degrees, professions or schools which our services are targeting (art and computer science); (ii) improved quality and number of art schools in the PRC; (iii) the inability of students to pay tuition; (iv) increasing market competition, particularly price reductions by competitors that we are unable or unwilling to match; and (v) adverse changes in relevant government policies or general economic conditions. If one or more of these factors reduce market demand for our services, our student enrollments could be negatively affected or our costs associated with student acquisition and retention could increase, or both, any of which could materially affect our ability to grow our gross billings and net revenues. These developments could also harm our brand and reputation, which would negatively impact our ability to expand our business. 

11

 

 

If fewer Chinese students, particularly art students, choose to study abroad, demand for our international program may decline.

 

One of the principal drivers of the growth of our business is the increasing number of Chinese students, particularly art students who choose to study abroad, reflecting the growing Chinese students demand for higher education in overseas countries. As such, any restrictive changes in immigration policy, terrorist attacks, geopolitical uncertainties and any international conflicts involving countries of popular demand could make it more difficult for Chinese students to obtain student visas to study overseas, or decrease the appeal of studying in such countries to Chinese students. Any significant changes in admission standards adopted by overseas educational institutions could also affect the demand for overseas education by Chinese students. Additionally, Chinese students may also become less attracted to studying abroad for other reasons, such as improving domestic educational or employment opportunities associated with increased economic development in China. These factors could cause declines in the demand for our international program, which may adversely affect our revenue and profitability.

 

We face risks related to natural disasters, extreme weather conditions, health epidemics and other catastrophic incidents, which could significantly disrupt our operations.

 

In the past, China has experienced significant natural disasters, including earthquakes, extreme weather conditions, as well as health scares related to epidemics, and any similar event could materially impact our business in the future. If a disaster or other disruption were to occur in the future that affects the regions where we operate our business, our operations could be materially and adversely affected due to loss of personnel, damages to property and insufficient student enrollments. Even if we are not directly affected, such a disaster or disruption could affect the operations or financial condition of our ecosystem participants, which could harm our results of operations.

 

Our business could be affected by public health epidemics. If any of our employees or if one or more of our students who receive our services in person (for example, those students who enrolled in our one-on-one consulting services program) is suspected of having contracted a contagious disease, we may be required to apply quarantines or suspend our operations. Furthermore, any future outbreak may restrict economic activities in affected regions, resulting in reduced business volume, temporary closure of our offices or other disruptions of our business operations and adversely affect our results of operations.

 

The outbreak of the novel coronavirus, commonly referred to as “COVID-19”, first found in mainland China, then in Asia and eventually throughout the world, has significantly affected business and other activities within China, including travel restrictions or quarantines within China, and postponement of the spring semester of 2020. Additionally, countries that our students will study in, including the U.S., Australia, Italy and Spain are currently affected by COVID-19, which led to measures taken by the respective governments trying to contain the spread of COVID-19, such as a lockdown, closure of schools and travel restrictions. Additional travel and other restrictions may be put in place to further control the outbreak. These measures may cause suspension of our one-on-one consulting services, as well as postponement of payment from our partnering schools. Students seeking to enroll in international educational institutions may choose to remain in China, thereby not seeking our services. In addition, the execution of the Company’s smart campus contracts and collection of the payment may be delayed. Accordingly, our business, results of operations and financial condition may be adversely affected.

 

Due to the continuous and rapid development of the COVID-19 outbreak, which was categorized as a pandemic by the World Health Organization on March 11, 2020, the potential negative impact of COVID-19 outbreak on our business is currently unknown.

 

We cannot assure you that the new China Liberal-branded schools that we intend to open in Beijing and in Italy will be opened as scheduled, if at all.

 

We intend to open our own branded schools in Beijing at our current headquarters as well as in Italy in 2020. However, we cannot assure you that either or both schools can obtain permits or licenses, if required, can enroll the viable number of students to ensure profits, can hire qualified teachers to teach the courses, or for our Italian location, can successfully cooperate with our local partner. Failure to accomplish any one or more of these factors could substantially delay the schools’ openings, if the schools can be opened at all, and our results of operations and financial prospects may suffer substantially.

 

12

 

 

Our smart campus solutions may not be accepted by the intended users of our products, which could harm our future financial performance.

 

There can be no assurance that our smart campus solutions systems will achieve wide acceptance by our intended users, including management, teachers, and students of our current and future partnering schools. The degree of acceptance for products and services based on our technology will also depend upon a number of factors, such as whether we are able to meet and exceed the expectation of our uses in speed and safety, availability of various functions, user-friendliness and the ability to integrate different user platforms and data. Long-term subscription of our products and services will also depend, in part, on the capabilities and operating features of our products and technologies as compared to those of other available products and services. As a result, there can be no assurance that currently available solutions will be able to achieve revenue growth or profitability, which could harm our future financial performance.

 

We depend upon the development of new solutions and enhancements to existing solutions for our current and future partnering schools. If we fail to predict and respond to emerging technological trends and clients’ and intended users’ changing needs, our operating results and market share may suffer.

 

The market for our smart campus solutions is characterized by rapidly changing technology, evolving industry standards, new product introductions, and evolving methods of building and maintaining our products. Our operating results depend on our ability to develop and introduce innovative products and to maintain the integrated system we have implemented. The process of developing new technology, including Software as a Service, or SaaS model cloud computing technology, more programmable, flexible and virtual networks, and technology related to other market transitions- such as security, digital transformation and IoT and IoE (Internet of Everything), and cloud- is complex and uncertain, and if we fail to accurately predict clients’ and intended end users’ changing needs and emerging technological trends our business could be harmed.

 

We may need to commit significant resources, including monetary investments and developer personnel to developing new products before knowing for sure whether such investments will result in products the intended end users’ will accept. Similarly, our business could be harmed if we fail to develop, or fail to develop in a timely fashion, offerings to address other evolving needs, or if the offerings addressing these other transitions that ultimately succeed are based on technology, or an approach to technology, different from ours. In addition, our business could be adversely affected in periods surrounding the launch of new products if customers delay their purchasing decisions to evaluate the new product offerings.

 

Furthermore, we may not execute successfully on our vision or strategy because of challenges with regard to product planning and timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of necessary resources. This could result in competitors, some of which are technology giants in the PRC, providing those solutions before we do, which in turn, causes us loss of market share, revenue, and earnings.

 

Historically, the gross margin from the smart campus solutions line of business was lower than our other lines of business, and we cannot assure you that such line of business will be profitable in the foreseeable future, if at all.

 

While the gross margin from the smart campus solutions line of business was 23.4% in the six months ended June 30, 2019, historically, it was lower than our other lines of business, with gross margin of 6.5% in 2017 and 19.7% in 2018. This is due to the nature of the smart campus solutions business, that is, higher cost associated with the customization of software, higher hardware facilities and device costs, and higher investment into the research and development of the technology serving the smart campus solutions. We cannot assure you that the profit margin will become higher in the future. Therefore, there can be no assurance that we can generate income from the smart campus solutions line of business, or that any income that we achieve can be sustained.

 

13

 

 

We provide our technology consulting services to a limited number of schools for their smart campus solutions, and if we are not able to continue to secure agreements with some or all of these schools, or secure new agreements with other schools, our results of operations and financial condition may be materially and adversely affected.

 

Currently, we provide our technology consulting services to two universities for smart campus hardware and software build-out or servers upgrade. We also provide smart campus solutions equipment procurement and installment services to three other universities. However, one or more of these universities may decide to terminate their agreements with us for reasons such as dissatisfaction of our services, a change of programs or curriculum, hiring of in-house tech support personnel, or simply not to choose us as their service provider after a project is completely. If any of these situations occur, we cannot assure you that we will be able to timely secure other service agreements with other schools, if at all, and therefore, our results of operations and financial condition may be materially and adversely affected.

 

Our reputation in the job readiness training market relies heavily upon the student-employees trained by us remaining in their respective positions and performing in a satisfactory manner, which is not within our control. If these student-employees are not able to stay in their respective positions for a reasonable amount of time or are consistently not able to meet the employers’ criteria, our reputation in the job readiness training market may suffer.

 

While our job readiness training services are highly tailored in order to train the student-employees to meet the specific requirements of our contracted employers, there may be situations not within our control which may lead to a student-employee’s leaving his/her position before the end of required length of services. Such situations may include a student-employee’s voluntary resignation without good reason or his/her violation of the employer’s internal guidelines and rules. Although such situations are not within our control, our reputation may be damaged if similar situations occur repeatedly.

 

We do not generate revenues under our job readiness training until a student is successfully placed and we will not be fully paid by the employer until such student-employee stay with the employer for a set period of time. If a student-employee fails to stay in his/her position for an agreed upon amount of time, our results of operations and financial condition may be materially and adversely affected.

 

Our business model under the job readiness training line of business is such that we will not start generating revenues until a student is successfully placed and starts working for the target employer. Once these conditions have been met, the employer will start paying us monthly starting at the end of the first month of employment for the fixed period of time set forth in our agreement with the employer. However, if a student-employee leaves due to voluntary resignation without good reason or is asked to leave before the end of the applicable length of services, we will not be compensated for the remaining months that such student-employee is not providing services. Although we typically sign a separate agreement with a student before providing training services whereby the student is required to pay us for any of such remaining months, we cannot assure you that he/she will perform this obligation fully according to such agreement, in which case our results of operations and financial condition may be materially and adversely affected.

 

We have grown steadily and expect to continue to invest in our operations for the foreseeable future. If we fail to manage this growth effectively, the success of our business model will be compromised.

 

We have experienced steady growth in net revenues in recent years, primarily driven by the diversifying of our core business while leveraging our network of trusted schools. Our net revenues grew by 22.8% from RMB 21 million ($3,163,302) in 2016 to RMB 26.26 million ($3,885,886) in 2017 and further increased by 23.8% to RMB 31.82 million ($4,808,993) in 2018. Our net revenue was RMB 12.76 million ($1,880,068) in the six months ended June 30, 2019.

 

Our growth may place a significant strain on our sales and marketing capacities, administrative and operating infrastructure, facilities and other resources. To maintain our growth, we need to continue to acquire more partnering Sino-foreign programs or institutes, enroll more students, increase our academic and administrative faculty, as well as further developing and strengthening our software and systems. We will also be required to refine our operational, financial and management controls and reporting systems and procedures. If we fail to efficiently manage this expansion of our business, our costs and expenses may increase more than anticipated and we may not successfully attract a sufficient number of students and qualified academic and administrative faculty in a cost-effective manner, respond to competitive challenges, or otherwise execute our business plans. In addition, we may, as part of carrying out our growth strategies, adopt new initiatives to offer additional course packages and educational content and to implement new pricing models and strategies. We cannot assure you that these initiatives may achieve the anticipated results. These proposed changes may not be well received by our existing and prospective students, in which case their experience with our education services may suffer, which could damage our reputation and business prospect.

 

Our ability to effectively implement our strategies and manage any significant growth of our business will depend on a number of factors, including our ability to: (i) effectively market our products and services to potential partners and students with sufficient growth potential; (ii) develop and improve educational content to  appeal to existing and prospective partners and students; (iii) maintain and increase our student enrollments; (iv) effectively recruit, train and motivate a large number of new employees, including our faculty members, foreign teachers and sales and marketing personnel; (v) successfully implement enhancements and improvements to our software and systems; (vi) continue to improve our operational, financial and management controls and efficiencies; (vii) protect and further develop our intellectual property rights; and (viii) make sound business decisions in light of the scrutiny associated with operating as a public company. These activities require significant capital expenditures and investment of valuable management and financial resources, and our growth will continue to place significant demands on our management. There are no guarantees that we will be able to effectively manage any future growth in an efficient, cost-effective and timely manner, or at all. Our growth in a relatively short period of time is not necessarily indicative of results that we may achieve in the future. If we do not effectively manage the growth of our business and operations, our reputation, results of operations and overall business and prospects could be negatively impacted.

 

14

 

 

If we are unable to conduct sales and marketing activities cost-effectively, our results of operations and financial condition may be materially and adversely affected.

 

We rely heavily on our sales and marketing efforts to increase student enrollment. Our sales and marketing expenses consist primarily of employee salaries and student enrollment. We incurred approximately $541,424, $704,060 and $156,061, respectively, in sales and marketing expenses in 2017 and 2018, and in the six months ended June 30, 2019. We expect our sales and marketing expenses to continue to increase in the future as we further expand our operations. 

Our sales and marketing activities may not be well received by the market and may not result in the levels of sales that we anticipate. We also may not be able to retain or recruit a sufficient number of experienced sales and marketing personnel, or to train newly hired sales and marketing personnel, which we believe is critical to implementing our sales and marketing strategies cost-effectively. Further, sales and marketing approaches and tools in China’s private education market are evolving rapidly. This requires us to continually enhance our sales and marketing approaches and experiment with new methods to keep pace with industry developments and student preferences.

 

Failure to engage in sales and marketing activities in a cost-effective manner may reduce our market share, cause our revenues and gross billings to decline, negatively impact our profitability, and materially harm our business, financial condition and results of operation.

 

Part of our core business is seasonal and we have increased risk from disruption during peak periods which makes our operating results difficult to predict.

 

We derive a significant portion of our net revenues from our Sino-foreign Jointly Managed Academic Programs, which typically occur around the commencement of an academic year in October and November. In addition, we typically see a “rush” to subscribe to our one-on-one consulting services by art students in June to December due to the annual registration cycle of overseas art schools, and thus, our net revenues from this core business fluctuate substantially accordingly. In addition, payments from our technology consulting services provided under the smart campus solutions typically settle at the end of a calendar year. Any shortfalls or disruptions in our operations during these peak periods, therefore, will have a disproportionately large impact on our annual operating results and the potential future growth of our business.

 

As a result of this seasonality, which corresponds to the academic calendar, our revenues fluctuate significantly quarter to quarter depending upon the timing of where we are in our “rush” cycle and sequential quarter-over-quarter comparisons of our revenues and operating results are to some extent not likely to be meaningful. In addition, our operating results from these two core businesses for any given quarter cannot be used as an accurate indicator of our results for the year. In particular, we anticipate that our ability to accurately forecast financial results for future periods will be most limited at the time we present our third quarter financial results, which will generally occur after the “rush” to subscription to our one-on-one courses in the spring and precede the fall academic year.

 

We base our operating expense budgets on expected net revenue trends. Operating expenses, similar to revenues and cost of revenues, fluctuate significantly quarter to quarter due to the seasonality of our business and are generally higher during the first and second quarters as we incur marketing expense in connection with our peak periods before the registration deadlines for art schools overseas as well as at the beginning of each academic year in the PRC. As a result, sequential quarterly comparison of our financial results has not been meaningful. We expect our seasonality to shift as a result of our continuous diversifying of our business by offering and maintaining our smart campus solution. Further, a portion of our expenses, such as office space lease obligations and personnel costs, are largely fixed and are based on our expectations of our peak levels of operations. We also intend to start enrolling students and offering preparation services to more art students on a much larger scale by operating our own branded schools in the PRC and in Italy, from which we expect more revenues to offset potential shortfall during off-peak periods. Nonetheless, we expect to continue to incur significant marketing expenses during peak periods and to have fixed expenses for office space and personnel and as such, we may be unable to adjust spending quickly enough to offset any unexpected revenues shortfall. Accordingly, any shortfall in net revenues may cause significant variation in operating results in any quarter.

 

15

 

 

We face regulatory risks and uncertainties surrounding PRC laws and regulations governing the education industry in general, including the amendments to the Implementation Rules for the Law for Promoting Private Education.

 

Our provision of Overseas Study Consulting Services offered language and art training to students, as advised by Tian Yuan Law Firm, our PRC legal counsel, is not considered running a private school, because we are not currently engaging in education that would lead to the issuance of a diploma, pre-school education, study assistance to students enrolled to take examinations for specific courses in order to obtain college degrees without attending conventional classroom-based universities, other cultural education or training of professional skills, or vocational qualifications, and thus, we are not a private school. Therefore, we are not required to hold a private school permit required under the Law for Promoting Private Education (2018) and the Implementation Rules for the Law for Promoting Private Education (2004) (collectively, “Private Education Law”).

 

Our plan to open and operate a China Liberal school, i.e., a for-profit private school, will subject us to the Private Education Law. Nonetheless, as advised by Tian Yuan Law Firm, the current PRC laws and regulations, including the Private Education Law, remain unclear as to whether the requirement for a private school operating permit is applicable to us, because in practice, private schools providing language and art training are usually not required to hold this permit.

 

The issuance of the draft submitted for approval for the amendment to the Implementation Rules for the Law for Promoting Private Education (the “MOJ Draft Amendments”) will make it clear that our planned China Liberal school in the PRC will not require a permit or approval, because this school will be providing language and art training to students, which is exempted from a permit or approval, and only a regular business recording with authority is required.

 

Nevertheless, we cannot assure you that the MOJ Draft Amendments will be adopted into law in its entirety without any revisions. Therefore, we cannot assure you that we will not be required to obtain a private school operating permit in the future. If the PRC government requires us to obtain a private school operating permit, and if we fail to do so and still operate the school, we may be subject to monetary fines up to five times the illegitimate gains generated from the provision of training services without a proper license, other administrative sanctions, such as being ordered to stop conducting our educational activities, refund tuition payments to the students, or criminal liabilities, for our lack of a private school operating permit.

 

We may also be subject to regulatory requirements that are more stringent than the ones currently applicable to us, including those relating to sales and marketing, courses and educational content offerings, teachers’ qualification, as well as tuition fee rates and tuition refund policies, or laws and regulations that require us to obtain and maintain additional licenses and permits, and we may incur substantial expenses or alter or change our business to comply with these requirements.

 

We face regulatory risks and uncertainties associated with our teacherslack of teaching qualifications.

 

Pursuant to the Detailed Rules for the Implementation of Supervision and Administration of For-profit Private Schools issued by the Ministry of Education, the Ministry of Human Resources and Social Security and the then State Administration for Industry and Commerce (the “Detailed Rules”), teachers employed by a for-profit private school shall obtain teaching licenses or hold relevant professional skill qualifications. The Detailed Rules do not specifically provide whether “teachers”, “tutors”, or however they may be called in practice (collectively, “teachers”) of non-school tutoring institutions shall obtain teaching licenses or other relevant teaching qualifications. However, the Detailed Rules require that for-profit private tutoring institutions shall also be regulated by reference to the Detailed Rules. Further, PRC laws and regulations do not explicitly set forth what “relevant professional skill qualifications” other than teaching licenses the teachers in private schools or tutoring institutions shall obtain. In practice, there may be various interpretations and implementations by local education authorities as to whether and what qualifications are to be obtained by such teachers.

 

As advised by Tian Yuan Law Firm, our PRC counsel, we do not believe that we are subject to the regulations of for-profit private schools because we do not provide education for diploma, pre-school education, study assistance to students enrolled to take examinations for specific courses in order to obtain college degrees without attending conventional classroom-based universities, other cultural education or training of professional skills, or vocational qualifications. However, since we also deliver language and art training to prepare students for their studies abroad, we may be deemed a for-profit tutoring institution by local education authorities. In such case, we may be subject to the Detailed Rules, and thus, our teachers may be required to obtain relevant professional skill qualifications by local education authorities. Although we have been maintaining high standards to recruit skilled and qualified employees, we cannot assure you that the teachers responsible for the foregoing language and art training would obtain all relevant qualifications required by local education authorities from time to time.

 

As of the date of this prospectus, we have not received any notice of warning or been subject to any penalties or disciplinary action from government authorities due to the teachers’ lack of qualifications. In the event that our teachers are required by laws or local education authorities to obtain certain specific qualifications, we may not be able to ensure that our teachers do so timely, if at all. Therefore, we may be ordered to rectify such noncompliance or subject to penalties under the then-effective PRC laws and regulations, in which case our business may be disrupted, and our financial condition, reputation and prospects would be materially and adversely affected.

 

16

 

 

Our failure to obtain and maintain approval and permit related to publishing and selling our textbooks could have a material adverse impact on our business, financial conditions and results of operations.

 

Pursuant to PRC laws and regulations related to publication, the publication and sale of our textbooks require government approval and permit, even though we limit the use of our textbooks to students enrolled under some of our Sino-foreign Jointly Managed Academic Programs. We have not applied for such government approval or permit. Although we are a course provider printing and distributing our own teaching materials at a small scale without obtaining any permit for publication and distribution, and although as of the date of this prospectus, we have not been subject to any fines or other form of regulatory or administrative penalties or sanctions due to the lack of any the above-mentioned approvals or permits, we cannot guarantee that the government authorities will not impose any penalties or sanctions on us in the future for any incompliance in the past, which may include fines, mandates to remedy any violations, confiscation of the gains derived from the services for which approval or permit is required, an order to cease to provide such services and/or criminal liabilities, in which case, we could be subject to operational disruption and our financial condition and results of operations could be adversely affected.

 

We have a limited history of operating some of our business lines.

 

We have been operating the Sino-foreign Jointly Managed Academic Programs since 2011. However, we have only been offering one-on-one consulting services and technological consulting services for smart campus solutions since 2017, and job readiness training since late 2018. Our limited history of operating part or all of our business may not serve as an adequate basis for evaluating our future prospects and operating results, including gross billings, net revenue, cash flows and profitability.

 

We may not be able to continue to recruit, train and retain a sufficient number of qualified faculty members.

 

Our faculty members are key to the quality of our educational services, as well as our brand and reputation. Our ability to continue to attract faculty members with the necessary experience and qualifications is a key driver in the success of our business. We seek to recruit qualified faculty members who are dedicated to teaching and are able to stay up-to-date with ever-changing teaching methods and approaches.

 

Additionally, given that our services are provided to students with goals to study abroad, we tend to hire teachers with strong education background and qualifications. The market for the recruitment of faculty members in the PRC is competitive. In order to attract and recruit talents, we must provide candidates with competitive compensation packages and offer attractive career development opportunities. Although we have not experienced major difficulties in recruiting or training qualified teachers in the past, we cannot guarantee that we will be able to continue to recruit, train and retain a sufficient number of qualified faculty members in the future as we continue to expand our business, which may have a material adverse effect on our business, financial condition and results of operations.

 

Our failure to obtain and maintain permit related to human resources services could have a material adverse impact on our business, financial conditions and results of operations.

 

Pursuant to the Interim Regulations on Human Resources Market, effective as of October 1, 2018, any for-profit human resources service provider shall obtain approval from the administrative department of human resources and social security to conduct human resources services. We recommend foreign teachers based on certain standards found in our agreements with partner universities or programs. We recommended three foreign teachers in 2016, three foreign teachers in 2017 and one foreign teacher in 2018, which may subject us to the qualification requirements of a human resources services provider. However, we have ceased to recommend new foreign teachers since 2019. Besides, as of the date of this prospectus, we have not been subject to any fines or other form of regulatory or administrative penalties or sanctions due to the lack of such approval or permit. Nevertheless, due to the broad provisions and discretionary implementation of the PRC laws, we cannot guarantee that the government authorities will not impose any penalties or sanctions on us in the future for any incompliance in the past, which may include fines, mandates to remedy any violations, confiscation of the gains derived from the services for which approval or permit is required, and/or an order to cease to provide such services, in which case, we could be subject to operational disruption and our financial condition and results of operations could be adversely affected.

 

Failure to adequately and promptly respond to changes in the exams our students must take or in the requirements our students must meet to pursue their desired degrees or schools could cause our education services to be less attractive to our students.

 

There have been continuous changes in the curriculum requirements associated with, and the format of, the exams our existing and prospective students must take to pursue their desired degrees or schools, the manner in which the exams are administered, topics frequently tested in the exams, as well as the materials and documents students must submit for admission. These changes require us to continually update and enhance our course offerings, our educational and consultancy content and our teaching methods. Any inability to track and respond to these changes in a timely and cost-effective manner would make our education services less attractive to students, which may materially and adversely affect our reputation and ability to continue to attract students without a significant decrease in our tuition.

 

17

 

 

Delays or failures in responding to issues raised by end users of our platforms could harm our operations.

 

The performance and reliability of our platforms used by management, teachers and students is critical to our operations and reputation. We provide our campus management, teaching and/or learning platforms to our partnering schools and we rely on our end users to promptly give us feedback regarding their user experience as well as any issues in connection with such platforms. However, there may be delay in feedback from these end users, or delay or failure on our end to address such issues. These could damage our reputation, decrease end user satisfaction, negatively impact our current coopering relationships, adversely impact our ability to attract new partners, and materially disrupt our operations. If any of these occur, our business operations, reputation and prospects could be harmed.

 

Our business depends on the continued success of our brand “China Liberal,” and if we fail to maintain and enhance recognition of our brand, we may face difficulty enrolling new students, and our reputation and operating results may be harmed.

 

We believe that market awareness of our brand “China Liberal” has contributed significantly to the success of our business. Maintaining and enhancing our brand are critical to our efforts to grow our business. Failure to maintain and enhance our brand recognition could have a material and adverse effect on our business, operating results and financial condition. We have devoted significant resources to our brand promotion efforts in recent years, but we cannot assure you that these efforts will be successful. If we are unable to further enhance our brand recognition, or if we incur excessive marketing and promotion expenses, or if our brand image is negatively impacted by any negative publicity, our business and results of operations may be materially and adversely affected.

 

If we fail to effectively identify, pursue and consummate strategic alliances or acquisitions, our ability to grow and to achieve profitability could be impacted.

