F-1/A 1 ea128792-f1a5_globalinter.htm AMENDMENT NO. 5 TO FORM F-1

As filed with the U.S. Securities and Exchange Commission on October 29, 2020

Registration No. 333-233745

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 5

to

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

Global Internet of People, Inc.

(Exact name of registrant as specified in its charter)

 

Cayman Islands   7389   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

Room 208, Building 1, No. 28 Houtun Road

Haidian District, Beijing

People’s Republic of China

+861082967728

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

 

Cogency Global Inc.

122 E 42nd St 18th FL

New York, NY 10168
(212) 947-7200

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

 

With a Copy to:

 

Ying Li, Esq.

Louis Taubman, Esq.

Hunter Taubman Fischer & Li LLC

800 Third Ave., Suite 2800

New York, NY 10022

212-530-2206

 

Richard I. Anslow, Esq.

Jonathan H. Deblinger, Esq.

Wei Wang, Esq.

Ellenoff Grossman & Schole LLP

1345 Avenue of the Americas, 11th Floor

New York, NY 10105

212-370-1300

 

Approximate date of commencement of proposed sale to the public: Promptly after the effective date of this registration statement.

 

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

 

 ϮThe term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to Be Registered   Amount to Be Registered     Proposed Offering Price per Share     Proposed Aggregate Offering Price     Amount of Registration Fee  
Ordinary Shares, par value US$0.0001 per share(1)(2)(3)    

6,440,000
    $ 5.00     $ 32,200,000     $ 4,179.56  
Underwriter’s warrants(2)(4)    

     

     

     

 
Ordinary Shares underlying Underwriter’s warrants(2)(5)     644,000     $ 5.75     $ 3,703,000     $

480.65

 
Total     7,084,000           $ 35,903,000     $ 4,660.21 (6)

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to 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.
(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) Includes the offering price of up to an additional 840,000 additional Ordinary Shares that the underwriter has the option to purchase to cover over-allotments, if any.
(4) No fee required pursuant to Rule 457(g) of the Securities Act.
(5) We have agreed to issue to the Underwriter warrants to purchase the number of Ordinary Shares (the “Underwriter Warrants”) in the aggregate equal to 10% of the shares sold at closing of the offering and shares sold to cover over-allotments, if any. The Underwriter Warrants will be exercisable at any time, and from time to time within 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 115% of the public offering price per share in the offering.
(6)

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, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 

 

 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell the securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting any offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

SUBJECT TO COMPLETION

 

PRELIMINARY PROSPECTUS DATED OCTOBER 29, 2020

 

5,600,000 Ordinary Shares

 

 

Global Internet of People, Inc.

 

This is an initial public offering of our ordinary shares. We are offering on a firm commitment engagement basis, 5,600,000 ordinary shares, par value US$0.0001 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 fixed at US$5.00 per Ordinary Share. The initial public offering is contingent upon the Registrant receiving authorization to list the Ordinary Shares on a national exchange. We have applied to list our Ordinary Shares on the Nasdaq Capital Market and have reserved the symbol “SDH” for purposes of listing our Ordinary Shares on the Nasdaq Capital Market.

 

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

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended and as such, we have elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings. See “Risk Factors” and “Prospectus Summary—Implications of Our Being an Emerging Growth Company” on pages 7 and 1, respectively.

 

    Per Share     Total  
Initial public offering price   $ 5.000     $ 28,000,000  
Underwriter’s discounts (1)   $ 0.375     $ 2,100,000  
Proceeds to our company before expenses(2)   $ 4.625     $ 25,900,000  

 

(1)

See “Underwriting” in this prospectus for more information regarding our arrangements with the underwriter.

 

(2) The total estimated expenses related to this offering are set forth in the section entitled “Expenses Relating to This Offering.”

 

 

 

We have granted the underwriters an option for a period of 45 days to purchase up to an additional 840,000 shares from us at the public offering price less the underwriting discounts to cover over-allotments.

 

The underwriters expect to deliver the Ordinary Shares against payment in New York, New York on [●], 2020.

 

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.

  

Prospectus dated [●], 2020

 

 

 

 

 

About this Prospectus

 

We and the underwriters 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 Ordinary 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 page of the prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Other Pertinent Information

 

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

 

  “Affiliated Entities” are to GIOP’s subsidiaries, and SDH and its subsidiaries;
  “APP” are to our mobile application, “Shidonghui APP;”
  “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;
  “Enterprise Service Client” or “Enterprise Service Clients” are to small and medium-sized enterprises that have entered into service agreements with us for customized enterprise services;
  “Expert” or “Experts” are to individual(s) qualified and certified by us to provide services to Users and Members;
  “GMB HK” are to “Global Mentor Board Information Technology Limited”, GIOP’s wholly-owned-subsidiary, a Hong Kong corporation.
  “GMB (Hangzhou)” are to Global Mentor Board (Hangzhou) Technology Co., Ltd., a limited liability company organized under the laws of the PRC, SDH’s wholly owned subsidiary;
  “GMB (Beijing)” are to Shidong (Beijing) Information Technology Co., Ltd., a limited liability company organized under the laws of the PRC and 51% of its equity interest is owned by SDH;
  “GMB Culture” are to Shanghai Voice of Seedling Cultural Media Co., Ltd., a limited liability company organized under the laws of the PRC and 51% of its equity interest is owned by SDH;
  “GMB Consulting” are to Global Mentor Board (Shanghai) Enterprise Management Consulting Co. Ltd., a limited liability company organized under the laws of the PRC and 51% of its equity interest is owned by SDH;
  “GMB Linking” are to “Linking (Shanghai) Network Technology Co., Ltd., a limited liability company organized under the laws of the PRC and 51% of its equity interest is owned by SDH;
  “GIOP BJ” or “WFOE” are to GIOP’s wholly foreign owned subsidiary, Beijing Mentor Board Union Information Technology Co, Ltd., a limited liability company organized under the laws of the PRC;
  “Member” or “Members” are to individual(s) and enterprise(s) who signed up for each of our three annual membership plans: Platinum, Diamond, Protégé;
  “Mentor” or “Mentors” are to individual(s) invited by us to provide services to Users and Members;
  “shares,” “Shares,” or “Ordinary Shares” are to the Ordinary Shares of the Company, par value US$0.0001 per share;
  “SDH” are to Global Mentor Board (Beijing) Information Technology Co., Ltd., a limited liability company organized under the laws of the PRC, which we control via a series of contractual arrangements among WFOE, SDH and shareholders of SDH;
  “U.S.” are to the United States;
  “User” or “Users” are to registered users of our APP;
  “VIE” are to variable interest entity;
  “we,” “us,” the “Company,” or “GIOP” are to one or more of Global Internet of People, Inc. and its Affiliated Entities, as the case may be; and
  “Zibo Shidong” are to Zibo Shidong Digital Technology Service Co., Ltd., a limited liability company organized under the laws of the PRC, SDH’s wholly owned subsidiary.

 

Our business is conducted by SDH, our VIE entity in the PRC, and its subsidiaries, using RMB, the currency of China. Our consolidated financial statements are presented in United States dollars or US$. In this prospectus, we refer to assets, obligations, commitments and liabilities in our consolidated financial statements in United States dollars or US$. These US$ 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 and the value of our assets, including accounts receivable.

 

Unless expressly indicated herein to the contrary, all references to share amounts in this prospectus give retroactive effect to share consolidations, the last of which was effected on April 24, 2020.

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
PROSPECTUS SUMMARY 1
   
RISK FACTORS 7
   
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS 25
   

TRADEMARKS, SERVICE MARKS AND TRADENAMES 

26
   
USE OF PROCEEDS 26
   
DIVIDEND POLICY 27
   
CAPITALIZATION 28
   
DILUTION 29
   
ENFORCEABILITY OF CIVIL LIABILITY 30
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 31
   
INDUSTRY 51
   
BUSINESS 56
   
REGULATIONS 73
   
MANAGEMENT 83
   
EXECUTIVE COMPENSATION 87
   
PRINCIPAL SHAREHOLDERS 88
   
RELATED PARTY TRANSACTIONS 89
   
DESCRIPTION OF SHARE CAPITAL 92
   
SHARES ELIGIBLE FOR FUTURE SALE 103
   
TAXATION 105
   
UNDERWRITING 110
   
EXPENSES RELATING TO THIS OFFERING 115
   
LEGAL MATTERS 116
   
EXPERTS 116
   
WHERE YOU CAN FIND MORE INFORMATION 116
   
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. This prospectus contains certain estimates and information from an industry report (“Frost & Sullivan Report”) commissioned by us and prepared by Frost & Sullivan Inc. (“Frost & Sullivan”), an independent market research firm, regarding our industries and our market positions in China, which have not been independently verified by us, the underwriters or any of their respective affiliates or advisers. The information in such sources may not be consistent with other information compiled in or outside of China.

 

Overview

 

We started our operation as a consulting company providing enterprise services to small and medium-sized enterprises in the PRC in December 2014, and launched our peer-to-peer knowledge sharing and enterprise service platform in May 2016. Since then, we have continued to expand and improve our platform, where knowledge is shared, and services are requested and provided. We operate our platform through our PRC operating entity, SDH and its subsidiaries, both online, via our mobile application “Shidonghui App” (the “APP”), and offline, through local offices directly operated by us in Beijing, Shanghai and Hangzhou, as well as 51 local centers operated by some of our Members in 35 cities and 21 provinces throughout the PRC as of the date of this prospectus. Our mission is to become a worldwide leading knowledge sharing and enterprise service platform.

 

According to the International Monetary Fund, from 2014 to 2019, the nominal GDP per capita in the PRC rose from $7,701 in 2014 to $10,581 in 2019, representing a compound annual growth rate (“CAGR”) of approximately 6.6%. A growing economy and generally positive market environment in China have created many entrepreneurial and high-growth enterprises, many of which need corporate services such as financial consulting and management training. In line with the trend of nominal GDP, the disposable income of urban residents in the PRC recorded an increase from 2013 to 2019, as there was a rise in overall household spending capabilities due to the booming economy. According to the National Bureau of Statistic of the PRC, the per capita disposable income of urban residents in the PRC increased from $4,305 in 2014 to $6,322 in 2019, representing a CAGR of 8.0%. Previously, our platform focused on providing enterprise services to enterprises and entrepreneurs, but we are actively expanding our service to individuals and families that seek advice and services relating to health, beauty, travel, fashion, housing, etc.

 

When we launched our platform, our aim was not only to continue providing enterprise services to PRC’s growing business communities, but also create a marketplace where qualified individuals and entities have opportunities to serve as providers, and receive rewards by sharing their knowledge with others on the platform. As of September 30, 2020, our knowledge sharing and enterprise service ecosystem had 550 Mentors, 998 Experts, 1,467 Members, and 5.49 million Users. In addition to serving our Users and Members, we continue to provide enterprise services to small and medium-sized enterprises in China through a dedicated team with seven full-time professional consultants, as well as our Mentors and Experts. Our providers (Mentors, Experts and consultants) are successful entrepreneurs, scientists, investors, and professionals with qualifications and achievements in major industries such as finance, energy, health care, technology, manufacturing and academia. Our core strength is the knowledge brought by our providers, highlighted by their experience, wisdom, industry know-how, and social connections.

 

Our APP was released to the public in May 2016. The number of Users increased from approximately 800,000 in December 2017 to approximately 5.49 million in September 2020, and the number of Members increased from 139 in May 2016 to 1,467 in September 2020. The services we offer to Users on our APP are (1) Questions and Answers (Q&A) Sessions and (2) streaming of audio and video courses and programs. The offline services we offer to our Members are study tours and forums.

 

To meet the growing demand of our Users, Members and Enterprise Service Clients for professional services and advice in a rapidly changing business environment, we have been continually expanding and improving our platform and services. In March 2018, we launched our comprehensive tailored service program, a customized enterprise packaged service targeting small business owners; in December 2018, we launched GMB Regional Economic Accelerator, a business initiative designed to help with economic growth of less developed areas in China, by entering into cooperating programs with regional government entities for the purpose of providing services to local businesses; starting in 2019, we began to promote our brands “SDH” and “GMB” and seek opportunities to expand our platform in the United States. We believe these business initiatives will enrich our service offerings and attract more individuals and enterprises to join our platform. In late 2019, we started procuring and offering merchandises for sale through our platform to our clients and the general public. Most of these merchandises are obtained from some of our clients in exchange for collection of our membership fees and consulting fees owed by these clients while the rest of these merchandises are sourced by us based on current market trend and demand. Taking advantage of our knowledge of market demand and trends, as well as access to resources afforded to us by our knowledge sharing platform, we have achieved a significant growth in sale of merchandises, which generated $1,219,296 as of June 30, 2020, compared to $9,568 as of December 31, 2019.

 

We have been profitable since fiscal year 2018, and generated net revenues of $13,538,999, $17,925,476, and $6,506,463 for the fiscal years ended December 31, 2018 and 2019, and six months ended June 30, 2020, respectively. Our revenues were generated from the following:

 

 

fees generated from Member services, in the amount of $5,280,587, $2,525,084, and $491,806, or 39.00%, 14.09% and 7.56% of the net revenues of fiscal years 2018 and 2019, and six months ended June 30, 2020, respectively;

 

1

 

  

  fees generated from enterprise services, in the amount of $8,046,406, $15,210,675, and $4,590,984, or 59.43%, 84.85%, and 70.56% of the net revenues of fiscal years 2018 and 2019, and six months ended June 30, 2020, respectively;
     
  fees generated from sale of merchandises, in the amount of nil, $9,568  and  $1,219,296, or nil, 0.05%, and 18.74% of the net revenues of fiscal years 2018 and 2019, and six months ended June 30, 2020, respectively;
     
  fees generated from online services, in the amount of $8,098, $66,304, and  $191,443, or 0.06%, 0.37% and 2.94% of the net revenues of fiscal years 2018 and 2019, and six months ended June 30, 2020, respectively; and
     
  fees generated from other services, in the amount of $203,908, $113,845, and  $12,934, or 1.51%, 0.64%, and 0.20% of the net revenues of fiscal years 2018 and 2019, and six months ended June 30, 2020, respectively.

 

For fiscal years 2017 and 2018, our revenues generated from online services were much smaller compared to revenues generated from Member services and enterprise services, primarily due to the fact that we have focused on growing our online knowledge sharing community by providing services for Users to enjoy at low or no charge. We do not require any fee to become a User on our platform, and most of the audio and video courses and programs on our APP were free for our Users to access. Beginning in 2019, to increase our revenues from our online services, we started to charge our Users fees for streaming most of our audio and video courses and programs, although there are still about 1,020, or 10%, out of the approximately 9,880 audio and video courses and programs on our APP available for streaming for no fee, as of the date of this prospectus. As a result, for the fiscal year 2019 and six months ended June 30, 2020, we increased our revenues generated from online services to $66,304, and $191,443, respectively, an increase of more than 700% and 1,446%, compared to the fiscal year 2018 and the six months ended June 30, 2019, respectively. We believe that our online services will greatly contribute to the overall growth and expansion of our knowledge sharing platform if we are able to continually execute our strategy to attract more Users, Mentors, and Experts to join and contribute to our peer-to-peer sharing platform.

 

Currently, we only operate in mainland China, although some of our APP Users are located in foreign countries including US, Canada, Malaysia, and Sri Lanka. Our plan is to continually expand our services both online and offline, explore new business ventures and initiatives to generate additional revenues, and ultimately become a worldwide leading knowledge sharing and enterprise service platform that offers and creates value for everyone in our ecosystem.

 

Competitive Advantages

 

We believe that the following competitive strengths have contributed to our success and differentiated us from our competitors:

 

  our founder and CEO, Mr. Haiping Hu, nicknamed “General Hu Haiping on Horseback”, has extensive leadership experience and is a well-known entrepreneur in China;  
     
  our service providers bring a wealth of knowledge readily accessible to our Users, Members and Enterprise Service Clients;
     
  our rich service offering combines both online and offline services; and
     
  our platform builds long-term mutually beneficial relationships with our clients, including our Users, Members and Enterprise Service Clients.

 

Growth Strategies

 

Our goal is to become a worldwide leading knowledge sharing and enterprise service platform, and our primary strategies to achieve our goal include:

 

  to increase the number of our knowledge sharing service providers;
     
  to research and develop new online services and improve existing online services to attract more Users;
     
  to increase the scope of our Member service offerings; and
     
  to promote, build, and grow the influence of our brand.

 

Corporate Information

 

Our principal executive offices are located at (1) Room 208, Building 1, No. 28 Houtun Road, Haidian District, Beijing and (2) 25th Floor, YiBai Shanshan Building, No.985 Dongfang Road, Pudong, Shanghai, and our phone number is +86 10-82967728 for the Beijing office and +86 21-68828790 for the Shanghai office. Our registered office in the Cayman Islands is located at Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman, KY1-1111, Cayman Islands, and the phone number of our registered office is +1 345 945 3901. We maintain a corporate website at www.sdh365.com. The information contained in, or accessible from, our website or any other website does not constitute a part of this prospectus.

 

2

 

 

Corporate Structure

 

The following diagram illustrates our corporate structure as of the date of this prospectus and upon completion of our IPO based on 5,600,000 Ordinary Shares being offered. For more detail on our corporate history please refer to “Business – Corporate History and Structure”.

 

 

3

 

 

Implications of Our Being an “Emerging Growth Company”

 

As a company with less than US$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, as amended, 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, as amended, or the Sarbanes-Oxley Act;
     
  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 until 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” at the end of the fiscal year in which the fifth anniversary of our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, herein referred to as the Securities Act, if we have more than US$1.07 billion in annual revenues, have more than US$700 million in market value of our Ordinary Shares held by non-affiliates, or issue more than US$1 billion in principal amount of non-convertible debt over a three-year period.

 

Implications of Being a Foreign Private Issuer

 

We are also considered a “foreign private issuer”. In our capacity as a foreign private issuer, we are exempted from certain rules under the U.S. Securities Exchange Act of 1934, as amended (“Exchange Act”), that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our Ordinary Shares. Moreover, we are not required to file periodic reports and financial statements with the U.S. Securities and Exchange Commission (“SEC”), as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. In addition, we are not required to comply with Regulation FD, which restricts the selective disclosure of material information.

 

We may take advantage of these exemptions until such time as we are no longer a foreign private issuer. We would cease to be a foreign private issuer at such time when more than 50% of our outstanding voting securities are held by U.S. residents and any of the following three circumstances applies: (1) the majority of our executive officers or directors are U.S. citizens or residents; (2) more than 50% of our assets are located in the United States; or (3) our business is administered principally in the United States.

 

We have taken advantage of certain reduced reporting and other requirements in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold equity securities.

 

4

 

 

THE OFFERING

 

Ordinary Shares offered by us   5,600,000 Ordinary Shares, or 6,440,000 Ordinary Shares if the underwriter exercises its over-allotment option in full.
     
Price per Ordinary Share   We currently estimate that the initial public offering price will be  US$5.00 per Ordinary Share.
     
Ordinary Shares outstanding prior to completion of this offering   16,800,000 Ordinary Shares

 

Ordinary Shares outstanding immediately after this offering   22,400,000 Ordinary Shares (or 23,240,000 Ordinary Shares if the underwriter exercises its over-allotment option in full)
     
Indemnification Escrow   Net proceeds of this offering in the amount of $500,000 shall be used to fund an escrow account for a period of 24 months following the closing date of this offering, which account shall be used in the event we have to indemnify the underwriters pursuant to the terms of an underwriting agreement with the underwriters.
     
Underwriter’s Warrants   We have agreed to issue to the Underwriter warrants, exercisable at a price equal to 115% of the public offering price per share of this offering within 5 years from the effective date of this registration statement to purchase the number of Ordinary Shares in the aggregate equal to 10% of the shares sold at closing of the offering.
     
Listing   We have applied to have our Ordinary Shares listed on Nasdaq Capital Market.
     
Nasdaq Capital Market symbol   “SDH”
     
Transfer Agent   Transhare Corporation
     
Use of proceeds   We intend to use the proceeds from this offering for working capital and general corporate purposes, including the expansion of our business. See “Use of Proceeds” for more information.
     
Risk factors   The investment in our Ordinary Shares offered hereby involve a high degree of risk. You should read “Risk Factors” for a discussion of factors to consider before deciding to invest in our Ordinary Shares.

 

5

 

 

Summary Financial Data

 

The following summary consolidated statement of operations data for the two years ended December 31, 2018 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations and comprehensive income data for the six months ended June 30, 2019 and 2020, and summary consolidated balance sheets data as of June 30, 2020 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Our historical results do not necessarily indicate results expected for any future periods. You should read the summary consolidated financial data in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.

 

The following table presents our summary consolidated statement of comprehensive income for the years ended December 31, 2019, 2018, and for the six months ended June 30, 2020 and 2019.

 

    For the years ended
December 31,
   For the six months ended
June 30,
 
    2019    2018    2020    2019  
              (Unaudited)    (Unaudited)  
                      
REVENUE, NET   $ 17,925,476     $ 13,538,999     $ 6,506,463     $ 5,799,093  
                                 
COSTS AND OPERATING EXPENSES                                
Service costs     2,109,649       1,142,596       634,314       1,024,777  
Cost of goods sold     -       -       749,485       -  
Selling expenses     1,350,894       1,282,677       475,496       687,282  
General and administrative expenses     2,897,079       1,749,209       1,871,146       1,407,761  
Research and development expenses     795,540       665,378       434,836       239,384  
Total costs and operating expenses     7,153,162       4,839,860       4,165,277       3,359,204  
                                 
PROFIT (LOSS) FROM OPERATIONS     10,772,314       8,699,139       2,341,186       2,439,889  
                                 
OTHER INCOME (EXPENSES)                                
Investment gains (losses)     (23,799 )     (20,194 )     8,563       (14,336 )
Interest income     212,285       142,612       129,549       150,892  
Other income (expense), net     9,069       (10,619 )     10,777       (1,092 )
Total other income, net     197,555       111,799       148,889       135,464  
                                 
PROFIT (LOSS) BEFORE INCOME TAXES     10,969,869       8,810,938       2,490,075       2,575,353  
                                 
Income taxes provision (benefits)     1,589,101       1,158,465       271,220       449,598  
                                 
NET INCOME (LOSS)     9,380,768       7,652,473       2,218,855       2,125,755  
Less: net (loss) profit attributable to non-controlling interests     (365,617 )     175,407       (73,099 )     (120,399 )
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING SHAREHOLDERS   $ 9,746,385     $ 7,477,066     $ 2,291,954     $ 2,246,154  

  

The following table presents our summary consolidated balance sheets data as of June 30, 2020, December 31, 2019, and 2018. 

 

    June 30,
2020
   December 31,
2019
   December 31,
2018
 
    (Unaudited)            
                 
Current assets   $ 16,607,493     $ 19,562,356     $ 13,703,736  
Total assets     25,131,566       26,967,708       14,266,390  
Current liabilities     3,071,728       6,866,325       3,605,614  
Total liabilities     3,102,791       6,971,110       3,605,614  
Total equity   $ 22,028,775     $ 19,996,598     $ 10,660,776  

  

6

 

 

RISK FACTORS

 

An investment in our Ordinary Shares involves a high degree of risk. Before deciding whether to invest in our Ordinary Shares, you should consider carefully the risks described below, together with all of the other information set forth in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. If any of these risks actually occurs, our business, financial condition, results of operations or cash flow could be materially and adversely affected, which could cause the trading price of our Ordinary Shares to decline, resulting in a loss of all or part of your investment. The risks described below are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business. You should only consider investing in our Ordinary Shares if you can bear the risk of loss of your entire investment.

 

Risks Related to Our Business

 

We have a limited operating history and are subject to the risks encountered by development-stage companies.

 

We have been in business since December 2014 as a consulting company, and our APP was released to the public in 2016. We have only been profitable since the year ended December 31, 2018. As a development-stage company, our business strategies and model are constantly being tested by the market and operating results, and we work to adjust our allocation of resources accordingly. As such, our business may be subject to significant fluctuations in operating results in terms of amounts of revenues and percentages of total with respect to the business segments.

 

We are, and expect for the foreseeable future to be, subject to all the risks and uncertainties, inherent in a development-stage business. As a result, we must establish many functions necessary to operate a business, including expanding our managerial and administrative structure, assessing and implementing our marketing program, implementing financial systems and controls and personnel recruitment. Accordingly, you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies with a limited operating history. These risks and challenges are, among other things:

 

  we operate in industries that are or may in the future be subject to increasing regulation by various governmental agencies in China;
     
  we may require additional capital to develop and expand our operations which may not be available to us when we require it;
     
  our marketing and growth strategy may not be successful;
     
  our business may be subject to significant fluctuations in operating results; and
     
  we may not be able to attract, retain and motivate qualified professionals.

 

Our future growth will depend substantially on our ability to address these and the other risks described in this prospectus. If we do not successfully address these risks, our business would be significantly harmed.

 

Our historical financial results may not be indicative of our future performance.

 

Our business has achieved rapid growth since we launched our knowledge sharing and enterprise service platform in 2016. Our net revenue was $13,538,999 and $17,925,476 for the years ended December 31, 2018 and 2019, respectively. Our net income was $7,652,473 and $9,380,768 for the year ended December 31, 2018 and 2019, respectively. Our net revenue was $5,799,093 and $6,506,463 for the six months ended June 30, 2019 and 2020, respectively. Our net income was $2,125,755 and $2,218,855 for the six months ended June 30, 2019 and 2020, respectively. However, our historical growth rate and the limited history of operation make it difficult to evaluate our future prospects. We may not be able to sustain our historically growth or may not be able to grow our business at all.

 

If we cannot manage our growth effectively and efficiently, our results of operations or profitability could be adversely affected.

 

Our revenue for the six months ended June 30, 2020 was $6,506,463, an increase of 12.20% from $5,799,093 for the six months ended June 30, 2019. Our revenue for the year ended December 31, 2019 was $17,925,476, an increase of 32.40% from $13,538,999 for the year ended December 31, 2018. Our revenue for the fiscal year ended December 31, 2018 was $13,538,999, an increase of 491.96% from $2,287,160 in 2017. We intend to continue to expand our services and operations. For example, to complement and expand our existing enterprise services, we launched GMB Regional Economic Accelerator, which is designed to provide enterprise services to small and medium-sized enterprises in 2018. Such expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological and other resources. Our planned expansion will also place significant demands on us to maintain the quality of our services to ensure that our brand does not suffer as a result of any deviations, whether actual or perceived, in the quality of our services. In order to manage and support our growth, we must continue to improve our existing operational and administrative systems and our quality control, and recruit, train and retain additional qualified professionals as well as other administrative and sales and marketing personnel, particularly as we expand into new business ventures and launch new business initiatives. We may not be able to effectively and efficiently manage the growth of our operations, recruit and retain qualified personnel and integrate new expansion into our operations. As a result, our quality of service may deteriorate and our results of operations or profitability could be adversely affected.

 

7

 

 

We may not be successful in implementing important new strategic initiatives, which may have an adverse impact on our business and financial results.

 

There is no assurance that we will be able to implement important strategic initiatives in accordance with our expectations, which may result in an adverse impact on our business and financial results. For example, our strategic initiative, GMB Regional Economic Accelerator launched in 2018 to target small and medium-sized enterprise in less-developed Chinese towns and cities, and our various ongoing initiatives to expand our platform to the U.S. market, are designed to create growth, improve our results of operations and drive long-term shareholders value; however, our management may lack required experience, knowledge, insight, or human and capital resources to carry out the effective implementation to expand into new spaces outside of our current focuses. As such, we may not be able to realize our expected growth, and our business and financial results will be adversely impacted.

 

If we are not successful in selling inventory, we may have to sell the inventory at significantly reduced prices or may not be able to sell the inventory at all.

 

In late 2019, we started selling merchandises obtained through (1) nonmonetary transactions with our customers, which are entered into at our discretion to receive inventory in exchange of collection of account receivables due from our customers, and (2) purchases of goods for resale based on our knowledge and assessment of market demand and trends. Our profitability in sale of merchandises depends on our ability to manage inventory levels and respond to shifts in consumer demand patterns. Overestimating customer demand for merchandises will likely result in the need to record inventory markdowns and sell excess inventory at clearance prices which would negatively impact our gross margins and operating results. Underestimating customer demand for merchandises can lead to inventory shortages, missed sales opportunities and negative customer experiences. Our gross margins could suffer if we are unable to effectively manage our inventory and sell merchandises at a significantly reduced price, which could have a material adverse effect on our results of operations and cash flows. 

 

Increasing competition within our industries could have an impact on our business prospects.

 

The enterprise service and knowledge sharing are industries where new competitors can easily enter into since there are no significant barriers to entry. We also face many competitors in the knowledge sharing industry where a number of competitors have been in business longer than us. Competing companies may have significantly greater financial and other resources than we have and may offer services that are more attractive to prospective clients; increased competition would have a negative impact on both our revenues and our profit margins.

 

Interruption or failure of our own information technology and communication systems or those of third-party service providers we rely upon could impair our ability to provide products and services, which could damage our reputation and harm our results of operations.

 

Our ability to provide products and services, both online and offline, depends on the continuing operation of our information technology and communication systems. Any damage to or failure of our systems could interrupt our services. Service interruptions could reduce our revenue and profit and damage our brand if our systems are perceived to be unreliable. Our systems are vulnerable to damage or interruption as a result of terrorist attacks, wars, earthquakes, floods, fires, power loss, telecommunication failures, undetected errors or “bugs” in our software, computer viruses, interruptions in access to our platform through the use of “denial of service” or similar attacks, hacking or other attempts to harm our systems, and similar events. Some of our systems are not fully redundant, and our disaster recovery planning does not account for all possible scenarios.

 

Our servers, which are hosted at third-party or our own internet data centers, are vulnerable to break-ins, sabotage and vandalism. The occurrence of natural disasters or closure of an internet data center by a third-party provider without adequate notice could result in lengthy service interruptions. In addition, our domain names are resolved into internet protocol (IP) addresses by systems of third-party domain name registrars and registries. Any interruptions or failures of those service providers’ systems, which are beyond our control, could significantly disrupt our own services. If we experience frequent or persistent system failures on our platform, whether due to interruptions and failures of our own information technology and communications systems or those of third-party service providers that we rely upon, our reputation and brand could be severely harmed. The steps we take to increase the reliability and redundancy of our systems may cause us to incur heavy costs and reduce our operating margin, and may not be successful in reducing the frequency or duration of service interruptions.

 

We may be required to obtain and maintain additional approvals, licenses or permits applicable to our business, including our online business, which could have a material adverse impact on our business, financial conditions and results of operations.

 

Our business is subject to governmental supervision and regulation by the relevant PRC governmental authorities, including the Ministry of Commerce, or MOFCOM, the Ministry of Industry and Information Technology, or MIIT, the National Radio and Television Administration or NRTA, and other governmental authorities in charge of the relevant categories of services offered by us. Together, these government authorities promulgate and enforce regulations that cover many aspects of the operation of online services we provide on our APP, including entry into this online service industry, the scope of permissible business activities, licenses and permits for various business activities, and foreign investment.

 

We currently hold an ICP License (the Administrative Measures on Internet Information Services, or the Internet Measures, promulgated by the State Council requires commercial internet content-related services operators to obtain a VATS (“value added telecommunications service”) License for internet content provision business, or the ICP License), and an Internet Culture Business Operating License. Although we do not currently believe we are required to hold any other licenses, we may be required to obtain additional licenses, permits or approval, given the significant uncertainties of the interpretation and implementation of certain regulatory requirements applicable to our business. See “Regulations— Regulations Related to Online Transmission of Audio-Visual Programs.”

 

8

 

 

As the internet industry in China is still at a relatively early stage of development, new laws and regulations may be adopted from time to time to address new issues that come to the authorities’ attention. Considerable uncertainties still exist with respect to the interpretation and implementation of existing and future laws and regulations governing our business activities. As of the date of this prospectus, we are not aware of any other approvals, licenses, or permits that are material to our business operations that we have not, but may be required to, obtain; nor have we received any notice of warning or been subject to penalties or other disciplinary action from the relevant governmental authorities for lack of approvals and permits or noncompliance with regulations related to our current licenses. However, we cannot assure you that we will not be subject to any warning, investigations or penalties in the future. If the PRC government deems us as operating without proper approvals, licenses or permits, promulgates new laws and regulations that require additional approvals or licenses or impose additional restrictions on the operation of any part of our business, we may be required to apply for additional approvals, license or permits, or be subject to various penalties, including fines, termination or restrictions of the part of our business or revoking of our business licenses, which may materially and adversely affect our business, financial conditions and results of operations.

 

The successful operation of our online service depends upon the performance and reliability of the internet infrastructure and fixed telecommunication networks in China.

 

Our online service depends on the performance and reliability of the internet infrastructure in China. Almost all access to the internet is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the MIIT. In addition, the national networks in China are connected to the internet through international gateways controlled by the PRC government. These international gateways are the only channels through which a domestic user can connect to the internet. It is unpredictable whether a more sophisticated internet infrastructure will be developed in China. We may not have access to alternative networks in the event of disruptions, failures or other problems with China’s internet infrastructure. In addition, the internet infrastructure in China may not support the demands associated with continued growth in internet usage.

 

We rely on China Telecommunications Corporation, or China Telecom, and China United Network Communications Group Company Limited, or China Unicom, to provide us with network services and data center hosting services. We have limited access to alternative services in the event of disruptions, failures or other problems with the fixed telecommunications networks of these companies, or if these companies otherwise fail to provide the services. Any unscheduled service interruption could damage our reputation and result in a decrease in our revenues. Furthermore, we have no control over the costs of the services provided by these telecommunication companies. If the prices that we pay for telecommunications and internet services rise significantly, our gross margins could be adversely affected. In addition, if internet access fees or other charges to internet users increase, our user traffic may decrease, which in turn may harm our revenues.

 

Security breaches and improper access to or disclosure of our data or user data, or any system failure or compromise of our security, could harm our reputation and adversely affect our business.

 

Our business is prone to cyber-attacks seeking unauthorized access to our data or user data or to disrupt our ability to provide services. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data or user data, such as personal information, names, accounts, user IDs and passwords, and payment or transaction related information, could result in the loss or misuse of such data, which could cause a loss or give rise to liabilities to the owners of confidential information, such as our Users, Members, Experts, and Mentors. We also have encountered attempts to create false or undesirable user accounts, or take other actions on our platform for purposes such as spamming, spreading misinformation, or other objectionable ends. Such attacks may cause interruptions to the services we provide, degrade the user experience, cause users to lose confidence and trust in our products and services, impair our internal systems, or result in financial harm to us.

 

Affected users could initiate legal or regulatory actions against us in connection with any actual or perceived security breaches or improper disclosure of data, which could cause us to incur significant expense and liabilities or result in orders or consent decrees forcing us to modify our business practices. Such incidents or our efforts to remediate such incidents may also result in a decline in our user base or engagement levels. Any of these events could have a material and adverse effect on our business, reputation, or results of operations.

