F-1 1 ff12019_mingzhulogistic.htm FORM F-1 REGISTRATION STATEMENT

As filed with the U.S. Securities and Exchange Commission on September 27, 2019.

Registration No. 333-          

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

 

 

MingZhu Logistics Holdings Limited

明珠货运控股有限公司

(Exact name of Registrant as specified in its charter)

 

 

 

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands   4700   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

 

27F, Yantian Modern Industry Service Center

No. 3018 Shayan Road, Yantian District

Shenzhen, Guangdong, China 518081

Tel: (86) 755-25209839

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

 

 

 

Puglisi & Associates
850 Library Avenue, Suite 204
Newark, DE 19711
Tel: (302) 738-6680

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

 

 

 

Copies to:

 

Richard I. Anslow, Esq.
Jonathan Deblinger, Esq.
Wei Wang, Esq.
Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas
New York, NY 10105
Phone: (212) 370-1300
Fax: (212) 370-7889
 

Joel D. Mayersohn, Esq.

Dickinson Wright PLLC

350 East Las Olas Blvd.

Ft. Lauderdale, FL 33301

Phone: (954) 991-5426
Fax: (844) 670-6009

 

Approximate date of commencement of proposed sale to the public: as soon as practicable 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 standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

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

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of the Class of Securities to be Registered   Proposed Maximum Aggregate Offering
Price(1)
    Amount of Registration Fee(5)  
Ordinary shares, par value $0.001 per share (2)   $ 11,500,000     $ 1,393.8  
Underwriter Warrants (3)   $ -     $ -  
Ordinary shares underlying Underwriter Warrants (2) (4)   $  1,322,500     $ 160.3  
Total   $ 12,822,500     $ 1,554.1  

 

(1)

Estimated solely for the purpose of calculating the registration fee under Rule 457(o) of the Securities Act of 1933, as amended (the “Securities Act”).  Includes ordinary shares that are issuable upon the exercise of the over-allotment option of the underwriters.

 

(2) Pursuant to Rule 416 under the Securities Act, the securities being registered hereunder include such indeterminate number of additional ordinary shares as may be issued after the date hereof as a result of share splits, share dividends or similar transactions.

 

(3) In accordance with Rule 457(g) under the Securities Act, because the shares of the registrant’s ordinary shares underlying the underwriters’ warrants (“Underwriter Warrants”) are registered hereby, no separate registration fee is required with respect to the warrants registered hereby.
   
(4) As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act.  As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, the proposed maximum aggregate offering price of the Underwriter Warrants is $1,322,500 (which is equal to 115% of $1,150,000).

 

(5) Paid herewith.

 

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 Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

  

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective.

 

PRELIMINARY PROSPECTUS (Subject to Completion)   Dated September 27, 2019

 

________ Ordinary Shares

 

 

MingZhu Logistics Holdings Limited

明珠货运控股有限公司

 

This is the initial public offering of ordinary shares of MingZhu Logistics Holdings Limited明珠货运控股有限公司, a Cayman Islands exempted company. We are offering          ordinary shares. We expect the initial public offering price of the shares to be $     per share. Prior to this offering, there has been no public market for our ordinary shares. We have applied to have our ordinary shares listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol “YGMZ.” We cannot guarantee that we will be successful in listing our ordinary shares on the Nasdaq; however, we will not complete this offering unless we are so listed.

 

Following the completion of this offering, we will be a “controlled company” under the listing requirements of Nasdaq. Mr. Jinlong Yang, our founder and chairman of our board of directors, will beneficially own approximately        % of the aggregate voting power of our outstanding ordinary shares upon completion of this offering. We do not intend to rely on the controlled company exemptions under the Nasdaq listing rules. See “Risk Factors” and “Management — Controlled Company.”

 

We are an “emerging growth company,” as that term is used in the Jumpstart Our Business Startups Act of 2012, and will be subject to reduced public company reporting requirements. See “Prospectus Summary — Implications of Being an Emerging Growth Company.”

 

Investing in our ordinary shares is highly speculative and involves a significant degree of risk. See “Risk Factors” beginning on page 7 of this prospectus for a discussion of information that should be considered before making a decision to purchase our ordinary shares.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

    Per Share    Total 
Public offering price  $   $  
Underwriting fee and commissions(1)(2)  $   $  
Proceeds to us, before expenses  $   $  

 

 

(1)Represents underwriting discount and commissions equal to $[●] per share, which is the underwriting discount we have agreed to pay on investors that participate in this Offering.

 

(2)Does not include a non-accountable expense allowance equal to 1% of the gross proceeds of this offering, payable the underwriters, or the reimbursement of certain expenses of the underwriters. In addition to the underwriting discounts listed above and the non-accountable expense allowance described in the footnote, we have agreed to issue upon the closing of this offering, compensation warrants to the underwriters exercisable for a period of five years from the effective date of this registration statement entitling the representative to purchase up to 5% of the number of shares sold in this offering at a per share exercise price equal to 115% of the public offering price. The registration statement of which this prospectus is a part also covers such warrants and the shares issuable upon the exercise thereof. See “Underwriting” of this prospectus for additional information regarding total underwriter compensation.

 

This offering is being conducted on a firm commitment basis. The underwriters are obligated to take and pay for all of the shares if any such shares are taken. We have granted the underwriters an option for a period of 45 days after the closing of this offering to purchase up to 15% of the total number of our ordinary shares to be offered by us pursuant to this offering (excluding shares subject to this option), solely for the purpose of covering over-allotments, at the initial public offering price less the underwriting discount. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable will be $             based on an offering price $          per share, and the total proceeds to us, before expenses, will be $             . If we complete this offering, net proceeds will be delivered to our company on the closing date. We will not be able to use such proceeds in China, however, until we complete capital contribution procedures which requires prior approval from certain PRC regulators. See remittance procedures in the section titled “Use of Proceeds” beginning on page 31.

 

The underwriters expect to deliver the ordinary shares against payment as set forth under “Underwriting”, on or about         , 2019.

 

ViewTrade Securities, Inc.

 

 

The date of this prospectus is         , 2019. 

 

 

 

TABLE OF CONTENTS

 

    Page
PROSPECTUS SUMMARY   1
RISK FACTORS   7
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA   30
USE OF PROCEEDS   31
CAPITALIZATION   32
DILUTION   33
ENFORCEABILITY OF CIVIL LIABILITIES   34
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA   35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   36
OUR INDUSTRY   48
BUSINESS   57
REGULATIONS   77
MANAGEMENT   84
PRINCIPAL SHAREHOLDERS   90
RELATED PARTY TRANSACTIONS   91
DESCRIPTION OF SHARE CAPITAL   93
SHARES ELIGIBLE FOR FUTURE SALE   98
TAXATION   99
UNDERWRITING   104
EXPENSES RELATING TO THIS OFFERING   109
LEGAL MATTERS   109
EXPERTS   109
WHERE YOU CAN FIND ADDITIONAL INFORMATION   109
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS   F-1

 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

 

i

 

 

PROSPECTUS SUMMARY

 

This summary highlights certain information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including our financial statements and related notes and the risks described under “Risk Factors” beginning on page 7. We note that our actual results and future events may differ significantly based upon a number of factors. The reader should not put undue reliance on the forward-looking statements in this document, which speak only as of the date of this prospectus.

 

This prospectus contains information from a report commissioned by us and prepared by Frost & Sullivan, an independent market research firm, to provide information on the transportation industry in China and certain regions thereof.

 

All references to “we,” “us,” “our,” or similar terms used in this prospectus refer to MingZhu Logistics Holdings Limited明珠货运控股有限公司, a Cayman Islands exempted company, including its wholly-owned subsidiaries, unless the context otherwise indicates.

 

“PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of this prospectus, Taiwan, Hong Kong and Macau, “RMB” or “Renminbi” refers to the legal currency of China and “$” or “U.S. dollars” refers to the legal currency of the United States.

 

Overview

 

We are one of China’s fastest growing trucking services provider in China with over 17 years of experience in the transportation and logistics industry. We formed our first operating subsidiary in 2002 to engage in the business of trucking services and subsequently formed four other wholly owned subsidiaries. Our current operations are conducted through our subsidiaries. We experienced a steady growth in our business in recent years and our revenue increased by 34.1% in 2018 compared to 2017. As a result of our continuous growth, we have become the second largest transportation service provider in the Guangdong region and have been recognized and accredited by the China Federation of Logistics and Purchasing as a 3A-grade trucking service provider.

 

Our transportation services operate out of two terminals, one in the Guangdong region, and one in the Xinjiang region. We primarily provide Dedicated Truckload Services within the PRC. We have created a successful business model that has allowed us to expand our customer base and market coverage whilst maintaining good relations with our existing customers. With the proceeds raised, we intend to carry out our strategy that will allow us to reach our mission to become China’s largest and most trusted transportation company.

 

We operate a truckload fleet with 132 tractors and 90 trailers, all of which are owned by us. Given the large scale of our fleet, we offer both network density and broad geographic coverage to meet our customers’ diverse transportation needs within the PRC.

 

Our customers primarily include sizeable logistics companies, freight forwarders and warehouse operators in the PRC. During the fiscal years 2018 and 2017, we had 40 and 36 customers, respectively, and our top five customers accounted for approximately 63.9% and 71.4% of our total revenue, respectively.

 

We generate revenue from our trucking service business. Our total revenue was $27,676,789 and $20,616,011 for the fiscal years of 2018 and 2017, respectively, representing an increase of approximately 34.1%. We recorded an income from operations of approximately $4,034,766 and $2,317,476 for the fiscal years of 2018 and 2017, respectively. For the fiscal years ended December 31, 2018 and 2017, our revenue generated from Guangdong and Xinjiang provinces accounted for 52.2% and 47.8%, respectively, of our total revenue.

 

Our Strengths

 

We believe that the following strengths differentiate us from our competitors and provide us with advantages for realizing the potential of market opportunity:

.

  Substantial Industry Experience
     
  Long-Standing Relationships with Customers in the PRC, primarily including sizeable third-party logistics companies
     
  Experienced and Motivated Management Team
     
  Sizable Fleet Consisting of Over 130 Tractors and 90 Trailers
     
  Well-Functioned Network
     
  Fleet and Maintenance System designed to Optimize Life-Cycle Investment

 

1

 

 

Our Strategies

 

Our principal objective is to sustain a continuous growth in our business and maintain our competitive advantages such that we can be positioned as a leading player in the transportation industry in the PRC. We plan to implement the following strategies to further develop our existing transportation business and reputation in the PRC:

 

Attract and retain top talent at all levels to ensure sustainable growth
   
Expand and upgrade our fleet size in response to the increase in market demands
   
Strengthen our information technology system
   
Maintain stable relationships with our major customers and suppliers and expand our customer base
   
Further expand into Xinjiang and other less competitive new markets
   

Acquire and invest in strategic entities

 

Corporate Structure

 

The following diagram illustrates our corporate structure as of the date of this prospectus, including our subsidiaries. For more detail on our corporate history, please refer to “Business - Corporate History and Structure” on page 75 of this prospectus.

  

 

2

 

 

Summary of Risks Affecting Our Company

 

Our business is subject to numerous risks described in the section titled “Risk Factors” and elsewhere in this prospectus. The main risks set forth below and others you should consider are discussed more fully in the section entitled “Risk Factors” beginning on page 7, which you should read in its entirety.

 

Our reliance on major customers and any loss of our major customers or changes in their demands for our services would likely have a material adverse effect on our business, results of operations, financial conditions and prospect.
   
Our principal shareholder (controlled by our Chairman and Chief Executive Officer) will continue to exert substantial influence over our company.
   
Our executive officers have no prior experience in operating a U.S. public company, and their inability to operating the public company aspects of our business could harm us.
   
We are exposed to credit risk from our customers.
   
Our cash flow position may deteriorate owing to the difference in timing between receipt of payments from our customers and payments to our suppliers and subcontractors if we are unable to manage such timing difference and its impact on our cash flow properly.
   
We have identified material weaknesses in our internal accounting controls, which we may be unable to remediate despite the efforts we plan to make to address such weaknesses.
   
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
   
An active trading market for our ordinary shares may not develop following this offering, and the trading price of our ordinary shares may be volatile, each of which could result in substantial losses to investors.
   
Because we are incorporated under Cayman Islands law, investors may face difficulties in protecting their interests, and investors’ ability to protect their rights through U.S. courts may be limited.

 

Implications of Being an Emerging Growth Company

 

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

 

being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in our filings with the Securities and Exchange Commission, or the SEC;
   
not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
   
reduced disclosure obligations regarding executive compensation in periodic reports, proxy statements and registration statements; and
   
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our ordinary shares pursuant to this offering. However, if certain events occur before the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company before the end of such five-year period.

 

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. We have elected to take advantage of the extended transition period for complying with new or revised accounting standards and acknowledge such election is irrevocable pursuant to Section 107 of the JOBS Act.

 

3

 

 

Foreign Private Issuer Status

 

We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, we are exempt from certain provisions applicable to United States domestic public companies. For example:

 

  we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;

 

  for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;

 

  we are not required to provide the same level of disclosure on certain issues, such as executive compensation;

 

  we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;

 

  we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and

 

  we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.

 

Corporate Information

 

Our principal executive offices are located at 27F, Yantian Modern Industry Service Center, No. 3018 Shayan Road, Yantian District, Shenzhen, Guangdong, China 518081, and our telephone number at that address is (86) 755-25209839. Our website is www.szygmz.com. Information contained on, or available through, our website does not constitute part of, and is not deemed incorporated by reference into, this prospectus. Our registered office in the Cayman Islands is located at Ogier Global (Cayman) Limited, 89 Nexus Way, Camana Bay, Grand Cayman KY1-9009 Cayman Islands. Our agent for service of process in the United States is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

 

Conventions that Apply to this Prospectus

 

This prospectus contains information and statistics relating to China’s economy and the industries in which we operate derived from various publications issued by market research companies and PRC governmental entities, which have not been independently verified by us, the underwriters or any of their affiliates or advisers including Frost & Sullivan, an independent market research and consulting firm with respect to information on the transportation industry in China. The information in such sources may not be consistent with other information compiled in or outside of China.

 

We use U.S. dollars as the reporting currency in our financial statements and in this prospectus. Monetary assets and liabilities denominated in Renminbi are translated into U.S. dollars at the rates of exchange as of the applicable balance sheet date. Equity accounts are translated at historical exchange rates, and revenues, expenses, gains and losses are translated using the average rates for the applicable period. In other parts of this prospectus, any Renminbi denominated amounts are accompanied by the related translations. With respect to amounts not recorded in our consolidated financial statements included elsewhere in this prospectus, all translations from Renminbi to U.S. dollars were made at RMB 6.8755 to $1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board at December 31, 2018. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government restricts or prohibits the conversion of Renminbi into foreign currency and foreign currency into Renminbi for certain types of transactions — overseas investments in areas including real estate, hotels, cinemas, the entertainment industry, and sports clubs will be limited, while investments in some sectors such as gambling will be banned.

 

Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option.

 

4

 

 

Summary Consolidated Financial and Operating Data

 

The following summary consolidated statements of income and comprehensive income for the years ended December 31, 2018 and 2017, and the summary consolidated balance sheet data as of December 31, 2018 and 2017, have been derived from our consolidated financial statements included elsewhere in this prospectus. 

 

Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following summary financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

   For the Year Ended
December 31,
 
   2018   2017 
Selected Consolidated Statements of Income and Comprehensive Income Data:  USD   USD 
Revenues   27,646,789    20,616,011 
Transportation costs   22,399,066    16,806,258 
General and administrative expenses   1,147,101    1,452,369 
Income from operations   4,034,766    2,317,476 
Other (expenses) income   (173,851)   (391,121)
Income before income taxes   3,860,915    1,926,355 
Provision for income taxes   1,006,028    688,265 
Net income   2,854,887    1,238,090 
Other comprehensive income (loss)   (419,684)   291,244 
Comprehensive income   2,435,203    1,529,334 
Earnings per share - basic and diluted   2,854.89    1,238.09 
Weighted average ordinary shares outstanding   1,000    1,000 

 

   December 31,
2018
   December 31,
2017
 
Selected Consolidated Balance Sheet Data:  USD   USD 
Current assets   10,567,898    11,471,380 
Property and equipment, net   4,988,774    5,431,913 
Total assets   

15,883,551

    

17,297,480

 
Total debt (including current maturities)   2,522,726    3,843,967 
Capital lease obligation   1,464,109    1,781,414 
Shareholders’ equity   8,505,031    5,040,587 

 

5

 

 

The Offering

 

Securities being offered:                    ordinary shares on a firm commitment basis.
     
Initial offering price:   We estimate the initial public offering price for the ordinary shares will be $            per ordinary share.
     
Number of ordinary shares outstanding before the offering:   1,000 ordinary shares.
     
Number of ordinary shares outstanding after the offering:                 ordinary shares, assuming full exercise of the underwriters’ over-allotment option, and           ordinary shares, assuming no exercise of the underwriters’ over-allotment option.
     
Underwriters’ Over-Allotment Option   We have granted the underwriters an option for a period of up to 45 days to purchase up to              additional ordinary shares.
     
Use of proceeds:   We intend to use the net proceeds of this offering for expansion of fleet size, operational improvement as well as strategic acquisitions and alliances based on market conditions and for other general corporate purposes. As of the date of this prospectus, we are not a party to any agreement or understanding with respect any such acquisitions or alliances. For more information on the use of proceeds, see “Use of Proceeds” on page 31.
     
Lock-up agreements   All of our directors and officers and certain shareholders have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of, directly or indirectly, any of our ordinary shares or securities convertible into or exercisable or exchangeable for our ordinary shares for a period of 12 months from the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting” for more information.
     
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 that we have to indemnify the underwriters pursuant to the terms of an underwriting agreement with the underwriters.
     
Proposed Nasdaq symbol:   We have applied to have our ordinary shares listed on the Nasdaq under the symbol “YGMZ.”
     

Risk factors:

 

Investing in our ordinary shares is highly speculative and involves a significant degree of risk. As an investor you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 7.

 

6

 

 

RISK FACTORS

 

Investing in our ordinary shares is highly speculative and involves a significant degree of risk. You should carefully consider the following risks, as well as other information contained in this prospectus, before making an investment in our company. The risks discussed below could materially and adversely affect our business, prospects, financial condition, results of operations, cash flows, ability to pay dividends and the trading price of our ordinary shares. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, prospects, financial condition, results of operations, cash flows and ability to pay dividends, and you may lose all or part of your investment.

 

Risks Related to Our Business and Industry

 

Our reliance on major customers and any loss of our major customers or changes in their demands for our services would likely have a material adverse effect on our business, results of operations, financial conditions and prospect.

 

We have historically relied on a limited number of major customers for a significant portion of our revenue and we anticipate that such reliance will remain unchanged in the near future. For the years ended December 31, 2018 and 2017, top five customers accounted for 63.9% and 71.4% of our total revenue, respectively. In particular, for the year ended December 31, 2018, Chanji Prefecture Jiukang Logistics Co., Ltd. and Guangzhou Hoolinks Technologies Co., Ltd. accounted for 20.4% and 16.3% of our revenue, respectively. For the year ended December 31, 2017, Changshan Zhongka Yunli Supply Chain Management Co., Ltd., Best Logistics Technology Co., Ltd. and Foshan Bufeng Lianhua Management Consultation Co., Ltd. accounted for 29.2%, 15.4% and 11.0% of our total revenue, respectively.

 

Our service agreements with our customers are generally for an average term of one year. While certain service contracts contain options of renewal, there is no assurance that our major customers will continue their business relationship with us, or the revenue generated from dealings with them will be maintained or increased in the future. In particular, if there is any claim against us related to the quality of our services from our major customers, such claim would affect the relationship with our major customers or substantially reduce their demand of our trucking services.

 

If we are unable to enter into new service contracts with our customers upon expiry of the current contracts, or there is a reduction or cessation of demands from these customers for whatever reasons and we are unable to enter into service contracts of comparable size and terms in substitution, our business, financial conditions and results of operation may be materially and adversely affected. In addition, any deterioration on our customers’ ability to use our services and/or pay for our services in a timely manner will also have a material adverse effect on our business, results of operations, financial conditions and prospect.

 

Although a number of our business strategies will help mitigate risks resulting from our reliance on major customers, see “Business – Our Strategies”, “Business – Customers – Our relationship with major customers,” there is no assurance that these strategies will be implemented successfully or, if implemented, fully mitigate the risks in connection with the loss of one or more major customers.

 

None of our service agreements with our customers are on an exclusive basis.

 

None of our service agreements with our customers are on an exclusive basis and our customers can engage other trucking services provider(s) for the provision of transportation and delivery services in addition to or in lieu of us.

 

Though we have had stable business relationships with our major customers, there is no assurance that our major customers will not engage one or more service providers for the provision of trucking services during the term of our service agreements with them. We cannot assure you that we can generate the same level of or increased revenue from our major customers as compared to the existing scenario. Any appointment of any additional logistics services providers by our major customers could therefore have a material adverse impact on our business, financial condition and operating results.

 

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

 

Our business depends on our ability to successfully obtain payment from our customers of the amounts they owe us for our services. As at December 31, 2018 and 2017, we recorded account receivables amounted to $7,481,932, and $8,199,216, respectively, of which approximately $89,069 and $29,518 were allowanced and $890,845 and $765,699 were past due but not impaired, respectively, accounting for approximately 11.9% and 9.3% of our total account receivables.

 

We establish an allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding the credit risk of specific customers. However, actual losses on customer receivables balance could differ from those that we anticipate and as a result we might need to adjust our allowance. There is no guarantee that we will accurately assess the creditworthiness of our customers. Macroeconomic conditions, including related turmoil in the global financial system, could also result in financial difficulties for our customers, including limited access to the credit markets, insolvency or bankruptcy, and as a result could cause customers to delay payments to us, requesting modifications to their payment arrangements that could increase our receivables balance or default on the payment obligations to us. As a result, an extended delay or default in payment relating to a significant account will have a material and adverse effect on the aging schedule and turnover days of our account receivable. If we are unable to collect our receivables from our customers in accordance with the contracts with our customers, our results of operations and cash flows could be adversely affected.

 

7

 

 

We may incur losses in the future.

 

We had a net income of $2,854,887 and $1,238,090, respectively, for the fiscal years ended December 31, 2018 and 2017. Despite our history of generating net income, we anticipate that our operating expenses, together with the increased general administrative expenses of a growing public company, will increase in the foreseeable future as we seek to maintain and continue to grow our business, attract potential customers and further enhance our services. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. As a result of the foregoing and other factors, we may incur net losses in the future and may be unable to achieve or maintain profitability on a quarterly or annual basis for the foreseeable future.

 

We generate a significant portion of our revenue from transportation services of slack coal in Xinjiang. Our reliance on such services subjects us to risks resulting from any decline in the business performance of our customers in the slack coal industry and adverse events in the slack coal industry or in the Xinjiang region in general.

 

We have relied upon transportation services of slack coal in Xinjiang for a significant portion of revenue. For the fiscal years ended December 31, 2018 and 2017, our revenue generated from this type of services accounted for 47.8% and 24.7%, respectively, of our total revenue. Although we plan to diversify our services and customer base as we further expand into the Xinjiang market, we anticipate that we will at least to certain extent continue to rely on transportation services of slack coal in the near future. As such, our business performance will be affected by the slack coal industry in Xinjiang and the business performance of our customers in that industry. If these customers’ sales decline, such decline may likely lead to a corresponding decrease in demand for our services. Furthermore, any adverse developments in the slack coal industry or in the Xinjiang region in general could also materially and adversely affect our business, financial condition and results of operations.

 

The agreements governing the loan facilities MingZhu currently has contain restrictions and limitations that could significantly affect our ability to operate our business, raise capital, as well as significantly affect our liquidity, and therefore could adversely affect our results of operations.

 

Under its loan agreements with existing lenders, MingZhu has the obligation to notify its lenders prior to certain corporate actions. Such corporation actions include, among other events, mergers, equity offerings, transfers of material assets, involvement in a material lawsuit and certain material related party transactions. In addition, pursuant to its loan agreements, MingZhu cannot provide guarantees to any third party, prioritize repayment of other loans, pay dividends to its shareholders or consummate a reorganization or share ownership restructuring without prior written consent of certain lenders. See “Business – Material Contracts.”

 

The foregoing provisions restrict, among other aspects, MingZhu’s ability to:

 

  incur or permit to exist any additional indebtedness or liens;

 

  guarantee or otherwise become liable with respect to the obligations of another party or entity;

 

  acquire any assets or enter into merger or joint venture transactions; and

 

  consummate certain related party transactions.

 

Our ability to comply with these provisions may be affected by events beyond our control.  A failure to comply with any of such provisions will constitute an event of default under existing loan agreements of MingZhu, upon which the lenders will have the right to take a number of remedial actions that could adversely affect our liquidity and results of operations. See “-Defaults under our loan agreements could result in a substantial loss of our assets.”

 

Defaults under our loan agreements could result in a substantial loss of our assets and adversely affect our financial condition and operating results.

 

A failure to repay any of the indebtedness under our loan agreements as they become due or to otherwise comply with the covenants contained therein could result in an event of default thereunder. In addition, the loan agreements between MingZhu and certain lenders contain a cross-default provision, pursuant to which a default under any other loan agreement will be deemed an event of default under such agreements.  If not cured or waived, an event of default under our existing loan agreements could enable the lenders to declare all borrowings outstanding on such debt, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit. The lenders could also elect to foreclose on our assets securing such debt. In such an event, we may not be able to refinance or repay our indebtedness, pay dividends or have sufficient liquidity to meet operating and capital expenditure requirements. Any such acceleration could cause us to lose a substantial portion of our assets and will substantially adversely affect our financial condition and operating results.

 

8

 

 

Our cash flow position may deteriorate owing to the difference in timing between receipt of payments from our customers and payments to our suppliers and subcontractors if we are unable to such timing difference and its impact on our cash flow properly.

 

For our daily operations, we outsourced a portion of our trucking services to external transportation companies, and sourced tires and fuel oils from the third party suppliers. Our cash flows depend on timely receipt of payments from our customers to meet our payment obligations to our suppliers and subcontractors. As of December 31, 2018 and 2017, our trade payables amounted to approximately $845,093 and $1,709,088, respectively, whereas the respective trade payables accounted for approximately 15.3% and 14.7% of our total current liabilities, respectively.

 

Our account receivables turnover days were approximately 102.7 days and 113.09 days, respectively, during 2018 and 2017. As a result of the above, our daily operation has to rely on our internal resources, bank borrowings and loans from shareholders to maintain our cash flow and satisfy the needs of our daily operations.

 

If we fail to manage the timing difference between receipt of customer payments and supplier payments, or if the timing difference is further aggravated, we may have to resort to reserve further funds from our internal resources and/or obtain banking facilities and/or shareholder loans to meet our payment obligations, which may not be readily available, or if available on reasonable economic terms and our financial condition may be materially and adversely affected as a result.