 

We may from time to time engage in evaluations of, and discussions with, possible domestic and international acquisition or alliance candidates. We may not be able to identify suitable strategic alliances or acquisition opportunities, complete such transactions on commercially favorable terms, or successfully integrate business operations, infrastructure and management philosophies of acquired businesses and companies. There may be particular complexities, regulatory or otherwise, associated with our expansion into new markets, and our strategies may not succeed beyond our current markets. If we are unable to effectively address these challenges, our ability to execute acquisitions as a component of our long-term strategy will be impaired, which could have an adverse effect on our growth.

 

We face intense competition in our industry, which could divert student to our competitors, lead to pricing pressure and loss of market share, and significantly reduce our gross billings and net revenues.

 

China’s education market targeting students going overseas is intensely competitive. We compete with other Chinese education service providers engaged in Sino-foreign Jointly Managed Academic Programs and overseas study consultancy, for student enrollments and acquisition, high-quality academic and administrative faculty, and sales and marketing personnel, among other things. Some of our current and future competitors may have substantially greater name recognition and financial and other resources than we do, which may enable them to compete more effectively for potential students and decrease our market share. We also expect to face competition as a result of new entrants particularly those who provide consultancy services targeting art students.

 

We may not be able to compete successfully against current or future competitors and may face competitive pressures that could adversely affect our business or results of operations. The increasingly competitive landscape may also result in longer and more complex sales cycles with a prospective student or a decrease in our market share, any of which could negatively affect our gross billings and net revenues and our ability to grow our business.

 

18

 

 

If our security measures are breached or fail and result in unauthorized disclosure of data by our employees, we could lose existing partners, fail to attract new partners and be exposed to protracted and costly litigation.

 

Maintaining software and system security is of critical importance to our partnering schools and our end users because the system stores and transmits proprietary and confidential information, including sensitive personally identifiable information that may be subject to stringent legal and regulatory obligations. As a technology driven smart campus solutions provider, we face continuous security threats to our system, including unauthorized activity and access by our employees, system viruses, worms, malicious code and organized cyberattacks, which could breach our security and disrupt our business. We take the proprietary and confidential information of our Company, our partners and our end users seriously. Each of our employees is required to sign and is abide by an employment agreement that contains standard confidentiality agreements. Our employees are also required to attend internal continuing training sessions. Additionally, our research and development personnel regularly monitor and maintain our software and system. We intend to, in the near future, establish a team of maintenance personnel to conduct real-time monitoring. These measures, however, may not be as effective as we anticipate. If our security measures are breached or fail as a result of third-party action, employee error, malfeasance or otherwise, we could be subject to liability or our business could be interrupted, potentially over an extended period of time. Any or all of these issues could harm our reputation, adversely affect our ability to maintain existing partners or attract prospective partners, or subject us to third-party lawsuits, regulatory fines or other action or liability. Further, any reputational damage resulting from breach of our security measures could create distrust of our company by prospective partners or investors. We may be required to expend significant additional resources to protect against the threat of these disruptions and security breaches or to alleviate problems caused by such disruptions or breaches.

 

We rely heavily on Aliyun, a cloud-based server provider to provide server service to us. Any interruption to such service could significantly disrupt our operations.

 

A vast majority of our data, codes and solutions is stored on the cloud-based service platform, Aliyun, we subscribe to. Although the use of such service is perceived to have lower risks than a conventional physical server, we may still face risks such as closure or discontinuity of services without adequate notice, financial difficulties (such as bankruptcy) faced by the server provider or their contractor(s), or any system vulnerability or security risk that are not timely fixed by Aliyun, which may have negative effects on our business, the nature and extent of which are difficult to predict.

 

Privacy concerns could limit our ability to collect and leverage our user data and disclosure of user data could adversely impact our business and reputation.

 

In the ordinary course of our business and in particular in connection with the technological consulting services provided under smart campus solutions, we collect and utilize data supplied by our users. We currently face certain legal obligations regarding the manner in which we treat such information. Increased regulation of data utilization practices, including self-regulation or findings under existing laws that limit our ability to collect, transfer, integrate and use data, could have an adverse effect on our business. Failure to comply with these obligations could subject us to liability, and to the extent that we need to alter our business model or practices to adapt to these obligations, we could incur additional expenses.

 

Our success depends on the continuing efforts of our senior management team and other key employees.

 

We depend on the continued contributions of our senior management and other key employees. The loss of the services of any of our senior management or other key employees could harm our business. Competition for qualified talents in the PRC is intense. If one or more of our senior management or other key employees are unable or unwilling to continue in their present positions, we may not be able to find replacements in a timely manner, or at all, and our business may be disrupted. Moreover, if any member of our senior management team or any of our other key personnel joins a competitor or forms or invests in a competing business, we may lose student enrollment, qualified teaching faculty members and other key sales and marketing personnel to our competitors. Our future success is also dependent on our ability to attract a significant number of qualified employees and retain existing key employees. If we are unable to do so, our business and growth may be materially and adversely affected. Our need to significantly increase the number of our qualified employees and retain key employees may cause us to materially increase compensation-related costs, including share-based compensation.

 

19

 

 

We may from time to time be subject to infringement claims relating to intellectual properties of third parties.

 

We cannot assure you that our course offerings, educational contents, textbooks, software and platforms do not or will not infringe upon copyrights or other intellectual property rights held by third parties. We may encounter disputes from time to time over rights and obligations concerning intellectual properties, and we may not prevail in those disputes.

 

We have adopted policies and procedures to prohibit our users, students and employees from infringing upon third-party copyright or intellectual property rights. However, we cannot ensure that they will not, against our policies, use third-party copyrighted materials or intellectual property without proper authorization. We may incur liability for unauthorized duplication or distribution of materials posted used in our classes or posted on our platforms. Any intellectual property infringement claim could result in costly litigation and divert our management attention and resources, which in turn could negatively affect our business, financial condition and prospect.

 

If we fail to protect our intellectual property rights, our brand and business may suffer.

 

We rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Although we seek to obtain copyright or trademark protection for our intellectual property when applicable, it is possible that we may not be able to do so successfully or that the copyright or trademark we have obtained may not be sufficient to protect all of our intellectual property rights. In particular, we rely, to a significant extent, upon our educational content developed in-house, including textbooks and teaching materials, course syllabi and outlines, quiz banks, and teaching notes, to provide high-quality education services. Additionally, we have developed and will continue to develop and maintain our copyrighted software offered within our smart campus solution. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or duplicate our intellectual property or otherwise use our intellectual properties without obtaining our consent. For example, unauthorized third parties may use our “China Liberal” brand to operate similar businesses, or to make illegal copies of our textbooks and teacher materials for market resale. Monitoring unauthorized use of our intellectual property is difficult and costly, and we cannot be certain that the steps we have taken will effectively prevent misappropriation of our intellectual properties. If we are not successful in protecting our intellectual property rights, our business and results of operations may be adversely affected.

 

Our end users may engage in intentional or negligent misconduct or other improper activities or misuse our software and systems, which could harm our brand and reputation.

 

We are exposed to the risk of fraud or other misconduct committed by the end users of our software and systems. The PRC laws governing the fair use of these third-party materials are imprecise and adjudicated on a case-by-case basis, which makes it challenging for us to adopt and implement policies governing these practices. We could, as a result, incur liability to third parties for the unauthorized duplication, distribution or other use of these materials. Any such claims could subject us to costly litigation and impose a significant strain on our financial resources and attention of management personnel regardless of whether the claims have merit. Additionally, we may be required to alter or cease our uses of such materials, which may include changing or removing content from courses or altering the functionality of our platform, or to pay monetary damages. Fraud or other misconduct by our students, employees or third parties may also involve engaging in unauthorized misrepresentation to our potential students and misappropriating third-party intellectual property and other propitiatory rights during marketing activities, misusing sensitive personal information of our students, and engaging in bribery or other unlawful payments, any of which could result in customer complaints, regulatory and legal liabilities, as well as serious harm to our brand and reputation.

 

If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately or timely report our results of operations or prevent fraud, and investor confidence and the market price of our Ordinary Shares may be materially and adversely affected.

 

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 controls over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of auditing our consolidated financial statements as of December 31, 2018 and for the year ended December 31, 2017, we and our independent registered public accounting firm identified four material weaknesses in our internal control over financial reporting and other control deficiencies as of December 31, 2018. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

The material weaknesses identified relate to (i) a lack of accounting staff and resources with appropriate knowledge of generally accepted accounting principles in the United States (“U.S. GAAP”) and SEC reporting and compliance requirements; (ii) a lack of sufficient documented financial closing policies and procedures; (iii) a lack of independent directors and an audit committee; and (iv) a lack of an effective review process by the accounting manager.

 

20

 

 

Following the identification of the material weaknesses and control deficiencies, we plan to continue to take remedial measures including (i) hiring more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework; (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel; (iii) setting up an internal audit function as well as engaging an external consulting firm to assist us with assessment of Sarbanes-Oxley compliance requirements and improvement of overall internal control; and (iv) appointing independent directors, establishing an audit committee, and strengthening corporate governance.

 

We have taken measures and plan to continue to take measures to remedy these material weaknesses. The implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct theses material weaknesses or our failure to discover and address any other material weaknesses could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our Ordinary Shares, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud.

 

Upon the 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, or Section 404, will require that we include a report from 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 in 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, we may identify 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. Generally speaking, 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, harm our results of operations and lead to a decline in the trading price of our Ordinary Shares, if and when they trade. 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.

 

Failure to qualify for or obtain any preferential tax treatments that are available in China could adversely affect our results of operations and financial condition.

 

The modified Enterprise Income Tax Law, effective on February 24, 2017, or the EIT Law, and its implementation rules generally impose a uniform income tax rate of 25% on all enterprises, but grant preferential treatment to “high and new technology enterprises strongly supported by the state,” or HNTEs, to enjoy a preferential enterprise tax rate of 15%. China Liberal Beijing is currently accredited as an HNTE. According to the relevant administrative measures, to qualify as an “HNTE,” China Liberal Beijing must meet certain financial and non-financial criteria and complete verification procedures with the administrative authorities. Continued qualification as an HNTE is subject to a three-year review by the relevant government authorities in China, and in practice certain local tax authorities also require annual evaluation of the qualification. In the event that China Liberal Beijing fails to obtain accreditation as HNTE or are not verified by the local tax authorities, it will be subject to the standard PRC enterprise income tax rate of 25%.

 

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We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

 

Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the NASDAQ, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.07 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also permits an emerging growth company to delay adopting new or revised accounting standards until such time as those standards apply to private companies.

 

After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our Board of Directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

We may grant share incentives, which may result in increased share based compensation expenses.

 

We believe the granting of share-based awards is of significant importance to our ability to attract and retain key personnel and employees, and we may grant share-based awards in the future. As a result, we may start to incur expenses associated with share-based compensation, which may have an adverse effect on our results of operations.

 

Failure to make adequate contributions to various government-sponsored employee benefits plans as required by PRC regulations may subject us to penalties.

 

Companies operating in China are required to participate in various government-sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to specified percentages of salaries, including bonuses and allowances, of employees up to a maximum amount specified by the local government from time to time at locations where our employees are based. The requirements of employee benefit plans have not been implemented consistently by the local governments in China given the different levels of economic development in different regions. We did not pay, or were not able to make, certain social insurance or housing fund contributions for all of our employees and the amount we paid was lower than the requirements of relevant PRC regulations. Our failure in making contributions to social security and housing providence fund plans and in complying with applicable PRC labor-related laws may subject us to penalties and/or late payment fees, as the case maybe, in addition to the payment of outstanding contributions for these plans, e.g., the failure to contribute full payment to the social security funds and subsequent refusal to make up the payment within specified time limit may lead to fines amounting to one to three times the unpaid amount. 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. In addition, to the extent that we can make a reasonable estimate of the liability arising from our failure in making full contributions to various employee benefit plans, we record a related contingent liability. However, the amount of our estimates may be inaccurate, in which case our financial condition and cash flow may be adversely affected if we were to pay late fees or fines in relation to the underpaid employee benefits.

 

Increases in labor costs in the PRC may adversely affect our business and results of operations.

 

The currently effective PRC Labor Contract Law was first adopted on June 29, 2007 and later amended on December 28, 2012. The PRC Labor Contract Law has reinforced the protection of employees who, under the PRC Labor Contract Law, have the right, among others, to have written employment contracts, to enter into employment contracts with no fixed term under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts. Furthermore, the PRC Labor Contract Law sets forth additional restrictions and increases the costs involved with dismissing employees. To the extent that we need to significantly reduce our workforce, the PRC Labor Contract Law could adversely affect our ability to do so in a timely and cost-effective manner, and our results of operations could be adversely affected. In addition, for employees whose employment contracts include noncompetition terms, the PRC Labor Contract Law requires us to pay monthly compensation after such employment is terminated, which will increase our operating expenses.

 

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In addition, we are required by PRC laws and regulations to maintain social insurance registration and open housing fund accounts with the relevant governmental authorities and pay for various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. If we fail to make adequate social insurance and housing fund contributions, we may be subject to fines and legal sanctions, and our business, financial condition and results of operations may be adversely affected. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to pass on these increased labor costs to our customers by increasing the prices of our products and services, our financial conditions and results of operations would be materially and adversely affected.

 

We may not be able to renew leases or control rent increases at our existing locations at reasonable terms.

 

We lease all real properties used by us, except our Hangzhou office, where we are allowed to use the office free of charge because of our cooperation relationship with China Academy of Art. We lease from Beijing Sino-U.S. Star International Film & Television Culture Media Co., Ltd. for our headquarters location, which is currently the location where we provide one-on-one consultancy services, as well as the location we intend to host our school in the near future.

 

The term of this lease is for four years, expiring May 31, 2022, and is renewable upon six-month notice by the Company. However, there is no assurance that the lessor will agree to renew the lease at the level of rent or at a price that is acceptable to us. Similarly, leases for our Beijing Tongzhou District location and our Fuzhou location require us to re-negotiate in order to keep those leases, and the lease for our Ji’nan location does not set forth terms and provisions relating to renewal. Therefore, there is no assurance that the lessors of these locations will agree to sign new leases with us at the level of rent or at a price that is acceptable to us, if at all. There is also no assurance that China Academy of Art will continue to allow us to use their office free of charge. As a result, we may fail to reach agreements for rental prices or otherwise fail to continue to lease or use one or more of these properties. We may be forced to relocate the affected operations to a new location or pay substantially higher rent, which could involve substantial rent increases and material business interruptions.

 

In addition, we cannot assure you that the lessors or the owner of our offices have duly obtained the title certificates of the properties subject to our leases or otherwise have the right to lease the properties. If any of our leases or our rights to occupy and use were terminated as a result of challenges by third-parties or governmental authorities, we may be forced to relocate the affected operations and incur significant expenses. There is no assurance that we may find suitable replacement sites in a timely manner on terms acceptable to us.

 

As of the date of this prospectus, we are not aware of any actions, claims or investigations being contemplated by or pending before any governmental authorities with respect to our leased or occupied properties. We have not received any notice of claim from any third-party for our use of such leased or occupied properties. However, if any of these risks materializes, our business, financial condition and results of operations may be materially and adversely affected. See “Business—Facilities/Properties” for more information.

 

Accidents or injuries may occur at our properties, which could affect our reputation and student retention and enrollment.

 

We could be held liable for the accidents or injuries or other harm to students or other people at our locations, including those caused by or otherwise arising in connection with our facilities or employees. We could also face claims alleging that we were negligent, provided inadequate maintenance to our facilities or supervision to our employees and therefore should be held liable for accidents or injuries suffered by our students or other people at our schools. Our schools may be perceived to be unsafe, which may discourage prospective students from enrolling in our services. Although we maintain certain liability insurance, this insurance coverage may not be adequate to fully protect us from these kinds of claims. In addition, we may not be able to obtain liability insurance in the future at reasonable prices or at all. A liability claim against us or any of our employees could adversely affect our reputation and student enrollment and retention. Even if unsuccessful, such a claim could create unfavorable publicity, cause us to incur substantial expenses and divert the time and attention of our management.

 

We currently do not have any business insurance coverage.

 

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result, we do not have any liability, business interruption, litigation or property insurance coverage for our operations in China. Any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.

 

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Risks Related to Our Corporate Structure

 

The beneficial owners have substantial influence over our Company. Their interests may not be aligned with the interests of the Company and our other shareholders, and these beneficial owners, if voting as a group, could prevent or cause a change of control or other transactions that could be beneficial to our Company and other minority shareholders.

 

As of the date of this prospectus, although no single shareholder currently own more than 41.16% of our outstanding Ordinary Shares, our beneficial owners Ngai Ngai Lam, Choi Sio Peng, Yuk Sing Lai and Lin Ailian beneficially own an aggregate of 72.4276% of our outstanding Ordinary Shares. Upon completion of this Offering, our beneficial owners will beneficially own approximately 3,621,380 Ordinary Shares, or approximately 57% of our outstanding Ordinary Shares.

 

Accordingly, these beneficial owners could have significant influence in determining the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations, the election of directors and other significant corporate actions. In cases where their interests are aligned and they vote together, these beneficial owners will also have the power to prevent or cause a change in control. Without the consent of some or all of these shareholders, we may be prevented from entering into transactions that could be beneficial to us or our minority shareholders. The interests of these beneficial owners may differ from the interests of our other shareholders. The concentration in the ownership of our Ordinary Shares may cause a material decline in the value of our Ordinary Shares. For more information regarding our beneficial owners and their affiliated entities, see “Principal Shareholders.”

 

In the event we are presented with business combination opportunities, we may be unable to complete such transactions efficiently or on favorable terms due to complicated merger and acquisition regulations and certain other PRC regulations

 

On August 8, 2006, six PRC regulatory authorities, including MOFCOM, the State Assets Supervision and Administration Commission, SAT, the State Administration for Industry and Commerce, CSRC and SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which became effective on September 8, 2006 and was amended in June 2009. The M&A Rules, governing the approval process by which foreign investors merge with PRC business entities or acquire PRC assets and/or equity interests in PRC business entities, require the PRC parties to make a series of applications and supplemental applications to PRC government authorities, depending on the structure of the transaction. In some instances, the application process may require presentation of economic data concerning a transaction, including appraisal of the target business and evaluation of the acquirer, which are designed to allow the government to assess the transaction. Accordingly, due to the M&A Rules, our ability to engage in cross-border business combination transactions has become significantly more complicated, time-consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our shareholders or sufficiently protect their interests in such transaction.

 

The M&A Rules allow PRC government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit to MOFCOM and other relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction. The M&A Rules also prohibit a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets in order to prevent disguised transfer of capital from China to foreign countries, and in certain structures, among others, in the structures where foreign investors merge with Chinese enterprises and establish foreign-invested enterprises, require that considerations must be paid within defined periods, generally not in excess of a year after the business license of the foreign-invested enterprise has been issued. In addition, the M&A Rules also limit our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Moreover, the Anti-Monopoly Law of the People’s Republic of China, effective as of August 1, 2008, and relevant implementation rules require that the MOC be notified in advance of any of concentrations of undertaking if certain turnover thresholds are triggered. Besides, Notice of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, issued on February 3, 2011 and became effective on March 3, 2011 establishes a security review system for merger and acquisition of domestic companies by foreign investors. These security review rules 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. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction on legal and/or financial terms that satisfy our investors and protect our shareholders’ economic interests. 

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You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

 

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2018 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties 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 have a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

 

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association that will become effective immediately prior to completion of this offering to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Securities to be Registered.”

 

You may be unable to present proposals before annual general meetings or extraordinary general meetings not called by shareholders.

 

Cayman Islands law provides shareholders with only limited rights to convene a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our articles of association allow our shareholders holding shares representing in aggregate not less than one third of our voting share capital in issue, to convene a general meeting of our shareholders, in which case our directors are obliged to call such meeting. Advance notice of at least ten clear days is required for the convening of our general meetings. A quorum required for a meeting of shareholders consists of at least one shareholder present or by proxy, representing not less than one-third in nominal value of the total issued voting shares in the Company.

 

Recently introduced economic substance legislation of the Cayman Islands may impact the Company or its operations

 

The Cayman Islands, together with several other non-European Union jurisdictions, have recently introduced legislation aimed at addressing concerns raised by the Council of the European Union as to offshore structures engaged in certain activities which attract profits without real economic activity. Effective January 1, 2019, the International Tax Co-operation (Economic Substance) Law, 2018 (the “Substance Law”) and issued Regulations and Guidance Notes came into force in the Cayman Islands introducing certain economic substance requirements for “relevant entities” which are engaged in certain “relevant activities,” which in the case of exempted companies incorporated before January 1, 2019, will apply in respect of fiscal years commencing July 1, 2019, onwards. A “relevant entity” includes an exempted company incorporated in the Cayman Islands; however, it does not include an entity that is tax resident outside the Cayman Islands. Accordingly, for so long as the Company is a tax resident outside the Cayman Islands, it is not required to satisfy the economic substance test. Although it is presently anticipated that the Substance Law will have little material impact on the Company or its operations, as the legislation is new and remains subject to further clarification and interpretation it is not currently possible to ascertain the precise impact of these legislative changes on the Company.

 

Certain judgments obtained against us by our shareholders may not be enforceable.

 

We are a Cayman Islands company and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in the PRC. In addition, most of our current directors and 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 U.S. 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 the PRC 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 the PRC, see “Enforceability of Civil Liabilities.”

 

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Risks Related to Doing Business in China

 

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.

 

Substantially all of our assets and operations are located in the PRC. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in the PRC generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over the PRC’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

 

While the Chinese economy has experienced significant growth over past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in the PRC, in the policies of the Chinese government or in the laws and regulations in the PRC could have a material adverse effect on the overall economic growth of the PRC. Such developments could adversely affect our business and operating results, lead to a reduction in demand for our services and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in the PRC, which may adversely affect our business and operating results.

 

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

 

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value.

 

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters generally. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in the PRC. However, the PRC has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in the PRC. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, these regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.

 

Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in the PRC may be protracted, resulting in substantial costs and diversion of resources and management attention.

 

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in the prospectus based on foreign laws.

 

We conduct substantially all of our operations in China, and substantially all of our assets are located in China. In addition, our CEO, Mr. Jianxin Zhang and our CFO, Mr. Wenhuai Zhuang reside within China for a significant portion of the time and are PRC nationals. As a result, it may be difficult for our shareholders to effect service of process upon us or those persons inside the PRC. In addition, the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in the PRC of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.

 

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We may rely on dividends and other distributions on equity paid by our PRC Subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC Subsidiary to make payments to us could have a material and adverse effect on our ability to conduct our business.

 

We rely principally on dividends and other distributions on equity from our PRC Subsidiary for our cash requirements, including for services of any debt we may incur.

 

Our PRC Subsidiary’s ability to distribute dividends is based upon its distributable earnings. Current PRC regulations permit our PRC Subsidiary to pay dividends to its respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC Subsidiary is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Our PRC Subsidiary, as a Foreign Invested Enterprise, or FIE, 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 its discretion. These reserves are not distributable as cash dividends. If our PRC operating subsidiary incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our PRC Subsidiary to distribute dividends or other payments to their respective shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.

 

In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC resident enterprises are incorporated.

 

The custodians or authorized users of our controlling non-tangible assets, including chops and seals, may fail to fulfill their responsibilities, or misappropriate or misuse these assets.

 

Under the PRC law, legal documents for corporate transactions, including agreements and contracts are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with relevant PRC industry and commerce authorities.

 

In order to secure the use of our chops and seals, we have established internal control procedures and rules for using these chops and seals. In any event that the chops and seals are intended to be used, the responsible personnel will submit the application through our office automation system and the application will be verified and approved by authorized employees in accordance with our internal control procedures and rules. In addition, in order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to authorized employees. Although we monitor such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees could abuse their authority, for example, by entering into a contract not approved by us or seeking to gain control of our PRC operating subsidiary. If any employee obtains, misuses or misappropriates our chops and seals or other controlling non-tangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take significant corporate or legal actions, which could involve significant time and resources to resolve and divert management from our operations.

 

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay 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.

 

Any funds we transfer to our PRC Subsidiary, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, in China, capital contributions to our PRC Subsidiary are subject to the approval of or filing with the Ministry of Commerce, or MOFCOM or its local branches and registration with a local bank authorized by the State Administration of Foreign Exchange, or SAFE. In addition, (i) any foreign loan procured by our PRC Subsidiary is required to be registered with SAFE or its local branches and (ii) our PRC Subsidiary may not procure foreign loans which exceed the difference between its total investment amount and registered capital, or 2.5 times of the amount of the PRC Subsidiary’s net assets, whichever is larger. As of the date of this prospectus, such maximum amount of foreign loans that our PRC Subsidiary is allowed to procure, based on the audited net asset value of our PRC Subsidiary as of December 31, 2018, is RMB 101,091,423.50 (approximately $14,425,352). For more information on restrictions and limitations on the amount of loans, please see “Regulations—Regulations on loans to and direct investment in the PRC entities by offshore holding companies”. Any medium or long-term loan to be provided by us to our PRC operating entity, i.e., China Liberal Beijing, must be registered with the NDRC and the SAFE or its local branches. We may not be able to complete such registrations on a timely basis, with respect to future capital contributions or foreign loans by us to our PRC Subsidiary. If we fail to complete such registrations, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

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On March 30, 2015, the SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19, which took effect as of June 1, 2015. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capital for expenditure beyond their business scopes, providing entrusted loans or repaying loans between nonfinancial enterprises. The SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, effective in June 2016. Pursuant to SAFE Circular 16, enterprises registered in China may also convert their foreign debts from foreign currency to Renminbi on a self-discretionary basis. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on a self-discretionary basis which applies to all enterprises registered in China. SAFE Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, while such converted Renminbi shall not be provided as loans to its non-affiliated entities. As this circular is relatively new, there remains uncertainty as to its interpretation and application and any other future foreign exchange related rules. Violations of these Circulars could result in severe monetary or other penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to use Renminbi converted from the net proceeds of this offering to fund our PRC operating subsidiary, to invest in or acquire any other PRC companies through our PRC Subsidiary, which may adversely affect our business, financial condition and results of operations.