 

If we fail to hire, train or retain qualified managerial and other employees, our business and results of operations could be materially and adversely affected.

 

We place substantial reliance on the knowledge sharing and enterprise service industry experience and knowledge of our senior management team as well as their relationships with other industry participants. The loss of the services of one or more members of our senior management could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements for our current senior management could be difficult, and competition for such personnel of similar experience is intense. If we fail to retain our senior management, our business and results of operations could be materially and adversely affected.

 

Our personnel are critical to maintaining the quality and consistency of our services, brand and reputation. It is important for us to attract qualified managerial and other employees who have experience in consulting services and are committed to our service approach. There may be a limited supply of such qualified individuals. We must hire and train qualified managerial and other employees on a timely basis to keep pace with our rapid growth while maintaining consistent quality of services across our operations. We must also provide continuous training to our managerial and other employees so that they are equipped with up-to-date knowledge of various aspects of our operations and can meet our demand for high-quality services. If we fail to do so, the quality of our services may decrease, which in turn, may cause a negative perception of our brand and adversely affect our business.

 

9

 

 

If we fail to attract or retain qualified service providers, our business and results of operations could be materially and adversely affected.

 

Our core strength is the knowledge brought by our service providers, highlighted by their experiences, wisdom, industry know-how, and social connections. We rely heavily on the expertise of our service providers, including Mentors, Experts, and our consultants to maintain our core competence. As of September 30, 2020, we had 550 Mentors, 998 Experts, and a team of full-time consultants as our knowledge sharing providers. Many of our Mentors are experienced leaders of successful and well-known corporations. Likewise, our Experts are outstanding professionals in their specialized fields, and our team of consultants is professionals with industrial experiences of more than five years. As our business scope increases, we expect to continue to invest significant resources in attracting and retaining service providers. Our ability to sustain our growth will depend on our ability to attract and retain qualified service providers. If we fail to attract or retain qualified service providers, our business and results of operations could be materially and adversely affected.

 

If we were to lose our certification as a National High Tech Enterprise, we could face higher tax rates than we currently pay for much of our revenues.

 

In October 2017, SDH was approved as a National High Tech Enterprise, which certificate expires in October 2020 and is expected to be renewed in November 2020. This certification entitles SDH to a favorable tax rates of 15%, rather than the unified rate of 25% if it was not so certified. For the year ended December 31, 2019, the total taxes payable by SDH would have increased by $1,001,939 if SDH was not certified as a National High Tech Enterprise. In the event SDH were to lose the benefit of the favorable tax rate in the future, we could see significant increases in the amount of taxes we pay, meaning that our operating results could be materially harmed, even in the absence of a decrease in our operations.

 

Failure to maintain or enhance our brand or image could have a material and adverse effect on our business and results of operations.

 

We believe our SDH (“师董会”) brand is associated with a well-recognized knowledge sharing and enterprise services provider in the markets that we operate with online and offline services designed to suit our clients’ needs. Our brand is integral to our sales and marketing efforts. We have obtained trademark registrations for our brand SDH in the PRC. Our continued success in maintaining and enhancing our brand and image depends to a large extent on our ability to satisfy customer needs by further developing and maintaining quality of services across our operations, as well as our ability to respond to competitive pressures. If we are unable to satisfy clients’ needs or if our public image or reputation were otherwise diminished, our business transactions with our clients may decline, which could in turn adversely affect our results of operations.

 

Any failure to protect our trademarks and other intellectual property rights could have a negative impact on our business.

 

We believe our key trademark, “师董会,” for which we have obtained trademark protection in China, and 29 computer software copyrights and one artwork copyright, for which we have obtained protection with the Copyright Protection Centre of China (CPCC), and other intellectual property rights are critical to our success. Any unauthorized use of our trademarks or other intellectual property rights could harm our competitive advantages and business. Historically, China has not protected intellectual property rights to the same extent as the United States, and infringement of intellectual property rights continues to pose a serious risk of doing business in China. Monitoring and preventing unauthorized use are difficult. The measures we take to protect our intellectual property rights may not be adequate. Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us. If we are unable to adequately protect our brand, trademarks and other intellectual property rights, we may lose these rights and our business may suffer materially.

 

As internet domain name rights are not rigorously regulated or enforced in China, other companies may incorporate in their domain names elements similar in writing or pronunciation to the “师董会” trademarks or their Chinese equivalents. This may result in confusion between those companies and our company and may lead to the dilution of our brand value, which could adversely affect our business.

 

Risks Related to Our Corporate Structure

 

If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Foreign ownership of certain parts of our businesses including the value-added telecommunications services, or the VATS, is subject to restrictions under current PRC laws and regulations. For example, the ultimate foreign equity ownership in a VATS provider may not exceed 50%. Also, for a foreign investor contemplating to acquire any equity interest in a VATS business in China, it must satisfy a number of stringent performance and operational experience requirements. In addition, to conduct any VATS business in China, foreign investors have to set up foreign-invested enterprises and obtain a relevant telecommunications business operating license. See “Regulations—Regulations Related to Foreign Investment.”

 

10

 

 

In light of the above restrictions and requirements, we currently operate our knowledge sharing and enterprise service platform through SDH, a VIE entity, through a series of contractual arrangements, as a result of which, under United States generally accepted accounting principles, the assets and liabilities of SDH are treated as our assets and liabilities and the results of operations of SDH are treated in all aspects as if they were the results of our operations. For a description of these contractual arrangements, see “Business—Contractual Arrangements between WFOE, SDH and Its Shareholders” and “Related Party Transactions—Contractual Arrangements with WFOE, SDH and Its Shareholders.

 

In the opinion of our PRC legal counsel, GFE Law Office, based on its understandings of the relevant PRC laws and regulations, (i) the ownership structures of SDH in China and WFOE, both currently and immediately after giving effect to this offering, are not in violation of applicable PRC laws and regulations currently in effect; and (ii) each contracts among WFOE, SDH and its shareholders is legal, valid, binding and enforceable in accordance with its terms and applicable PRC laws. However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, the PRC regulatory authorities may ultimately take a view contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or SDH are found to be in violation of any PRC laws or regulations, if the contractual arrangements among WFOE, SDH and its shareholders are determined as illegal or invalid by the PRC court, arbitral tribunal or regulatory authorities, or if we or SDH fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including:

 

revoking the business and/or operating licenses of WFOE or SDH;

 

discontinuing or restricting the operations of WFOE or SDH;

 

imposing conditions or requirements with which we, WFOE, or SDH may not be able to comply;

 

requiring us, WFOE, or SDH to restructure the relevant ownership structure or operations which may significantly impair the rights of the holders of our Ordinary Shares in the equity of SDH;

 

restricting or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; and

 

imposing fines.

 

The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of SDH in our consolidated financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in violation of PRC laws and regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of SDH or our right to receive substantially all the economic benefits and residual returns from SDH and we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of SDH in our consolidated financial statements. Either of these results, or any other significant penalties that might be imposed on us in this event, would have a material adverse effect on our financial condition and results of operations.

 

We rely on contractual arrangements with SDH, a VIE entity, and its subsidiaries and shareholders for our China operations, which may not be as effective in providing operational control as direct ownership.

 

We have relied and expect to continue to rely on contractual arrangements with SDH, its subsidiaries and shareholders to operate our business in China. For a description of these contractual arrangements, see “Business—Contractual Arrangements between WFOE, SDH and Its Shareholders” and “Related Party Transactions— Contractual Arrangements with WFOE, SDH and Its Shareholders.” These contractual arrangements may not be as effective in providing us with control over SDH and its subsidiaries as direct ownership. We have no direct or indirect equity interests in SDH or any of its subsidiaries.

 

If we had direct ownership of SDH and its subsidiaries, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of SDH and its subsidiaries, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. But under the current contractual arrangements, as a legal matter, if SDH or any of its subsidiaries and shareholders fails to perform their obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example, if the shareholders of SDH were to refuse to transfer their equity interest in SDH to us or our designee when we exercise the call option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal action to compel them to fulfill their contractual obligations.

 

Many of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our affiliated entities, and our ability to conduct our business may be negatively affected.

 

11

 

 

The contractual arrangements we have entered into with SDH and its shareholders, and any other arrangements and transactions among related parties that we currently have or will have in future may be subject to scrutiny by the PRC tax authorities and they may determine that we owe additional taxes, which could substantially reduce our consolidated net income and the value of your investment.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities determine that the VIE contractual arrangements were not entered into on an arm’s-length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of SDH in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by SDH for PRC tax purposes, which could in turn increase its tax liabilities without reducing our PRC subsidiary’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on SDH for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if SDH’s tax liabilities increase or if it is required to pay late payment fees and other penalties.

 

The shareholders of SDH may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

Almost all of our beneficiary owners hold equity interests in SDH respectively. They may have conflicts of interest with us. Conflicts of interest may arise between the dual roles of them who are both shareholders of our Company and shareholders of SDH, our VIE. These shareholders may breach, or cause SDH to breach, or refuse to renew, the existing contractual arrangements we have with them and SDH, which would have a material and adverse effect on our ability to effectively control SDH and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with SDH to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our Company or such conflicts will be resolved in our favor.

 

Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our Company, except that we could exercise our purchase option under the exclusive option agreements with these shareholders to request them to transfer all of their equity interests in SDH to a PRC entity or individual designated by us, to the extent permitted by PRC law. If we cannot resolve any conflicts of interest or disputes between us and those individuals, we would have to rely on legal proceedings, which may materially disrupt our business. There is also substantial uncertainty as to the outcome of any such legal proceeding.

 

Our executive officers, directors and affiliates own a significant percentage of our shares and will be able to exert significant control over matters subject to shareholder approval. 

 

As of October 28, 2020, our executive officers, directors and affiliates beneficially own approximately 62.04% of our outstanding Ordinary Shares. Therefore, these stockholders will have the ability to influence us through their ownership positions. Further, our CEO and majority shareholder, Mr. Haiping Hu, has beneficial ownership of 6,820,887 Ordinary Shares. These shares represent ownership of approximately 40.60% of our Ordinary Shares as of October 28, 2020. These shareholders may be able to determine all matters requiring shareholder approval. For example, these shareholders, acting together, may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited transaction proposals or offers for our Ordinary Shares that you may believe are in your best interest as one of our shareholders.

 

We may lose the ability to use and enjoy assets held by SDH that are material to the operation of certain portion of our business if SDH goes bankrupt or become subject to a dissolution or liquidation proceeding.

 

As part of our contractual arrangements with SDH, SDH and its subsidiaries hold certain assets that are material to the operation of certain portion of our business, including intellectual property and licenses. If SDH goes bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, SDH may not, in any manner, sell, transfer, mortgage or dispose of their assets or legal or beneficial interests in the business without our prior consent. If SDH undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

Because we are a Cayman Island company and all of our business is conducted in the PRC, you may be unable to bring an action against us or our officers and directors or to enforce any judgment you may obtain.

 

We are incorporated in the Cayman Island and conduct our operations primarily in China. Substantially all of our assets are located outside of the United States and the proceeds of this offering will primarily be held in banks outside of the United States. In addition, the majority of our directors and officers reside outside of 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 we have violated your rights, either under United States federal or state securities laws or otherwise, or if you have a claim against us. Even if you are successful in bringing an action of this kind, the laws of the Cayman Island and of China may not permit you to enforce a judgment against our assets or the assets of our directors and officers. See “Enforceability of Civil Liabilities.

 

The SEC, the U.S. Department of Justice and other U.S. authorities may also have difficulties in bringing and enforcing actions against us or our directors or executive officers in the PRC. The SEC has stated that there are significant legal and other obstacles to obtaining information needed for investigations or litigation in China. China has recently adopted a revised securities law, and Article 177 of which provides, among other things, that no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Accordingly, without governmental approval in China, no entity or individual in China may provide documents and information relating to securities business activities to overseas regulators when it is under direct investigation or evidence discovery conducted by overseas regulators, which could present significant legal and other obstacles to obtaining information needed for investigations and litigation conducted in China.

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Risks Related to Doing Business in China

 

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

 

Although the Chinese economy expanded well in the last two decades, the rapid growth of the Chinese economy has slowed down since 2012, and there is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the People’s Bank of China and financial authorities of some of the world’s leading economies, including the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa, which have resulted in volatility in oil and other markets. There have also been concerns on the relationship among China and other Asian countries, which may result in or intensify potential conflicts in relation to territorial disputes. 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 may materially and adversely affect our business, results of operations and financial condition.

 

We face risks related to health epidemics such as the COVID-19 coronavirus outbreak originated in Wuhan city at the end of 2019, and other outbreaks, which significantly disrupted our operations and may continue to adversely affect our business, financial condition and results of operations.

 

Our business has been significantly disrupted and may continue to be materially and adversely affected by health epidemics such as the COVID-19 coronavirus outbreak originated in Wuhan city at the end of 2019 and other outbreaks affecting the PRC. Our business operations depend on China’s overall economy and demand for our services, which could be disrupted by health epidemics. Since May 2020, the outbreak in China has been generally stabilized, and large-scale offline activities have been permitted by the government as of June 2020, prior to which, due to the government restrictions, we were prevented from arranging offline activities, resulting in cancellations or postponements of study tours, forums and sponsorship advertising events, which adversely impacted the performance of our member services and enterprise services during the lock-down. However, revenues from our online services increased due to our extra efforts in promoting our APP, as well as providing more live video streaming programs during the lock-down. For the six months ended June 30, 2020, the revenues generated from our core businesses (member services, enterprise services and online services) decreased by approximately 8%, compared to the same period of the last year. Nevertheless, the aforementioned negative impact on our business was mitigated when the outbreak became stabilized in China. However, it remains uncertain as to if and when there may be a COVID-19 resurgence in China and to what extent its impact could have on our long-term business outlook.

 

Changes in the policies of the PRC government could have a significant impact upon our ability to operate profitably in the PRC.

 

Currently, we conduct all of our operations and all of our revenue is generated in the PRC. Accordingly, economic, political and legal developments in the PRC will significantly affect our business, financial condition, results of operations and prospects. Policies of the PRC government can have significant effects on economic conditions in the PRC and the ability of businesses to operate profitably. Our ability to operate profitably in the PRC may be adversely affected by changes in policies by the PRC government, including changes in laws, regulations or their interpretation that may affect our ability to operate as currently contemplated.

 

Because our business is dependent upon government policies that encourage a market-based economy, change in the political or economic climate in the PRC may impair our ability to operate profitably, if at all.

 

Although the PRC government has been pursuing a number of economic reform policies for more than two decades, the PRC government continues to exercise significant control over economic growth in the PRC. Because of the nature of our business, we are dependent upon the PRC government pursuing policies that encourage private ownership of businesses. We cannot assure you that the PRC government will pursue policies favoring a market-oriented economy or that existing policies will not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting political, economic and social life in the PRC.

 

PRC laws and regulations governing our current business operations are sometimes vague and uncertain and any changes in such laws and regulations may impair our ability to operate profitably.

 

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations governing our business and the enforcement and performance of our arrangements with customers in certain circumstances. The laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness and interpretation of newly enacted laws or regulations, including amendments to existing laws and regulations, may be delayed, and our business may be affected if we rely on laws and regulations which are subsequently adopted or interpreted in a manner different from our understanding of these laws and regulations. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.

 

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Because our business is conducted in RMB and the price of our Ordinary Shares is quoted in United States dollars, changes in currency conversion rates may affect the value of your investments.

 

Our business is conducted in the PRC, our books and records are maintained in RMB, which is the currency of the PRC, and the financial statements that we file with the SEC and provide to our shareholders are presented in United States dollars. Changes in the exchange rate between the RMB and dollar affect the value of our assets and the results of our operations in United States dollars. The value of the RMB against the United States dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions and perceived changes in the economy of the PRC and the United States. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenue and financial condition. Further, our Ordinary Shares offered by this prospectus are denominated in United States dollars, we will need to convert the net proceeds we receive into RMB in order to use the funds for our business. Changes in the conversion rate between the United States dollar and the RMB will affect that amount of proceeds we will have available for our business.

 

Under the PRC Enterprise Income Tax Law, or the EIT Law, we may be classified as a “resident enterprise” of China, which could result in unfavorable tax consequences to us and our non-PRC shareholders.

 

The EIT Law and its implementing rules provide that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” under PRC tax laws. The implementing rules promulgated under the EIT Law define the term “de facto management bodies” as a management body which substantially manages, or has control over the business, personnel, finance and assets of an enterprise. In April 2009, the State Administration of Taxation, or SAT, issued the Circular on Issues Concerning the Identification of Chinese-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance With the Actual Standards of Organizational Management, known as SAT Circular 82, which has been revised by the Decision of the State Administration of Taxation on Issuing the Lists of Invalid and Abolished Tax Departmental Rules and Taxation Normative Documents on December 29, 2017 and by the Decision of the State Council on Cancellation and Delegation of a Batch of Administrative Examination and Approval Items on November 8, 2013. Circular 82 has provided certain specific criteria for determining whether the “de facto management bodies” 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 Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met: (i) the places where senior management and senior management departments that are responsible for daily production, operation and management of the enterprise perform their duties are mainly located within the territory of China; (ii) financial decisions (such as money borrowing, lending, financing and financial risk management) and personnel decisions (such as appointment, dismissal, salary and wages) are made or need to be made by organizations or persons located within the territory of China; (iii) main property, accounting books, corporate seal, the board of directors and files of the minutes of shareholders’ meetings of the enterprise are located or preserved within the territory of China; and (iv) one half (or more) of the directors or senior management staff having the right to vote habitually reside within the territory of China.

 

We believe that GIOP is not a resident enterprise for PRC tax purpose. GIOP is not controlled by a PRC enterprise or PRC enterprise group and we do not meet some of the conditions outlined in the immediately preceding paragraph. For example, as a holding company, the key assets and records of GIOP, including the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that has been deemed a PRC “resident enterprise” by the PRC tax authorities. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body”.

 

If we are deemed as a PRC “resident enterprise” by PRC tax authorities, we will be subject to PRC enterprise income tax on our worldwide income at a uniform tax rate of 25%, although dividends distributed to us from our existing PRC subsidiary and any other PRC subsidiaries which we may establish from time to time could be exempt from the PRC dividend withholding tax due to our PRC “resident recipient” status. This could have a material and adverse effect on our overall effective tax rate, our income tax expenses and our net income. Furthermore, dividends, if any, paid to our shareholders may be decreased as a result of the decrease in distributable profits. In addition, if we were considered a PRC “resident enterprise”, any dividends we pay to our non-PRC investors, and the gains realized from the transfer of our Ordinary Shares may be considered income derived from sources within the PRC and be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty). It is unclear whether holders of our Ordinary Shares would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. This could have a material and adverse effect on the value of your investment in us and the price of our Ordinary Shares.

 

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

 

Under the 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 the Arrangement between the 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, a withholding tax rate of 10% may be lowered to 5% if the PRC enterprise is at least 25% held by a Hong Kong enterprise for at least 12 consecutive months prior to distribution of the dividends and is determined by the relevant PRC tax authority to have satisfied other conditions and requirements under the Double Tax Avoidance Arrangement and other applicable PRC laws.

 

However, based on the Circular on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, or the SAT Circular 81, which became effective on February 20, 2009, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment. According to Circular on Several Issues regarding the “Beneficial Owner” in Tax Treaties, which became effective as of April 1, 2018, when determining an applicant’s status as the “beneficial owner” regarding tax treatments in connection with dividends, interests, or royalties in the tax treaties, several factors will be taken into account. Such factors include whether the business operated by the applicant constitutes actual business activities, and whether the counterparty country or region to the tax treaties does not levy any tax, grant tax exemption on relevant incomes, or levy tax at an extremely low rate. This circular further requires any applicant who intends to be proved of being the “beneficial owner” to file relevant documents with the relevant tax authorities. Our PRC subsidiary is wholly owned by our Hong Kong subsidiary, GMB HK. However, we cannot assure you that our determination regarding our qualification to enjoy the preferential tax treatment will not be challenged by the relevant PRC tax authority or we will be able to complete the necessary filings with the relevant PRC tax authority and enjoy the preferential withholding tax rate of 5% under the Double Tax Avoidance Arrangement with respect to dividends to be paid by our PRC subsidiary to our GMB HK, in which case, we would be subject to the higher withdrawing tax rate of 10% on dividends received.

 

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

 

We are an offshore holding company conducting our operations in China through our PRC subsidiary, VIE and its subsidiaries. We may make loans to our PRC subsidiary, VIE and its subsidiaries, or we may make additional capital contributions to our PRC subsidiary. Any capital contributions or loans that we, as an offshore entity, make to our PRC subsidiary, including from the proceeds of this offering, are subject to PRC regulations. For example, loans to our PRC subsidiary cannot exceed statutory limits and are subject to foreign exchange loan registrations. Our capital contributions to our PRC subsidiary must be registered with the MOFCOM or its local counterpart. For more details, see “Regulation—Regulations Related to Foreign Debt.” and “Regulation—Regulations Related to Foreign Exchange.”

 

In light of the various requirements imposed by of PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals or filings on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or our VIE or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals on a timely basis or at all, our ability to use the proceeds we expect to receive from this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

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If we become directly subject to the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation.

 

U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on us, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing our business. If such allegations are not proven to be groundless, we and our business operations will be severely affected and you could sustain a significant decline in the value of our stock.

 

The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.

 

We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC reports and other disclosures and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by the China Securities Regulatory Commission, a PRC regulator that is responsible for oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of us, our SEC reports, other filings or any of our other public pronouncements.

 

The failure to comply with PRC regulations relating to mergers and acquisitions of domestic entities by offshore special purpose vehicles may subject us to severe fines or penalties and create other regulatory uncertainties regarding our corporate structure.

 

On August 8, 2006, MOFCOM, joined by the CSRC, the State-owned Assets Supervision and Administration Commission of the State Council, the SAT, the State Administration for Industry and Commerce (the “SAIC”), and State Administration of Foreign Exchange (“SAFE”), jointly promulgated regulations entitled the Provisions Regarding Mergers and Acquisitions of Domestic Entities by Foreign Investors (the “M&A Rules”), which took effect as of September 8, 2006, and as amended on June 22, 2009. These regulations, among other things, have certain provisions that require offshore special purpose vehicles formed for the purpose of acquiring PRC domestic companies and controlled directly or indirectly by PRC individuals and companies, to obtain the approval of MOFCOM prior to engaging in such acquisitions and to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. On September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval. The application of the M&A Rules with respect to our corporate structure remains unclear, with no current consensus existing among leading PRC law firms regarding the scope and applicability of the M&A Rules.

 

Our PRC legal counsel, GFE Law Office, has advised us that, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval of this offering because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether offering such as this offering contemplated by our Company are subject to the M&A Rules; (ii) the PRC Subsidiary was incorporated as wholly foreign-owned enterprise by means of direct investment rather than by merger or acquisition of equity interest or assets of a PRC domestic company owned by PRC companies or individuals as defined under the M&A Rules that are our Company’s beneficial owners; and (iii) there is no provision in the M&A Rules that clearly classifies the contractual arrangements as a kind of merger and acquisition transaction falling under the M&A Rules.

 

However, our PRC counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do. If the CSRC, MOFCOM, or another PRC regulatory agency determines that government approval was required for the VIE arrangement between WFOE and SDH, or if prior CSRC approval for overseas financings is required and not obtained, we may face severe regulatory actions or other sanctions from MOFCOM, the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines or other penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from overseas financings into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our Ordinary Shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel overseas financings, to restructure our current corporate structure, or to seek regulatory approvals that may be difficult or costly to obtain.

 

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PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase its registered capital or distribute profits to us, or may otherwise adversely affect us.

 

On July 4, 2014, SAFE issued the Circular on Issues Concerning Foreign Exchange Control over the Overseas Investment and Financing and Round-trip Investment by Domestic Residents via Special Purpose Vehicles, or SAFE Circular 37, which became effective as of July 4, 2014 and has replaced the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles (“SAFE Circular 75”). According to SAFE Circular 37, prior registration with the local SAFE branch is required for PRC residents, including PRC individuals and PRC corporate entities as well as foreign individuals that are deemed as PRC residents for foreign exchange administration purpose, in connection with their direct or indirect contribution of domestic assets or interests to offshore companies, known as SPVs. SAFE Circular 37 further requires amendment to the SAFE registrations in the event of any changes with respect to the basic information of the offshore special purpose vehicle, such as change of a PRC individual shareholder, name and operation term, or any significant changes with respect to the offshore special purpose vehicle, such as increase or decrease of capital contribution, share transfer or exchange, or mergers or divisions. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future. In February 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, effective June 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of SAFE.

 

In addition to SAFE Circular 37 and SAFE Notice 13, our ability to conduct foreign exchange activities in China may be subject to the interpretation and enforcement of the Implementation Rules of the Administrative Measures for Individual Foreign Exchange promulgated by SAFE in January 2007 (as amended and supplemented, the “Individual Foreign Exchange Rules”). Under the Individual Foreign Exchange Rules, any PRC individual seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas must make the appropriate registrations in accordance with SAFE provisions, the failure of which may subject such PRC individual to warnings, fines or other liabilities.

 

All of our shareholders who are subject to the SAFE Circular 37 and Individual Foreign Exchange Rules have completed the initial registrations with the qualified banks as required by the regulations. However, we may not be informed of the identities of all the PRC residents holding direct or indirect interest in our company, and we have no control over any of our beneficial owners. Thus, we cannot provide any assurance that our current or future PRC resident beneficial owners will comply with our request to make or obtain any applicable registrations or continuously comply with all registration procedures set forth in these SAFE regulations. Such failure or inability of our PRC residents beneficial owners to comply with these SAFE regulations may subject us or our PRC residents beneficial owners to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiary’s ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent us from being able to make distributions or pay dividends, as a result of which our business operations and our ability to distribute profits to you could be materially adversely affected.

 

Our contractual arrangements with SDH are governed by the laws of the PRC and we may have difficulty in enforcing any rights we may have under these contractual arrangements.

 

As all of our contractual arrangements with SDH are governed by the PRC laws and provide for the resolution of disputes through arbitration in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. Disputes arising from these contractual arrangements between us and SDH will be resolved through arbitration in China, although these disputes do not include claims arising under the United States federal securities law and thus do not prevent you from pursuing claims under the United States federal securities law. The legal environment in the PRC is not as developed as in the United States. As a result, uncertainties in the PRC legal system could further limit our ability to enforce these contractual arrangements, through arbitration, litigation and other legal proceedings remain in China, which could limit our ability to enforce these contractual arrangements and exert effective control over SDH. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over SDH, and our ability to conduct our business may be materially and adversely affected.

 

Increases in labor costs in the PRC may adversely affect our business and our profitability.

 

China’s economy has experienced increases in labor costs in recent years, which is expected to continue to grow. The average wage level for our employees has also increased in recent years. 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 prices for our products or services, our profitability and results of operations may be materially and adversely affected.

 

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In addition, we have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees and paying various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and childbearing insurance to designated government agencies for the benefits of our employees. Pursuant to the PRC Labor Contract Law, or the Labor Contract Law, that became effective in January 2008 and its implementing rules that became effective in September 2008 and its amendments that became effective in July 2013, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations.

 

As the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment practice does not and will not violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.

  

We may be involved from time to time in legal proceedings and commercial or contractual disputes, which could have a material adverse effect on our business, results of operations and financial condition.

 

From time to time, we may be involved in legal proceedings and commercial disputes. Such proceedings or disputes are typically claims that arise in the ordinary course of business, including, without limitation, commercial or contractual disputes, and other disputes with customers and suppliers, intellectual property matters, tax matters and employment matters. There can be no assurance that such proceedings and claims, should they arise, will not have a material adverse effect on our business, results of operations and financial condition.

 

Risks Relating to this Offering and the Trading Market

 

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

 

Prior to this offering, there has not been a public market for our Ordinary Shares. The initial public offering is contingent upon receiving authorization to list the Ordinary Shares on a national exchange. We have applied to list our Ordinary Shares on the Nasdaq Capital Market and have reserved the symbol “SDH” for purposes of listing our Ordinary Shares on the Nasdaq Capital Market. We cannot assure you that Nasdaq will approve our application to list our Ordinary Shares on the Nasdaq Capital Market. In that case, we will not be able to consummate the offering and may have to seek other ways to finance our operations. Even if we are approved to list our Ordinary Shares on the Nasdaq Capital Market, an active public market for our Ordinary Shares may not develop or be sustained after the offering, in which case the market price and liquidity of our Ordinary Shares will be materially and adversely affected.

 

Nasdaq may apply additional and more stringent criteria for our initial and continued listing because we plan to have a small public offering and insiders will hold a large portion of the company’s listed securities.

 

Nasdaq Listing Rule 5101 provides Nasdaq with broad discretionary authority over the initial and continued listing of securities in Nasdaq and Nasdaq may use such discretion to deny initial listing, apply additional or more stringent criteria for the initial or continued listing of particular securities, or suspend or delist particular securities based on any event, condition, or circumstance that exists or occurs that makes initial or continued listing of the securities on Nasdaq inadvisable or unwarranted in the opinion of Nasdaq, even though the securities meet all enumerated criteria for initial or continued listing on Nasdaq. In addition, Nasdaq has used its discretion to deny initial or continued listing or to apply additional and more stringent criteria in the instances, including but not limited to: (i) where the company engaged an auditor that has not been subject to an inspection by the Public Company Accounting Oversight Board (“PCAOB”), an auditor that PCAOB cannot inspect, or an auditor that has not demonstrated sufficient resources, geographic reach, or experience to adequately perform the company’s audit; (ii) where the company planned a small public offering, which would result in insiders holding a large portion of the company’s listed securities. Nasdaq was concerned that the offering size was insufficient to establish the company’s initial valuation, and there would not be sufficient liquidity to support a public market for the company; and (iii) where the company did not demonstrate sufficient nexus to the U.S. capital market, including having no U.S. shareholders, operations, or members of the board of directors or management. Our public offering will be relatively small and the insiders of our Company will hold a large portion of the company’s listed securities. Nasdaq might apply the additional and more stringent criteria for our initial and continued listing, which might cause delay or even denial of our listing application.

 

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A recent joint statement by the SEC and the Public Company Accounting Oversight Board (United States), or the “PCAOB,” proposed rule changes submitted by Nasdaq, and an act passed by the U.S. Senate all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.

 

On April 21, 2020, SEC and PCAOB released a joint statement highlighting the risks associated with investing in companies based in or having substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.

 

On May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply a minimum offering size requirement for companies primarily operating in a “Restrictive Market,” (ii) adopt a new requirement relating to the qualification of management or the board of directors for Restrictive Market companies, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditor.

 

On May 20, 2020, the U.S. Senate passed an act requiring a foreign company to certify it is not owned or manipulated by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditor for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange.

 

On June 4, 2020, the U.S. President issued a memorandum ordering the President’s working group on financial markets to submit a report to the President within 60 days of the date of the memorandum that should include recommendations for actions that can be taken by the executive branch and by the SEC or PCAOB to enforce U.S. regulatory requirements on Chinese companies listed on U.S. stock exchanges and their audit firms. However, it remains unclear what further actions, if any, the U.S. executive branch, the SEC, and PCAOB will take to address the problem.

 

The lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of these accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our Ordinary Shares to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

 

Our auditor, Friedman LLP, is an independent registered public accounting firm with the PCAOB, and as an auditor of publicly traded companies in the U.S., is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor has been inspected by the PCAOB on a regular basis. However, the above recent developments have added uncertainties to our proposed offering, to which Nasdaq may apply additional and more stringent criteria after considering the effectiveness of our auditor’s audit and quality control procedures, adequacy of personnel and training, sufficiency of resources, geographic reach, and experience as related to our audit. 

 

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 will be determined by negotiations between us and the Underwriter based on various factors, and does not bear any relationship to our earnings, book value or any other indicia of value. See “Underwriting.” 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.

 

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If we are a passive foreign investment company for United States federal income tax purposes for any taxable year, United States holders of our Ordinary Shares could be subject to adverse United States federal income tax consequences.  

 

A non-United States corporation will be a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year if either (i) at least 75% of its gross income for such taxable year is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce or are held for the production of passive income. Based on the current and anticipated value of our assets and the composition of our income and assets, we do not expect to be a PFIC for United States federal income tax purposes for our current taxable year or in the foreseeable future. However, the determination of whether or not we are a PFIC according to the PFIC rules is made on an annual basis and will depend on the composition of our income and assets and the value of our assets from time to time. Therefore, changes in the composition of our income or assets or the value of our assets may cause us to become a PFIC. The determination of the value of our assets (including goodwill not reflected on our balance sheet) may be based, in part, on the quarterly market value of our Ordinary Shares, which is subject to change and may be volatile. 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 2019 taxable year or for any subsequent year, more than 50% of our assets may be assets which produce passive income.

 

Although the U.S. tax law with regards to VIEs is unclear, we are treating SDH as being owned by us for United States federal income tax purposes, not only because we control their management decisions, but also because we are entitled to the economic benefits associated with SDH, and as a result, we are treating SDH as our wholly-owned subsidiary for U.S. federal income tax purposes. For purposes of the PFIC analysis, in general, according to Section 1297(c) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), a non-U.S. corporation is deemed to own its pro rata share of the gross income and assets of any entity in which it is considered to own at least 25% of the equity by value. Although our Company does not technically own any stock in SDH there are numerous factors that give rise to a strong conclusion that its control of management decisions, the entitlement to economic benefits associated with SDH, and the inclusion of SDH as part of the consolidated group (Under Accounting Standards Codification (ASC) Topic 810, “Consolidation,” VIEs are generally consolidated with other related entities under common control) is so akin to our Company holding a stock interest in SDH that it is reasonable and consistent to consider our Company’s interest in SDH as a deemed stock interest. Therefore, the income and assets of SDH should be included in the determination of whether or not we are a PFIC in any taxable year. It is important to emphasize that there is little to no guidance other than the statute itself (Internal Revenue Code Section 1297(c)) and analogous portions of the code, treasury regulations and other accepted authorities and as such it is possible for the IRS to challenge the argument that the look through rule would apply in this case, especially since the statute explicitly says “stock”.

 

The classification of certain of our income as active or passive, and certain of our assets as producing active or passive income, and hence whether we are or will become a PFIC, depends on the interpretation of certain United States Treasury Regulations as well as certain IRS guidance relating to the classification of assets as producing active or passive income. Such regulations and guidance are potentially subject to different interpretations. If due to different interpretations of such regulations and guidance the percentage of our passive income or the percentage of our assets treated as producing passive income increases, we may be a PFIC in one or more taxable years.

 

If we are a PFIC for any taxable year during which a United States person holds Ordinary Shares, certain adverse United States federal income tax consequences could apply to such United States person.

  

U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS ABOUT THE PFIC RULES, THE POTENTIAL APPLICABILITY OF THESE RULES TO THE COMPANY CURRENTLY AND IN THE FUTURE, AND THEIR FILING OBLIGATIONS IF THE COMPANY IS A PFIC.