 

We rely on subcontractors to handle a proportion of our trucking services. Any delay or failure in their services would adversely affect our operations and financial results.

 

We subcontract a portion of our trucking services, specifically delivery orders from customers with irregular delivery schedules, to external transportation companies. For the years ended December 31, 2018 and 2017, subcontracting charges incurred by us were approximately 41% and 33% of our total transportation costs, respectively. Any significant increase in the service fees charged by our subcontractors may have an adverse impact on our financial results. See “Business – Subcontracting Arrangement.”

 

There is no assurance that we will be able to monitor the performance of our subcontractors as directly and efficiently as with our own staff. If their performance is below our requisite standards or those of our customers, these sub-standard services may adversely damage our business reputation, cause our customers to deduct our service fees, negatively affect the relationship with our customers and potentially expose us to litigations and claims from our customers. Further, we may incur additional costs for sourcing alternative services providers at a price higher than we originally anticipated. This could adversely affect the profitability of our business.

 

Notwithstanding the stable business relationship with our subcontractors, there is no assurance that we would be able to maintain such a relationship with them in the future. There is also no assurance that we would be able to find alternative subcontractors with the requisite expertise, experience and capability that can meet our business needs and tight delivery schedules with competitive prices and acceptable terms of service in a timely manner. In addition, we are not sure that our all customers will allow us to subcontract our business in the future. In such event, our ability to complete our trucking services on time with effective cost could be impaired, thereby damaging our business reputation and adversely affecting our operations and financial results.

 

Difficulty in obtaining material, equipment, goods and services from our vendors and suppliers could adversely affect our business.

 

We are dependent upon our suppliers for certain products and materials, including our tractors and trailers. We manage our over-the-road fleet to a five-year trade cycle with the current average age-of-fleet of our vehicles at approximately three years. Accordingly, we rely on suppliers of our trucks and truck components to maintain the age of our fleet. We believe that we have positive relationships with our suppliers and are generally able to obtain favorable pricing and other terms from such parties. If we fail to maintain these relationships with our suppliers, or if our suppliers are unable to provide the products and materials we need or undergo financial hardship, we could experience difficulty in obtaining needed goods and services because of production interruptions, limited material availability or other reasons. Subsequently, our business and operations could be adversely affected.

 

The trucking services and transportation industry in the PRC is highly competitive and fragmented, which subjects us to competitive pressures pertaining to pricing, capacity and service.

 

Our operating segments compete with many truckload carriers, certain railroads, logistics, brokerage, freight forwarding and other transportation companies. The transportation market in the PRC is highly competitive and fragmented. Some of our competitors may have greater access to equipment, a larger fleet, a wider range of services, preferential dedicated customer contracts, greater capital resources or other competitive advantages. Numerous competitive factors could impair our ability to maintain or improve our profitability. These factors include the following:

 

  Many of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth in the economy. This may make it difficult for us to maintain or increase freight rates, or may require us to reduce our freight rates. Additionally, it may limit our ability to maintain or expand our business.

 

  Since some of our customers also operate their own private trucking fleets, they may decide to transport more of their own freight.

  

  Many customers periodically solicit bids from multiple carriers for their shipping needs, despite the existence of dedicated contracts, which may depress freight rates or result in a loss of business to our competitors.

 

  The continuing trend toward consolidation in the trucking industry may result in more large carriers with greater financial resources and other competitive advantages, with which we may have difficulty competing.

 

  Higher fuel prices and higher fuel surcharges to our customers may cause some of our customers to consider freight transportation alternatives, including rail transportation.

 

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  Advancements in technology may necessitate that we increase investments in order to remain competitive, and our customers may not be willing to accept higher freight rates to cover the cost of these investments.

 

  Competition from freight logistics and brokerage companies may negatively impact our customer relationships and freight rates.

 

  Smaller carriers may build economies of scale with procurement aggregation providers, which may improve such carriers’ abilities to compete with us.

 

The truckload transportation industry is affected by economic and business risks that are largely beyond our control.

 

The truckload industry is highly cyclical, and our business is dependent on a number of factors that may have a negative impact on our operating results, many of which are beyond our control. We believe that some of the most significant factors beyond our control that may negatively impact our operating results are economic changes that affect supply and demand in transportation markets, such as:  

 

  changes in customers’ inventory levels, including shrinking product/package sizes, and in the availability of funding for their working capital;

 

  commercial driver shortages;

 

  industry compliance with an ongoing regulatory environment;

 

  excess truck capacity in comparison with shipping demand; and

 

  downturns in customers’ business cycles, which may be caused by declines in consumer spending.

 

The risks associated with these factors are heightened when the Chinese economy is weakened. Some of the principal risks during such times are as follows:

 

  low overall freight levels, which may impair our asset utilization;

 

  customers with credit issues and cash flow problems;

 

  changing freight patterns resulting from redesigned supply chains, resulting in an imbalance between our capacity and customer demand; and

 

  customers bidding out freight or selecting competitors that offer lower rates, in an attempt to lower their costs, forcing us to lower our rates or lose freight.  

 

Economic conditions that decrease shipping demand or increase the supply of capacity in the truckload transportation industry can exert downward pressure on rates and equipment utilization, thereby decreasing asset productivity. Declining freight levels and rates, a prolonged recession or general economic instability could result in declines in our results of operations, which declines may be material.

 

We also are subject to cost increases outside our control that could materially reduce our profitability if we are unable to increase our rates sufficiently. Such cost increases include, but are not limited to, fuel and energy prices, driver wages, taxes and interest rates, tolls, license and registration fees, insurance premiums, regulations, revenue equipment and related maintenance costs and healthcare and other benefits for our associates. We cannot predict whether, or in what form, any such cost increase or event could occur. Any such cost increase or event could adversely affect our profitability.

 

In addition, events outside our control, such as strikes or other work stoppages at our facilities or at customer, port, border or other shipping locations, weather, actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against a foreign country or group located in a foreign country or heightened security requirements could lead to reduced economic demand, reduced availability of credit or temporary closing of shipping locations. Such events or enhanced security measures in connection with such events could impair our operations and result in higher operating costs.

 

We are, to a certain extent, dependent on the consumer and retail industry in the PRC.

 

We mainly provide trucking services to our customers in the logistics industry, some of whom ultimately provide logistics services to end customers in the retail and consumer industry in the PRC. As such, our business performance will, to a certain extent, be affected by our customers’ business performance and the retail and consumer industry in the PRC. Although these customers of ours who are consumer goods delivery services providers may not have contributed substantially to our total revenue in the past two years, if these customers’ sales in the PRC decline, such decline may likely lead to a corresponding decrease in demand for our services. Furthermore, as we expand our business, we may solicit new customers who are consumer goods delivery services providers or strengthen our relationships with this type of existing customers, which may lead to stronger reliance on these customers. Any adverse developments in our customers’ business performance could therefore materially and adversely affect our business, financial condition and results of operations.

 

10

 

 

We may not be able to implement all or any of our business plans successfully.

 

As part of our business strategies, we plan to expand our own fleet of delivery vehicles and labor force, expand our sales and marketing network and establish an information technology system which can facilitate our preparation of delivery routes and schedules and enable tracking and monitoring of the status of delivery by our self-owned trucking vehicles and subcontractors. Such future plan is developed based on a number of assumptions, forecasts and commitment of our management. We may not succeed in executing our business strategies due to a number of reasons, including the following:

 

we may fail to acquire delivery vehicles at our expected prices or recruit a sufficient number of skilled drivers and employees to align with our expansion;
   
we may not have sufficient financial resources available;
   
we may fail to adapt ourselves to the information technology system;
   
we may fail to expand our sales and marketing network;
   
we may fail to meet our customers’ demands for our trucking services; and
   
we may fail to reach the targets we expect from our expansion and business strategies.

 

If we fail to successfully implement our business strategies, we may not be able to maintain our growth rate and our business, financial condition and results of operations may be materially and adversely affected.

 

Expanding our self-owned vehicle fleet may result in a significant increase in our depreciation expenses.

 

We intend to expand the scale of our own vehicle fleet in order to accommodate potential new business opportunities. Such expansion of our self-owned vehicle fleet may result in a significant increase in our depreciation expenses, which may in turn materially and adversely affect our business, financial condition and results of operations.

 

Our operation is exposed to disruptions due to bad weather, possible occurrences of natural disasters, epidemics and other diseases and uncertainties, traffic congestions and public civil movements.

 

As we provide trucking services, any significant disruption in traffic due to severe traffic congestions, weather conditions or disturbances such as public civil movements, flash floods, or breakdown in major road infrastructure may lead to a reduction in and/or delay of our services. Such service interruptions may adversely affect our service quality in meeting our customers’ KPIs requirements and negatively affect our relationship with our customers. Further, we may have to engage additional delivery vehicles from other transportation companies to maintain our service operations. The occurrence of any of the foregoing events may adversely affect our business, financial condition and results of operations.

 

An increase in fuel prices may reduce profitability.

 

The provision of trucking services is highly reliant on the availability of the appropriate fuel and its cost and an increase in fuel prices may increase our costs. During the two years ended December 31, 2018 and 2017, our fuel costs accounted for approximately 20.9% and 23.1% of our transportation costs, respectively.

 

The cost of fuel can fluctuate significantly and is subject to many economic and political factors that are beyond our control, including but not limited to the political instability in oil-producing regions. According to Frost & Sullivan report issued in July 2019, while diesel fuel price has decreased during 2017 to RMB 5,846.1 (approximately $898.5) per ton, it is expected that the diesel price will gradually increase and will reach RMB 7,261.5 (approximately $1,056.1) per ton in 2021, due to the anticipated oil production cut by the Organization of the Petroleum Exporting Countries and other oil production countries in the coming years. Without a corresponding increase in our transportation rates when the price of fuel oil surges, our profitability may be adversely affected.

 

11

 

  

Our service agreements with our customers allow us to adjust our service fees to some extent when the fuel prices fluctuate significantly. However, if the fluctuations fall within the acceptable range, the service fees cannot be adjusted, and we would not be able to pass the increased cost of fuel oil to our customers. Therefore, we are still exposed to the risk of the fuel price fluctuation which may affect our profitability.

 

We may experience labor shortage or unrest.

 

Our trucking services involve a substantial amount of labor force. As of the date of this prospectus, we have a total of 175 drivers which accounted for approximately 86% of our total workforce. While we have not experienced any significant labor shortage, we may face such problem in the future. We may be required to increase the wages for our workers as a result of changes in the labor market conditions or industry practices.

 

We expect that the wage levels of our employees will continue to be determined in accordance with the prevailing market rates in the relevant regions in the PRC as well as the performance of the relevant employees in the foreseeable future. There is no assurance that we will not face labor unrest or we do not have to adjust the wages upward for our employees demanding higher wages from us. Labor unrest will disrupt our services and the higher wages will result in increased services costs for us. Should we fail to increase our service prices to offset the additional labor costs in a timely manner or fail to manage labor shortage or labor unrest, our business, operation and financial performance could be adversely affected.

 

Our customers could become our competitors.

 

Many of our customers are logistic companies which have the capability and financial resources to diversity and own their own vehicle fleet. These customers may also continue to evaluate whether to own their vehicle fleet or engage other transportation companies to provide the logistics services. In the event that our customers own their vehicle fleet, such customers could reduce or eliminate their need of our trucking services, which would subsequently result in a reduction of our revenue and would adversely affect our business and results of operations.

 

We may not be familiar with new regions or markets we enter and may not be successful in offering new products and services or maintain our current growth.

 

The growth of our company was based on the services we currently provided to existing markets and our income from operation, which was 74.1% and 35.2%, respectively, for fiscal years 2018 and 2017. We may expand our business and enter other regional markets in the future. However, we may be unable to replicate our current success in new markets. In expanding our business, we may enter markets in which we have limited, or no, experience. We may not be familiar with the local business and regulatory environment and we may fail to attract a sufficient number of customers due to our limited presence in that region. In addition, competitive conditions in new markets may be different from those in our existing markets and may make it difficult or impossible for us to generate high income in these new markets. If we are unable to manage these and other difficulties in our expansion into other regions in China, our prospects and results of operations may be adversely affected.

 

12

 

 

Our results of operations may fluctuate significantly and may not fully reflect the underlying performance of our business.

 

Our results of operations, including our operating revenue, expenses and other key metrics, may vary significantly in the future and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results for any one quarter are not necessarily an indication of future performance. Our financial results may fluctuate due to a variety of factors, some of which are outside of our control and, as a result, may not fully reflect the underlying performance of our business. Fluctuation in our operational results may adversely affect the price of our ordinary shares. Factors that may cause fluctuations in our quarterly results include:

 

  our ability to attract new customers, maintain relationships with existing customers, and expand into new territories in China;
     
  the amount and timing of operating expenses related to acquiring customers and the maintenance and expansion of our business, operations and infrastructure;
     
  general economic, industry and market conditions in China;
     
  our emphasis on customer experience instead of near-term growth; and
     
  the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired technologies or businesses.

 

If we fail to promote and maintain our brand in an effective and cost-efficient way, our business and results of operations may be harmed.

 

We believe that developing and maintaining awareness of our brand effectively is critical to attracting new and retaining existing customers. Our efforts to build our brand have caused us to incur significant expenses, and it is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses incurred. If we fail to promote and maintain our brand, while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.

 

If labor costs in the PRC increase substantially, our business and costs of operations may be adversely affected.

 

In recent years, the Chinese economy has experienced inflation and labor cost increases. Average wages are projected to continue to increase. Further, under PRC law we are required to pay various statutory employee benefits, including pensions, housing funds, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase. If we are unable to control our labor costs or pass such increased labor costs on to our customers by increasing the price of our products and services, our financial condition and results of operations may be adversely affected.

 

Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees needed to support our business.

 

As we continue to experience growth, we believe our success depends on the efforts and talents of our employees, including experienced drivers, financial personnel and marketing professionals. Our future success depends on our continued ability to attract, develop, motivate and retain highly qualified and skilled employees. Competition for highly skilled personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.

 

In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve customers could diminish, resulting in a material adverse effect on our business.

 

Our business depends on the continued efforts of our senior management, particularly Mr. Jinlong Yang. If Mr. Yang, or one or more other of our key executives, were unable or unwilling to continue in their present positions, our business may be severely disrupted.

 

Our business operations depend on the continuing services of our senior management, particularly Mr. Jinlong Yang, our Chairman and Chief Executive Officer, and our other executive officers named in this prospectus. While we have provided different incentives to our management, we cannot assure you that we can continue to retain their services. If one or more of our key executives were unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain qualified personnel. In addition, although we have entered into confidentiality and non-competition agreements with our key executives of our subsidiaries in China, there is no assurance that any member of our management team will not join our competitors or form a competing business. If any dispute arises between us and our current or former officers, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all. 

 

13

 

 

Our executive officers have no prior experience in operating a U.S. public company, and their inability to operate the public company aspects of our business could harm us.

 

Our executive officers have no experience in operating a U.S. public company, which makes our ability to comply with applicable laws, rules and regulations uncertain. Our failure to comply with all laws, rules and regulations applicable to U.S. public companies could subject us or our management to regulatory scrutiny or sanction, which could harm our reputation and share price.

 

From time to time we may evaluate and potentially consummate acquisitions or alliances, which could require significant management attention, disrupt our business, adversely affect our financial results, be unsuccessful or fail to achieve the desired result.

 

We plan to evaluate and consider strategic transactions, combinations, acquisitions or alliances to enhance our existing business or develop new products and services. These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate the transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such a transaction.

 

Any acquisition or alliance will involve risks commonly encountered in business relationships, including:

 

  difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business;
     
  inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;
     
  difficulties in retaining, training, motivating and integrating key personnel;
     
  diversion of management’s time and resources from our normal daily operations;
     
  difficulties in successfully incorporating licensed or acquired technology and rights into our products;
     
  difficulties in retaining relationships with customers, employees and suppliers of the acquired business;
     
  regulatory risks; and
     
  liability for activities of the acquired business before the acquisition, including patent, copyright and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities.

 

Any future acquisitions or alliances may not be successful. Furthermore, we may not benefit from our business strategy, nor generate sufficient revenue to offset the associated costs or may otherwise not result in the intended benefits. In addition, we cannot assure you that any future acquisition of, or alliance with respect to, new businesses or technology will lead to the successful development of new or enhanced services or that any new or enhanced services, if developed, will achieve market acceptance or prove to be profitable.

 

We may need additional capital, and financing may not be available on terms acceptable to us, or at all.

 

Although our current cash and cash equivalents, anticipated cash flows from operating activities and the proceeds from this offering will be sufficient to meet our anticipated working capital requirements and capital expenditures in the ordinary course of business for at least 12 months following this offering, there is a risk that we may need additional cash resources in the future to fund our growth plans or if we experience adverse changes in business conditions or other developments. We may also need additional cash resources in the future if we find and wish to pursue opportunities for new investments, acquisitions, capital expenditures or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. The issuance and sale of additional equity would result in further dilution to our shareholders.

 

  default and foreclosure on our assets if our operating revenue is insufficient to repay debt obligations;

 

14

 

 

  acceleration of obligations to repay the indebtedness (or other outstanding indebtedness), even if we make all principal and interest payments when due, if we breach any covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant;

  

  our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding;
     
  diverting a substantial portion of cash flow to pay principal and interest on such debt, which would reduce the funds available for expenses, capital expenditures, acquisitions and other general corporate purposes; and
     
  creating potential limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate. 

 

The occurrence of any of these risks could adversely affect our operations or financial condition. 

 

We will be subject to changing laws, rules and regulations in the U.S. regarding regulatory matters, corporate governance and public disclosure that will increase both our costs and the risks associated with non-compliance.

 

Following this offering, we will be subject to rules and regulations by various governing bodies and self-regulatory organizations, including, for example, the Securities and Exchange Commission  and The Nasdaq Stock Market, which are charged with the protection of investors and the oversight of companies whose securities are publicly traded, and to new and evolving regulatory measures under applicable law. Our efforts to comply with new and changing laws and regulations have resulted in and are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

 

Moreover, because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these regulations and any subsequent changes, we may be subject to penalty and our business may be harmed.  

 

Our business is subject to risks related to lawsuits and other claims brought by our clients or business partners. If the outcomes of these proceedings are adverse to us, it could have a material adverse effect on our business, results of operations and financial condition.

 

We are subject to lawsuits and other claims in the ordinary course of our business. We are currently not involved in any lawsuits with any of our customers. However, claims arising out of actual or alleged violations of law could be asserted against us by individuals, companies, governmental or other entities in civil, administrative or criminal investigations and proceedings. These claims could be asserted under a variety of laws and regulations, including but not limited to contract laws, consumer protection laws or regulations, intellectual property laws, environmental laws, and labor and employment laws. These actions could expose us to adverse publicity and to monetary damages, fines and penalties, as well as suspension or revocation of licenses or permits to conduct business. Even if we eventually prevail in these matters, we could incur significant legal fees or suffer reputational harm, which could have a material adverse effect on our business and results of operations as well as our future growth and prospects. 

 

We are subject to extensive environmental laws and regulations, and the costs related to compliance with, or our failure to comply with, existing or future laws and regulations, could adversely affect the business and results of operations.

 

Our operations are subject to national and local laws and regulations relating to the protection of the environment. Sanctions for noncompliance may include revocation of permits, corrective action orders, significant administrative or civil penalties and criminal prosecution. In recent years, the PRC government has strengthened the regulations of environmental protection by enacting new laws and modifying existing laws. Our business involves environmental management and issues typically associated with fuel consumption. We have not received any non-compliance notice or warning from the government regarding environmental violations. However, the PRC government may pass new legislation or amend current laws and regulations and set higher requirements and standards for vehicle operations. Our cost of complying with environmental laws and regulations may increase and we may assign more personnel for environmental compliance. As a result, our financial conditions and results of operation may be materially and adversely affected. 

 

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

 

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

 

15

 

 

Any failure to protect our own intellectual property rights could impair our brand, negatively impact our business or both.

 

We currently own 21 PRC patents related to technologies used in connection with trucking services. We also own one PRC trademark and 16 PRC copyright registrations. Our intellectual property rights are key to our operations and business prospects.

 

Our success and ability to compete also depend in part on protecting our own intellectual property. We rely on a combination of patents, copyrights, trade secrets, trademarks and other rights, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, processes and other intellectual property. However, the steps we take to protect our intellectual property rights may be inadequate. We have only filed patent applications in China and we have not acquired any related international patent rights by filing pursuant to the Patent Cooperation Treaty. Our patents are under no protections outside of China.

 

Third parties may seek to challenge, invalidate or circumvent our patents, copyrights, trade secrets, trademarks and other rights or applications for any of the foregoing. In order to protect our intellectual property rights, we may be required to spend significant resources. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management. Our failure to secure, protect and enforce our intellectual property rights could adversely affect our brand and impact our business.

 

We may be sued by third parties for alleged infringement of their proprietary rights, which could harm our business.

 

Our competitors, as well as other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, a third-party provider may claim that we are infringing on their intellectual property rights. We may, however, be unaware of the intellectual property rights that others may claim over some or all of our applications, technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, restrict us from conducting our business or require that we comply with other unfavorable terms. We may also be obligated to indemnify parties or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management from our business operations.

 

We have identified material weaknesses in our internal accounting controls, and if we fail to implement and maintain an effective system of internal controls or fail to remediate the material weaknesses in our internal control over financial reporting that have been identified, we may be unable to accurately report our results of operations or prevent fraud or fail to meet our reporting obligations, and customer confidence and the market price of our ordinary shares may be materially and adversely affected.

 

Prior to this offering, we were a private company based in China with limited accounting personnel and other resources and with limited experience in establishing and maintaining internal accounting controls and procedures in a manner appropriate for a U.S. listed and reporting public company. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in preparing our consolidated financial statements as of and for the years ended December 31, 2018 and 2017, we and our independent registered public accounting firm have identified material weaknesses in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States (“PCAOB”) and other control deficiencies. The material weaknesses identified related to (i) a lack of accounting staff and resources with appropriate knowledge of generally accepted accounting principles in the United States (“U.S. GAAP”) and SEC reporting and compliance requirements; and (ii) a lack of independent directors, an audit committee and internal audit function to establish formal risk assessment process and internal control framework. We are seeking to remediate these material weaknesses, but the implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting. Our failure to correct the material weaknesses or our failure to discover and address any other material weaknesses or control deficiencies could result in inaccuracies in our consolidated financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ordinary shares, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud.

 

Upon completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of this Act will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2021. In addition, once we cease to be an “emerging growth company,” as such term is defined in the Jumpstart Our Business Startups Act (“JOBS Act”), our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to complete our evaluation testing and any required remediation in a timely manner.

 

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Certain data and information in this prospectus were obtained from third-party sources and were not independently verified by us.

 

We have engaged Frost & Sullivan to prepare a commissioned industry report that analyzes the PRC transportation industry. Information and data relating to the PRC transportation industry have been derived from Frost & Sullivan’s industry report. Statistical data included in the Frost & Sullivan report also include projections based on a number of assumptions. The transportation industry may not grow at the rate projected by market data, or at all. Any failure of the PRC transportation industry to grow at the projected rate may have a material adverse effect on our business and the market price of our ordinary shares. Furthermore, if any one or more of the assumptions underlying the market data is later found to be incorrect, actual results may differ from the projections based on these assumptions.

 

We have not independently verified the data and information contained in the Frost & Sullivan report or any third-party publications and reports Frost & Sullivan has relied on in preparing its report. Data and information contained in such third-party publications and reports may be collected using third-party methodologies, which may differ from the data collection methods used by us. In addition, these industry publications and reports generally indicate that the information contained therein is believed to be reliable, but do not guarantee the accuracy and completeness of such information.

 

Insurance and claims expenses could significantly reduce our earnings.

 

Although we maintain auto insurance for our vehicles, our future insurance and claims expenses might exceed historical levels, which could reduce our earnings. We maintain a high deductible for a portion of our claims exposure resulting from auto liability. Estimating the number and severity of claims, as well as related judgment or settlement amounts is inherently difficult. This, along with legal expenses, incurred but not reported claims and other uncertainties can cause unfavorable differences between actual claim costs and our reserve estimates. We reserve for anticipated losses and expenses and periodically evaluate and adjust our claims reserves to reflect our experience. However, ultimate results may differ from our estimates, which could result in losses over our reserved amounts.

 

We maintain insurance with licensed insurance carriers above the amounts which we retain. Although we believe our aggregate auto insurance limits should be sufficient to cover reasonably expected claims, it is possible that the amount of one or more claims could exceed our aggregate coverage limits. If any claim were to exceed our coverage, we would bear the excess, in addition to our other retained amounts. Insurance carriers have raised premiums for many businesses, including transportation companies. As a result, our insurance and claims expense could increase, or we could raise our deductible when our policies are renewed or replaced. Our operating results and financial condition could be materially and adversely affected if (i) cost per claim, premiums, or the number of claims significantly exceeds our estimates, (ii) we experience a claim in excess of our coverage limits, (iii) our insurance carriers fail to pay on our insurance claims or (iv) we experience a claim for which coverage is not provided.

 

We do not have any business insurance coverage.

 

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

 

We may have exposure to greater than anticipated tax liabilities.

 

We are subject to enterprise income tax, value-added tax, and other taxes in each province and city in China where we have operations. Our tax structure is subject to review by various local tax authorities. The determination of our provision for income tax and other tax liabilities requires significant judgment. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate decisions by the relevant tax authorities may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.

 

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Risks Related to Doing Business in China

 

Changes in the PRC’s political, economic and governmental policies may have an adverse impact on our operations.

 

All of our operations are currently located in the PRC and all of our revenue was generated in the PRC during the years of 2018 and 2017. We expect that the PRC will continue to be our principal market and place of operation. Accordingly, our business, financial condition and results of operations are subject to political, economic and legal developments in the PRC to a significant degree. The PRC’s economy differs from the economies of most developed countries in many aspects, including the extent of government involvement, growth rate, control of foreign exchange, allocation of resources and capital investment. We cannot assure there will not be any unfavorable changes in the PRC’s political, economic and governmental policies and measures that could impact the industries in which we operate, which could in turn diminish the demand for our services.

 

There are uncertainties regarding the interpretation and enforcement of PRC laws and regulations.

 

The PRC legal system is based on written statutes and their legal interpretations by the Standing Committee of the National People’s Congress. Previous court decisions may be cited for reference but have limited precedential value. Since 1979, the PRC government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, as these laws and regulations are relatively new, and due to the limited volume of published cases and their non-binding nature, interpretation and enforcement of these laws and regulations involve uncertainties.

 

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

 

Any failure to comply with relevant regulations relating to social insurance and housing provident fund may subject us to penalty and materially and adversely affect our business, financial condition and results of operations.