 

Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.

 

The value of the Renminbi 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 conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on exchange rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi solely to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, however, this appreciation halted and the Renminbi was traded within a narrow range against the U.S. dollar. Between July 2010 and November 2015, the Renminbi fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of IMF completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that effective October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows from China. This depreciation halted in 2017, and the RMB appreciated approximately 7% against the U.S. dollar during this one-year period. Since February 2018, the RMB has depreciated significantly, over 8% against the U.S. dollar. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may announce further changes to the exchange rate system in the future, and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces, PRC or U.S. government policies may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

 

Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. The net proceeds from this offering will be denominated in U.S. dollars. Fluctuations in exchange rates, primarily those involving the U.S. dollar, may affect the relative purchasing power of these proceeds. In addition, appreciation or depreciation in the value of the Renminbi 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. Fluctuations in the exchange rate will also affect the relative value of earnings from and the value of any U.S. dollar-denominated investments we make in the future.

 

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure, if at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currencies. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

 

If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.

 

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or SAT, issued the Notice of the State Administration of Taxation on Issues Concerning the Determination of Chinese-Controlled Enterprises Registered Overseas as Resident Enterprises on the Basis of Their Bodies of Actual Management, known as SAT Notice 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Notice 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China, and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC. 

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We believe our company is not a PRC resident enterprise for PRC tax purposes. 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.” If the PRC tax authorities determine that our company is a PRC resident enterprise for enterprise income tax purposes, we will be subject to PRC enterprise income on our worldwide income at the rate of 25%. Furthermore, we be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. In addition, non-resident enterprise shareholders may be subject to PRC tax on gains realized on the sale or other disposition of ordinary shares, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders and any gain realized on the transfer of or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source by us). These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ordinary shares.

 

There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC Subsidiary, and dividends payable by our PRC Subsidiary to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.

 

Under the PRC EIT Law and its implementation rules, the profits of a foreign invested enterprise generated through operations, which are distributed to its immediate holding company outside the PRC, will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong Kong and the PRC, this rate may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity interest in the PRC company. Our PRC Subsidiary is wholly-owned by our Hong Kong subsidiary. Moreover, under the Notice of the State Administration of Taxation on Issues regarding the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009, the tax payer needs to satisfy certain conditions to enjoy the benefits under a tax treaty. The beneficial owner of the relevant dividends and the corporate shareholder to receive dividends from the PRC Subsidiary must have continuously met the direct ownership thresholds during the 12 consecutive months preceding the receipt of the dividends. Further, the State Administration of Taxation promulgated the Announcement on Issues Concerning “Beneficial Owners” in Tax Treaties in February 2018, which stipulates that a “beneficial owner” means a person who owns and has the right to dispose of the income and the rights or property generated from the said income, and sets forth certain detailed factors in determining the “beneficial owner” status. In current practice, a Hong Kong enterprise must obtain a tax resident certificate from the relevant Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority. As of the date of this prospectus, we have not commenced the application process for a Hong Kong tax resident certificate from the relevant Hong Kong tax authority, and there is no assurance that we will be granted such a Hong Kong tax resident certificate.

 

Even after we obtain the Hong Kong tax resident certificate, we are required by applicable tax laws and regulations to file the required forms and materials with the relevant PRC tax authorities to prove that we can enjoy 5% lower PRC withholding tax rate. Boya Hong Kong intends to obtain the required materials and file with the relevant tax authorities when it plans to declare and pay dividends, but there is no assurance that the PRC tax authorities will approve the 5% withholding tax rate on dividends received from Boya Hong Kong.

 

We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprise by its non-PRC holding companies.

 

On February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Bulletin 7. SAT Bulletin 7 extends its tax jurisdiction to transactions involving the transfer of taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets.

 

On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017 and was amended in 2018. The SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.

 

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.

 

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We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or taxed if our company is a transferor in such transactions, and may be subject to withholding obligations if our company is a transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC Subsidiary may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 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.

 

Regulation and censorship of information disseminated over the internet in China may adversely affect our business and reputation and subject us to liability for information displayed on our website.

 

The PRC government has adopted regulations governing internet access and the distribution of news and other information over the internet. Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide internet content and other licenses, and the closure of the concerned websites. The website operator may also be held liable for such censored information displayed on or linked to the websites. If our website is found to be in violation of any such requirements, we may be penalized by relevant authorities, and our operations or reputation could be adversely affected.

 

Risks Related to this Offering and the Trading Market

 

An active trading market for our Ordinary Shares may not develop and the trading price for our Ordinary Shares may fluctuate significantly.

 

We have applied to list our Ordinary Shares on the Nasdaq Capital Market. Prior to the completion of this offering, there has been no public market for our Ordinary Shares, and we cannot assure you that a liquid public market for our Ordinary Shares will develop. If an active public market for our Ordinary Shares does not develop following the completion of this offering, the market price and liquidity of our Ordinary Shares may be materially and adversely affected. The initial public offering price for our Ordinary Shares will be determined by us and the Underwriter based upon several factors, and we can provide no assurance that the trading price of our Ordinary Shares after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their holding of our Ordinary Shares.

 

The trading price of our Ordinary Shares is likely to be volatile, which could result in substantial losses to investors.

 

The trading price of our Ordinary Shares is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for our Ordinary Shares may be highly volatile for factors specific to our own operations and our industry, including the following:

 

variations in our revenues, earnings and cash flows;
announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;
announcements of new offerings, solutions and expansions by us or our competitors;
changes in financial estimates by securities analysts;
detrimental adverse publicity about us, our services or our industry;
announcements of new regulations, rules or policies relevant for our business;
additions or departures of key personnel;
release of lockup or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and
potential litigation or regulatory investigations.

 

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Any of these factors may result in large and sudden changes in the volume and price at which our Ordinary Shares will trade.

 

In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were to be involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

The initial public offering price for our Ordinary Shares may not be indicative of prices that will prevail in the trading market and such market prices may be volatile.

 

The initial public offering price for our Ordinary Shares has been determined by negotiations between us and the underwriter, and does not bear any relationship to our earnings, book value or any other indicia of value. We cannot assure you that the market price of our Ordinary Shares will not decline significantly below the initial public offering price. The financial markets in the United States and other countries have experienced significant price and volume fluctuations in the last few years. Volatility in the price of our Ordinary Shares may be caused by factors outside of our control and may be unrelated or disproportionate to changes in our results of operations.

 

Because our initial public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

 

If you purchase our Ordinary Shares in this offering, you will pay more for your Ordinary Shares than the amount paid by our existing shareholders for their ordinary shares per share. As a result, you will experience immediate and substantial dilution of approximately $4.25 per Ordinary Share, representing the difference between the assumed initial public offering price of $6.00 per share and our net tangible book value per share as of June 30, 2019, after giving effect to the net proceeds to us from this offering. See “Dilution” for a more complete description of how the value of your investment in our Ordinary Shares will be diluted upon the completion of this offering.

 

The offering price of the primary offering and resale offering could differ.

 

The offering price of our Ordinary Shares in the initial public offering has been determined by negotiations between the Company and the underwriter. The offering price in the initial public bears no relationship to our assets, earnings or book value, or any other objective standard of value. The selling shareholder may sell the resale shares at prevailing market prices or privately negotiated prices after close of the offering and listing of the Ordinary Shares on NASDAQ. Therefore, the offering prices of the initial public and resale offering could differ. As a result, the purchasers in the resale offering could pay more or less than the offering price in the primary offering.

   

The Resale by the Selling Shareholder may cause the market price of our Ordinary Shares to decline.

 

The resale of Ordinary Shares by the selling shareholder, as well as the issuance of Ordinary Shares in this Offering could result in resales of our Ordinary Shares by our current shareholders concerned about the potential dilution of their holdings. In addition, the resale by the selling shareholder after expiration of the lock-up period could have the effect of depressing the market price for our Ordinary Shares.

 

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding the Ordinary Shares, the market price for the Ordinary Shares and trading volume could decline.

 

The trading market for our Ordinary Shares will be influenced by research or reports that industry or securities analysts publish about our business. If industry or securities analysts decide to cover us and in the future downgrade our Ordinary Shares, the market price for our Ordinary Shares would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, 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.

 

The sale or availability for sale of substantial amounts of our Ordinary Shares could adversely affect their market price.

 

Sales of substantial amounts of our Ordinary Shares in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our Ordinary Shares and could materially impair our ability to raise capital through equity offerings in the future. The Ordinary Shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 under the Securities Act and the applicable lockup agreements. There will be 6,333,333 ordinary shares outstanding immediately after this offering, assuming the Underwriter has not exercised its over-allotment option and 6,533,333 ordinary shares assuming full exercise of the over-allotment option. In connection with this offering, we, our directors, executive officers and existing shareholders have agreed, subject to certain exceptions, not to sell any Ordinary Shares for six months to one year after the date of this prospectus without the prior written consent of the Underwriter. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our Ordinary Shares. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering. 

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Techniques employed by short sellers may drive down the market price of our Ordinary Shares.

 

Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the market.

 

Public companies that have substantially all of their operations in the PRC have been the subject of short selling. Much of the scrutiny and negative publicity has centered on allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.

 

It is not clear what effect such negative publicity could have on us. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract our management from growing our business. Even if such allegations are ultimately proven to be groundless, allegations against us could severely impact our business operations, and any investment in our Ordinary Shares could be greatly reduced or even rendered worthless.

 

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on a price appreciation of our Ordinary Shares for a return on your investment.

 

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our Ordinary Shares as a source for any future dividend income.

 

Our Board of Directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our Board of Directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our Board of Directors. Accordingly, the return on your investment in our Ordinary Shares will likely depend entirely upon any future price appreciation of our Ordinary Shares. There is no guarantee that our Ordinary Shares will appreciate in value after this offering or even maintain the price at which you purchased our Ordinary Shares. You may not realize a return on your investment in our Ordinary Shares and you may even lose your entire investment in our Ordinary Shares.

 

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We are an emerging growth company within the meaning of the Securities Act 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 requirements applicable to other public companies that are not emerging growth companies, including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain 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.

 

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.

 

Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;
the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;
the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and
the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

 

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We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of NASDAQ. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

 

Because we are a foreign private issuer and are exempt from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have less protection than you would have if we were a domestic issuer.

 

Nasdaq Listing Rules require listed companies to have, among other things, a majority of its board members be independent. As a foreign private issuer, however, we are permitted to, and we may, follow home country practice in lieu of the above requirements, or we may choose to comply with the Nasdaq requirement within one year of listing. The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors. Since a majority of our board of directors will not consist of independent directors, fewer board members will be exercising independent judgment and the level of board oversight on the management of our company may decrease as a result. In addition, the Nasdaq listing rules also require U.S. domestic issuers to have a compensation committee, a nominating/corporate governance committee composed entirely of independent directors, and an audit committee with a minimum of three members. We, as a foreign private issuer, are not subject to these requirements. The Nasdaq listing rules may require shareholder approval for certain corporate matters, such as requiring that shareholders be given the opportunity to vote on all equity compensation plans and material revisions to those plans, certain ordinary share issuances. We intend to comply with the requirements of Nasdaq Listing Rules in determining whether shareholder approval is required on such matters and to appoint a nominating and corporate governance committee. However, we may consider following home country practice in lieu of the requirements under Nasdaq listing rules with respect to certain corporate governance standards which may afford less protection to investors.

 

If we are classified as a passive foreign investment company, United States taxpayers who own our Ordinary Shares may have adverse United States federal income tax consequences.

 

A non-U.S. corporation such as ourselves will be classified as a passive foreign investment company, which is known as a PFIC, for any taxable year if, for such year, either

 

  At least 75% of our gross income for the year is passive income; or
  The average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income or which are held for the production of passive income is at least 50%.

 

Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets.

 

If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our Ordinary Shares, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.

 

Depending on the amount of cash we raise in this offering, together with any other assets held for the production of passive income, it is possible that, for our 2018 taxable year or for any subsequent year, more than 50% of our assets may be assets which produce passive income, In which case we would be deemed a PFIC, which could have adverse US federal income tax consequences for US taxpayers who are shareholders. We will make this determination following the end of any particular tax year.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

 

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated under the laws of the Cayman Islands because of certain benefits associated with being a Cayman Islands corporation, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the United States and provides significantly less protection for investors than the United States.

 

Substantially all of our assets are located in the PRC. In addition, a majority of our directors and officers are nationals or residents of the PRC and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

 

We have appointed Hunter Taubman Fischer & Li LLC as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

 

Campbells, our counsel to the laws of Cayman Islands, and Tian Yuan Law Firm, our counsel to PRC law, have advised us that there is uncertainty as to whether the courts of the Cayman Islands or the PRC would (i) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States or (ii) entertain original actions brought in the Cayman Islands or the PRC against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

 

Campbells has further advised us that the United States and the Cayman Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of courts of the United States in civil and commercial matters and that a final judgment for the payment of money rendered by any general or state court in the United States based on civil liability, whether or not predicated solely upon the U.S. federal securities laws, may not be recognized and enforceable in the Cayman Islands on the grounds that such provisions are penal in nature. Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, courts of the Cayman Islands will recognize and enforce a foreign judgment of a court of competent jurisdiction if such judgment is final, for a liquidated sum, provided it is not in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands’ judgment in respect of the same matters, and was not obtained in a manner which is contrary to the public policy of the Cayman Islands. In addition, a Cayman Islands court may stay proceedings if concurrent proceedings are being brought elsewhere.

 

Tian Yuan Law Firm has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. Tian Yuan Law Firm has advised us further that there are no treaties between China and the United States for the mutual recognition and enforcement of court judgments, thus making the recognition and enforcement of a U.S. court judgment in China difficult.

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds from this offering, after deducting the estimated underwriting discounts and the estimated offering expenses payable by us and based upon an assumed initial public offering price of US$6.00 per Ordinary Share, of $6,159,445. If the underwriter exercises its over-allotment option in full, we estimate that the net proceeds to us from this offering will be $7,275,445, after deducting the underwriting discounts and estimated offering expenses payable by us.

 

   Use of
Proceeds
Cash Flow for Smart Campus Solutions  US$ 907,773.61
Research and Development  US$   1,500,000
Integration of Enterprises and Vocational Education  US$  1,500,000
Establishment of Big Data Calculation Training School, As Support to Integration of Enterprises and Vocational Education  US$   1,500,000

  

 

In the event that the Underwriter’s over-allotment option is exercised, we intend to use 50% of such additional proceeds (up to $1,116,000) for cash flow for smart campus solutions, and the remaining 50% for research and development.

 

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this Offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this 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. To the extent that the net proceeds we receive from this Offering are not immediately used for the above purposes, we intend to invest our net proceeds in short-term, interest-bearing bank deposits or debt instruments.

 

As an offshore holding company, we are permitted under PRC laws and regulations to provide funding to our PRC Subsidiary through loans or capital contributions, subject to applicable regulatory approvals. We currently cannot make loans or capital contributions to our PRC Subsidiary without first obtaining regulatory approvals, registration or filings, i.e., making a filing with the local branch of the MOFCOM, and registering with the local branch of the State Administration for Market Regulation, or SAMR, and the approval of and registration with a local bank authorized by the SAFE. As of March 20, 2020, the maximum amount of loans that our PRC Subsidiary is allowed to procure, based on the audited net asset value of our PRC Subsidiary as of December 31, 2018, is RMB 101,091,423.50 (approximately $14,425,352), which is higher than the maximum amount that we expect to raise from this Offering. However, there is no such restriction on capital contributions. Although to the best of our knowledge there is no material regulatory obstacles for us to obtain such approvals, registration or filings, we cannot assure you that we will be able to obtain these approvals, registration or filings in a timely manner. See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay 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.”

 

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DIVIDEND POLICY

 

We intend to keep any future earnings to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future.

 

Under Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts due in the ordinary course of business.

 

If we determine to pay dividends on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our BVI subsidiary, Yi Xin International Investment Limited.

 

Current PRC regulations permit our PRC Subsidiary to pay dividends to Boya Hong Kong from the revenues from the operations of our PRC operating entity, China Liberal Beijing, if any, determined in accordance with Chinese accounting standards and regulations. In addition, China Liberal Beijing is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. China Liberal Beijing is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.

 

The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our subsidiaries 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 the operations of our PRC operating entity, China Liberal Beijing, 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. Boya Hong Kong may be considered a non-resident enterprise for tax purposes, so that any dividends China Liberal Beijing pays to Boya Hong Kong 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%. See “Taxation—People’s Republic of China Enterprise Taxation.” 

 

In order for us to pay dividends to our shareholders, we will rely on payments made from China Liberal Beijing to Boya Hong Kong. Certain payments from China Liberal Beijing to Boya Hong Kong are subject to PRC taxes, including business taxes and VAT. In addition, if China Liberal Beijing or its subsidiaries or branches incur debt on their own behalves in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

 

Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC project. However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong project must be the beneficial owner of the relevant dividends; and (b) the Hong Kong project must directly hold no less than 25% share ownership in the PRC project during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong project must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by China Liberal Beijing to its immediate holding company, Boya Hong Kong. As of the date of this prospectus, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. Boya Hong Kong intends to apply for the tax resident certificate when China Liberal Beijing plans to declare and pay dividends to Boya Hong Kong. See “Risk Factors—There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC Subsidiary, and dividends payable by our PRC Subsidiary to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.”

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2019:

 

on an actual basis;
on an as adjusted basis to reflect the issuance and sale of 1,333,333 Ordinary Shares by us in this Offering at the assumed initial public offering price of $6.00 per Ordinary Share, after deducting the estimated discounts to the Underwriter and the estimated offering expenses payable by us.

 

You should read this capitalization table in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

    June 30, 2019  
    Actual     Pro Forma As adjusted (1)  
    US$     US$  
Equity            
Share capital US$0.001 par value, 50,000,000 Ordinary Shares  authorized, 5,000,000 Ordinary Shares issued and  outstanding as of June 30, 2019; Pro forma without over-allotment reflects 6,333,333 Ordinary Shares issued and outstanding     5,000       6,333  
Additional paid-in capital     4,579,116       10,737,228  
Statutory reserve     322,770       322,770  
Retained earnings     286,603       286,603  
Accumulated other comprehensive income     (252,322 )     (252,322 )
Total equity     4,941,167       11,100,612  
Total capitalization     4,941,167       11,100,612  

 

(1) Reflects the sale of ordinary shares in this offering at an assumed initial public offering price of $6.00 per share, and after deducting the estimated underwriting discounts and estimated offering expenses payable by us, assuming the Underwriter’s over-allotment option has not been exercised. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing. Additional paid-in capital reflects the net proceeds we expect to receive, after deducting the underwriting discounts and estimated offering expenses payable by us. We estimate that such net proceeds will be approximately $6,159,445 assuming the Underwriter has not exercised the over-allotment option. The net proceeds of $6,159,445 are calculated as follows: $8,000,000 gross offering proceeds, less underwriting discounts and commissions of $560,000 and estimated offering expenses of $1,280,555. The pro forma as adjusted total equity of $11,100,612 is the sum of the net proceeds of $6,159,445 and the actual equity of $4,941,167.

 

A $0.05 increase (decrease) in the assumed initial public offering price of $6.00 per Ordinary Share would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by $0.06 million, assuming the number of Ordinary Shares offered by us, as set forth on the cover page of this prospectus, remains the same after deducting the estimated underwriting discounts and estimated expenses payable by us.

 

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DILUTION

 

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented giving effect to a stock split of our outstanding Ordinary Shares at a ratio of 1,000-for-1 that occurred on July 8, 2019, and an issuance of 3,999,000 Ordinary Shares on July 15, 2019.

 

If you invest in our Ordinary Shares, your interest will be diluted for each Ordinary Share you purchase to the extent of the difference between the initial public offering price per Ordinary Share and our net tangible book value per Ordinary Share after the Offering. Dilution results from the fact that the initial public offering price per Ordinary Share is substantially in excess of the net tangible book value per Ordinary Share attributable to the existing shareholders for our presently outstanding Ordinary Shares.

 

After giving effect to the sale of 1,333,333 ordinary shares in this offering at the assumed initial public offering price of $6.00 per ordinary share and after deducting the underwriting discounts and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value at June 30, 2019 would have been $11,100,612, or $1.75 per ordinary share. This represents an immediate increase in pro forma as adjusted net tangible book value of $0.76 per ordinary share to existing investors and immediate dilution of $4.25 per ordinary share to new investors. The following table illustrates such dilution to new investors purchasing ordinary shares in this offering:

 

    Post-Offering (1)     Full
Exercise
of Over-
allotment
Option
 
Assumed initial public offering price per ordinary share   $ 6.00     $ 6.00  
Net tangible book value per ordinary share as of June 30, 2019   $ 0.99     $ 0.99  
Increase in pro forma as adjusted net tangible book value per ordinary share attributable to new investors purchasing ordinary shares in this offering   $ 0.76     $ 0.88  
Pro forma as adjusted net tangible book value per ordinary share after this offering   $ 1.75     $ 1.87  
Dilution per ordinary share to new investors in this offering   $ 4.25     $ 4.13  

 

Each $0.50 increase (decrease) in the assumed initial public offering price of $6.00 per ordinary share would increase (decrease) our pro forma as adjusted net tangible book value as of June 30, 2019 after this offering by approximately $0.11 per ordinary share, and would increase (decrease) dilution to new investors by $0.39 per ordinary share, assuming that the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

 

If the underwriter exercises the over-allotment option in full, the pro forma as adjusted net tangible book value per ordinary share after the offering would be $1.87, the increase in /net tangible book value per ordinary share to existing shareholders would be $0.88, and the immediate dilution in net tangible book value per ordinary share to new investors in this offering would be $4.13.

The table and discussion above is based on 5,000,000 ordinary shares outstanding as of June 30, 2019. 

To the extent that we issue additional ordinary shares in the future, there will be further dilution to new investors participating in this offering.

 

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

  

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Disclosure Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

 

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented giving effect to a stock split of our Ordinary Shares at a ratio of 1,000-for-1, which occurred on July 8, 2019, and an issuance of 3,999,000 Ordinary Shares on July 15, 2019.

 

Overview

 

We are an educational service provider operating under the “China Liberal” brand in the People’s Republic of China (the “PRC”).

 

We offer a wide range of educational services and programs to our customers, consisting primarily of Sino-foreign jointly managed and delivered academic programs (“Sino-foreign Jointly Managed Academic Programs”), overseas study consulting services (“Overseas Study Consulting Services”), technological consulting services provided for targeted Chinese universities to improve their campus information and data management system and to optimize their teaching, operating and management environment, under the concept of “creating a smart campus” (“Technological Consulting Services for Smart Campus Solutions”). We also develop and provide textbooks and other course materials to students enrolled under the Sino-foreign Jointly Managed Academic Programs to ensure the quality of students’ learning outcomes. Since December 2018, we started to provide job readiness training services acting as the key bridge between our partner schools and employers, and to provide tailored job readiness training to graduating students (“Integration of Enterprises and Vocational Education”). We did not start generating revenue from this line of business until January 2019. However, revenue generated from this new business segment was immaterial during the six months ended June 30, 2019 since we need time to accumulate experience, explore the appropriate approach and adjust our strategy accordingly in order to better serve our customers with tailored job training demand in the future. We anticipate revenue from this new business segment will diversify our service offerings to become a new profit driver in the foreseeable future.

Our revenues increased by $923,107, or 23.8%, from $3,885,886 for the fiscal year ended December 31, 2017, to $4,808,993 for the fiscal year ended December 31, 2018. Revenues from our services provided for joint education programs accounted for 66.0%, 50.1% and 72.6% of our total revenues for the six months ended June 30, 2019, and for the fiscal years ended December 31, 2018 and 2017, respectively; revenues from our study abroad consulting services accounted for 0.0%, 11.4% and 1.6% of our total revenues for the six months ended June 30, 2019, and for the fiscal years ended December 31, 2018 and 2017, respectively; while revenue from providing technological consulting services accounted for 33.3%, 37.9% and 24.5% of our total revenue for the six months ended June 30, 2019, and for the years ended December 31, 2018 and 2017, respectively. Revenues from sales of textbooks and course materials accounted for 0.7%, 0.6% and 1.3% of our total revenue for the six months ended June 30, 2019, and for the years ended December 31, 2018 and 2017, respectively. 