 

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You will experience immediate and substantial dilution in the net tangible book value of Ordinary Shares purchased.

 

The initial public offering price of our Ordinary Shares is substantially higher than the net tangible book value per share of our Ordinary Shares. Consequently, when you purchase our Ordinary Shares in the offering and upon completion of the offering, you will incur immediate dilution, based on an assumed initial public offering price of US$5.00 per share. See “Dilution.” In addition, you may experience further dilution to the extent that additional ordinary shares are issued upon exercise of outstanding warrants or options we may grant from time to time.

 

Because we are an “emerging growth company,” we may not be subject to requirements that other public companies are subject to, which could affect investor confidence in us and our Ordinary Shares.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from disclosure and other requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for so long as we are an emerging growth company. 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. See “Implications of Our Being an Emerging Growth Company”.

 

Substantial future sales of our Ordinary Shares or the anticipation of future sales of our Ordinary Shares in the public market could cause the price of our Ordinary Shares to decline.

 

Sales of substantial amounts of our Ordinary Shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our Ordinary Shares to decline. An aggregate of 16,800,000 Ordinary Shares are outstanding before the consummation of this offering and 22,400,000 Ordinary Shares are expected to be outstanding immediately after the consummation of this offering, assuming the underwriter does not exercise its over-allotment option. Sales of these shares into the market could cause the market price of our Ordinary Shares to decline.

 

We will incur increased costs as a result of being a public company.

 

Once we become a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company prior to this offering. In addition, the Sarbanes-Oxley Act as well as new rules subsequently implemented by the SEC and Nasdaq, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we incur ongoing additional costs associated with our public company reporting requirements. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

 

If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud.

 

We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. As we are an “emerging growth company,” we are expected to first include a management report on our internal controls over financial reporting in our annual report in the second fiscal year end following the effectiveness of our initial public offering. As such, these requirements are expected to first apply to our annual report on Form 20-F for the fiscal year ending on December 31, 2021. Our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may still decline to attest to our management’s assessment or 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. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

 

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. If our management or our independent registered public accounting firm determines that we have any material weaknesses or other control deficiencies, we plan to remediate such material weaknesses and control deficiencies, in time to meet the deadline imposed by Section 404 of the Sarbanes-Oxley Act. If we fail to timely achieve or maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting. Moreover, effective internal controls over financial reporting are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our Ordinary Shares. Furthermore, we anticipate that we will incur considerable costs and devote significant management time and efforts and other resources to comply with Section 404 of the Sarbanes-Oxley Act.

 

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We do not intend to pay dividends for the foreseeable future.

 

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Ordinary Shares if the market price of our Ordinary Shares increases.

 

If securities or industry analysts do not publish research or reports about our business, or if the publish a negative report regarding our Ordinary Shares, the price of our Ordinary Shares and trading volume could decline.

 

The trading market for our Ordinary Shares may depend in part on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade us, the price of our Ordinary Shares would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of our Ordinary Shares and the trading volume to decline.

 

The market price of our Ordinary Shares may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

 

The initial public offering price for our Ordinary Shares will be determined through negotiations between the Underwriter and us and may vary from the market price of our Ordinary Shares following our initial public offering. If you purchase our Ordinary Shares in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the initial public offering price of our Ordinary Shares, or the market price following our initial public offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to our initial public offering. The market price of our Ordinary Shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

  actual or anticipated fluctuations in our revenue and other operating results;
     
  the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
     
  actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
     
  announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
     
  price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
     
  lawsuits threatened or filed against us; and
     
  other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, shareholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

 

If we cease to qualify as a foreign private issuer, we would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers, and we would incur significant additional legal, accounting and other expenses that we would not incur as a foreign private issuer.

 

We expect to qualify as a foreign private issuer upon the completion of this offering. As a foreign private issuer, we will be exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as United States domestic issuers, and we will not be required to disclose in our periodic reports all of the information that United States domestic issuers are required to disclose. While we currently expect to qualify as a foreign private issuer immediately following the completion of this offering, we may cease to qualify as a foreign private issuer in the future which will increase our compliance costs.

 

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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 Rule requires listed companies to have, among other things, a majority of its board members be independent. As a foreign private issuer, however, we are permitted to, and we may, follow home country practice in lieu of the above requirements, 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 may not consist of independent directors, fewer board members may 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 the Nasdaq listing rules with respect to certain corporate governance standards which may afford less protection to investors.

 

Anti-takeover provisions in our memorandum and articles of association may discourage, delay or prevent a change in control.

 

Some provisions in our memorandum and articles of association, may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including, among other things, the following:

 

provisions that permit our board of directors by resolution to issue classes of shares with preferred, deferred or other special rights or restrictions as the board of directors determine in their discretion, without any further vote or action by our shareholders. If issued, the rights, preferences, designations and limitations of any class of preferred shares could operate to the disadvantage of the outstanding ordinary shares the holders of which would not have any pre-emption rights in respect of such an issue of preferred shares. Such terms could include, among others, preferences as to dividends and distributions on liquidation, or could be used to prevent possible corporate takeovers; and

 

provisions that restrict the ability of our shareholders holding in aggregate less than thirty percent (30%) of the outstanding voting shares in the company to call general meetings or annual general meetings and to include matters for consideration at shareholder meetings and the ability of our shareholders holding in aggregate of 10% of the outstanding voting shares to call for special meetings of shareholders.

 

Our board of directors may decline to register transfers of ordinary shares in certain circumstances.

 

Our board may decline to recognize any instrument of transfer unless: (a) a fee of such maximum sum as the Designated Stock Exchange may determine to be payable or such lesser sum as the Board may from time to time require is paid to the Company in respect thereof; (b) the instrument of transfer is in respect of only one class of share; (c) the instrument of transfer is lodged at the Office or such other place at which the Register is kept in accordance with the Law or the Registration Office (as the case may be) accompanied by the relevant share certificate(s) and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer (and, if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do); (d) if applicable, the instrument of transfer is duly and properly stamped; and (e) the transfer is not to more than four joint holders.

 

If our directors refuse to register a transfer they shall, within one month after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal. The registration of transfers may, on 14 days’ notice being given by advertisement in such one or more newspapers or by electronic means, be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year.

 

If we cannot satisfy, or continue to satisfy, the initial listing requirements and other rules of Nasdaq Capital Market, although we are exempt from certain corporate governance standards applicable to US issuers as a Foreign Private Issuer, our securities may not be listed or may be delisted, which could negatively impact the price of our securities and your ability to sell them.

 

We will seek to have our securities approved for listing on the Nasdaq Capital Market before consummation of this offering. The initial public offering is contingent upon receiving authorization to list the Ordinary Shares on a national exchange. However, we cannot assure you that we will be able to meet those initial listing requirements at that time. In that case, we will not be able to consummate the offering and may have to seek other ways to finance our operations. Even if our securities are listed on the Nasdaq Capital Market, we cannot assure you that our securities will continue to be listed on the Nasdaq Capital Market.

 

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In addition, following this offering, in order to maintain our listing on the Nasdaq Capital Market, we will be required to comply with certain rules of Nasdaq Capital Market, including those regarding minimum stockholders’ equity, minimum share price and certain corporate governance requirements. Even if we initially meet the listing requirements and other applicable rules of the Nasdaq Capital Market, we may not be able to continue to satisfy these requirements and applicable rules. If we are unable to satisfy the Nasdaq Capital Market criteria for maintaining our listing, our securities could be subject to delisting.

 

If the Nasdaq Capital Market does not list our securities, or subsequently delists our securities from trading, we could face significant consequences, including:

 

  a limited availability for market quotations for our securities;
     
  reduced liquidity with respect to our securities;
     
  a determination that our Ordinary Shares are a “penny stock,” which will require brokers trading in our Ordinary Shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our Ordinary Shares;
     
  limited amount of news and analyst coverage; and
     
  a decreased ability to issue additional securities or obtain additional financing in the future.

 

The laws of the Cayman Islands may not provide our shareholders with benefits comparable to those provided to shareholders of corporations incorporated in the United States.

 

Our corporate affairs are governed by our memorandum and articles of association, by the Companies Law and by the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands and from English common law. Decisions of the Privy Council (which is the final Court of Appeal for British overseas territories such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions of the English courts, and particularly the Supreme Court and the Court of Appeal are generally of persuasive authority but are not binding in the courts of the Cayman Islands. Decisions of courts in other Commonwealth jurisdictions are similarly of persuasive but not binding authority. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws relative to the United States. Therefore, our public shareholders may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

 

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 requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association and have been provided for in the amended articles and memorandum of association of the Company, subject to the restrictions described therein. Advance notice of at least twenty-one clear days is required for the convening of our annual general shareholders’ meeting and at least 14 clear days’ notice any other general meeting of our shareholders. 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. To the extent that shareholders hold in aggregate less than thirty percent (30%) of the outstanding voting shares in the Company, they cannot (a) call general meetings or annual general meetings; and (b) Include matters for consideration at shareholder meetings.

 

Our pre-IPO shareholders will be able to sell their shares after completion of this offering subject to restrictions under the Rule 144.

 

Our pre-IPO shareholders may be able to sell their Ordinary Shares under Rule 144 after completion of this offering. Because these shareholders have paid a lower price per Ordinary Share than participants in this offering, when they are able to sell their pre-IPO shares under Rule 144, they may be more willing to accept a lower sales price than the IPO price. This fact could impact the trading price of the stock following completion of the offering, to the detriment of participants in this offering. We issued a total of 16,800,000 Ordinary Shares as of the date of this prospectus. Under rule 144, before our pre-IPO shareholders can sell their shares, in addition to meeting other requirements, they must meet the required holding period, as well as the lock-up period required as part of our underwriting agreement with our underwriter. We do not expect any of the Ordinary Shares to be sold pursuant to Rule 144 during the pendency of this offering.

 

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995, all of which are subject to risks and uncertainties. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by the use of words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “will,” “would,” “should,” “could,” “may” or other similar expressions in this prospectus. These statements are likely to address our growth strategy, financial results and product and development programs. You must carefully consider any such statements and should understand that many factors could cause actual results to differ from our forward-looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

  future financial and operating results, including revenues, income, expenditures, cash balances and other financial items;
     
  our ability to execute our growth and expansion, including our ability to meet our goals;
     
  current and future economic and political conditions;
     
  the future growth of the Chinese knowledge sharing and enterprise service industries;
     
  our ability to continue to operate through our VIE structure;
     
  our capital requirements and our ability to raise any additional funds which we may require;
     
  our ability to attract clients and further enhance our brand recognition;
     
  our ability to hire and retain qualified management personnel and key employees in order to enable us to develop our business;
     
  trends and competition in Chinese enterprise service and knowledge sharing industries;
     
  impact of the novel COVID-19 outbreak on our business operations; and
     
  other assumptions described in this prospectus underlying or relating to any forward-looking statements.

 

We describe material risks, uncertainties and assumptions that could affect our business, including our financial condition and results of operations, under “Risk Factors.” We base our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may, and are likely to, differ materially from what is expressed, implied or forecast by our forward-looking statements. Accordingly, you should be careful about relying on any forward-looking statements. Except as required under the federal securities laws, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this prospectus, whether as a result of new information, future events, changes in assumptions, or otherwise.

 

You should read thoroughly this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance.

 

This prospectus contains statistical data that we obtained from various government publications and the Frost & Sullivan Report. We have not independently verified the data in these reports. Statistical data in these publications also may include projections based on a number of assumptions. If any one or more of the assumptions underlying the statistical data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

 

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TRADEMARKS, SERVICE MARKS AND TRADENAMES

 

This prospectus contains trademarks, service marks and trade names of others, which are the property of their respective owners. Solely for convenience, the trademarks, service marks, logos and trade names referred to in this prospectus are included without the ® and ™ symbols. All trademarks, service marks and trade names appearing in this prospectus are, to our knowledge, the property of their respective owners. We do not intend our use or display of other companies’ trademarks, service marks, copyrights or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies or unrelated parties.

 

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$5 per Ordinary Share, of approximately $25,020,921.

 

Proceeds from this offering in the amount of $500,000 shall be used to fund an escrow account for a period of 24 months following the closing date of this offering, which account shall be used in the event we have to indemnify the underwriters pursuant to the terms of an underwriting agreement with the underwriters.

 

We plan to use the net proceeds we receive from this offering, excluding the $500,000, which shall be used to fund the escrow account, for the following purposes:

 

    Use of Proceeds Approximately
in US$1,000
 
Content providing (both in-house and third-party providers) 30%   US$

7,357

 
Software and hardware upgrade 20%   US$

4,904

 
Marketing, branding, and sales 20%   US$

4,904

 
Personnel training and recruitment 5%   US$

1,226

 
Acquisition of knowledge sharing providers and consulting companies 25%*   US$

6,130

 

*We plan to strategically acquire (i) knowledge sharing providers including training and education related service providers to grow our ecosystem and expand our reach to potential Users, and (ii) consulting companies to expand our enterprise services. As of the date of this prospectus, we do not have any specific acquisition target.

 

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this Offering. The net proceeds may be used for corporate purposes that do not increase our operating results or the market value of our Ordinary Shares.

 

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, and to our VIE only through loans, subject to satisfaction of applicable government registrations, approvals and filing requirements. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Our Corporate Structure—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary and VIE, 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 PRC subsidiary. Pursuant to the EIT law and its implementation rules, any dividends paid by PRC subsidiary to GMB HK will be subject to a withholding tax rate of 10% unless otherwise reduced to 5% by relevant tax authorities according to Double Tax Avoidance Arrangement or other applicable laws. See “Risk Factors—Risks Relating to Doing Business in the PRC—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.”

 

Current PRC regulations permit our PRC subsidiary to pay dividends to GMB HK only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiary and consolidated affiliates in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserve funds, however, may not be distributed as cash dividends.

 

Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments, and trade and service-related foreign exchange transactions, can be made in foreign currencies, without prior approval of SAFE, by complying with certain procedural requirements. Specifically, without prior approval of SAFE, cash generated from the operations in PRC may be used to pay dividends to our company.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2020:

 

  on an actual basis; and
     
  on an as adjusted basis to reflect the issuance and sale of the Ordinary Shares by us in this offering, at the proposed initial public offering price at US$5.00 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,” “Summary Financial Data,” “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.

 

The actual and as adjusted information set forth in the table, assuming the Underwriter does not exercise its over-allotment option, and excludes warrants to purchase up to 644,000 Ordinary Shares issuable to the Underwriter in connection with this offering.

 

    US$
(Actual)
    US$
(As adjusted)
 
Equity            
Share capital US$0.0001 par value, 500,000,000 Ordinary Shares authorized, 16,800,000 Ordinary Shares issued and outstanding; 22,400,000 Ordinary Shares issued and outstanding, as adjusted     1,680       2,240  
Additional paid-in capital(1)     4,462,177       29,482,538  
Statutory reserves     1,636,414       1,636,414  
Retained earnings     16,705,050       16,705,050  
Accumulated other comprehensive loss     (914,629 )     (914,629 )
Total shareholders’ equity attributable to controlling shareholders     21,890,692      

46,911,613

 
Non-controlling interests     138,083       138,083  
Total equity     22,028,775      

47,049,696

 
Total capitalization     22,028,775      

47,049,696

 

  

(1) Pro forma additional paid in capital reflects the net proceeds we expect to receive, after deducting underwriting fee, Underwriter expense allowance and other expenses. We expect to receive net proceeds of approximately $25,020,921 (offering proceeds of $28,000,000, less underwriting discounts of $2,100,000, non-accountable expense of $25,000 and offering expenses of $854,079). The additional paid in capital reflects the net proceeds we expect to receive, after deducting underwriting discounts, Underwriter expense allowance and other expenses.

  

A US$1.00 increase (decrease) in the assumed initial public offering price of $5 per Ordinary Share would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by US$5,175,000, assuming 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 estimated underwriting discounts and estimated expenses payable by us.

 

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DILUTION

 

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 this 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.

 

Our net tangible book value as of June 30, 2020 was US$17,262,426, or US$1.03 per Ordinary Share. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting the as adjusted net tangible book value per Ordinary Share from the initial public offering price per Ordinary Share and after deducting the estimated discounts to the underwriter and the estimated offering expenses payable by us.

 

Without taking into account any other changes in net tangible book value after June 30, 2020, other than to give effect to our sale of Ordinary Shares offered in this offering based on the proposed offering price of US$5.00 after deduction of the estimated discounts to the underwriter and the estimated offering expenses payable by us, our as adjusted net tangible book value as of June 30, 2020 would have been US$42,283,347, or US$1.89 per outstanding Ordinary Share and US$1.89 per Ordinary Share. This represents an immediate increase in net tangible book value of US$0.86 per Ordinary Share to the existing shareholders, and an immediate dilution in net tangible book value of US$3.11 per Ordinary Share to investors purchasing Ordinary Shares in this offering. The as adjusted information discussed above is illustrative only. The following table illustrates such dilution:

 

    Amount  
Proposed initial public offering price per Ordinary Share   US$ 5.00  
Net tangible book value per Ordinary Share as of June 30, 2020   US$ 1.03  
As adjusted net tangible book value per Ordinary Share attributable to payments by new investors   US$ 1.89  
Increase in net tangible book value per Ordinary Share to the existing shareholders   US$ 0.86  
Amount of dilution in net tangible book value per Ordinary Share to new investors in the offering   US$ 3.11  

  

The following table summarizes, on an as adjusted basis as of June 30, 2020, the number of shares of Ordinary Shares purchased from us, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing shareholders and by new investors in the offering at an assumed initial public offering price of $5.00 per share before deducting the estimated discounts to the underwriter and the estimated offering expenses payable by us.

 

    Ordinary Shares
purchased
    Total consideration     Average
price per ordinary
 
    Number     Percent     Amount     Percent     share  
                               
Existing shareholders     16,800,000       75.00 %   US$  4,463,857       13.75 %   US$ 0.27  
New investors     5,600,000       25.00 %   US$ 28,000,000       86.25 %   US$ 5.00  
Total     22,400,000       100.00 %   US$ 32,463,857       100.00 %   US$ 1.45  

  

The as adjusted information as discussed above is illustrative only.

 

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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, the 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 Cogency Global Inc. 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.

 

Conyers Dill & Pearman (“Conyers”), our counsel with respect to the laws of Cayman Islands, and GFE Law Office, our counsel with respect 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.

 

Conyers, has further advised us that it is uncertain that Cayman Islands courts would enforce: (1) judgments of U.S. courts obtained in actions against us or other persons that are predicated upon the civil liability provisions of the U.S. federal securities laws; or (2) original actions brought against us or other persons predicated upon the Securities Act. Conyers has informed us that there is uncertainty with regard to Cayman Islands law relating to whether a judgment obtained from the U.S. courts under civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. Furthermore, there is currently no statutory enforcement or treaty between the United States and the Cayman Islands providing for enforcement of judgments. However, a judgment obtained in the United States may be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination on the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment: (i) is given by a foreign court of competent jurisdiction; (ii) is final; (iii) is not in respect of taxes, a fine or a penalty; and (iv) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or public policy of the Cayman Islands.

 

GFE Law Office 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. GFE Law Office 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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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.

 

Overview

 

We started our operation as a consulting company providing enterprise services to small and medium-sized enterprises in the PRC in December 2014, and launched our peer-to-peer knowledge sharing and enterprise service platform in May 2016. Since then, we have continued to expand and improve our platform, where knowledge is shared and gained, and services are requested and provided. We operate our platform through our PRC operating entity, SDH and its subsidiaries, both on-line, via our mobile application “Shidonghui App” (the “APP”), and off-line, through local offices directly operated by us in Beijing, Shanghai and Hangzhou, as well as 51 local centers operated by some of our Members in 35 cities and 21 provinces throughout the PRC. Our mission is to become a worldwide leading knowledge sharing and enterprise service platform.

 

Substantially all of our operations are conducted in the PRC and all of our revenues, expenses, cash and cash equivalents are denominated in RMB. Foreign ownership of certain parts of our businesses including the value-added telecommunications services, or the VATS, is subject to restrictions under current PRC laws and regulations. See “Regulations—Regulations Related to Foreign Investment.” The business activities that we engage in are VATS, therefore, we have relied and expect to continue to rely on contractual arrangements with SDH, its subsidiaries and shareholders to operate our business in China. For a description of these contractual arrangements, see “Business—Contractual Arrangements between WFOE, SDH and Its Shareholders.” In the opinion of our PRC legal counsel, GFE Law Office, based on its understandings of the relevant PRC laws and regulations, (i) the ownership structures of SDH in China and WFOE, both currently and immediately after giving effect to this offering, are not in violation of applicable PRC laws and regulations currently in effect; and (ii) each contracts among WFOE, SDH and its shareholders is legal, valid, binding and enforceable in accordance with its terms and applicable PRC laws. However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. See “Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Through the last two decades, a growing economy and a generally positive market environment have created many entrepreneurial and high-growth enterprises, many of which need corporate services such as financial consulting and management training. Likewise, as a result of China’s economic expansion, the Chinese population saw large increases of personal wealth. Previously, our platform has focused on providing enterprise services to enterprises and entrepreneurs, but we are actively expanding our service to individuals and families that seek advice and services relating to health, beauty, travel, fashion, housing, etc.

 

When we launched our platform, our aim was not only to continue providing enterprise services to PRC’s growing business communities, but also create a marketplace where qualified entities (individuals and enterprises) have opportunities to serve as providers, and receive rewards by sharing their knowledge with others on the platform. As of September 30, 2020, our knowledge sharing and enterprise service ecosystem had 550 Mentors, 998 Experts, 1,467 Members, and approximately 5.49 million Users. In addition to serving our Users and Members, we continue to provide enterprise services to small and medium-sized enterprises in China, through a dedicated team with seven full-time professional consultants, as well as our Mentors and Experts. Our providers (Mentors, Experts and consultants) are successful entrepreneurs, scientists, investors, and professionals with qualifications and achievements in major industries such as finance, energy, health care, and academia. Our core strength is the knowledge brought by our providers, highlighted by their experiences, knowledge, industry know-how, and social connections.

 

Key Factors that Affect Operating Results

 

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

 

Ability to acquire clients effectively

 

Our ability to increase our revenue largely depends on our ability to attract and engage potential clients, which include Users, Members, and Enterprise Service Clients. Our sales and marketing efforts include those related to client acquisition and retention, and general marketing. We intend to continue to dedicate significant resources to our sales and marketing efforts, including using a portion of the proceeds from this offering to promote our sales and market efforts. (See “Use of Proceeds”) and constantly seek to improve the effectiveness of these efforts to grow our revenues.

 

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Our client acquisition channels primarily include our sales and marketing campaigns and existing client referrals. In order to acquire clients, we have made significant efforts in building mutually beneficial long-term relationships with local government and local business associations. In addition, we also market our services through the influence of our founder and CEO, Mr. Haiping Hu, who is a well-known entrepreneur in China, and through social media platforms, such as WeChat and Weibo. If any of our current client acquisition channels becomes less effective, or if we are unable to continue to use any of these channels, we may not be able to attract new clients in a cost-effective manner or convert potential clients into active clients and may even lose our existing clients to our competitors. To the extent that our current client acquisition and retention efforts becomes less effective, our service revenue may be significantly impacted, which would have a significant adverse effect on our revenues, financial condition and results of operations.

 

Ability to attract and retain our qualified service providers

 

We rely heavily on the expertise of our service providers, including Mentors, Experts, and consultants to maintain our core competence. As of September 30, 2020, we had 550 Mentors, 998 Experts, and a team of professional consultants as our knowledge sharing providers. Many of our Mentors are experienced leaders of successful well-known corporations. Likewise, our Experts are outstanding professionals in their specialized fields, our team of consultants consists of professionals with an average of five years’ industrial experiences. We have been able to achieve significant growth since we launched our knowledge sharing and enterprise service platform in 2016, and as our business scope increases, we expect to continue to invest significant resources in hiring and retaining service providers. Our ability to sustain our growth will depend on our ability to attract and retain qualified service providers.

 

Transition to public company status

 

Subsequent to the completion of our initial public offering, our general and administrative expenses are expected to increase materially in connection with meeting our public company reporting obligations and corporate governance requirements. The increased expenses will include legal, accounting and other professional service fees, insurance premiums, auditing fees, investor relations, shareholder meetings, printing and filing fees, share-based compensation expense, as well as employee-related expenses for regulatory compliance and other costs. In addition, our selling and administrative expenses are also expected to increase as we add personnel and incur additional fees and costs related to the growth of our business and our operation as a publicly traded company in the United States. We are a relatively early-stage company with a limited operating history. As a result, our costs associated with being a public company are expected to be of a higher proportion of revenue and net profit as compared to a larger or more mature company.

 

Impact from COVID-19

 

In early January of 2020, a novel coronavirus (“COVID-19”) outbreak took place in Wuhan, China. Subsequently, it has spread rapidly to Asia and other parts of the world. The COVID-19 outbreak has resulted in widespread economic disruptions in China, as well as stringent government measures by the Chinese government to contain its transmissions including quarantines, travel restrictions, and temporary closures of non-essential businesses in China and elsewhere. The outbreak in China mainly occurred in the first quarter of 2020, and it gradually stabilized and business activities started to resume under the guidance and support of the government since late second quarter of 2020.

 

All of our revenues and operations are concentrated in China. Consequently, our results of operations and financial performances were affected for the six months ended June 30, 2020. 

 

Due to the government restrictions, we were prevented from arranging offline activities from late January to May 2020, resulting in cancellations or postponements of study tours, forums and sponsorship advertising events, which adversely impacted the performance of our member services and enterprise services, especially sponsorship advertising services. In addition, due to widespread economic disruptions during the outbreak, demand for our consulting services to small and medium-sized enterprises was also adversely affected. For the six months ended June 30, 2020, our revenue from member services decreased by $0.6 million or 56%, our revenue from sponsorship advertising services decreased by $0.8 million, or 40%, and revenue from consulting services decreased by $0.3 million, or 61% as compared to the same period of 2019.

  

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To mitigate the negative impact of the COVID-19 outbreak on our business, we shifted offline activities to online by using remote video and WeChat meeting sessions since February 2020. Accordingly, we have experienced an increasing demand for our comprehensive tailored services, which were provided to clients through online communications and conferences or video recording. Our online services also grew due to an increasing number of our APP Users. For the six months ended June 30, 2020, our revenue from comprehensive tailored services increased by $1.1 million or 53%, and our revenue from online services increased by $0.2 million, or 1,446%, as compared to the same period of 2019. We also continued to expand our new revenue stream from sale of merchandises and realized revenue of $1.2 million from sale of merchandises, which was nil for the six months ended June 30, 2019.

  

As of September 30, 2020, the COVID-19 outbreak in China appears to be generally under control and business activities have recovered on the whole. Since June 2020, we have resumed offline activities including study tour and forum with sponsorship advertising and we expect the aforementioned negative impact will be further mitigated since the third quarter of 2020, and gradually further mitigate in the future when the outbreak becomes more stabilized in China and other regions in the world. Nevertheless, due to the uncertainty on future developments, which cannot be predicted with confidence at this time, we are not able to assess the overall or long-term effect the outbreak may have on our financial results and business operations. 

 

A severe or prolonged slowdown in the global or Chinese economy.

 

The rapid growth of the Chinese economy has slowed down since 2012 and such slowdown may continue in the future. There is considerable uncertainty over the 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 relationship among 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.

 

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Results of Operations

 

Six Months Ended June 30, 2020 and 2019

 

The following table summarizes the results of our operations during the six months ended June 30, 2020 and 2019, and provides information regarding the dollar and percentage increase or decrease during such periods.

 

    For the six months ended
June 30,
    Change in     of %  
    2020     2019     Amount     change  
    (Unaudited)     (Unaudited)              
                         
REVENUE, NET   $ 6,506,463     $ 5,799,093     $ 707,370       12.20 %
                                 
COSTS AND OPERATING EXPENSES                                
Service costs     634,314       1,024,777       (390,463 )     (38.10 )%
Cost of goods sold     749,485       -       749,485       100 %
Selling expenses     475,496       687,282       (211,786 )     (30.82 )%
General and administrative expenses     1,871,146       1,407,761       463,385       32.92 %
Research and development expenses     434,836       239,384       195,452       81.65 %
Total costs and operating expenses     4,165,277       3,359,204       806,073       24.00 %
                                 
PROFIT FROM OPERATIONS     2,341,186       2,439,889       (98,703 )     (4.05 )%
                                 
OTHER (EXPENSES) INCOME                                
Investment gains (losses)     8,563       (14,336 )     22,899       (159.73 )%
Interest income     129,549       150,892       (21,343 )     (14.14 )%
Other income (expense), net     10,777       (1,092 )     11,869       (1,086.90 )%
Total other income, net     148,889       135,464       13,425       9.91 %
                                 
PROFIT BEFORE INCOME TAXES     2,490,075       2,575,353       (85,278 )     (3.31 )%
                                 
Income taxes provision     271,220       449,598      

(178,378

)     (39.67 )%
                                 
NET INCOME     2,218,855       2,125,755       93,100       4.38 %
Less: net loss attributable to non-controlling interests     (73,099 )     (120,399 )     47,300       (39.29 )%
NET INCOME ATTRIBUTABLE TO CONTROLLING SHAREHOLDERS   $ 2,291,954     $ 2,246,154       45,800       2.04 %

 

Revenue

 

Our revenues for the six months ended June 30, 2020 and 2019 were derived from the following sources:

  

    For the six months ended June 30,     Change  
    2020     %     2019     %     Amount     %  
                                     
Member services   $ 491,806       7.56 %   $ 1,129,232       19.47 %   $ (637,426 )     (56.45 )%
Enterprise services                                                
-Comprehensive tailored services     3,190,371       49.03 %     2,090,700       36.05 %     1,099,671       52.60 %
-Sponsorship advertising services     1,201,415       18.47 %     2,002,324       34.53 %     (800,909 )     (40.00 )%
-Consulting services     199,198       3.06 %     512,525       8.84 %     (313,327 )     (61.13 )%
Online services     191,443       2.94 %     12,385       0.21 %     179,058       1,445.77 %
Sale of merchandises     1,219,296       18.74 %     -       -       1,219,296       100.00 %
Other services     12,934       0.20 %     51,927       0.90 %     (38,993 )     (75.09 )%
Revenues, net   $ 6,506,463       100.00 %   $ 5,799,093       100.00 %   $ 707,370       12.20 %

 

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Our revenues increased by $707,370, or 12.20%, from $5,799,093 for the six months ended June 30, 2019, to $6,506,463 for the six months ended June 30, 2020. Revenues from member services accounted for 7.56% of our net revenues in six months ended June 30, 2020, as compared to 19.47% in six months ended June 30, 2019. Revenue from enterprise services accounted for 70.56% and 79.42% of our net revenues for the six months ended June 30, 2020 and 2019, respectively. Revenue from sale of merchandises accounted for 18.74% and nil of our net revenues for the six months ended June 30, 2020 and 2019, respectively. The increase in our revenues was primarily attributable to the increase in the revenue generated from sale of merchandises, comprehensive tailored services and online services and partially offset by the decrease of revenue from member services, sponsorship advertising services and consulting services.

 

Revenues from member services

 

The Company offers three tiers of membership services, Platinum, Diamond and Protégé, which differ in membership fees as well as the level of the services provided. Members pay a fixed fee for exchange of the right to participate in seven activities, including study tours and forums, within a typically one-year membership period.

 

Revenues from member services decreased by $637,426, or 56.45%, from $1,129,232 for the six months ended June 30, 2019, to $491,806 for the six months ended June 30, 2020, primarily due to the fact that since the fourth quarter of 2018, we have put more efforts on the development of enterprise services and we have paid less attention to retaining existing members and developing new members that resulted in the decrease of the number of members. Revenues from member services were generated from 56 Platinum members, 47 Diamond members and 7 Protégé member for the six months ended June 30, 2020, as compared to 106 Platinum members, 200 Diamond members and 1 Protégé member for the six months ended June 30, 2019. The revenue decrease from member services was also due to the fact we were prevented from arranging offline activities from late January to May 2020 due to COVID-19.

 

Revenues from comprehensive tailored services

 

There are four major categories of our comprehensive tailored services. The following table presents the type of tailored services as well as their respective prices:

 

Type of comprehensive tailored services   Pricing
Conference and salon organization   RMB50,000 (approximately US$7,110)
Booth exhibition services   RMB50,000 (approximately US$7,110)
On-site mentors’ guidance   RMB50,000-100,000 (approximately US$7,110-US$14,220)
Other additional services   RMB10,000-200,000 (approximately US$1,422 -US$28,440)

 

Revenues from comprehensive tailored services increased by $1,099,671, or 52.60%, from $2,090,700 for the six months ended June 30, 2019, to $3,190,371 for the six months ended June 30, 2020, primarily due to the fact that the demand of comprehensive tailored services among enterprise clients increased, especially mentors’ guidance on coping with challenges from COVID-19 in the six months ended June 30, 2020. As a result, we entered into contracts with a total amount of $3,114,379 in the six months ended June 30, 2020, of which $2,938,093 was recognized as revenue in the six months ended June 30, 2020, while we signed contracts with a total amount of $2,167,886 in the six months ended June 30, 2019, of which $ 1,847,614 was recognized as revenue for in the six months ended June 30, 2019.

 

Revenues from sponsorship advertising services

 

Sponsorship advertising is a special form of advertising, generally referring to a publicity strategy adopted by enterprises in order to enhance their corporate and product image, as well as brand awareness and influence. We provide sponsorship advertising services for our enterprise clients at events we hold, such as forums and study tours.

 

Revenues from sponsorship advertising services decreased by $800,909, or 40.00% from $2,002,324 for the six months ended June 30, 2019, to $1,201,415 for the six months ended June 30, 2020, primarily due to the COVID-19 outbreak in early 2020, which prevented us from offering offline events from late January 2020 to May 2020. There were only two offline events held for sponsorship advertising services in June 2020 for the six months ended June 30, 2020, while there were thirteen activities held for sponsorship advertising services for the six months ended June 30, 2019.

  

Revenues from consulting services

 

We provide consulting services to small and medium-sized enterprises to develop strategies and solutions for the following: corporate reorganization, product promotion and marketing, industry supply chain integration, corporate governance, financing and capital structure, etc. Revenues from consulting services decreased by $313,327, or 61.13% from $512,525 for the six months ended June 30, 2019, to $199,198 for the six months ended June 30, 2020, primarily due to the fact that small and medium-sized enterprises’ business were adversely affected by COVID-19 and such enterprises have put in stricter control of their business spending.

 

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Revenues from online services

 

We provide two types of online services to the Company’s APP Users, which are questions and answers (Q&A) session with chosen Mentors or Experts and online streaming of courses and programs. Top-up credits are paid by Users through the Company’s APP, using which Users can purchase the online services.