 

In accordance with the PRC Social Insurance Law and the Regulations on the Administration of Housing Fund and other relevant laws and regulations, China has established a social insurance system and other employee benefits including basic pension insurance, basic medical insurance, work-related injury insurance, unemployment insurance, maternity insurance, housing fund, and a handicapped employment security fund, or collectively the Employee Benefits. An employer shall pay the Employee Benefits for its employees in accordance with the rates provided under relevant regulations and shall withhold the social insurance and other Employee Benefits that should be assumed by the employees. For example, an employer that has not made social insurance contributions at a rate and based on an amount prescribed by the law, or at all, may be ordered to rectify the non-compliance and pay the required contributions within a stipulated deadline and be subject to a late fee of up to 0.05% or 0.2% per day, as the case may be. If the employer still fails to ratify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three times of the amount overdue.

 

Under the Social Insurance Law and the Regulations on the Administration of Housing Fund, our PRC subsidiaries shall register with local social insurance agencies and register with applicable housing fund management centers and establish a special housing fund account in an entrusted bank. Both our PRC subsidiaries and their employees are required to pay the Employee Benefits.

 

Some of our PRC subsidiaries are in the process of completing the social insurance registration and the housing fund registration, and we have only made social insurance payments and housing provident fund contributions for some of our PRC employees, and did not make contributions in full for the social insurance fund and housing provident fund for our employees as required under the relevant PRC laws and regulations. Although we have not received any order or notice from the local authorities nor any claims or complaints from our current and former employees regarding our non-compliance in this regard, we cannot assure you that we will not be subject to any order to rectify non-compliance in the future, nor can we assure you that there are no, or will not be any, employee complaints regarding social insurance payment or housing provident fund contributions against us, or that we will not receive any claims in respect of social insurance payment or housing provident fund contributions under the PRC laws and regulation. In addition, we may incur additional costs to comply with such laws and regulations by the PRC Government or relevant local authorities. Any such development could materially and adversely affect our business, financial condition and results of operations.

 

Non-compliance with labor-related laws and regulations of the PRC may have an adverse impact on our financial condition and results of operation.

 

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 benefit 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 was amended 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 affect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations. We believe our current practice complies with the Labor Contract Law and its amendments. However, the relevant governmental authorities may take a different view and impose fines on us in such circumstance.

 

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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.

 

Some of the lease agreements of our leased properties have not been registered with the relevant PRC government authorities as required by PRC law, which may expose us to potential fines.

 

Under PRC law, all lease agreements are required to be registered with the local land and real estate administration bureau. Although failure to do so does not in itself invalidate the leases, the lessees may not be able to defend these leases against bona fide third parties and may also be exposed to potential fines if they fail to ratify such non-compliance within the prescribed time frame after receiving notice from the relevant PRC government authorities. The penalty ranges from RMB1,000 (approximately $145.4) to RMB10,000 (approximately $1,454.0) for each unregistered lease, at the discretion of the relevant authority. As of the date of this prospectus, the lease agreement for our leased building in China has not been registered with the relevant PRC government authorities. In the event that any fine is imposed on us for our failure to register our lease agreements, we may not be able to recover such losses from the lessors.

  

Our rights to use our leased properties could be challenged by property owners or other third parties, which may disrupt our operations and incur relocation costs.

 

 As of the date of this prospectus, the lessors of our leased properties in China have not been able to provide us with valid property ownership certificates or authorizations from the property owners for the lessors to sublease the properties, and we have subleased certain of our leased properties to third parties. There is a risk that such lessors may not have the relevant property ownership certificates or the right to lease or sublease such properties to us, in which case the relevant lease agreements and the sublease agreements may be deemed invalid and we may be forced to vacate these properties. In addition, our usage of the leased properties may be inconsistent with the designated usage, in which case we may not be able to continue to use the leased properties. The above risks could interrupt our business operations and result in relocation costs. Moreover, if our lease agreements are challenged by third parties, it could result in diversion of management attention and cause us to incur costs associated with defending such actions, even if such challenges are ultimately determined in our favor.

 

Fluctuation in the currency exchange rate of RMB may have a material adverse effect on our business, operations and financial position.

 

Our revenue and expenses have been and are expected to continue to be primarily denominated in RMB and we are exposed to the risks associated with the fluctuation in the currency exchange rate of RMB. Should RMB appreciate against other currencies, the value of the proceeds from this offering and any future financings, which are to be converted from US dollar or other currencies into RMB, would be reduced and might accordingly hinder our business development due to the lessened amount of funds raised. On the other hand, in the event of the devaluation of RMB, the dividend payments of our Company, which are to be paid in US dollars after the conversion of the distributable profit denominated in RMB, would be reduced. Hence, substantial fluctuation in the currency exchange rate of RMB may have a material adverse effect on our business, operations and financial position and the value of your investment in the Shares.

 

We are a holding company and our ability to pay dividends is primarily dependent upon the earnings of, and distributions by, our subsidiaries in the PRC.

 

We are a holding company incorporated under the laws of the Cayman Islands with limited liability. No dividends have been paid or declared by our Company. The majority of our business operations are conducted through our subsidiaries in the PRC and hence, our revenue and profit are substantially contributed by our subsidiaries in the PRC.

 

Our ability to pay dividends to our shareholders is primarily dependent upon the earnings of our subsidiaries in the PRC and their distribution of funds to us, primarily in the form of dividends. The ability of our subsidiaries in the PRC to make distributions to us depends upon, among others, their distributable earnings. Under the PRC laws, payment of dividends is only permitted out of accumulated profits according to PRC accounting standards and regulations, and our subsidiaries in the PRC are also required to set aside part of its after-tax profits to fund certain reserve funds that are not distributable as cash dividends. Other factors such as cash flow conditions, restrictions on distributions contained in our PRC subsidiaries’ articles of associations, restrictions contained in any debt instruments, withholding tax and other arrangements will also affect the ability of our subsidiaries in the PRC to make distributions to us. These restrictions could reduce the amount of distributions that we receive from our subsidiaries in the PRC, which in turn would restrict our ability to pay dividends on the Shares. The amounts of distributions that any of our subsidiaries declared and made in the past are not indicative of the dividends that we may pay in the future. There is no assurance that we will be able to declare or distribute any dividend in the future.

 

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

 

Under the PRC Enterprise Income Tax Law and its implementation rules, the profits of a foreign-invested enterprise generated through operations, which are distributed to its immediate holding company outside China, will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong Kong and China, such rate may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity interest in the PRC company. Our current PRC subsidiaries are wholly owned by our Hong Kong subsidiary, YGMZ (Hong Kong) Limited. Accordingly, YGMZ (Hong Kong) Limited may qualify for a 5% tax rate in respect of distributions from its PRC subsidiaries. Under the Notice of the State Administration of Taxation on Issues regarding the Administration of the Dividend Provision in Tax Treaties promulgated in 2009, the tax payer needs to satisfy certain conditions to enjoy the benefits under a tax treaty. These conditions include: (i) the tax payer must be the beneficial owner of the relevant dividends, and (ii) the corporate shareholder to receive dividends from the PRC subsidiaries must have met the direct ownership thresholds during the 12 consecutive months preceding the receipt of the dividends. Further, the SAT promulgated the Notice on How to Understand and Recognize the “Beneficial Owner” in Tax Treaties in 2009, which limits the “beneficial owner” to individuals, enterprises or other organizations normally engaged in substantive operations, and sets forth certain detailed factors in determining “beneficial owner” status.

 

Entitlement to a lower tax rate on dividends according to tax treaties or arrangements between the PRC central government and governments of other countries or regions is subject to the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties, which provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. As a result, we cannot assure you that we will be entitled to any preferential withholding tax rate under treaties for dividends received from our PRC subsidiaries.

 

The approval of the China Securities Regulatory Commission, or CSRC, may be required in connection with this offering under PRC law, and if required, we cannot assure you that we will be able to obtain such approval.

 

The M&A Rules purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. In September 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by a special purpose vehicle seeking CSRC approval of its overseas listings. The interpretation and application of such regulations remain unclear. If CSRC approval is required, it is uncertain whether it would be possible for us to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.

 

We will not be required to submit an application to the CSRC for the approval of the listing and trading of the ordinary shares on the NASDAQ. However, there are substantial uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering, and we 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 our perspective, and hence we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the ordinary shares. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ordinary shares offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of our ordinary shares.

  

PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to change their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC laws.

 

In July 2014, China’s State Administration of Foreign Exchange (“SAFE”) promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37. SAFE Circular 37 requires 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) to register with SAFE or its local branches in connection with their direct or indirect investment activities. SAFE Circular 37 further requires an 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.

 

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If our shareholders who are PRC residents fail to make the required registration or to update the previously filed registration, our PRC subsidiaries may be prohibited from distributing their profits or the proceeds from any capital reduction, share transfer or liquidation to us, and we may also be prohibited from making additional capital contribution into our PRC subsidiaries. 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.

 

 Mr. Jinlong Yang, our controlling shareholder, has completed the initial registrations with the local SAFE branch or qualified banks as required by SAFE Circular 37. However, we may not be informed of the identifies of all the PRC residents holding direct or indirect interest in our company, and we cannot provide any assurance that these PRC residents will comply with our request to make or obtain any applicable registrations or continuously comply with all requirements under SAFE Circular 37 or other related rules. The failure or inability of the relevant shareholders to comply with the registration procedures set forth in these regulations may subject us to fines and legal sanctions, such as restrictions on our cross-border investment activities, on the ability of our wholly foreign-owned subsidiaries in China to distribute dividends and the proceeds from any reduction in capital, share transfer or liquidation to us. Moreover, any failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC law for circumventing applicable foreign exchange restrictions. Furthermore, as these foreign exchange regulations are still relatively new and their interpretation and implementation have been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. As a result, our business operations and our ability to distribute profits to you could be materially and adversely affected.

 

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

 

Any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration with relevant governmental authorities in China regardless of the amount of the transfer. According to the relevant PRC regulations on FIEs in China, capital contributions to our PRC subsidiaries are subject to the filing with the MOFCOM or their respective local branches and registration with a local bank authorized by the State Administration of Foreign Exchange, or SAFE. In addition, (i) any foreign loan procured by our PRC subsidiaries is required to be registered with SAFE or their respective local branches and (ii) our PRC subsidiaries may not procure loans which exceed the difference between their respective total project investment amount and registered capital or twice of their net worth. See “Regulations – Regulation Relating to Funds Transfer to PRC Subsidiaries.” We may not be able to complete such registrations or obtain necessary approvals on a timely basis with respect to future capital contributions or foreign loans by us to our PRC subsidiaries. If we fail to complete such registrations, our ability to use the proceeds of this offering, and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

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

 

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

 

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or SAT, issued a circular, known as SAT Circular 82, partially abolished on December 29, 2017, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular applies only 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, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China, and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC. 

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

  

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

 

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

 

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

 

Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such. Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who pays for the transfer is obligated to withhold the applicable taxes currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

 

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or may be taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfers of shares of our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

 

Epidemics, acts of war and other disasters may adversely affect our operations.

 

Our business is subject to general economic and social conditions in the PRC. Natural disasters, epidemics and other acts of God which are beyond human control may adversely affect the economy, infrastructure and livelihood of the people of the PRC. Many major cities in the PRC are under threat of flood, earthquake, typhoon, sandstorm or drought. Our business, results of operations and financial condition may be adversely affected if such natural disasters occur. We may be required to disinfect our affected operational premises, which could adversely affect our operations. Even if we are not directly affected by the epidemic, it could slow down or disrupt the level of economic activity generally, which could in turn adversely affect our operating results.

 

In addition, acts of war and terrorist attacks may cause damage or disruption to our operations, employees, markets or clients, any of which could adversely impact our turnover, cost of sales, overall results and financial condition or the market price of the Shares. Potential war or terrorist attacks may also cause uncertainty and cause the business to suffer in ways that we cannot currently predict.

 

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Risks Related to Our Ordinary Shares and This Offering

 

An active trading market for our ordinary shares or our ordinary shares may not develop and the trading price for our ordinary shares may fluctuate significantly.

 

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

 

We may not maintain our listing on NASDAQ which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.

 

We have applied to list our ordinary shares on Nasdaq. Even if our ordinary shares are approved to be listed on Nasdaq, we cannot assure you that our ordinary shares will continue to be listed on Nasdaq in the future. In order to continue listing our securities on Nasdaq, we must maintain certain financial, distribution and share price levels. Generally, we must (i) maintain a minimum amount in shareholders’ equity (generally above $2,500,000), maintain a minimum market value of listed securities (generally above $35,000,000) or have a minimum net income from operations for the prior year of for two of the preceding years (generally above $500,000); and (ii) a minimum number of publicly held shares (generally greater than 500,000) and a minimum number of public shareholders (generally greater than 300 shareholders). Our ordinary shares also cannot have a bid price of less than $1.00. Moreover, we must comply with certain listing standards regarding the independence of our board of directors and members of our audit committee. We intend to fully comply with these requirements, but we may not continue to be able to meet these requirements in the future.

 

If Nasdaq delists our securities from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including:

 

a limited availability of market quotations for our securities;

 

reduced liquidity for our securities;

 

a determination that our ordinary shares is 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 securities;

 

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a limited amount of news and analyst coverage; and

 

a decreased ability to issue additional securities or obtain additional financing in the future.

 

The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because we expect that our ordinary shares will be listed on Nasdaq, such securities will be covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if we were no longer listed on Nasdaq, our securities would not be covered securities and we would be subject to regulations in each state in which we offer our securities.

 

The trading price of our ordinary shares may be volatile, which could result in substantial losses to investors.

 

The trading price of our ordinary shares may be volatile and could fluctuate widely due to factors beyond our control. This may happen because of the broad market and industry factors, like the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. A number of Chinese companies have listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection with their initial public offerings. The trading performances of these Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States in general and consequently may impact the trading performance of our ordinary shares, regardless of our actual operating performance.

 

In addition to market and industry factors, the price and trading volume for our ordinary shares may be highly volatile for factors specific to our own operations, including the following:

 

variations in our revenues, earnings, cash flow and data related to our user base or user engagement;

 

announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;

 

announcements of new products, services and expansions by us or our competitors;

 

changes in financial estimates by securities analysts;

 

detrimental adverse publicity about us, our services or our industry;

 

additions or departures of key personnel;

 

release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

 

potential litigation or regulatory investigations.

 

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

 

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

 

Our ordinary shares will initially trade under $5.00 per share and thus will be penny stock. Trading in penny stocks has certain restrictions and these restrictions could negatively affect the price and liquidity of our ordinary shares.

 

Our ordinary shares are expected to trade below $5.00 per share upon listing. As a result, our ordinary shares would be known as a “penny stock,” which is subject to various regulations involving disclosures to be given to you prior to the purchase of any penny stock. The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Depending on market fluctuations, our ordinary shares could be considered to be a “penny stock.” A penny stock is subject to rules that impose additional sales practice requirements on broker/dealers who sell these securities to persons other than established members and accredited investors. For transactions covered by these rules, the broker/dealer must make a special suitability determination for the purchase of these securities. In addition, a broker/dealer must receive the purchaser’s written consent to the transaction prior to the purchase and must also provide certain written disclosures to the purchaser. Consequently, the “penny stock” rules may restrict the ability of broker/dealers to sell our ordinary shares, and may negatively affect the ability of holders of our ordinary shares to resell them. These disclosures require you to acknowledge that you understand the risks associated with buying penny stocks and that you can absorb the loss of your entire investment. Penny stocks generally do not have a very high trading volume. Consequently, the price of the stock is often volatile and you may not be able to buy or sell the stock when you want to.

 

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

 

The trading market for our ordinary shares will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ordinary shares, the market price for our ordinary shares would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ordinary shares to decline.

 

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

 

Sales of substantial amounts of our ordinary shares in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ordinary shares and could materially impair our ability to raise capital through equity offerings in the future. The ordinary shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. Following the consummation of our initial public offering, there will be ordinary shares outstanding immediately after this offering. In connection with this offering, we and each of our directors and officers named in the section “Management,” and certain shareholders have agreed not to sell any ordinary shares for 12 months from the date of this prospectus without the prior written consent of the underwriters, subject to certain exceptions. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. (“FINRA”). We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ordinary shares. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

 

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

 

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

 

Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ordinary shares will likely depend entirely upon any future price appreciation of our ordinary shares. There is no guarantee that our ordinary shares will appreciate in value after this offering or even maintain the price at which you purchased our ordinary shares. You may not realize a return on your investment in our ordinary shares and you may even lose your entire investment.

 

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

 

If you purchase ordinary shares in this offering, you will pay more for each share than the corresponding amount paid by existing shareholders for their ordinary shares. As a result, you will experience immediate and substantial dilution of $       per share, representing the difference between our net tangible book value per share of $         as of December 31, 2018, after giving effect to this offering and an assumed initial public offering price of $     per share. See “Dilution” for a more complete description of how the value of your investment in our ordinary shares will be diluted upon the completion of this offering.

 

You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase our share price.

 

We plan to use the net proceeds of this offering primarily for expansion of fleet size, operational improvement as well as strategic acquisitions and alliances based on market conditions and for general corporate purposes. See “Use of Proceeds.” However, our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve or maintain profitability or increase our share price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

 

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

 

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

 

At least 75% of our gross income for the year is passive income; or

 

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

 

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

 

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

 

Depending on the amount of cash we raise in this offering, together with any other assets held for the production of passive income, it is possible that, for our current taxable year or for any subsequent year, more than 50% of our assets may be assets which produce passive income. We will make this determination following the end of any particular tax year. Although the law in this regard is unclear, we treat our consolidated affiliated entities as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their operating results in our consolidated financial statements. For purposes of the PFIC analysis, in general, a non-U.S. corporation is deemed to own its pro rata share of the gross income and assets of any entity in which it is considered to own at least 25% of the equity by value.

 

For a more detailed discussion of the application of the PFIC rules to us and the consequences to U.S. taxpayers if we were determined to be a PFIC, see “Taxation — Material United States Federal Income Tax Consideration — Passive Foreign Investment Company.”

 

The amended and restated memorandum and articles of association that we intend to adopt contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares.

 

We intend to adopt an amended and restated memorandum and articles of association immediately prior to the completion of this offering. Our proposed amended and restated memorandum and articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. In addition, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ordinary shares may fall and the voting and other rights of the holders of our ordinary shares underlying the ordinary shares may be materially and adversely affected.

 

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Our principal shareholders have substantial influence over our company. Their interests may not be aligned with the interests of our other shareholders, and they could prevent or cause a change of control or other transactions.

 

As of the date of this prospectus, Mr. Jinlong Yang, our founder and chairman of our board of directors, beneficially owns an aggregate of 60% of our outstanding ordinary shares. Upon the completion of this offering, our executive officers and directors, together with our existing shareholders, will beneficially own approximately ordinary shares, or approximately % of our outstanding ordinary shares.

 

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

 

As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from Nasdaq corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with Nasdaq corporate governance listing standards.

 

As an exempted company incorporated in the Cayman Islands that is expected to be listed on Nasdaq, we are subject to Nasdaq corporate governance listing standards. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from Nasdaq corporate governance listing standards. Currently, we do not plan to rely on the home country practice with respect to our corporate governance after we complete this offering. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would enjoy under Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.

 

As a “controlled company” under the Nasdaq listing rules, we may follow certain exemptions from certain corporate governance requirements that could adversely affect our public shareholders.

 

We believe following this offering, our principal shareholder, founder and chairman of our board of directors, Mr. Jinlong Yang, will continue to own more than a majority of the voting power of our outstanding ordinary shares. Under the Nasdaq listing rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and is permitted to phase in its compliance with the independent committee requirements. Although we do not intend to rely on the “controlled company” exemptions under the Nasdaq listing rules, we could elect to rely on these exemptions in the future. If we were to elect to rely on the “controlled company” exemptions, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. Accordingly, if we rely on the exemptions, during the period we remain a controlled company and during any transition period following a time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

 

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

 

We are an exempted company incorporated under the laws of the Cayman Islands with limited liability. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2018 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against our directors and us, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the English common law, which are generally of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a different body of securities laws than the United States, and provide significantly less protection to investors. In addition, Cayman Islands companies may not have the standing to initiate a shareholder derivative action in a federal court of the United States. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances, recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

 

Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as the U.S. Currently, we do not plan to rely on home country practice with respect to any corporate governance matter. However, if we choose to follow our home country practice in the future, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

 

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

 

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

 

We are a Cayman Islands exempted company and substantially all of our assets are located outside of the United States. All of our current operations are conducted in China. In addition, all of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons or to enforce against us or them judgments obtained in the 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. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforcement of Civil Liabilities.” As a result of all of the above, our shareholders may have more difficulties in protecting their interests through actions against us or our officers, directors, or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

 

We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company.

 

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the extended transition period, although we have early adopted certain new and revised accounting standards based on transition guidance permitted under such standards. As a result of this election, our future financial statements may not be comparable to other public companies that comply with the public company effective dates for these new or revised accounting standards.

 

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

 

Because we are a foreign private issuer under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC;

 

the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

 

the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

the selective disclosure rules by issuers of material non-public information under Regulation FD.

 

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

 

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

 

As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to us on June 30, 2019. In the future, we would lose our foreign private issuer status if (1) more than 50% of our outstanding voting securities are owned by U.S. residents and (2) a majority of our directors or executive officers are U.S. citizens or residents, or we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. If we lose our foreign private issuer status, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are more detailed and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the listing rules of the Nasdaq. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer.

 

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We will incur significantly increased costs and devote substantial management time as a result of the listing of our ordinary shares.

 

We will incur additional legal, accounting and other expenses as a public reporting company, particularly after we cease to qualify as an emerging growth company. For example, we will be required to comply with the additional requirements of the rules and regulations of the SEC and the Nasdaq rules, including applicable corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. We cannot predict or estimate the number of additional costs we may incur as a result of becoming a public company or the timing of such costs.

 

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidelines are provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may also initiate legal proceedings against us and our business may be adversely affected.

 

If a limited number of participants in this offering purchase a significant percentage of the offering, the effective public float may be smaller than anticipated and the price of our ordinary shares may be volatile which could subject us to securities litigation and make it more difficult for you to sell your shares.

 

As a company conducting a relatively small public offering, we are subject to the risk that a small number of investors will purchase a high percentage of the offering. While the underwriters are required to sell shares in this offering to at least 300 round lot shareholders (a round lot shareholder is a shareholder who purchases at least 100 shares) with at least 50% of such round lot holders holding securities with a market value of at least $2,500 in order to ensure that we meet the Nasdaq initial listing standards, we have not otherwise imposed any obligations on the underwriters as to the maximum number of shares they may place with individual investors. If, in the course of marketing the offering, the underwriters were to determine that demand for our shares was concentrated in a limited number of investors and such investors determined to hold their shares after the offering rather than trade them in the market, other shareholders could find the trading and price of our shares affected (positively or negatively) by the limited availability of our shares. If this were to happen, investors could find our shares to be more volatile than they might otherwise anticipate. Companies that experience such volatility in their share price may be more likely to be the subject of securities litigation. In addition, if a large portion of our public float were to be held by a few investors, smaller investors may find it more difficult to sell their shares.

 

29

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

 

This prospectus contains forward-looking statements that reflect our current expectations and views of future events. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Regulation.” Known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

 

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

 

our goals and strategies;

 

our future business development, financial condition and results of operations;

 

the expected growth of the logistics industry, particularly, in China;

 

our expectations regarding demand for and market acceptance of our marketplace’s products and services;

 

our expectations regarding our platform’s base of borrowers and investors;

 

our plans to invest in our platform;

 

our relationships with our partners;

 

competition in our industry; and

 

relevant government policies and regulations relating to our industry.

 

These forward-looking statements are subject to various and significant risks and uncertainties, including those which are beyond our control. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should thoroughly read this prospectus and the documents that we refer to herein 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. We disclaim any obligation to update our forward-looking statements, except as required by law.

 

This prospectus contains certain data and information that we obtained from various government and private publications, including industry data and information from Frost & Sullivan. Statistical data in these publications also include projections based on a number of assumptions. The transportation services market in China may not grow at the rate projected by market data, or at all. Failure of this industry to grow at the projected rate may have a material adverse effect on our business and the market price of our ordinary shares.

 

In addition, the new and rapidly changing nature of the transportation industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our industry. Furthermore, if any one or more of the assumptions underlying the market data are later found 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.

 

30

 

 

USE OF PROCEEDS

 

We estimate that we will receive net proceeds from this offering of approximately $      million after deducting estimated underwriting discounts and commissions and the estimated offering expenses payable by us and based upon an assumed initial offering price of $       per ordinary share (excluding any exercise of the underwriters’ over-allotment option). A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) the net proceeds to us from this offering by approximately $      million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no change to the number of ordinary share offered by us as set forth on the cover page of this prospectus, provided, however, that in no case would we decrease the initial public offering price to less than $     per share.

 

We intend to use the net proceeds of this offering as follows after we complete the remittance process:

 

  50% for acquiring  new revenue equipment through capital leases, including tractors and trailers;
    5% for operational improvement, including a new information system for fleet management and additional management personnel for expanded operation;
  15% for strategic acquisitions and alliances; and
  30% for working capital and general corporate purposes

 

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.

 

The foregoing is set forth based on the order of priority of each purpose and represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. See “Risk Factors — Risks Related to Our Ordinary Shares and this Offering— You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase our stock price.” Although we plan to use a portion of the net proceeds from this offering for strategic acquisitions and alliances, as of the date of this prospectus, we are not a party to any agreement or understanding with respect any such acquisitions or alliances and have not identified the business for such transactions.

 

Pending any use described above, we plan to invest all the net proceeds in short-term, interest-bearing, debt instruments or demand deposits.

 

In using the proceeds of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our wholly foreign-owned subsidiary in China only through loans or capital contributions, subject to the approval of government authorities and limit on the amount of capital contributions and loans. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our wholly foreign-owned subsidiary in China or make additional capital contributions to our wholly-foreign-owned subsidiary to fund its capital expenditures or working capital. In general, the relevant registration and approval procedures for capital contributions typically take approximately eight weeks to complete and there is no statutory limit on the amount of capital contributions under PRC laws and regulations. In addition, if we provide funding to our wholly foreign-owned subsidiary through loans, such loans must be registered or filed with the PRC State Administration of Foreign Exchange (“SAFE”) or its local branches. If we make loans to our PRC subsidiaries, the principal amount of such loans cannot exceed the surplus between the total investment in projects approved by the verifying governmental departments and the registered capital or twice of net worth of the relevant PRC subsidiary  subject to different calculation methods as regulated by the relevant PRC laws. See “Regulations – Regulation Relating to Funds Transfer to PRC Subsidiaries.” If we transfer proceeds to our PRC subsidiaries via capital contribution, our PRC subsidiaries will be required to complete the filing procedures with the MOFCOM. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Doing Business in China — PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of this offering and our concurrent private placement, to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

31

 

 

CAPITALIZATION

 

The following table sets forth our capitalization as of December 31, 2018 as follows:

 

on an actual basis; and

 

on an adjusted basis to reflect the sale of ordinary shares in this offering, at an assumed initial public offering price of $ per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

The adjustments reflected below are subject to change and are based upon available information and certain assumptions that we believe are reasonable. Total shareholders’ equity and total capitalization following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this capitalization table in conjunction with “Use of Proceeds,” “Summary Consolidated Financial and Operating 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.