The following table illustrates the amount and percentage of our revenue derived from our different services provided:

 

   For the six months ended June 30,   For the years ended December 31, 
   2019   2018   2018   2017 
   Amount   %   Amount   %   Amount   %   Amount   % 
Revenue from Sino-foreign Jointly Managed Academic Programs  $1,240,856    66.0%  $1,256,083    86.8%  $2,410,781    50.1%  $2,821,602    72.6%
Revenue from textbook and course material sales   13,316    0.7%   23,485    1.6%   29,717    0.6%   52,345    1.3%
Revenue from Overseas Study Consulting Services   -    0.0%   10,370    0.7%   547,521    11.4%   60,947    1.6%
Revenue from Technological Consulting Services for Smart Campus Solutions   625,896    33.3%   157,849    10.9%   1,820,974    37.9%   950,992    24.5%
Total revenue  $1,880,068    100.0%  $1,447,787    100.0%  $4,808,993    100.0%  $3,885,886    100.0%

 

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Key Factors that Affect Our Results of Operations

 

We believe the following key factors may affect our financial condition and results of operations:

 

Demand for International Education from Chinese Students

 

Education services are an investment for the future. We are optimistic that the Chinese economy’s steady growth will likely drive incomes and consumption levels for Chinese citizens, who will have more capital for their children’s educations. We believe that tuition fees are impacted less by volatility in the overall economy as people in China generally cut back on other spending before they reduce spending on their children’s education.

 

We have benefited from Chinese students’ increasing demand for international education. Such demand is primarily driven by an increasing number of Chinese students seeking quality educations and who aspire to study abroad, which is in turn driven by factors such as: (i) an increasing number of affluent families in China, (ii) the rising recognition of the quality of higher education overseas, (iii) the emphasis placed by Chinese parents on the importance of enrollment in globally-recognized universities to improve their children’s career prospects, and (iv) other economic and political factors. Any material change to these factors will significantly affect our operation results.

 

Number of Student Enrollments

 

Our revenues primarily consist of tuition and fees from students enrolled in the Sino-foreign Jointly Managed Academic Programs in which we are engaged to provide coordination, teaching and supporting services, as well as our consulting service fees charged to students contemplating studying abroad. The number of student enrollments is largely driven by the demand for the educational services and programs offered by us, the amount of fees we charge, the effectiveness of our marketing and brand promotion efforts, our ability to maintain the consistency and quality of our teaching, as well as our ability to respond to competitive pressures. The level of students enrolled in our Sino-foreign Jointly Managed Academic Programs, and the number of students who come to us for study abroad consulting services directly affects our revenue and profitability.

 

Our Tuition and Service Fees Charged

 

Our results of operations are directly affected by the level of the tuition and service fees we charge to our students. Under our cooperation with Chinese host universities/colleges for Sino-foreign Jointly Managed Education Programs, the Chinese host universities/colleges determine on the amount of tuitions and fees charged to enrolled students, ranging from RMB 15,000 (USD 2,268) per student per school year to RMB 28,000 (USD 4,233) per student per school year, depending on the applicable education programs. The total fees we receive from tuition collected by these universities and colleges varies based on the terms of our contracts with the Chinese host universities we partner with, and are based on our services rendered and can range from RMB 2,250 (USD 340) to RMB 11,200 (USD 1,693) per student per school year. With respect to Sino-foreign Jointly Managed Academic Programs, our contracts with Chinese host universities/colleges provide that (1) the host universities/ colleges will withhold the tuition collected from students for one to three months after the academic school year starts in September, and then remit the portion of tuition fees to us after the student headcounts have been finalized, and (2) the portion of tuition fee that we are entitled to receive is calculated based on the final actual number of students retained with the universities/colleges after any student dropout has been adjusted. Accordingly, any tuition refund has already been deducted by host universities/ colleges before we receive our portion of the tuition fees. For accounting purposes, at the beginning of each academic school year, we initially accrue the estimated refund based on an historical 1% student dropout rate, and make subsequent true-up adjustments after the final number of students retained with the host universities/colleges is determined. Such adjustments were immaterial for the years ended December 31, 2018 and 2017, and the six months ended June 30, 2019. Our ability to receive our portion of tuition fee from Chinese host universities/ colleges largely depends on whether Chinese host universities/ colleges are satisfied with our teaching services, or whether we can maintain positive communication with Chinese host universities/colleges to resolve any service deficiency on a timely manner. Any extended tuition withholding or delayed tuition payment to us from Chinese host universities/ colleges due to our service deficiency, may negatively impact our revenue, results of operations and financial condition. 

We determine overseas study consulting service fees based on services provided to each individual student to satisfy his or her needs. Under the smart campus solutions, our fees are based on the scope of services specified in our agreements with the Chinese universities we service. Any change in our service fees would have a material impact on our revenue and profitability.

 

Our Ability to Control Costs and Expenses and Improve Our Operating Efficiency

 

Staffing costs and administrative expenses have a direct impact on our profitability. The size of our staff, particularly our foreign faculty teachers appointed to selected Chinese host universities/colleges, generally increases as the student base expands, while other expenses, particularly those relating to administrative functions, are relatively fixed. With respect to Sino-foreign Jointly Managed Academic Programs, our contracts with Chinese host universities/colleges provide that foreign teachers assigned by us should be substituted, and teaching textbooks, course materials and curriculums should be adjusted in a timely manner in order to ensure a satisfactory teaching result. The Chinese host universities/ colleges have the right to withhold our portion of the tuition if we do not take corrective action when our service deficiency is identified. Any costs related to teacher substitution, textbooks, course materials and curriculums adjustment should be borne by us. Historically, we have maintained active communications with the host universities/ colleges in order to obtain feedback on the quality of the services performed, and any identified service deficiency has been corrected on a timely manner, which led to immaterial costs associated with teacher substitution, textbooks, course materials and curriculums adjustment for the years ended December 31, 2018 and 2017, and the six months ended June 30, 2019. Our ability to drive the productivity of our staff and enhance our operating efficiency affects our profitability. If we fail to implement initiatives to control costs (including teacher substitution, textbooks, course materials and curriculums adjustment related costs) and improve our operating efficiency over time, our profitability will be negatively impacted. 

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If we are unable to compete successfully, our financial condition and results of operations may be harmed.

 

The education sector in China is rapidly evolving, highly fragmented and competitive, and we expect competition in this sector to persist and intensify. We face competition in each service segment we offer. Significant competition could reduce our operating margins and profitability and result in a loss of market share. Some of our existing and potential competitors may have competitive advantages, such as significantly greater brand recognition, financial, marketing, or other resources and may be able to mimic and adopt our business model. Significant competition could lead to lower prices and decreased revenues, gross margins and profits, any of which could have a material and adverse effect on our results of operations. 

 

A severe or prolonged slowdown in the global or Chinese economy could materially and adversely affect our business and our financial condition.

 

The rapid growth of the Chinese economy has slowed down since 2012 and this slowdown may continue in the future. There is considerable uncertainty over trade conflicts between the United States and China and the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. The withdrawal of these expansionary monetary and fiscal policies could lead to a contraction. There continue to be concerns over unrest and terrorist threats in the Middle East, Europe, and Africa, which have resulted in volatility in oil and other markets. There are also concerns about the relationships between China and other Asian countries, which may result in or intensify potential conflicts in relation to territorial disputes. The eruption of armed conflict could adversely affect global or Chinese discretionary spending, either of which could have a material and adverse effect on our business, results of operation in financial condition. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy would likely materially and adversely affect our business, results of operations and financial condition. In addition, continued turbulence in the international markets may adversely affect our ability to access capital markets to meet liquidity needs.

 

COVID-19

 

In December 2019, a novel strain of coronavirus, or COVID-19, was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. The COVID-19 outbreak is causing lockdowns, travel restrictions, and closures of businesses and schools. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, and the impact on our customers and schools, all of which are uncertain and cannot be predicted. Although the outbreak has not significantly impacted the enrollment, tuitions received or drop outs through March 27, 2020, such recent developments are expected to exert a negative impact our financial condition and results of operations, the extent of which is dependent on the duration of the outbreak and other uncertainties and, therefore, the total financial impact is unknown at this time.

 

Key Financial Performance Indicators

 

Our key financial performance indicators consist of the number of student enrollment, average tuition fees we received from students enrolled under the Sino-foreign Jointly Managed Academic Programs, average service fees we charged to students for our Overseas Study Consulting Services , as well as the number of contracts we signed for smart campus solution projects, which significantly impacted our net revenues, cost of revenues and operating expenses, as discussed in greater detail under “Results of Operations” below.

 

We derived net revenues from our four operating segments in terms of percentages of our total net revenues from continuing operations as follows in fiscal year 2018 and 2017, and the six months ended June 30, 2019:

 

   For the six months ended June 30,   For the years ended
December 31,
 
   2019   2018   2018   2017 
                 
Revenue from Sino-foreign Jointly Managed Academic Programs   66.0%   86.8%   50.1%   72.6%
Revenue from textbook and course material sales   0.7%   1.6%   0.6%   1.3%
Revenue from Overseas Study Consulting Services   0.0%   0.7%   11.4%   1.6%
Revenue from Technological Consulting Services for Smart Campus Solutions   33.3%   10.9%   37.9%   24.5%
Total revenue   100.0%   100.0%   100.0%   100.0%

 

Revenues from our services provided for the Sino-foreign Jointly Managed Academic Programs accounted for 66.0%, 50.1% and 72.6% of our total revenues for the six months ended June 30, 2019, and the fiscal years ended December 31, 2018 and 2017, respectively; revenues from our Overseas Study Consulting Services accounted for 0.0%, 11.4% and 1.6% of our total revenues for the six months ended June 30, 2019, and the fiscal years ended December 31, 2018 and 2017, respectively; revenues from providing Technological Consulting Services for Smart Campus Solutions accounted for 33.3%, 37.9% and 24.5% of our total revenue for the six months ended June 30, 2019, and the years ended December 31, 2018 and 2017, respectively; and revenues from sales of textbooks and course materials accounted for 0.7%, 0.6% and 1.3% of our total revenue for the six months ended June 30, 2019, and the years ended December 31, 2018 and 2017, respectively.

 

Our revenues from the Sino- foreign Jointly Managed Academic Programs and Overseas Study Consulting Services segments are primarily generated from tuition fees or service fees we charged to students. Those revenues are linked to the number of student enrollments. Our students enrollment is affected by a mix of factors including the number and variety of our programs or service offerings, overall demand for our programs or service offerings, the geographic markets where the programs or services are offered, the pricing of our education programs or services, the fees charged by our competitors for the same or similar programs or services, any changes in the regulatory regime applicable to the education industry in China, and our reputation.

 

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The total number of students enrolled under our Sino-foreign Jointly Managed Academic Programs were 2,337 in the six months ended June 30, 2019, 2,390 in fiscal year 2018 and 2,877 in fiscal year 2017. We did not have any students who signed up for our Overseas Study Consulting Services in the six months ended June 30, 2019, had 49 students signed up in fiscal year 2018 and 7 students signed up in fiscal year 2017. In terms of tuition fee, our Chinese host universities/colleges determine the amount of tuitions and fees charged to enrolled students, ranging from RMB 15,000 (USD 2,268) per student per school year to RMB 28,000 (USD 4,233) per student per school year, depending on the applicable education programs. The total fees we receive from tuition collected by these universities and colleges vary based on the terms of our contracts with the Chinese host universities we partner with, and are based on our services rendered and can range from RMB 2,250 (USD 340) to RMB 11,200 (USD 1,693) per student per school year. Consulting fees we charge students to provide Overseas Study Consulting Services range from RMB 50,000 ($7,558) per person to RMB 80,000 ($12,093) per person, depending on different majors that our students are planning to pursue in foreign countries, which majors then determine the level of customized tutoring services we provide.

 

Our revenue from the sale of textbooks and course material is largely affected by the number of students enrolled under the Sino-foreign joint education programs. Revenue from this segment only accounted for 0.7%, 0.6% and 1.3% of our total revenue for the six months ended June 30, 2019, and the fiscal year 2018 and 2017, respectively. We expect revenue in this segment to keep a steady pace in the foreseeable future.

 

Our revenue from Technological Consulting Services for Smart Campus Solutions largely depends on the number of contracts we may enter into with customers, and on our ability to customize our solutions in a cost-effective way. Our “smart campus” related technological consulting service contracts are primarily on a fixed-price basis, which require us to perform services including project planning, project solution and design, data management application customization, installations of hardware equipment and components, integration of hardware and software application, and post-contract continuous maintenance support, based on the specific needs of each customer. For the fiscal years ended December 31, 2018 and 2017, we have successfully provided smart campus solutions to FMP and several other Chinese universities, namely Strait College of Minjiang University, Capital Normal University, Beijing University of Chinese Medicine and University of International Business and Economics. During the six months ended June 30, 2019, based on our experience and reputation, we have entered into additional smart campus solution contracts with a larger number of Chinese universities/ colleges, including Capital Normal University, Shougang Technician College, Beijing Institute of Technology, North China Electric Power University, University of Chinese Academy of Sciences, Beijing Advanced Technical School of Arts and Craft and China University of Mining & Technology (Beijing), etc., to provide smart campus solution consulting services to these universities/ colleges, including but not limit to internet network improvement, digital classroom solutions, and educational management system customization. Some of these new smart campus contracts have been executed, completed, and accepted by these universities/ colleges to help us generate increased revenue for the six months ended June 30, 2019, while some of the contracts are still in performance as of June 30, 2019 and we expect to generate increased revenue during the second half of fiscal year 2019 based on the progress of these projects. To manage and support our growth and profitability in this segment, we plan to enhance our operational, administrative and technological systems and our financial and management controls. If we cannot achieve these operational improvements, our financial condition and results of operations may be materially adversely affected.

 

Cost of revenues

 

Our cost of revenues consists of salary, welfare and insurance costs for our faculty, rent expense for foreign faculty, textbook and course materials costs, travel, meals and entertainment expenses associated with teaching activities, consulting fees paid to third-parties for course design and teacher training, hardware parts and components purchase costs as well as labor costs incurred to undertake the software application customization for the smart campus projects, and business taxes. Our cost of revenues accounted for 54.4%, 56.2% and 55.6% of our total revenue for the six months ended June 30, 2019, the fiscal year 2018 and 2017, respectively. In April 2019, we submitted our application to local township to apply for using our current location for opening the school, which has been approved by local township in July 2019. After this approval, we further submitted our application for school license and permit to local governmental education committee. We originally expected to receive the permit and license before September 2019. However, due to delayed review and approval procedures by local governmental education committee, as well as the impact of the outbreak of COVID-19, we are unsure when such review and approval procedures will be resumed and when we will receive the approval. Once we open our China Liberal School in Beijing, we will further open our China Liberal School in Italy. We expect our cost of revenues to increase as we further expand our operations by opening our China Liberal Schools in Beijing and Italy, driven in large part by a planned increase in the number of our teachers and study advisors and increased utility and lease payment for our schools to support our study abroad consulting service business segment. In addition, in anticipation of the increase in our smart campus solution contracts with additional Chinese universities/ colleges, we expect our costs associated with hardware equipment and facilities purchase as well as data management application system customization will further increase in the foreseeable future.

 

Operating expenses

 

Our operating expenses consist of selling and marketing expenses and general and administrative expenses.

 

Our selling expenses primarily include expenses incurred for various sales activities, advertising, payroll expense paid to our sales and marketing personnel as well as shipping and delivery expenses. As a percentage of revenues, our selling expenses accounted for 8.3%, 14.6% and 13.9% of our total revenue for the six months ended June 30, 2019, and the years ended December 31, 2018 and 2017, respectively. We expect that our overall sales and marketing expenses, including but not limited to, advertising expenses, brand promotion expenses and salaries, will continue to increase in the foreseeable future if our business further grows.

 

Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, depreciation and professional service expenses. As a percentage of revenues, general and administrative expenses were 27.2%, 12.1% and 10.5% of our revenue for the six months ended June 30, 2019, and for fiscal year 2018 and 2017, respectively. We expect our general and administrative expenses, including, but not limited to, salaries and business consulting expenses, to continue to increase in the foreseeable future, as we hire additional personnel and incur additional expenses in connection with the expansion of our business operations. We expect our professional fees for legal, audit, and advisory services to increase as we become a public company upon the completion of this offering.

 

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Results of Operations

 

 

Comparison of Results of Operations for the Six Months Ended June 30, 2019 and 2018

 

   For the Six Months Ended June 30,         
   2019   2018         
   Amount   As %
of Sales
   Amount   As %
of Sales
   Amount
Increase
(Decrease)
   Percentage
Increase
(Decrease)
 
                         
Revenue  $1,880,068    100.0%  $1,447,787    100.0%  $432,281    29.9%
Cost of revenue   1,022,655    54.4%   701,653    48.5%   321,002    45.7%
Gross profit   857,413    45.6%   746,134    51.5%   111,279    14.9%
Operating expenses                              
Selling expenses   156,061    8.3%   234,580    16.2%   (78,519)   (33.5)%
General and administrative expenses   511,024    27.2%   286,672    19.8%   224,352    78.3%
Total operating expenses   667,085    35.5%   521,252    36.0%   145,833    28.0%
Income from operations   190,328    10.1%   224,882    15.5%   (34,554)   (15.4)%
Other income (expenses)                              
Interest income   3,617    0.2%   48,526    3.4%   (44,909)   (92.5)%
Other income (expense),net   (2,179)   (0.1)%   10,729    0.7%   (12,908)   (120.3)%
Total other income, net   1,438    0.1%   59,255    4.1%   (57,817)   (97.6)%
Income before income taxes   191,766    10.2%   284,137    19.6%   (92,371)   (32.5)%
Provision for income taxes   52,756    2.8%   43,709    3.0%   9,047    20.7%
Net income  $139,010    7.4%  $240,428    16.6%  $(101,418)   (42.2)%
Less: net income attributable to non-controlling interest   -    0.0%   21,214    1.5%   (21,214)   (100.0)%
Net income attributable to the Company  $139,010    7.4%  $219,214    15.1%  $(80,204)   (36.6)%

 

Revenues. Revenues increased by $432,281, or 29.9%, to $1,880,068 in the six months ended June 30, 2019 from $1,447,787 in the six months ended June 30, 2018. The increase in our revenue was due to the fact that the Company rendered more consulting services in the six months ended June 30, 2019 as compared to the same period of 2018.

 

Our revenue by service type is as follows:

 

   For the six months ended June 30, 
   2019   2018   Changes 
   Amount   %   Amount   %   Amount   % 
Revenue from Sino-foreign Joint Managed Academic Programs  $1,240,856    66.0%  $1,256,083    86.8%  $(15,227)   -1.2%
Revenue from textbook and course material sales   13,316    0.7%   23,485    1.6%   (10,169)   -43.3%
Revenue from Overseas Study Consulting Services   -    0.0%   10,370    0.7%   (10,370)   -100.0%
Revenue from Technological Consulting Services for Smart Campus Solutions   625,896    33.3%   157,849    10.9%   468,047    296.5%
Total  $1,880,068    100.0%  $1,447,787    100.0%  $432,281    29.9%

 

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Revenue from Sino-foreign Jointly Managed Academic Programs

 

Our revenue from Sino-foreign Jointly Managed Academic Programs primarily consists of our cooperation with the following Chinese universities:

 

(i) Fuzhou Melbourne Polytechnic (FMP)

 

FMP is currently hosting the Australia English for Academic Purposes Program, or the FMP EAP Program. Before FMP rebranded in January 2017, FMP’s former entity operating under the name IEN College of Minjiang University also hosted the International General Education Courses, or IGEC program.

 

(ii) Strait College of Minjiang University (Strait College)

 

Strait College is currently hosting the Fujian-Taiwan Universities Joint Talent Training Program. Since January 2017, Strait College has also been hosting the IGEC program after it took over this program from the then IEN College of Minjiang University.

 

(iii) Fujian University of Technology (FUT)

 

FUT hosted the Fujian University of Technology International Scholarly Exchange Curriculum Program, or FUT ISEC Program. However, as discussed below, we made a decision to cease recruitment and enrollment activity, and the program was discontinued after the then last class of students graduated in July 2018. Accordingly, there was no revenue generated from FUT for the six months ended June 30, 2019.

 

(iv) Fujian Preschool Education College

 

Fujian Preschool Education College is currently hosting the New Zealand Tertiary College, or NZTC Program. However, as discussed below, we made a decision to cease recruitment and enrollment activity, and the program will be discontinued after the last class of students graduate in July 2019.

 

   For the six months ended June 30, 
   2019   2018   Changes 
   Amount   %   Amount   %   Amount   % 
Fuzhou Melbourne Polytechnic  $349,612    28.2%  $183,888    14.6%  $165,724    90.1%
Strait College of Minjiang University   851,968    68.7%   930,896    74.1%   (78,928)   -8.5%
Fujian University of Technology   -    0.0%   56,776    4.5%   (56,776)   -100.0%
Fujian Preschool Education College   39,276    3.2%   84,523    6.7%   (45,247)   -53.5%
Total  $1,240,856    100.0%  $1,256,083    100.0%  $(15,227)   -1.2%
                               
Number of students under joint education programs                     
Fuzhou Melbourne Polytechnic   673         490         183    37.3%
Strait College of Minjiang University   1,603         1,712         (109)   -6.4%
Fujian University of Technology   -         76         (76)   -100.0%
Fujian Preschool Education College   61         137         (76)   -55.5%
Total number of students   2,337         2,415         (78)   -3.2%
                               
Average tuition fee the Company received per student                     
Fuzhou Melbourne Polytechnic  $519        $375        $144    38.4%
Strait College of Minjiang University  $531        $544        $(13)   -2.4%
Fujian University of Technology  $-        $747        $(747)   -100.0%
Fujian Preschool Education College  $644        $617        $27    4.4%

 

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Our revenues from Sino-foreign Jointly Managed Academic Programs decreased by $15,227 or 1.2% from $1,256,083 in the six months ended June 30, 2018 to $1,240,856 in the six months ended June 30, 2019. This decrease can be primarily attributed to a decrease in the number of students by 78 or 3.2%, from 2,415 students in the six months ended June 30, 2018 to 2,337 students in the six months ended June 30, 2019, and affected by the changes in average tuition fees we collected from Chinese host universities/ colleges. The following factors impact the revenue we generate from services provided for joint education programs for the six months ended June 30, 2019 and 2018:

 

(1) In 2018, China’s Ministry of Education, or MOE, approved the termination of certain Sino-foreign cooperative education programs as a move to improve quality, tighten regulatory control, and promote reforms in China’s educational system. These changes were made because problems had appeared in certain institutions and projects (none of which we service) that were previously approved by the relevant authorities. These problems included insufficient utilization of high quality educational resources, low instructional quality, weak specialized capabilities in academic departments, lack of content-based development mechanisms, low student satisfaction and poor attractiveness of programs, making it difficult for those institutions and projects to continue operating and they were therefore closed down. In order to clarify the above described action by MOE, we made an anonymous phone call inquiry with the MOE. We were informed by the MOE that this action was never taken by MOE before, and that this action was taken to close down institutions and projects that were originally approved but at the time of termination did not have enrolled students any more. We were further informed that the purpose of this action was to improve the overall quality of the industry. In light of this, Fujian Province, the province where all of the Sino-foreign Jointly Managed Academic Programs we service are located, set a minimum score for English (as a subject) for those students who are applying for any four-year Sino-foreign joint programs that offer undergraduate degrees. As a result of these new regulatory controls and policy adjustments, even though none of the programs we service were terminated by the MOE, overall student recruiting and enrollment under our Sino-foreign joint education programs was negatively impacted, because some potential candidates could not meet the minimum score for English. For example, student enrollments under our joint education programs with Strait College of Minjiang University decreased by 109 students from 1,712 students in the six months ended June 30, 2018 to 1,603 students, which led to our revenue generated from joint education programs with Strait College of Minjiang University decreased by $78,928 in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018, due to the higher eligibility requirements for students to enroll in any Sino-foreign joint education programs in Fujian Province. We cannot assure you that the local government in Fujian Province or the MOE will not set an even higher eligibility standard for students to enroll in these joint education programs in the future, in which case our enrollment numbers, result of operations and financial conditions could be negatively impacted.  

 

(2) FMP was formerly known as IEN College of Minjiang University, and our IGEC program (the “Strait IGEC Program”) was previously hosted by IEN College of Minjiang University from September 2013 to July 2017. In January 2017, IEN College of Minjiang University was approved by the provincial government of Fujian and became the first Sino-foreign joint institution with independent legal status in Fujian Province and accordingly changed its name to FMP. As a result of this rebranding, FMP stopped hosting the IGEC program beginning September 2017 and the program was taken over by Strait College of Minjiang University going forward. This led to a decrease in the total number of students enrolled with FMP. Starting September 2017, FMP only continued to provide the FMP EAP Program. As of June 30, 2018, there were only 490 students enrolled FMP EAP program. During our fiscal year ended December 31, 2018, FMP completed its smart campus projects. With advanced digital classrooms, improved internet network and business school experiment center, the teaching environment of FMP’s EAP program becomes more attractive to encourage student enrollment. At the same time, FMP conducted a series of marketing campaign in order to attract more students to the FMP EAP program. This led to total number of students enrolled with FMP increased to 673 students as of June 30, 2019, representing an increase of 183 students, or 37.3% as compared to six months ended June 30, 2018. In addition, we normally charge higher tuition fee to freshman students during their first year of college study because more English lectures are conveyed to them during this academic year. The portion of tuition fee we receive from first year freshman students is RMB 9,000 per student, and the portion of tuition fee we receive lowers down to RMB 3,000 per student in the second academic year. During the September 2018 to 2019 academic school year, we have enrolled more students into FMP’s EAP program due to our good reputation, attractive learning environment and strengthened marketing efforts. As a result, average tuition fee collected from FMP EAP program increased by $144 per student or 38.4% during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The increase in number of students enrollment and increase in average tuition fee led to an increase in revenue of $165,724 of our revenue generated under the FMP EAP programs during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.