 

For the Q&A session, the Company charges 30% of the Q&A fees as a facilitator of online services. The Company recognizes online service fees as revenue at completion of Q&A sessions on a net basis, as the Company merely provides a platform for its users and is neither the primary obligor of the Q&A session, nor has it have risks and rewards as a principal. Revenues from Q&A online services were $65,641 and $12,385 for the six months ended June 30, 2020 and 2019, respectively, with a significant increase mainly caused by an increase in both the numbers of Users and the number of the Q&A sessions completed on our platform.

 

For the online streaming of courses and programs, our Users can either: (1) purchase a la carte courses and programs for unlimited streaming, or (2) subscribe as an annual VIP, which grants Users the access right to the Company’s VIP courses and programs over the subscription period. Revenues generated from online streaming were $125,802 and nil for the six months ended June 30, 2020 and 2019, respectively, as this type of online service started in late 2019.

 

We believe that our knowledge sharing platform is capable of building and maintaining long-term relationships with our Users and we expect to improve User retention and daily activity levels on our APP. However, we do not expect the online services revenue will become a major revenue stream in the near future.

 

Revenues from sale of merchandises

 

We started to sell merchandises obtained through nonmonetary transactions with our clients or purchased from third parties at the end of 2019. We generated revenue from sale of merchandises of $1,219,296 and nil for the six months ended June 30, 2020 and 2019, respectively.

 

Revenues from other services

 

Other services fees are mainly derived from non-member participation of our study tours and forums at the service level of Platinum members. We charge non-members a fixed fee of RMB3,000 (approximately US$434) for each member activity.

 

Fees are usually collected on site at the date of each activity and revenues are recognized at the completion of such activity. Other services fees decreased by $38,993, or 75.09% as compared to the six months ended June 30, 2019 due to less non-member participation and less availability of our study tours or forums.  

 

Costs and operating expenses

 

The following table sets forth the breakdown of our costs and operating expenses for the six months ended June 30, 2020 and 2019:

 

    For the six months ended June 30,     Change        
    2020     %     2019     %     Amount     %  
                                     
Service costs   $ 634,314       15.23 %   $ 1,024,777       30.51 %   $ (390,463 )     (38.10 )%
Cost of goods sold     749,485       17.99 %     -       -       749,485       100.00 %
Selling expenses     475,496       11.42 %     687,282       20.46 %     (211,786 )     (30.82 )%
General and administrative expenses     1,871,146       44.92 %     1,407,761       41.91 %     463,385       32.92 %
Research and development expenses     434,836       10.44 %     239,384       7.13 %     195,452       81.65 %
Total costs and operating expenses     4,165,277       100.00 %     3,359,204       100.00 %     806,073       24.00 %

  

Service costs

 

Our service costs primarily include (1) the cost of holding activities, such as venue rental fees, conference equipment fees, (2) professional and consulting fees paid to third parties for our activities; (3) the fees paid to Mentors and Experts; (4) labor costs; and (5) amortization cost of copyright. Service costs decreased by $390,463, or 38.10% for the six months ended June 30, 2020 compared to same period in 2019, mainly due to the decrease of $317,476 in professional and consulting fees paid to third parties for our activities, decrease of $233,750 in labor costs for serving our activities and decrease of $203,408 in cost of holding activities, which was partially offset by the increase in amortization of copyright of course videos of $362,363. Because offline events were not permitted during the outbreak of COVID-19, we cancelled offline activities during the period from late January 2020 until May 2020. Instead we organized Mentors’ knowledge sharing by pre-recorded videos. There were only three offline activities held for the six months ended June 30, 2020, while there were 13 offline activities held for the six months ended June 30, 2019. The amortization of copyright of course videos increased due to the fact that they were acquired in late 2019.

 

Cost of goods sold

 

We started to sell merchandises at the end of 2019 and cost of goods sold were $749,485 and nil for the six months ended June 30, 2020 and 2019, respectively. Cost of goods sold consists of cost of inventories obtained through nonmonetary transactions with our clients and purchased from third parties. Cost of goods sold is recognized when revenue from sale of merchandises is recognized.

 

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Selling expenses

 

Our selling expenses decreased by $211,786 or 30.82% from $687,282 for the six months ended June 30, 2019 to $475,496 for the six months ended June 30, 2020. The decrease in our selling expenses was primarily attributable to a $206,934 decrease in salary and bonus paid to the sales staff for the six months ended June 30, 2020 as compared to the same period in 2019, mainly due to less bonus paid to sales staff as we had significantly less offline activities for the six months ended June 30, 2020 as compared to the same period in 2019.

 

General and administrative expenses

 

Our general and administrative expenses increased by $463,385 or 32.92%, from $1,407,761 for the six months ended June 30, 2019 to $1,871,146 for the six months ended June 30, 2020. Such increase was primarily due to an increase in bad debt expenses of $468,815, as we experienced a slow-down in the collection of accounts receivable resulting from impact from COVID-19 for the six months ended June 30, 2020 due to the fact that some of our customers’ businesses were adversely impacted by the outbreak.

 

Research and development expenses (“R&D expenses”)

 

Research and development expenses for our mobile application, the APP, increased by $195,452 or 81.65% from $239,384 for the six months ended June 30, 2019 to $434,836 for the six months ended June 30, 2020, primarily due to the fact that we hired more personnel to upgrade the APP to meet our Users’ increasing need especially during the outbreak of COVID-19. We expect research and development expenses to continue to increase in the foreseeable future as we will increase our investment in the research and development of the APP.

 

Other income, net

 

Total net other income increased by $13,425 or 9.91% from $135,464 for the six months ended June 30, 2019 to $148,889 for the six months ended June 30, 2020. The increase in total net other income was primarily due to the fact that an investment income of $8,563 was recognized for the six months ended June 30, 2020, while an investment loss of $14,336 was recognized for the six months ended June 30, 2019.

 

Income taxes provision

 

GIOP was incorporated in the Cayman Islands and under the current laws of the Cayman Islands, it is not subject to tax on its income or capital gains. In addition, no Cayman Islands withholding tax will be imposed upon the payment of dividends by GIOP to its shareholders.

 

GMB HK is a company registered in Hong Kong, which is subject to income taxes within Hong Kong at the applicable tax rate on taxable income. From year of assessment of 2018/2019 onwards, Hong Kong profit tax rates are 8.25% on assessable profits up to HK$2,000,000 (approximately US$289,855), and 16.5% on any part of assessable profits over HK$2,000,000. However, GMB HK did not have any assessable profits arising in or derived from Hong Kong for the six months ended June 30, 2020 and 2019, therefore no provision for Hong Kong profits tax was made in these periods.

 

Our subsidiaries in the PRC are subject to the PRC Enterprise Income Tax Laws (“EIT Laws”) with the statutory income tax rate of 25%. SDH obtained its “National High Tech Enterprise” (“NHTE”) certificate on October 25, 2017 and is eligible to enjoy a preferential tax rate of 15% from 2017 to 2019 to the extent it has taxable income under the EIT Laws. SDH has completed the process of renewing the NHTE certificate and expects to obtain the renewal in the second half of 2020. In 2019, our PRC subsidiary and VIE’s subsidiaries other than SDH and GMB (Hangzhou) are qualified as small-scale and low-profit enterprises, whose annual taxable income is less than RMB1,000,000 (approximately US$144,928), they were qualified to enjoy a favorable income tax rate of 5%. We expected all of our PRC subsidiaries except SDH and GMB (Hangzhou) will be qualified as small-scale and low-profit enterprises in 2020, since GMB(Beijing), GMB Culture, GMB Consulting, GMB Linking and GMB Technology had accumulated operating loss as of June 30, 2020. GMB (Hangzhou) is not qualified as small-scale and low-profit enterprises thus is subject to standard income tax rate of 25%.

 

Our income taxes provision decreased by $178,378 when comparing six months ended June 30, 2020 to 2019, primarily due to decreased taxable income for the six months ended June 30, 2020.

 

Net income

 

As a result of the foregoing, we reported a net income of $2,218,855 for the six months ended June 30, 2020, as compared to a net income of $2,125,755 for the six months ended June 30, 2019.

 

Net loss attributable to non-controlling interest

 

Non-controlling interests are recognized to reflect the portion of minority shareholders’ equity that is not attributable, directly or indirectly, to the Company as the controlling shareholder. For the Company’s consolidated subsidiaries, VIE and VIE’ s subsidiaries, non-controlling interests represent a minority shareholder’s 49% ownership interest in GMB (Beijing), GMB Culture, which has a majority-owned subsidiary called GMB Technology, GMB Consulting, GMB Linking as of June 30, 2020. Net loss attributable to non-controlling interest was $73,099 and $120,399 for the six months ended June 30, 2020 and 2019, respectively.

 

Net income attributable to the Company

 

Net income attributable to the Company increased by $45,800, or 2.04% from $2,246,154 for the six months ended June 30, 2019 to net income $2,291,954 for the six months ended June 30, 2020.

 

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Years Ended December 31, 2019 and 2018

 

The following table summarizes the results of our operations during the years ended December 31, 2019 and 2018, respectively, and provides information regarding the dollar and percentage increase or decrease during such periods.

 

   For the years ended
December 31,
   Change in   of % 
   2019   2018   Amount   change 
                 
                 
REVENUE, NET  $17,925,476   $13,538,999   $4,386,477    32.40%
                     
COSTS AND OPERATING EXPENSES                    
Service costs   2,109,649    1,142,596    967,053    84.64%
Selling expenses   1,350,894    1,282,677    68,217    5.32%
General and administrative expenses   2,897,079    1,749,209    1,147,870    65.62%
Research and development expenses (“R&D expenses”)   795,540    665,378    130,162    19.56%
Total costs and operating expenses   7,153,162    4,839,860    2,313,302    47.80%
                     
PROFIT FROM OPERATIONS   10,772,314    8,699,139    2,073,175    23.83%
                     
OTHER (EXPENSES) INCOME                    
Investment losses   (23,799)   (20,194)   (3,605)   17.85%
Interest income (expense)   212,285    142,612    69,673    48.85%
Other income (expenses), net   9,069    (10,619)   19,688    (185.40)%
Total other (expense) income, net   197,555    111,799    85,756    76.71%
                     
PROFIT BEFORE INCOME TAXES   10,969,869    8,810,938    2,158,931    24.50%
                     
Income taxes provision   1,589,101    1,158,465    430,636    37.17%
                     
NET INCOME   9,380,768    7,652,473    1,728,295    22.58%
Less: net (loss) attributable to non-controlling interests   (365,617)   175,407    (541,024)   (308.44)%
NET INCOME ATTRIBUTABLE TO CONTROLLING SHAREHOLDERS  $9,746,385   $7,477,066   $2,269,319    30.35%

 

Revenue

 

Our revenues for the years ended December 31, 2019 and 2018 were derived from the following sources:

  

   For the years ended December 31,   Change 
   2019   %   2018   %   Amount   % 
                         
Member services  $2,525,084    14.09%  $5,280,587    39.00%  $(2,755,503)   (52.18)%
Enterprise service                              
-Comprehensive tailored services   5,733,342    31.98%   4,732,980    34.96%   1,000,362    21.14%
-Sponsorship advertising services   8,288,164    46.24%   2,520,026    18.61%   5,768,138    228.89%
-Consulting services   1,189,169    6.63%   793,400    5.86%   395,769    49.88%
Online services   66,304    0.37%   8,098    0.06%   58,206    718.77%
Other services   123,413    0.69%   203,908    1.51%   (80,495)   (39.48)%
Revenues, net  $17,925,476    100.00%  $13,538,999    100.00%  $4,386,477    32.40%

 

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Our revenues increased by $4,386,477, or 32.40%, from $13,538,999 for the year ended December 31, 2018, to $17,925,476 for the year ended December 31, 2019. Revenues from Member services accounted for 14.09% of our net revenues for the year ended December 31, 2019, as compared to 39.00% for the year ended December 31, 2018. Revenue from enterprise services accounted for 84.85% and 59.43% of our net revenues for the year ended December 31, 2019 and 2018, respectively. We put in more efforts to promote our enterprise services in the fiscal year 2019 than 2018, as a result, our revenues generated from sponsorship advertising services, consulting services and comprehensive tailored services all increased in the fiscal year 2019 as compared to the decrease of revenue from member services.

 

Revenues from member services

 

The Company offers three tiers of member services, Platinum, Diamond and Protégé, which differ in membership fees as well as the level of the services provided. Members pay a fixed fee for exchange of the right to participate in seven activities, including study tours and forums, within a typically one-year membership period.

 

Revenues from Member services decreased by $2,755,503, or 52.18%, from $5,280,587 for the year ended December 31, 2018, to $2,525,084 for the year ended December 31, 2019, primarily due to the fact that we put in more efforts on the development of enterprise services from the fourth quarter of 2018 that resulted in the decrease of the number of new members. Decrease in the renewal of existing membership also contributed to the decrease in revenues from Member services. Revenues were generated from 228 Diamond members, 144 Platinum members and 7 Protégé member for the year ended December 31, 2019, as compared to 444 Diamond members, 263 Platinum members and 12 Protégé members for the year ended December 31, 2018.

 

Revenues from comprehensive tailored services

 

There are four major categories of our comprehensive tailored services. The following table presents the type of tailored services as well as their respective prices:

 

Type of comprehensive tailored services   Pricing
Conference and salon organization -   RMB50,000 (approximately US$7,248)
Booth exhibition services   RMB50,000 (approximately US$7,248)
On-site mentors’ guidance   RMB50,000-100,000 (approximately US$7,248-US$14,496)
Other additional services   RMB10,000-200,000 (approximately US$1,450-US$ 28,992)

 

Revenues from comprehensive tailored services increased by $1,000,362, or 21.14%, from $4,732,980 for the year ended December 31, 2018, to $ 5,733,342 for the year ended December 31, 2019, primarily due to the fact that (a) the demand of comprehensive tailored services among enterprise clients increased; (b) we put more efforts into comprehensive tailored services to meet clients’ needs, such as organizing large-scale conferences of hot topics and inviting Mentors and Experts with relevant experiences from specific industries. As a result, we entered into 82 contracts with a total amount of $4,511,690 in the fiscal year 2018, of which $3,844,498 was recognized as revenue for in the fiscal year 2018, while we signed 93 contracts with a total amount of $6,152,554 in the fiscal year 2019, of which $5,060,069 was recognized as revenue in the fiscal year 2019.

 

Revenues from sponsorship advertising services

 

Sponsorship advertising is a special form of advertising, generally referring to a publicity strategy adopted by enterprises in order to enhance their corporate and product image, as well as brand awareness and influence. We provide sponsorship advertising services for our enterprise clients at events we hold, such as forums and study tours.

 

Revenues from sponsorship advertising services increased by $5,768,138, or 228.89% from $2,520,026 for the year ended December 31, 2018, to $ 8,288,164 for the year ended December 31, 2019, primarily due to the fact that a) we started the sponsorship advertising services from the second half of 2018; and b) the demand of sponsorship advertising services among enterprise clients increased; and c) we put more efforts to organizing more sponsorship advertising services activities to meet clients’ needs. As a result, we were able to organize more activities, including large-scale forums, which we use as venues for our sponsorship advertising services. We had 44 sponsorship advertising services activities in fiscal year 2019 and 18 sponsorship advertising services activities in fiscal year 2018.

 

Revenues from consulting services

 

We provide consulting services to small and medium-sized enterprise to develop strategies and solutions for the following: corporate reorganization, product promotion and marketing, industry supply chain integration, corporate governance, financing and capital structure, etc.

 

Revenues from consulting services increased by $395,769, or 49.88 %, from $793,400 for the year ended December 31, 2018, to $1,189,169 for the year ended December 31, 2019, primarily due to the fact that: a) the demand of consulting services among enterprise clients increased; and b) we put more efforts into hiring consultants with specific consulting experiences to meet clients’ needs.

 

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Revenues from online services

 

We provide two types of online services to the Company’s APP Users, which are questions and answers (Q&A) session with chosen Mentors or Experts and online streaming of courses and programs. Top-up credits are paid by Users through the Company’s APP, using which Users can purchase the online services.

 

For the Q&A session, fees are paid by Users through the Company’s APP platform, on which Users can raise questions to chosen Mentors or Experts for each Q&A dialogue with fixed fees. Chosen Mentors or Experts set their own fees for Q&A sessions. The chosen Mentors or Experts would then be automatically engaged by the Users with private 1-to-1 Q&A dialogues. If the response is delayed or unsatisfactory to the User, he or she may notify our customer service representatives who will contact the provider to follow up with the User.

 

The Company charges 30% of the Q&A fees as a facilitator of online services. The Q&A fees are allocated to the Company and chosen Mentors or Experts automatically by the APP on a 30%/70% split upon completion of Q&A sessions. The Company recognizes online service fees as revenue at completion of Q&A sessions on a net basis, i.e., in the amount of 30% of allocated Q&A fees, as the Company merely provides a platform for its users and is not the primary obligor of the Q&A session, neither has risks and rewards as principal. Revenues from Q&A online services were $15,196 and $8,098 for the years ended December 31, 2019 and 2018, respectively, with a significant increase mainly caused by an increase in the numbers of Users.

 

For the online streaming of courses and programs, our Users can either: (1) purchase a la carte courses and programs at a rate ranging from RMB 9.9 to 299, which translates to approximately US$3 to US$43, per course or program by top-up credits through the Company’s APP platform, for unlimited streaming, or (2) subscribe as an annual VIP at a rate of RMB299 per year, approximately US$43, which grants Users the access right to the Company’s VIP courses and programs over the subscription period. Revenues generated from online streaming were $51,108 and $nil for the years ended December 31, 2019 and 2018, respectively.

 

To continually grow our online business, we have expanded the catalogue of our video and audio courses and programs, improved services on our APP, invested resources to attract and retain content and service providers since 2019. In addition, our APP developing team keeps improving the usability of our APP to offer better User experiences. We believe that our knowledge sharing platform is capable of building and maintaining long-term relationships with our Users and we expect to improve User retention and daily activity levels on our APP. However, we do not expect the online services revenue will become a major revenue stream in the near future.

 

Other Revenues

 

Other revenues mainly consist of revenues from rendering of other services and sale of merchandises, decreased by $80,495 or 39.48% as compared to the year ended December 31, 2018.

 

Other services fees are mainly derived from non-member participation of our study tours and forums at the service level of Platinum members. We charge non-members a fixed fee of RMB3,000 for each member activity. Other services fees decreased by $90,048, or 44.16% as compared to the year ended December 31, 2018 due to less non-member participation of our study tours or forums.  

 

The Company started sale of merchandises at the end of 2019 and realized revenue of $9,553. 

 

Costs and operating expenses

 

The following table sets forth the breakdown of our costs and operating expenses for the years ended December 31, 2019 and 2018:

 

   For the years ended December 31,   Change     
   2019   %   2018   %   Amount   % 
                         
Service costs  $2,109,649    29.49%  $1,142,596    23.61%  $967,053    84.64%
Selling expenses   1,350,894    18.89%   1,282,677    26.50%   68,217    5.32%
General and administrative expenses   2,897,079    40.50%   1,749,209    36.14%   1,147,870    65.62%
Research and development expenses   795,540    11.12%   665,378    13.75%   130,162    19.56%
Total costs and operating expenses   7,153,162    100.00%   4,839,860    100.00%   2,313,302    47.80%

  

Service costs

 

Our service costs primarily include (1) the cost of organizing activities, such as venue rental fees, conference equipment fees, (2) professional and consulting fees paid to third parties for our activities; (3) the fees paid to Mentors and Experts for on-site consulting and in-person lectures in our activities; and (4) labor costs. Service costs increased by $967,053, or 84.64% for the year ended December 31, 2019 compared to the same period in 2018, mainly due to the increase of $775,619 in professional and consulting fees paid to third parties for our member services and enterprise services activities, and an incremental amortization expense of intangible assets, the online course videos, of $123,123.

 

Selling expenses

 

Our selling expenses increased by $68,217 or 5.32 % from $1,282,677 for the year ended December 31, 2018 to $1,350,894 for the year ended December 31, 2019. The increase in our selling expenses was primarily attributable to a $63,598 increase in conference fee in line with the increase in the number of activities we organized in fiscal year 2019 compared to fiscal year 2018.

 

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General and administrative expenses

 

Our general and administrative expenses increased by $1,147,870 or 65.62%, from $1,749,209 for the year ended December 31, 2018 to $ 2,897,079 for the year ended December 31, 2019. Such increase was primarily due to an increase in office lease expenses of $160,394 for a larger office space leased to meet our business expansion needs, an increase in salary expenses of $280,447, an increase in professional fee of $158,022 incurred for the preparation of our IPO and an increase in allowance of $151,239 in line with the increase of account receivables balance, and an increase in miscellaneous service fee of $238,433, including training and general consulting services to improve our client service capacity and capability. We expect to continue to hire more employees and engage legal, accounting and other professional service providers to meet our public company reporting and corporate governance requirements as we become a public company upon the completion of this offering.

 

R&D expenses

 

Research and development expenses for our mobile application, the APP, increased by $130,162 or 19.56 %, from $665,378 for the year ended December 31, 2018 to $795,540 for the year ended December 31, 2019, primarily due to the fact that we hired more personnel to upgrade the APP to meet our Users’ need. We expect R&D expenses to continue to increase in the foreseeable future as we will increase the research and development of the APP. 

 

Other (expenses) income

 

Total net other income increased by $85,756 or 76.71% from $111,799 for the year ended December 31, 2018 to $197,555 for the year ended December 31, 2019, primarily due to an increase in interest income of $69,673.

 

Income taxes provision

 

GIOP was incorporated in the Cayman Islands and under the current laws of the Cayman Islands, GIOP is not subject to tax on its income or capital gains. In addition, no Cayman Islands withholding tax will be imposed upon the payment of dividends by the Company to its shareholders.

 

GMB HK is a company registered in Hong Kong, which is subject to income taxes within Hong Kong at the applicable tax rate on taxable income. From year of assessment of 2018/2019 onwards, Hong Kong profit tax rates are 8.25% on assessable profits up to HK$2,000,000, (approximately US$ 289,855), and 16.5% on any part of assessable profits over HK$2,000,000. However, the Company did not have any assessable profits arising in or derived from Hong Kong for the year ended December 31, 2019 and 2018, therefore no provision for Hong Kong profits tax was made in these periods.

 

In 2018, our other PRC subsidiary and VIE’s subsidiaries are qualified as small-scale and low-profit enterprises, whose annual taxable income is less than RMB1,000,000 (approximately US$ 144,928), their income is reduced by 50% to the taxable income, and enterprise income tax is paid at 20% tax rate, which is essentially resulting in a favorable income tax rate of 10%. On January 17, 2019, the State Taxation Administration issued new preferential policies on small-scale and low-profit corporate income tax, which further reduced the favorable income tax rate to 5% for enterprises whose annual taxable income is less than RMB1,000,000, approximately US$144,928. We expected all of our PRC subsidiaries except SDH and GMB (Hangzhou) will be qualified as small-scale and low-profit enterprises. Since GMB(Beijing), GMB Culture, GMB Linking and GMB Technology had accumulated operating loss as of December 31, 2019, only GMB Consulting will enjoy the preferential tax rate of 5% for the tax year of 2019. SDH obtained its “National High Tech Enterprise” certificate on October 25, 2017 and is eligible to enjoy a preferential tax rate of 15% from 2017 to 2020 to the extent it has taxable income under the EIT Law. SDH is in the process of renewing the NHTE certificate and expects to obtain the renewal in the second half of 2020. GMB (Hangzhou) is no longer qualified as small-scale and low-profit enterprises thus is subject to standard income tax rate of 25% due to its increasing taxable income.

 

Our income tax provision increased by $430,636 when comparing year ended December 31, 2019 to 2018, primarily due to increased taxable income for the year ended December 31, 2019.

 

Net income

 

As a result of the foregoing, we reported a net income of $9,380,768 for the year ended December 31, 2019, compared to a net income of $7,652,473 for the year ended December 31, 2018.

 

Net profit attributable to non-controlling interest

 

Non-controlling interests are recognized to reflect the portion of their equity that is not attributable, directly or indirectly, to the Company as the controlling shareholder. For the Company’s consolidated subsidiaries, VIE and VIE’ s subsidiaries, non-controlling interests represent a minority shareholder’s 49% ownership interest in GMB (Beijing), GMB Culture, which has a majority-owned subsidiary called GMB Technology, GMB Consulting, GMB Linking as of December 31, 2019. Net loss attributable to non-controlling interest was $365,617 for the year ended December 31, 2019, which was derived from GMB(Beijing) of $82,246, GMB Culture of $178,180, GMB Technology of $124,989 and GMB Linking of $4,096, offset by net income attributable to non-controlling interest of GMB Consulting of $23,895, while net income attributable to non-controlling interest was $175,407 for the year ended December 31, 2018.

 

Net income attributable to the Company

 

Net income attributable to the Company increased by $2,269,319, or 30.35% from $7,477,066 for the year ended December 31, 2018 to $9,746,385 for the year ended December 31, 2019.

 

41

 

 

Liquidity and Capital Resources 

To date, we have financed our operations primarily through cash flows from operations and additional capital contributions from shareholders. We received an aggregate capital injection by our shareholders of $119,996 and $238,128 for the six months ended June 30, 2020 and the year ended December 31, 2019, respectively. We plan to support our future operations primarily from cash generated from our operations and cash on hand.

 

As of June 30, 2020, our cash and cash equivalents amounted to $5,748,044 as compared to $9,439,106 as of December 31, 2019. The accounts receivable from third parties amounted to $7,352,432 as of June 30, 2020, out of which, $1,473,268 was subsequently collected as of August 31, 2020. Our deferred revenue amounted to $422,865 as of June 30, 2020, which is mainly derived from member services and comprehensive tailored services, and will be recognized as revenue as our services were gradually provided, and enhance our working capital.

 

As of June 30, 2020 and December 31, 2019, our working capital was $13,535,765 and $12,696,031, respectively. Our working capital requirements are influenced by the level of operations, the numerical volume of our sales contracts, and the progress of execution of our services.

 

We believe that our working capital is at a positive position and sufficient to meet our operation requirement in the next 12 months from the interim financial statements issuance date. It is mainly contributed from, (1) our current position of cash and cash equivalents, and (2) cash flows provided by operating activities.

 

If we experience an adverse operating environment or incurred unanticipated capital expenditure requirements, or if we accelerate our growth, then additional financing may be required. No assurance can be given, however, that additional financing, if required, would be on favorable terms or available at all. 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 dilutions to our existing shareholders. 

Substantially all of our operations are conducted in the PRC and all of our revenues and the vast majority of our expenses, cash and cash equivalents are denominated in RMB. As of June 30, 2020, 99.05% of our cash and cash equivalents were held in China, and held by our VIE and VIE’s subsidiaries and denominated in Renminbi, while 0.95% of our cash and cash equivalents were held in Hong Kong, and held by GIOP and GMB HK and denominated in US dollars. Although we consolidate the results of our VIE and its subsidiaries, we only have access to the assets or earnings of our VIE and their subsidiaries through our contractual arrangements with our VIE and its shareholders. See “Business — Contractual Arrangements between WFOE, SDH and Its Shareholders.” 

In utilizing the proceeds we expect to receive from this offering, we may make additional capital contributions to our PRC subsidiary, or make loans to our PRC subsidiary. However, most of these uses are subject to PRC regulations.

See “Risk Factors—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary and VIE, which could materially and adversely affect our liquidity and our ability to fund and expand our business.” and “Use of Proceeds.”

A majority of our future revenues are likely to continue to be in the form of Renminbi. Under existing PRC foreign exchange regulations, Renminbi may be converted into foreign exchange for current account items, including profit distributions, interest payments and trade-and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiaries are allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, approval from or registration with competent government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future.

As of June 30, 2020, the following were outstanding balances of our cash and cash equivalents and short-term investments in each jurisdiction:

    Cash and
cash
equivalents
    Short-term
investments
    Total  
PRC   $ 5,693,174     $ -     $ 5,693,174  
Hong Kong     54,870       -       54,870  
Cayman Islands     -       -       -  
Total   $ 5,748,044     $ -     $ 5,748,044  

 

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Cash Flows

Six Months Ended June 30, 2020 and 2019

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

    For the six months ended
June 30,
 
    2020     2019  
Net cash provided by operating activities   $ 353,027     $ 1,299,778  
Net cash (used in) provided by investing activities     (4,076,428 )     270,189  
Net cash provided by financing activities     119,996       135,841  
Effect of foreign exchange rate on cash and cash equivalents     (87,657 )     (28,417 )
Net (decrease) increase in cash and cash equivalents   $ (3,691,062 )   $ 1,677,391  

 

Operating Activities

 

Net cash provided by operating activities amounted to $353,027 for the six months ended June 30, 2020. It was primarily due to a) a net income of $2,218,855, mainly adjusted by depreciation and amortization of $397,234, deferred tax assets variation of $135,772, bad debt expense of $579,440 and amortization of operating lease right-of-use asset of $158,030; b) decrease in prepaid expenses and other current assets of $589,053 mainly due to utilization of prepaid VAT; c) decrease in inventories of $755,754; and partially offset by a) increase in accounts receivable of $2,893,180 due to a slow-down in the collection of accounts receivables resulting from COVID-19; b) decrease in income tax payable of $218,999 due to income tax for the fiscal year 2019 paid in the six months ended June 30, 2020; c) decrease in operating lease liabilities of $139,814; and d) decrease in accrued expenses and other current liabilities of $ 648,908.

 

Net cash provided by operating activities amounted to $1,299,778 for the six months ended June 30, 2019. It was primarily due to a) a net income of $2,125,755, adjusted by depreciation and amortization of $16,255, investment losses of $14,336, deferred tax assets of $83,531, bad debt expense of $117,402 and amortization of operating lease right-of-use asset of $246,192; b) decrease in amounts due from related parties of $730,002 due to the repayment of loans to related parties for the six months ended June 30, 2019; c) increase in operating lease liabilities of $246,404; d) increase in income taxes payable of $287,269 due to our increased taxable income for the six months ended June 30, 2019; e) decrease in accounts receivable of $179,707 due to the collection in accounts receivable for the six months ended June 30, 2019; and partially offset by a) increase in prepaid expenses and other current assets of $844,402 because of our IPO efforts and the expansion of our business for the six months ended June 30, 2019; b) decrease in deferred revenue of $1,075,563 because we received services fees in the fiscal year 2018 from customers for member services and comprehensive tailored services and other services have been rendered in the six months ended June 30, 2019.

 

Investing Activities

 

Net cash used in investing activities amounted to $4,076,428 for the six months ended June 30, 2020. It was primarily due to purchase of an office building for $1,581,414 and purchase of intangible asset of $2,549,031.

 

Net cash provided by investing activities amounted to $270,189 for the six months ended June 30, 2019. It was primarily due to the redemption of financial products from financial institution of $294,950, and partially offset by purchase of property and equipment of $24,761.

 

Financing Activities

 

Net cash provided by financing activities amounted to $119,996 for the six months ended June 30, 2020, representing capital contributions from the shareholders.

 

Net cash provided by financing activities amounted to $135,841 for the six months ended June 30, 2019, representing capital contributions from the non-controlling shareholders.

 

Years Ended December 31, 2019 and 2018

 

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

 

   For the years ended
December 31,
 
   2019   2018 
Net cash provided by operating activities  $1,236,071   $5,763,893 
Net cash used in investing activities   (3,525,061)   (363,530)
Net cash provided by financing activities   238,128    340,647 
Effect of foreign exchange rate on cash and cash equivalents   (168,316)   (513,164)
Net (decrease) increase in cash and cash equivalents  $(2,219,178)  $5,227,846 

 

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Operating Activities 

Net cash provided by operating activities amounted to $1,236,071 for the year ended December 31, 2019. It was primarily due to a) a net income of $9,380,768, adjusted by depreciation and amortization of $167,876, investment losses of $23,799, bad debt expense of $151,246 and amortization of operating lease right-of-use asset of $328,289; b) increase in income taxes payable of $1,233,231 due to our increased taxable income for the year ended December 31, 2019; c) decrease in due from related parties of $708,988; d) increase in accrued expenses and other current liabilities of $669,873 because of our IPO efforts and the expansion of our business for the year ended December 31, 2019, and partially offset by a) increase in accounts receivable of $7,392,412 because of the expansion of our business in the fiscal year 2019; b) decrease in deferred revenue of $1,554,399 because we received services fees in the fiscal year 2018 from customers for member services and comprehensive tailored services and other services have been rendered in the year ended December 31, 2019; c) increase in prepaid expenses and other current assets of $1,051,597; d) increase in inventories of $823,817 due to purchase from third parties; e) net decrease in operating lease liabilities of $409,739.

Net cash provided by operating activities amounted to $5,763,893 for the year ended December 31, 2018. It was primarily due to a) a net income of $7,652,473, adjusted by net deferred tax provision of $165,321, depreciation and amortization of $20,882, investment losses of $20,194; b) an increase in income taxes payable of $674,036 due to our increased taxable income in the fiscal year 2018; c) an increase in accrued expenses and other current liabilities of $542,423 due to the increase in accrued payroll of $95,923 and the increase in value added tax payable of $367,411 in the fiscal year 2018; and partially offset by a) an increase in accounts receivable of $614,389 because of the expansion of our business in the fiscal year 2018; and b) a decrease in deferred revenue of $2,278,629 because we received services fees in the fiscal year 2017 from customers for member services and comprehensive tailored services and other services have been rendered in the fiscal year 2018.

Investing Activities

Net cash used in investing activities amounted to $3,525,061 for the year ended December 31, 2019. It was primarily due to prepayments for property of $1,204,094, purchase of intangible asset of $2,188,061, and purchase of long-term investments of $184,098, and partially offset by the redemption of short-term investments of $289,918.

Net cash used in investing activities amounted to $363,530 for the fiscal year ended December 31, 2018 which includes purchases of property and equipment of $49,962, purchase of long-term investments of $11,334, and purchase of short-term investments of $302,234.

Financing Activities

Net cash provided by financing activities amounted to $238,128 for the year ended December 31, 2019, representing capital contributions from the non-controlling shareholders.

Net cash provided by financing activities amounted to $340,647 for the year ended December 31, 2018, which consists of capital contributions of $213,518 from the controlling shareholders and capital contributions of $127,129 from the non-controlling shareholders.

Trend Information 

Other than as disclosed elsewhere in this prospectus, 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, incomes from 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, 2020.

Contingencies 

The Company may be involved in various legal proceedings, claims and other disputes arising from the commercial operations, projects, employees and other matters which, in general, are subject to uncertainties and in which the outcomes are not predictable. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Although the outcomes of these legal proceedings cannot be predicted, the Company does not believe these actions, in the aggregate, will have a material adverse impact on its financial position, results of operations or liquidity. As of June 30, 2020, the Company was not aware of any litigations or lawsuits against it.

Contractual Obligations 

As of June 30, 2020, except for operating lease obligations, we have no other contractual obligations.