 

   As of
December 31,
2018
 
Shareholders’ Equity  Actual   As adjusted 
   ($) 
Ordinary shares, par value $0.001 per share, 38,000,000 ordinary shares authorized, 1,000 ordinary shares issued and outstanding on an actual basis,         ordinary shares issued and outstanding on an adjusted basis and        ordinary shares to be issued in this offering   1                
Share subscription receivables   (837,837)     
Additional paid-in capital   4,115,388      
Statutory reserves   537,874      
Retained earnings   4,820,640      
Accumulated other comprehensive loss   (131,035)     
Total Shareholders’ Equity   8,505,031      
Total Capitalization   15,883,551      

 

If the underwriters’ over-allotment option to purchase additional shares from us was exercised in full, pro forma (i) ordinary shares would be       shares, (ii) additional paid-in capital would be $      (iii) total shareholders’ equity would be $      and (iv) total capitalization would be $      .

 

32

 

 

DILUTION

 

If you invest in our ordinary shares, your interest will be immediately diluted by $     per ordinary share, representing the difference between our net tangible book value per share of $     as of December 31, 2018, after giving effect to this offering and an assumed initial public offering price of $     per share. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

 

Our net tangible book value as of December 31, 2018 was $8,505,031 or $   per ordinary share as of that date. 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 net tangible book value per ordinary share, after giving effect to the proceeds we will receive from this offering, from the assumed initial public offering price of $.     per ordinary share, which is based on the estimated initial public offering price set forth on the cover page of this prospectus and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

Without taking into account any other changes in net tangible book value after December 31, 2018, other than to give effect to the sale of the ordinary shares offered in this offering at the assumed initial public offering price of $      per ordinary share, which is based on the estimated initial public offering price set forth on the cover page of this prospectus and after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2018 would have been approximately $     , or $    per ordinary share. This represents an immediate increase in net tangible book value of $ per ordinary share to the existing shareholders and an immediate dilution in net tangible book value of $    per ordinary share to investors purchasing our ordinary shares in this offering. The following table illustrates such dilution:

 

   Per
Ordinary
Share
 
   ($) 
Assumed initial public offering price per ordinary share            
Net tangible book value per ordinary share as of December 31, 2018     
Pro forma as adjusted net tangible book value per ordinary share after giving effect to this offering     
Amount of dilution in net tangible book value per ordinary share to new investors in this offering     

 

A $1.00 change in the assumed public offering price of $    per ordinary share, which is based on the estimated initial public offering price set forth on the cover page of this prospectus, would increase (decrease), in the case of an increase (decrease), our pro forma as adjusted net tangible book value after giving effect to this offering by approximately $       million, the pro forma as adjusted net tangible book value per ordinary share after giving effect to this offering by $    per ordinary share and the dilution in pro forma as adjusted net tangible book value per ordinary share to new investors in this offering by $     per ordinary share, assuming no change to the number of ordinary shares offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses.

 

The following table summarizes, on a pro forma as adjusted basis as of December 31, 2018, the differences between existing shareholders and the new investors with respect to the number of ordinary shares purchased from us in this offering, the total consideration paid and the average price per ordinary share paid before deducting the underwriting discounts and commissions and estimated offering expenses.

 

   Ordinary Shares
Purchased
   Total Consideration   Average
Price Per
Ordinary
 
   Number   Percent   Amount   Percent   Share  
Existing shareholders                      %  $                       %  $          
New investors               %  $       %  $    
Total          %  $       %  $    

 

The pro forma as adjusted information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ordinary shares and other terms of this offering determined at pricing.

 

33

 

 

ENFORCEABILITY OF CIVIL LIABILITIES

 

We were incorporated in the Cayman Islands in order to enjoy the following benefits:

 

political and economic stability;

 

an effective judicial system;

 

a favorable tax system;

 

the absence of exchange control or currency restrictions; and

 

the availability of professional and support services.

 

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to, the following:

 

the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors; and

 

Cayman Islands companies may not have the standing to sue before the federal courts of the United States.

 

Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated. Currently, substantially all of our operations are conducted outside the United States, and substantially all of our assets are located outside the United States. All of our officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon 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 Puglisi & Associates, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

 

Ogier, our counsel as to Cayman Islands law, and Jingtian & Gongcheng, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

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

 

entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

 

Enforcement of Judgments/Enforcement of Civil Liabilities

 

Ogier has advised us that it is uncertain whether the courts of the Cayman Islands will allow shareholders of our company to originate actions in the Cayman Islands based upon securities laws of the United States. In addition, there is uncertainty with regard to Cayman Islands law related to whether a judgment obtained from the U.S. courts under civil liability provisions of U.S. securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as our company. As the courts of the Cayman Islands have yet to rule on making such a determination in relation to judgments obtained from U.S. courts under civil liability provisions of U.S. securities laws, it is uncertain whether such judgments would be enforceable in the Cayman Islands. Ogier has further advised us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of 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 (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

 

We have been advised by our PRC counsel, Jingtian & Gongcheng, 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, and PRC courts will not recognize or enforce these foreign judgments if PRC courts believe the foreign judgments violate the basic principles of PRC laws or national sovereignty, security or public interest after review. However, currently, China does not have treaties or reciprocity arrangement providing for recognition and enforcement of foreign judgments ruled by courts in the United States or the Cayman Islands. Thus, it is uncertain whether a PRC court would enforce a judgment ruled by a court in the United States or the Cayman Islands.

 

34

 

 

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

 

The following summary consolidated statements of income and comprehensive income for the years ended December 31, 2018 and 2017, and the summary consolidated balance sheet data as of December 31, 2018 and 2017, have been derived from our consolidated financial statements included elsewhere in this prospectus.

 

Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following summary financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

   For the Year Ended December 31, 
   2018   2017 
Selected Consolidated Statements of Income and Comprehensive Income Data:  USD   USD 
Revenues   27,646,789    20,616,011 
Transportation costs   22,399,066    16,806,258 
General and administrative expenses   1,147,101    1,452,369 
Income from operations   4,034,766    2,317,476 
Other (expenses) income   (173,851)   (391,121)
Income before income taxes   3,860,915    1,926,355 
Provision for income taxes   1,006,028    688,265 
Net income   2,854,887    1,238,090 
Other comprehensive income (loss)   (419,684)   291,244 
Comprehensive income   2,435,203    1,529,334 
Earnings per share - basic and diluted   2,854.89    1,238.09 
Weighted average ordinary shares outstanding   1,000    1,000 

 

    December 31,
2018
    December 31,
2017
 
Selected Consolidated Balance Sheet Data:   USD     USD  
Current assets     10,567,898       11,471,380  
Property and equipment, net     4,988,774       5,431,913  
Total assets     15,883,551       17,297,480  
Total debt (including current maturities)     2,522,726       3,843,967  
Capital lease obligation     1,464,109       1,781,414  
Shareholders’ equity     8,505,031       5,040,587  

  

35

 

 

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 consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.

 

Overview

 

We are a fast growing trucking services provider in the PRC with over 17 years of history in the transportation industry. We formed our first operating subsidiary in 2002 to engage in the business of trucking services and subsequently formed four other wholly owned subsidiaries. Our current operations are conducted through our subsidiaries. We experienced a steady growth in our business in recent years and our revenue increased by 34.1% in 2018 compared to 2017. As a result of our continuous growth, we have become the second largest transportation company in the Guangdong Province and we have been accredited by the China Federation of Logistics and Purchasing as a 3A-grade trucking service provider. We operate a truckload fleet with approximately 132 tractors and 90 trailers, all of which are owned by us. Given the large scale of our fleet, we offer both network density and broad geographic coverage to meet our customers’ diverse transportation needs within the PRC. Operating out of our two regional terminals in Guangdong and Xinjiang in the PRC, we transport a diverse range of goods and merchandises from our customers’ designated pick up points to their designated destinations across different provinces in the PRC or within Guangdong and Xinjiang province, either through our own fleet of transportation vehicles or by our subcontractors.

 

MingZhu Logistics Holdings Limited (“MingZhu Cayman”) is a holding company incorporated on January 2, 2018 under the laws of the Cayman Islands. Our history can be traced back to July 2002 when our first operating subsidiary, Shenzhen Yangang Mingzhu Freight Industry Co., Ltd. (“MingZhu”) was established in Shenzhen, Guangdong, China as a limited liability company on July 10, 2002.

 

Mr. Jinlong Yang, our Chairman of the Board and CEO, is our controlling shareholder holding 60% equity interest of MingZhu Cayman prior to our initial public offering.

 

We experienced steady growth in our business in recent years. Our total revenue was $27,646,789 and $20,616,011, respectively, for fiscal years 2018 and 2017, representing an increase of approximately 34.1%.

 

Reorganization

 

A reorganization of the Company’s legal structure was completed on April 13, 2018. The reorganization involved the incorporation of MingZhu Cayman, and its wholly-owned subsidiaries, MingZhu Investment Limited (“MingZhu BVI”), and YGMZ (Hong Kong) Limited (“MingZhu HK”); and the transfer of all equity ownership of Shenzhen MingZhu to MingZhu HK from the former shareholders of MingZhu. In consideration of the transfer, the Company issued 1,000 shares of the Company with par value $0.001 (HKD 0.01) per share to the former shareholders of MingZhu.

 

On April 13, 2018, the former shareholders transferred their 100% ownership interest in MingZhu to MingZhu HK, which is 100% owned by MingZhu Cayman through MingZhu BVI. After the reorganization, MingZhu Cayman owns 100% equity interests of MingZhu BVI, MingZhu HK and MingZhu. The controlling shareholder of MingZhu Cayman is same as of MingZhu prior to the reorganization.

 

MingZhu was incorporated on July 10, 2002 in Shenzhen, Guangdong under the laws of the PRC. Shenzhen Pengcheng Shengshi Logistics Co., Ltd. (“MingZhu Pengcheng”), a company providing trucking services, was incorporated on April 7, 2010 in Shenzhen, Guangdong under the laws of the PRC. Prior to the reorganization, MingZhu and MingZhu Pengcheng were under common control. On November 10, 2017, for the purpose of reorganization so that the business of the Company could be rearranged to be under a common holding company, all outstanding equity interest of MingZhu Pengcheng was transferred to MingZhu.

 

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

 

36

 

 

Key Factors that Affect Operating Results

 

Our performance of operations and financial conditions have been, and are expected to continue to be, affected by a number of factors, including macroeconomic conditions, major customers demand, fuel charges, collectability of account receivable and timing of collection, driver capacity and wage cost, regulations and seasonality, many of which may be beyond our control.

 

Major customers demand

 

During fiscal years 2017 and 2018, sales to our top five customers accounted for approximately 71.4% and 63.9%, respectively, of our total revenue in each of the respective years. Our service agreements with our customers have an expected length of one year or less. While certain service contracts contain options of renewal, there is no assurance that our major customers will continue their business relationship with us, or the revenue generated from dealings with them will be maintained or increased in the future. If we are unable to enter into new service contracts with our customers upon expiry of the current contracts, or there is a reduction or cessation of demands from these customers for whatever reasons and we are unable to enter into service contracts of comparable size and terms in substitution, our business, financial conditions and results of operation may be materially and adversely affected.

 

Fuel charges

 

Fuel shortage, increases in fuel prices and rationing of petroleum products may increase our cost and have a material adverse effect on our operations’ profitability. The cost of fuel can fluctuate significantly and is subject to many economic and political factors that are beyond our control, including but not limited to the political instability in oil-producing regions. Our service agreements with our customers allow us to adjust our service fees to some extent when the fuel prices fluctuate significantly. However, if the fluctuations fall within the acceptable range, the service fees cannot be adjusted and thus we are still exposed to the risk of the fuel price fluctuation which may affect our profitability.

 

Collectability and timing of collection of our account receivables

 

Our cash flows depend on the timely receipt of payments from our customers. There is no assurance that our customers will pay us on time and in full. Should we experience any unexpected delay or difficulty in collecting account receivables from our customers, our operating results and financial condition may be adversely affected.

 

Driver Capacity and Wage Cost

 

We recognize that our professional driver workforce is one of our most valuable assets. Drivers who hold A2 driving license are the most needed manpower of the Chinese trucking service market. Drivers with an A2 driving license are allowed to drive heavy trucks, trailer-towing vehicles and semi-trailer towing vehicles at times, there are A2 driving license drivers shortages in the trucking industry. Changes in the demographic composition of the workforce, alternative employment opportunities that become available in the economy, and individual drivers’ desire to be home more frequently can affect the availability of drivers, including by increasing the wages our drivers require. Driver shortages impact both our ability to serve customers and driver wages paid to attract and retain drivers and can have a material adverse effect on our operations and profitability.

 

Regulations

 

In recent years, the government has issued many supportive policies to encourage the development of the logistic industry in Guangdong and Xinjiang which are our two main markets. Encouraged by those policies, the logistic industry is expected to become more standardized and modernized. The trucking service market which is a subset of the logistic industry is likely to evolve along with the development of logistic industry.

 

Seasonality

 

For our customers that are logistic companies, the routes and schedules that have been contracted with us are generally scheduled and regular and remain unchanged throughout the contract period. If our customers experience sudden spikes in demand for trucking services, they may seek other service providers instead of changing the terms of our trucking services.

 

In general, demand for our trucking services has been observed to be higher in June, November and December each year due to the sales campaigns organized by various online shopping platforms. To meet the demand in peak seasons, we extend our hours of operation each day during these months. Despite peak demand seasons being observed in the consumer goods industry, the business’s dedicated truckload services ensures a level of stability in our operations and therefore our Directors feel that seasonality do not have major impact to the business’ overall revenue and business operations.

 

In addition to the foregoing factors, our operating results are also affected by certain trends in the PRC economy and the trucking industry. According to the Frost & Sullivan July 2019 report, for the period from 2019 to 2023, the estimated CAGR in China’s macro economy, revenue of trucking services in China, road revenue of trucking services in Guangdong region and the volume of road freight in Xinjiang is of 5.1%, 2.5%, 2.9% and 6.3% respectively. We expect an organic growth our revenue in the foreseeable future driven by the foregoing factors.

 

37

 

 

Results of Operations

 

For the years ended December 31, 2018 and 2017.

 

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

 

   For the Year Ended
December 31,
       
   2018   2017   Change   Change (%) 
                 
REVENUES  $27,646,789   $20,616,011   $7,030,778    34.1%
                     
COSTS AND EXPENSES                    
Transportation costs   22,399,066    16,806,258    5,592,808    33.3%
General and Administrative expenses   1,147,101    1,452,369    (305,268)   -21.0%
Sales and marketing expenses   65,856    39,908    25,948    65.0%
Total costs and expenses   23,612,023    18,298,535    5,313,488    29.0%
                     
OPERATING INCOME   4,034,766    2,317,476    1,717,290    74.1%
                     
OTHER (EXPENSES) INCOME                    
Interest expenses   (355,332)   (289,967)   (65,365)   22.5%
Other expenses   (8,204)   (186,515)   178,311    -95.6%
Other income   189,685    85,361    104,324    122.2%
Total other expenses, net   (173,851)   (391,121)   217,270    -55.6%
                     
INCOME BEFORE INCOME TAXES   3,860,915    1,926,355    1,934,560    100.4%
                     
PROVISION FOR INCOME TAXES   1,006,028    688,265    317,763    46.2%
                     
NET INCOME  $2,854,887   $1,238,090   $1,616,797    130.6%

 

Revenues

 

Our revenues are primarily derived from transportation services. Total revenues increased by $7,030,778, or 34.1%, to $27,646,789 for the year ended December 31, 2018 as compared to $20,616,011 for the year ended December 31, 2017. Such increase was mainly attributable to the significant increase in revenue generated by our business expansion in Xinjiang province.

 

Our operations are primarily based in the PRC, where we derive a substantial portion of revenues. Management also review consolidated financial results by business locations. Disaggregated information of revenues by geographic locations are as follows:

 

   For the year ended December 31,
2018
   For the year ended December 31,
2017
   Change  

Change

(%)

 
Revenue                    
Guangdong  $14,426,772   $15,514,679   $(1,087,907)   -7.0%
Xinjiang   13,220,017    5,101,332    8,118,685    159.1%
Total revenue  $27,646,789   $20,616,011   $7,030,778    34.1%

 

Our revenue was primarily generated from Guangdong province and Xinjiang province in the PRC, which accounted for approximately 52.2% and 47.8% of our total revenue for the year ended December 31, 2018, respectively; and approximately 75.3% and 24.7% of our total revenue for the year ended December 31, 2017 respectively.

 

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Revenue from Guangdong province

 

Revenue from Guangdong province is primarily comprised of highway transportation services. Services are mostly starting from Guangdong province to other provinces in the PRC except Xinjiang province. Revenue is recognized over the requisite transit period as the customer’s goods move from origin to destination which would take one to three days.

 

For the year ended December 31, 2018, the revenue generated from Guangdong province is $14,426,772 as compared to $15,514,679 for the year ended December 31, 2017, representing a decrease of $1,087,907 or -7.0%. Such slight decrement is acceptable as our management cut out some less profitable routes and reallocated our revenue equipment for the business development in Xinjiang province for greater growth. As a result of the limited working capital, revenue equipment and personnel, we decided to reduce the proportion of revenue generated from Guangdong province till it contributes 50% (with fluctuation of five percentage points) of our total revenue. This target was achieved by the end of fiscal year 2018. We intend to maintain such proportion in the future by expanding our business simultaneously in both provinces.

 

Revenue from Xinjiang province

 

Revenue from Xinjiang province is primarily comprised of transportation services within the Xinjiang province. Services are mostly completed within approximately 24 hours. Revenue is recognized over the requisite transit period as the customer’s goods move from origin to destination, and the delivery note is signed by both parties.

 

The management believes the emerging market of Xinjiang is the main driver for the Company’s future growth. Starting from the last season of 2016, we have expanded our business into Xinjiang province which has less fierce competitions and high demand of trucking services. Our revenue generated in Xinjiang province increased from $5,101,332 for the year ended December 31, 2017 to $13,220,017 for the year ended December 31, 2018, representing an increase of $8,118,685 or 159.1%. Such exponential growth was expected as the initial expansion in a new geographic market for trucking services is generally rapid, which results in high growth in revenue. However; as we further expand our operations in Xinjiang, we expect that the growth rate will adjust itself to more consistent levels which, we believe, will be more sustainable in the long run. Through reasonable and effective allocation of our resources, we expect that our revenue will grow in both Xinjiang and Guangdong.

 

Costs and expenses

 

The costs and expenses of our trucking services consist of transportation costs, general and administrative expenses and sales and marketing expenses.

 

   For the year ended
December 31,
2018
   For the year ended
December 31,
2017
   Change   Change (%) 
Costs and expenses                    
Transportation costs  $22,399,066   $16,806,258   $5,592,808    33.3%
General and administrative expenses   1,147,101    1,452,369    (305,268)   -21.0%
Sales and marketing expenses   65,856    39,908    25,948    65.0%
Total costs and expenses  $23,612,023   $18,298,535   $5,313,488    29.0%

 

Total costs and expenses increased by $5,313,488, or 29.0%, to $23,612,023 for the year ended December 31, 2018 as compared to $18,298,535 for the year ended December 31, 2017. The increase in costs and expenses was in line with the increase of revenue.

 

Transportation costs

 

Transportation costs primarily consist of fuel expenses, highway bridge expenses, insurance expenses, drivers’ wages, maintenance and repair expenses, subcontractor fees, depreciation expenses and others expenses.

 

   For the year ended December 31,
2018
   For the year ended December 31,
2017
   Change   Change (%) 
Transportation costs                    
Drivers wages  $1,859,150   $1,242,086   $617,064    49.7%
Fuel expenses   4,684,828    3,884,642    800,186    20.6%
Highway bridge expenses   3,902,543    2,830,110    1,072,433    37.9%
Insurance expenses   375,637    351,892    23,745    6.7%
Subcontractor fees   9,122,701    5,514,058    3,608,643    65.4%
Depreciation expenses   1,266,174    1,195,201    70,973    5.9%
Maintenance and repair expenses   974,750    812,353    162,397    20.0%
Others expenses   213,283    975,916    (762,633)   -78.1%
Total transportation costs  $22,399,066   $16,806,258   $5,592,808    33.3%

 

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Except for the relatively lower increase in insurance expenses and depreciation expenses due to the disposal of revenue equipment throughout the last season of 2017, the management believes that increase of drivers’ wages, fuel expenses, highway bridge expenses and maintenance and repair expenses reasonably match the increase of revenue.

 

Furthermore, as a result of securing the market share of Xinjiang province, subcontractor fees increased by approximate $3,608,643, or 65.4%, to $9,122,701 for the year ended December 31, 2018 as compared to $5,514,058 for the year ended December 31, 2017. Other expenses decreased by approximate $762,633, or 78.1%, to $213,283 for the year ended December 31, 2018 as compared to $975,916 for the year ended December 31, 2017. The decrease in other expenses is due to the expenses incurred by the disposal of operating supplies in 2017.

 

General and Administrative expenses

 

For the year ended December 31, 2018, we incurred total general and administrative expenses in the amount of $1,147,101, which was mainly comprised of professional fees of $285,259, salary expenses of $647,060, rental expenses of $38,350, allowance for doubtful accounts of $63,601 and others expenses of $112,831.

 

For the year ended December 31, 2017, we incurred total general and administrative expenses in the amount of $1,452,369, which primarily consists of professional fees of $794,099, salary expenses of $480,006, rental expenses of $29,279, allowance for doubtful accounts of $28,424 and others expenses of $120,561.

 

General and administrative expenses decreased by $305,268 or 21.0% for the year ended December 31, 2018 as compared to $1,452,369 for the year ended December 31, 2017, was primarily due to decrease in other expenses of $7,729 and a decrease of $508,840 of professional expense in relation with the capital market planning as no related expenses incurred during the fiscal year of 2018; but offset by an increase of $167,054 in salary expenses; an increase of rental expenses of $9,071; an increase of allowance for doubtful accounts of $35,177.

 

Other Income and (Expenses)

 

For the years ended December 31, 2018 and 2017 the other income and expenses primarily consist of net rental income from renting out spare office space and property, interest expenses and others. Total other expenses were decreased by $217,270, or 55.6%, to $173,851 for the year ended December 31, 2018 as compared to $391,121 for the year ended December 31, 2017. The decrease is mainly attributable to a decrease in other expenses due to the expense accrued in relation to a lawsuit in 2017. The decrease was offset by the increase of interest expenses of $65,365; and a decrease of the net rental income derived from renting out spare office space of $19,106 as some of the lease agreements expired during the year ended 2018.

 

Liquidity and Capital Resources

 

Our business requires substantial amounts of cash to cover operating expenses as well as to fund capital expenditures, working capital changes, principal and interest payments on our obligations, lease payments, to support tax payments when we generate taxable income. Recently, we have financed our capital requirements with borrowings under our existing term loan facility, borrowings under our existing revolving credit facility, cash flows from operating activities, direct equipment financing, operating leases and proceeds from equipment sales.

 

As of December 31, 2018, we had a cash flow from operating activities of $3,798,997 and had cash and restricted cash of $808,309. Our working capital was $5,050,487 as of December 31, 2018. The management believes the company’s revenues and operations will continue to grow and the current working capital is sufficient to support its operations and debt obligations as they become due one year from the date of this report. However, we may need additional cash resources in the future if we experience changed business conditions or other developments and may also need additional cash resources in the future if we wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If it is determined that the cash requirements exceed our amounts of cash on hand, we may seek to issue debt or equity securities or obtain a credit facility.

 

Cash Flow

 

The followings summarize the key components of our cash flows for the years ended December 31, 2018 and 2017:

 

   For the Year Ended
December 31,
 
   2018   2017 
Net cash provided by operating activities  $3,798,997   $1,933,926 
Net cash (used in) provided by investing activities   (16,509)   506,455 
Net cash used in financing activities   (3,295,414)   (2,699,745)
Effect of exchange rate change on cash   (31,513)   24,744 
Net increase (decrease) in cash and cash restricted cash   455,561    (234,620)
Cash and restricted cash at beginning of the year   352,748    587,368 
Cash and restricted cash at end of the year  $808,309   $352,748 

 

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Operating Activities:

 

Net cash provided by operating activities was $3,798,997 for the year ended December 31, 2018 and was primarily attributable to (i) net income of $2,854,887, (ii) various non-cash item of $1,666,082 including loss on disposals of equipment, provision for doubtful accounts, amortization of deferred financing fees, depreciation for plant and equipment and deferred tax expense, (iii) a $166,637 decrease of operating supplies, (iv) a $247,278 decrease of other receivables, (v) a $87,537 decrease of deposits (vi) a $564,503 increase of tax payables. This cash inflow is offset by (i) the $72,261 increase of account receivables, (ii) a $535,532 increase of prepayments as the expanded operation required more cash paid in advance to suppliers, (iii) a $803,359 decrease of accounts payable, (iv) a $376,775 decrease of other payables and accrued liabilities.

 

For the year ended December 31, 2018, cash provided by operating activities was $3,798,997 comparing to $1,933,926 for the year ended December 31, 2017, the increase of $1,865,070, or 96.4%, was primarily due to the increase of revenue. It is observed that the collection of repayments of accounts receivable was much more efficient during the year ended December 31, 2018. Our account receivables turnover days were reduced from approximately 113.09 days for the year ended December 31, 2017 to approximately 102.7 days for the year ended December 31, 2018. This is also evident by the fact that a $7,030,778 increase of revenue only brought up the accounts receivable by $72,261. If other conditions remain unchanged, the increase of revenue should had brought up the accounts receivable balance pro rata, but for the year ended 2018, the increase of revenue of $7,030,778 only raise up the accounts receivable by $72,261, which means we have improved accounts receivable collection. Our management will continue to lower the accounts receivable turnover days by implementing a number of strategies, including selecting customers with better credit, valuable assets, experienced management team and better reputation in the logistic industry, implementing strategies to improve customer relationship management skills and entering into new customer contracts with more desirable collection terms. In terms of improving customer relationship management, we plan to introduce an Enterprise Resource Planning system to further integrate various functions relating to accounts management and streamline customer relationship management process. We are also dedicated to continuously improving our services and building up brand awareness in order to gain more bargain power in negotiating customer contracts. To better manage the timing difference in receiving customer payments and supplier payments, we plan to seek more supplier contracts with longer payment terms in addition to the foregoing measures to better managing accounts receivables.

 

Investing Activities

 

Net cash used in investing activities was $16,509 for the year ended December 31, 2018 and was primarily attributable to purchase of equipment of 108,591, which is offset by proceeds from the disposal of equipment of $92,082.