 

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(3) Our joint programs with Fujian University of Technology (FUT) and Fujian Preschool Education College (FPEC) were originally designed to improve students’ English language skills. However, due to the overall low language proficiency backgrounds of the students enrolled, we noted that most students could not adapt to the high standards of an English teaching environment. For example, a total of 193 students were recruited by FUT under the architecture, civil engineering and software engineering majors in our joint programs with FUT. According to the curriculum designs and outlines, some core courses had to be taught by foreign teachers in English. Therefore, students who could follow the course lecture were those who had adequate English reading, writing and listening skills. However, after those 193 students started these programs, we noted that their overall English language proficiency was low and we had to add Chinese teachers in the classrooms to conduct simultaneous translation and interpretation in order to help the students fully understand the course content. Adding extra teachers for translation doubled our teaching costs as qualified translators were difficult to find and salaries paid to translators roughly amounted to the amount of salaries paid to foreign teachers. In addition, any inappropriate translation could have negatively impacted how our course was perceived and the value of such course to our existing and prospective students. Our joint program with FPEC provides Chinese students with the opportunity to enroll in courses delivered by New Zealand Tertiary College (“NZTC”). Upon completion of this program, students would receive a Ministry of Education, or MOE, Diploma in Early Childhood Education in the PRC and a certificate in Early Childhood Teaching issued by NZTC. This program is a three-year education degree program in which students may choose to complete their first two-years of education in China and go to NZTC for their third-year and final year in the program, or, alternatively, to stay with the Chinese host college for the entire three years of study. Since we launched this program, approximately 300 students have been recruited into this program. However, most of the enrolled students had low English language proficiency, which led to limited number of students choosing to study abroad in New Zealand. As of the date of this prospectus, only 3 students have decided to go to New Zealand after finishing the first two-year education with the Chinese host college. NZTC did request that we send more students to NZTC for purposes of increasing their revenue. However, based on our assessment, in order for us to train existing students to meet the minimum language requirements for studying abroad, we would have to add one more year of English courses to existing students, which would significantly increase our teaching costs. Additionally, most of our existing students are reluctant to extend their education by an additional year since they can find a job in the market relatively easily after obtaining the certificate in Early Childhood Teaching issued by FPEC.

 

Therefore, the Sino-foreign Jointly Managed Academic Programs with these two institutions became increasingly less attractive and less profitable. As a result, we decided to stop recruiting and enrolling new students into the FUT ISEC Program after the Class of July 2018 graduated. We also decided to suspend recruiting for the NZTC Program after current students graduate in July 2019. As a result of such business decision, the number of students enrolled in FUT decreased by 100.0% from 76 students in the six months ended June 30, 2018 to Nil student in the six months ended June 30, 2019, and the number of students enrolled in FPEC decreased by 55.5% from 137 students in the six months ended June 30, 2018 to 61 students in the six months ended June 30, 2019. The average tuition fee we collected from Sino-foreign Jointly Managed Academic Programs was adjusted. As a result, average tuition fee collected from FPEC slightly increased by 4.4% in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. Consequently, the decrease in tuition revenue from FPEC resulted from decrease in number of enrolled students was offset by the increase in average tuition fee to certain extent.

 

In December 2019, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. The COVID-19 outbreak is causing lockdowns, travel restrictions, and closures of businesses and schools. However, our revenue from Sino-foreign Jointly Managed Academic Programs was not significantly impacted because the host Chinese universities/colleges have been closed for winter break in December 2019 before the outbreak of COVID-19. Although the host Chinese universities/colleges remain closed at this time due to COVID-19, we have been providing remote teaching services to students and as of the date of this prospectus no dropout has been reported to us during this temporary school closure period. Currently enrolled students are expected to return to school in April 2020. Despite the COVID-19 outbreak, our revenue from Sino-foreign Jointly Managed Education Programs is expected to remain stable as compared to the revenue in the first quarter of fiscal year 2019, at an estimated amount of $660,000 in the first quarter of fiscal year 2020.

 

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Revenue from textbooks and course material sales

 

In order to ensure the quality of the course content delivered to students and to meet international standards, we have developed and edited more than 16 English textbooks and course materials with an emphasis on language training, and distributed these materials to students enrolled under our Sino-foreign joint education programs. Revenue from sales of textbooks and course materials decreased by $10,169 or 43.3% from $23,485 in the six months ended June 30, 2018 to $13,316 in the six months ended June 30, 2019. The decrease in textbook and course material sales was primarily attributable to the total number of students enrolled under the joint education programs which decreased from 2,415 students in the six months ended June 30, 2018 to 2,337 students in the six months ended June 30, 2019. As discussed above, we stopped recruiting and enrolling new students into the FUT ISEC Program with FUT after the then existing students graduated in July 2018. We also suspended recruiting for the NZTC Program with FPEC after current students graduated in July 2019. As a result of such business decision, the number of students enrolled with FUT decreased by 100% from 76 students in the six months ended June 30, 2018 to Nil students in the six months ended June 30, 2019, and the number of students enrolled with FPEC decreased by 55.5% from 137 students in the six months ended June 30, 2018 to 61 students in the six months ended June 30, 2019. As a result of this business decision, for the academic school year starting from September 2018, there were no additional new students recruited into the joint education programs with these two academic institutions. Accordingly, we reduced the textbooks and course material sales in the six months ended June 30, 2019. The total number of textbooks and course materials sold decreased by 41.4% from 3,576 in the six months ended June 30, 2018 to 2,097 in the six months ended June 30, 2019. In addition, for our Sino-foreign Jointly Managed Academic Programs with FMP, since 2018, FMP made some teaching course content and curriculum settings adjustment, which led to FMP purchase textbooks and course materials from other vendors in order to match the new curriculum settings. As a result, our textbook sales to FMP reduced accordingly.

 

The outbreak of COVID-19 delayed our sales of textbooks and course materials to students because the host Chinese universities/colleges closed for winter break in December 2019 and will remain closed until reopening, currently estimated to take place in April 2020. During the temporary school closure period, we have been providing remote teaching services to students. We did not record textbooks and course materials sales revenue for the first quarter of fiscal year 2020. When compared to the first quarter of fiscal year 2019, we estimate the reduction of our textbooks and course materials sales in the first quarter of fiscal year 2020 is around $7,000.

 

Revenue from Overseas Study Consulting Services

 

   For the six months ended June 30, 
   2019   2018   Changes 
              Amount    % 
Revenue from overseas study consulting services  $-   $10,370   $(10,370)   (100.0)%
                     
Number of students for study abroad consulting service   -    1    (1)   (100.0)%
                     
Average consulting service fee per student  $-   $10,370   $(10,370)   (100.0)%

 

Our Overseas Study Consulting Services target those students who wish to study in foreign countries to enrich their learning experiences, expand their horizons, and gain exposure to a broader array of employment opportunities. We provide customized consulting services to students on an individual basis. Fees we charge students to provide overseas study consulting services range from RMB 50,000 ($7,558) per person to RMB 80,000 ($12,093) per person. We typically charge higher consulting service fees to students planning to pursue art majors in foreign countries than we do for students pursuing general majors such as business, technology and other majors, because art programs typically require demonstration of a student’s specialty in art, which is usually reflected in an art portfolio that the student submits along with other application materials. We have to assign qualified teachers to provide more detailed and customized tutoring to these students pursuing art majors and accordingly we charge them higher consulting service fee.

 

Revenue from providing Overseas Study Consulting Services decreased by $10,370 or 100.0%, from $10,370 in the six months ended June 30, 2018 to $Nil in the six months ended June 30, 2019. The decrease was due to the fact that the number of students who sought study abroad consulting services from us decreased, from 1 student pursuing art major in Italy in the six months ended June 30, 2018 to Nil students in the six months ended June 30, 2019. However, in May and June 2019, we have recruited 55 students who will be pursuing art majors in Italy, Japan, Russia and Germany. We received consulting service fees of approximately $384,604 (RMB 2.64 million) and recorded it as deferred revenue, because our study abroad consulting services have not been completed and our performance obligation has not been satisfied as of June 30, 2019, and as a result, we did not recognize study abroad consulting service revenue for the six months ended June 30, 2019. It normally takes about four to six months for us to complete the related consulting services under the one-on-one private tutoring model, including, but not limit to providing school information to help students make informed decisions about which institution and major to choose from, helping them prepare for school application and admission; providing study plans, language training and test preparation courses to help students improve their foreign language ability and help them achieve higher scores in international admission and assessment tests, and helping students on visa application and paperwork, and offering overseas extended services such as finding accommodation and travel assistance. We expect to complete related consulting services between October and November 2019. Once our services are rendered and performance obligations are satisfied, we expect to recognize revenue of $384,604 in the second half of fiscal year 2019, which would potentially help us to increase our net income by approximately $146,000 assuming these numbers.

 

48

 

 

Our Overseas Study Consulting Services are subject to seasonality impact to a certain extent. Typically, we start to recruit students in May and June each year, with the largest student enrollments in our third and fourth fiscal quarters, which run from July 1 to December 31 each year, primarily because many students enroll in our courses to prepare for admissions and assessment tests in subsequent school terms. As a result, we did not record significant revenue from our study abroad consulting services for the first quarter of fiscal 2020 and 2019, and we originally expected to see seasonal growth in our revenue from study abroad consulting service in the latter half of fiscal 2020. However, the recent outbreak of COVID-19 may affect our revenues in this segment for fiscal year 2020, since school closure and international travel bans may restrict students from pursuing their overseas education in Europe, Australia, the United States and other foreign countries, which may result in a reduced number of students needing our services, temporary suspension of our one-on-one consulting services, and postponement of payment from the Company’s partnering schools. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak or the impact on the Company’s customers and schools, all of which are uncertain at this point.

 

Revenue from Technological Consulting Services for Smart Campus Projects

 

   For the six months ended June 30, 
   2019   2018   Changes 
    Amount    Amount    Amount    % 
Fuzhou Melbourne Polytechnic  $95,482   $152,459   $(56,977)   -37.4%
Capital normal university   117,484    -    117,484    100.0%
Shougang Technician College   9,454    -    9,454    100.0%
Beijing Institute of Technology   3,900    -    3,900    100.0%
North China Electric Power University   279,645    -    279,645    100.0%
Beijing Normal University   6,486    -    6,486    100.0%
University of Chinese Academy of Sciences and others   113,445         113,445    100.0%
Others        5,390    (5,390)   -100.0%
Total  $625,896   $157,849   $468,047    296.5%

 

Revenue from providing smart campus related technological consulting service increased by $468,047 or 296.5% from $157,849 in the six months ended June 30, 2018 to $625,896 in the six months ended June 30, 2019, primarily due to the fact that the number of smart campus projects we have undertaken increased during current period. In 2017, we entered into a contract with Fuzhou Melbourne Polytechnic (“FMP”) to provide a total solution for its smart campus project, which includes a big data center, digital classrooms, and an experience-based simulation teaching center for its business school. These facilities will be linked and bundled with the campus data management application system software to create a smart campus for FMP. In addition to the installation of hardware and software to allow the smart campus system to meet its expected operational conditions, we are also responsible for maintenance and providing continuing technological support during the period of 2019 to 2021. The total contract price under the FMP “smart campus” project is RMB 16.68 million (approximately $2.4 million) for completion of the software and hardware installation. Post-installation maintenance and continuing technical support fees amount to RMB 5.05 million (approximately $0.74 million). Based on the contract payment terms, after completion of the required smart campus project, FMP is obligated to make three installment payments of RMB 5.56 million (approximately $809,865) each in 2019, 2020 and 2021, respectively. Among the RMB 5.05 million maintenance and support fee, RMB 1.04 million (USD $151,644) contract receivable for maintenance and technical support services rendered in 2018 has been received in January 2019. The remaining RMB 4.01 million (approximately $0.58 million) post-contract maintenance and technical support fee will be paid in three equal installments in 2019 to 2021 when services are rendered.

 

For the six months ended June 30, 2018, we recognized revenue of $152,459 from the technology services we provided to FMP for its smart campus project. Services we provided included upgrading the experiment centers for FMP’s business school. These services were completed, passed inspection and were accepted by FMP. All contracted smart campus projects with FMP has been completed in December 2018. For the six months ended June 30, 2019, we recognized $95,482 revenue from FMP projects which represents the post-completion maintenance and technical support services we rendered during the six months ended June 30, 2019.

 

In addition to the smart campus project with FMP, during the six months ended June 30, 2019, based on our experience and reputation, we have entered into additional smart campus solution contracts with a larger number of Chinese universities/ colleges, including Capital Normal University, Shougang Technician College, Beijing Institute of Technology, North China Electric Power University, University of Chinese Academy of Sciences, and China University of Mining & Technology (Beijing), etc., to provide smart campus solution consulting services to these universities/ colleges, including but not limit to internet network improvement, digital classroom solutions, and educational management system customization. Some of these new smart campus contracts have been executed, completed, and accepted by these universities/ colleges to help us to generate increased revenue for the six months ended June 30, 2019, while some of the contracts are still under performance as of June 30, 2019 and we expect to generate increased revenue during the second half of fiscal year 2019 based on the progress of these projects. Revenue from above mentioned new smart campus solution contracts amounted to $530,414 for the six months ended June 30, 2019.

 

 

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Subsequent to June 30, 2019, we have signed additional “smart campus” solution contract with Zhengzhou University and will be engaged to customize their teaching management system and digital classrooms for aggregate contract amount of RMB 0.5 million. In addition, we also signed a contract with Beijing Advanced Technical School of Arts and Craft for a contract price of RMB 1.1 million to update its sever rooms and art and craft product showroom. Also, we have confirmed with FMP to enter into new service contract with FMP to provide solutions for its hotel management experiment center and information technology experiment center for contract price of approximately RMB 11 million. These engagement requires us to provide solutions and improvement for the digital classrooms, internet network improvement and big data and cloud computing facility update. Assuming those numbers, the above mentioned new smart campus contracts could potentially bring in RMB 12.6 million (approximately $1.9 million) service revenue in the second half of 2019 based on the progress of these projects, which may generate net income of approximately $230,000 (approximately RMB 1.6 million) in the second half of 2019. Therefore, the increase in our exposure and cooperation with more academic institutions on smart campus-related projects will help us increase our revenue and cash flows going forward.

 

Due to school closure and travel restrictions caused by the COVID-19 outbreak, our revenues from providing smart campus related technological consulting services are expected to decrease by approximately 43%, to an estimated amount of $74,000 in the first quarter of fiscal year 2020 as compared to the first quarter of fiscal 2019. We originally expected to complete the execution of three “smart campus” contracts before March 31, 2020 with Beijing Institute of Graphic Communication, Beijing Foreign Studies University and FMP related to their digital classrooms setup, server room, big data and computing facility update. However, due to school closures, we only partially completed these contracts and have to delay the performance of the remaining contracts until these universities commence the spring semester, which is expected to happen in April 2020, and most of these projects are expected to be completed during the summer of 2020. Therefore, we expect the negative impact of the COVID-19 outbreak on our smart campus services to be temporary and our revenues to grow once we are able to resume our normal business activities. However, the extent of the impact of COVID-19 on our operational and financial performance for the remaining 2020 fiscal year will depend on certain developments, including the duration and spread of the outbreak, all of which are uncertain at this point.

 

Cost of Revenues

 

   For the six months ended June 30, 
   2019   2018   Changes   % 
                     
Teacher salary, welfare benefit and insurance  $511,967   $445,575   $66,392    14.9%
Textbook and course materials   7,633    3,831    3,802    99.2%
Travel, meals and entertainment expense relating to teaching activities   12,658    4,334    8,324    192.1%
Apartment rent expense for teachers   86,722    60,234    26,488    44.0%
Hardware and software application costs for “smart campus” projects   291,910    92,572    199,338    215.3%
Professional fees for course design, teacher training   104,887    79,735    25,152    31.5%
Business tax   2,473    13,068    (10,595)   -81.1%
Others   4,405    2,304    2,101    91.2%
Total cost of revenue  $1,022,655   $701,653   $321,002    45.7%

 

Our cost of revenues consists of salary, welfare and insurance costs for our faculty, rent expense for foreign faculty, textbook and course materials costs, travel, meals and entertainment expenses associated with teaching activities, consulting fees paid to third-parties for course design and teacher training, hardware parts and components purchase costs as well as labor costs incurred to undertake the software application customization for the smart campus projects, and business taxes. Our overall cost of revenue increased by $321,002 or 45.7% from $701,653 in the six months ended June 30, 2018 to $1,022,655 in the six months ended June 30, 2019, primarily due to increased hardware and software costs associated with the smart campus projects of $199,338, increased rent expense of $26,488 because we leased larger office space since 2018 in order to meet our expanded business operation, and increased salary, welfare and insurance costs for teachers and faculty by $66,392 because we hired and appointed more qualified teachers to the Sino-foreign jointly managed programs in order to ensure the teaching quality students’ learning results. In connection with the identification of qualified teachers, our professional fees for teaching training and course design also increased by $25,152 during the six months ended June 30,2019 as compared to the same comparative period of 2018. Our cost of revenue accounted for 54.4% and 48.5% of our total revenue for the six months ended June 30, 2019 and 2018, respectively.

 

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Our cost of revenue by business segment is as follows:

 

   For the six months ended June 30, 
   2019   2018   Changes   % 
                     
Cost associated with Sino-foreign Jointly Managed Academic Programs  $535,638   $561,606   $(25,968)   -4.6%
Cost associated with Overseas Study Consulting Services   -    23,696    (23,696)   -100.0%
Cost associated with Technological Consulting Services for Smart Campus related   479,384    112,520    366,864    326.0%
Cost associated with textbooks and course materials sales   7,633    3,831    3,802    99.2%
Total cost of revenue  $1,022,655   $701,653   $321,002    45.7%

 

Cost of revenues associated with Sino-foreign Jointly Managed Academic Programs decreased by $25,968 or 4.6% from $561,606 in the six months ended June 30, 2018 to $535,638 in the six months ended June 30, 2019, primarily due to decreased costs associated with faculty involvement as the total number of students enrolled under the Sino-foreign joint education programs decreased from 2,415 students in the six months ended June 30, 2018 to 2,337 students in the six months ended June 30, 2019, especially when we stopped recruiting and enrolling new students into the FUT ISEC Program after the Class of July 2018 graduated, and when we suspended recruiting for the NZTC Program after current students graduate in July 2019, as discussed above. Our cost of revenue associated with Sino-foreign Jointly Managed Academic Programs is expected to remain at a stable level as compared to the first quarter of fiscal year 2019, in an estimated amount of $132,000 in the first quarter of fiscal year 2020.

 

Cost of revenues associated with Overseas Studying Consulting Services decreased by $23,696 or 100.0% when comparing the six months ended June 30, 2019 to the six months ended June 30, 2018, because we did not report revenue from this business segment during the six months ended June 30, 2019 since our performance obligation under the contract has not been satisfied. In the six months ended June 30, 2018, we provided study abroad consulting service to one student, while during the six months ended June 30, 2019 we recruited 55 students in May and June 2019 and our consulting services are still ongoing. It normally takes about four to six months for us to complete the related consulting services under one-on-one private tutoring model. We expect to complete related consulting services between October and November 2019. Once our services are rendered and our performance obligations are satisfied, we expect to recognize revenue of $384,604 and allocate related costs in the second half of fiscal year 2019. Due to the recent COVID-19 outbreak, we estimate that our Overseas Studying Consulting Services may be negatively impacted in fiscal year 2020. Although we did not report revenue and cost of revenue associated with our Overseas Studying Consulting Services for the first quarter of fiscal year 2020 due to seasonality impact as discussed above, we anticipate a significant decrease in business activities associated with our Overseas Studying Consulting Services in the remaining period of fiscal 2020 as we expect a sharp decrease in the number of students who wish to pursue overseas study in Europe, Australia and the United States. The extent of the impact will depend on the duration and spread of the outbreak, which is uncertain at this point.

 

Cost of revenues associated with Technological Consulting Services for Smart Campus Solutions increased by $366,864 or 326.0%, from $112,520 in the six months ended June 30, 2018 to $479,384 in the six months ended June 30, 2019. This increase was in line with the increased revenue we recognized in the six months ended June 30, 2019. In 2017, we entered into a contract with FMP to help FMP implement a comprehensive solution for its smart campus project, which includes a big data center, digital classrooms, and an experience-based simulation teaching center for its business school. During the six months ended June 30, 2018, our technological consulting services to FMP primarily included upgrade the experiment centers for FMP’s business school. We recognized related revenue of $152,459 and allocated associated cost of revenue of $112,520, which primarily included hardware facility and installation. We fully completed the hardware and software projects for FMP by the end of 2018. During the six months ended June 30, 2019, we recognized $95,482 revenue from FMP projects which represents the post-completion maintenance and technical support services we rendered during the six months ended June 30, 2019. Our costs of revenue associated with the FMP project maintenance and technical support revenue amounted to $36,143, primarily included labor costs incurred on performing such maintenance service. In addition to the FMP smart campus projects, during the six months ended June 30, 2019, we have also entered into additional smart campus solution contracts with a larger number of Chinese universities/ colleges, such as Capital Normal University, Shougang Technician College, Beijing Institute of Technology, North China Electric Power University, University of Chinese Academy of Sciences and others, to provide smart campus solution consulting services to these universities/ colleges, including but not limit to internet network improvement, digital classroom solutions, and educational management system customization. The increase in our revenues corresponds to the increased cost of revenues associated with these smart campus projects in the six months ended June 30, 2019 as compared to the same comparative period of 2018. Due to the recent COVID-19 outbreak, the execution of our “smart campus” contracts with several Chinese universities/ colleges have been temporarily delayed because of school closures. As discussed above under “Revenue from Technological Consulting Services for Smart Campus Solutions”, our revenue is expected to decrease by approximately 43%, to an estimated amount of $74,000 in the first quarter of fiscal year 2020 as compared to the first quarter of fiscal 2019, and as a result, related cost of revenue also expected to decrease by 16% to an estimated amount of $52,000 in the first quarter of fiscal year 2020. However, we expect the negative impact of the COVID-19 outbreak on our “smart campus” services to be temporary and we expect our revenues and cost of revenue to increase once we resume our normal business activities, with most of our existing “smart campus” projects expected to be completed during the summer of 2020.

 

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Cost of revenue associated with textbook and course material sales increased by $3,802 or 99.2% from $3,831 in the six months ended June 30, 2018 to $7,633 in the six months ended June 30, 2019. Over the past years, our textbook and course materials used by Strait College of Minjiang University and FMP were not officially published books and course materials. In response to recent requirement from Chinese universities/ colleges, we are required to formally press and publish these textbooks in order to supply better quality textbooks to students. Accordingly we are engaged with a third-party press agent to formally print our textbooks, which led to increased textbook re-design and printing costs during the six months ended June 30,2019.

 

The outbreak of COVID-19 delayed our sales of textbooks and course materials to students because the host Chinese universities/colleges have been closed for winter break in December 2019 and remain closed as of the date of this prospectus, with universities/colleges reopening expected in April 2020. During the temporary school closure period, we have been providing remote teaching services to students. We did not record textbooks and course materials sales revenue and related costs of revenue for the first quarter of fiscal year 2020. When compared to the first quarter of fiscal year 2019, we estimate the reduction of our textbooks and course materials sales in the first quarter of fiscal year 2020 is around $7,000, and as a result, related cost of revenue is estimated to decrease by around $3,000.

 

Gross profit

 

   For the six months ended June 30, 
   2019   2018   Changes 
   Amount   %   Amount   %   Amount   % 
Gross profit from Sino-foreign Jointly Managed Academic Programs  $705,218    56.8%  $694,477    55.3%  $10,741    1.5%
Gross profit from textbook and course material sales   5,683    42.7%   19,654    83.7%   (13,971)   -41.0%
Gross profit (loss) from Overseas Study Consulting Services   -    0.0%   (13,326)   -128.5%   13,326    128.5%
Gross profit from Technological Consulting Services for Smart Campus   146,512    23.4%   45,329    28.7%   101,183    -5.3%
Total  $857,413    45.6%  $746,134    51.5%  $111,279    -5.9%

 

Our overall gross profit increased by $111,279 or 14.9% from $746,134 in the six months ended June 30,2018 to $857,413 in the six months ended June 30, 2019 while gross profit margin decreased by 5.9% from 51.5% in the six months ended June 30, 2018 to 45.6% in the six months ended June 30, 2019.

 

Our gross profit associated with Sino-foreign Jointly Managed Academic Programs increased by $10,741, from $694,477 in the six months ended June 30, 2018 to $705,218 in the six months ended June 30, 2019, primarily due to decreased costs associated with faculty involvement as the total number of students enrolled under the Sino-foreign joint education programs decreased from 2,415 students in the six months ended June 30, 2018 to 2,337 students in the six months ended June 30, 2019, when we stopped recruiting and enrolling new students into the FUT ISEC Program after the Class of July 2018 graduated, and when we suspended recruiting for the NZTC Program after current students graduate in July 2019, as discussed above. As a result of a decrease in faculty cost, gross profit increased during the six months ended June 30, 2019.