 

The Company’s known contractual obligations as of June 30, 2020 were as follows:

 

    Payments due by period  
    Total     Less than 1 year     1-3 years     3-5 years     More than 5 years  
Contractual Obligations                                        
Operating Lease Obligations   $

171,912

      140,342     31,570            -             -  

 

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Inflation

 

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

 

Seasonality

 

The nature of our business does not appear to be affected by seasonal variations.

 

Critical Accounting Policies and Management Estimates

 

We prepare our condensed consolidated financial statements in accordance with U.S. GAAP. These accounting principles require us to make judgments, estimates and assumptions on the reported amounts of assets and liabilities at the end of each fiscal period, and the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable.

 

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

 

Use of estimates

 

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and judgments are based on historical information, information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Significant estimates required to be made by management, include, but are not limited to, the assessment of the allowance for doubtful accounts, depreciable lives of property and equipment, and realization of deferred tax assets. Actual results could differ from those estimates.

 

Foreign currency translation

 

The Company’s principal country of operations is the PRC. The financial position and results of its operations are determined using RMB, the local currency, as the functional currency. The Company’s consolidated financial statements are reported using the U.S. Dollars (“US$” or “$”). The results of operations and the consolidated statements of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Translation adjustments arising from the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive income (loss) included in consolidated statements of changes in shareholders’ equity. Gains and losses from foreign currency transactions are included in the Company’s unaudited condensed consolidated statements of operations and comprehensive income.

 

The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of US$ reporting. The following table outlines the currency exchange rates that were used in preparing the consolidated financial statements:

 

    December 31,
2019
  December 31,
2018
  June 30,
2020
  June 30,
2019
Year/Period-end spot rate   US$1= RMB 6.9762   US$1= RMB 6.8632   US$1= RMB 7.0795   US$1= RMB 6.8747
Average rate   US$1= RMB 6.8985   US$1= RMB 6.6174   US$1= RMB 7.0319   US$1= RMB 6.7808

 

45

 

 

Fair value measurements

 

The Company follows the provisions of ASC 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the balance sheets for cash, accounts receivable, due from related parties, short-term investments, prepaid expenses and other current assets, deferred revenue, income taxes payable, accounts payable, due to related parties, accrued expenses and other current liabilities approximate their fair value based on the short-term maturity of these instruments. The Company reports short-term investments at fair value and discloses the fair value of these investments based on level 2.

 

The Company’s non-financial assets, such as property and equipment would be measured at fair value only if they were determined to be impaired.

 

Inventories

 

The inventories as of June 30, 2020 and December 31, 2019 consist of health service gift cards, learning course gift cards, Chinese tea, latex pillows and health care products, all of which are products available for sale, and are recorded at cost or net realizable value, whichever is lower.

 

Part of the Company’s inventories are obtained through nonmonetary transactions with its customers, which are entered into at the Company’s discretion to receive inventory in exchange of collection of account receivables due from the customers. The Company accounts for these nonmonetary exchanges based on the fair values of the assets involved. The cost of inventories acquired in exchange is initially measured at the fair value of the account receivables the Company surrendered to obtain them.

 

A valuation allowance is recorded to write down the cost of inventories to the estimated net realizable value, if lower, due to slow-moving or damaged products, which is dependent upon factors such as historical and forecasted consumer demand, market condition, and promotional environment. Net realizable value is determined by the estimated selling prices offset by estimated additional cost of goods sold, selling expenses and business taxes. There were no valuation allowance provided for the inventories for the six months ended June 30, 2020 and for the year ended December 31, 2019.

 

46

 

 

Lease

 

On January 1, 2019 the Company adopted Accounting Standards Update (“ASU”) 2016-02 (FASB ASC Topic 842). The adoption of Topic 842 resulted in the presentation of operating lease right-of-use assets and operating lease liabilities on the consolidated balance sheet. See Note 10 for additional information.

 

At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange of a consideration. To assess whether a contract is or contains a lease, the Company assess whether the contract involves the use of an identified asset, whether it has the right to obtain substantially all the economic benefits from the use of the asset and whether it has the right to control the use of the asset.

 

The right-of-use assets and related lease liabilities are recognized at the lease commencement date. The Company recognizes operating lease expenses on a straight-line basis over the lease term.

 

Operating lease right-of-use of assets

 

The right-of-use of asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and less any lease incentive received.

 

Operating lease liabilities

 

Lease liability is initially measured at the present value of the outstanding lease payments at the commencement date, discounted using the Company incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise fixed lease payments, variable lease payments that depend on an index or a rate, amounts expected to be payable under a residual value guarantee and any exercise price under a purchase option that the Company is reasonably certain to exercise.

 

Lease liability is measured at amortized cost using the effective interest rate method. It is remeasured when there is a change in future lease payments, if there is a change in the estimate of the amount expected to be payable under a residual value guarantee, or if there is any change in the Company assessment of option purchases, contract extensions or termination options.

  

Short-term leases and leases of low value assets

 

The Company has elected to not recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low value assets. Lease payments associated with these leases are expensed as incurred.  

 

Property and equipment, net

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is provided using the straight-line method over their expected useful lives, as follows:

 

Electronic equipment     3 years  
Furniture, fixtures and equipment     3 years  
Vehicle     3 years  
Office buildings     30 years  

 

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

 

Intangible assets, net

 

The Company’s intangible assets represent the copyright of course videos purchased from a third party, including but not limited to course videos which cover subjects such as entrepreneurship development, financial service, corporate governance, team management, marketing strategy, etc. Intangible assets are stated at cost less accumulated amortization and amortized on a straight-line basis over their estimated useful lives. The estimated useful lives of intangible assets are determined to be 5 to 10 years in accordance with the period the Company estimates to generate economic benefits from such copyright.

47

 

 

Revenue recognition

 

The Company early adopted the new revenue standard Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, starting January 1, 2017 using the modified retrospective method for contracts that were not completed as of January 1, 2017. The adoption of this ASC 606 did not have a material impact on the Company’s consolidated financial statements.

 

The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

Step 1: Identify the contract with the customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognize revenue when the company satisfies a performance obligation

 

The Company mainly offers and generates revenue from four kinds of services to its clients in China, member services, enterprise services, online services and other services. Enterprise services include comprehensive tailored services, sponsorship advertising services, and consulting services.

 

Revenue recognition policies for each type of the Company’s services are discussed as follows:

 

Member services

 

The Company offers three tiers of member services, Platinum, Diamond and Protégé, which differ in membership fees as well as the level of the services provided. Members pay a fixed fee for exchange of the right to participate in organized activities offered by the Company, such as study tours and forums, typically within one-year membership period. Any non-participating activities will expire and not be refunded beyond the agreed-upon period. Each Member is entitled to choose from same activities offered by the Company for a total of seven times but different level of membership will receive different level of privileges at each activity, such as seating arrangement or private consultation opportunity etc.. The activities for Platinum Members are also open to non-members, who pay a pre-set fee for participating in a single activity, while the Company does not offer Diamond and Protégé services to non-members separately.

 

Each activity represents a separate performance obligation, which is typically 5 days or less. The Company uses an expected cost plus margin approach to estimate the standalone selling prices of each activity. As Members can benefit from each activity on their own in the same way and there is no material difference in the Company’s delivering costs, such as number of staffs involved and size of each activity. Therefore, membership fees are equally allocated to seven performance obligations when the Company determines transaction price of each performance obligation.

 

The Company recognizes membership fees as revenue upon completion of each activity as the duration of each activity is short. Membership fees from non-participating activity will be recognized when the agreed-upon period has expired. Membership fees collected in advance are recorded as deferred revenue on the consolidated balance sheets.

 

Enterprise services

 

The Company charges its clients service fees for providing enterprise services, which mainly include comprehensive tailored services, sponsorship advertising services and consulting services.

 

Comprehensive tailored services

 

The comprehensive tailored services provide tailored packaged services to small and medium business, including conference and salon organization, booth exhibition services, on-site Mentors’ guidance, and other value-added services. The Company typically signs one-year framework agreements and a tailored services contract with the clients, which list the types of tailored services as ordered by the clients to fit their specific needs. Each tailored service is a separate performance obligation under ASC 606, as these performance obligations are distinct, the clients can benefit from each service on their own and the Company’s promises to deliver the services are separately identifiable from each other in the services contract. The performance of each tailored service is usually on a specific date designated by the clients.

 

The Company establishes a uniform list for the unit price of each type of tailored services with reference to quoted market prices. If no quoted market price is available, the price will be estimated by using an expected cost plus a margin approach.

 

The Company recognizes the price for each tailored service as revenue when the service has been provided on a specific date designated and the receipt of each tailored services is confirmed by the clients. If a client does not request certain items of the tailored services included in the services contract during the agreed-upon period, the Company will not refund the service fees and the revenue will be recognized upon expiration of service contracts. The tailored services fees collected before providing services are recorded as deferred revenue on the consolidated balance sheets.

 

48

 

 

Sponsorship advertising service

 

The Company provides sponsorship advertising service for its clients at certain activities it held, i.e. study tours and forums. The sponsorship advertising services are mainly to display banners with the clients’ information and distribute clients’ brochures through the activities, so that the clients can enhance their corporate and product image.

 

The fee the Company charges for sponsorship advertising service is depending on multiple specific factors, including number of event participants, location, public interest, etc. The Company considers all factors and determines pricing for each contract separately. The sponsorship advertising fees are recognized as revenue when services have been provided on a specific date designated and receipt of sponsorship advertising services are confirmed by clients. Sponsorship advertising fees collected before providing services are recorded as deferred revenue on the consolidated balance sheets.

 

Consulting services

 

The Company provides consulting services to small and medium-sized enterprises by helping them to develop strategies and solutions including: corporate reorganization, product promotion and marketing, industry supply chain integration, corporate governance, financing and capital structure, etc. The consulting services are tailored to meet each client’s specific needs and requirements.

 

Consulting fees are based on the specifics of the services provided, for instance, time and efforts required, relationship between the Company and the client, etc. The Company considers comprehensive factors and determines prices with reference to quoted market prices. If no quoted market price is available, price will be estimated by using an expected cost plus a margin approach.

  

Consulting fees are recognized as revenue when services have been provided and receipt of consulting services is confirmed by clients as the duration of services is short, typically one month or less. Consulting fees collected before providing any service are presented as deferred revenue on the consolidated balance sheets.

 

Online services

 

The Company provides two types of online services to the Company’s APP Users, which are questions and answers (Q&A) session with chosen Mentors and online streaming of courses and programs. Top-up credits are paid by Users through the Company’s APP platform, using which Users can purchase the online services.

 

Users can raise questions to chosen Mentors or Experts with a fixed fee per Q&A session preset by Mentors or Experts. The Q&A session is usually provided by chosen Mentors or Experts within a course of a 72-hour period. The Company charges 30% of the Q&A fees as a facilitator of online services. The Q&A fees are allocated to the Company and chosen Mentors or Experts automatically by the APP on a 30%/70% split upon completion of Q&A sessions. The Company recognizes this online service fees as revenue at completion of Q&A sessions on a net basis, i.e., in the amount of 30% of allocated Q&A fees, as the Company merely provides a platform for its Users and is not the primary obligor of the Q&A session, neither has risks and rewards as principal.

 

Prior to 2019, most of our online content were free for our User to enjoy because we mainly focused on growing our online knowledge sharing community. In November 2019, we started to implement a new fee structure for our online content, which grants Users the access to view various online courses and programs. Users can subscribe an annual VIP at a rate of RMB299. The VIP grants Users the access right to the Company’s VIP courses and programs over the subscription period. The Company recognizes the VIP annual subscription fees as revenue on a straight-line basis over VIP subscription period. Users can also purchase a-lar-cart courses and programs at a rate from RMB 9.9 to 299 per course or program by top-up credits through the Company’s APP platform. The payment for a-lar-cart course and program is not refundable. After the payment is collected by the Company, the Users obtain unlimited access to the courses and programs they purchased for without limitation. The Company recognizes the fees a-lar-cart courses and programs as revenue at the point of time that Users obtain the access to the courses and programs.

 

Sale of merchandises

 

The Company started to sell merchandises since the end of 2019. The merchandises are obtained through nonmonetary transactions with its customers, which are entered into at the Company’s discretion to receive inventory in exchange of collection of account receivables due from the customers or purchased from third parties. The revenue from sale of merchandises are recognized at the amount to which it expects to be entitled on a gross basis at the point of time when clients obtain the control of the merchandises.

 

Other services

 

Other services fees are mainly derived from non-member participation of study tours and forums at the service level of Platinum Members. The Company charges non-members a fixed fee for each Member activity and the price for non-members is determined based on our allocated Member pricing for each activity. Fees are usually collected on site at the date of each activity and revenues are recognized at the completion of such activity.

 

Service costs

 

Service costs primarily include (1) the cost of holding activity, such as venue rental fees, conference equipment fees, (2) professional and consulting fees paid to third parties for our activity; (3) the fees paid to Mentors and Experts; (4) labor costs; and (5) amortization cost of copyright. Service costs were $634,314 and $1,024,777 for the six months ended June 30, 2020 and 2019, and service costs were $2,109,649 and $1,142,596 for the years ended December 31, 2019 and 2018.

 

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Income taxes

 

The Company accounts for income taxes under ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

 

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

The provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures.

 

The Company believes there were no uncertain tax positions at June 30, 2020 and December 31, 2019. The Company does not expect that its assessment regarding unrecognized tax positions will materially change over the next 12 months. The Company is not currently under examination by an income tax authority, nor has been notified that an examination is contemplated.

 

Currency risk

 

A majority of the Company’s expense transactions are denominated in RMB and a significant portion of the Company’s assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through the PBOC or other Company foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.

 

The Company maintains certain bank accounts in the PRC. On May 1, 2015, China’s new Deposit Insurance Regulation came into effect, pursuant to which banking financial institutions, such as commercial banks, established in the PRC are required to purchase deposit insurance for deposits in RMB and in foreign currency placed with them. Such Deposit Insurance Regulation would not be effective in providing complete protection for the Company’s accounts, as its aggregate deposits are much higher than the compensation limit, which is RMB 500,000 for one bank. However, the Company believes that the risk of failure of any of these Chinese banks is remote. Bank failure is uncommon in the PRC and the Company believes that those Chinese banks that hold the Company’s cash and cash equivalents and short-term investments are financially sound based on public available information.

 

Other than the deposit insurance mechanism in the PRC mentioned above, the Company’s bank accounts are not insured by Federal Deposit Insurance Corporation insurance or other insurance.

 

Recently issued accounting pronouncements

 

The Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that are issued.

 

In December 2019, the FASB issued ASU No. 2019-12 “Income Taxes (Topic 740)”. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions, providing updated requirements and specifications in certain areas and by making minor codification improvements. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. Early adoption is permitted. The Company does not believe the adoption of this guidance may have a material impact on its financial statements.

 

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INDUSTRY

 

All the information and data presented in this section have been derived from Frost & Sullivan’s industry report in October 2020, entitled “The PRC Knowledge Sharing and Enterprise Service Industry Independent Market Research,” unless otherwise noted. Frost & Sullivan (Beijing) Inc., Shanghai Branch Co. has advised us that the statistical and graphical information contained herein is drawn from its database and other sources. The following discussion projections for future growth, which may not occur at the rates that are projected or at all.

 

OVERVIEW OF ENTERPRISE SERVICE MARKET IN THE PRC

 

Enterprise service refers to consulting and training services provided to clients with the aim of helping clients develop business strategies and solutions. From 2014 to 2019, revenue of enterprise service market in the PRC experienced a steady growth from RMB141.3 billion (approximately US$20.5 billion) in 2014 to RMB211.0 billion (approximately US$30.6 billion) in 2019, representing a Compound Annual Growth Rate (“CAGR”) of approximately 8.4%. Supported by the further integration with knowledge sharing market and rapid development of knowledge sharing platform, revenue of enterprise service market participants is projected to rise at a CAGR of approximately 8.5%, attaining RMB301.8 billion (approximately US$43.7 billion) by the end of 2024.

 

Market Size Analysis

 

 

Source: Frost & Sullivan Report

 

Market Drivers and Trend

 

Customized services. During the past five years, the demand for business consulting and advisory service has been increasing significantly as enterprises are seeking help to boost their strategic growth. In particular, recent years have witnessed an increasing trend of customized services. Consulting service providers are required to possess deep and comprehensive knowledge of the industry and an understanding of the clients’ specific requirements and needs based on the circumstances of the clients.

 

Training services for small and medium enterprises (SMEs). With the rapid growth in the PRC economy, the number of SMEs in the PRC has increased significantly, which has contributed to the employment market and economic development in the PRC. However, most SMEs are facing the problem of lacking of or access to professional knowledge, industry information and experienced staff, which has created business opportunities for enterprise training services including technical training, vocational training, entrepreneurship training, management training, etc.

 

Expansion of online services. With the rising adoption and application of the internet, an increasing number of traditional enterprise service providers are expanding their online service offering by developing their own online platforms or cooperating with online service providers such as knowledge sharing service providers in order to grow their businesses. Knowledge sharing platforms provide a professional team of experts to help expand the marketing and distribution channels of these enterprise service providers. Therefore, the expansion of online services and cooperation with knowledge sharing platforms is likely to become a trend in the next few years.

 

Competitive Landscape

 

The enterprise service market in the PRC is considered as a highly competitive and fragmented market. By the end of 2019, there are around 0.9 million enterprise platforms. As the economy in the PRC continues to expand, more and more enterprise in the PRC require enterprise services to boost their business growth rate. It is expected that those enterprise services providers with competitive strategies, well-established business relationships, high-quality and customized services and access to industry professionals will expand market share and become leading market participants in the enterprise services market in the PRC.

 

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Main Competitors

 

Market Participants   Year of Establishment   Country   Description
ATIF Holdings Limited (Nasdaq: ATIF)   2015   The PRC   A financial consulting company providing consulting and training services for enterprises. In 2019, the company went public on Nasdaq.
Dark Horse Venture (Beijing) Technology Co. Ltd (SZSE: 300688)   2008   The PRC   A company focusing on providing consulting and training services of entrepreneurship and innovation to entrepreneurs and enterprises.

 

OVERVIEW OF THE KNOWLEDGE SHARING SERVICE MARKET IN THE PRC

 

Definition and Categorization

 

Sharing economy is an economic concept based on the idea that people can leverage and share their resources such as vehicles, houses, knowledge and skills with others, and receive monetary reward as a result. It is a business model facilitated by a community built on on-line and off-line platforms. In the PRC, sharing economy is usually categorized into seven categories, namely knowledge sharing, vehicle sharing, house sharing, service sharing, healthcare sharing, office sharing and production capacity sharing.

 

Knowledge sharing, being the key category of the sharing economy in the PRC, refers to the exchange of knowledge including information, advice, expertise, industry know-how, insights, etc. It represents the monetization of knowledge and opinions of key opinion leaders (“KOLs”), industry experts, scholars, mentors, etc. Major products include lectures, Questions and Answers (Q&A) sessions, video and audio courses, books, Intellectual Property (IP), study tours, forums, trainings and seminars, one-to-one talks, consulting service, investment service, enterprise incubation service, financing service, trading service, etc. Online and offline knowledge sharing platforms will facilitate the communications between content providers (e.g. experts, KOLs, scholars and mentors) and consumers. Content providers and consumers can also build and develop their own online and offline communities through the knowledge sharing platform. All participants can offer products and services with focus on a certain group of end-users or a certain industry. For example, some knowledge sharing service market participants are mainly providing knowledge sharing products and services for enterprises, entrepreneurs and individuals who are interested in this area. Currently, there are several well-known knowledge sharing platforms including Quora, Zhihu, and Ximalaya.

 

Knowledge sharing can be further categorized based on the content providers, namely users, professionals and professional users. User-generated content (UGC) refers to contents posted and shared by unpaid contributors or users. Professionally-generated content (PGC) is produced to satisfy the demand of users by professionals such as professional production company, which is more specialized and high-quality. Professionally curated user-generated content (PUGC) is a combination of UGC and PGC where selected industry experts and KOLs produce contents with a full production team.

 

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Service Offerings

 

Source: Frost & Sullivan Report

 

There are various types of services provided by a knowledge sharing platform through online and offline channels:

 

Online and Offline Services. Online services include Q&A session, audio and video streaming, lectures and courses, and others, which are created on the online platforms for users to access and learn. The knowledge sharing platforms would charge commissions as service fee from both content creators and users.

 

Community Development. Through online and offline knowledge sharing activities, users, consumers and content creators including experts, KOLs and mentors can build their own online and offline communities or groups with common interests where they can exchange and share insights, ideas, opinions, opportunities, etc. Meanwhile, consumers experience including communications with users, members and experts and participations in activities in such communities will help increase consumers stickiness to the knowledge sharing platforms. Knowledge sharing service providers will assist and participant in the development of such communities and help manage their organization and operation.

 

Value Chain Analysis

 

 

Source: Frost & Sullivan Report

 

The knowledge sharing service market in the PRC consists of upstream knowledge providers, midstream knowledge sharing platforms, and the downstream consumers.

 

The content providers are the individuals who provide various contents to the sharing platforms. In general, the content providers are experts or professionals from their respective fields or industries, such as scholars, industry leaders, entrepreneurs, as well as KOLs, which could provide qualified contents to the platforms. In addition, the content providers are usually invited by the sharing platforms to provide exclusive contents on the platforms.

 

The knowledge sharing platforms act as the medium to handle contracting and payments, and facilitate the exchange of knowledge on behalf of their content providers and consumers. And the platforms also provide eligibility checks and certifications on the qualifications of the content providers to ensure the quality of the contents. The subscription-base model allows the consumers paying a certain fee at regular intervals to access the contents on the platform. On the other hand, the platform allows consumers to share their knowledge on the platform with other consumers. As such, consumers can also become content providers on the platform as “prosumers”. As the communications among the content providers and consumers are multi-dimensional, all consumers can benefit from the knowledge sharing platforms.

 

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Market Size Analysis

 

 

Source: State Information Center, Frost & Sullivan Report

 

Note: Trading volume of knowledge sharing market includes revenue of knowledge sharing platforms, income of content creators, and other monetization income that is generated through knowledge sharing.

 

Driven by the increasing demand for high-quality knowledge products and services, rising education levels of consumers, from 2014 to 2019, total trading value of knowledge sharing market in the PRC grew dramatically from RMB9.6 billion (approximately US$1.4 billion) in 2014 to RMB306.3 billion (approximately US$44.4 billion) in 2019, representing a CAGR of approximately 99.7% during the period. Looking forward, supported by growth of disposable income and decentralization of content production, knowledge sharing market in the PRC is expected to record RMB1,636.2 billion (approximately US$237.2 billion) by the end of 2024, with a CAGR of approximately 40.3% from 2020.

 

Market Drivers

 

Favorable macroeconomic environment driving the growth of knowledge sharing platform. The overall economic environment and the rising household income have demonstrated a stable growth over the past few years and such growth is expected to sustain in the next few years. It is the opinion of our management that the trend will improve people’s living standards and also guarantees a growing consumption demand and people’s demand for information and knowledge that would continue brings improvement to their current living standards. The above factors are likely to further drive the growth of knowledge sharing service in China.

 

Technology innovation and data availability. The advancement in technology is one of the essential success factors that drove the rapid development of the knowledge sharing service market. With the help of new technologies, the knowledge sharing platforms are able to target audience effectively and efficiently, monitor data traffic constantly and adjust the contents instantly to stay competitive in the current market. This would be one of the key driving forces of the market development of knowledge sharing service in the future.

 

Exploitation of big data. Due to the increasing volume of internet data traffic, the ability to analyze data to obtain valuable insights has become increasingly important for knowledge sharing platforms to compete and survive in today’s market. It is the opinion of our management that with the aid of big data, knowledge sharing platforms are able to obtain various valuable user insights and accurately feed useful information to different users. This in turn generates various business opportunities for the knowledge sharing platforms.

 

Future Trends

 

Horizontal integration of competitors. As competition of the market intensifies, it is crucial for scaled and resourceful knowledge sharing platforms to maintain their market share as well as further expand their businesses. It is expected that the trend upon horizontal integration of small and medium sized knowledge sharing platforms will continue in the future as this will not only enable them to diversify their product portfolio, but will also bring improvements upon their technology capability and capacity, enabling them to further consolidate the market concentration and attract a bigger user base.

 

Enrichment, diversification and personalized knowledge offerings. It is the opinion of our management that, in order to retain current customers and attain more customers, it is important for knowledge sharing platforms to meet their constantly changing preferences. The enrichment and diversification of contents will be one of the most critical factors in attracting customer base, hence for the knowledge sharing platforms to excel in the market. Personalized content is also one of the future trends, tailoring contents that are suitable for an individual customer and bringing more efficiency to the customers when browsing for contents.

 

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Mature collaboration between content creators and the knowledge sharing platforms. Accumulating from business experiences, content providers and knowledge sharing platforms are becoming more familiar with the operation models of knowledge sharing economy. With respect to the business arrangement between content providers and platforms to ensure inflow of contents to the platform, there are an increasing number of consumers who prefer to pay a fix amount of monthly or annual fee to subscribe to the contents offered. In addition, the advancement in technology allows the platforms to have more control and monitor of contents on platforms, which helps match the needs and demands of different consumers.

 

Constraints and Challenges

 

High operating costs. Attributed to the growing popularity of the concept of sharing economy and its relative low barrier to entry, inevitably the knowledge sharing platforms will face fierce competition from the better-established companies who own extensive resources and sophisticated data capacity. Companies who do not own a clear business model may waste resources in exploring the market and opportunities, placing pressure on their cost of operation.

 

Competitive Landscape

 

The knowledge sharing market in the PRC is considered as a highly competitive and fragmented market. By the end of 2019, there are over 100 notable knowledge sharing market participants in the PRC. It is expected the integrated and unique market participants targeting at certain industries or consumer groups are likely to enjoy a large room of development.

 

Main Competitors

 

Market Participants   Year of Establishment   Country   Description
IGet   2012   The PRC   A Beijing-based mobile application operator, originally a talk-show producing company named Luogic Talk Show, engaging in providing a knowledge sharing platform with a wide range of contents such as business administration, visual arts, sociology, humanity and practical skills.
ZaiHang   2015   The PRC   A Beijing-based mobile application operator providing a matchup platform to allow “one-to-one” conversations between industry experts and users.
Zhihu   2010   The PRC   A Beijing-based company providing a website where questions are created, answered, edited, and organized by its community of users. Live stream Q&A session service is also provided as a fee-charging service.
Ximalaya FM   2012   The PRC   The largest online UGC audio service provider in the PRC, enabling users to share their expertise and experience in specific areas through audio. Currently, it has around 50 million users.

 

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BUSINESS

 

Overview

 

We started our operation as a consulting company providing enterprise services to small and medium-sized enterprises in the PRC in December 2014, and launched our peer-to-peer knowledge sharing and enterprise service platform in May 2016. Since then, we have continued to expand and improve our platform, where knowledge is shared, and services are requested and provided. We operate our platform through our PRC operating entity, SDH and its subsidiaries, both online, via our mobile application “Shidonghui App” (the “APP”), and offline, through local offices directly operated by us in Beijing, Shanghai and Hangzhou, as well as 51 local centers operated by some of our Members in 35 cities and 21 provinces throughout the PRC as of the date of this prospectus. Our mission is to become a worldwide leading knowledge sharing and enterprise service platform.

 

According to the International Monetary Fund, from 2014 to 2018, the nominal GDP per capita in the PRC rose from $7,701 in 2014 to $10,581 in 2018, representing a CAGR of approximately 6.6%. A growing economy and generally positive market environment have created many entrepreneurial and high-growth enterprises, many of which need corporate services such as financial consulting and management training. In line with the trend of nominal GDP, the disposable income of urban residents in the PRC recorded an increase from 2013 to 2019, as there was a rise in overall household spending capabilities due the blooming economy. According to the National Bureau of Statistic of the PRC, the per capita disposable income of urban residents in the PRC increased from $4,305 in 2014 to $6,322 in 2019, representing a CAGR of 8.0%. Previously, our platform focused on providing enterprise services to enterprises and entrepreneurs, but we are actively expanding our service to individuals and families that seek advice and services relating to health, beauty, travel, fashion, housing, etc.

 

When we launched our platform, our aim was not only to continue providing enterprise services to PRC’s growing business communities, but also create a marketplace where qualified entities (individuals and enterprises) have opportunities to serve as providers, and receive rewards by sharing their knowledge with others on the platform. As of September 2020, our knowledge sharing and enterprise service ecosystem had 550 Mentors, 998 Experts, 1,467 Members, and 5.49 million Users. In addition to serving our Users and Members, we continue to provide enterprise services to small and medium-sized enterprises in China through a dedicated team with seven full-time professional consultants, as well as our Mentors and Experts. Our providers (Mentors, Experts and consultants) are successful entrepreneurs, scientists, investors, and professionals with qualifications and achievements in major industries such as finance, energy, health care, technology, manufacturing and academia. Our core strength is the knowledge brought by our providers, highlighted by their experiences, wisdom, industry know-how, and social connections.

 

We offer online services to our Users on our APP, which was released to the public in May 2016, and offline services to our Members. The number of Users, measured as the total of unique individuals who downloaded and registered to use our APP on their mobile devices, has increased from approximately 800,000 in December 2017 to approximately 5.49 million in September 2020. The number of our Members, measured as the total number of active subscribers of our three annual memberships (platinum, diamond and protégé), has increased from 139 in May 2016 to 1,467 in September 2020. “Active subscribers” are those who signed on and made full payment to receive our yearly Member services that were in effect (within the year period) at the time of measurement.

 

All of our Members are encouraged to become Users by downloading and registering on the APP to enjoy free online services, some Users also become Members in order to have access to our offline services. The services we currently offer to Users are (1) Questions and Answers (Q &A) Sessions and (2) streaming of audio and video courses and programs. The offline services we offer to our Members are study tours and forums.

 

To meet the growing demand of our Users, Members and Enterprise Service Clients for professional services and advice in a rapidly changing business environment, we have been continually expanding and improving our platform and services. In March 2018, we launched our Comprehensive Tailored Service program, a customized enterprise packaged service targeting small business owners; in December 2018, we launched GMB Regional Economic Accelerator, a business initiative designed to help with economic growth of less developed areas in China, by entering into cooperating programs with regional government entities for the purpose of providing services to local businesses; starting in 2019, we began to promote our brands “SDH” and “GMB” and seek opportunities to expand our platform in the United States. We believe these business initiatives will enrich our service offerings and attract more individuals and enterprises to join our platform.

 

In late 2019, we started procuring and offering merchandises for sale through our platform to our clients and the general public. Most of these merchandises are obtained from some of our clients in exchange for collection of our membership fees and consulting fees owed by these clients while the rest of these merchandises are sourced by us based on current market trend and demand. Taking advantage of our knowledge of market demand and trends, as well as access to resources afforded to us by our knowledge sharing platform, we have achieved a significant growth in sale of merchandises, which generated $1,219,296as of June 30, 2020, compared to $9,568 as of December 31, 2019. 

 

We have been profitable since fiscal year 2018, and generated net revenues of $13,538,999, $17,925,476, and $6,506,463 for the fiscal years ended December 31, 2018 and 2019, and six months ended June 30, 2020, respectively. Our revenues were generated from the following:

 

 

fees generated from Member services, in the amount of $5,280,587, $2,525,084, and $491,806, or 39.00%, 14.09% and 7.56% of the net revenues of fiscal years 2018 and 2019, and six months ended June 30, 2020, respectively;

     
 

fees generated from enterprise services, in the amount of $8,046,406, $15,210,675, and $4,590,984, or 59.43%, 84.85%, and 70.56% of the net revenues of fiscal years 2018 and 2019, and six months ended June 30, 2020, respectively;

 

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  fees generated from sale of merchandises, in the amount of nil, $9,568 and $1,219,296, or nil, 0.05%, and 18.74% of the net revenues of fiscal years 2018 and 2019, and six months ended June 30, 2020, respectively;
     
  fees generated from online services, in the amount of $8,098, $66,304, and $191,443, or 0.06%, 0.37% and 2.94% of the net revenues of fiscal years 2018 and 2019, and six months ended June 30, 2020, respectively; and
     
  fees generated from other services, in the amount of $203,908, $113,845, and $12,934, or 1.51%,0.64%, and 0.20% of the net revenues of fiscal years 2018 and 2019, and six months ended June 30, 2020, respectively.

 

For fiscal years 2017 and 2018, our revenues generated from online services were much smaller compared to revenues generated from Member services and enterprise services, primarily due to the fact that we have focused on growing our online knowledge sharing community by providing services for Users to enjoy at low or no charge. We do not require any fee to become a User on our platform, and most of the audio and video courses and programs on our APP were free for our Users to experience. Beginning in 2019, to increase our revenues from our online services, we started to charge our Users fees for streaming most of our audio and video courses and programs, although there are still about 1020, or 10%, out of the approximately 9,880 audio and video courses and programs on our APP, available for streaming for no fee, as of the date of the prospectus. As a result, for the fiscal year 2019 and six months ended June 30, 2020, we increased our revenues generated from online services to $66,304, and $191,443, more than 700% or 1,446% compared to the fiscal year 2018 and the six months ended June 30, 2019. We believe our platform has the potential of becoming a major knowledge sharing marketplace in the PRC and that our online services will greatly contribute to the overall growth and expansion of our knowledge sharing platform if we are able to continually execute our strategy to attract more Users, Mentors, and Experts to join and contribute to our peer-to-peer sharing platform.

 

Currently, we only operate in mainland China, although approximately 242 of our APP Users are located in foreign countries including 98 Users in North America, 30 in Malaysia, and 33 in Australia. We also have 10 Mentors in the United States as of the date of this prospectus. Our plan is to continually expand our services both online and offline, explore new business ventures and initiatives both domestic and abroad to generate additional revenues, and ultimately become a leading knowledge sharing and enterprise service platform that offers and creates value for everyone in our ecosystem.

 

Corporate History and Structure

 

On February 22, 2019, we established a holding company, GIOP, under the laws of the Cayman Islands. GIOP owns 100% of GMB HK, a Hong Kong company incorporated on March 22, 2019.

 

On June 3, 2019, GIOP BJ, or WFOE, was incorporated pursuant to PRC laws as a wholly foreign owned enterprise. GMB HK holds 100% of the equity interest in WFOE.

 

We operate through our VIE, or SDH, and its subsidiaries in the PRC, which we control via a series of contractual arrangements between WFOE and SDH. SDH (formerly known as Beijing Huatai Yihe Co., Ltd.) was established in 2014 as a limited company pursuant to PRC laws for the purpose of providing corporate consulting services.

 

SDH established a wholly owned subsidiary, GMB Hangzhou, on November 1, 2017 pursuant to PRC laws.