 

For the year ended December 31, 2018, cash used in investing activities was $16,509 comparing to $506,455 of cash provided by investing activities for the year ended December 31, 2017, the decrease of $522,964, or -103.3% was primarily due to the decreased amount of proceeds from disposal of equipment.

 

Financing Activities

 

Net cash used in financing activities was $3,295,414 for the year ended December 31, 2018 and was primarily attributable to (i) repayments of short-term bank borrowings of $3,580,723, (ii) repayments of long-term bank borrowings of $756,544, (iii) repayments obligations under capital leases of $1,178,813, (iv) repayments to related parties of $8,547,655, (v) a capital distribution of $3,630,448. This cash outflow is offset by (i) the proceeds from short-term bank borrowings of $1,815,706, (ii) the proceeds from long-term bank borrowings of $1,361,779, (iii) the amounts advanced from related parties of $7,304,612, (iv) a $3,916,672 of capital contribution.

 

For the year ended December 31, 2018, cash used in financing activities was $3,295,414. Compared to $2,699,745 for the year ended December 31, 2017, the increase of $595,669, or 22.1% was primarily a result from increased repayment of bank borrowings and obligations under capital leases.

 

Capital Expenditures

 

The Company made capital expenditures of $1,287,404 and $584,122 for the years ended December 31, 2018 and 2017, respectively. Our capital expenditures were mainly used for purchases of revenue equipment. We intend to fund our future capital expenditures with our existing cash balance, proceeds from this offering and other financing alternatives. We will continue to make capital expenditures to support the growth of our business.

 

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Credit Facilities

 

The table below presents our contractual obligations in relation with bank borrowings as of December 31, 2018.

 

Bank name  Term  Interest rate  Collateral/ Guarantee  Date of paid off   December 31,
2018
 
                  
Bank of China*  From March, 2018 to March, 2019  Weighted average rate of 6.53%  Guarantee by Mr. Jinlong Yang and Shenzhen Yangang Mingzhu Logistics Co., Ltd. (“MingZhu Logistics”), a company owned by Mr. Jinlong Yang’s sister, pledge by a property owned by Mr. Jinlong Yang’s family member and collateralized by MingZhu’s receivables   March 11, 2019   $272,707 
China Merchants Bank**  From April, 2018 to April, 2019  Weighted average rate of 6.61%  Guarantee by Mr. Jinlong Yang, pledge by a property owned by Mr. Jinlong Yang   April 10, 2019    221,075 
The Industrial Bank Co., Ltd.  From January, 2018 to January, 2019  Weighted average rate of 7.90%  Guarantee by Mr. Jinlong Yang and MingZhu Logistics   January 5, 2019    145,444 
Postal Savings Bank of China Co., Ltd.  From May, 2018 to May, 2019  Weighted average rate of 5.44%  Guarantee by third party, Mr. Jinlong Yang and other family members of Mr. Jinlong Yang, pledge by properties owned by family members of Mr. Jinlong Yang   April 20, 2019    574,504 
Postal Savings Bank of China Co., Ltd.*  From November, 2018 to November, 2020  Weighted average rate of 5.70%  Guarantee by Mr. Jinlong Yang and third party, pledge by properties owned by Mr. Jinlong Yang and properties owned by family members of Mr. Jinlong Yang   -    1,308,996 
Total                $2,522,726 

 

The table below presents our contractual obligations in relation with capital lease and financing obligations as of December 31, 2018.

 

Institution name  Minimum lease payments   Future finance changes   Present value of minimum lease payments 
Sumitomo Mitsui Finance and Leasing (China) Co., Ltd.  $1,119,273   $95,195   $1,024,078 
Zhejiang Zhongda Yuantong Finance Leasing Co.,Ltd.   51,218    2,242    48,976 
Shanghai Chengtai Finance Leasing Co., Ltd.   404,476    29,957    374,519 
Shenzhen Qianhai Yibainian Commercial Factoring Co., Ltd   18,190    1,654    16,536 
Total  $1,593,157   $129,048   $1,464,109 

 

The above two tables involve both short-term and long-term obligations.

 

In December 2017, we rolled over into a one-year term line of credit agreement with Bank of China pursuant to which we may borrow up to $ 2,036,216 (RMB 14,000,000). The agreement was renewed in December 2018 for another 12 months. The line of credit agreement entitles us to enter into separate loan contracts under such line of credit. We utilized $727,220 (RMB 5,000,000) in January 2018 and $436,332 (RMB 3,000,000) in March 2018. For each withdraw from the line of credit, a separate loan was entered into with a one-year term from the credit line withdraw date and we recorded these loans as short-term bank borrowings in our consolidated financial statements. As of December 31, 2018, the loan of $727,220 (RMB 5,000,000) had been fully paid off and the unutilized line of credit was $1,599,884 (RMB 11,000,000).

 

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In October 2017, we entered into a one-year term line of credit agreement with China Merchants Bank pursuant to which we may borrow up to $727,220 (RMB 5,000,000). The line of credit agreement entitles us to enter into two separate loan contracts under such line of credit. We utilized $461,092 (RMB 3,000,000) in November 2017 and $290,888 (RMB 2,000,000) in April 2018. For each withdraw from the line of credit, a separate loan was entered into with a one-year term from the credit line withdraw date and we recorded these loans as short-term bank borrowings in our consolidated financial statements. As of December 31, 2018, the line of credit agreement expired.

 

In October 2018, we entered into a five-year term line of credit agreement with Postal Savings Bank of China Co., Ltd pursuant to which we may borrow up to $1,308,996 (RMB 9,000,000). The line of credit agreement entitles us to enter into separate loan contracts under such line of credit. We utilized $1,308,996 (RMB 9,000,000) in November 2018. For such withdraw from the line of credit, a separate loan was entered into with a two-year term from the line of credit withdraw date and we recorded this loan as long-term bank borrowings in our consolidated financial statements. As of December 31, 2018, the unutilized line of credit was $0.

 

Guarantees and Commitments

 

Guarantee Commitments

 

In November 2017, MingZhu entered into guarantee agreements for a capital lease of $2,531,453 to a subcontractor. The guarantee period was from November 2017 to January 2022. In November 2017, MingZhu entered into a guarantee agreement pursuant to which MingZhu Logistics provided guarantee for the above-mentioned capital lease.

 

Lease Commitments

 

The Company entered into a lease for office space located in Shenzhen, Guangdong, China for the period from November 21, 2018 to November 20, 2023, with a rent-free period from November 21, 2018 to November 20, 2019. The total future minimum lease payments under the non-cancellable operating lease with respect to the office December 31, 2018 are payable as follows:

 

12 months ending December 31,    
2019  $413,339 
2020   107,624 
2021   106,471 
2022   104,166 
2023   95,486 
Future minimum operating lease payments  $827,086 

 

The Company leases certain of its revenue equipment under capital lease agreements. The terms of the capital leases expire at various dates through May 2021. The Company has option to purchase the revenue equipment for a nominal amount at the end of the lease term.

 

We have capital lease commitments for revenue equipment summarized for the following fiscal years:

 

   Minimum lease payments   Present value of minimum lease payments 
12 months ending December 31,        
2019  $829,539   $737,463 
2020   622,048    587,723 
2021   141,570    138,923 
Thereafter   -    - 
Total   1,593,157    1,464,109 
           
Less: amount representing interest   (129,048)   - 
           
Present value of minimum lease payments  $1,464,109    1,464,109 
           
Less: current maturities        (737,463)
           
Capital lease obligations, long-term       $726,646 

 

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Contingencies

 

From time to time, the Company is party to certain legal proceedings, as well as certain asserted and unasserted claims.

 

On September 4, 2018, we received a notice from Shenzhen Arbitration Committee for Labor Disputes, which ruled that MingZhu was required to pay for worker compensation to Qing Tan, Xiangyang Shi, Haiyang Shi, and Hanxiao Shi in the amount of $65,223 (RMB 448,440). The Company accrued contingent liabilities of $72,722 (RMB 500,000) and $76,849 (RMB 500,000) based on the available information and the management’s best estimates as of December 31, 2018 and 2017, respectively. According to the enforcement order issued by the Shenzhen Yantian People’s Court on June 14, 2019, $74,961 (RMB 510,272) from our bank account was enforced by the court. Such amount includes the damages and other charges resulting from delayed performance. As of the date hereof, we have performed all our obligations under the arbitration award. We have filed an enforcement dissidence with the Shenzhen Yantian People’s Court. The case is currently pending before the Yantian People’s Court.

 

A contract dispute exists between MingZhu, MingZhu Pengcheng and Shengxin Wang. According to the Civil Judgement issued by the Shenzhen Intermediate People’s Court on August 23, 2018, Shengxin Wang was ordered to pay $3,098 (RMB 21,303) and overdue interests thereof and pay $0.15 (RMB 1) as the consideration of the vehicles to MingZhu Pengcheng and after that, MingZhu Pengcheng and MingZhu should respectively assist to transfer ownership of one tractor and one trailer to Shengxin Wang. According to the Civil Decision of Guangdong Provincial Higher People’s Court issued on December 20, 2018, Shengxin Wang’s application for retrial of the above Civil Judgement was rejected. On March 22, 2019, the Shenzhen Yantian People’s Court issued an Enforcement Order to MingZhu and MingZhu Pengcheng, which ordered MingZhu and MingZhu Pengcheng to perform relevant obligations as required by the foresaid judgement or otherwise the judgement would be enforced by the court. On May 29, 2019, a cash balance equal to Shenxin Wang’s payment obligation was frozen in his bank account and meanwhile, Shengxin Wang took over the tractor from MingZhu Pengcheng. According to the inquiry notes taken by the Yantian People’s Court Enforcement Bureau on May 30, 2019, MingZhu has made preparation for handover of the trailer to Shengxin Wang.  As of the date of this prospectus, Shengxin Wang has taken over the trailer, the balance half of the vehicles, from MingZhu, and the case has been concluded.

 

However, regarding the same dispute, Shengxin Wang filed another lawsuit against MingZhu Pengcheng. According to the Civil Indictment filed by Shengxin Wang (the plaintiff) on February 26, 2019, Shengxin Wang requested that MingZhu Pengcheng (the defendant) be ordered to compensate for the stoppage loss of $694,098 (RMB 4,772,269). The nature of the case was a property damage compensation dispute. According to the Notice of Appeal issued by the Shenzhen Yantian People’s Court on March 21, 2019, the court has accepted this case. According to the Civil Judgment issued by the Yantian District People's Court in Shenzhen City, Guangdong Province on August 30, 2019, the court ruled that MingZhu Pengcheng should pay damages in the amount of $29,627 (RMB 203,700) yuan to Shengxin Wang and rejected Shengxin Wang's other claims. MingZhu Pengcheng submitted an Appeal Petition to the Shenzhen Intermediate People's Court on September 20, 2019, requesting a change in the judgment of first instance and changing the judgment so that MingZhu Pengcheng will not have to pay the damages to Shengxin Wang. MingZhu Pengcheng has paid the case acceptance fee. As the date of this prospectus, the case is pending for appeal court hearing.

 

On August 22, 2019, Sujin Wei (the plaintiff) submitted a Civil Complaint to the Yangjiang Yangdong District People’s Court against China Pacific Property Insurance Co., Ltd. Shenzhen Branch, MingZhu and two other defendants. The complaint requested that China Pacific Property Insurance Co., Ltd. Shenzhen Branch shall make the death and disability compensation to the plaintiff in the amount of $15,999 (RMB 110,000) and compensate the plaintiff of $44,699 (RMB 307,328.02) within the third party liability insurance limit and also requested that defendants Shengming Zheng and MingZhu shall be jointly and severally liable for the foregoing claims, and the litigation fee in this case shall be borne by the four defendants. According to the response notice issued by the Yangjiang Yangdong District People’s Court on the September 18, 2019, this case has been filed on September 4, 2019. As of the date of the prospectus, the case has not yet been heard by the court.

 

Contractual Obligations

 

As of December 31, 2018, the future minimum payments under certain of our contractual obligations were as follows:

 

   Payment due by period 
Contractual obligations  Total   Less than 1 year   1-3 years   3-5 years   More than 5 years 
                     
Bank Borrowings  $2,666,521   $1,467,394   $1,199,127   $-   $- 
Capital Lease Obligations   1,593,156    829,539    763,617    -    - 
Operating Lease Obligations   827,086    413,339    214,095    199,652          - 
Total  $5,086,763   $2,710,272   $2,176,839   $199,652   $- 

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions. In certain circumstances, those estimates and assumptions can affect amounts reported in the accompanying consolidated financial statements and notes. In preparing our financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. Application of the accounting policies described below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The following is a brief discussion of our critical accounting policies and estimates. 

 

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Use of estimates and assumptions

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in our consolidated financial statements include the useful lives of property and equipment, impairment of long-lived assets, allowance for doubtful accounts, provision for contingent liabilities, revenue recognition, and deferred taxes and uncertain tax position. Actual results could differ from these estimates.

 

Accounts Receivable and allowance for doubtful accounts

 

Accounts receivables are stated and carried at original invoiced amount. Accounts are considered overdue after 90 days. In establishing the required allowance for doubtful accounts, management considers historical collection experience, aging of the receivables, the economic environment, industry trend analysis, and the credit history and financial conditions of the customers. Management reviews its receivables on a regular basis to determine if the bad debt allowance is adequate and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after all means of collection have been exhausted and that the likelihood of collection is not probable.

 

Property and equipment, net

 

Property and equipment are stated at cost net of accumulated depreciation and impairment. Depreciation is provided over the estimated useful lives of the assets using the straight-line method from the time the assets are placed in service, after considering the estimated residual value which is 5% of costs. Estimated useful lives are as follows:

 

Classification  Estimated
Useful Life
Buildings and improvements  10 years
Computer and office equipment  3-5 years
Revenue equipment*  5 years

 

*Revenue equipment are trucks and trailers only used for providing trucking services.

 

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the consolidated statements of income and comprehensive income. Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to earnings as incurred, while additions, renewals and betterments, which are expected to extend the useful life of assets, are capitalized. The Company also re-evaluates the periods of depreciation to determine whether subsequent events and circumstances warrant revised estimates of useful lives.

 

Leases

 

The Company accounts for all significant leases as either operating or capital. At lease inception, if the lease meets any of the following four criteria, the Company will classify it as a capital lease: (a) transfer of ownership to lessee at the end of the lease term, (b) bargain purchase option, (c) lease term is equal to 75% or more of the estimated economic life of the leased property, or (d) the present value of the minimum lease payments is 90% or more of the fair value of the leased asset. Otherwise, the lease will be treated as an operating lease.

 

Impairment of long-lived assets

 

Long-lived assets, including property and equipment are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, the Company will reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. For the years ended December 31, 2018 and 2017, no impairment of long-lived assets was recognized.

 

Fair Value Measurement

 

The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by us.

 

The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels of the fair value hierarchy are as follows:

 

  Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
     
  Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
     
  Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

Financial instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.

 

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Revenue Recognition

 

The Company elected to adopt Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606), effective as of January 1, 2017. Accordingly, the consolidated financial statements for the years ended December 31, 2018 and 2017 are presented under ASC 606. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company elected the modified retrospective method which required a cumulative adjustment to retained earnings instead of retrospectively adjusting prior periods. The adoption of ASC 606 did not have material impact on the Company’s consolidated financial statements.

 

Revenues are generated from provision of trucking services. For each trip, the Company has a single performance obligation, to transport our customer’s freight from a specified origin to a specified destination, with the transit period typically being less than three days.

 

The management have determined that revenue recognition over the transit period provides a reasonable estimate of the provision of services to our customers as our obligation is performed over the transit period. For loads picked up during the reporting period, but delivered in a subsequent reporting period, revenue is allocated to each period based on the transit time in each period as a percentage of total transit time.

 

We utilize independent contractors and third-party carriers in the performance of certain transportation services. While various ownership arrangements may exist for the equipment utilized to perform these services, including company-owned, owner-operator owned, and third-party carriers, revenue is generated from the same base of customers. We evaluate whether our performance obligation is a promise to transfer services to the customer (as the principal) or to arrange for services to be provided by another party (as the agent) using a control model. Our evaluation determined that we are in control of establishing the transaction price, managing all aspects of the shipments process and taking the risk of loss for delivery, collection, and returns. Based on our evaluation of the control model, we determined that all of our major businesses act as the principal rather than the agent within their revenue arrangements and such revenues are reported on a gross basis.

 

The Company applies the practical expedient in Topic 606 that permits the Company not to disclose the aggregate amount of transaction price allocated to performance obligations that are unsatisfied as of the end of the period as the Company’s contracts have an expected length of one year or less. The Company also applies the practical expedient in Topic 606 that permits the recognition of incremental costs of obtaining contracts as an expense when incurred if the amortization period of such costs is one year or less. These costs are included in purchased transportation costs.

 

The Company’s performance obligations represent the transaction price allocated to future reporting periods for freight services started but not completed at the reporting date. This includes the unbilled amounts. As of December 31, 2018, the Company has $21,596 of unbilled amounts recorded in accounts receivable and $17,497 of accrued freight costs recorded in accounts payable.

 

Income taxes

 

The Company accounts for income taxes in accordance with the laws of the relevant tax authorities. The charge for taxation is based on the results for the fiscal year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

 

Deferred taxes are accounted for using the asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized, or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

 

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. No penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.

 

46

 

 

Recent Accounting Pronouncements

 

See Note 2 to the consolidated financial statements included elsewhere in this prospectus for a discussion of recently issued accounting standards.

 

Quantitative and Qualitative Disclosures about Market Risk and Credit Risk

 

Interest Rate Risk

 

Our market risk is affected by changes in interest rates. Historically, we have used a combination of fixed rate and variable rate obligations to manage our interest rate exposure. Fixed rate obligations expose us to the risk that interest rates might fall. Variable rate obligations expose us to the risk that interest rates might rise. We currently do not have any interest rate swaps although we may enter into such swaps in the future.

 

We are exposed to variable interest rate risk principally from our existing term loan facility and our existing revolving credit facility. We are exposed to fixed interest rate risk principally from equipment notes and mortgages. At December 31, 2018, we had bank borrowings totaling $2,522,726 comprised of $2,086,394 of variable rate borrowings and $436,332 of fixed rate borrowings. At December 31, 2017, we had bank borrowings totaling $3,843,967 comprised of $3,843,967 of variable rate borrowings and $0 of fixed rate borrowings. Accordingly, holding other variables constant (including borrowing levels), the Group’s interest rate risk is mainly concentrated on the fluctuation of interest rates quoted by The People’s Bank of China arising from the Company’s RMB denominated bank borrowings. If interest rates had been one percentage point higher/lower and all other variables were held constant, our profit for the years ended 31 December 2017 and 2018 would decrease/increase by approximately $20,000 and $38,000, respectively. Management believes that the influence of such change has no material impact on the Company’s consolidated financial statements.

 

Credit Risk

 

Credit risk is controlled by the application of credit approvals, limits and monitoring procedures. We manage credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. We identify credit risk collectively based on industry, geography and customer type. In measuring the credit risk of our sales to our customers, we mainly reflect the “probability of default” by the customer on its contractual obligations and consider the current financial position of the customer and the current and likely future exposures to the customer.

 

Liquidity Risk

 

We are also exposed to liquidity risk which is the risk that we will be unable to provide sufficient capital resources and liquidity to meet our commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, we will turn to other financial institutions and related parties to obtain short-term funding to cover any liquidity shortage.

 

Foreign Exchange Risk

 

While our reporting currency is the U.S. dollar, almost all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. Most of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between the U.S. dollar and RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

 

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OUR INDUSTRY

 

We have engaged Frost & Sullivan to prepare a commissioned industry report that analyzes the PRC transportation industry. All information and data presented in this section have been derived from Frost & Sullivan’s industry report, unless otherwise noted. The following discussion includes projections for future growth, which may not occur at the rates that are projected or at all.

 

The trucking industry in China is one of the largest in the world. Trucking is a form of road transportation that is a part of the transportation system. It is vital in the connection of other modes of transportation such as rail, waterway, and civil aviation. The revenue of trucking service market in China has from RMB 4,771.3 billion (approximately $694.0 billion) in 2012 to RMB 5,161.8 billion (approximately $750.8 billion) in 2017, representing a CAGR of 1.6 percent. Looking forward, the revenue of trucking service market in China is expected to increase from RMB5.16 trillion (approximately $750.8 billion) in 2017 to RMB5.70 trillion (approximately $829.7 billion) in 2021, representing a CAGR of 2.5 percent.

 

 

Source: Frost & Sullivan July 2019

 

Freight turnover has seen an increase of CAGR of 2.5%, from 17,377 billion ton per kilometer in 2012 to 19,613 billion ton per kilometer in 2017, with the eastern region of China contributing to the highest percentage of freight turnover.

 

 

Source: Frost & Sullivan July 2019

 

Tremendous growth has been observed in the trucking industry and this can be attributed to the following:

 

1)The growth of E-commerce in China

 

2)Domestic economic growth in China

 

3)Government support through Official Policies and Planning Support

 

4)Infrastructure Improvement

 

As trucking services are the primary choice for the E-commerce market, the trucking industry has been able to share in the prosperity of the E-commerce boom. Upgrades in Information Technology across all sectors has reduced the operating costs for trucking businesses and improved their overall performance by allowing for better fleet, employee, and customer management, and as such, trucking businesses have been able to provide better service to their customers. There has been a shift in focus for China’s trucking service companies where they have moved from working on expanding to concentrating on developing and improving their existing systems instead.

 

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Among all the growth factors, domestic economic growth has had the strongest impact. China’s GDP with a CAGR1 of 8.7% from 2013 to 2018 has been favorable for transportation revenues. Domestic economic growth is expected to remain as supported by the 13th five-year plan that aims to create economic balance, inclusiveness, and sustainability in China. 

 

 

 

Source: Frost & Sullivan July 2019

 

Moreover, as disposable incomes continue to rise, we expect to see even higher earnings in the transportation industry. The reason for such higher earnings is that higher disposable income will bring with it higher purchasing power and higher standard of living. From 2012 to 2017, per capita annual disposable income increased from RMB 16,510 ($2,401) to RMB 25,974 ($3,778) with a CAGR of 9.5%. Such number is expected to reach RMB 36,264 ($5,274) by 2021.

 

 

Source: Frost & Sullivan July 2019 

 

 

1Compounded Annual Growth Rate

 

2Published by the National Bureau of Statistics of China

 

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The effects have become more noticeable as the population of China continues to climb steadily. From 2012 to 2017, the total population grew from 1,354 million to 1,390.1 million. Urbanization rates have also increased from 52.6% in 2012 to 58.5% in 2017, and is expected to reach 64.3% in 2021.

 

 

Source: Frost & Sullivan July 2019

 

China’s government has played a large role in supporting the growth of the transportation industry through its policies and regulations. In the previous 12th five-year plan for the road transport industry, China’s government focused its efforts on supporting the road transport industry through vehicle and equipment upgrades, providing support to new market entrants, and information technology enhancements. In the most recent 13th 5-Year Plan for the Transportation Industry, the PRC Ministry of Transport points out that it will focus on building a unified and open integrated transport market system, enhance the service efficiency of integrated transport corridors, improve the service quality of integrated transportation hubs, deepen the capacity building of transport security and promote the joint development of transport services and related industries.

 

Infrastructure improvements have been vital to China’s economic success. During China’s five-year plan from 2011 to 2015, China had constructed 4,580,000 kilometers of highways and 80,000 kilometers of expressways.

 

Current Environment

 

Trucking services are closely linked to the economic and road infrastructure and development in a country. As illustrated in the diagram below, China’s trucking services industry has reached the “Perfecting Stage” of its cycle.

 

 

Source: Frost & Sullivan July 2019

 

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From 2013 to 2018, China’s road mileage has increased from 4,356.2 thousand kilometers to 4,846.5 thousand kilometers, with a CAGR of 2.2%. This growth is expected to continue into 2023 with road mileage reaching 5,229.8 kilometers as China continues to raise its investment into highway construction.

 

 

Source: Frost & Sullivan July 2019

 

Key Success Factors for PRC Transportation Industry Participants

 

Expanding Transportation Fleet for Scale Effect In the trucking service market, large fleet’s utilization rate of vehicles is higher than the small-to-medium sized fleet. With the expansion of large companies on the demand side, clients need large transportation fleet to ensure the stability of the carriage of goods and the breadth of the transportation service area. Meanwhile, companies with large fleet team are more likely to obtain and maintain high quality clients. Therefore, expanding container fleet is beneficial for obtaining scale effect and reducing operation costs.

 

Applying Digital Tools for Improving Operation and Management Digital tools can be used to monitor the vehicle driving conditions and report solutions to administration in time. Therefore, unsafe driving behaviors such as speeding, drunk driving and fatigue driving are able to be effectively controlled by digital monitoring equipment. Moreover, monitoring and analyzing vehicles by means of digital tools for improving the operation and management of the transportation companies is quite common in some European and American countries.

 

Combining the Own Advantages and Introducing Differentiated Products The trucking service market is highly fragmented with fierce competition. Strong market participants know how to arrange their transport network and exploit differentiated products based on their own advantages. For example, considering the companies’ geographic position, fleet scale, customer relations and financial capacity, companies could choose to invest in some areas with less competition and further improve the overall competitiveness through the success in certain segmented market.

 

Using the Internet of Things to Improve Operational Efficiency The Internet of things (IOT) is the network of physical devices, vehicles and other items embedded with electronics, software, sensors, actuators, and network connectivity which enables these objects to connect and exchange data. The IOT allows objects to be sensed or controlled remotely across existing network infrastructure and resulting in improved efficiency, accuracy and economic benefit. Hence, trucking service companies with better application of IOT are more likely to be successful in competition.

 

Entry Barriers

 

Transportation Network The scale of transportation network plays an important role in the development and expansion of trucking service enterprises as well as one of the entry barriers for new entrant of the market. Trucking service provider with multiple transportation lines are more attractive to customers in various industries and regions, and have ability to cope with different customers’ demands on transportation routes.

 

Capital Investment Before doing the business, trucking service enterprises need to configure a lot of manpower and equipment, including vehicles, ability to adapt to variety of goods, and operating staff in each business line. Moreover, with the expansion of business scale and the improvement of customer’s requirements on the transportation service quality, trucking service enterprises need to apply and update information system and automatic systems to improve service quality and operational efficiency. Therefore, the trucking service market has a high demand for huge and continuous capital investment for new entrants.

 

Customer Relationship Experienced trucking service enterprises are able to achieve stable sources of business based on their long-term cooperative relationship with customers. In addition, in order to maintain the service quality, customers usually choose suppliers with a good reputation and track record and are unlikely to change their suppliers frequently. This poses a significant barrier to the new entrants.

 

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Guangdong

 

The transportation industry in Guangdong has grown alongside its economy and trade. In 2018, total road freight traffic volume reached 3.05 billion tons, with a CAGR of 3.1% from 2013 to 2018.