 

Our gross profit associated with sales of textbook and course material decreased by $13,971, from $19,654 in the six months ended June 30, 2018 to $5,683 in the six months ended June 30, 2019. As discussed above, recently, Strait College of Minjiang University and FMP are trying to make some teaching course content and curriculum settings adjustment, which requires us to make some textbook content change accordingly. This led to an increase in our cost of revenue associated with textbook and course materials sales because additional cost incurred on the textbook re-design and content update. In addition, our textbook printing costs were higher in the six months ended June 30, 2019 than in the six months ended June 30, 2018. As a result, our gross profit associated with the textbook sales decreased in the six months ended June 30, 2019.

 

We did not report revenue and gross profit associated with Overseas Study Consulting Services during the six months ended June 30, 2019 because our performance obligations under our contract with enrolled students have not been satisfied. Gross loss associated with study abroad consulting services in the six months ended June 30, 2018 amounted to $13,326 because we only provided consulting service to one student, our limited revenue could not absorb the fixed overhead cost such as rent expense and teacher salary associated with providing such consulting service.

 

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Our gross profit associated with Technological Consulting Services for Smart Campus Solutions increased by $101,183, from $45,329 in the six months ended June 30, 2018 to $146,512 in the six months ended June 30, 2019. The smart campus projects normally leverage hardware such as sensors, internet of things devices such as digital portals, electronic blackboards, smartboards, projectors, LED display panels, high definition classroom audio and sound systems and other lab-based equipment, together with data management applications, to create total solutions for targeted Chinese universities. In order to complete each individual project, we need to purchase parts and hardware components from outside vendors, to be used in conjunction with our data management software or other solutions. Our profit margin is affected by the fluctuation of the purchase price of the applicable hardware, purchase channels, and the price we paid to laborers in the installation process. Additionally, our engagement under each contract may include different tasks and jobs, some of them only require limited hardware purchase and put more focus on the software side, while others may require more hardware components to be included. Normally, software components have higher margin than hardware components. All of these factors impact our gross margin for each reporting period. Our gross profit in the six months ended June 30, 2018 was lower because we were primarily engaged to upgrade the experiment centers for FMP’s business school which required more hardware components (such as digital portal, electronic blackboards, smartboards, projectors, LED display panels, high definition classroom audio and sound system) purchase. In the six months ended June 30, 2019, in addition to provide post-completion maintenance and technical support service to FMP, we have entered into additional smart campus solution contracts with a larger number of Chinese universities/ colleges, such as Capital Normal University, Shougang Technician College, Beijing Institute of Technology, North China Electric Power University, University of Chinese Academy of Sciences and others, to provide smart campus solution consulting services to these universities/ colleges, including but not limit to internet network improvement, digital classroom solutions, and educational management system customization. The increase in number of smart campus solution related projects led to increased revenue and gross profit for the six months ended June 30, 2019. However, these new projects require both hardware and software application, as a result, our cost of revenue associated with undertaking these projects was still high. This reduced the profit margin to certain extent. Consequently, our gross profit margin on smart campus projects was 23.4%, while the gross profit margin in the six months ended June 30, 2018 was 28.7%.

 

Operating expenses

 

The following table sets forth the breakdown of our operating expenses for the six months ended June 30, 2019 and 2018

 

   For the six months ended June 30,   Change 
   2019   %   2018   %   Amount   % 
Selling expenses  $156,061    23.4%  $234,580    45.0%  $(78,519)   (33.5)%
General and administrative expenses   511,024    76.6%   286,672    55.0%   224,352    78.3%
Total operating expenses  $667,085    100.0%  $521,252    100.0%  $145,833    28.0%

 

Selling expenses

 

Our selling expenses primarily include expenses incurred for various sales activities, advertisings, payroll expense paid to our sales and marketing personnel as well as shipping and delivery expenses. Selling expenses decreased by $78,519 or 33.5% from $234,580 in the six months ended June 30, 2018 to $156,061 in the six months ended June 30, 2019. In the six months ended June 30, 2018, in order to develop our study abroad consulting service business and technological consulting service for “smart campus” solutions, we hired more sales and marketing personnel to promote our business, accordingly, we incurred more salary and employee welfare expenses than that of in the six months ended June 30, 2019 when our brand awareness among customers have been strengthened. The decrease in our selling expense can be attributed primarily due to a decrease in our brand advertising expenses by $4,423, a decrease in salary and employee welfare benefit expenses by $41,974, a decrease of travel and transportation expenses by $28,020 resulting from reduced marketing and promotion activities. As a percentage of revenues, our selling expenses accounted for 8.3% and 16.2% of our total revenue for the six months ended June 30, 2019 and 2018, respectively. We expect that our overall sales and marketing expenses, including but not limited to, advertising expenses, brand promotion expenses and salaries, will continue to increase in the foreseeable future if our business further grows. 

 

General and Administrative Expenses

 

Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, depreciation and professional service expenses. General and administrative expenses increased by $224,352 or 78.3% from $286,672 in the six months ended June 30, 2018 to $511,024 in the six months ended June 30, 2019, primarily due to an increase in salaries, welfare expenses and insurance expenses by $66,476, when we hired more administrative employees and expanded our management team to meet the business growth demand, an increase of audit fee and other professional consulting service fees by $143,400 and increased property management fees by $9,556. As a percentage of revenues, general and administrative expenses were 27.2% and 19.8% of our revenue in the six months ended June 30, 2019 and 2018, respectively. We expect our general and administrative expenses, including, but not limited to, salaries and business consulting expenses, to continue to increase in the foreseeable future, as our business further grows. We expect our professional fees for legal, audit, and advisory services to increase as we become a public company upon the completion of this offering.

 

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Interest Income

 

Our interest income decreased by $44,909 or 92.5%, from $48,526 in the six months ended June 30, 2018 to $3,617 in the six months ended June 30, 2019. On March 17, 2017, we advanced a $1,997,726 (RMB 13 million) interest bearing short-term loan to a third party Jinjiang Hengfeng Trading Co., Ltd. (“Hengfeng”) as working capital, with interest rate of 4.8% per annum and a maturity date of September 19, 2017. Immediately before the maturity date, on September 5, 2017, the Company and Hengfeng signed a supplemental agreement to extend the maturity date to December 19, 2018 with adjusted interest rate of 5% per annum. The loan was guaranteed by a third party Fujian Rongde Cotton Spinning Co., Ltd. The loan receivable was fully collected in December 31, 2018 and we did not have such loan receivable during the six months ended June 30, 2019. This led to interest income on third-party loan decreased in six months ended June 30, 2019 as compared to six months ended June 30, 2018.

 

Other Income (expenses)

 

Other income, net, decreased by $12,908 or 120.3% when comparing six months ended June 30, 2019 to six months ended June 30, 2018. We reported other expense of $2,179 in the six months ended June 30, 2019 primarily included bank charges during this period. For the same comparative period of 2018, we reported other income of $10,729 primarily includes government subsidies in the form of immediate refund of the levied VAT tax back to us, as an incentive to encourage education service provider like us to expand the business.

 

Provision for Income Taxes

 

Our provision for income taxes was $52,756 in the six months ended June 30, 2019, an increase of $9,047 from $43,709 in the six months ended June 30, 2018 due to our increased taxable income generated from our major operating subsidiary China Liberal Beijing. The principal business of our subsidiary, China Liberal Beijing, is performed in the PRC, and is therefore subject to PRC income tax, which is computed according to the relevant laws and regulations in the PRC. As a High and New Technology Enterprises (“HNTEs”), China Liberal Beijing is entitled to a reduced income tax rate of 15% instead of 25%, beginning December 2016, which is valid for three years. Accordingly, our income taxes provision for the six months ended June 30, 2019 and 2018 were reported at a reduced rate of 15% as a result of China Liberal Beijing being approved as a HNTE. The impact of the tax holidays noted above decreased foreign taxes by $32,820 and $27,330 for the six months ended June 30, 2019 and 2018, respectively. The benefit of the tax holidays on net income per share (basic and diluted) was $0.01 and $0.00 for the six months ended June 30, 2019 and 2018, respectively.

 

Net Income

 

As a result of the foregoing, we reported a net income of $139,010 for the six months ended June 30, 2019, representing a $101,418 decrease from a net income of $240,428 for the six months ended June 30, 2018, primarily due to increased operating expense as described above.

 

As discussed above, as a result of the recent COVID-19 outbreak, we expect our revenues from several business segments to be affected. On the other hand, our fixed operating costs such as employee salary and office rent costs did not decrease even during the temporary business shutdown period. As a result, our net income is expected to decrease by approximately $100,000, or 30% when comparing the first quarter of fiscal year 2020 to the first quarter of fiscal year 2019. However, as the spread of COVID-19 in China seems to be under control and businesses and some schools have already started to reopen, we expect the negative impact of the COVID-19 coronavirus outbreak on our business to be temporary.

 

Net income attributable to non-controlling interest

 

Non-controlling interests represent five minority shareholders’ 8.8228% ownership interest in our major operating subsidiary China Liberal Beijing for the six months ended June 30, 2018. In December 2017, five minority shareholders contributed an aggregate of RMB 2,952,206 (approximately $453,669) cash into China Liberal Beijing, for an aggregate of 8.8228% ownership interest. On February 1, 2019, Boya Hong Kong entered into share transfer agreements with each of the non-controlling shareholders of China Liberal Beijing and completed the acquisition of the 8.8228% non-controlling interest in China Liberal Beijing, for a total price of RMB 2.95 million (approximately $453,669). The total value of the non-controlling interest amounted to $540,907 as of the acquisition date. After this transaction, China Liberal Beijing became a 100% owned subsidiary of Boya Hong Kong. As a result, net income attributable to non-controlling interest decreased by $21,214 when comparing six months ended June 30, 2019 to the six months ended June 30, 2018.

 

Net income attributable to the Company

 

As a result of the above, net income attributable to the Company decreased by $80,204, or 36.6%, from $219,214 in the six months ended June 30, 2018 to $139,010 in the six months ended June 30, 2019.

 

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Comparison of Results of Operations for the Years Ended December 31, 2018 and 2017

 

The following table summarizes the results of our operations during the fiscal years ended December 31, 2018 and 2017, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such years.

 

   For the Years Ended December  31,         
   2018   2017         
   Amount   As %
of Sales
   Amount   As %
of Sales
   Amount
Increase
(Decrease)
   Percentage
Increase
(Decrease)
 
                         
Revenue  $4,808,993    100.0%  $3,885,886    100.0%  $923,107    23.8%
Cost of revenue   2,702,297    56.2%   2,161,322    55.6%   540,975    25.0%
Gross profit   2,106,696    43.8%   1,724,564    44.4%   382,132    22.2%
Operating expenses                              
Selling expenses   704,060    14.6%   541,424    13.9%   162,636    30.0%
General and administrative expenses   579,500    12.1%   408,762    10.5%   170,738    41.8%
Total operating expenses   1,283,560    26.7%   950,186    24.5%   333,374    35.1%
Income from operations   823,136    17.1%   774,378    19.9%   48,758    6.3%
Other income (expenses)                              
Interest income   88,926    1.8%   70,743    1.8%   18,183    25.7%
Other income   180,191    3.7%   187,794    4.8%   (7,603)   (4.0)%
Total other income, net   269,117    5.6%   258,537    6.7%   10,580    4.1%
Income before income taxes   1,092,253    22.7%   1,032,915    26.6%   59,338    5.7%
Provision for income taxes   167,813    3.5%   158,109    4.1%   9,704    6.1%
Net income  $924,440    19.2%  $874,806    22.5%  $49,634    5.7%
Less: net income attributable to non-controlling interest   81,779    1.7%   5,800    0.1%   75,979    1310.0%
Net income attributable to the Company  $842,661    17.5%  $869,006    22.4%  $(26,345)   (3.0)%

  

Revenues. Revenues increased by $923,107, or 23.8%, to $4,808,993 in 2018 from $3,885,886 in 2017. The increase in our revenue was due to more consulting services have been rendered in 2018 as compared to 2017.

 

Our revenue by service type is as follows:

 

   For the years ended December 31, 
   2018   2017   Changes 
   Amount   %   Amount   %   Amount   % 
Revenue from Sino-foreign Joint Managed Academic Programs  $2,410,781    50.1%  $2,821,602    72.6%  $(410,821)   -14.6%
Revenue from textbook and course material sales   29,717    0.6%   52,345    1.3%   (22,628)   -43.2%
Revenue from Overseas Study Consulting Services   547,521    11.4%   60,947    1.6%   486,574    798.4%
Revenue from Technological Consulting Services for Smart Campus Solutions   1,820,974    37.9%   950,992    24.5%   869,982    91.5%
Total  $4,808,993    100.0%  $3,885,886    100.0%  $923,107    23.8%

 

Revenue from Sino-foreign Jointly Managed Academic Programs

 

Our revenue from Sino-foreign Jointly Managed Academic Programs primarily consists of our cooperation with the following Chinese universities:

 

(i) Fuzhou Melbourne Polytechnic (FMP)

 

FMP is currently hosting the Australia English for Academic Purposes Program, or the FMP EAP Program. Before FMP rebranded in January 2017, FMP’s former entity operating under the name IEN College of Minjiang University also hosted the International General Education Courses, or IGEC program.

 

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(ii) Strait College of Minjiang University (Strait College)

 

Strait College is currently hosting the Fujian-Taiwan Universities Joint Talent Training Program. Since January 2017, Strait College has also been hosting the IGEC program after it took over this program from the then IEN College of Minjiang University.

 

(iii) Fujian University of Technology (FUT)

 

FUT hosted the Fujian University of Technology International Scholarly Exchange Curriculum Program, or FUT ISEC Program. However, as discussed below, we made a decision to cease recruitment and enrollment activity, and the program was discontinued after the then last class of students graduated in July 2018.

 

(iv) Fujian Preschool Education College

 

Fujian Preschool Education College is currently hosting the New Zealand Tertiary College, or NZTC Program. However, as discussed below, we made a decision to cease recruitment and enrollment activity, and the program will be discontinued after the last class of students graduate in July 2019.

 

   For the years ended December 31, 
   2018   2017   Changes 
   Amount   %   Amount   %   Amount   % 
Fuzhou Melbourne Polytechnic  $465,081    19.3%  $1,455,013    51.6%  $(989,932)   -68.0%
Strait College of Minjiang University   1,744,233    72.4%   943,447    33.4%   800,786    84.9%
Fujian University of Technology   70,799    2.9%   210,686    7.5%   (139,887)   -66.4%
Fujian Preschool Education College   130,668    5.4%   212,456    7.5%   (81,788)   -38.5%
Total  $2,410,781    100.0%  $2,821,602    100.0%  $(410,821)   -14.6%
                 
Number of students under joint education programs                
Fuzhou Melbourne Polytechnic   551        1,307               (756)   -57.9% 
Strait College of Minjiang University   1,676         1,220         456    37.3%
Fujian University of Technology   51         154         (103)   -67.1%
Fujian Preschool Education College   112         196         (84)   -42.9%
Total number of students   2,390         2,877         (487)   -17.0%
                               
Average tuition fee the Company received per student                          
Fuzhou Melbourne Polytechnic  $844        $1,113        $(269)   -24.2%
Strait College of Minjiang University  $1,041        $773        $268    34.6%
Fujian University of Technology  $1,397        $1,368        $29    2.1%
Fujian Preschool Education College  $1,170        $1,086        $84    7.8%

 

Our revenues from Sino-foreign Jointly Managed Academic Programs decreased by $410,821 or 14.6% from $2,821,602 in fiscal year 2017 to $2,410,781 in fiscal year 2018. This decrease can be primarily attributed to a decrease in the number of students by 488 or 17.0%, from 2,877 students in fiscal year 2017 to 2,389 students in fiscal year 2018, and affected by the changes in average tuition fees we collected from Chinese host universities/colleges. The following factors impact the revenue we generate from services provided for joint education programs for the years ended December 31, 2018 and 2017:

 

(1) In 2018, China’s Ministry of Education, or MOE, approved the termination of certain Sino-foreign cooperative education programs as a move to improve quality, tighten regulatory control, and promote reforms in China’s educational system. These changes were made because problems had appeared in certain institutions and projects (none of which we service) that were previously approved by the relevant authorities. These problems included insufficient utilization of high quality educational resources, low instructional quality, weak specialized capabilities in academic departments, lack of content-based development mechanisms, low student satisfaction and poor attractiveness of programs, making it difficult for those institutions and projects to continue operating and they were therefore closed down. In order to clarify the above described action by MOE, we made an anonymous phone call inquiry with the MOE. We were informed by the MOE that this action was never taken by MOE before, and that this action was taken to close down institutions and projects that were originally approved but at the time of termination did not have enrolled students any more. We were further informed that the purpose of this action was to improve the overall quality of the industry. In light of this, Fujian Province, the province where all of the Sino-foreign Jointly Managed Academic Programs we service are located, set a minimum score for English (as a subject) for those students who are applying for any four-year Sino-foreign joint programs that offer undergraduate degrees. As a result of these new regulatory controls and policy adjustments, even though none of the programs we service were terminated by the MOE, overall student recruiting and enrollment under our Sino-foreign joint education programs was negatively impacted, because some potential candidates could not meet the minimum score for English. For example, student enrollments under our joint education programs with Strait College of Minjiang University only increased by 456 students from 2017 to 2018, such increase was resulted from the transfer of the 756 students under the IGEC programs originally enrolled with IEN College and not from new enrolled students. Without taking into account this IGEC program transfer from FMP to Strait College of Minjiang University, the total number of students enrolled with Strait College of Minjiang University would have actually decreased by 300 students from 2017 to 2018 due to the higher eligibility requirements for students to enroll in any Sino-foreign joint education programs in Fujian Province. We cannot assure you that the local government in Fujian Province or the MOE will not set an even higher eligibility standard for students to enroll in these joint education programs in the future, in which case our enrollment numbers, result of operations and financial conditions could be negatively impacted. 

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(2) FMP was formerly known as IEN College of Minjiang University, and our IGEC program (the “Strait IGEC Program”) was previously hosted by IEN College of Minjiang University from September 2013 to July 2017. In January 2017, IEN College of Minjiang University was approved by the provincial government of Fujian and became the first Sino-foreign joint institution with independent legal status in Fujian Province and accordingly changed its name to FMP. As a result of this rebranding, FMP stopped hosting the IGEC program beginning September 2017 and the program was taken over by Strait College of Minjiang University going forward. This led to a decrease in the total number of students enrolled with FMP, from 1,307 students in fiscal year 2017 to 551 students in fiscal year 2018 because students originally enrolled under the IGEC programs have been transferred to Strait College of Minjiang University. Starting September 2017, FMP only continued to provide the FMP EAP Program.

 

(3) The reason our revenue generated from the Sino-foreign Jointly Managed Academic Program with FMP decreased by $989,932 or 68.0% from $1,455,013 in fiscal year 2017 to $465,081 in fiscal year 2018 can be attributed to two factors: (i) in connection with the transfer of IGEC program from FMP to Strait College of Minjiang University, the total number of enrolled students with FMP decreased by 756, or 57.2%; and (ii) we receive a lower percentage of tuition fees from the FMP EPA Program than from the IGEC program. Under the FMP EPA Program, our services and responsibility only cover the first two-year EAP trainings, but under the Strait IGEC Program, we are responsible for promoting the program, recruiting students, staffing foreign language teachers, and ensuring students are connected with appropriate foreign universities in North America or Europe. Under the FMP EAP Program, the average tuition that FMP charges enrolled students is RMB 18,000 (USD 2,721) per student per school year, of which we are entitled to receive RMB 9,000 (USD 1,360) per student per school year for their freshman years and RMB 3,000 (USD 453) per student per school year for their sophomore years. On the other hand, under the Strait IGEC Program, the average tuition fee that Strait College charges enrolled students is RMB 28,000 per student per school year, of which we receive RMB 9,800 (USD 1,481) per student per school year for the first two years, and then RMB 11,200 (USD 1,693) per student per school year for the remaining two years. Therefore, the tuition fee from Strait IGEC Program is higher than the tuition fee we receive from the FMP EAP Program. As a result of the transfer of the IGEC program from FMP to Strait College, our tuition revenue from FMP decreased by $989,932 or 68.0% because the average tuition fee decreased from $1,113 per student in fiscal year 2017 to $844 per student in fiscal year 2018. On the other hand, our tuition revenue from Strait College increased by $800,786 or 84.9% because the average tuition fee increased from $773 per student in fiscal year 2017 to $1,041 per student in fiscal year 2018.

 

(4) Our joint programs with Fujian University of Technology (FUT) and Fujian Preschool Education College (FPEC) were originally designed to improve students’ English language skills. However, due to the overall low language proficiency backgrounds of the students enrolled, we noted that most students could not adapt to the high standards of an English teaching environment. For example, a total of 193 students were recruited by FUT under the architecture, civil engineering and software engineering majors in our joint programs with FUT. According to the curriculum designs and outlines, some core courses had to be taught by foreign teachers in English. Therefore, students who could follow the course lecture were those who had adequate English reading, writing and listening skills. However, after those 193 students started these programs, we noted that their overall English language proficiency was low and we had to add Chinese teachers in the classrooms to conduct simultaneous translation and interpretation in order to help the students fully understand the course content. Adding extra teachers for translation doubled our teaching costs as qualified translators were difficult to find and salaries paid to translators roughly amounted to the amount of salaries paid to foreign teachers. In addition, any inappropriate translation could have negatively impacted how our course was perceived and the value of such course to our existing and prospective students. Our joint program with FPEC provides Chinese students with the opportunity to enroll in courses delivered by New Zealand Tertiary College (“NZTC”). Upon completion of this program, students would receive a Ministry of Education, or MOE, Diploma in Early Childhood Education in the PRC and a certificate in Early Childhood Teaching issued by NZTC. This program is a three-year education degree program in which students may choose to complete their first two-years of education in China and go to NZTC for their third-year and final year in the program, or, alternatively, to stay with the Chinese host college for the entire three years of study. Since we launched this program, approximately 300 students have been recruited into this program. However, most of the enrolled students had low English language proficiency, which led to limited number of students choosing to study abroad in New Zealand. As of the date of this prospectus, only 3 students have decided to go to New Zealand after finishing the first two-year education with the Chinese host college. NZTC did request that we send more students to NZTC for purposes of increasing their revenue. However, based on our assessment, in order for us to train existing students to meet the minimum language requirements for studying abroad, we would have to add one more year of English courses to existing students, which would significantly increase our teaching costs. Additionally, most of our existing students are reluctant to extend their education by an additional year since they can find a job in the market relatively easily after obtaining the certificate in Early Childhood Teaching issued by FPEC.

 

Therefore, the Sino-foreign Jointly Managed Academic Programs with these two institutions became increasingly less attractive and less profitable. As a result, we decided to stop recruiting and enrolling new students into the FUT ISEC Program after the Class of July 2018 graduated. We also decided to suspend recruiting for the NZTC Program after current students graduate in July 2019. As a result of such business decision, the number of students enrolled in FUT decreased by 67.1% from 154 students in fiscal year 2017 to 51 students in fiscal year 2018, and the number of students enrolled in FPEC decreased by 42.9% from 196 students in fiscal year 2017 to 112 students in fiscal year 2018. The average tuition fee we collected from Sino-foreign Jointly Managed Academic Programs was adjusted. As a result, average tuition fee collected from FUT and FPEC slightly increased by 2.1% and 7.8% in fiscal year 2018 as compared to fiscal year 2017, respectively. Consequently, the decrease in tuition revenue from both FUT and FPEC resulted from decrease in number of enrolled students and was offset by the increase in average tuition fee.

 

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Revenue from textbooks and course material sales

 

In order to ensure the quality of the course content delivered to students and to meet international standards, we have developed and edited more than 16 English textbooks and course materials with an emphasis on language training, and distributed these materials to students enrolled under our Sino-foreign joint education programs. Revenue from sales of textbooks and course materials decreased by $22,628 or 43.2% from $52,345 in fiscal year 2017 to $29,717 in fiscal year 2018. The decrease in textbook and course material sales was primarily attributable to the total number of students enrolled under the joint education programs which decreased from 2,877 students in fiscal year 2017 to 2,389 students in fiscal year 2018. As discussed above, we stopped recruiting and enrolling new students into the FUT ISEC Program with FUT after the then existing students graduated in July 2018. We also suspended recruiting for the NZTC Program with FPEC after current students graduated in July 2019. As a result of such business decision, the number of students enrolled with FUT decreased by 67.1% from 154 students in fiscal year 2017 to 51 students in fiscal year 2018, and the number of students enrolled with FPEC decreased by 42.9% from 196 students in fiscal year 2017 to 112 students in fiscal year 2018. As a result of this business decision, for the academic school year starting from September 2018, there were no additional new students recruited into the joint education programs with these two academic institutions. Accordingly, we reduced the textbooks and course material sales in 2018. The total number of textbooks and course materials sold decreased by 11.4% from 3,591 in fiscal year 2017 to 3,183 in fiscal year 2018. In addition, for our Sino-foreign Jointly Managed Academic Programs with FMP, in 2018, FMP made some teaching course content and curriculum settings adjustment, which led to FMP purchase textbooks and course materials from other vendors in order to match the new curriculum settings. As a result, our textbook sales to FMP reduced accordingly.