 

In 2017 and 2018, SDH also established four subsidiaries pursuant to PRC laws, which were GMB (Beijing), GMB Culture, GMB Consulting, and GMB Linking. SDH owns 51% of the equity interest of each of these four subsidiaries. Additionally, GMB Culture has a subsidiary Mentor Board Voice of Seeding (Shanghai) Cultural Technology Co., Ltd., and owns 60% of its equity interest.

 

On October 16, 2020, SDH established another wholly owned subsidiary, Zibo Shidong, pursuant to PRC laws.

 

Pursuant to PRC laws, each entity formed under PRC law shall have certain business scopes as submitted to the Administration of Industry and Commerce or its local counterpart. Pursuant to specific business scopes, approval by the relevant competent regulatory agencies may be required prior to commencement of business operations. As such, WFOE’s business scope is to primarily engage in: technology development, technology promotion, technology transfer, technical consultation, technical services; sales of self-developed products; business management consulting; corporate planning; conference services, organization of cultural and artistic exchange activities (excluding commercial performances); economic and trade consulting. Since the sole business of WFOE is to provide SDH with technical support, consulting services and other management services relating to its day-to-day business operations and management in exchange for a service fee approximately equal to SDH’s earnings before corporate income tax, i.e., SDH’s revenue after deduction of operating costs, expenses and other taxes, subject to adjustment based on services rendered and SDH’s operation needs, such business scope is necessary and appropriate under PRC laws. SDH, on the other hand, is also able to, pursuant to its business scope, provide a platform for our Members to obtain practical corporate guidance, financing sources, resource joining, assistance with corporate emergencies, support with public listings and other mutual assistance services.

 

We control SDH through contractual arrangements, which are described under “Business — Contractual Arrangements between WFOE, SDH and Its Shareholders.” GIOP is a holdings company with no business operation other than holding the shares in GMB HK, which is also a pass-through entity with no business operation.

 

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The following diagram illustrates our corporate structure, including WFOE, VIE and its principal subsidiaries, as of the date of the prospectus and upon completion of our IPO based on 5,600,000 Ordinary Shares being offered:

 

 

 

Contractual Arrangements among WFOE, SDH and Its Shareholders

 

Neither we nor our subsidiaries own any equity interest in SDH. Instead, we control and receive the economic benefits of SDH’s business operation through a series of contractual arrangements. WFOE, SDH and its shareholders entered into a series of contractual arrangements, also known as VIE Agreements, in June 2019. The VIE agreements are designed to provide WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of SDH, including absolute control rights and the rights to the assets, property and revenue of SDH.

 

Each of the VIE Agreements is described in detail below:

 

Exclusive Technical and Consulting Services Agreement

 

Pursuant to the Exclusive Technical and Consulting Services Agreement between SDH and WFOE (the “Exclusive Service Agreement”), WFOE provides SDH with technical support, consulting services, business support and other management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages in technology, human resources, and information. For services rendered to SDH by WFOE under the Exclusive Service Agreement, WFOE is entitled to collect a service fee approximately equal to SDH’s earnings before corporate income tax, i.e., SDH’s revenue after deduction of operating costs, expenses and other taxes, subject to adjustment based on services rendered and SDH’s operation needs.

 

This agreement became effective on June 10, 2019 and will remain effective unless otherwise terminated as required by laws or regulations, or by relevant governmental or regulatory authorities. Nevertheless, this agreement shall be terminated after all the equity interest in SDH held by its shareholders and/or all the assets of SDH have been legally transferred to WFOE and/or its designee in accordance with the Exclusive Option Agreement.

 

The CEO of WFOE, Mr. Haiping Hu, is currently managing SDH pursuant to the terms of the Exclusive Service Agreement. The Exclusive Service Agreement does not prohibit related party transactions. Upon the establishment of the audit committee at the consummation of this offering, the Company’s audit committee will be required to review and approve in advance any related party transactions, including transactions involving WFOE or SDH.

 

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Equity Pledge Agreement

 

Under the Equity Pledge Agreement between WFOE, and shareholders of SDH, together holding 100% of the shares of SDH (“SDH Shareholders”), the SDH Shareholders pledged all of their equity interests in SDH to WFOE to guarantee the performance of SDH’s obligations under the Exclusive Service Agreement. Under the terms of the Equity Pledge Agreement, in the event that SDH or the SDH Shareholders breach their respective contractual obligations under the Exclusive Service Agreement, WFOE, as pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends generated by the pledged equity interests. The SDH Shareholders also agreed that upon occurrence of any event of default, as set forth in the Equity Pledge Agreement, WFOE is entitled to dispose of the pledged equity interests in accordance with applicable PRC laws. The SDH Shareholders further agreed not to dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interests without the prior written consent of WFOE.

 

The Equity Pledge Agreement is effective until: (1) the secured debt in the scope of pledge is cleared off; and (2) Pledgers transfer all the pledged equity interests to Pledgees according to the Exclusive Option Agreement, or other entity or individual designated by it.

 

The purposes of the Equity Pledge Agreement are to (1) guarantee the performance of SDH’s obligations under the Exclusive Service Agreement; (2) make sure the SDH Shareholders do not transfer or assign the pledged equity interests, or create or allow any encumbrance that would prejudice WFOE’s interests without WFOE’s prior written consent. In the event SDH breaches its contractual obligations under the Exclusive Service Agreement, WFOE will be entitled to dispose of the pledged equity interests.

 

Exclusive Option Agreement

 

Under the Exclusive Option Agreement, the SDH Shareholders irrevocably granted WFOE (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in SDH or the assets of SDH. The option price to be paid by WFOE to each shareholder of SDH is RMB10 (approximately US$1.47) or the minimum amount to the extent permitted under PRC law at the time when such transfer occurs.

 

Under the Exclusive Option Agreement, WFOE may at any time under any circumstances, purchase, or have its designee purchase, at its discretion, to the extent permitted under PRC law, all or part of the SDH Shareholders’ equity interests in SDH or the assets of SDH. The Exclusive Option Agreement, together with the Equity Pledge Agreement, the Exclusive Service Agreement, and Powers of Attorney, enable WFOE to exercise effective control over SDH.

 

The Exclusive Option Agreement remains effective until all the equity or assets of SDH is legally transferred under the name of WFOE and/or other entity or individual designated by it, or unilaterally terminated by WFOE with a 30-day written notice.

 

Powers of Attorney

 

Under each of the Powers of Attorney, the SDH Shareholders authorized WFOE to act on their behalf as their exclusive agent and attorney with respect to all rights as shareholders, including, but not limited to: (a) attending shareholders’ meetings; (b) exercising all the shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association, including, but not limited to, the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders the legal representative, the executive director, supervisor, the chief executive officer, and other senior management members of SDH.

 

The Powers of Attorney are irrevocable and continuously valid from the date of execution of the Powers of Attorney, so long as the SDH Shareholders own the equity interests of SDH.

 

Spousal Consent

 

Pursuant to the Spousal Consent, each spouse of the individual shareholders of SDH irrevocably agreed that the equity interest in SDH held by their respective spouses would be disposed of pursuant to the Equity Pledge Agreement, the Exclusive Option Agreement, and the Powers of Attorney. Each spouse of the shareholders agreed not to assert any rights over the equity interest in SDH held by their respective spouses. In addition, in the event that any spouse obtains any equity interest in SDH through the respective shareholder for any reason, he or she agreed to be bound by the contractual arrangements.

 

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Our Knowledge Sharing and Enterprise Service Platform Ecosystem

 

Our Members and Users

 

Our Members

 

Our Members can choose from three annual membership plans: Platinum, Diamond, and Protégé. Members enjoy services included in their respective membership plans. The following table presents the annual membership fees and the number of Members for each of the membership tiers, as of September 30, 2020:

 

Membership Tiers   Annual Membership Fee   Number of Members
Platinum   RMB 16,800 (approximately US$2,435)   860
Diamond   RMB 98,000 (approximately US$14,203)   579
Protégé   RMB 500,000 (approximately US$72,464)   28

 

Our Users

 

Our APP is available in the PRC and elsewhere in the world where potential Users can access on the internet the http hyper-link we provide for our APP download/installation on their mobile devices; anyone over the age of 18, with a mobile phone (IOS or Android) can download our APP and complete an online registration process to become a User. Currently, although we do not charge any fee to register for our APP, we do require our Users to obtain a verification code via their mobile devices to register. Additionally, Users must agree to our Terms of Use in the form of a user agreement, which can be completed and submitted to us on our APP.

 

Since the inception of our APP in May 2016, the number of our Users has increased steadily from year to year. As of September 30, 2020, we had approximately 5.49 million Users, an increase of 5.30 million from 0.19 million in September 30, 2019, representing a compound annual growth rate of 206.86%.  

 

 

Our Mentors and Experts

 

Our Mentors

 

Our Mentors are leaders in their respective professional fields, all of them enjoy strong social influence due to their professional achievements and social status in China. The majority of our Mentors are successful well-known entrepreneurs, executive officers of public companies, PE/VC partners, doctors, and artists, in a wide range of industries including academia, health care, financial service, energy, technology, manufacturing, etc. As of September 30, 2020, we had 550 Mentors, and all of them were hand-picked and invited by our management to join our platform.

 

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Below are some of our representative Mentors (not in any particular order):

 

Name   Specialty   Credentials

Yang Wang, CEO of Cybernaut Investment Group

  Finance and Business Management   Mr. Wang was former global Vice President and General Manager of China Development Center of IBM, responsible for big data, cloud computing and artificial intelligence. Currently, Mr. Wang is the CEO of Cybernaut, a company with 100 billion assets worldwide and is committed to investing in international technological innovation, industrial innovation, regional innovation and entrepreneurship, transformation and upgrading, and new business models.
         
 Weigang Wang, Chairman of Board, Nuode Investment Co., Ltd.   Innovation and Entrepreneurship   Mr. Wang is the chairman of the board of Nuode Investment Co., Ltd.  Mr. Wang enjoys the PRC State Council special allowance, a government subsidy granted to highly skilled professional and technical personnel who made outstanding contributions.  Previously, Mr. Wang served as the dean of Sinosteel Anshan Thermo-Energy Research Institute, and was a professor at Beijing University of Science and Technology, Liaoning University of Science and Technology, and Anhui University of Technology.
         
Zhengming Feng, Managing Director of Softbank China Capital   Financial Services   Mr. Feng has been Managing Director of Softbank China Capital since December 2009, and was CEO of China Environmental Protection Technology Group (listed in Singapore) from September 2008 to December 2009.  He was also Executive Director, Executive Deputy General Manager, and CFO of Tsinghua Tongfang Environment from January 2004 to September 2008.
         
 Baozhong Li, Chairman of Shanghai Xiangzhong Investment Co., Ltd. and China Internet Insurance (Ningbo) Industrial Fund     Finance   Mr. Li currently serves as a director at Shanghai Xiangzhong Investment Co., Ltd. and Ningbo Zhonghu Technology Co., Ltd.  Previously, Mr. Li served as the CEO of Haier Capital.  Mr. Li earned a Master’s degree in Management of Agricultural Economy from Zhejiang University and an EMBA degree in Finance from Shanghai Advanced Institute of Finance.
         

Yanshi Jin, President of Beijing Xinxing Eaton Technology Service Co., Ltd.

  Finance and Economics   Mr. Jin is the President of Beijing Xinxing Eaton Technology Service Co., Ltd., Chairman of the Board of Directors of the United Nations Blockchain Foundation, Director of the Fundamental Theory Research Center of the Capital University of China University of Political Science and Law, Director of the Financial Program of Peking University HSBC Business School; and Chief Economics of Xinhua Index Company Family. He was also elected as 2009 CCTV Annual Economic Persons Selection Committee Member, elected by China Securities Market as the “Most Influential People Award” for 20 years, and won the “First Financial Economics” Financial figures of the year in 2010.
         
Dr. Dexter Y Sun, Clinical Associate Professor of Neurology at the Cornell University School   Medicine   Dr. Sun is a clinical professor of Neurology, Weill Cornell Medical, the Chief Physician of New York Presbyterian Hospital-Weill Cornell Medicine and a visiting professor of Zhejian University School of Medicine. He is the former President of the Society of Chinese American Physician Entrepreneurs and Co-Chairman of Medical Advisory Board of Republican National Committee. He also serves as Member of Zhejiang University Alumni Association and Vice President of Zhejiang University School of Medicine Branch.

 

Our Experts

 

Our Experts are skilled and qualified in their specialized fields to provide advice and guidance to our Users. Persons can become Experts through a certification process either on our APP or in-person at our local offices and centers. Our certification process consists of three steps: (1) an applicant is required to demonstrate his or her expertise and qualifications by submitting an application along with supporting documents such as resume, publications, and school transcripts; (2) our team reviews and verifies the applicant’s qualifications and background information, based on which we make a determination on whether to approve the application; and (3) we enter into a service agreement with the approved applicant. As of September 30, 2020, we had 998 Experts.

 

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Below are some of our Experts:

 

Name   Specialty   Credentials
Baijun Song, President of Zhonghui Innovation (Beijing) International Institute of Information Technology   Innovation and Entrepreneurship   Mr. Song has engaged in technological innovation and patent planning and development for more than 20 years.  He has served as the chief of technical innovation and patent strategy for a number of public companies in China.  He has assisted a number of institutions in obtain more than 1,000 patents in China, which generated more than several hundred million RMB in terms of economic value.
         
Dr. Jiesong, Shi, CEO, Beijing Shijiesong Marketing Management Co., LTD.   Marketing   Mr. Shi is the founder and CEO of Beijing Shijiesong Marketing Management Consulting Co., LTD. He also serves as a professor at the Human Marketing College, a consultant at Jilin Province Agricultural Development Co., Ltd., and a mentor at TusStar.com, a startup incubator.  Mr. Shi earned a Doctor’s degree in Marketing Strategy Management from China Agricultural University.  Previously, Mr. Shi served as a marketing manager at Lenovo and Nokia.
         

Dianshuai Li, General Manager of Xi’an Hejun Enterprise Management Consulting Co., Ltd.

  Branding Strategy   Mr. Li is partner of Xi’an Hejun Management Consulting Co., Ltd. He is the chief customer resource management expert for the Western China Think Tank Co. Ltd., and has worked as a consultant for Alliance PKU Management Consultants Ltd.  He has many years of experiences providing consultation in marketing planning and branding strategies.
         
Jiazheng Wang, Founding Partner of Beijing Yutaisike Technology Co., Ltd.      Project Evaluation and Investment Incubation   Mr. Jiazheng Wang graduated from Beijing Normal University.  Mr. Wang is one of the four founding partners of Beijing Yutaisike Technology Co., Ltd., which provides consulting services related to angel investment analysis and management.

 

Service Agreements with Our Mentors and Experts

 

Each of our Mentors and Experts, as a service provider on our platform, must enter into a service agreement with us that governs the rights and obligations of each party. The term of the service agreement is open and can be terminated by either party without any cause, and the services they provide to our Users and Members must be given exclusively on our platform, either online or offline, for which the fees generated are shared between us and the providers, usually at a 30/70 split, that is, we receive 30% and providers receive 70% of the fees. Under certain circumstances where providers generate additional fees such as registering new members, the providers will be entitled to a larger percentage of the fees generated, as decided between the parties on a case by case basis.

 

Our Local Centers

 

In order to better assist and service our Members as well as promote our business, we have established a number of local centers in major cities in China, predominant in the provinces in the Southern and Eastern China, where there are more economic activities. Our local centers are used for business development and communications where our local Members gather to share information, promote businesses, and organize events such as product promotions and lectures. Our local centers are operated under our supervision by Diamond and Protégé Members, who must have access to office spaces of at least twenty square meters, and whose qualifications must be pre-approved by our management. We also enter into a service agreement with each of our local center operators. Currently, we do not pay any fees to the Members who operate local centers. As of September 30, 2020, we had 51 local centers located in 35 cities and 21 provinces.

 

Our Enterprise Service Consultants

 

We have a professional consulting team with seven full-time employees, who have at least five years of experience in their respective fields of professions, including finance, capital markets, marketing, public relations, sales, etc. The majority of our team previously worked in the technology or finance industries. See “Consulting” below.

 

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Our Enterprise Service Clients

 

The majority of our Enterprise Service Clients are small and medium-sized enterprises located in the following provinces: Zhejiang, Shanxi, Guangdong, Shandong and Liaoning, as well as Shanghai City. For the fiscal years ended December 31, 2018, or 2019, or six months ended June 30, 2020, none of our clients accounted for more than 10% of our revenues.

 

Our Services

 

Member Service

 

We started our Member service in November 2015, and the chart below summarizes the services Members receive:

 

Membership Tier   Service
Platinum   seven SDH organized activities (study tours and forums) per year
Diamond   seven SDH organized activities (study tours and forum) per year, during which Member may enjoy special seating assigned only to Diamond Members, and make presentations and sales pitches of his or her business, products and services
Protégé   seven SDH organized activities (study tours and forum) per year, during which Member may enjoy special seating assigned only to Protégé Members, make presentations and sales pitches of his or her business, products and services, and communicate with Mentors and Experts in person at such activities

 

During each of our study tours and forums, a number of our Mentors and Experts, along with other business leaders, are invited to attend, give speeches and host discussion sessions at these activities. We compensate the attending Mentors and Experts with fees ranging from RMB5,000 (approximately US$725) to RMB20,000 (approximately US$2,899) depending on factors such as the size of the audience, the location of the activity and qualifications of the attending Mentors and Experts.

 

Our Member activities are open to non-members, who pay RMB3,000 (approximately US$427) for each activity. For the fiscal years 2018 and 2019, we generated fees from non-members in the amount of $203,908, and $113,845 respectively. For the six months ended June 30, 2020 and 2019, we generated fees from non-members in the amount of $12,934 and $51,927, respectively.

 

Study Tours

 

Beginning in 2016, we started organizing study tours for our Members, and offered five, seven, ten, 13, and two study tours in 2016, 2017, 2018, 2019, and the first half of 2020, respectively. Our study tours are designed to provide trainings on real world business skills for entrepreneurs and executives. Each study tour generally lasts two days, in which a day and a half are dedicated to classroom style lecturing and discussions, while the remaining half day is spent on visiting the headquarters or facilities of successful enterprises. All participants are responsible for their own food, traveling and living accommodations throughout the study tours.

 

Below are some of our study tours given in the past:

 

Dates   Location (City)   Enterprise Visited
July 20 -21, 2019   Liaocheng   Dong-E-E-Jiao Co Ltd
June 22-24, 2019   Hangzhou   Wahaha Group
May25-27,2019   Guangzhou   Xuesong Group
August 24 – 26, 2018   Quanzhou   361 Degrees International Limited
July 13 – 15, 2018   Taiyuan   Fenjiu Group
May 25 – 27, 2018   Ningbo   Sunny Optical Technology (Group) Co., Ltd. and Ningbo Shanshan Co., Ltd.
December 9 – 11, 2017   Guangzhou   Changlu Group
October 27 – 29, 2017   Hangzhou   Zhejiang Panshi Information Technology Co., Ltd. and Zhejiang Xizihangkong Industry Co., Ltd.
November 26 – 27, 2016   Shanghai   Ningbo Shanshan Co., Ltd.
July 31 – August 1, 2016   Zunyi   Kweichow Moutai Group

  

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Forums

 

We organize large-scale forums (with more than 1,000 attendees) that last two to three days. The purpose of our forums is to share business intelligence with small and medium-sized enterprises and help them develop business plans and strategies. The themes of our forums are usually related to interpretation of newly published governmental policies, sharing of industry opportunities and perspectives on corporate transformation and growth. We held one large-scale forum per year in 2016 and 2017, three large-scale forums in 2018, and two in 2019.

 

“China’s Private Economy Summit”, another large-scale forum, was held on April 22-23, 2018 in Beijing. Participants in this event had the opportunity to discuss and share insights on the following topics: “Investment Opportunities under the Trend of Intelligent Manufacturing Industry”; “The Direction of Tax Reform and Corporate Response Measures”; “The Current Economic Situation in China and Its Prospects”; “How to judge the feasibility of the proposed project from the perspective of capital”; “knowledge Sharing and Practical Mutual Assistance in the Age of Human Internet”; “Overseas Listing Raiders”; “Using United Nations Channel Resources to Promote the Strategic Innovation Practice of Chinese Enterprises”; “Prospects for the Development of Commercial Aerospace Industry”; and “Traditional Industry Transformation and Sharing Economy”.

 

We held another large-scale forum, “Industry China knowledge Sharing Economy Wisdom Summit”, on June 12-13, 2019 in Beijing. Participants had the opportunity to discuss and share insights on topics relating to sharing economy in China and were attended by the following business leaders: Mr. Haiping Hu, founder of GIOP; Mr. Jianjun Yu, founder of Himalaya; Mr. Mingyue Zhu, founder of Zhubajie Net; Mr. Rubo Lian, founder of Douying; Mr. Kai Qu, founder of ZhangJin; Mr. Kia Wong, founder of Uncle Wong’s Stories; Mr. Junxiu Zhu, founder of Kanliao; Mr. Yang Yu, founder of Yiguanshuju; Mr. Deng Pan, founder of Pandeng Reading Club; Mr. Chunjian Bao, founder of Xiaoertong; Mr. Baochen Wang, founder of ChianKetie; and Mr. Zhou Ke, founder of BijiXia.

 

Enterprise Service

 

In addition to providing services to our Users and Members, we have been providing customized enterprise service to small and medium-sized enterprises in the PRC since our inception in 2014. Enterprise service is an integral part of our platform, and a number of our Enterprise Service Clients are also our Members and Users.

 

Below are the three main enterprise services we provide:

 

Our Comprehensive Tailored Services

 

In May 2017, we launched our Comprehensive Tailored Service, geared towards small and medium-sized businesses, to provide tailored packaged services including conference and salon organizations, booth exhibition services, guidance by Mentors and Experts, and other value-added services, for the purpose of promoting and growing their businesses. Clients are required to enter into service agreements with us, which are individually negotiated based on the services and resources we provide. For the year ended on December 31, 2018, our comprehensive enterprise service generated revenue in the amount of US$4,732,980 from 126 clients. For the year ended December 31, 2019, our comprehensive enterprise service generated revenue in the amount of US$5,733,342 from 89 clients. For the six months ended June 30, 2020, our comprehensive enterprise service generated revenue in the amount of US$3,190,371 from 36 clients.

 

Consulting

 

Our team of professional consultants provides enterprise consulting services and develops strategies and solutions for corporate reorganization, product promotion and marketing, industry supply chain integration, corporate governance, financing and capital structure, etc. Our consulting services are customized to meet each client’s specific needs and requirements. Our fees and payment structures are based on the specifics of the services we provide, such as the time and efforts required, the duration of the service, and are usually in the range of RMB20,000 (approximately US$2,898) to RMB80,000 (approximately US$11,594) for a one-time service charge, or monthly fees in the amounts of RMB10,000 (approximately US$1,449) to RMB20,000 (approximately US$2,898) for continued services. Below are some of the consulting projects we have completed:

 

  We assisted a Beijing based investment and development company to: (1) allocate and develop customer resources; and (2) provide expert support for a strategic development and research project regarding the development of a shopping mall.
     
  We assisted a company based in Jiangsu province to formulate a customized financing plan based on their specific financing needs for business development and we successfully obtained the required funds for our client.  
     
  We assisted an energy company based in Jiangsu province with a comprehensive evaluation of its business model and development plan.

 

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Sponsorship Advertising

 

Sponsorship advertising is a special form of advertising, generally referring to a publicity strategy adopted by enterprises in order to enhance their corporate and product image, as well as brand awareness and influence. We provide sponsorship advertising services for our enterprise clients at events we hold, such as forums and study tours, in the following forms:

 

  We display the names and logos of the sponsor enterprises on the background and display boards at our events.
     
  The representatives of the sponsor enterprises are assigned to the VIP seating areas with name tags displaying their company names and logos.
     
  The sponsor enterprises enjoy a certain number of tickets for an event, which can be used for sale or as gifts to their customers.
     
  The names and logos of the sponsor company are displayed in the related advertisements and promotional materials for an event.
     
  We use products exclusively provided by the sponsor enterprise for an event.
     
  The names and logos of the sponsor enterprise may also be displayed in programs and videos we produce such as “Haiping’s Meeting Room.”

 

The fees we charge for sponsorship advertising is in the range of RMB500,000 (approximately US$72,463) to RMB2,000,000 (approximately US$289,855) per engagement, depending on several specific factors, such as the number of the participants, the location, and popularity of an event.

 

Sale of Merchandises

 

In late 2019, we started procuring and offering merchandises for sale through our platform to our clients and the general public. Our merchandises include Chinese tea, red wine, wellness products, gift cards, and others. Most of our merchandises for sale are obtained from our Members and enterprise service clients in exchange for collection of membership fees and consulting fees. Such exchanges are made at our discretion, based on a number of factors, including but not limited to, the market demand for such merchandises, the profit margin expected to be realized from the sale of such merchandises, the credit-worthiness of and our relationship with these clients. Our other merchandises are sourced based on our knowledge of current market trend and demand generated from our platform, and some of these merchandises are directly procured from our clients at preferred prices. Taking advantage of our management’s knowledge of market demand and trend, as well as access to resources afforded to us by our knowledge sharing platform, we have achieved significant growth in sale of merchandises. For the six months ended June 30, 2020, we generated $1,219,296, or approximately 19%, of our total revenue from sale of merchandises, which we believe has become a new revenue stream that is both profitable and strategically aligned with our other operations.

 

Online Service

 

We provide our Users two services on the APP: (1) Question and Answer (Q&A) Sessions and (2) Online Streaming of Courses and Programs. In addition, our APP has a community building function that facilitates relationship building on our platform. For example, our APP allows Users to share their “moments,” such as pictures and videos of their life experiences, via instant messaging, with other Users on the APP. Users may also “like” and/or comment on other User’s “moments.” In addition, Users may establish their own communities by creating and inviting other Users to join his or her group.

 

Our APP

 

Our APP was launched in May 2016, and runs on both IOS and Android devices. We strive to provide our Users superb experiences on our APP and have established an in-house Information Technology team of eight employees dedicated to the development and support of our system. To date, we have registered 29 computer software copyrights with the Copyright Protection Centre of China (CPCC), in connection with the development of our APP. In October 2017, as a result of our efforts, SDH was certified by the State Intellectual Property Office (“SIPO”) as a national high-tech enterprise, which affords SDH a favorable tax rate of 15%, rather than the unified rate of 25% for the duration of the certification. The certification lasts for three years, and is subject to renewal in October 2020. The Company has submitted an application for renewal and expects to receive the approval in November 2020. As of September 30, 2020, our APP has been downloaded by approximately 5.49 million Users, compared to 800,000 as of December 2017. The number of average monthly active Users has grown from 8,083 in May 2017 to 76,049 in September, 2020.

 

Questions and Answers (Q &A) Session

 

Our Mentors and Experts, as providers, are available to answer questions and share valuable personalized guidance and advice in a wide range of fields, including business management, health care, beauty, financial services, education, etc. Through a Q&A session, a User can submit questions on our APP to a chosen provider, who are listed on the APP under their specializing sectors, and receive a response within 72-hours. When a User submits a question on our APP, our customer service representatives and the chosen provider receive a text notification from our system immediately. Upon receipt of the text notification, our provider is required to respond within 72-hours, although most of the time the responses are provided in a much shorter time frame. If the response is delayed or unsatisfactory to the User, he or she may notify our customer service representatives who will contact the provider to follow-up with the User.

 

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Users must purchase top-up credits on our APP to pay for Q&A sessions. Providers set their own fees for Q&A sessions. At present, the average fee for a Q&A session is RMB31 (approximately US$4.38), which translates to 31 APP top-up credits. After each session concludes, credits are automatically awarded to the provider’s APP account and can be used for services on our APP or converted to RMB and paid out to the provider’s bank account linked with our APP. When submitting a question in a Q&A session, a User can also choose to share the Q&A session on the APP for a fee of one to five credits and earn credits when other Users access the shared Q&A session. The credits earned from the shared Q&A sessions are to be split 50/50 between the Users and us.

 

As of September 30, 2020, our APP completed a total of 9,425 Q&A sessions, and had about 1,194 daily accesses to shared Q&A sessions. Our top-earning providers generate about an average of RMB1,761 (approximately US$250) from answering questions in the Q&A sessions per month for the 24 months ended September 30, 2020. 

 

Online Streaming of Video & Audio Courses and Programs

 

We provide video and audio courses and programs on our APP for on-demand and live streaming. At present, our APP has approximately 5,144 audio and 4,736 video courses and programs available for streaming. The majority of the courses and programs are business-oriented, which cover subjects such as entrepreneurship development, financial service, corporate governance, team management, marketing strategy, etc. We also provide some focused courses and programs that target special audience groups, such as parent-child education for new parents, and business school selection programs for graduate students. The majority of our online courses are sourced from third party content providers including professional content production companies and individuals.

 

Below are some of our popular online courses and programs:

 

Name (release date)   Presenter   Theme of Course  

Number of
Streams* as of
September 30,

2020

Large Micromarketing Trends (04/06/2017)   Dongming Liu (Founding Partner of Chain Board, a media company)   Enterprises need to use the same internet tools that users are using to market to them. The battlefield is where the users are, and micromarketing is currently the best marketing weapon.   735,411
The Metamorphosis of Growth (04/06/2017)   Hao Chen (Founder of Shanxi Jindao Shengshi, a media company)   Before a person desires a type of lifestyle, he or she should first think clearly about his or her goals and setting up a goal worthy of pursuing for life.   218,491
Principal Hong’s Investment Course (05/03/2017)  

Hong Rong

(financial expert on SINA Finance’s “The Big V’s of Financial Affairs”)

  Principal Hong utilizes the experience of multiple people to provide 20 years of systematically researched stock exchange trading experience.   309,386
Leadership and Training Systems (05/09/2017)   Zhigang Qiu (Vice President of Guolian Group, Distinguished Lecturer of China Tao Xingzhi Research Association)   As a leader, how do you establish your own charisma and how do you manage your employees from the perspective of energy?   295,450
Duplicable Leadership Ability (05/12/2017)   Junshu Zhou (consultant of the Institute of Psychology of the Chinese Academy of Sciences, author of “Three Dimensional Leadership Coach”)   A team is made up of a wide variety of people. To truly lead others, we must understand them so as to achieve true empowerment.   410,934
Negotiation Strategies (03/01/2018)   Ligang Li (Sohu Internet Sales consultant)  

The course covers the the layout of negotiation strategy, mastering, and deal closing skills including how to

collect information and take the initiative in the negotiation in negotiations.

  622,735
Secret for Achieving Enterprise Multiple Growth (04/03/2018)   Wen Zhang (Chairman of Beijing Times Group)   This course teaches practical skills on how to start a business, what a new business needs, and how to expand the growth of a business.   593,978
Business Model by Tao Jin - First Season (03/25/2019)   Tao Jin (Chairman of Futuristic Enterprise Management Co., Ltd.)   How to: grow multiple sources of income from one income; recognize three major indicators of value investment; create two paths from industry to capital.   687,851

  

*Number of Streams is measured as the aggregate of each time the content is accessed by a User, which may include multiple accesses by such User.

 

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At present, we release an average of 100 to 200 online courses and programs each month and have 5,000 to 15,000 online streaming sessions every week. As of September 30, 2020, approximately 34.57% of the courses and programs were produced and owned by our two subsidiaries, GMB Culture and GMB Linking. We produce in-house video and audio courses and programs for streaming on our APP and several other internet content providers in China, such as Tencent, iQiyi, Youku, and Himalaya FM. For example, we produce “Haiping’s Meeting Room”, a video program debuted in June 2017, hosted by our CEO, Mr. Haiping Hu, which focuses on sharing practical business knowledge through one-on-one or roundtable interviews with well-known entrepreneurs and executives, with new episodes being released once or twice every month. We have received favorable responses from our clients, as each episode of “Haiping’s Meeting Room” received 7 to 14 million visits.

 

The other content on our APP were produced by third party content providers, including (1) approximately 43.24% by Beijing Winning at the Frontlines Cultural Exchange Co., Ltd. (“Beijing Winning”), (2) approximately 8.9% by individual content providers, such as our Mentors and Experts, and (3) the remaining 13.29% by other third party production companies including Beijing Binbin Youli Network Technology Co., Ltd., Shanghai Maokong Information Technology Co., Ltd., Beijing Friendship Culture Communication Co., Ltd., Asia United Education Technology Co., Ltd., Xiameng Xingfujia Co., Ltd., and Wuxi Ruijian Times Co., Ltd.

 

All content on our APP is copyrighted. We enter into licensing agreements with the third party content providers and have full rights to use and distribute the content on our APP. On May 30, 2016, we entered into a strategic cooperation agreement and a copyright authorization agreement, both for a term of five-years, with our main third party content provider, Beijing Winning. Pursuant to the agreements, we had non-exclusive right to use and distribute Beijing Winning’s productions on our platform without paying any upfront fee, and Beijing Winning had the right to all derivative profits, including consulting and speaking fees generated from engagements made with our Users. On November 2, 2019, we entered into an intangible assets purchase agreement with Beijing Winning to acquire 3,104 episodes of “Big Lecture Hall of Winner business management TV program” owned by Beijing Winning for a total price of RMB36,000,000 (approximately US$5,097,345). We agreed to pay the purchase price to Beijing Winning in seven installments from November 19, 2019 to February 2, 2020, and the full ownership of the purchased assets was transferred to us on November 19, 2019.

 

Our agreements with the other third party content providers, including both individuals and professional production companies, grant us non-exclusive right to use and distribute the third party content in exchange for a specified percentage of profits generated by such content on our platform.

 

Prior to 2019, most of our online content were free for our Users to enjoy because we mainly focused on growing our online knowledge sharing community. In November 2019, we started to implement a new fee structure for our online content. As of the date of this prospectus, approximately 90%, or 8,860 online courses and programs require fees to access; while the remaining 1,020, or 10%, are still available for our Users to enjoy without any fees. Under the new fee structure, there are two paid content categories: (1) a la carte: Users are charged from RMB 9.9 to 299 per course or program; and (2) VIP annual subscription: Users are charged a yearly access fee of RMB299 for all of the VIP courses and programs. As of the date of the prospectus, there are approximately 4,700 a la carte courses and programs, and 3,700 VIP courses and programs. As of September 30, 2020, 2,252 Users purchased a la carte content and 6,133Users had VIP annual subscriptions.

 

Other Services

 

Our Member activities, including study tours and forums, are also open to non-members, who pays a fixed fee of RMB3,000 (approximately US$427) for each activity. Fees are usually collected on site on the date of each activity.

  

Our New Business Initiatives

 

We have always been focused on finding business opportunities and creating new strategic plans and initiatives in order to improve and expand our platform. Below are our initiatives launched since 2018:

 

GMB Regional Economic Accelerator

 

Economic growth in China in the last two decades has been uneven in terms of geographical regions. In particular, many third and fourth tiered cities in central and western China have lagged behind, mainly due to lack of resources such as human talent, capital, and technology. Recognizing the needs of these regions for better economic growth, we reach out to regional government entities for the purpose of offering and our online and offline services and resources to the local businesses. In December 2018, we launched GMB Regional Economic Accelerator, an initiative that partners us with regional government entities to help transform and reinvent local businesses in order to compete more effectively.