 

 

Source: Frost & Sullivan July 2019

 

Road transportation continues to be the most popular form of transportation among other tools such as rail, waterway, and civil aviation. However, in terms of freight turnover, waterway transportation took the highest percentage whilst road transportation accounted for 12.9%. Guangdong accounted for approximately 14.2% of freight turnover in 2017 and has the highest GDP figure among all provinces in China. With its increasing social demand for consumer goods and the development of E-Commerce, the total road freight traffic volume is expected to reach 3.52 billion tons in 2023.

 

Recently, the total revenue of the trucking service market reached RMB 92.8 billion ($13.5 billion) in 2017, with a CAGR of 9.2% from 2012 to 2017. Revenue is expected to continue growing to RMB 124.2 billion ($18.1 billion) in 2022.

 

 

Source: Frost & Sullivan July 2019

 

Several factors explain the success of the transportation industry in the Guangdong region. Firstly, its advantageous geographic location. Guangdong borders the Southeast coast, also known as the beginning of “The Silk Road.” As such, it has access to many ports and is ideal for domestic and foreign trade. Secondly, Guangdong has taken efforts to improve their infrastructure significantly, an example being the revisions that have taken place in Shenzhen where ports have been reconstructed to handle higher shipping tonnage and container handling. Lastly, Guangdong’s government has issued many supportive policies to standardize and modernize the logistics industry, one of which is known as Guangdong, such as Plan for Modern Logistics Development in Guangdong Province (2016-2020). Encouraged by those policies, the logistics industry in Guangdong is expected to be standardized and modernized, will facilitate the growth of the trucking service market in Guangdong.

 

According to the Frost & Sullivan July 2019 report, among all the modes of transport in China, such as railroad and waterway, road transportation covers the highest percentage, especially in the Guangdong region, where 72.1% of total freight volume was from road transportation in 2017.

 

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Xinjiang

 

Xinjiang houses a crucial segment of the Silk Road leading to Euroasia. According to the Frost & Sullivan July 2019 report, in the past 7 years, Xinjiang’s GDP has risen from approximately RMB 0.75 trillion ($0.11 trillion) in 2012 to RMB 0.96 trillion ($0.14 trillion) in 2016 and is expected to rise to RMB 1.42 trillion ($0.20 trillion) in 2021. Furthermore, Xinjiang’s road mileage had been increasing steadily from 165.9 thousand kilometers in 2012 to 182.1 thousand kilometers in 2016. Despite a slow start to trucking services as compared to the central and eastern regions of China, Xinjiang is expected to grow in this area under the “One Belt, One Road” initiative. The volume of road freight in Xinjiang has increased from 596.2 million tons in 2013 to 850.3 million tons in 2018, equating to a CAGR of 7.4%. Such increase is largely a result of the continuous road upgrading and economic development in the area. Estimates show that volume of road freight will eventually reach 1,154.1 million tons in 2023.

 

 

 

Source: Frost & Sullivan July 2019

 

Due to its ideal geographical location for trade, Xinjiang benefits from national policies that are focused on creating a more welcoming business environment via better taxation and financing systems. Policies such as those issued by the People’s government of Xinjiang autonomous region aim to finish construction of a transportation hub in Xinjiang by 2030. These observations point to Xinjiang being a promising market to develop in.

 

Competition

 

China’s trucking industry is highly competitive and fragmented with thousands of companies, none of which dominate the market. More specifically, in the Guangdong region, the top 5 trucking service providers, one of which is our company, collectively only own 0.71% of the total market in 2017. Service and price are the principal factors considered by customers in the trucking industry.

 

 

 

Source: Frost & Sullivan July 2019

 

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Entry barrier for new entrants remains high. One of these obstacles is having an established transportation network. Trucking service providers with multiple transportation lines will be able to cover more industries and geographic regions and will therefore have more exposure. In addition, they have the ability to meet customers’ demands on transportation routes. Another entry barrier is the heavy investments, initially and subsequently needed for expansion. These investments are required for manpower, equipment, and vehicles. Subsequently, funds are needed to upgrade information systems to keep up with the competition, especially to provide quality service. Lastly, customers prefer working with businesses with an existing track record and a strong reputation. These relationships formed over a long period of time can’t be replicated by new entrants. As such, it is predicted that due to the cost and complexity of entering and surviving in the transportation industry, the economic and competitive pressures will force smaller competitors to either exit, or, be acquired in the future. We believe being larger will work to our competitive advantage and put us in a position primed to acquire smaller companies.

 

Supply

 

Several external factors affect the transportation industry, specifically operational costs. The most notable ones are manpower, fuel, and rubber. China has been seeing a shortage of drivers. Drivers holding the A2 driving license are in most demand as they are able to drive heavy trucks and trailer-towing vehicles. Due to the shortage and high turnover of A2 drivers, their salaries have seen a continuous increase over the years. In 2017, the average monthly salary of an A2 driving licensed driver reached RMB 8,515. The average monthly salary of a driver in the trucking service industry is projected to reach RMB 10,780 ($1,580) in 2021.

 

 

 

Source: Frost & Sullivan July 2019

 

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Chinese diesel prices are closely linked to international crude oil and domestic supply and demand. Diesel prices took a dip in 2016, but have since stabilized, and are expected to grow to RMB 7,261.5 ($1,056.1) per ton in 2021. Decreasing diesel prices from 2012 to 2017 were due to a slowdown in China’s economic growth, raised interest rates, and higher oil production levels from the US and Iran. We believe the impact of fuel prices will be lessened by our investment into LNG-powered vehicles and our strategy to enter the intermodal rail business.

 

 

 

Source: Frost & Sullivan July 2019

 

Rubber is a main component of our vehicle tires, due to an oversupply of rubber, prices largely decreased from 2012 to 2015. After which prices bottomed in 2016 and has since rose due to a decline in rubber production. Rubber prices have recovered and are expected to stabilize to approximately RMB 13,543.1 ($1,969.8) per ton in 2021.

 

 

 

Source: Frost & Sullivan July 2019

 

Future

 

 

Source: Frost & Sullivan July 2019

 

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China’s macro economic growth and improvements with infrastructure, road transportation is anticipated to reach 50.9 billion tons in 2023, with CAGR of 5.1% from 2018 to 2023.

 

In the Guangdong region, the revenue of trucking service is expected to reach RMB 124.2 billion ($18.1 billion) in 2022. In 2018, road freight traffic in China reached 39.6 billion tons. Total road freight volume in Guangdong is expected to grow at a CAGR of 2.9% from 2018 to 2023.

 

As road freight traffic volumes grow in China, the growth in revenue of trucking services will subsequently follow. Revenue of trucking services in China is expected to increase from RMB 5,161.8 billion ($750.8 billion) 2017 to RMB 5,704.8 billion ($829.7 billion) in 2021, representing a CAGR of 2.5%.

 

 

 

Source: Frost & Sullivan July 2019

 

With the “One Belt, One Road” strategy well on its way, China’s transportation network is expected to become more efficient and more cohesive, with better linkages between different modes of transport. Logistic parks are being planned for construction for a cluster effect. In addition, the industry is expected to become more environmentally friendly with the elimination of high-pollution trucking vehicles. As information upgrades take place, trucking companies will shift their focus from extensive expansion to intensive development, and as such, operational costs are expected to go down. It is also expected that there will be a higher concentration of mid to large-sized companies, as smaller ones consolidate, become acquired, or exit the industry.

 

In the future, underpinned by the macroeconomy and the further improvement of infrastructure in China, the road transportation industry in China is expected to grow continuously. In 2023, the road freight traffic volume in China is anticipated to reach 50.9 billion tons with a CAGR of 5.1% from 2018 to 2023. With the growing economy and increasing social demand on consumer goods as well as the development of e-commerce, the transportation industry in Guangdong is expected to grow steadily. In 2023, total road freight traffic volume in Guangdong is expected to reach 3.52 billion tons, with a CAGR of 2.9% from 2018 to 2023. As for Xinjiang, with the sustainable growth of Xinjiang’s economy and the increasing demand of Xinjiang’s resource products, it is expected that the road freight traffic volume in Xinjiang will increase from 850.3 million tons in 2018 to 1,154.1 million tons in 2023, representing a CAGR of 6.3%.

 

In addition to the anticipated growth of the PRC transportation market, the industry has observed the following trends:

 

Development of Comprehensive Transportation Network The coordination of different modes within the PRC transportation network is relatively poor. In the future, through scientific planning and design, different modes of transportation can achieve a reasonable connection. For instance, roads, waterways, railways, aviation, and pipelines can be linked to each other smoothly. With the establishment of comprehensive transportation network, trucking can be well connected with other transportation modes, the efficiency of trucking is expected to be improved greatly in Guangdong and the PRC.

 

Environmentally-friendly Transportation Vehicles With guidance from the government’s policies and market regulation, the trucking service market in Guangdong will become increasingly environmental, trucking vehicles are expected to be upgraded and reconstructed. High-polluting trucking vehicles are anticipated to be eliminated gradually in the future. Besides, Guangdong’s government attaches great importance in renovating the transportation stations to promote the green development of trucking service market in Guangdong.

 

Increasing Industry Concentration At present, a large number of small-scaled trucking providers are faced with some problems such as similar operating structure, low management level, high competitive pressure and low profitability. With the standardization of the logistics industry and integration of transportation supply chain resources, the concentration of trucking service market is expected to be increased in the future, which is likely to bring more opportunities for large and standardized trucking provider.

 

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BUSINESS

 

OVERVIEW

 

We are one of the fastest growing 3A-grade trucking services provider in China with over 17 years of experience in the transportation industry. We formed our first operating subsidiary in 2002 to engage in the business of trucking services and subsequently formed four other wholly owned subsidiaries. Our current operations are conducted through our subsidiaries. We experienced a steady growth in our business in recent years and our revenue increased by 34.1 in 2018 compared to 2017. As a result of our continuous growth, we have become the second largest transportation company in the Guangdong region and we have been recognized and accredited by the China Federation of Logistics and Purchasing as a 3A-Grade trucking service provider.

 

We operate a truckload fleet with 132 tractors and 90 trailers, all of which are owned by us. Given the large scale of our fleet, we offer both network density and broad geographic coverage to meet our customers’ diverse transportation needs within the PRC. Our transportation services operate out of two terminals, one in the Guangdong region, and one in the Xinjiang region. Our business has created a successful business model that has allowed us to expand our customer base and market coverage whilst maintaining good relations with our existing customers.

 

Our customers primarily include sizeable logistics companies, freight forwarders and warehouse operators in the PRC. During the fiscal years 2018 and 2017, we had 40 and 36 customers, respectively, and our top five customers accounted for approximately 63.9% and 71.4% of our total revenue, respectively.

 

We generate revenue from our trucking service business. Our total revenue was $27,646,789 and $20,616,011, respectively, for fiscal years 2018 and 2017, representing an increase of approximately 34.1%. We recorded an income from operation of approximately $4,034,766 and $2,317,476 for fiscal years 2018 and 2017, respectively. For the fiscal years ended December 31, 2018 and 2017, our revenue generated from Guangdong and Xinjiang provinces accounted for 52.2% an 47.8%, respectively, of our total revenue. The following table sets forth the breakdown of our revenue generated from our trucking services from the regional terminals in Guangdong and Xinjiang during the past two fiscal years:

 

    FY2018     FY2017  
    Revenue     %     Revenue     %  
Terminal 1 GUANGDONG                                
Across different provinces and within Guangdong province   $ 14,426,772       52.2 %   $ 15,514,679       75.3 %
                                 
Terminal 2 XINJIANG                                
Within Xinjiang Province   $ 13,220,017       47.8 %   $ 5,101,332       24.7 %
Total   $ 27,646,789       100     $ 20,616,011       100  

 

Our mission has been and will continue to be a trusted solution provider in China offering punctual, cost-effective, capable and reliable trucking services to businesses in the PRC by maintaining a sizeable fleet of transportation vehicles of our own complemented by reliable subcontracting arrangements. Given that the transportation industry in many regions of China is still underrepresented, we aim to capture additional market share by leveraging our strengths we have developed during the past 17 years as described in “Competitive Strength” below and continue to grow our business by implementing a number of strategies as described in “Our Strategies” below.

 

COMPETITIVE STRENGTH

 

We believe that the following competitive strengths are the key factors that have contributed to our success to date:

 

Substantial Industry Experience

 

We are an established trucking services provider with over 17 years of operation in the transportation industry in the PRC. As of the date of this prospectus, we are able to mobilize a sizeable fleet of 132 tractors and 90 trailers, and coupled with our subcontractors, we are able to provide a fleet of 200 tractors and 200 trailers on a stable basis. We have approximately 200 drivers who can travel an average of approximately 52,700 kilometers per day, with a maximum capacity of approximately 65,000 kilometers per day. The size of our fleet has allowed us to cater to the needs of all our customers in a timely manner.

 

To establish a solid reputation in the transportation industry in the PRC, we focus on the quality of our trucking services to ensure that we are able to meet the quality standards expected from our customers. Our focus on quality covers various areas such as vehicle reliability, service reliability, flexible and customizable service offerings for our customers, as well as responsiveness to customer feedback, and continuous process improvement. Please refer to the paragraph headed “Quality Assurance” in this section for further details on our quality control measures.

 

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Long-Standing Relationship with Our Sizeable and Reputable Customers in the PRC

 

Our focus on providing quality services has enabled us to establish a strong customer base across different industries. We had 40 and 36 customers in 2018 and 2017, respectively.

 

We have been able to maintain stable business relationships with our major customers, including reputable logistics companies in the PRC. Among our major customers, Best Inc. Group (NYSE: BSTI) is one of the largest companies in the logistics and supply chain management industry in the PRC. We have had a business relationship with this customer for nine years. Our ability to provide trucking services to Best Inc. Group has provided us substantial and stable revenue and has also shown our ability to successfully serve a sizeable logistics company. Our other major customers include Bu Feng Lotus Group, a leading retail operator in the PRC whose parent company is listed on the Main Board of the Hong Kong Stock Exchange (HKEX: 0121). Another example is ANE Group, a leading less-than-truckload third-party logistics operator in the PRC who we have been working with since 2010. We have also worked with Tiandi Huayu Group, a leading logistics company, since 2008. Working with sizeable customers has strengthened our company’s reputation and credibility in the transportation industry.

 

We believe that it is vital for us to continue to develop and maintain long-standing relationships with our existing customers. To this end, we strive to understand the evolving needs of our existing and potential customers on an on-going basis and flexibly adjust our trucking services to match their trucking needs. With respect to our existing customers, our senior management team proactively communicate with them to collect their feedbacks on our trucking services periodically through telephone calls and meetings. Some of our customers have developed their own KPIs to review and evaluate our trucking services and to ascertain if our trucking services can meet their standards. This has provided us with clear minimum guidelines to meet and surpass.

 

Experienced and Motivated Management Team

 

We believe that the extensive industry expertise and experience of our management team is essential to our success. Our senior management team has an average of approximately 10 years of experience with our company and 14 years of experience in the transportation industry in the PRC. We believe that the experience and knowledge of our management team would enable us to keep abreast of our competitiveness and market landscape from time to time, recognize the needs of our customers more readily and manage our operations, specifically, labor and vehicle deployment, more efficiently.

 

Sizable Fleet Consisting of Over 130 Tractors and 90 Trailers

 

As of the date of this prospectus, we have a fleet of 132 tractors and 90 trailers that provide our trucking services. We have also established business relationships with a number of external transportation companies located in the PRC for the provision of trucking services to our customers, which enable us to mobilize 200 tractors and 200 trailers at one time. We strategically prioritize deploying our own transportation vehicles for dedicated truckload services. These are contracts with customers that have more routine schedule and routes.

 

Having a sizeable fleet has given us the advantage of being able to provide stable, reliable, and flexible trucking services to our customers. Furthermore, our fleet is capable to effectively minimize service interruption or delay caused by vehicle malfunctions of our transportation vehicles by deploying our other available vehicles or subcontractors as substitutes within a short period of time; and enlarge our customer base by having the capability to perform different types of delivery orders.

 

Well-Functioned Network

 

With two regional terminals, one in Guangdong and one in Xinjiang, we have set up an established network of transport nodes throughout the years. Such a network has opened many routes for us to offer our customers more comprehensive services. We have become capable of covering a larger geographic region and provide more types of transportation services. We believe that our wide range of services offered has provided us with a significant competitive advantage over other local service providers in the PRC that only offer limited types of road trucking services with fixed routes, itinerary, and schedules.

 

To maximize revenue and to best serve our customers, we outsource transportation jobs when our own fleets are occupied. We have engaged a pool of four external transportation companies as our subcontractors. We continuously conduct a comprehensive assessment of our subcontractors in order to better control the quality of their services.

 

Fleet and Maintenance System Designed To Optimize Life Cycle Investment

 

Our fleet represents our largest capital investment, a visible representation of our brand for customers and drivers and a large portion of our controllable costs. We select, maintain and dispose of our fleet based on rigorous analysis of our investments and operating cost.

 

We generated cost and revenue synergies with increased operational efficiencies and cost control through the adoption of best practices and capabilities.

 

We are committed to safe and secure operations. We conduct a mandatory driver qualification process, including preparing drivers on safety procedures. We have teams focused on personnel safety, regulatory compliance and adoption of a comprehensive insurance.

 

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OUR STRATEGIES

 

Our principal objectives are to sustain the continuous growth of our business and maintain our competitive advantages such that we can be positioned as a leading player in the transportation industry in the PRC. We plan to implement the following strategies to further develop our transportation business and reputation in the PRC.

 

Attract and retain top talent at all levels to ensure sustainable growth

 

Our people are our strongest assets, and we believe they are key to growing our customer base and driving our performance. Our goal is to attract, retain, and develop the best talent in the industry across all levels. We strive to foster a collaborative environment and seek individuals who are passionate about our business and fit within our culture. Our goal is to become a preferred carrier within the driver community. Our culture, which from our founding has focused on the well-being of our employees, has allowed us to attract and retain high quality drivers. We have also been focusing on maintaining sound safety records for our drivers by continuously training them so our drivers are always up to date with the newest routes and road upgrades, having live GPS tracking technology installed into our vehicles so we can monitor any irregularities in case of accidents, and adopting periodical vehicle checkup to ensure the vehicles are in top condition for driving. Prior to onboarding new drivers, they are given safety training and their driving skills are monitored. In addition, we offer our employees physical health checkups and schedule mandatory rest stops for each delivery trip they make. Our investment into the well-being of our drivers is not limited to just their physical health as we are strong believers in personal development. As such, our company provides training and other educational channels to equip our employees with additional skills outside of their job scope so they can remain competitive in the industry.

 

Expand and upgrade our fleet size in response to increase in market demands

 

We intend to expand our vehicle fleet size by acquiring additional tractors, trailers and trucks in order to cope with the anticipated increasing demand of our trucking services in the market. We believe that the enlarged vehicle fleet will permit us to cater for increased demand from our existing customers and from prospective customers. We are of the view that an expansion and upgrade in our fleet size is necessary to cater for increasing demands from existing customers and from prospective customers. According to the Frost & Sullivan July 2019 Report, with the growing economic and increasing social demand, the revenue of the road container transportation industry is expected to grow steadily and reach RMB 30.1 billion (approximately $4.38 billion) in 2021, at CAGR of 5.7%; during the period between 2016 and 2021.

 

Through our communications with our customers, which have indicated to us of higher volume of sales in the years ahead, we expect our trips to increase. We consider that the expansion in our fleet size will provide us with sufficient capacity to meet demand from our customers and enable us to further grow our market share.

 

The utilization rate of our tractors also increased from approximately 65.9% for year 2017 to approximately 83.1% for year 2018. We are of the view that an expansion of our vehicle fleet size will allow us to better cope with increasing demand of our trucking services from our customers.

 

In addition to expanding our fleet size, we also plan to update our fleet in the following aspects:

 

1)Introducing liquefied natural gas-powered transportation vehicles into our fleet to achieve better emission standards

 

As an effort to promote green growth with reduced carbon emission and to improve the air quality in the PRC, the PRC government has set out in its 13th five-year-plan on natural gas development to encourage the application of natural gas in the transportation section as the preferred power source over fossil fuel. According to the five-year-plan, the PRC government will continue to formulate and promulgate policies which promote the development and use of natural gas-powered vehicles, including but not limited to transportation vehicles in the logistics industry. It is expected that the number of natural gas-powered vehicles and the number of gas refueling station will reach approximately 10 million and 12,000 by 2020, respectively. Natural gas vehicles, such as LNG-powered transportation vehicles have undergone major development in the recent years. They are suitable for long distance traveling and with high engine thermal efficiency, and in certain extent more efficient than trucks running in fossil fuel. Furthermore, natural gas vehicles have also benefitted from government support, such as production subsidies, funding for research and development, and also waiver of highway tolls for natural gas vehicles. It is expected that these policies and technological advances would lead to natural gas becoming a more available source of fuel, and at the same time further reduction of cost of purchase and operation of natural gas-powered vehicles.

 

After considering the above, we believe that the introduction of LNG-powered transportation vehicles into our fleet will not only enable us to reduce carbon emission which aligns with our own policy and national policy, it would also allow us to be benefitted from the government policies and achieve cost savings simultaneously, which would enhance our corporate image as well as having a beneficial effect on our business operation.

 

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2)Upgrade and replace our existing transportation vehicles to minimize downtime and disruption of our trucking services

 

Of our current fleet of 132 tractors, 20 tractors are due for replacement as these tractors have an average remaining useful life of approximately six to eight years. On the other hand, of our current fleet of 90 trailers, 40 trailers are due for replacement as these trailers have an average remaining useful life of approximately four to eight years. It would be costly to maintain older transportation vehicles due to the insurance costs incurred, the higher maintenance and repairs costs and the higher chance of breaking down. The breakdown of older transportation vehicles will possibly result in downtime causing disruption to the provision of our trucking services.

 

Strengthen our information technology systems

 

We intend to acquire a customized integrated transportation tracking system that will allow us to not only track but also record the movement of the transportation vehicles via global positioning satellite data, allowing us to monitor job completion progress better. With this new system, customers will be able to track the movements of our transportation vehicles delivering their goods online through our system. Further, we also aim to have the system linked with our operation and finance systems so that when our staff places the order details to our system, the system can plan the route and delivery time and generate delivery list and invoice subsequently upon an encrypted authorized access of certain staff. Such customized system will increase the efficiency of our operations by reducing the manual input of the orders into our separate systems, minimize the risks of mistakes by integrating all systems instead of manually inputting data into each separate system and also reduce the accident rates by more promptly responding to any emergencies and accidents arisen during the course of delivery. We also intend to extend our integrated transportation tracking system to our subcontractors so that our customers can also monitor our subcontractors’ deliveries online through our system.

 

We also plan to acquire additional hardware such as workstations and servers to support the implementation of the customized integrated transportation tracking system. We believe that the strengthening of our information technology systems will allow us to improve our workflow efficiency, deliver a better service experience to our customers, and reduce our spending in insurance coverage due to lower accident rates.

 

Maintain stable relationships with our major customers and suppliers and expand our customer base

 

Maintaining good relationships with our existing customers and suppliers has always been important to us as it ensures a platform for cross-selling our services, improves our network and reputation within the transportation industry. Additionally, new customer acquisition has been successful via referrals by existing customers. Our major customers and suppliers have established relationships with us for up to nine years. This has been due to our dedication to customer satisfaction, constant improvement of business know-how, and our ability to maintain reliable, consistent, and professional partnerships. To maintain the relationships with our existing customers, we focus on giving them the best service possible, and growing our service offerings to match their evolving needs. We are constantly expanding our portfolio of services to ensure their needs are always met. Such efforts include upgrading our vehicle fleet, technology, and improving our operational flow to minimize downtime and increase efficiency. In addition, we assign dedicated relationship managers with our important customers so they can regularly check in, answer to their needs promptly and have a deeper understanding of their business operations.

 

To expand our customer base, we seek out new customers through marketing activities such as participating in trade fairs and functions. We plan to focus on attracting financially stable customers who ideally share traffic flows that complement our existing routes. By maintaining an even flow of freight traffic, we improve our utilization rate by minimizing movement of idle equipment. Additionally, we continuously form strategic alliances with local government agencies to attain strong regional market knowledge and influence.

 

Further expansion into Xinjiang and other new markets

 

The road transportation industry is highly competitive, and each geographic market is highly fragmented. We believe that it is advantageous to enter new emerging markets ahead of the competition. We believe this can be achieved as we already have the existing infrastructure, network, experience, and financial resources for us to move ahead of our competitors.

 

During the last two years, we have begun to execute our geographic expansion strategy by entering the Xinjiang region. Xinjiang is a market and geographic region that has experienced high demand but has been largely untapped by our competitors. Located in far-western China, Xinjiang houses a crucial segment of the Silk Road leading to Euroasia. According to the Frost & Sullivan July 2019 report, in the past 7 years, Xinjiang’s GDP has risen from approximately RMB 0.75 trillion ($0.11 trillion) in 2012 to RMB 0.96 trillion ($0.14 trillion) in 2016 and is expected to rise to RMB 1.38 trillion ($0.20 trillion) in 2021. These figures have attracted numerous Fortune 500 companies to set up bases there over the years. Since its value-added tax reform in May 2018, the business environment has become ideal for businesses to operate. Furthermore, Xinjiang’s road mileage has been increasing steadily from 165.9 thousand kilometers in 2012 to 182.1 thousand kilometers in 2016. Despite a slow start to trucking services as compared to the central and eastern regions of China, Xinjiang is expected to grow in this area under the One Belt, One Road initiative of the PRC government. The volume of road freight in Xinjiang has increased from 519 million tons in 2012 to 651.4 million tons in 2016, equating to a compound annual growth rate of 5.8%, largely a result of continuous road upgrading and economic development in the area. Estimates show that volume of road freight will eventually reach 987.9 million tons in 2021.

 

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Since entering Xinjiang, we have successfully expanded our business by partnering with local logistics companies. One of these partnerships will allow us to offer intermodal trucking services. Intermodal trucking services transports containers on railroad flat cars, this method reduces timings for road transport over short distances thus reducing freight costs. Going forward, we will devote more resources and increase our presence in Xinjiang and other emerging regions by strengthening sales and marketing and forming more strategic alliances with government bodies and other businesses.

 

Acquire and Invest in Strategic Entities

 

In addition to growing our company organically, we plan to pursue selected acquisitions and form strategic alliances to take advantage of opportunities that complement our existing operations. These acquisitions and alliances will increase our service offerings, enhance our technology capabilities, increase our vehicle and personnel fleet size, access valuable information about new and existing markets, and increase our market coverage. All these benefits will help us remain competitive in this industry.

 

The transportation industry is currently highly fragmented. According to the Frost and Sullivan  July 2019 report, the top 5 trucking service providers in the Guangdong region account for only 0.71% of the total trucking service market in Guangdong. This highlights the opportunities available for mergers and acquisitions. As mentioned, growing the size of our operations will allow us to gain significant competitive advantage. Given the size of our business and experience, we expect any future acquisitions to be integrated into our business more easily. As of the date of this prospectus, we are not a party to any agreement or understanding with respect any such acquisitions or alliances.