 

Revenue from Overseas Study Consulting Services

 

   For the years ended December 31, 
   2018   2017   Changes 
           Amount   % 
Revenue from overseas study consulting services  $547,521   $60,947   $486,574    798.4%
                     
Number of students for study abroad consulting service   49    7    42    600.0%
                     
Average consulting service fee per student  $11,174   $8,707   $2,467    28.3%

 

Our Overseas Study Consulting Services target those students who wish to study in foreign countries to enrich their learning experiences, expand their horizons, and gain exposure to a broader array of employment opportunities. We provide customized consulting services to students on an individual basis. Fees we charge students to provide overseas study consulting services range from RMB 50,000 ($7,558) per person to RMB 80,000 ($12,093) per person. We typically charge higher consulting service fees to students planning to pursue art majors in foreign countries than we do for students pursuing general majors such as business, technology and other majors, because art programs typically require demonstration of a student’s specialty in art, which is usually reflected in an art portfolio that the student submits along with other application materials. We have to assign qualified teachers to provide more detailed and customized tutoring to these students pursuing art majors and accordingly we charge them higher consulting service fee.

 

Revenue from providing study abroad consulting services increased by $486,574 or 798.4%, from $60,947 in fiscal year 2017 to $547,521 in fiscal year 2018. The increase was due to an increased number of students who came to us for study abroad consulting services, from 7 students in fiscal year 2017 to 49 students in fiscal year 2018. In addition, we served more students pursing art major in fiscal year 2018 than in fiscal year 2017. As a result, our average service fee increased by 28.3% from $8,707 per student in fiscal year 2017 to $11,174 per student in fiscal year 2018.

 

Revenue from Technological Consulting Services for Smart Campus Projects

 

   For the years ended December 31, 
   2018   2017   Changes 
   Amount   Amount   Amount   % 
Fuzhou Melbourne Polytechnic  $1,670,450    700,592   $969,858    138.4%
Strait College of Minjiang University   -    215,642    (215,642)   -100.0%
Fujian High School and others   -    34,758    (34,758)   -100.0%
Capital normal university   84,574    -    84,574    100.0%
Beijing University of Chinese Medicine   38,365    -    38,365    100.0%
University of International Business and Economics and others   27,585    -    27,585    100.0%
Total  $1,820,974   $950,992   $869,982    91.5%

 

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Revenue from providing smart campus related technological consulting service increased by $869,982 or 91.5% from $950,992 in fiscal year 2017 to $1,820,974 in fiscal year 2018, primarily due to increased revenues recognized from the smart campus project with Fuzhou Melbourne Polytechnic. In 2017, we entered into a contract with FMP to provide a total solution for its smart campus project, which includes a big data center, digital classrooms, and an experience-based simulation teaching center for its business school. These facilities will be linked and bundled with the campus data management application system software to create a smart campus for FMP. In addition to the installation of hardware and software to allow the smart campus system to meet its expected operational conditions, we are also responsible for maintenance and providing continuing technological support during the period of 2019 to 2021. The total contract price under the FMP “smart campus” project is RMB 16.68 million (approximately $2.4 million) for completion of the software and hardware installation. Post-installation maintenance and continuing technical support fees amount to RMB 5.05 million (approximately $0.73 million). Based on the contract payment terms, after completion of the required smart campus project, FMP is obligated to make three installment payments of RMB 5.56 million (approximately $808,593) each in 2019, 2020 and 2021, respectively. Among the RMB 5.05 million maintenance and support fee, RMB 1.04 million (USD $151,644) contract receivable for maintenance and technical support services rendered in 2018 has been received in January 2019. The remaining RMB 4.01 million (approximately $0.58 million) post-contract maintenance and technical support fee will be paid in three equal installments in 2019 to 2021 when services are rendered. We recognized revenue of $700,592 from the technology services we provided to FMP for its smart campus project in 2017. Services we provided included setting up the required hardware device and facilities such as digital portal, electronic blackboards, smartboards, projectors, LED display panels, high definition classroom audio and sound system, as well as data management software that could be linked together to bring the contracted digital classroom project to completion, which passed the inspection and was accepted by FMP. Therefore, our smart campus solutions revenue in 2017 was primarily generated from completion of the above-described digital classroom project for FMP. In 2018, we recognized more revenue from our FMP smart campus project. We upgraded the experiment centers for FMP’s business school and completed the big data center project through bundling of data management software with hardware facilities and device. We also bundled the data management software. These services were completed, passed inspection and were accepted by FMP. FMP put these facilities into use by November 2018. As a result, we recognized $1,670,450 revenue in 2018 from FMP smart campus projects.

 

In addition to the smart campus project with FMP, we were also involved with a campus server rooms upgrade project for Strait College of Minjiang University in 2017, and generated revenue of $215,642. We also provided smart campus solution consulting services to Capital Normal University, Beijing University of Chinese Medicine and University of International Business and Economics in 2018 and generated revenue of $84,574, $38,365 and $27,585, respectively. The increase in our exposure and cooperation with more academic institutions on smart campus-related projects also helped us increase our revenue in 2018 as compared to 2017.

 

Cost of Revenues

 

   For the years ended December 31, 
   2018   2017   Changes   % 
                 
Teacher salary, welfare benefit and insurance  $877,292   $801,909   $75,383    9.4%
Textbook and course materials   19,490    46,532    (27,042)   -58.1%
Travel, meals and entertainment expense relating to teaching activities   34,040    38,633    (4,593)   -11.9%
Apartment rent expense for teachers   145,225    109,106    36,119    33.1%
Hardware and software application costs for “smart campus” projects   1,249,445    774,347    475,098    61.4%
Professional fees for course design, teacher training   331,222    340,626    (9,404)   -2.8%
Business tax   31,776    29,063    2,713    9.3%
Others   13,807    21,106    (7,299)   -34.6%
Total cost of revenue  $2,702,297   $2,161,322   $540,975    25.0%

 

Our cost of revenues consists of salary, welfare and insurance costs for our faculty, rent expense for foreign faculty, textbook and course materials costs, travel, meals and entertainment expenses associated with teaching activities, consulting fees paid to third-parties for course design and teacher training, hardware parts and components purchase costs as well as labor costs incurred to undertake the software application customization for the smart campus projects, and business taxes. Our overall cost of revenue increased by $540,975 or 25.0% from $2,161,322 in fiscal year 2017 to $2,702,297 in fiscal year 2018, primarily due to increased hardware and software costs associated with the smart campus projects of $475,098, increased rent expense of $36,119 because we leased larger office space in 2018 in order to meet our expanded business operation, and increased salary, welfare and insurance costs for teachers and faculty by $75,382 because we hired more qualified teachers to provide one-on-one tutoring to the students for our overseas studying consulting services. Our cost of revenue accounted for 56.2% and 55.6% of our total revenue for the years ended December 31, 2018 and 2017, respectively.

 

Our cost of revenue by business segment is as follows:

 

   For the years ended December 31, 
   2018   2017   Changes   % 
                 
Cost associated with Sino-foreign Jointly Managed Academic Programs  $1,155,854   $1,175,646   $(19,792)   -1.7%
Cost associated with Overseas Study Consulting Services   64,321    49,765    14,556    29.2%
Cost associated with Technological Consulting Services for Smart Campus related   1,462,435    889,379    573,056    64.4%
Cost associated with textbooks and course materials sales   19,687    46,532    (26,845)   -57.7%
Total cost of revenue  $2,702,297   $2,161,322   $540,975    25.0%

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Cost of revenues associated with Sino-foreign Jointly Managed Academic Programs decreased by $19,792 or 1.7% from $1,175,646 in fiscal year 2017 to $1,155,854 in fiscal year 2018, primarily due to decreased costs associated with faculty involvement as the total number of students enrolled under the Sino-foreign joint education programs decreased from 2,877 students in fiscal year 2017 to 2,389 students in fiscal year 2018.

 

Cost of revenues associated with Overseas Studying Consulting Services increased by $14,556 or 29.2%, from $49,765 in fiscal year 2017 to $64,321 in fiscal year 2018. We launched the study abroad consulting services in April 2017 and only provided consulting services to 7 students in fiscal year 2017, as compared to 49 students served in 2018. As a result, we incurred higher costs in fiscal year 2018 as we placed greater emphasis on student coaching efforts to help prepare students for school selection, school applications, language training, and visa applications.

 

Cost of revenues associated with Technological Consulting Services for Smart Campus Solutions increased by $573,056 or 64.4%, from $889,379 in fiscal year 2017 to $1,462,435 in fiscal year 2018. This increase was in line with the increased revenue we recognized in 2018. In 2017, we entered into a contract with FMP to help FMP implement a comprehensive solution for its smart campus project, which includes a big data center, digital classrooms, and an experience-based simulation teaching center for its business school. We completed part of the hardware facility installation in 2017 and completed all of the remaining hardware and software projects by November 2018, all of which have passed inspection and were accepted by FMP. As a result, more hardware components purchase costs and installation related labor costs have been allocated in 2018 as compared to 2017. In addition to the FMP smart campus projects, in 2018, we also provided smart campus solution consulting services to Capital Normal University, Beijing University of Chinese Medicine and University of International Business and Economics. The increase in our revenues corresponds to the increased cost of revenues associated with these smart campus projects in 2018 as compared to fiscal year 2017.

 

Cost of revenue associated with textbook and course material sales decreased by $26,845 or 57.7% from $46,532 in fiscal year 2017 to $19,687 in fiscal year 2018. The decrease was in line with a decrease in number of textbooks and course materials delivered, which resulted from a decrease in the number of students enrolled under the Sino-foreign jointly managed and delivered academic programs.

 

Gross profit

 

   For the years ended December 31, 
   2018   2017   Changes 
   Amount   %   Amount   %   Amount   % 
Gross profit from Sino-foreign Jointly Managed Academic Programs  $1,254,927    52.1%  $1,645,956    58.3%  $(391,029)   -6.2%
Gross profit from textbook and course material sales   10,030    33.8%   5,813    11.1%   4,217    22.7%
Gross profit from Overseas Study Consulting Services   483,200    88.3%   11,182    18.3%   472,018    70.0%
Gross profit from Technological Consulting Services for Smart Campus   358,539    19.7%   61,613    6.5%   296,926    13.2%
Total  $2,106,696    43.8%  $1,724,564    44.4%  $382,132    -0.6%

 

Our overall gross profit increased by $382,132 or 22.2% from $1,724,564 in fiscal year 2017 to $2,106,696 in fiscal year 2018, while gross profit margin decreased by 0.6% from 44.4% in fiscal year 2017 to 43.8% in fiscal year 2018.

 

Our gross profit associated with Sino-foreign Jointly Managed Academic Programs decreased by $391,029, from $1,645,956 in fiscal year 2017 to $1,254,927 in fiscal year 2018, because tuition we received under the joint education programs decreased by $410,821 when the total number of students enrolled under these programs decreased by 488 from 2,877 students in 2017 to 2,389 students in 2018. Although this decrease in the number of students led to a decreased associated cost of revenue by $19,792 when we reduced the faculty involvement, we still carried higher overhead costs, such as rent expense, teaching and supporting related costs in order to keep the joint education programs running, irrespective of how many students were left within each joint education program. Our gross margin associated with such joint education programs also decreased by 6.2% from 58.3% in fiscal year 2017 to 52.1% in fiscal year 2018.

 

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Our gross profit associated with sales of textbook and course material increased by $4,218, from $5,813 in fiscal year 2017 to $10,030 in fiscal year 2018, because the cost of revenues associated with our textbook sales was $46,532 in 2017, as compared to $19,687 in 2018. The higher costs of revenue of $26,845 in 2017 can be attributed to higher textbook printing costs in 2017 than in 2018. As a result, gross profit associated with the textbook sales in 2017 was lower than that of 2018.

 

Our gross profit associated with Overseas Study Consulting Services increased by $472,018, from $11,182 in fiscal year 2017 to $483,200 in fiscal year 2018, due to increased recognized revenue of $486,574 when the number of students subscribed to our study abroad consulting services increased from seven students in 2017 to 49 students in 2018. Gross profit margin in this segment increased by 70.0% from 18.3% in fiscal year 2017 to 88.3% in fiscal year 2018 because we assisted more students pursuing art majors, for whom we charged higher service fees than we normally charge to students pursuing other majors with international academic institutions.

 

Our gross profit associated with Technological Consulting Services for Smart Campus Solutions increased by $296,926, from $61,613 in fiscal year 2017 to $358,539 in fiscal year 2018. The smart campus projects normally leverage hardware such as sensors, internet of things devices such as digital portals, electronic blackboards, smartboards, projectors, LED display panels, high definition classroom audio and sound systems and other lab-based equipment, together with data management applications, to create total solutions for targeted Chinese universities. In order to complete each individual project, we need to purchase parts and hardware components from outside vendors, to be used in conjunction with our data management software or other solutions. Our profit margin is affected by the fluctuation of the purchase price of the applicable hardware, purchase channels, and the price we paid to laborers in the installation process. Additionally, our engagement under each contract may include different tasks and jobs, some of them only require limited hardware purchase and put more focus on the software side, while others may require more hardware components to be included. Normally, software components have higher margin than hardware components. All of these factors impact our gross margin for each reporting period. Our gross margin in fiscal year 2018 was higher than in fiscal year 2017, because the 2017 smart campus projects with FMP primarily related to 40 digital classrooms, which required more hardware components (such as digital portal, electronic blackboards, smartboards, projectors, LED display panels, high definition classroom audio and sound system) purchase. In addition, the 2017 smart campus project with Strait College of Minjiang University primarily related to server rooms upgrade, which also required more hardware components purchased from external third-party suppliers. As more purchased hardware components instead of software components were used in these smart campus projects, our gross margin in 2017 was only 6.5%. In 2018, our smart campus project with FMP primarily consisted of upgrades of experiment centers for the business school and completion of the big data center through bundling of data management software with hardware facilities and device. Additionally, we gradually reduced hardware components for FMP and focused more on FMP’s software and application, as well as maintenance and technical support. In addition, our other smart campus projects, i.e., projects with Capital Normal University, Beijing University of Chinese Medicine and University of International Business and Economics were all focused on higher-margin campus data management system upgrades, and as a result, our gross profit margin in 2018 from smart campus projects reached 19.7%.

 

Operating expenses

 

The following table sets forth the breakdown of our operating expenses for the fiscal years ended December 31, 2018 and 2017

 

   For the years ended December 31,   Change 
   2018   %   2017   %   Amount   % 
Selling expenses  $704,060    54.9%  $541,424    57.0%  $162,636    30.0%
General and administrative expenses   579,500    45.1%   408,762    43.0%   170,738    41.8%
Total operating expenses  $1,283,560    100.0%  $950,186    100.0%  $333,374    35.1%

 

Selling expenses

 

Our selling expenses primarily include expenses incurred for various sales activities, advertisings, payroll expense paid to our sales and marketing personnel as well as shipping and delivery expenses. Selling expenses increased by $162,636 or 30.0% from $541,424 in 2017 to $704,060 in 2018. This increase in selling expenses can be attributed primarily due to an increase in our brand advertising expenses by $19,469, an increase in salary and employee welfare benefit expenses by $117,907 resulting from our hiring of additional sales and marketing personnel to promote our business, an increase of entertainment expenses associated with sales activities by $16,657, and an increase of business travel and transportation expenses by $22,781 for marketing and promotion activities. As a percentage of revenues, our selling expenses accounted for 14.6% and 13.9% of our total revenue for the years ended December 31, 2018 and 2017, respectively. The increase in selling expenses is consistent with the increase of revenues. We expect that our overall sales and marketing expenses, including but not limited to, advertising expenses, brand promotion expenses and salaries, will continue to increase in the foreseeable future if our business further grows.

 

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General and Administrative Expenses

 

Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, depreciation and professional service expenses. General and administrative expenses increased by $170,738 or 41.8% from $408,762 in 2017 to $579,500 in 2018, primarily due to an increase in salaries, welfare expenses and insurance expenses by $74,926, when we hired more administrative employees and expanded our management team to meet the business growth demand, an increase of professional consulting fees by $82,473 and increased property management fees by $10,124. As a percentage of revenues, general and administrative expenses were 12.1% and 10.5% of our revenue in 2018 and 2017, respectively. We expect our general and administrative expenses, including, but not limited to, salaries and business consulting expenses, to continue to increase in the foreseeable future, as our business further grows. We expect our professional fees for legal, audit, and advisory services to increase as we become a public company upon the completion of this offering.

 

Interest Income

 

Our interest income increased by $18,183 or 25.7%, from $70,743 in 2017 to $88,926 in 2018. On March 17, 2017, we advanced a $1,997,726 (RMB 13 million) interest bearing short-term loan to a third party Jinjiang Hengfeng Trading Co., Ltd. (“Hengfeng”) as working capital, with interest rate of 4.8% per annum and a maturity date of September 19, 2017. Immediately before the maturity date, on September 5, 2017, the Company and Hengfeng signed a supplemental agreement to extend the maturity date to December 19, 2018 with adjusted interest rate of 5% per annum. The loan was guaranteed by a third party Fujian Rongde Cotton Spinning Co., Ltd. As a result of the interest rate adjustment in 2018, we reported higher interest income on the third-party loan in 2018 as compared to 2017.

 

Other Income

 

Our other income primarily includes government subsidies in the form of immediate refund of the levied VAT tax back to us, as an incentive to encourage education service provider like us to expand the business. Total government subsidy amounted to $177,160 and $158,625 for the years ended December 31, 2018 and 2017, respectively. In addition, we used cash to buy bank financial product and generated short-term investment income of $3,500 and $29,747 for the years ended December 31, 2018 and 2017. As a result, total other income was $180,191 in 2018 and $187,794 in 2017.

 

Provision for Income Taxes

 

Our provision for income taxes was $167,813 in 2018, an increase of $9,704 from $158,109 in 2017 due to our increased taxable income. The principal business of our subsidiary, China Liberal Beijing, is performed in the PRC, and is therefore subject to PRC income tax, which is computed according to the relevant laws and regulations in the PRC. As a High and New Technology Enterprises (“HNTEs”), China Liberal Beijing is entitled to a reduced income tax rate of 15% instead of 25%, beginning December 2016, which is valid for three years. Accordingly, our income taxes provision for fiscal 2018 and 2017 were reported at a reduced rate of 15% as a result of China Liberal Beijing being approved as a HNTE. The impact of the tax holidays noted above decreased foreign taxes by $105,864 and $100,549 for the years ended December 31, 2018 and 2017, respectively. The benefit of the tax holidays on net income per share (basic and diluted) was $0.02 and $0.02 for the years ended December 31, 2018 and 2017, respectively.

 

Net Income

 

As a result of the foregoing, we reported a net income of $924,440 for the fiscal year ended December 31, 2018, representing a $49,634 increase from a net income of $874,806 for the fiscal year ended December 31, 2017.

 

Net income attributable to non-controlling interest

 

Non-controlling interests represent five minority shareholders’ 8.8228% ownership interest in our major operating subsidiary China Liberal Beijing. In December 2017, five minority shareholders contributed an aggregate of RMB 2,952,206 (approximately $453,669) cash into China Liberal Beijing, for an aggregate of 8.8228% ownership interest. Net income attributable to non-controlling interest increased by $75,979 for fiscal year 2018 as compared to fiscal year 2017, because five individual minority shareholders completed the cash injection and registration in December 2017 and only a small portion of our fiscal year 2017 net income was allocated to non-controlling shareholders in 2017. However, we allocated more net income to non-controlling shareholders in fiscal year 2018 because these minority shareholders still held the ownership interest in China Liberal Beijing as of December 31, 2018.

 

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Net income attributable to the Company

 

As a result of the above, net income attributable to the Company decreased by $26,345, or 3.0%, from $869,006 in fiscal year 2017 to $842,661 in fiscal year 2018.

 

B. Liquidity and Capital Resources

 

Cash Flows for the Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018

 

As of June 30, 2019, we had $1,992,87 in cash on hand as compared to $2,077,166 as of December 31, 2018. We also had $925,730 in accounts receivable for consulting services rendered, including $49,834 in accounts receivable from overseas study consulting services, $875,896 in tuition receivable from Sino-foreign Jointly Managed Academic Programs.

 

   June 30,
2019
   December 31,
2018
 
Accounts receivable- Overseas Study Consulting Services  $49,834   $346,332 
Accounts receivable- Sino-foreign Jointly Managed Academic Programs   875,896    486,842 
Less: allowance for doubtful accounts   -    - 
Accounts receivable, net  $925,730   $833,174 

 

Most of our accounts receivable as of June 30, 2019 were aged less than 3 months.  Between August and early September 2019, we have fully collected the June 30, 2019 accounts receivable balances of $875,896 associated with Sino-foreign Jointly Managed Academic Programs and $49,834 associated with our overseas study consulting services. 

 

As of June 30, 2019, we also had outstanding contract receivable of $2,287,063 derived from providing smart campus technological consulting services to Chinese universities/ colleges:

 

   June 30,
2019
   December 31,
2018
 
Contract receivable- “Smart Campus” related technological consulting services with FMP  $2,235,522   $2,425,779 
Contract receivable- “Smart campus” project maintenance and technical support fee   -    151,644 
Contract receivable – other “Smart Campus” related technological consulting services   51,541    - 
Less: allowance for doubtful accounts   -    - 
Total contract receivable, net   2,287,063    2,577,423 
Less: current portion of contract receivable   1,072,266    960,237 
Contract receivable, non-current  $1,214,797   $1,617,186 

 

For contract receivable associated with FMP smart campus technological consulting services, our contract with FMP for providing smart campus solution related technological consulting services has the following payment schedule:

 

Payment term  RMB   USD 
2019   5,561,180   $809,865 
2020   5,561,180    809,865 
2021   5,561,180    809,865 
Total   16,683,540   $2,429,595 

 

Based on the above schedule, $809,865 contract receivable was scheduled to be settled by FMP within 2019. In April 2019, FMP made a payment of RMB 2 million (USD $291,256) to the Company as part of the 2019 payment and the Company collected the remaining $518,608 from FMP by December 2019. As of June 30, 2019, total outstanding contract receivable from FMP amounted to $2,235,522, including non-current portion of $1,214,797.

 

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As of June 30, 2019 and December 31, 2018, no allowance for doubtful accounts was recorded as we considers all of the contract receivable on “smart campus” project from FMP fully collectible because in addition to the “smart campus” project, the Company has Sino-foreign Jointly Managed Academic Programs with FMP since 2011 and there was no payment default based on past experience with FMP. Accordingly, management believes that cash collection from FMP is reasonably assured.

 

During the six months ended June 30, 2019, we have entered into additional smart campus solution contracts with a larger number of Chinese universities/ colleges, including Capital Normal University, Shougang Technician College, Beijing Institute of Technology, North China Electric Power University, University of Chinese Academy of Sciences and others, to provide smart campus solution consulting services to these universities/ colleges, including but not limit to internet network improvement, digital classroom solutions, and educational management system customization. Some of these new smart campus contracts have been executed, completed, and accepted by these universities/ colleges, which led to increased revenue for the six months ended June 30, 2019, while some of these contracts are still under performance as of June 30, 2019 and we expect to generate increased revenue during the second half of fiscal year 2019 based on the progress of these projects.

 

We believe the contract receivable related to smart campus projects are fully collectible based on the payment terms and based on our continuing cooperation with our partner Chinese universities. The collection of our accounts and contract receivable will make cash available use in our operation as working capital, if necessary.

 

As of June 30, 2019, we also have deferred revenue of $614,641 derived from customer deposits for consulting services. In May and June 2019, we have recruited 5 students who are pursuing art majors in Italy, Japan, Russia and Germany. We received consulting service fees of approximately $384,604 (RMB 2.64 million) and recorded it as deferred revenue because our study abroad consulting services have not been completed and our performance obligation has not been satisfied. We expect to complete related consulting services between October and November 2019. Once our services are rendered and performance obligations are satisfied, our deferred revenue will be recognized as revenue.

 

As of June 30, 2019, we had positive working capital of $3,632,214. Our working capital requirements are influenced by the level of our operations, the numerical volume and dollar value of our sales contracts, the progress of execution on our customer contracts, and the timing of accounts receivable collections.

 

Our cash and equivalents and working capital at the date of this filing approximate $1.7 million and $5.4 million respectively. We believe that our current cash and cash flows provided by operating activities, and loans from our principal shareholders will be sufficient to meet our working capital needs in the next 12 months from this filing.

 

In December 2019, a novel strain of coronavirus was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. The COVID-19 outbreak is causing lockdowns, travel restrictions, and closures of businesses and schools. The potential impact which may be caused by the outbreak is uncertain; however it may result in a material adverse impact on our financial position, operations and cash flows. Based on our operating results from January 1, 2020 through the date of this filing, total revenue is lower than previously expected but our revenue from Sino-foreign jointly managed academic programs was not significantly impacted because the host Chinese universities/colleges closed for winter break in December 2019 the outbreak of COVID-19. Although the host Chinese universities/colleges remained closed from February to present due to COVID-19, we have been providing distance teaching services to students and no dropout has been reported to us during this temporary school closure period. Current enrolled students are expected to go back to school in April 2020. Our revenue from study abroad consulting services may be affected because school closure and international travel bans may restrict students from pursuing their overseas education in Europe, Australia, the United States and other foreign countries, which may cause suspension of our one-on-one consulting services, as well as postponement of payment from our partnering schools. In addition, the execution of our smart campus contracts with Chinese universities/colleges and collection of the payment may be delayed. These uncertainties may cause decrease in our revenue for fiscal year 2020. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and schools, all of which are uncertain at this point.