 

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On January 25, 2019, we entered into a five-year strategic cooperation agreement with the City Government of Ruzhou, a county-level city in the west-central part of Henan province. Based on the agreement, we helped the City Government of Ruzhou establish a local business center, which was officially opened on March 22, 2019, and have since been used by many local enterprises for business development purposes such as product display and promotion, enterprise training and seminars, new product launching events, etc. We also held a forum with the Ministry of Industry and Information Technology Development Center for small and medium-sized enterprises in Ruzhou in March 2019, to promote local businesses and accelerate economic growth in the City of Ruzhou. In return, the City government of Ruzhou committed to promoting our platform to its local business communities and recruiting a certain number of Members from the Ruzhou city. As the date of this prospectus, we have registered 8 platinum and 26 diamond Members from the Ruzhou City.

 

United States Market Initiatives

 

Beginning in 2019, we started to promote our brands (“SDH” and “GMB”) and took additional initiatives to expand our enterprise consulting services in the United States market. Our goal is to provide consulting services to small and medium-sized U.S. enterprises looking for investment and business opportunities in China.

 

In October 2019, we entered into a business cooperating agreement with the American Chinese CEO Society (“ACCS”), with the aim to promote each other in the United States and China. Founded in 2005, ACCS is a non-profit organization for business executives and entrepreneurs; its mission is to foster investment and business opportunities between the United States and China. As of the date of this prospectus, ACCS has approximately 4,500 and 1,200 members in the United States and China, respectively.

 

In March 2020, we entered into a strategic cooperation agreement with F50, which is a venture capital platform based in Silicon Valley with a mission to identify innovative companies and products in North America and connect them with corporate partners and investors throughout the world. Our cooperation seeks to establish a long-term comprehensive strategic partnership for the purpose of mutual resource sharing and business development. We participated as a co-sponsor at F50’s “Global Capital Summit” event, with the theme “Elevating HealthTech Innovation”, on June 16-17, 2020. This event was broadcasted on F50’s YouTube and Zoom channels and watched by investors and entrepreneurs through F50’s global network covering North America, Europe, Australia, India, South America and China. We believe it provided a good opportunity for us to introduce our company and services to potential investors and clients in the United States and other regions.

 

As of the date of the prospectus, our APP has 98 registered Users in North America and 10 Mentors in the United States. We plan to promote our APP in the Chinese-speaking communities in the United States to recruit more Users and Mentors to join our platform by participating in events organized by our strategic partners including ACCS and F50.

 

Although none of these initiatives have generated any revenue as of the date of this prospectus, we plan to actively pursue our strategies and look for opportunities to continue expanding our platform in the United States.

 

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Growth Strategy

 

Since we launched our platform in 2016, our revenues have continued to grow rapidly, and the number of the registered Users of our APP has grown to approximately 5.49 million as of September 30, 2020. Our goal is to become a leading knowledge sharing and enterprise service platform and we believe that the following strategies help us achieve our goal.

 

Increase the number of our knowledge sharing providers

 

As of September 30, 2020, our knowledge sharing providers included 550 Mentors and 998 Experts, who are the main contributors to provide services on our platform. Currently the majority of our providers are from backgrounds related to business development due to the fact that we have focused on providing services to enterprise clients. In the future, we intend to add more qualified Mentors and Experts from more diversified backgrounds, particularly in the fields that tend to attract larger numbers of targeted audiences, such as beauty, health, fashion, and parenting, to expand our reach to potential clients interested in seeking information and advices related to these fields. In the next five years, we hope to increase the number of our providers to more than 5,000 through aggressive recruiting and networking.

 

Research and develop new online services and improve existing online services to attract more Users

 

We continue to improve our services based on the needs of our Users and providers. For example, we are constantly expanding the catalogue of our video and audio courses and programs for streaming on our APP, as such, the number of our online courses and programs has increased from 780 in 2016 to 9,880 in September 2020. Based on market research and feedbacks from our Users, we are currently developing new services on our APP, such as “Wisdom Shop” and “Live video Q&A”, both are designed to assist Users gain knowledge through interactions with Mentors, Experts and other Users. We hope these new offerings will attract more Users to join our platform. In addition, our team of APP developers are continually improving the usability of our APP to offer better User experiences.

 

Increase the scope of our service offerings

 

Previously, we have mainly focused on providing services to small business owners and enterprise clients, hence our marketing strategies were devised to directly target these groups. However, in China, governmental entities at various levels are major contributors to economic development. Our new business initiative, GMB Regional Economic Accelerator, was launched in December 2018 to target regional government entities as our strategic partners in recruiting local enterprises to join our platform. On January 25, 2019, we entered into a strategic cooperation agreement with the City Government of Ruzhou, a county-level city in the west-central part of Henan province. Beginning in 2019, we started a number of initiatives to promote our brands and expand our services in the United States.

 

Promote, build, and grow the influence of our brand

 

We believe a strong brand name brings many benefits to a business, such as customer recognition and loyalty, credibility, and value building. We plan to build our brand through large-scale offline activities such as forums and seminars where we regularly invite celebrities, well-known entrepreneurs and business leaders, who tend to attract media attention that bring us more exposure to the general public. We also strive to build and strengthen our brand by providing excellent customer services, as well as bring value and results to everyone on our platform.

 

Marketing and Brand Promotion

 

As of the date of this prospectus, our sales and marketing department has 32 employees, including 7 employees of our brand promotion center, who are responsible for developing and executing marketing strategies and plans. We utilize a variety of marketing and promotion methods to attract potential clients, and enhance our “SDH” brand recognition.

 

We recruit new Users, Members and Enterprise Service Clients mainly through the following: sales calls and events conducted by our sales professionals, recommendations by existing Users, Members, Mentors, Experts, and Enterprise Service Clients; promotional events at our forums and other activities; online promotional advertisements (Baidu, Headlines, WeChat Moments and advertisements on other social media websites).

 

We use the following methods to promote our “SDH” brand: organize and co-host large-scale forums and events; have our Mentors and Experts participate as guest speakers or moderators at cultural conferences and industry association meetings; distribute informational brochures, posters, and flyers at various conferences, exhibitions and trade shows; advertisement arrangements with media outlets, including newspapers, magazines, industry publications and advertisement on metro stations’ display boards.

 

We also believe the best method for marketing and brand promotion is through building and maintaining long-term relationships with existing Users, Members, Mentors, Experts, and Enterprise Service Clients by striving to provide service that consistently meet or exceed their expectations. As such, many of our clients joined our platform as a result of referrals from existing clients.

 

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Competition

 

We compete in both the enterprise service and knowledge sharing markets in the PRC, and both markets are considered as highly competitive and fragmented.

 

According to the Frost & Sullivan Report by the end of 2019, there are around 0.9 million enterprise service providers. As the economy in the PRC continues to expand, a rising number of enterprises in the PRC require enterprise services to boost their business growth rate. It is expected that those enterprise services provider with competitive strategies, well-established business relationships, high-quality and customized services and access to industry professionals will expand market share and become leading market participants in the enterprise services market in the PRC. Currently, our main competitors are ATIF Holdings Limited, a Shenzhen-based financial consulting company providing consulting and training services for enterprises; and Dark Horse Venture (Beijing) Technology Co. Ltd, a Beijing-based company focusing on consulting and training services of entrepreneurship and innovation.

 

Attributed to the growing popularity of the concept of sharing economy and its relative low barrier to entry, the knowledge sharing platforms will inevitably face fierce competition from more established companies who own extensive resources and sophisticated data capacity. Companies who do not own a clear business model may waste resources in exploring the market and opportunities, placing pressure on their cost of operation. According to the Frost & Sullivan report, a number of competitors entered into the knowledge sharing market in the PRC, and there were over 100 notable knowledge sharing market participants by the end of 2019. It is expected that the integrated and unique market participants targeting certain industries or user groups are likely to enjoy a large room of development. Our main competitors are: IGet, a Beijing-based mobile application operator, originally a talk-show producing company named Luogic Talk Show, providing a knowledge sharing platform with a wide range of content such as business administration, visual arts, sociology, humanity and practical skills; ZaiHang, another Beijing-based mobile application operator providing a matching platform to allow “one-to-one” conversations between industry experts and users; and Zhihu, also a Beijing-based company providing a website where questions are created, answered, edited, and organized by its community of users.

 

Although some of our competitors are bigger and have more resources than us, we believe we are uniquely positioned to compete effectively in the enterprise service and knowledge sharing markets because our platform is capable of offering clients integrated and personalized services both online and offline. We also have recruited a number of successful entrepreneurs and executives to join our platform as service providers (see Business – Our Knowledge Sharing and Enterprise Service Platform Ecosystem – Our Mentors and Experts), whose experiences, wisdom, industry expertise, and social connections have helped attract approximately 5.49 million Users to join our platform since its inception in May 2016.

 

Our Competitive Strengths

 

We believe that the following strengths enable us to capture business opportunities and differentiate us from our competitors:

 

Our founder and CEO, Mr. Haiping Hu, nicknamed “General Hu Haiping on Horseback”, has extensive leadership experience and is a very well-known entrepreneur in China.

 

Mr. Haiping Hu, our CEO, is a well-known entrepreneur in China. Nicknamed “General Haiping Hu on Horseback,” Mr. Hu has more than twenty years of experience as a founder and executive. He was voted as “China’s Top Ten Outstanding CEOs” by CHINA CEO FORUM in 2010, and was on the cover of Fortune Magazine and Business Watch Magazine in 2016. From 1996 to 2016, he led Shanshan Group, and transformed the company from a traditional clothing manufacturer into an energy company ranked within the top 500 largest companies in China since 2002. In addition to overseeing every aspect of the Company’s operation, Mr. Hu hosts several learning programs for streaming on our APP.

 

Our service providers bring a wealth of knowledge readily accessible to our Users, Members and Enterprise Service Clients.

 

As of September 30, 2020, we had 550 Mentors, 998 Experts, and a team of ten professional consultants as our knowledge sharing providers. Many of our Mentors are experienced leaders of successful well-known corporations, including: Mr. Ning Li, who is named as China’s “Prince of Gymnastics” after winning six medals in the 1984 Summer Olympic, and later became a successful entrepreneur by founding and serving as Chairman of Viva China Holdings Limited; Mr. Nanchun Jiang, Chairman of Focus Media; and Mr. Yang Wang, president of the Cybernaut investment Group. Likewise, our Experts are outstanding professionals in their specialized fields. We are proud of the wealth of knowledge brought by our Mentors and Experts, which are readily available to be shared with and accessed by our Users, Members and Enterprise Service Clients. Finally, our team of consultants are professionals with more than five years of industrial experience.

 

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Our Rich Service Offering Combines Both Online and Offline Services.

 

Our knowledge sharing and enterprise service platform offers a rich combination of online and offline services to our Users, Members, and Enterprise Service Clients. Our APP allows Users access to Mentors and Experts through dedicated Q&A Sessions online. Members can also participate in many offline activities and events that afford them opportunities to connect, learn and share with Mentors, Experts, and other Members. While we believe our platform provides good value for our Users, Members, Mentors and Experts, we strive to continually improve and expand our services in order to instill customer loyalty and attract more individuals and enterprises to join our platform.

 

Our Platform Builds Long Term Mutually Beneficial Relationship with Our Clients.

 

We believe our platform was established and built upon the common interest of its people to share and gain knowledge. Therefore, it is capable of cultivating and maintaining a long-term mutually beneficial relationship with everyone on our platform, including our Users, Members, Mentors, and Experts. We have also been successful in offering customized enterprise services to our existing Members and Users. Between January 1, 2019 and December 31, 2019, we generated total revenue in the amount of RMB5,850,000 (approximately US$848,010) from enterprise services provided to our Members. In addition, 0.79 million new Users joined our platform through referral of existing Members and Users, between January 1, 2019 and December 31, 2019. Between January 1, 2020 and June 30, 2020, we generated total revenue in the amount of RMB2,544,630 (approximately US$361,869.58) from enterprise services provided to our Members. In addition, 9,742 new Users joined our platform through referral of existing Members and Users, between January 1, 2020 and June 30, 2020.

  

Employees

 

We had a total of 85, 106 and 134 full-time employees as of December 31, 2017, 2018 and 2019, respectively.  As of the date of the prospectus, we have 105 full-time employees. The following table sets forth the numbers of our employees by area of business:

 

Department   Number of Employees     % of Total  
Senior Management     7       6.67  
Human Resources & Administration     13       12.38  
Sales & Marketing     32       30.48  
Business & Consulting     6       5.71  
Customer Service     8       7.62  
Information Technology     7       6.67  
Research & Development     22       20.95  
Finance     10       9.52  
Total     105       100 %

   

Generally, we enter into standard employment contracts with our officers, managers, and other employees. According to these contracts, all of our employees are prohibited from engaging in any other employment during the period of their employment with us. None of our employees is a member of a labor union and we consider our relationship with our employees to be good. See “Executive Compensation — Agreements with Named Executive Officers.”

 

Seasonality

 

We currently do not experience seasonality in our operations.

 

Facilities

 

We currently maintain our headquarters in Beijing and Shanghai in the PRC. Our total office space is 2,806 square meters including both leased and owned properties. We lease 2,168 square meters of office space under non-cancelable operating lease agreements with expiration dates in 2020 or 2022. Operating lease expense amounted to $379,355 and $215,138 for the years ended December 31, 2019 and 2018, respectively. In December 2019, the Company signed property purchase agreements to acquire four properties in Beijing with approximately an aggregate of 638 square meters of office space for a total consideration of US$2,637,539. The Company has paid US$1,204,094 as a prepayment as of December 31, 2019. The Company paid the rest of the consideration of US$1,433,445 and acquired the ownership of the properties in May 2020.

 

Future minimum lease payments under non-cancellable operating leases were as follows as of December 31, 2019:

 

Year ending December 31,    
2020  $277,250 
2021   107,078 
Total      $384,328 

 

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We believe our facilities are sufficient for our business operation.

 

Intellectual Property

 

We use a combination of trade secret, copyright, trademark, and other rights to protect our intellectual property and our brand. We own 29 computer software copyrights and one artwork copyright in China.

 

As the date of this prospectus, we have completed registration of 90 trademarks, with the Trademark Office of the State Administration for Industry & Commerce of the PRC. Our trademarks will expire at various dates between December 2026 and June 2030.

 

The Company owns the internet domain names “www.sdh365.com”, “huatayihe.com”, “师董会.com”, “Shidhui.com”, “shidonghui.cn”,“gmbip.com”, “globalmentorboard.com”, “51xuedian.com”, “17xuedian.com” and “v-seedling.com”.

 

Legal Proceedings

 

We are not currently a party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business, operating results, cash flows or financial condition.

 

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REGULATIONS

 

This section set forth a summary of the principal PRC laws and regulations relevant to our business and operations in China.

 

Regulations Related to Internet Information Services

 

Among all of the applicable laws and regulations, the Telecommunications Regulations of the PRC, or the Telecom Regulations, promulgated by the PRC State Council on September 25, 2000 and most recently amended on February 6, 2016, is the primary governing law, which sets out the general framework for the provision of telecommunications services by domestic PRC companies. Under the Telecom Regulations, telecommunications service providers are required to procure operating licenses prior to their commencement of operations. The Telecom Regulations distinguish “basic telecommunications services” from VATS. VATS are defined as telecommunications and information services provided through public networks. The Telecom Catalogue was issued as an attachment to the Telecom Regulations to categorize telecommunications services as either basic or value-added. In February 2003, December 2015, and June 2019, the Telecom Catalogue was updated respectively, categorizing information services provided via fixed network, mobile network among others, as VATS.

 

The Administrative Measures on Telecommunications Business Operating Licenses was promulgated by the Ministry of Industry and Information Technology on March 1, 2009 and most recently amended on July 3, 2017, which set forth more specific provisions regarding the types of licenses required to operate VATS, the qualifications and procedures for obtaining such licenses and the administration and supervision of such licenses. Under these regulations, a commercial operator of VATS must first obtain a VATS License, from the MIIT or its provincial level counterparts, otherwise such operator might be subject to sanctions including corrective orders and warnings from the competent administration authority, fines and confiscation of illegal gains and, in the case of significant infringements, the websites may be ordered to close.

 

In September 2000, the State Council promulgated the Administrative Measures on Internet Information Services, or the Internet Measures, which was most recently amended on January 8, 2011. Under the Internet Measures, commercial internet content-related services operators shall obtain a VATS License for internet content provision business, or the ICP License, from the relevant government authorities before engaging in any commercial internet content-related services operations within China.

 

Our VIE obtained the ICP License on July 2, 2019, which will remain effective for 5 years.

 

Regulations Related to Foreign Investment

 

Guidance Catalogue of Industries for Foreign Investment

 

Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalogue of Industries for Foreign Investment, or the Guidance Catalog, which was promulgated and is amended from time to time by Ministry of Commerce, or MOFCOM, and the National Development and Reform Commission, or NDRC. The Guidance Catalog lays out the basic framework for foreign investment in China, classifying businesses into three categories with regard to foreign investment: “encourage,” “restricted” and “prohibited.” Industries not listed in the catalog are generally deemed as falling into a fourth category “permitted” unless specifically restricted by other PRC laws.

 

In addition, in June 2018 the MOFCOM and the NDRC promulgated the Special Management Measures (Negative List) for the Access of Foreign Investment, or the Negative List, which became effective on July 28, 2018 and was further updated on June 30, 2019 and June 23, 2020. The value-added telecommunications services (except for e-commerce, domestic conferencing, store-and-forward, and call center services), or the VATS, fall within the Negative List.

 

Pursuant to the Provisions on Administration of Foreign-Invested Telecommunications Enterprises promulgated by the State Council in December 2001 and most recently amended in February 2016, or the FITE Regulations, the ultimate foreign equity ownership in a VATS provider may not exceed 50%. Moreover, for a foreign investor contemplating to acquire any equity interest in a VATS business in China, it must satisfy a number of stringent performance and operational experience requirements, including demonstrating good track records and experience in operating VATS business overseas.

 

In July 2006, Ministry of Information Industry, or the MII (the predecessor of the MIIT), released the Notice on Strengthening the Administration of Foreign Investment in and the Operation of Value-added Telecommunications Business, or the MII Notice, which requires foreign investors to set up foreign-invested enterprises and obtain a relevant telecommunications business operating license, to conduct any VATS business in China. Furthermore, under the MII Notice, domestic telecommunication enterprises may not rent, transfer or sell a telecommunications business operating license to foreign investors in any form, nor may they provide any resources, premises, facilities and other assistance in any form to foreign investors for their illegal operation of any telecommunications business in China. In addition, under the MII Notice, the relevant trademarks and domain names used by a foreign-invested VATS operator shall be legally owned by that operator (or its shareholders).

 

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The Company engages in business activities that are VATS, and in light of the above restrictions and requirements, the Company relies on contractual arrangements between the WFOE and VIE to operate its business in China.

 

Foreign Investment Law

 

On March 15, 2019, the National People’s Congress approved the Foreign Investment Law of the PRC, or the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law of the PRC and the Wholly Foreign-invested Enterprise Law of the PRC, together with their implementation rules and ancillary regulations. The organization form, organization and activities of foreign-invested enterprises shall be governed, among others, by the PRC Company Law and the PRC Partnership Enterprise Law. Foreign-invested enterprises established before the implementation of the Foreign Investment Law may retain the original business organization and so on within five years after the implementation of this Law.

 

The Foreign Investment Law is formulated to further expand opening-up, vigorously promote foreign investment and protect the legitimate rights and interests of foreign investors. According to the Foreign Investment Law, foreign investments are entitled to pre-entry national treatment and are subject to negative list management system. The pre-entry national treatment means that the treatment given to foreign investors and their investments at the stage of investment access shall not be less favorable than that of domestic investors and their investments. The negative list management system means that the state implements special administrative measures for access of foreign investment in specific fields. The Foreign Investment Law does not mention the relevant concept and regulatory regime of VIE structures. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. See “Risk Factors—Risks Related to Our Corporate Structure—Uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

 

Foreign investors’ investment, earnings and other legitimate rights and interests within the territory of China shall be protected in accordance with the law, and all national policies on supporting the development of enterprises shall equally apply to foreign-invested enterprises. Among others, the state guarantees that foreign-invested enterprises participate in the formulation of standards in an equal manner and that foreign-invested enterprises participate in government procurement activities through fair competition in accordance with the law. Further, the state shall not expropriate any foreign investment except under special circumstances. In special circumstances, the state may levy or expropriate the investment of foreign investors in accordance with the law for the needs of the public interest. The expropriation and requisition shall be conducted in accordance with legal procedures and timely and reasonable compensation shall be given. In carrying out business activities, foreign-invested enterprises shall comply with relevant provisions on labor protection.

 

Regulations Related to Mobile Internet Applications Information Services

 

In addition to the telecommunications regulations and other regulations above, mobile Internet applications and application stores are specifically regulated by the Administrative Provisions on Mobile Internet Applications Information Services, or the App Provisions, which were promulgated by the Cyberspace Administration of China, or the CAC, on June 28, 2016, and became effective on August 1, 2016. Pursuant to the App Provisions, application information service providers shall obtain the relevant qualifications prescribed by laws and regulations, strictly implement their information security management responsibilities and carry out certain duties, including establishing and completing user information security protection mechanism and information content inspection and management mechanisms, protect users’ right to know and to choose in the process of usage, and to record and preserve users’ daily usage information for at least 60 days. Furthermore, internet application store service providers and internet application information service providers shall sign service agreements to determinate both sides’ rights and obligations.

 

In addition, on December 16, 2016, the MIIT promulgated the Interim Measures on the Administration of Pre-Installation and Distribution of Applications for Mobile Smart Terminals, or the App Interim Measures, which took effect on July 1, 2017. The App Interim Measures requires, among others, that internet information service providers must ensure that a mobile application, as well as its ancillary resource files, configuration files and user data can be uninstalled by a user on a convenient basis, unless it is a basic function software, which refers to a software that supports the normal functioning of hardware and operating system of a mobile smart device.

 

Neither the App Provisions nor the App Interim Measures, however, has further clarified the scope of “information services,” neither do they specify what “relevant qualification(s)” that an app owner/operator must obtain. In practice, operational activities of a company conducted through an app is currently subject to the supervisions of local departments of the Information Communications Administration, and often, the local departments differentiate the operational activities conducted through websites and through apps.

 

To comply with these laws and regulations, our VIE obtained the ICP License on July 2, 2019, which will remain effective for 5 years, we have also adopted and implemented strict information security policies and measures to protect our cyber security systems and customer information.

 

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Regulations Related to Online Transmission of Audio-Visual Programs

 

On April 13, 2005, the State Council promulgated the Certain Decisions on the Entry of the Non-state-owned Capital into the Cultural Industry. On July 6, 2005, five PRC governmental authorities, including the Ministry of Culture, or the MOC, the State Administration of Radio, Film and Television, or the SARFT (the predecessor of the National Radio and Television Administration, or NRTA), the General Administration of Press and Publication, or the GAPP, the China Securities Regulatory Commission, or the CSRC and the MOFCOM, jointly adopted the Several Opinions on Canvassing Foreign Investment into the Cultural Sector. Under these provisions, non-state owned capital and foreign investors are prohibited from engaging in the business of distributing audio-visual programs through information networks.

 

To further regulate the provision of audio-visual program services to the public via the internet, including through mobile networks, within the territory of the PRC, the SARFT and the MIIT jointly promulgated the Administrative Provisions on Internet Audio-Visual Program Service, or the Audio-Visual Program Provisions, on December 20, 2007, which took effect on January 31, 2008 and subsequently amended on August 28, 2015. Pursuant to the Audio-Visual Program Provisions, Internet audio-visual program services refer to activities of making, redacting and integrating audio-visual programs, providing them to the general public via the Internet, and providing platforms for uploading and spreading audio-visual programs. Providers of internet audio-visual program services are required to obtain the Audio-Visual License issued by SARFT, or complete certain registration procedures with SARFT. In general, providers of internet audio-visual program services must be either state-owned or state-controlled entities, and the business to be carried out by such providers must satisfy the overall planning and guidance catalog for internet audio-visual program service determined by SARFT. Our VIE is neither state-owned nor state-controlled, therefore it is unlikely that it will be able to obtain the Audio-Visual License if required to do so. Whoever engages in Internet audio-visual program service without the license or registration, the competent authorities shall give it/him an admonition and order it/him to correct, and may impose a fine of not more than RMB30,000 (approximately US$4,348); if the circumstances are serious, a punishment shall be imposed in accordance with the provision of Article 47 of the Radio and Television Administration Regulation.

 

On May 21, 2008, SARFT issued a Notice on Relevant Issues Concerning Application and Approval of License for the Online Transmission of Audio-Visual Programs, as amended on August 28, 2015, which further set out detailed provisions concerning the application and approval process regarding the Audio-Visual License. Further, on March 31, 2009, SARFT promulgated the Notice on Strengthening the Administration of the Content of Internet Audio-Visual Programs, which reiterates the pre-approval requirements for the audio-visual programs transmitted via the internet, including through mobile networks, where applicable, and prohibits certain types of internet audio-visual programs containing violence, pornography, gambling, terrorism, superstition or other similarly prohibited elements.

 

On March 17, 2010, the SARFT issued the Internet Audio-visual Program Services Categories (Provisional), or the Provisional Categories, as amended on March 10, 2017. According to the Provisional Categories, there are four categories of internet audio-visual program services which are further divided into seventeen sub-categories. The third sub-category to the second category covers the making and editing of certain specialized audio-visual programs concerning, among other things, finance and educational content, and broadcasting such content to the general public online. However, there are still significant uncertainties relating to the interpretation and implementation of the Audio-Visual Program Provisions, in particular, the scope of “internet audio-visual programs”.

 

In addition, the Notice concerning Strengthening the Administration of the Streaming Service of Online Audio-Visual Programs promulgated by the State Administration of Press and Publication Radio, Film and Television, or the SAPPRFT (the predecessor of NRTA) on September 2, 2016 emphasizes that, unless a specific license is granted, audio-visual programs service provider is forbidden from engaging in live streaming on major political, military, economic, social, cultural and sports events. On November 4, 2016, the State Internet Information Office promulgated the Administrative Provisions on Internet Live-Streaming Services, or Internet Live-Streaming Services Provisions, which came into effect on December 1, 2016. According to the Internet Live-Streaming Services Provisions, an internet live-streaming service provider shall (a) establish a live-streaming content review platform; (b) conduct authentication registration of internet live-streaming issuers based on their identity certificates, business licenses and organization code certificates; and (c) enter into a service agreement with internet live-streaming services user to specify both parties’ rights and obligations.

 

On March 16, 2018, the SAPPRFT issued the Notice on Further Regulating the Transmission Order of Internet Audio-Visual Programs, which requires that, among others, audio-visual platforms shall: (i) not produce or transmit programs intended to parody or denigrate classic works, (ii) not re-edit, re-dub, re-caption or otherwise

 

On July 22, 2019, in the Beijing Municipal Radio and Television Bureau’s Q&A section of its official website, the Bureau responded to an inquiry submitted by an online education service provider, and confirmed that the offering of online audio and video courses or programs on websites or mobile applications for the purpose of improving the professional qualifications/skills of target audiences, does not fall into the activities regulated by the PRC Administrative Provisions on Internet Audio-Visual Program Services; therefore, the service provider is not required to obtain an Audio-Visual License. Currently, all of our online content on our APP are educational and training video and audio courses targeting specific groups of audiences, such as small and medium enterprise owners and graduate students, who use our online courses and programs to improve their professional qualifications and skills. Accordingly, based on the Bureau’s published interpretation, we believe we are not required to obtain an Audio-Visual License. However, given the significant uncertainties of the interpretation and implementation of Internet related regulations in the PRC, we cannot assure you that the competent PRC authorities will not ultimately take a view contrary to our opinion. See “Risk Factors—Risks Related to Our Business— We may be required to obtain and maintain additional approvals, licenses or permits applicable to our business, including our online business, which could have a material adverse impact on our business, financial conditions and results of operations.”

 

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Regulations Related to Information Security

 

Internet content in China is regulated and restricted from a state security standpoint. The Standing Committee of the National People’s Congress, or the SCNPC, enacted the Decisions on the Maintenance of Internet Security on December 28, 2000, which was amended on August 27, 2009, that may subject persons to criminal liabilities in China for any attempt to: (i) gain improper entry to a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information or (v) infringe upon intellectual property rights. In 1997, Ministry of Public Security, or the MPS, issued the Administration Measures on the Security Protection of Computer Information Network with International Connections, which were amended by the State Council on January 8, 2011 and prohibit using the Internet in ways which, among others, result in a leakage of state secrets or a spread of socially destabilizing content. The MPS has supervision and inspection powers in this regard, and relevant local security bureaus may also have jurisdiction. On December 13, 2005, the MPS promulgated Regulations on Technological Measures for Internet Security Protection, or the Internet Protection Measures, which took effect on March 1, 2006 and requires internet service providers to take proper measures including anti-virus, data back-up and other related measures, to keep records of certain information about its users (including user registration information, log-in and log-out time, IP address, content and time of posts by users) for at least 60 days, and to detect illegal information, stop transmission of such information, and keep relevant records. If an ICP License holder violates these measures, the PRC government may revoke its ICP License and shut down its websites.

 

In November 2016, the SCNPC promulgated the Cyber Security Law of the PRC, or the Cyber Security Law, which became effective on June 1, 2017 and requires network operators to perform certain functions related to cyber security protection and the strengthening of network information management. For instance, under the Cyber Security Law, network operators of key information infrastructure shall store within the territory of the PRC all the personal information and important data collected and produced within the territory of PRC and their purchase of network products and services that may affect national securities shall be subject to national cybersecurity review. On April 13, 2020, the CAC and other 11 Commissions, Ministries and Administrations, jointly issued the Measures for Cybersecurity Review, which took effect on June 1, 2020, to provide for more detailed rules regarding cybersecurity review requirements.

 

To comply with these laws and regulations, we have adopted security policies and measures to protect our cyber system and customer information.

 

Regulations Related to Internet Privacy Protection

 

Pursuant to the Internet Protection Measures, Internet services providers are prohibited from unauthorized disclosure of users’ information to any third parties unless such disclosure is required by the laws and regulations. They are further required to establish management systems and take technological measures to safeguard the freedom and secrecy of the users’ correspondences.

 

On December 28, 2012, the SCNPC promulgated the Decision on Strengthening Network Information Protection, which took into effect on the same date, to enhance the legal protection of information security and privacy on the internet. On July 16, 2013, the MIIT promulgated the Provisions on Protection of Personal Information of Telecommunication and Internet Users, which took into effect on September 1, 2013, to regulate the collection and use of users’ personal information in the provision of telecommunication services and internet information services in China and the personal information includes a user’s name, birth date, identification card number, address, phone number, account name, password and other information that can be used independently or in combination with other information for identifying a user.

 

On December 29, 2011, the MIIT promulgated the Several Provisions on Regulation of the Order of Internet Information Service Market, which took into effect on March 15, 2012. The Provisions stipulate that without the consent of users, internet information service providers shall not collect information relevant to the users that can lead to the recognition of the identity of the users independently or in combination with other information, nor shall they provide the information to others, unless otherwise provided by laws and administrative regulations.

 

On May 8, 2017, the Supreme People’s Court and the Supreme People’s Procuratorate released the Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in the Handling of Criminal Cases Involving Infringement of Citizens’ Personal Information, or the Interpretations, which took into effect on June 1, 2017. The Interpretations clarify several concepts regarding the crime of “infringement of citizens’ personal information” stipulated by Article 253A of the Criminal Law of the PRC, including “citizen’s personal information”, “provision”, and “unlawful acquisition”. Also, the Interpretations specify the standards for determining “serious circumstances” and “particularly serious circumstances” of this crime.

 

To comply with these laws and regulations, we have required our customers to consent to our collecting and using of their personal information in order to receive our services, and established information security systems to protect customers’ privacy.

 

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Regulations Related to Internet Culture Activities

 

On February 17, 2011, the MOC promulgated the Interim Administrative Provisions on Internet Culture, or the Internet Culture Provisions, which became effective on April1, 2011 and was amended on December 15, 2017. The Internet Culture Provisions require ICP services providers engaging in commercial “internet culture activities” to obtain an Internet Culture Business Operating License from the MOC. “Internet cultural activity” is defined in the Internet Culture Provisions as an act of provision of internet cultural products and related services, which includes (i) the production, duplication, importation, and broadcasting of the internet cultural products; (ii) the online dissemination whereby cultural products are posted on the internet or transmitted via the internet to end-users, such as computers, fixed-line telephones, mobile phones, television sets and games machines, for online users’ browsing, use or downloading; and (iii) the exhibition and comparison of the internet cultural products. In addition, “internet cultural products” is defined in the Internet Culture Provisions as cultural products produced, broadcast and disseminated via the internet, which mainly include internet cultural products specially produced for the internet, such as online music entertainment, online games, online shows and plays (programs), online performances, online works of art and online cartoons, and internet cultural products produced from cultural products such as music entertainment, games, shows and plays (programs), performances, works of art, and cartoons through certain techniques and duplicating those to internet for dissemination.

 

Our VIE obtained an Internet Culture Business Operating License on July 17, 2020, which covers the operation of online performances and will remain effective until February 2, 2022.

 

Regulations Related to Consumer Rights Protection

 

The Consumer Rights and Interests Protection Law of the PRC, or the Consumer Protection Law, promulgated by the SCNPC on October 31, 1993 and most recently amended on October 25, 2013 (effective as of March 15, 2014), and the Online Trading Measures issued by the State Administration for Industry and Commerce on January 26, 2014 (effective as of March 15, 2014), set out the obligations of business operators and the rights and interests of the customers. For example, business operators must guarantee the quality, function, usage, term of validity, personal or property safety requirement of the goods and services and provide customers with authentic information about the goods and services. Consumer whose legitimate rights and interests are harmed in the purchase of goods or receipt of services rendered through an online trading platform may seek compensation from the seller or the service provider.

 

Additionally, Internet information service providers, under the Tort Liability Law of the PRC, which became effective on July 1, 2010, shall bear tortious liabilities in the event they infringe upon other person’s rights and interests due to providing wrong or inaccurate content through the internet. Where an internet service provider conducts tortious acts through internet services, the infringed person has the right to request the internet service provider take necessary actions such as deleting contents, screening and de-linking. Failing to take necessary actions after being informed, the internet service provider will be subject to its liabilities with regard to the additional damages incurred. Where an internet service provider knows that an internet user is infringing upon other persons’ rights and interests through its internet service but fails to take necessary actions, it is jointly and severally liable with the internet user.