 

OUR TRUCKING SERVICES AND OPERATION

 

We transport and deliver a diverse range of products from our customers’ designated pick up locations to their designated destinations. Our trucking services are mainly Dedicated Truckload Service, in which we provide exclusive use of vehicles and equipment and offer customized solutions under long term contracts, generally with higher operating margins and a lower rate of driver turnover. With these contracts, a dedicated relationship manager is usually assigned to the account, and the customer is given priority to a predetermined set of drivers and vehicles. Under these contracts, our vehicle utilization rate is maximized with cargo carrying return trips. The regularity of these contracts has also allowed for better fleet management and cash flow planning.

 

Our trucking and delivery services cover various parts of the PRC as illustrated below:

 

 

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OUR SERVICE ENGAGEMENT

 

We obtain our service engagements with our customers by way of (i) quotation; or (ii) a tendering process. The following table sets forth the revenue generated by quotations and by tenders during the past two fiscal years.

 

   FY2018   FY2017 
   Revenue   %   Revenue   % 
By quotations  $22,885,990    82.8   $11,931,562    57.9 
By tenders  $4,760,799    17.2   $8,684,449    42.1 
Total  $27,646,789    100   $20,616,011    100 

 

Quotations: We obtained a majority of our new contracts through quotations. In a quotations process, we give a fixed price quote for a delivery job that a potential or existing customer is looking to fulfill. The quotation will include payment terms and the contract’s length. If the price and terms for the delivery service is accepted, our team carries out the job.

 

Tenders: In a tender process, our customers invite us and our competitors to submit tender offers for a specific transportation job. These tender offers state the price and terms of the transportation service provided. The customer then evaluates all the tender documents submitted and chooses a company for that particular job.

 

Due to our reputation and track record in the transportation industry in the PRC, we have experienced success in both tendering and quotation.

 

OUR OPERATION FLOW

 

The below diagram shows the general workflow for our trucking services:

 

 

Depending on the needs of our customers, if the services are provided by our own transportation vehicles, our vehicles will arrive at the designated places in accordance with the regular delivery schedules pre-agreed by us and our customers. We will generally follow the process including (a) job planning and dispatch; (b) collection of goods at the designated pick-up points and location; (c) delivery to customer’s designated destinations; and (d) returned trailers to pick-up points or other designated destinations or locations.

 

Process (a): Job planning and dispatch

 

We assign particular drivers and transportation vehicles as our dedicated fleet for that customer to ensure that our drivers would perform the trucking services effectively and efficiently. In particular, we assign the same group of drivers to be responsible for a designated route with fixed schedules so they can arrive at the designated pick-up points according to the fixed schedule. Furthermore, when customers require transportation vehicles of a particular size, we will ascertain if our transportation vehicles meet such requirements. If not, we will arrange one of our subcontractors to provide the trucking services and also provide the delivery information to such subcontractor in advance.

 

When selecting the subcontractors for a specific assignment from our existing pool of subcontractors, we understand the transportation vehicles provided by different subcontractors are suitable for different customers. We arrange for the same subcontractor to provide trucking services to a particular customer to ensure that subcontractor’s transportation vehicles are in compliance with the customers’ requirements and standards.

 

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Process (b): Collection of goods at designated pick-up points or location

 

Our transportation vehicles will arrive at the designated pick-up points or location pursuant to the pre-agreed delivery schedules, where our customers will be responsible to handle the packing and loading by its workers onto the container. In accordance with the pre-agreed delivery schedule, our driver will deliver the goods to our customer’s designated destinations, which are mainly logistics centers or warehouses.

 

A number of our vehicles with the “drop and hook” system will be able to pick up the loaded trailers immediately with minimal downtime so our drivers can make their return trip.

 

Process (c): Delivery to customer’s designated destinations

 

Our transportation vehicles will depart at the designated time. Depending on the distance traveled, it generally takes approximately two hours to two days to arrive at the destination. Similarly, our driver assigned to the project will communicate with our operation team the departure and arrival time. When our goods are delivered to our customer’s logistics centers or warehouses or other designated destinations, our customer will then proceed to unload all goods from the transportation vehicles. The delivery is considered to be completed when the goods are safely delivered to the designated destinations and when the delivery notes are signed by both parties. The unloading work is generally handled by the customer directly. To further facilitate our fleet planning, ensure timely delivery and expedite our billing process, our drivers will communicate with our operation team regarding departure time and arrival time which will be inputted into the monthly billing invoices for our and customer’s records. The monthly billing invoice will include the details of routes, the estimated and actual departure and arrival time and the name of the responsible drivers.

 

To effectuate the delivery of goods to our customers’ designated destinations in the most speedy and efficient manner, we keep track on the whereabouts of our transportation vehicles by GPS and also assign our transportation vehicles and drivers to the same designated route(s) so that each driver can become familiar with the route(s) assign to him/her and he/she will be responsible for the delivery of goods within certain route(s) only.

 

Process (d): Reloading and returned trailers to pick-up points or other designated destinations or locations

 

After our customer has successfully unloaded all the goods from the transportation vehicles, our vehicles will be reloaded with goods for the return trip. The unloading and reloading time will range from three hours to one day which may include the rest time of the drivers. Our transportation vehicles will then go back to the original pick-up points or to other designated locations. Throughout this whole process, we keep track of the movement of our transportation vehicles to ensure a smooth delivery to all delivery points. Our drivers will report to our operation team on their departure and arrival time. With respect to our trucking services which are performed by our subcontractors, we will rely on the same process as described above.

 

We issue monthly invoices to our customers on a monthly basis based on the amount of services we have performed. As such, the monthly fee varies depending on the actual quantity of services carried out. We are required to keep records on a daily basis and present a monthly report on our trucking services to our customers pursuant to the relevant master agreements.

 

If our customers raise any queries on the invoices issued by us regarding the number of deliveries made by our drivers, our customers will negotiate with us for settlement of the disputed amount. Our invoices will be subsequently issued to reflect the amount after such negotiation.

 

During the past two fiscal years, all revenue from our trucking services was derived from the PRC and denominated in Renminbi. Generally, our customers pay our invoices by bank transfers.

 

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OUR FLEET

 

Our trucking services are mainly carried out by our self-owned vehicle fleet, which comprises of 132 tractors and 90 trailers. In line with the PRC government’s 13th five-year-plan on natural gas development, we have also invested in 61 of Liquefied Natural Gas (LNG) transportation vehicles which have enabled us to reduce carbon emissions which falls in line with both our goals and the nation’s policy. In addition, we install GPS systems in our vehicles that enables the operations team to track the location of the vehicle in real-time. This not only improves safety for our drivers but also provides for better record keeping and updating for our customers. In addition, we have invested in vehicles with the “drop and hook” Technology. The service allows our customers to preload the trailers with their goods so our drivers do not need to wait for the goods to be loaded upon arrival at their designated location. This decreases the driver’s downtime and increases vehicle turnaround speed. In addition, our vehicles are all insured against losses and damages for both our drivers and third parties, and regular maintenance programs have been put in place to ensure our vehicles are always in their best condition for our drivers.

 

Tractor

 

 

 

 

 

 

 

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Trailer

 

 

 

 

 

 

 

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CUSTOMERS

 

Our customers are mainly sizeable third-party logistics companies, freight forwarders, warehouse operators, and other supply chain service providers in the PRC.

 

Our relationship with major customers

 

Our five largest customers in aggregate accounted for approximately 71.4% and 63.9%, respectively, of our revenue for fiscal years 2017 and 2018. All of our five largest customers are unaffiliated third parties. Among our major customers, Best Inc. Group (NYSE: BSTI) is one of the largest companies operating the business of logistics and supply chain management in the PRC that has maintained the business relationship with us for nine years. Our other major customers include Bu Feng Lotus Group, a leading retail operator in the PRC whose parent company is listed on the Main Board of the Hong Kong Stock Exchange (HKEX: 0121), ANE Group, a leading less-than-truckload third-party logistics operator in the PRC who we have been working with since 2010 and Tiandi Huayu Group, a leading logistics company called who we have been working with since 2008. Working with sizeable customers has strengthened our company’s reputation and credibility in the transportation industry.

 

Despite our concentration on a limited number of major customers, we believe that a number of factors will help mitigate any material adverse impact of such concentration on our business operations and financial condition. Our services model and facilities are not specifically designed to cater solely for one particular customer. In contrast, they are flexible and adaptable in serving different customers’ needs. In the event that our current business relationship with our five largest customers or any one of them deteriorates, our services can be readily transferred to serve other potential new customers and satisfy their needs. The preparation works required for serving new customers usually include fine-tuning quality procedures to suit individual customer requirements, coordinating with new customers, re-designing the delivery route, allocating warehousing space and updating computer systems to facilitate the process, which in our view will not incur any significant cost or require long transition periods. In fact, our major customers continued to evolve in the past three years.

 

We believe that our continuous effort in providing high quality trucking services to our customers is the key to enlarge our market share in the transportation industry, strengthen our customer base as well as enhance our marketing effectiveness. Our operation team generally handles inquiries, complaints and feedbacks from our customers and will maintain a regular contact with our external transportation subcontractors with the goal of resolving issues such as late deliveries or complaints from customers in a timely fashion.

 

We recognize that having a high level of customer services is crucial in maintaining our reputation in the market and cultivating customer loyalty. Thus, we follow up with the orders and keep track of the level of satisfaction of our customers. We also gather customers’ feedbacks and review the flow of our trucking services in order to increase our customers’ satisfaction and improve our service quality. For further information regarding our quality control, please refer to “Quality Assurance.”

 

Customer acquisition

 

Our new customers are mainly referrals from our existing customers which in our view, is a reflection of our existing customers’ satisfaction with our services. Our primary strategy for new customer acquisition is to further develop our existing terminals in Guangdong and Xinjiang by expanding the range of transportation solutions offered from these terminals. We also plan to expand into new geographic regions through the opening of new terminals in new markets.

 

In addition, we seek out new customers through marketing activities such as participating in trade fairs and functions. We focus on attracting financially stable customers who ideally share traffic flows that complement our existing routes. By maintaining an even flow of freight traffic, we improve our utilization rate by minimizing movement of empty idle equipment. Additionally, we continuously form strategic alliances with local government agencies to attain stronger regional market knowledge and influence.

 

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General terms of the master agreements with customers

We entered into master agreements with our customers. Among these agreements, certain contracts are short term ones with terms ranging from less than one year to two years while other contracts are long term agreements with indefinite terms. As part of our business strategy and commercial decision, we focus on having sizable customers with larger scales of operations as opposed to smaller customers as it provides substantial benefits including (i) higher and more steady income flows; (ii) better utilization rates of our vehicles as we are able to plan and schedule routes in advance; (iii) economies of scale as costs decrease; and (iv) management of our customer relationships more personally as we can focus on a smaller pool of customers.

Although the terms of master agreements may vary, the material terms that are generally contained in our agreements with major customers are set out below:

Scope of service

Each master agreement specifies the basic type of services to be provided, which is the provision of trucking services.

 

Condition of the Transportation Vehicles

The transportation vehicles provided are generally required to be in good condition. The types and required condition of the transportation vehicles to be provided may also be specified in certain master agreements.

 

Service fees

In relation to our trucking services, we generally charge our customers at various fixed rates based on the scope of services provided. Our charging rate is mainly based on (i) the estimated amount of services required; or (ii) the distance between the designated pick-up points and delivery destinations; or (iii) the type of transportation vehicles required, particularly their gross vehicle weight.

 

Certain customer contracts also allow us to adjust our service fees in view of fluctuations in fuel prices from time to time.

  

Liability

Generally, the master agreements set out the respective rights and obligations of our Group and our customers, and the Key Performance Indicators (KPIs) of respective customers.

 

We will be liable for any damages to the goods, equipment and premises of the customers caused by us during the provision of our trucking services. We are also liable for any loss or damages to the goods that are in our custody and for any non-compliance of relevant laws and regulations in the PRC.

 

Renewal

Certain master agreements have an automatic renewal clause while other agreements can be renewed upon written notice rendered within a specific period.

 

Termination

Generally, there are early termination clauses in the master agreements, which entitle our customers to immediately terminate the master agreements, including:

     
  our persistent failure to reach the agreed KPIs over a certain period, usually within two to four months; and/or
  any breach of the master agreements by us.
     
Insurance

Customers who entered into master agreements with us generally require us to maintain adequate insurance coverage with respect to, among other things, employee compensation, third party liability and loss or damage to goods in the course of our provision of trucking services.

 

We shall be responsible for any loss or damages to the goods entrusted to us or any loss or damage or personal injury happened in the course of our provision of relevant trucking services.

   
Subcontracting

In most master agreements, subcontracting of our trucking services to any third party is not expressly prohibited.

 

KPIs

Most of our customers assess the quality of our trucking services using their own KPIs. If our service quality falls below a predetermined benchmark of the KPIs set by each individual customer, our customers are entitled to request us to improve the quality of our trucking services. Failure to fulfil the KPIs may result in the termination of a master agreement.

 

With respect to our trucking services, the KPIs are measured mainly by reference to our ability to complete the deliveries, timeliness of delivery and condition of the goods which have been delivered by us.

  

Minimum commitments

In some master agreements, we undertake to provide a minimum number of transportation vehicles or trips of delivery services per month. Any failure to meet the minimum commitments will result in the monetary compensation from us or a breach of contract on our part.

 

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Credit and provision policy

 

We generally grant our customers a credit period ranging from 10 to 120 days from the invoice date. Although this is memorialized in our services agreement with each individual customer, our customers may settle our invoices beyond the credit period. The length of credit period granted varies on a case-by-case basis depending on the amount of services, the length of the relationship with these customers and the payment method. We update individual customers’ payment records from time to time and, if necessary, will revise the credit terms of individual customers accordingly.

 

MATERIAL CONTRACTS

 

Below is a summary of all material contracts to which we are a party dated within the preceding two years from the date hereof other than agreements entered into in our ordinary course of business:

 

Agreements with Postal Savings Bank of China

 

On October 27, 2018, MingZhu entered into a small business credit agreement with Postal Savings Bank of China (“Postal Bank”), pursuant to which, Postal Bank agreed to extend credit of up to RMB 9 million (approximately $1.3 million) to MingZhu for a credit period from October 29, 2018 to October 28, 2023 and a drawdown period from October 29, 2018 to October 28, 2021. The types of credit available under the credit agreement, include, but not limited to, working capital loans, fix assets loans, trade financing and letters of guarantees. Pursuant to the credit agreement, MingZhu will enter into a supplemental agreement with Postal Bank prior to the applicable drawdown that will set forth the terms of each borrowing thereunder, including term of loan, principal, interest rate and borrowing expenses. Postal Bank has the sole discretion to approve each drawdown. The credit is secured by a pledge of two real properties owned by Jinlong Yang, our principal shareholder, founder and Chairman of our board of directors, and Jinhua Yang, sister of Jinlong Yang and guaranteed by Jinlong Yang and Jinhua Yang, pursuant to the terms of separate pledge and guarantee agreements with Postal Bank.

 

Under the credit agreement, MingZhu has the obligation to notify Postal Bank of any circumstances that may affect the financial conditions or performance of obligations under the credit agreement and related agreements by MingZhu or its guarantors, which includes, but not limited to, merger, reorganization, planned public offering, transfer of material assets or equity and involvement of a material lawsuit.

 

Upon the occurrence of an event of default, Postal Bank has the right to adjust the credit available under the credit agreement, suspend the use of the remaining credit by MingZhu and declare all outstanding balance to become immediately due and payable. Events of default under the credit agreement include, among other matters, material adverse changes in MingZhu’s business or financial conditions, MingZhu’s involvement of a major lawsuit, MingZhu’s material breach of loan agreements with other creditors, MingZhu’s failure to perform its contractual obligations with Postal Bank, provision of false materials or omission of important business or financial facts of MingZhu, change of control, illegal conduct or involvement of litigation by MingZhu’s controlling shareholder or executive officers, and a breach of guarantee contract by MingZhu’s guarantor.

 

On October 27, 2018, MingZhu entered into a small business working capital loan agreement and a promissory note with Postal Bank for the drawdown of RMB 9 million (approximately $1.3 million) for a term of up to 24 months at an interest rate of 5.7% with a maturity date of November 12, 2020 for the purpose of freight payments. Pursuant to the loan agreement, MingZhu agreed, among other aspects, not to provide guarantees, prioritize repayment of other loans or pay dividends to its shareholders within the term of the loan without Postal Bank’s consent. In the event of default, MingZhu is required to pay 1% of total contract price of the loan agreement as liquidated damage.

 

Agreements with Zhujiang Rural Bank

 

On April 29, 2019, MingZhu entered into a comprehensive credit agreement with Zhujiang Rural Bank (“Zhujiang Bank”), pursuant to which, Zhujiang Bank agreed to extend credit of up to RMB 3 million (approximately $0.4 million) to MingZhu for a credit period from May 6, 2019 to May 5, 2020. The types of credit available under the credit agreement, include, but not limited to, general loans, bill acceptance, letters of credit, delivery guarantee, package loans, import and export bills, import payments and letter of guarantees. Pursuant to the credit agreement, MingZhu will enter into a supplemental loan agreement and a promissory note with Zhujiang Bank prior to each applicable drawdown that will set forth the terms of each borrowing thereunder. MingZhu is required to submit a written drawdown application to Zhujiang Bank five (5) business days in advance.

 

Under the credit agreement, MingZhu has the obligation to notify Zhujiang Bank thirty (30) days in advance and pay back any outstanding balance under the loan or provide additional guarantee upon the occurrence of certain events involving MingZhu, which includes, but not limited to, merger, debt or equity reorganization, dissolution and bankruptcy. MingZhu also has the obligation to notify Zhujiang Bank of any related party transaction that concerns 10% or more of MingZhu’s net assets.

 

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Zhujiang Bank has the right to suspend the use of the remaining credit by MingZhu and declare all outstanding balance to become immediately due and payable, upon the occurrence of certain events, including, among other matters, provision of false materials or omissions of important business or financial facts of MingZhu, change of use of loan proceeds for purposes that are inconsistent with the credit agreement or for illegal purposes, reorganization or restructuring without consent from Zhujiang Bank, any breach of credit agreement by MingZhu and any breach of guarantee agreement by MingZhu’s guarantor.

 

On April 29 and May 6, 2019, MingZhu entered into an enterprise loan agreement and a promissory note, respectively, with Zhujiang Bank for the drawdown of RMB 3 million (approximately $0.4 million) for a term of 12 months at a monthly interest rate of 5.4375‰ with a maturity date of May 5, 2020 for its working capital purposes. Pursuant to the loan agreement, the loan is secured by pledge from Jinlong Yang of RMB 1 million (approximately US$0.1 million) cash deposited in Zhujiang Bank, our principal shareholder, founder and chairman of our board of directors, and by guarantee from Jinlong Yang and Guizhi Yang, Jinlong Yang’s sister, both of who entered into separate pledge and guarantee agreements with Zhujiang Bank.

 

Agreements with Industrial Bank

 

On April 16, 2019, MingZhu entered into a working capital loan agreement with Industrial Bank (“Industrial Bank”) for a term loan in the amount of RMB2 million (approximately $0.3 million) for one (1) year at an interest rate of 1.345% over LPR (one year) with a maturity date of April 16, 2020 for working capital purposes. The loan shall be repaid with a monthly installment of RMB 100,000 (approximately $14,544) on the 21th day of each month starting from the third month and the remaining balance is due upon maturity. MingZhu may submit an extension request for the repayment of loan sixty (60) business days in advance and the term of the loan may be extended upon Industrial Bank’s approval. Prepayment is allowed without penalty, provided that MingZhu notifies Industrial Bank fifteen (15) business days in advance. The loan is guaranteed by Jinlong Yang and MingZhu Logistics pursuant to the terms and conditions of separate guarantee agreements.

 

Pursuant to the loan agreement, MingZhu shall notify Industrial Bank thirty (30) business days in advance of any material corporate actions, including, but not limited to, mergers, equity transfers, reorganization or any event that results in a change of 30% or more of MingZhu’s equity ownership. In addition, MingZhu is required to notify Industrial Bank seven (7) business days in advance of any material operational or financial crisis of MingZhu’s controlling shareholder or its related entities or a change of 30% or more of MingZhu Logistics’ equity. MingZhu also has the obligation to notify Industrial Bank of any related party transaction that concerns 10% or more of MingZhu’s net assets. In addition, if proceeds from the loan is used for purposes other than the purposes set forth under the loan agreement or MingZhu fails to make timely payments under the loan agreement without negotiating an extension with Industrial Bank, the bank has the right to increase the interest rate by 50%.

 

Industrial Bank has the right to declare all outstanding balance to become immediately due and payable, upon the occurrence of certain events, including, among other, mergers, reorganization, equity transfers that may affect the repayment of the loan or MingZhu’s failure to make timely repayments.

 

SALES AND MARKETING

 

We proactively source new customers by participating in industry events such as the China (Shenzhen) International Logistics and Transportation Fair. We believe that this allows the public to know more about our business, services and strengths through our direct communication, and also gives us an opportunity to understand our competitors. We continue to develop strategic partnerships with provincial and local government agencies to drive sales by leveraging their strengths and resources in targeted customer base, strong regional market influence and extensive government and industry resources.

 

We also rely on our established relationships with our existing customers, customer referrals and our reputation in the transportation industry to expand our business. Aside from obtaining new customers through referrals, we also seek out new customers by marketing our trucking services to them and by attending and participating in trade fairs. Our management team will regularly attend functions to build a stronger network with existing customers and so that potential customers may be referred to us. Our sales and marketing team regularly contact customers to maintain good business relationship and expand our network by soliciting new customers through referrals from existing customers.

 

SUBCONTRACTING ARRANGEMENT

 

During the past two fiscal years, we engaged a pool of four external transportation companies as our subcontractors. We continuously conduct a comprehensive assessment of our subcontractors in order to better control the quality of their services. We place orders to these subcontractors on a back-to-back basis, which means that, once we have entered into any service agreements with our customers, we will allocate the work to the subcontractors and pass along the relevant information to them. Such back-to-back arrangements can ensure the quality and quantity of the trucking services rendered by our subcontractors are in compliance with our customers’ requirements. Our subcontractors will then arrange for an appropriate number of vehicles for performing the agreed trucking services. Apart from the above, we also implement a series of measures to ensure that the delivery services provided by our subcontractors can fulfil the requirements of our customers. See “Business – Quality Assurance.”

 

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We usually enter into master agreements with these subcontractors setting out the principal terms of the subcontracting arrangement. The terms and conditions in the master agreement entered into between us and our customers will be incorporated into the subcontracting master agreements.

 

The master agreements we provide our subcontractors are on a back-to-back basis, therefore we expect the terms and obligations we have with our clients to be shared and equally kept. The routes that have been scheduled will be written in the master agreements for clarity and allows for better planning by our subcontractors. In addition, we expect our subcontractors to comply with the basic standards that we have already set, such as possessing valid transportation licenses required to operate certain transportation vehicles. All these steps ensure that our subcontractors can provide our customers an equally good quality service experience.

 

In general, the subcontractors charge us based on the type of transportation vehicles required by our customers, the routes that will be taken, and the value and amount of the goods to be delivered.

 

The key terms of the master agreements for subcontractors are set out below:

 

Terms of duration

The agreements generally contain standard fixed durations ranging from one to two years.

 

Obligations

The agreements will include the agreed provision of the respective transportation and delivery services.

 

Price

The price is determined by us and each individual subcontractor and thus, it varies.

 

Credit term

Generally ranging from five to 60 days from the invoice date

 

Termination

The agreement can be terminated by either party by written notice in advance for certain periods set forth under the applicable agreement.

 

Insurance

In certain master agreements, we require our subcontractors to maintain insurance covering goods, transportation vehicles, traffic accident, medical and other insurances for their employees.

  

As of the date of this prospectus, we have not experienced any material dispute with our subcontractors. We do not foresee any material difficulties in sourcing substitute subcontractors if we terminate our relationship with any of the existing subcontractors.

  

SUPPLIERS

 

The supplies we need for our trucking service business mainly include tires, vehicles, fuel oil and gas. Our major suppliers for the past two years include China Petrochemical Marketing Co. Ltd. Huizhou Branch, Shenzhen Xinguoji Automobile Co., Ltd., Guangdong Hechengzhida Automobile Management Services Co., Ltd. and China National Petroleum Corporation Dongguan Branch.

 

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QUALITY ASSURANCE

 

MingZhu has obtained an ISO9001:2015 Certification. The ISO9001 Certification is an internationally recognized standard for quality management. MingZhu has also obtained a three stars certification with respect to our trucking services of non-dangerous chemical goods from Shenzhen Institute of Standards and Technology.

 

We believe that our ability to maintain the quality of our trucking services is critical to our growth. Our quality assurance measures include the following:

 

Pre-trip commencement vehicle inspection

 

Before our drivers commence their first trip each day, they are required to perform a routine check on their vehicle. We provide our drivers with a vehicle checklist which they are required to complete before using the vehicle. The purpose of the checklist is to ensure that all vehicles in our fleet are in a roadworthy condition such that our drivers can operate in a safe working environment.

 

Regular vehicle inspection

 

To ensure vehicular safety, we have implemented a regular vehicle maintenance regime for our tractors and trailers. All tractors and trailers in our fleet are subject to regular inspection as regulated by a third-party vehicle inspection company with the view that vehicles that are not roadworthy can be a potential hazard to other road users and that regular inspections help to minimize vehicular breakdowns and road accidents. We have spent approximately RMB 6.4 million (approximately $974,750) and RMB 5.5 million (approximately $812,353) on vehicle repair and maintenance, respectively, during fiscal years 2017 and 2018.

 

GPS installations

 

We have implemented a GPS system on our vehicles that enables us to accurately track the delivery departure and arrival time and detect any malpractice in the course of the delivery.

 

Monthly safety meetings

 

Our management and other staff hold regular monthly safety meetings with drivers to discuss topics relating to safe driving. During the meetings, all vehicle inspections, equipment conditions, driver feedback, weather conditions, and road conditions reports are presented and discussed among the operators and upper management.

 

Safety courses for drivers

 

As our drivers are responsible for operating vehicles, we require our drivers to attend relevant safety courses. We conduct in-house safety courses, including refresher courses to ensure that the drivers are up to date with the latest safety regulations. Our customers and suppliers may also conduct their own safety courses for our drivers who operate within their premises.

 

Trainings provided by vehicle manufacturers

 

Apart from attending our internal safety courses, our employees also attend training courses provided by the manufacturers of vehicles. Such training help drivers better understand the use of specific vehicles.

 

Customer feedbacks and process improvement

 

Our sales and marketing team and customer service team work closely with our customers throughout each job engagement. We constantly seek feedbacks from our customers on possible areas of improvement and often make changes to our internal processes in order to deliver higher quality services to our customers.