 

As a result of the recent COVID-19 outbreak, our revenues from January 1, 2020 to date were below expectations. As discussed above, our revenue and cost of revenue associated with our Technological Consulting Services for Smart Campus Solutions is expected to decrease by approximately 43% and 16% to an estimated amount of approximately $74,000 and $52,000, respectively, in the first quarter of fiscal year 2020. On the other hand, our fixed operating costs such as employee salary and office rent expenses did not decrease even during the temporary business shutdown and school closure period, and as a result our net income is expected to decrease by approximately $100,000 in the first quarter of fiscal 2020 as compared to the same period of fiscal year 2019. The extent to which the COVID-19 will impact our revenues, results of operations and financial condition is dependent on the duration of the outbreak and other uncertainties and, therefore, the total financial impact for our fiscal year 2020 is unknown at this time. We continued to provide teaching services under the Sino-foreign jointly managed academic programs. Additionally, we anticipate to recruit more students in the second half of 2020 because more Chinese students are expected to stay in China instead of studying overseas until the outbreak of COVID-19 is under permanent control. In addition, we have signed large smart campus project contracts with several Chinese universities/ colleges and we anticipate to start the projects after these Chinese universities/ colleges commence the spring semester in April 2020. Most of these projects are expected to be completed in the summer of 2020. In order to diversify our revenue source, we started to provide job readiness training services to customers since late 2019. Our job readiness training services are provided to students before their graduation in order to help them to find jobs. We did not record revenue from job readiness training services during first quarter of fiscal year 2020 because the Chinese universities/colleges closed for winter break in December 2019 and as of the date of this prospectus remain closed. The outbreak of COVID-19 delayed the estimated campus reopening to April 2020. Once students go back to school, we anticipate to expand the customer base to generate increased revenue from this business segment in the coming months.

 

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Due to the effects of the outbreak of COVID-19 discussed above, to the extent we experience a further adverse operating environment or incur unanticipated capital expenditure requirements, or if we decide to accelerate our growth, then additional financing may be required. We cannot guarantee, however, that additional financing, if required, would be available at all or on favorable terms. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders. 

 

In the coming years, we will be looking to other sources, such as raising additional capital by issuing shares of stock, to meet our cash needs. While facing uncertainties in regards to the size and timing of capital raises, we are confident that we can continue to meet operational needs solely by utilizing cash flows generated from our operating activities and shareholder working capital funding, as necessary.

 

The following table sets forth summary of our cash flows for the periods indicated:

 

   For the Six Months Ended June 30, 
   2019   2018 
Net cash provided by (used in) operating activities  $(103,403)  $200,309 
Net cash used in investing activities   (466,695)   (9,828)
Net cash provided by financing activities   481,431    (59)
Effect of exchange rate change on cash   3,988    (7,235)
Net increase (decrease) in cash   (84,679)   183,187 
Cash, beginning of period   2,077,166    7,970 
Cash, end of period  $1,992,487   $191,157 

 

Operating Activities

 

Net cash used in operating activities was approximately $(103,403) in the six months ended June 30, 2019, primarily consisted of the following:

 

  Net income of $139,010 for the period ;

 

  An increase in accounts receivable of $99,777 because we had portion of tuition receivable from Sino-foreign Jointly Managed Academic Programs not collected back as of the balance sheet date. We fully collected our June 30, 2019 outstanding accounts receivable during the period of August to early September 2019.

 

  A decrease in contract receivable of $297,936 because we provided technological consulting services to FMP for “smart campus” solutions, these amounts represent services rendered, billed but not received as of the balance sheet date. Based on our contract payment term with FMP, these outstanding contract receivable will be paid in three installment payment during 2019 to 2021. In January 2019, we received $151,644 smart campus project maintenance support fee from FMP for our maintenance support services rendered in 2018. In addition, in April 2019, FMP made a payment of RMB 2 million (USD $291,256) to us as part of the 2019 payment and we collected the remaining $518,608 from FMP by December 2019.

 

  An increase in deferred initial public offering costs of $321,569. In connection with our IPO effort, we have prepaid various service fees such as legal fees, underwriter due diligence fees, IR fees, capital market advisory fees, as well as secretary company services fees. These IPO related expenses will be offset against the estimated IPO proceeds we receive

 

  An increase in advance to suppliers by $339,463 because during the six months ended June 30, 2019 we have entered into additional smart campus solution contracts with a larger number of Chinese universities/ colleges. We made advance payments to suppliers for purchase of materials and equipment to be used in these new smart campus projects. Some of these  new smart campus contracts have been executed, completed, and accepted by these universities/ colleges to help us to generate increased revenue for the six months ended June 30, 2019, while some of the contracts are still under execution as of June 30, 2019 and we expect to generate increased revenue during the second half of fiscal year 2019 based on the progress of these projects.

 

  An increase of prepaid expenses and other current assets by $511,104 primarily due to increased other receivable balance by $484,980 because we increased advances to employees for business development during the six months ended June 30, 2019. Subsequently in early September 2019, approximately $384,604 (RMB 2.64 million) other receivable has been collected back.

 

  An increase in deferred revenue by $470,410, because, in May and June 2019, we have recruited 55 students who are pursuing art majors in Italy and Germany. We received consulting service fees of approximately $384,604 (RMB 2.64 million) and recorded it as deferred revenue because our study abroad consulting services have not been completed and our performance obligation has not been satisfied as of June 30, 2019. We expect to complete related consulting services between October and November 2019. Once our services are rendered and performance obligations are satisfied, we expect to recognize revenue in the second half of fiscal year 2019; and

 

  An increase in taxes payable by $90,591 due to increased taxable income generated from our major operating subsidiary China Liberal Beijing during the six months ended June 30, 2019.

 

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Net cash provided by operating activities was approximately $200,309 in the six months ended June 30, 2018, primarily consisted of:

 

  Net income of $240,428 for the period; adjusted by

 

  A decrease in accounts receivable of $154,425 because we collected portion of the December 31, 2017 tuition receivable from Sino-foreign Jointly Managed Academic Programs during the period of January to February 2018.
     
  An increase in contract receivable of $157,033 because we started to provide technological consulting services to FMP for “smart campus” solutions in 2017, these amounts represent services rendered, billed but not received as of the balance sheet date. We completed the digital classroom projects for FMP in 2017 and further completed an experience-based simulation teaching center for its business school during the six months ended June 30, 2018, and accordingly, we recognized revenue when such services were completed, passed inspection and were accepted by FMP.

 

  A decrease in advance to suppliers by $432,928, because we made advance payments to suppliers for purchase of materials and equipment to be used in the smart campus projects in 2017, and we received the purchased materials and equipment from suppliers and used such materials and equipment in the FMP smart campus projects during the six months ended June 30, 2018;

 

  An increase in prepaid expenses and other current assets by $227,555 due to increased temporary cash advance to sales and marketing employees to expand our business, these amount were not reimbursed as of the balance sheet date and will be reimbursed in subsequent accounting period; and increased interest receivable on third party loan receivable when the interest rate was adjusted from original 4.8% per annum in 2017 to 5% per annum in 2018

 

  An increase in deferred revenue by $261,654 because, in May 2018, we have recruited 78 students who are pursuing art majors in Italy. We received consulting service fees from these students and recorded it as deferred revenue because our study abroad consulting services have not been completed and our performance obligation has not been satisfied as of June 30, 2018. We completed related consulting services in the second half of 2018.

 

Investing Activities

 

Net cash used in investing activities amounted to $466,695 for the six months ended June 30, 2019, including purchase of property and equipment of $13,026 and cash paid for acquisition of 8.8228% non-controlling interest in China Liberal Beijing. On February 1, 2019, Boya Hong Kong entered into share transfer agreements with each of the non-controlling shareholders of China Liberal Beijing and completed the acquisition of the 8.8228% non-controlling interest in China Liberal Beijing, for a total value of RMB 2.95 million (approximately $453,669). The total value of the non-controlling interest amounted to $540,907 as of the acquisition date. We borrowed cash from related party to make this acquisition payment. After this transaction, China Liberal Beijing became a 100% owned subsidiary of Boya Hong Kong.

 

Net cash used in investing activities amounted to $9,828 for the six months ended June 30, 2018, respectively, primarily consist of purchase of property and equipment for the period indicated.

  

Financing Activities

 

Net cash provided by financing activities amounted to $481,431 for the six months ended June 30, 2019 and primarily consist of borrowings from related parties as working capital. In connection with our acquisition of the 8.8228% non-controlling interest in China Liberal Beijing, we borrowed cash of $453,669 from related party, Ms. Yiyi Lin, the controlling shareholder of the Company, and made the payment to original five non-controlling shareholders. Such borrowing are non-interest bearing and due on demand. We plan to make a repayment to related party in the fourth quarter of fiscal year 2019 using cash generated from operating activities.

 

Net cash used in financing activities amounted to $59 for the six months ended June 30, 2018, representing a repayment of related party borrowing during this period.

 

Contractual obligations

 

Our main operating subsidiary China Liberal Beijing leases office spaces for its headquarter office and local branches under non-cancelable operating lease agreements with various expiration dates between 2019 and 2022. Rent expense For the six months ended June 30, 2019 and 2018 was $144,857 and $107,385, respectively.

 

As of June 30, 2019, the Company was obligated under operating leases for minimum rentals as follows:

 

For the Twelve Months Ended June 30,    
2020  $269,575 
2021   281,775 
2022   237,937 
   $789,287 

 

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Cash Flows for the Fiscal Year Ended December 31, 2018, Compared to the Fiscal Year Ended December 31, 2017

 

As of December 31, 2018, we had $2,077,166 in cash on hand as compared to $7,970 as of December 31, 2017. We also had $833,174 in accounts receivable for consulting services rendered, including $346,332 in accounts receivable from overseas study consulting services, $486,842 in tuition receivable from Sino-foreign Jointly Managed Academic Programs.

 

   December 31, 2018   December 31, 2017 
Accounts receivable- Overseas Study Consulting Services  $346,332   $- 
Accounts receivable- Sino-foreign Jointly Managed Academic Programs   486,842    632,724 
Less: allowance for doubtful accounts   -    - 
Accounts receivable, net  $833,174   $632,724 

 

Most of our accounts receivable as of December 31, 2018 and 2017 were aged less than 3 months.  Between January and March 2019, we have fully collected the December 31, 2018 accounts receivable balances of $486,842 associated with Sino-foreign Jointly Managed Academic Programs and $346,332 associated with our overseas study consulting services. 

 

As of December 31, 2018, we also had outstanding contract receivable of $2,577,423 derived from providing smart campus technological consulting services to FMP:

 

   December 31, 2018   December 31, 2017 
Contract receivable- “Smart Campus” related technological consulting services  $2,425,779   $845,050 
Contract receivable- “Smart campus” project maintenance and technical support fee   151,644    - 
Less: allowance for doubtful accounts   -    - 
Total contract receivable, net   2,577,423    845,050 
Less: current portion of contract receivable   960,237    160,270 
Contract  receivable, non-current  $1,617,186   $684,780 

 

For contract receivable associated with smart campus technological consulting services, our contract with FMP for providing smart campus solution related technological consulting services has the following payment schedule:

 

Payment term  RMB   USD 
2019   5,561,180   $808,593 
2020   5,561,180    808,593 
2021   5,561,180    808,593 
Total   16,683,540   $2,425,779 

 

Based on the above schedule, as of December 31, 2018, $808,593 contract receivable aged above 1 year was scheduled to be settled by FMP within 2019. Subsequently in April 2019, FMP made a payment of RMB 2 million (USD $290,799) to us as part of the 2019 payment and we collected the remaining $517,794 from FMP in December 2019.

 

We believe the contract receivable related to smart campus projects are fully collectible based on the payment terms and based on our continuing cooperation with our partner Chinese universities. The collection of our accounts and contract receivable will make cash available use in our operation as working capital, if necessary.

 

As of December 31, 2018, we also had deferred revenue of  $149,560 derived from customer deposits for consulting services. Such amounts will be recognized as revenue as our consulting services are rendered.

 

As of December 31, 2018, we had positive working capital of  $3,533,188. Our working capital requirements are influenced by the level of our operations, the numerical volume and dollar value of our sales contracts, the progress of execution on our customer contracts, and the timing of accounts receivable collections.

 

We believe that our current cash and cash flows provided by operating activities, loans from our principal shareholders, and the estimated net proceeds from this offering will be sufficient to meet our working capital needs in the next 12 months from the date the audited financial statements were issued. If we experience an adverse operating environment or incur unanticipated capital expenditure requirements, or if we decide to accelerate our growth, then additional financing may be required. We cannot guarantee, however, that additional financing, if required, would be available at all or on favorable terms. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.

 

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In the coming years, we will be looking to other sources, such as raising additional capital by issuing shares of stock, to meet our cash needs. While facing uncertainties in regards to the size and timing of capital raises, we are confident that we can continue to meet operational needs solely by utilizing cash flows generated from our operating activities and shareholder working capital funding, as necessary.

 

The following table sets forth a summary of our cash flows for the periods indicated:

 

   For the Years Ended December  31, 
   2018   2017 
Net cash provided by (used in) operating activities  $261,816   $(3,715,193)
Net cash provided by investing activities   1,881,329    2,833,955 
Net cash provided by financing activities   8,094    455,249 
Effect of exchange rate change on cash   (82,043)   (4,738)
Net increase (decrease) in cash   2,069,196    (430,727)
Cash, beginning of year   7,970    438,697 
Cash, end of year  $2,077,166   $7,970 

 

Operating Activities

 

Net cash provided by operating activities was approximately $261,816 in 2018, primarily consisted of the following:

 

Net income of $924,440 for the year;

An increase in accounts receivable of $243,769 because we provided increased overseas study consulting services to students and we had portion of tuition receivable from Sino-foreign Jointly Managed Academic Programs not collected back as of the balance sheet date. We fully collected our December 31, 2018 outstanding accounts receivable during the period of January to March 2019.

 An increase in contract receivable of $1,848,073 because we provided technological consulting services to FMP for “smart campus” solutions, these amounts represent services rendered, billed but not received as of the balance sheet date. Based on our contract payment term with FMP, these outstanding contract receivable will be paid in three installment payment during 2019 to 2021. Subsequently in January 2019, we received $151,644 smart campus project maintenance support fee from FMP for our maintenance support services rendered in 2018. In addition, As of December 31, 2018, $808,593 contract receivable aged above 1 year was scheduled to be settled by FMP within 2019. Subsequently in April 2019, FMP made a payment of RMB 2 million (USD $290,799) to us as part of the 2019 payment and we collected the remaining $517,794 from FMP in December 2019.

A decrease in advance to suppliers by $1,484,014 because in 2017 we made advance payments to suppliers for purchase of materials and equipment to be used in the smart campus projects and we received the purchase in 2018;

An increase of prepaid expenses and other current assets by $130,282 due to increased temporary cash advance to sales and marketing employees to expand our business, these amount were not reimbursed as of the balance sheet date and will be reimbursed in subsequent accounting period; and increased interest receivable on third party loan receivable when the interest rate was adjusted from original 4.8% per annum in 2017 to 5% per annum in 2018; and

An increase in taxes payable by $78,988 due to increased taxable income for 2018.

 

Net cash used in operating activities was approximately $3,715,193 in 2017, primarily consisted of:

 

Net income of $874,806 for the year; offset by

An increase in accounts receivable of $552,457 because we had portion of tuition receivable from Sino-foreign Jointly Managed Academic Programs not collected back as of the balance sheet date. We fully collected our December 31, 2017 outstanding accounts receivable during the period of January to February 2018.

 An increase in contract receivable of $813,737 because we started to provide technological consulting services to FMP for “smart campus” solutions in 2017, these amounts represent services rendered, billed but not received as of the balance sheet date. We completed the digital classroom projects for FMP in 2017 and accordingly recognized revenue when such services were completed, passed inspection and were accepted by FMP.

An increase in advance to suppliers by $1,471,166 because we made advance payments to suppliers for purchase of materials and equipment to be used in the smart campus projects;

A decrease in deferred revenue by $1,847,265 when previously received tuition payments from the Sino-foreign Jointly Managed Academic Programs have been recognized as revenue when revenue recognition criteria have been met.

 

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Investing Activities

 

Net cash provided by investing activities amounted to $1,881,329 for the year ended December 31, 2018, primarily consist of:

 

Purchase of property and equipment of $83,515 and

A collection of third-party loan receivables by $1,964,844. On March 17, 2017, we advanced an interest-bearing short-term loan in the amount of $1,964,844 (RMB 13 million) to an unrelated third party, Jinjiang Hengfeng Trading Co., Ltd. (“Hengfeng”), as working capital, bearing an interest rate of 4.8% per annum with a maturity date of September 19, 2017. Immediate before the maturity date, on September 5, 2017, the Company and Hengfeng signed a supplemental agreement to extend the maturity date to December 19, 2018 with an adjusted interest rate of 5% per annum. The loan was guaranteed by another non-related third party Fujian Rongde Cotton Spinning Co., Ltd.

 

Net cash provided by investing activities amounted to $2,833,955 for the year ended December 31, 2017, primarily consisting of:

 

Purchase of property and equipment of $9,353;

An increase in loan receivable by $1,923,703 because, on March 17, 2017, we advanced an RMB 13 million interest bearing short-term loan to a non-related third party, Jinjiang Hengfeng Trading Co., Ltd.(“Hengfeng”), as working capital, bearing interest rate of 4.8% per annum with maturity date on September 19, 2017.

At the same time, we collected back a short-term interest bearing loan of $443,931 (RMB 3 million) that we advanced to another non-related third-party individual in 2016 at interest rate of 4.35% per annum.

In addition, in late 2016, we planned to expand our business into the kindergarten education sector and made an investment deposit of RMB 11.2 million with third-party Haixi Baby Early Childhood Education Center (“Haixi”) in an attempt to acquire Haixi after the due diligence is completed. The intended acquisition was terminated in early 2017 and the investment deposit of RMB 11.2 million (USD $1,659,491) was refunded back to us in 2017;

Furthermore, in 2016, we used cash of RMB18 million (equivalent to $2,663,589) to purchase a wealth management product from China Bank of Communication for 180 days in order to earn interest income at 4.8% interest rate per annum. This short-term investment was collected back upon maturity in 2017.

 

Financing Activities

 

Net cash provided by financing activities amounted to $8,094 for the year ended December 31, 2018 and primarily consist of borrowings from related parties as working capital. Such borrowing are non-interest bearing and due on demand.

 

Net cash provided by financing activities amounted to $455,249 for the year ended December 31, 2017, primarily consisting $453,669 capital contribution by five minority shareholders. In 2017, five individual shareholders contributed an aggregate of RMB2.95 million (approximately $453,669) into our main operating subsidiary China Liberal Beijing for an 8.8228% ownership interest and such amount was used to increase the paid-in capital of China Liberal Beijing. In addition, we also borrowed $1,580 from related parties as working capital.

 

Contractual obligations

 

Contractual Obligations for the Six Months Ended June 30, 2019 and 2018

 

Our main operating subsidiary China Liberal Beijing leases office spaces for its headquarter office and local branches under non-cancelable operating lease agreements with various expiration dates between 2019 and 2022. Rent expense For the six months ended June 30, 2019 and 2018 was $144,857 and $107,385, respectively.

 

As of June 30, 2019, the Company was obligated under operating leases for minimum rentals as follows:

 

For the Twelve Months Ended June 30,    
2020  $269,575 
2021   281,775 
2022   237,937 
   $789,287 

 

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Contractual Obligations for the Fiscal Years Ended December 31, 2018 and 2017

 

Our main operating subsidiary China Liberal Beijing leases office spaces for its headquarter office and local branches under non-cancelable operating lease agreements with various expiration dates between 2019 and 2022. Rent expense for the years ended December 31, 2018 and 2017 was $271,585 and $229,525, respectively.

 

As of December 31, 2018, our obligation under the operating leases for minimum rentals is as follows:

 

For the Twelve Months Ended December 31,    
2019  $305,808 
2020   282,364 
2021   277,078 
2022   110,466 
   $975,716 

 

Trend Information

 

Other than as disclosed elsewhere in this registration statement, we are not aware of any trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as of June 30, 2019, December 31, 2018 and 2017.

 

Inflation

 

Inflation does not materially affect our business or the results of our operations.

 

Seasonality

 

Seasonality affects our business or the results of our operations to some extent. We have experienced, and expect to continue to experience, seasonal fluctuations in our operations, primarily due to seasonal changes in student enrollments. Historically, our one-on-one consulting services tend to have the largest student enrollments in our third and fourth fiscal quarters, which run from July 1 to December 31 of each year, primarily because many students enroll in our courses to prepare for admissions and assessment tests in subsequent school terms, and the Sino-foreign joint programs typically make payments to us for our language training courses in October or November based on their student enrollments in the fall.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. The most significant estimates and assumptions include the valuation of accounts receivable, advances to suppliers, useful lives of property and equipment, the recoverability of long-lived assets, provision necessary for contingent liabilities, and revenue recognition. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this prospectus reflect the more significant judgments and estimates used in preparation of our consolidated financial statements.

 

The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:

 

Uses of estimates

 

In preparing the consolidated financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information as of the date of the consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the valuation of accounts receivable, advances to suppliers, useful lives of property and equipment, the recoverability of long-lived assets, provision necessary for contingent liabilities and revenue recognition. Actual results could differ from those estimates.

 

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Accounts and contract receivable, net

 

Accounts and contract receivable are recognized and carried at original invoiced amount less an estimated allowance for uncollectible accounts.

 

The Company determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trend. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best estimate of specific losses on individual exposures, as well as a provision on historical trends of collections. Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. As of June 30, 2019, December 31, 2018 and 2017, there was no allowance recorded as the Company considers all of the accounts receivable fully collectible.

 

Our contract receivable represents balance derived from technological consulting services for “smart campus” solutions provided to Chinese university Fuzhou Melbourne Polytechnic (“FMP’), when the projects under the contract have been completed and accepted by FMP, but the balance has not been past due based on the contracted payment schedule. We offer longer credit terms to FMP for the purpose of maintaining long-term relationship. In addition to the “smart campus” solutions related services provided to FMP, we also have Sino-foreign Jointly Managed Academic Programs services with FMP since 2011. We had not incurred any bad debts with FMP in the past, and accordingly considers the contract receivable fully collectible. Thus, there was no allowance recorded on such outstanding contract receivable for the six months ended June 30, 2019 and 2018, and for the years ended December 31, 2018 and 2017.

 

Revenue recognition

 

Our revenues are primarily derived from providing a wide range of educational services and programs to customers. Revenues are reported net of all value added taxes.

 

On January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (“ASC Topic 606”) using the modified retrospective method for contracts that were not completed as of July 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial statements, no adjustments to opening retained earnings were made as our revenue was recognized based on the amount of consideration expects to receive in exchange for satisfying the performance obligations.

 

ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

ASC 606 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way we record our revenue. We have assessed the impact of the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. Based on the assessment, we concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to our consolidated financial statements upon adoption of ASC 606.

 

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We generates our revenue from the following sources: 

 

  - Sino-foreign Jointly-Managed Academic Programs

 

We recommend and coordinate accredited international universities/colleges to forge partnerships with Chinese host universities/colleges to establish international education programs at degree level. Chinese host universities/colleges then utilize their existing administrative ability, campus classrooms and facilities to recruit Chinese students into such programs. We also select, recruit and appoint qualified foreign faculty to teach major courses at selected Chinese host universities/colleges and bear all faculty related costs, provide continuing support to foreign faculty, develop and deliver major course content and materials to ensure teaching quality meeting international standards, and to optimize students’ learning outcome and to prepare them for further education overseas and help them with course credit conversion in the event that any student decides to pursue further study overseas. We actively support and interact with enrolled students throughout their programs to ensure successful program completion. Our contracts with host Chinese universities/ colleges are fixed price contracts, pursuant to which, we are to receive a fixed portion of tuition for services rendered. As a result of performing the above mentioned services, we are entitled to receive 30% to 50% of such student tuitions depending on the universities/colleges and jointly managed academic programs, which are collected first by Chinese host universities/ colleges from enrolled students at the beginning of each academic school year, and then remitted to us.

 

With respect to Sino-foreign Jointly Managed Academic Programs, we are not involved in recruiting students, collecting refunding tuition when students dropout, all of which are handled by the host universities/ colleges. The host universities/ colleges normally offer tuition refund if a student drops out from school within the first month of each academic school year. Collected tuition fees become non-refundable after the one-month refund policy window. Historically, for students enrolled under the Sino-foreign Jointly Managed Academic Programs, the average student dropout rate was below 1%. Our contracts with Chinese host universities/colleges provide that (1) the host universities/ colleges will withhold the tuition collected from students for one to three months after the academic school year starts in September, and then remit the portion of tuition fees to us after the student headcounts have been finalized, and (2) the portion of tuition fee that we are entitled to receive is calculated based on the final actual number of students retained with the universities/ colleges after any student dropout has been adjusted. Accordingly, any tuition refund has already been deducted by host universities/ colleges before we receive our portion of the tuition fees. For accounting purposes, at the beginning of each academic school year, we initially accrue the estimated refund based on an historical 1% student dropout rate, and makes subsequent true-up adjustments after the final number of students retained with the host universities/colleges is determined. Such adjustments were immaterial for the six months ended June 30, 2019 and 2018, and for the years