 

Regulations Related to Intellectual Property Rights

 

Copyright

 

The Copyright Law of the PRC, or the Copyright Law, which took effect on June 1, 1991 and was amended in 2001 and in 2010, and its implementing regulations adopted in 2002 and amended in 2011 and 2013, provide that Chinese citizens, legal persons, or other organizations will, whether published or not, enjoy copyright provides that Chinese citizens, legal persons, or other organizations shall, whether published or not, own copyright in their copyrightable works, which include, among others, works of literature, art, natural science, social science, engineering technology and computer software. Copyright owners enjoy certain legal rights, including right of publication, right of authorship and right of reproduction. The Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and software products. In addition, the Copyright Law provides for a voluntary registration system administered by the China Copyright Protection Center, or the CPCC. According to the Copyright Law, an infringer of the copyrights shall be subject to various civil liabilities, which include ceasing infringement activities, apologizing to the copyright owners and compensating the loss of copyright owner. Infringers of copyright may also subject to fines and/or administrative or criminal liabilities in severe situations.

 

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Pursuant to the Computer Software Copyright Protection Regulations promulgated by the State Council in 1991 and amended in 2001, 2011 and 2013 respectively, Chinese citizens, legal persons and other organizations shall enjoy copyright on software they develop, regardless of whether the software is released publicly. Software copyright commences from the date on which the development of the software is completed. The protection period for software copyright of a legal person or other organizations shall be 50 years, concluding on December 31 of the 50th year after the software’s initial release. The software copyright owner may go through the registration formalities with a software registration authority recognized by the State Council’s copyright administrative department. The software copyright owner may authorize others to exercise that copyright, and is entitled to receive remuneration.

 

Trademark

Trademarks are protected by the Trademark Law of the PRC, which was adopted in 1982 and subsequently amended in 1993, 2001, 2013 and 2019 as well as by the Implementation Regulations of the PRC Trademark Law adopted by the State Council in 1983 and as most recently amended on April 29, 2014. The Trademark Office under the State Administration for Industry and Commerce handles trademark registrations. The Trademark Office grants a 10-year term to registered trademarks and the term may be renewed for another 10-year period upon request by the trademark owner. A trademark registrant may license its registered trademarks to another party by entering into trademark license agreements, which must be filed with the Trademark Office for its record. As with patents, the Trademark Law has adopted a first-to-file principle with respect to trademark registration. If a trademark applied for is identical or similar to another trademark which has already been registered or subject to a preliminary examination and approval for use on the same or similar kinds of products or services, such trademark application may be rejected. Any person applying for the registration of a trademark may not injure existing trademark rights first obtained by others, nor may any person register in advance a trademark that has already been used by another party and has already gained a “sufficient degree of reputation” through such party’s use.

 

Domain name

The domain names are protected under the Administrative Measures on the Internet Domain Names, or the Domain Name Measures, which was promulgated by the MIIT and became effective in November 2017. The MIIT is the major regulatory body responsible for the administration of the PRC internet domain names, under supervision of which China Internet Network Information Center, or the CNNIC, is responsible for the daily administration of CN domain names and PRC domain names. The CNNIC promulgated the Implementation Rules of Registration of Domain Name, or the CNNIC Rules, effective in May 2012. Pursuant to the Domain Name Measures and the CNNIC Rules, the registration of domain names adopts the “first to file” principle and the registrant shall complete the registration via the domain name registration service institutions. In the event of a domain name dispute, the disputed parties may lodge a complaint to the designated domain name dispute resolution institution to trigger the domain name dispute resolution procedure in accordance with the CNNIC Measures on Resolution of the Domain Name Disputes, file a suit to the People’s Court, or initiate an arbitration procedure.

 

Regulations Related to Foreign Exchange

 

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, promulgated by the State Council in 1996 and most recently amended in 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from State Administration of Foreign Exchange or SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans.

 

In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, or SAFE Circular 59, which was most recently amended in 2015 and substantially amends and simplifies the current foreign exchange procedures. Pursuant to SAFE Circular 59, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts, and guarantee accounts, the reinvestment of Renminbi proceeds derived by foreign investors in China, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously.

 

In February 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Circular 13, pursuant to which, instead of applying for approval regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals may apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of SAFE, may directly review the applications and conduct the registration.

 

In March 2015, SAFE issued the Circular of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or SAFE Circular 19. Pursuant to SAFE Circular 19, a foreign-invested enterprise may, according to its actual business needs, settle with a bank the portion of the foreign exchange capital in its capital account for which the relevant foreign exchange administration has confirmed monetary capital contribution rights and interests (or for which the bank has registered the injection of the monetary capital contribution into the account). In addition, for the time being, foreign-invested enterprises are allowed to settle 100% of their foreign exchange capital on a discretionary basis. A foreign-invested enterprise shall truthfully use its capital for its own operational purposes within the scope of business. Where an ordinary foreign-invested enterprise makes domestic equity investment with the amount of foreign exchanges settled, the invested enterprise must first go through domestic re-investment registration and open a corresponding account for foreign exchange settlement pending payment with the foreign exchange administration or the bank at the place where it is registered.

 

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In June 2016, SAFE promulgated Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, pursuant to which, in addition to foreign currency capital, enterprises registered in China may also convert their foreign debts, as well as repatriated fund raised through overseas listing, from foreign currency to Renminbi on a discretional basis. SAFE Circular 16 also reiterates that the use of capital so converted shall follow “the principle of authenticity and self-use” within the business scope of the enterprise. According to SAFE Circular 16, the Renminbi funds so converted shall not be used for the purposes of, whether directly or indirectly, (i) paying expenditures beyond the business scope of the enterprises or prohibited by laws and regulations; (ii) making securities investment or other investments (except for banks’ principal-secured products); (iii) granting loans to non-affiliated enterprises, except as expressly permitted in the business license; and (iv) purchasing non-self-used real estate (except for the foreign-invested real estate enterprises).

 

In January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, or SAFE Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of tax filing records, and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses before remitting the profits. Further, pursuant to SAFE Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment.

 

Regulations Related to Dividend Distribution

 

The principal regulations governing the distribution of dividends paid by WFOEs include the Company Law of PRC promulgated in 1993 and most recently amended in 2018, Wholly Foreign-Owned Enterprise Law promulgated in 1986 and most recently amended in 2016, and the Implementation Regulations on the Wholly Foreign-Owned Enterprise Law issued in 1990 and most recently amended in 2014. Under these regulations, WFOEs in China may pay dividends only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. In addition, a WFOE in China is required to set aside at least 10% of its after-tax profits based on PRC accounting standards each year to its general reserves until its cumulative total reserve funds reaches 50% of its registered capital. These reserve funds, however, may not be distributed as cash dividends.

 

Regulations Related to Foreign Exchange Registration of Offshore Investment by PRC Residents

 

In July 2014, SAFE issued the Circular of the State Administration of Foreign Exchange on Issues concerning Foreign Exchange Administration over the Overseas Investment and Financing and Round-trip Investment by Domestic Residents via Special Purpose Vehicles, or SAFE Circular 37 which was most recently amended on June 15, 2018 and has replaced the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles (known as Circular 75). SAFE Circular 37 regulates foreign exchange matters in relation to the use of special purpose vehicles, or “SPVs,” by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Under SAFE Circular 37, an SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate domestic or offshore assets or interests, while “round trip investment” refers to the direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management rights. Circular 37 requires that, before making contribution into an SPV, PRC residents or entities are required to complete foreign exchange registration with SAFE or its local branch.

 

In February 2015, SAFE promulgated the SAFE Circular 13. SAFE Circular 13 has amended SAFE Circular 37 by requiring PRC residents or entities to register with qualified banks instead of SAFE or its local branch in connection with their establishment of an SPV.

 

In addition, pursuant to SAFE Circular 37, an amendment to registration or subsequent filing with qualified banks by such PRC resident is also required if there is a material change with respect to the capital of the offshore company, such as any change of basic information (including change of such PRC residents, change of name and operation term of the SPV), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. Failure to comply with the registration requirements as set forth in SAFE Circular 37 and SAFE Circular 13, misrepresent on or failure to disclose controllers of foreign-invested enterprises that are established by round-trip investment may result in bans on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliates, and may also subject relevant PRC residents to penalties under the Foreign Exchange Administration Regulations of the PRC.

 

All of our shareholders who are subject to the SAFE Circular 37 have completed the initial registrations with the local SAFE branch or qualified banks as required by SAFE Circular 37.

 

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Regulations Related to Foreign Debt

 

As an offshore holding company, we may make additional capital contributions to WFOE subject to approval from the local department of commerce and the SAFE, with no limitation on the amount of capital contributions. We may also make loans to WFOE subject to the approval from SAFE or its local office and the limitation on the amount of loans.

 

By means of making loans, WFOE is subject to the relevant PRC laws and regulation relating to foreign debts. On January 8, 2003, the State Development Planning Commission, SAFE, and Ministry of Finance, or MOF, jointly promulgated the Circular on the Interim Provisions on the Management of Foreign Debts, or the Foreign Debts Provisions, which became effective on March 1, 2003, and was partially abolished on May 10, 2015. Pursuant to Foreign Debts Provisions, the total amount of foreign loans received by a foreign-invested company shall not exceed the difference between the total investment in projects as approved by the MOFCOM or its local counterpart and the amount of registered capital of such foreign-invested company. In addition, on January 12, 2017, the People’s Bank of China, or PBOC, issued the Circular on Full-Coverage Macro-Prudent Management of Cross-Border Financing, or the PBOC Circular 9, which sets out the statutory upper limit on the foreign debts for PRC non-financial entities, including both foreign-invested companies and domestic-invested companies, and the macro-prudential adjustment parameter is 1. Pursuant to the PBOC Circular 9, the foreign debt upper limit for both foreign-invested companies and domestic-invested companies is calculated as twice the net asset of such companies. As to net assets, the companies shall take the net assets value stated in their latest audited financial statement. On March 11, 2020, the PBOC and SAFE promulgated the Circular of the People’s Bank of China and the State Administration of Foreign Exchange on Adjusting the Macro-prudential Regulation Parameter for Full-covered Cross-border Financing, which provides that based on the current macro economy and international balance of payments, the macro-prudential regulation parameter as set forth in the PBOC Circular 9 is updated from 1 to 1.25.

 

The PBOC Circular 9 does not supersede the Foreign Debts Provisions. It provides a one-year transitional period from January 11, 2017, for foreign-invested companies, during which foreign-invested companies, such as WFOE, could adopt their calculation method of foreign debt upper limit based on either the Foreign Debts Provisions or the PBOC Circular 9. The transitional period ended on January 11, 2018. Upon its expiry, pursuant to the PBOC Circular 9, PBOC and SAFE shall reevaluate the calculation method for foreign-invested companies and determine what the applicable calculation method would be. As of the date of this prospectus, neither the PBOC nor SAFE has promulgated and made public any further rules, regulations, notices, or circulars in this regard.

 

Regulations Related to Tax

 

Enterprise Income Tax

 

On March 16, 2007, the SCNPC promulgated the EIT Law, which was recently amended on December 29, 2018. On December 6, 2007, the State Council enacted the Regulations for the Implementation of the Enterprise Income Tax Law. Under the EIT Law and relevant implementation regulations, both resident enterprises and non-resident enterprises are subject to the enterprise income tax so long as their income is generated within the territory of PRC. “Resident enterprises” are defined as enterprises that are established in China in accordance with PRC laws, or that are established in accordance with the laws of foreign countries but are actually or in effect controlled from within the PRC. “Non-resident enterprises” are defined as enterprises that are organized under the laws of foreign countries and whose actual management is conducted outside the PRC, but have established institutions or premises in the PRC, or have no such established institutions or premises but have income generated from inside the PRC. Under the EIT Law and relevant implementing regulations, a uniform corporate income tax rate of 25% is applied. If non-resident enterprises have not formed permanent establishments or premises in the PRC, or if they have formed permanent establishment or premises in the PRC but there is no actual relationship between the relevant income derived in the PRC and the established institutions or premises set up by them, however, enterprise income tax is set at the rate of 10% with respect to their income sourced from inside the PRC.

 

The EIT Law and its implementation rules permit certain “high and new technology enterprises strongly supported by the state” that independently own core intellectual property and meet statutory criteria, to enjoy a reduced 15% enterprise income tax rate.

 

According to the Administrative Rules for the Certification of High Tech Enterprises, effective on January 1, 2008 and amended on January 29, 2016 (effective as of January 1, 2016), for each entity accredited as High Tech Enterprise, such status is valid for three years if it meets the qualifications for High Tech Enterprise on a continuing basis during such period. Our VIE, SDH, has been certified as a High Tech Enterprise on October 25, 2017 and such certification will remain valid for three years until October 25, 2020.

 

Value-Added Tax (“VAT”)

 

The Provisional Regulations of the PRC on Value-added Tax was promulgated by the State Council on December 13, 1993, and most recently amended on November 19, 2017. The Detailed Rules for the Implementation of the Provisional Regulations of the PRC on Value-added Tax (Revised in 2011) were promulgated by the MOF on December 25, 1993, and were recently amended on October 28, 2011 (collectively with the VAT Regulations, the VAT Law). On April 4, 2018, MOF and SAT jointly promulgated the Circular on Adjustment of Value-Added Tax Rates, or MOF and SAT Circular 32. On March 20, 2019, MOF, SAT and General Administration of Customs, or GAC, jointly issued a Circular on Relevant Polices for Deepening Value-added Tax Reform, or MOF, SAT and GAC Circular 39, which became effective from April 1, 2019. According to the abovementioned laws and circulars, all enterprises and individuals engaged in the sale of goods, the provision of processing, repair and replacement services, sales of services, intangible assets, real property and the importation of goods within the territory of the PRC are the taxpayers of VAT. The VAT tax rates generally applicable are simplified as 13%, 9%, 6% and 0%, and the VAT tax rate applicable to the small-scale taxpayers is 3%.

 

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Withholding Tax

 

The Enterprise Income Tax Law of the PRC provides that since January 1, 2008, an income tax rate of 10% will normally be applicable to dividends declared to non-PRC resident investors which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC.

 

Pursuant to an Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Incomes, or the Double Tax Avoidance Arrangement, and other applicable PRC laws, if a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under such Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends the Hong Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5%. Based on the Circular on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, or the SAT Circular 81, issued on February 20, 2009, by the SAT, however, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment. According to the Circular on Several Questions regarding the “Beneficial Owner” in Tax Treaties, which was issued on February 3, 2018, by the SAT and took effect on April 1, 2018, when determining the applicant’s status of the “beneficial owner” regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including without limitation, whether the applicant is obligated to pay more than 50% of his or her income in 12 months to residents in third country or region, whether the business operated by the applicant constitutes the actual business activities, and whether the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes or levy tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual circumstances of the specific cases. This circular further provides that applicants who intend to prove his or her status of the “beneficial owner” shall submit the relevant documents to the relevant tax bureau according to the Announcement on Issuing the Measures for the Administration of Non-Resident Taxpayers’ Enjoyment of the Treatment under Tax Agreements.

 

Tax on Indirect Transfer

 

On February 3, 2015, the SAT issued the Circular on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or SAT Circular 7. Pursuant to SAT Circular 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises, may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. When determining whether there is a “reasonable commercial purpose” of the transaction arrangement, features to be taken into consideration include, inter alia, whether the main value of the equity interest of the relevant offshore enterprise derives directly or indirectly from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consist of direct or indirect investment in China or if its income is mainly derived from China; and whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure. According to SAT Circular 7, where the transferee fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. SAT Circular 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired on a public stock exchange. On October 17, 2017, the SAT issued the Circular on Issues of Tax Withholding regarding Non-PRC Resident Enterprise Income Tax, or SAT Circular 37, which further elaborates the relevant implemental rules regarding the calculation, reporting and payment obligations of the withholding tax by the non-resident enterprises. Nonetheless, there remain uncertainties as to the interpretation and application of SAT Circular 7. SAT Circular 7 may be determined by the tax authorities to be applicable to our offshore transactions or sale of our shares or those of our offshore subsidiaries where non-resident enterprises, being the transferors, were involved.

 

Regulations Related to Employment and Social Welfare

 

Employment

 

The Labor Law of the PRC, which was promulgated on July 5, 1994, effective since January 1, 1995, and most recently amended on December 29, 2018, the Labor Contract Law of the PRC, which was promulgated on June 29, 2007, and amended on December 28, 2012, and the Implementation Regulations of the Labor Contract Law of the PRC, which was promulgated on September 18, 2008, are the principal regulations that govern employment and labor matters in the PRC. Under the above regulations, labor contracts shall be concluded in writing if labor relationships are to be or have been established between employers and the employees. Employers are prohibited from forcing employees to work above certain time limit and employers shall pay employees for overtime work in accordance to national regulations. In addition, wages may not be lower than the local minimum wage. Employers must establish a system for labor safety and sanitation, strictly abide by state standards, and provide relevant education to its employees. Employees are also required to work in safe and sanitary conditions.

 

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Social Insurance and Housing Fund

 

Under the Social Insurance Law of the PRC that was promulgated by the SCNPC on October 28, 2010, and came into force as of July 1, 2011, and was most recently amended on December 29, 2018 (also the effective date), together with other laws and regulations, employers are required to pay basic pension insurance, unemployment insurance, basic medical insurance, employment injury insurance, maternity insurance, and other social insurance for its employees at specified percentages of the salaries of the employees, up to a maximum amount specified by the local government regulations from time to time. When an employer fails to fully pay social insurance premiums, relevant social insurance collection agency shall order it to make up for any shortfall within a prescribed time limit, and may impose a late payment fee at the rate of 0.05% per day of the outstanding amount from the due date. If such employer still fails to make up for the shortfalls within the prescribed time limit, the relevant administrative authorities shall impose a fine of one to three times the outstanding amount upon such employer.

 

In accordance with the Regulations on the Management of Housing Fund which was promulgated by the State Council in 1999 and most recently amended in March 2019 (which became effective as of March 24th 2019), employers must register at the designated administrative centers and open bank accounts for depositing employees’ housing funds. Employer and employee are also required to pay and deposit housing funds, with an amount no less than 5% of the monthly average salary of the employee in the preceding year in full and on time.

 

Prior to July 2019, the Company failed to deposit adequate contributions to the housing funds for some of its employees, but has since remediated such non-compliance. As of the date of this prospectus, the Company has complied with the laws and regulations on Social Insurance and Housing Fund, and has not received any notice of warning or been subject to penalties or other disciplinary action from the relevant governmental authorities for non-compliance on labor-related laws and regulations.

 

Regulations Related to Mergers and Acquisitions and Overseas Listings

 

On August 8, 2006, six PRC governmental and regulatory agencies, including MOFCOM and the China Securities Regulatory Commission, or the CSRC, promulgated the Rules on Acquisition of Domestic Enterprises by Foreign Investors, or the M&A Rules, governing the mergers and acquisitions of domestic enterprises by foreign investors that became effective on September 8, 2006, and was amended on June 22, 2009. The M&A Rules, among other things, requires that offshore SPVs that are controlled by PRC companies or individuals and that have been formed for overseas listing purposes through acquisitions of PRC domestic interest held by such PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.

 

Our PRC counsel, GFE Law Office, has advised us that, based on its understanding of current PRC laws, rules and regulations, and the M&A Rules, the CSRC approval is not required in the context of this offering because: (i) our PRC subsidiary was established by means of direct investment rather than by a merger with or an acquisition of any PRC domestic companies as defined under the M&A Rules, and were not PRC domestic companies as defined under the M&A Rules, and (ii) no explicit provision in the M&A Rules classifies the respective contractual arrangements among our PRC subsidiary, our consolidated VIE and its shareholders as a type of acquisition transaction falling under the M&A Rules. Notwithstanding the above opinion, our PRC counsel has further advised us that uncertainties still exist as to how the M&A Rules will be interpreted and implemented and its opinions summarized above are subject to any new laws, rules, and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. If the CSRC or other PRC regulatory agencies subsequently determine that prior CSRC approval was required, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies.

 

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MANAGEMENT

 

Set forth below is information concerning our directors, director nominees, and executive officers as of the date of this prospectus. Pursuant to our articles of association, the minimum number of directors is one. Unless removed or re-appointed, each director shall be appointed for a term expiring at the next-following annual general meeting, if any is held. At any annual general meeting held, our directors will be elected by a majority vote of shareholders eligible to vote at that meeting. At each annual general meeting, each director so elected shall hold office for a one-year term and until the election of their respective successors in office or removed. All of our executive officers are appointed by and serve at the discretion of our board of directors.

 

Name   Age   Position(s)
Haiping Hu   52   Chief Executive Officer (“CEO”), Chairman of the Board of Director
Chao Liu   39   Chief Financial Officer (“CFO”)
Chenming Qi   49   Chief Operating Officer (“COO”)
Haiwei Zuo   37   Director
Ligang Lu*   51   Independent Director Nominee
John G. Nossiff*   58   Independent Director Nominee
Allen J. Morrison*   62   Independent Director Nominee

 

*This individual has indicated his consent to occupy such position upon closing of this offering.

 

Mr. Haiping Hu has been our CEO and Chairman since February 2019, and he has served as CEO and Chairman of SDH since December 2014. From August 2004 to January 2018, he was CEO and Vice Chairman of Shanshan Holdings Co., Ltd, which is mainly engaged in the production of lithium-ion battery parts, such as lithium-ion capacitors, battery pack, and charging pile, and providing new energy services such as new energy vehicle operation and energy management services, etc. From January 1996 to July 2004, he served as Vice President of Shanshan Group Co., Ltd. Since 2002, Shanshan Holdings Co., Ltd. has ranked among the top 500 Chinese companies in successive years. Mr. Hu holds a bachelor’s degree in Chemical Automation and a master’s degree in Chemical Engineering from Zhejiang University. Nicknamed “General Hu Haiping on Horseback,” Mr. Hu has more than 20 years of experience as founder and executive, and is a well-known entrepreneur in China.

 

Ms. Chao Liu has served as our CFO since February 2019, and as the CFO of SDH since January 2016. From June 2012 to June 2015, she was the head of the accounting department of Beijing Meanfang Institute of Physics and Technology, which is engaged in manufacturing gas instruments that are widely used in petrochemical, cement, chemical fertilizer, agriculture, military, medical, environmental protection, scientific research and other fields, Beijing Meanfang Spectrum Technology Co., Ltd., which is engaged in manufacturing and selling spectrum instruments, and Beijing Zhongchuang Technology Co., Ltd., which is engaged in providing interactive marketing technology solutions for brand customers and advertising agents. From May 2008 to December 2015, she was the comptroller of Beijing Hongri Dongsheng Decoration Co., Ltd., which provides decoration services to customers and Beijing Sunshine Season Network Technology Company, which provides network maintenance services to its customers. From November 2003 to November 2014, she served as supervisor of the accounting department of Beijing Haixinyuan Food Co., Ltd. which is engaged in the manufacture and sale of cold candies, pastries and cold drinks and Beijing Haixinyuan Guest House Co., Ltd., which provides hoteling services to its customers. Ms. Liu studied finance at Beijing Language and Culture University and graduated in January 2016. She has a strong understanding of international accounting and tax policies.

 

Mr. Chenming Qi has served as our COO since February 2019, and as the COO and director of SDH since July 2017. From May 2014 to June 2017, Mr. Qi served as the Vice President of the sales division of 360 Enterprise Security Group, which specializes in providing enterprise-level network security technologies, products and services to government, enterprises, education, finance and other institutions and organizations. He co-founded Netgod Information Technology (Beijing) Co., Ltd, which is engaged in enterprise-level network security technologies, products and services in 2006, and served as a vice president of operations from June 2006 to May 2017. He served as the deputy general manager of Lenovo Information Security Division from April 2004 to June 2006. From March 2002 to March 2004, he was the sales director of Hampoo (China) Management Consulting Company, which is engaged in management consulting, IT planning, information implementation, etc. Mr. Qi graduated from Tianjin University with a master’s degree in Precision Instrument Engineering in March 1996. We believe that Mr. Qi, with over twenty years of experience in team building and enterprise management, is qualified to serve as our COO.

 

Mr. Haiwei Zuo has served as our director since February 2019, and as Vice Chairman of SDH since December 2014. From September 2013 to December 2014, he served as the Dean of Beijing Huatai Weiye Management Science and Technology Research Institute. From March 2009 to September 2013, he served as the CEO of Beijing Naked in Frontier Cultural Exchange Co., Ltd., which is engaged in producing TV program content that is in category of business and financial management. He studied business administration at the China Agricultural University and graduated in July 2019.

 

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Mr. John G. Nossiff will be appointed as our director upon closing of this offering. Mr. John G. Nossiff is a corporate attorney with more than 25 years of experience advising leadership teams of small to middle market, growth-stage organizations. His specialties include general counsel, mergers& acquisitions, corporate development, restructuring and turnaround advisory, corporate governance, private and public financing, Nasdaq listings & compliance, complex dispute resolution, and SEC enforcement, compliance and reporting. Mr. Nossiff founded the Nossiff Law Firm LLP and has served as the firm’s managing partner since March 2007. Prior to that, Mr. Nossiff was an equity partner at Brown Rudnick LLP’s Corporate and Securities Practice Group from January 1993 to February 2007, and an associate at Rich May’s Corporate and Securities Practice Group from March1990 to December 1992. Mr. Nossiff graduated Magna Cum Laude from Boston University School of Law, where he earned the highest academic honors awarded by the school: Tauro Distinguished Scholar, Hennessey Distinguished Scholar, and Liacos Distinguished Scholar. Mr. Nossiff earned his undergraduate degree from the University of New Hampshire, Summa Cum Laude with a bachelor’s degree in Economics, with concentrations in government, accounting and finance.

 

Dr. Allen J. Morrison will be appointed as our director upon closing of this offering.  Dr. Morrison has served as a professor of global management at the Thunderbird School at Arizona State University, in Phoenix, AZ, since January 1, 2015. While at Thunderbird, Dr. Morrison served as the school’s CEO and Director General until June 30, 2018. Prior to his position at Thunderbird, Dr. Morrison was a professor at the International Institute for Management Development (IMD) in Lausanne, Switzerland from July 2012 to December 2014.  While at IMD, he served as the Kristian Gerhard Jebsen Chair of Responsible Leadership and Director of the IMD Global CEO Center.  In addition, Dr. Morrison served as professor at a number of business schools, including INSEAD in Singapore and the U.S.A. from July 2008 to July 2012, IMD in Lausanne, Switzerland from July 2004 to June 2008, the Richard Ivey School of Business in London, Ontario from July 1998 to June 2004, and as a visiting professor at the University of California, Los Angeles (UCLA) in 1998 and the China European International Business School in Shanghai, China in 1998.  Dr. Morrison has held additional administrative positions including Director of Executive Development at INSEAD (North America), and Associate Dean at the Ivey Business School.  Dr. Morrison graduated with a Doctor of Philosophy degree from the University of South Carolina, in 1989, a Master of Business Administration (MBA) degree from the Richard Ivey Business School, University of Western Ontario, London, Ontario in 1985, and a Bachelor of Arts, Cum Laude (International Relations), from Brigham Young University, Utah in 1983.  Dr. Morrison is the author/co-author of 12 business management and corporate governance books published from 1990 to 2020.  He is also a frequent contributor of business management articles to journals such as Harvard Business Review, Strategic Management Journal, Asia Pacific Business Review, and Sloan Management Review. 

 

Mr. Ligang Lu will be appointed as our director upon closing of this offering. Since January 2011, Mr. Lu has been the auditor director and group supervisor of Shanshan Holdings Co. Ltd. which is mainly engaged in the production of lithium-ion battery parts, such as lithium-ion capacitors, battery pack, and charging pile, and providing new energy services such as new energy vehicle operation and energy management services, etc. From January 2003 to January 2011, he held several positions at Hebei Hualong Riqing Noodle Industry Group Co., Ltd., which is mainly engaged in noodle manufacturing, including audit manage and chief financial officer. From September 1990 to January 2003, he was the audit office director of Sinosteel Xingji Group, which is engaged in steel productions, sales, distributions related services. Mr. Lu holds a bachelor’s degree in Financial Auditing and Accounting from Hebei University of Economics and Business (formerly Hebei University of Finance and Economics). In May 2001, Mr. Lu was certified as senior auditor and accountant by China Human Resources Bureau of Hebei Province, and became a Certified Internal Auditor (“CIA”) by International Registered Institute of Internal Auditors (USA).

 

For additional information see “Description of Share Capital — Directors”.

 

Family Relationships

 

None of our directors, director nominees or executive officers has a family relationship as defined in Item 401 of Regulation S-K.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our directors, director nominees or executive officers has, during the past 10 years, been involved in any legal proceedings described in subparagraph (f) of Item 401 of Regulation S-K.

 

Board of Directors

 

Our board of directors will consist of five directors upon closing of this offering, three of which shall be independent directors as disclosed “Management” section of this prospectus.

 

Unless otherwise determined by the Company in general meeting, the number of directors shall not be less than two (2). There shall be no maximum number of directors unless otherwise determined from time to time by the shareholders of the Company in general meeting.

 

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Duties of Directors

 

Under Cayman Islands law, all of our directors owe three types of duties to us: (i) statutory duties, (ii) fiduciary duties, and (iii) common law duties. The Companies Law (2018 Revision), as amended, of the Cayman Islands imposes a number of statutory duties on a director. A Cayman Islands director’s fiduciary duties are not codified, however the courts of the Cayman Islands have held that a director owes the following fiduciary duties: (a) a duty to act in what the director bona fide considers to be in the best interests of the company, (b) a duty to exercise their powers for the purposes they were conferred, (c) a duty to avoid fettering his or her discretion in the future and (d) a duty to avoid conflicts of interest and of duty. The common law duties owed by a director are those to act with skill, care and diligence that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company and, also, to act with the skill, care and diligence in keeping with a standard of care commensurate with any particular skill they have which enables them to meet a higher standard than a director without those skills. In fulfilling their duty of care to us, our directors must ensure compliance with our amended articles of association, as amended and restated from time to time. We have the right to seek damages if a duty owed by any of our directors is breached.

 

Qualification

 

There is currently no shareholding qualification for directors, although a shareholding qualification for directors may be fixed by our shareholders by ordinary resolution.

 

Corporate Governance

 

Director Independence

 

Our Board of Directors has determined that Mr. Ligang Lu, Mr. John G. Nossiff and Mr. Allen J. Morrison are independent, as determined in accordance with the rules of the Nasdaq Capital Market. In making such independence determination, our Board of Directors considered the relationships that each such non-employee director has with us and all other facts and circumstances that the board of directors deemed relevant in determining their independence, including the beneficial ownership of our share capital by each non-employee director and the transactions involving them described in the section titled “Related Party Transactions.” Upon the closing of this offering, we expect that the composition and functioning of our Board of Directors and each of our committees will comply with all applicable requirements of the Nasdaq Capital Market and the rules and regulations of the SEC.

 

Board’s Role in Risk Oversight

 

Our Board of Directors oversees the management of risks inherent in the operation of our business and the implementation of our business strategies. Our Board of Directors performs this oversight role by using several different levels of review. In connection with its reviews of our operations and corporate functions, our Board of Directors addresses the primary risks associated with those operations and corporate functions. In addition, our Board of Directors reviews the risks associated with our business strategies periodically throughout the year as part of its consideration of undertaking any such business strategies.

 

Each of our board committees also oversees the management of our risk that falls within the committee’s areas of responsibility. In performing this function, each committee has full access to management, as well as the ability to engage advisors. Our Chief Financial Officer reports to the audit committee and is responsible for identifying, evaluating and implementing risk management controls and methodologies to address any identified risks. In connection with its risk management role, our audit committee meets privately with representatives from our independent registered public accounting firm and our Chief Financial Officer. The audit committee oversees the operation of our risk management program, including the identification of the primary risks associated with our business and periodic updates to such risks, and reports to our Board of Directors regarding these activities.

 

Committees of the Board of Directors

 

We will establish three committees under the board of directors immediately upon closing of this offering: an audit committee, a compensation committee and a nominating and corporate governance committee. We will adopt a charter for each of the three committees upon their formations. Each committee’s members and functions are described below.

 

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Audit Committee. Our audit committee will consist of Mr. Ligang Lu, Mr. John G. Nossiff and Mr. Allen J. Morrison. Mr. Ligang Lu will be the chairman of our audit committee. Our board also has determined that Mr. Ligang Lu qualifies as an audit committee financial expert within the meaning of the SEC rules or possesses financial sophistication within the meaning of the Nasdaq Listing Rules. The audit committee will oversee our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee will be responsible for, among other things:

 

  appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;
     
  reviewing with the independent auditors any audit problems or difficulties and management’s response;
     
  discussing the annual audited financial statements with management and the independent auditors;
     
  reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures;
     
  reviewing and approving all proposed related party transactions;
     
  meeting separately and periodically with management and the independent auditors; and
     
  monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

 

Compensation Committee. Our compensation committee will consist of Mr. John G. Nossiff, Mr. Ligang Lu and Mr. Allen J. Morrison. Mr. Ligang Lu will be the chairman of our compensation committee. The compensation committee will assist the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee will be responsible for, among other things:

 

  reviewing and approving to the board with respect to the total compensation package for our most senior executive officers;
     
  approving and overseeing the total compensation package for our executives other than the most senior executive officers;
     
  reviewing and recommending to the board with respect to the compensation of our directors;
     
  reviewing periodically and approving any long-term incentive compensation or equity plans;
     
  selecting compensation consultants, legal counsel or other advisors after taking into consideration all factors relevant to that person’s independence from management; and
     
  reviewing programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.

 

Nominating and Corporate Governance Committee. Our nominating and corporate governance committee will consist of Mr. John G. Nossiff, Mr. Allen J. Morrison and Mr. Ligang Lu. Mr. John G. Nossiff will be the chairperson of our nominating and corporate governance committee. The nominating and corporate governance committee will assist the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee will be responsible for, among other things:

 

  identifying and recommending nominees for election or re-election to our board of directors or for appointment to fill any vacancy;
     
  reviewing annually with our board of directors its current composition in light of the characteristics of independence, age, skills, experience and availability of service to us;
     
  identifying and recommending to our board the directors to serve as members of committees;
     
  advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to our board of directors on all matters of corporate governance and on any corrective action to be taken; and
     
  monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

 

Code of Ethics

 

Our board of directors has adopted a code of business conduct and ethics, which is applicable to all of our directors, officers and employees. We will make our code of business conduct and ethics publicly available on our website prior to the closing of this offering.

 

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EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table sets forth certain information with respect to compensation for the years ended December 31, 2019, earned by or paid to our chief executive officer and principal executive officer, our principal financial officer, and our other most highly compensated executive officers whose total compensation exceeded US$100,000 (the “named executive officers”).

 

Summary Compensation Table

 

Name and Principal Position  Year   Salary (US$)   Bonus (US$)   Stock Awards (US$)   Option Awards (US$)   Non-Equity Incentive Plan Compensation   Deferred Compensation Earnings   Other   Total (US$) 
                                     
Haiping Hu   2019    37,001