 

We believe that the foregoing measures have contributed to our quality service and low accident rate. During 2018 and 2017, we encountered 40 and 33 accidents, representing approximate 0.1% and 0.1%, respectively, of total trips in such year.

 

We have received a number of recognitions for our quality assurance programs. MingZhu received a certificate of First Grade Transportation Enterprise with respect to the Safety Production Standardization Level issued by the Ministry of Transport of the PRC in 2016. MingZhu was also awarded with 3 Stars Award with respect to the General Road Transportation (Excluding Dangerous Chemicals) based on the Third Party Logistics Services Evaluation Norms by Shenzhen Institute of Standards and Technology in 2016. We believe that these certificates are testaments to the effectiveness of our quality control measures and our dedications to the safety of our employees and the properties of our customers.

 

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SEASONALITY

 

In general, demand for our trucking services is higher in June, November and December of each year due to higher demands for delivery services of consumer services products driven by the sales campaign organized by various online shopping platforms during these periods. With respect to services we provide to logistics companies, the routes and schedules generally remain unchanged throughout the applicable contract period. In periods of peak demand, we will extend our hours of trucking services per day with our existing drivers and subcontractors if necessary. As seasonal fluctuations in demand do not have material effect on our total revenue, we believe seasonality has minimal effect to our business’ overall performance.

 

CUSTOMER SERVICES

 

We believe that our continuous effort in providing high-quality trucking services to our customers is key to increasing our market share in the transportation industry. We have in place an operations team that manages general inquiries, complaints, and feedback from our customers. They are also responsible for working with our subcontractors to resolve and complaints or late delivery issues. The most efficient and main channel for communication used between our operations team and our customers and subcontractors is telephone call or messaging. This has allowed us to resolve issues quickly.

 

We recognize that having a high level of customer satisfaction is crucial in helping us maintain a strong reputation in the market and cultivate customer loyalty. As such, we monitor our delivery and customer feedback closely with the goal of increasing service quality and customer satisfaction. For further information regarding our quality control, please refer to “Quality assurance” in this section.

 

ENVIRONMENTAL PROTECTION

 

Pursuant to the PRC Prevention of Environmental Noise Pollution Law, noise arising from the industrial and manufacturing activities should not exceed the prescribed emission level. We believe that we are in compliance with such requirement.

 

Due to the nature of our business, our operational activities do not directly generate industrial pollutants. As such, we have not directly incurred any cost of compliance with applicable PRC environmental protection rules and regulations as of the date of this prospectus and do not expect that we will directly incur significant costs for such compliance in the future.

 

Pursuant to the Limits and Measurement Methods of Fuel Consumption of Operating Vehicles and Limits and Measurement Methods of Fuel Consumption of Operating Truck, fuel consumption of our vehicles is subject to certain limitations prescribed thereunder. We have an internal policy in place to ensure all vehicles that we purchase are in compliance with these measures. We also engaged in fuel consumption testing project with truck manufacturer to test the fuel consumption of certain vehicles. In addition, we have invested largely in LNG vehicles to become more environmentally friendly and to adhere to international standards.

 

MingZhu, has obtained ISO14001:2015 Certification, which is an internationally recognized standard for identifying, managing, monitoring and controlling their environmental issues. As of the date of this prospectus, we had not come across any material non-compliance issues in respect of any applicable laws and regulations on environmental protection. We have not been subject to any administrative sanctions or penalties that have a material and adverse effect on our financial condition or business operation.

 

COMPETITION

 

According to the Frost & Sullivan July 2019 report, the transportation industry in the PRC is highly fragmented with fierce competition from thousands of small players. Entry barriers have dampened the rise of new entrants to a certain extent. Entry barriers include having an established transportation network means having multiple transport lines that can support the transport needs of customers, heavy initial and subsequent capital investments for acquiring manpower, equipment, and for business expansion, and long term customer relationships.

 

Our primary competitors are Shenzhen Chiwan Oriental Logistics Co., Ltd., Tianjin Shiqiao International Logistics Co., Ltd. and Guangzhou Zhihong Logistics Co., Ltd., each a private company operating in the PRC. Certain competitors have a cost structure that is characterized by lower capital expenditures or labor costs than ours, and other competitors may have greater scale, flexibility and more resources than we do. Our ability to compete with these players primarily depend on quality of our services (including reliability, responsiveness, expertise and convenience) and price.

 

INTELLECTUAL PROPERTY

 

We currently own 21 PRC patents related to technologies used in connection with trucking services, including 20 utility patents and one invention patent. We also own one PRC trademark and 16 PRC copyright registrations.

 

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EMPLOYEES

 

We had 203 full-time employees as of June 30, 2019. The following table sets forth the number of our full-time employees categorized by function as of June 30, 2019:

 

Function  Number of
Employees
Management  6
Administrative and Accounting  14
Safety and Technique  3
Transportation and Delivery Operations  5
Drivers  175
    
Total  203

 

Trucking services requires a large labor workforce. As of the date of this prospectus, we have employed a total of 175 drivers, accounting for roughly 86% of our total workforce. Our turnover rates are low compared to industry standards. Our core management team have remained onboard for over 10 years. Our team has shown a proven track record of growth and cost control.

 

We invest significant resources in the recruitment of employees in support of our rapidly growing business operations. We have established comprehensive training programs, including orientation programs and on-the-job-training, to enhance performance and service quality. We also regularly conduct employee trainings in the areas of risk management, managerial skills, company culture and communications.

 

We have established procedures to provide our staff with a safe and healthy working environment by setting out a series of work safety rules in the staff manual in case of emergencies including fire, electric shock and typhoons. We also provide our employees with occupational safety education and trainings to enhance their awareness of safety issues. In addition, we provide regular medical checks to our employees to ensure the health conditions of our drivers are fit for driving. In addition, we have invested in the use of LNG powered vehicles which are safer to drive, since the ignition point of LNG is higher than that of other fuels, LNG’s can volatilize and diffuse more quickly in case of any leakages. We are subject to the requirements under the local laws, national standards and industrial standards in the PRC to maintain safe working conditions and to protect the occupational health of employees. See “Regulations – Regulations Relating to Work Safety.”

 

As required by regulations in China, we participate in various government statutory social security plans, including a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan, a maternity insurance plan and a housing provident fund. We are required under PRC law to contribute to social security plans at specified percentages of the salaries, bonuses and certain allowances of our employees up to a maximum amount specified by the local government from time to time. For risk in relation to our contribution for employee social security plans, see “Risk Factors—Risks Related to Doing Business in China—Any failure to comply with relevant regulations relating to social insurance and housing provident fund may subject us to penalty and materially and adversely affect our business, financial condition, and results of operations.”

 

FACILITIES

 

We believe our facilities are sufficient for our current needs and that, should it be needed, suitable additional space will be available on commercially reasonable terms to accommodate any such expansion of our operations.

 

Location of property  Approximate
gross floor area
  Term of Lease  Facility Usage
   (sq. meters)      
Yantian District #5, Yantian Port, Yantian District, Shenzhen City, Guangdong Province, PRC  7,006  One year (November 11, 2018 to October 31, 2019)  Parking Lot
South Side of Yantian District #5, Yantian Port, Yantian District, Shenzhen City, Guangdong Province, PRC  900  One year (November 11, 2018 to October 31, 2019)  Parking Lot
South Side of Warehouse Number 5, Yantian District #5, Yantian Port, Yantian District, Shenzhen City, Guangdong Province, PRC  3,488  One year (November 11, 2018 to October 31, 2019)  Parking Lot
27th floor, Yantian Modern Industry Service Center, no.3018, Shayan Road, Yantian District, Shenzhen City, Guangdong Province, PRC  2,095.61  Five years (November 21, 2018 to November 20, 2023)  Office
Room 2307 and Room 2308, Unit A, Building 1, Haitongju, Zhongqing 1st road, Yantian District, Shenzhen City, Guangdong Province, PRC  99.04 

Three years (September 1, 2018 to August 31, 2021)

  Staff Accommodation

 

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LICENCES AND PERMITS

 

We have obtained all necessary licenses, approvals and permits that are material to our business, all of which are valid and current save as of the date of this prospectus. The details of the permits we have obtained by are as follows:

 

Approval  Recipient  Issuing body  Date of grant  Date of expiry
Road Freight Forwarding Operation Permit  MingZhu  Shenzhen Transportation Committee  November 7, 2018  November 6, 2022
Road Freight Forwarding Operation Permit  MingZhu Pengcheng  Shenzhen Transportation Committee  September 30, 2018  September 29, 2022

 

INSURANCE AND SOCIAL SECURITY MATTERS

 

We maintain automobile insurance policies against loss or damage to our vehicles, drivers and third parties arising in the course of the delivery and policies against damages and losses of cargo during the provision of trucking services. We currently do not have any business liability or disruption insurance. We also participate in various government statutory social security plans, including a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan, a maternity insurance plan and a housing provident fund.

 

Our insurance coverage complies with the requirements of our existing customers. We believe that such coverage is in line with industry norms in the PRC and is adequate and sufficient for our current operations.

 

RECOGNITIONS AND AWARDS

 

We have been accredited by the China Federation of Logistics & Purchasing as a 3A-grade trucking services company for the period of August 2014 to August 2020. A 3A-grade trucking services provider must meet the criteria of being able to cover routes across provinces and have (1 ) 60 million to 300 million freight revenue per year, (2) been operating for at least two years to three years, (3) have 40 million to 200 million total assets (no higher than 70% of debt ratio), 4) own 150 to 400 transport vehicles (or total weight of 750 to 2000 tones), (5) have 15 to 30 operating outlets, and (6) operate an effective institution with operating systems for management, finance, statistics, and have technical departments in place.

 

In addition to our 3A-grade accreditation, we have also been recognized as a Green Card Enterprise according to the qualitative assessments of Four Rates system set by the Shenzhen Bureau of Transportation in 2007 and 2008. Furthermore, we have received the following awards and recognitions that are notable within the industry:

 

Year of Award  Recipient  Award  Awarding organization or authority
2019  MingZhu  2018 Shenzhen National Road Traffic Safety Advanced Unit  Shenzhen Public Security Bureau Traffic Police Station
2017  MingZhu  Guangdong Province Road General Freight Transport Enterprise Integrity Evaluation AAA (Excellent)  Guangdong Provincial Department of Transportation
2017  MingZhu  Yantian District Advanced Enterprises with Harmonious Labor Relations  Shenzhen Yantian District Labor Relations Coordination Committee
2016  MingZhu  Advanced Unit of Transportation Safety Production  Shenzhen Port and Freight Transport Administration
2014  MingZhu  Outstanding Contribution Award  Yantian Chamber of Logistics
2010  MingZhu  Excellent Enterprise  Shenzhen Municipal Transportation Bureau and Shenzhen Container Trailer Transport Association
2009  MingZhu  Shenzhen Advanced Unit for Transportation Safety Production  Shenzhen Municipal Transportation Bureau

 

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LEGAL PROCEEDINGS

 

Mingzhu and Mingzhu Pengcheng have been involved in a contract dispute relating to damages of certain vehicles with Shengxin Wang. According to the Civil Judgement issued by the Shenzhen Intermediate People’s Court on August 23, 2018, Shengxin Wang was ordered to pay $3,098 (RMB 21,303) and overdue interests thereof and pay RMB 1(approximately $0.15) as the consideration for certain vehicles to MingZhu Pengcheng and after that, MingZhu Pengcheng and MingZhu should respectively assist to transfer ownership of one tractor and one trailer to Shengxin Wang. According to the Civil Decision of Guangdong Provincial Higher People’s Court issued on December 20, 2018, Shengxin Wang’s application for retrial of the above Civil Judgement was rejected. On March 22, 2019, the Shenzhen Yantian People’s Court issued an Enforcement Order to MingZhu and MingZhu Pengcheng, which ordered MingZhu and MingZhu Pengcheng to perform relevant obligations as required by the foresaid judgement or otherwise the judgement would be enforced by the court. On May 29, 2019, a cash balance equal to Shengxin Wang’s payment obligation was frozen in his bank account and meanwhile, Shengxin Wang took over the tractor from MingZhu Pengcheng. According to the inquiry notes taken by the Yantian People’s Court Enforcement Bureau on May 30, 2019, MingZhu has made preparation for handover of the trailer to Shengxin Wang.  As of the date of this prospectus, Shengxin Wang has taken over the trailer, the balance half of the vehicles, from MingZhu, and the case has been concluded. 

 

However, regarding the same dispute, Shengxin Wang filed another lawsuit against MingZhu Pengcheng. According to the Civil Indictment filed by Shengxin Wang (the plaintiff) on February 26, 2019, Shengxin Wang requested that MingZhu Pengcheng (the defendant) be ordered to compensate for the stoppage loss of $694,098 (RMB 4,772,269). The nature of the case was a property damage compensation dispute. According to the Notice of Appeal issued by the Shenzhen Yantian People’s Court on March 21, 2019, the court has accepted this case. According to the Civil Judgment issued by the Yantian District People's Court in Shenzhen City, Guangdong Province on August 30, 2019, the court ruled that MingZhu Pengcheng should pay damages in the amount of $29,627 (RMB 203,700) yuan to Shengxin Wang and rejected Shengxin Wang's other claims. MingZhu Pengcheng submitted an Appeal Petition to the Shenzhen Intermediate People's Court on September 20, 2019, requesting a change in the judgment of first instance and changing the judgment so that MingZhu Pengcheng will not have to pay the damages to Shengxin Wang. MingZhu Pengcheng has paid the case acceptance fee. As the date of this prospectus, the case is pending for appeal court hearing.

 

On August 22, 2019, Sujin Wei (the plaintiff) submitted a Civil Complaint to the Yangjiang Yangdong District People’s Court against China Pacific Property Insurance Co., Ltd. Shenzhen Branch, MingZhu and two other defendants. The complaint requested that China Pacific Property Insurance Co., Ltd. Shenzhen Branch shall make the death and disability compensation to the plaintiff in the amount of $15,999 (RMB 110,000) and compensate the plaintiff of $44,699 (RMB 307,328.02) within the third party liability insurance limit and also requested that defendants Shengming Zheng and MingZhu shall be jointly and severally liable for the foregoing claims, and the litigation fee in this case shall be borne by the four defendants. According to the response notice issued by the Yangjiang Yangdong District People’s Court on the September 18, 2019, this case has been filed on September 4, 2019. As of the date of the prospectus, the case has not yet been heard by the court.

 

Other than the proceeding disclosed above, we are currently not a party to any legal or administrative proceedings that will likely have material impact on our business operations, financial condition or results of operations. We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, may result in additional costs and diversion of our resources, including our management’s time and attention.

 

CORPORATE HISTORY AND STRUCTURE

 

Mingzhu Logistics Holdings Limited (“MingZhu Cayman”) was incorporated on January 2, 2018 as an exempted company structured as a holding company incorporated under the laws of Cayman Islands. Immediately prior to this offering, we were owned by three entities and one individual: Alpha Global (BVI) Limited, a company formed under the laws of the British Virgin Islands and wholly owned by Jinlong Yang, our Chairman and Chief Executive Officer, Excelsior Investment Limited (Hong Kong), a company formed under the laws of Hong Kong and wholly owned by Guiling Guo, a director and the Vice Chair of the board of director of our PRC operating subsidiary and Exquisite Elite Limited (BVI), a company formed under the laws of the British Virgin Islands and 86% of the equity interest owned by Zhuo Wang, our director. We began our operations in China in 2002 and currently conduct our business through our subsidiaries.

 

We currently have five wholly-owned subsidiaries, including MingZhu Investment Limited, a company formed under the laws of the British Virgin Islands (“MingZhu BVI”), YGMZ (Hong Kong) Limited (“MingZhu HK”), a limited liability company formed under the laws of Hong Kong and three operating subsidiaries, each a limited liability company formed under the laws of the PRC. In 2002, we formed Shenzhen Yangang Mingzhu Freight Industry Co., Ltd. (“MingZhu”) to primarily engage in the business of transportation services. We also established Shenzhen Pengcheng Shengshi Logistics Co., Ltd. (“MingZhu Pengcheng”) in 2010 under the laws of the PRC to engage in the business of trucking services. Through MingZhu BVI and MingZhu HK, we own 100% of the equity interest of Shenzhen Yangang Mingzhu Supply Chain Management Co., Ltd. (“MingZhu Management”), which is engaged in the business of transportation and supply chain management services. 

 

A reorganization of our legal structure was completed in April 2018. On April 13, 2018, the former shareholders transferred their 100% ownership interest in MingZhu to MingZhu HK, which is 100% owned by MingZhu Cayman through MingZhu BVI. In consideration of such transfer, the Company issued 1,000 ordinary shares to the former shareholders of MingZhu. After the reorganization, MingZhu Cayman owns 100% equity interests of MingZhu BVI, MingZhu HK and MingZhu. The controlling shareholder of MingZhu Cayman is same as that of MingZhu prior to the reorganization.

 

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The following diagram illustrates our corporate structure, including our subsidiaries as of the date of this prospectus:  

 

 

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REGULATIONS

 

This section sets forth a summary of the most significant laws, rules and regulations that affect our business activities in the PRC and our shareholders’ rights to receive dividends and other distributions from us.

 

Regulations Relating to Foreign Investment

 

The foreign investment is regulated by the Catalogue for the Guidance of Foreign Investment Industries (the “Catalogue”), which was promulgated and implemented in June 1995, respectively amended in 1997, 2002, 2004, 2007, 2011, 2015 and 2017. The version of the Catalogue currently in effect was jointly promulgated by National Development and Reform Commission (“NDRC”) and the MOFCOM in June 2017, effective from July 2017. Pursuant to the Catalogue, the foreign investment industries are divided into three categories in terms of foreign investment, which are “encouraged,” “restricted” and “prohibited”. All industries not listed under one of these categories are deemed to be “permitted.” Moreover, the Special Administrative Measures for Foreign Investment Access (Negative List) (2018) (the “2018 Negative List”) which was promulgated by the NDRC and the MOFCOM in June 2018 and came into effect in July 2018 revised the negative list specified in the Catalog of Industries for Guiding Foreign Investment (last amended in 2017), significantly broadened the market access and reduced the scope of industries in which foreign investments are restricted or prohibited. The business engaged by our PRC subsidiaries is not listed in the 2018 Negative List.

 

In addition, on 30 June 2019, NDRC and MOFCOM had jointly issued the Special Administrative Measures for Access of Foreign Investment (Negative List) (2019 Edition) (the “2019 Negative List”), the Special Administrative Measures for Access of Foreign Investment in Pilot Free Trade Zones (Negative List) (2019 Edition) and the Catalog of Industries for Encouraged Foreign Investment (2019 Edition), all of which will enter into force on July 30, 2019 and the 2018 Negative List, the Catalogue shall be repealed simultaneously. The 2019 edition of negative lists for access of foreign investment, stylistically and structurally same as the 2018 edition, is further made shorter than before, with a number of new opening-up measures launched. The business engaged by our PRC subsidiaries is not listed in the 2019 Negative List.

 

Pursuant to the Provisional Measures on Administration of Filing for Establishment and Modifications of Foreign Investment Enterprises (the “Provisional Measures”), promulgated by MOFCOM on October 8, 2016 and became effective on the same day, was last amended in June 2018, establishment and modifications of foreign-invested enterprises which are not subject to the approval under the special entry management measures shall be filed with the delegated commercial authorities. Within the record-filing scope stipulated in Provisional Measures, foreign-invested enterprises shall fill in online and submit an application for record-filing of the change of foreign-invested enterprises and the relevant documents and handle the record-filing procedures since October 8, 2016. After the completion of record-filing, foreign-invested enterprises may obtain relevant record-filing receipts.

 

Company Law of the PRC (the “Company Law”), which was enacted by the Standing Committee National People’s Congress (the “SCNPC”) in December 1993 and last amended in October 2018, provides for the establishment, corporate structure and corporate management of companies, which also applies to foreign-invested enterprises in the PRC. The PRC Wholly Foreign-owned Enterprise Law promulgated by the SCNPC in April 1986, amended in October 2000 and September 2016 and the Implementation Regulations on the Wholly Foreign-Owned Enterprise Law promulgated and became effective in December 1990, amended in April 2001 and February 2014, regulate the establishment, change, approval procedures of wholly foreign-owned enterprises.

 

On March 15, 2019, the National People’s Congress (the “NPC”) approved the PRC Foreign Investment Law (the “FIL”), which will take into effect on January 1, 2020 and replace three existing laws on foreign investments in the PRC, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture Law and the foresaid PRC Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations. The FIL embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic invested enterprises in the PRC. The FIL establishes the basic framework for the access to and the promotion, protection and administration of foreign investments in view of investment protection and fair competition.

 

Regulations Relating to Transportation Industry

 

Pursuant to the Regulations of the PRC on Road Transport promulgated by the State Council in April 2004 and last amended in March 2019, the permit on the operation of the road transportation business, issued by the local transportation authority, except otherwise provided by these regulations, is required for any individual or entity to conduct its road transportation business. The transportation vehicles shall take operation licenses which are prohibited from being assigned or leased. Under the Regulations of the PRC on Road Transport, a company engaged in the operation of road transportation without road transportation operation licenses shall be ordered to stop its operation by the administrations of road transportation at the county level or above; any illegal gains shall be confiscated and the company shall be fined not less than 2 times but not more than 10 times of the amount of the illegal gains; where no illegal gains or the illegal gains is less than RMB 20,000, the company shall be fined RMB 30,000 to RMB 100,000. The Regulations of the PRC on Road Transport also clarifies that foreign investors may, in accordance with relevant PRC laws, administrative regulations and relevant state regulations, invest in road transport operations and road transport related businesses in the territory of the People’s Republic of China through Chinese-foreign joint ventures, Sino-foreign cooperation, and sole proprietorship.

 

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In 2001, the Provisions on the Administrative of the Foreign-Invested Road Freight Forwarding Industry was promulgated and amended several times, which required that foreign-invested enterprises, engaging in road goods transport, road goods portage and loading and unloading, road goods storage and other supplementary services and vehicle maintenance relating to road transport and foreign invested enterprises for the provision of road freight forwarding services, including the transportation of goods by road, handling, warehousing and other related services, must obtain the Road Freight Forwarding Operation Permit from the provincial competent departments of communications and these enterprises must satisfy specific qualifications and conditions. However, the Provisions on the Administrative of the Foreign-Invested Road Freight Forwarding Industry has been revoked from November 2018 and therefore the business engaged by the Group is no longer regulated by the above provisions.

 

Pursuant to the Notice of Guangdong Provincial Department of Transportation on Delegating the Examination and Approval Authority of the Business Road Transportation of Hong Kong and Macao Enterprises (Yue Jiao Yun [2012] No.1118), the examination and approval authority of the Hong Kong and Macao commercial road transportation enterprises was delegated to the municipal department of transportation above local level, and the Hong Kong and Macao enterprises shall obtain the Road Freight Forwarding Operation Permit from the municipal department of transportation above local level.

 

Regulations Relating to Work Safety

 

Pursuant to the Work Safety Law of the PRC promulgated by the Standing Committee of National People’s Congress in June 2002 and was recently amended in August 2014, road transportation entities shall establish a work safety management office or be staffed with full-time work safety management personnel. In March 2015, the Ministry of Transportation issued the Notice on Implementing the Work Safe Law, pursuant to which, the relevant enterprise shall establish and improve the safety production responsibility system covering all aspects of production and operation, clear standards and responsibility to the post, solidly promote the standardization of production safety and strengthen safety production management.

 

Regulations Relating to Dividend Distributions

 

The principal regulations governing the distribution of dividends paid by wholly foreign-owned enterprises include the PRC Wholly Foreign-Owned Enterprise Law issued 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, wholly foreign-owned enterprises 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 wholly foreign-owned enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until its cumulative total reserve funds reach 50% of its registered capital. These reserve funds, however, may not be distributed as cash dividends. Pursuant the FIL, foreign investors may, according to the present Law, freely remit into or out of China, in RMB or any other foreign currency, their capital contributions, profits, capital gains, income from asset disposal, intellectual property royalties, lawfully acquired compensation, indemnity or liquidation income and so on within the territory of China.

 

Regulations Relating to Foreign Exchange

 

Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Round-trip Investment Through Special Purpose Vehicles, or Circular 37, issued by SAFE in and effective July 2014, 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 and conduct round trip investment in China. Under Circular 37, a 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. Circular 37 further provides that option or share-based incentive tool holders of a non-listed SPV can exercise the options or share incentive tools to become a shareholder of such non-listed SPV, subject to registration with SAFE or its local branch.

 

PRC residents or entities which have contributed legitimate domestic or offshore interests or assets to SPVs but have yet to obtain SAFE registration before the implementation of the Circular 37 shall register their ownership interests or control in such SPVs with SAFE or its local branch. An amendment to the registration is required if there is a material change in the registered SPV, such as any change of basic information (including change of such PRC resident’s name and operation term), increases or decreases in investment amounts, transfers or exchanges of shares, or mergers or divisions. Failure to comply with the registration procedures set forth in Circular 37, or making misrepresentation or failure to disclose controllers of foreign-invested enterprise that is established through round-trip investment, may result in restrictions on the foreign exchange activities of the relevant foreign-invested enterprises, including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations. In February 2015, SAFE further promulgated the Circular on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Circular 13, effective June 2015. This SAFE Circular 13 has amended SAFE Circular 37 by requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. 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. All of our shareholders who, to our knowledge, are subject to the above SAFE regulations have completed the necessary registrations with the local SAFE branch or qualified banks as required by SAFE Circular 37.

  

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In March 2015, SAFE promulgated the Circular on Reforming the Administration Approach of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or Circular 19, effective June 2015. According to Circular 19, the foreign exchange capital of foreign-invested enterprises shall be subject to the Discretionary Foreign Exchange Settlement. The Discretionary Foreign Exchange Settlement refers to the foreign exchange capital in the capital account of a foreign-invested enterprise for which the rights and interests of monetary contribution has been confirmed by the local foreign exchange bureau (or the book-entry registration of monetary contribution by the banks) can be settled at the banks based on the actual operational needs of the foreign-invested enterprise. The proportion of Discretionary Foreign Exchange Settlement of the foreign exchange capital of a foreign-invested enterprise is temporarily determined to be 100%. The Renminbi converted from the foreign exchange capital will be kept in a designated account and if a foreign-invested enterprise needs to make further payment from such account, it still needs to provide supporting documents and go through the review process with the banks.

 

SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or Circular 16, in June 2016, which became effective simultaneously. Pursuant to Circular 16, enterprises registered in the PRC may also convert their foreign debts from foreign currency to Renminbi on a discretionary basis. Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on a discretionary basis which applies to all enterprises registered in the PRC. Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, while such converted Renminbi shall not be provided as loans to its non-affiliated entities. As Circular 16 is newly issued, and SAFE has not provided detailed guidelines with respect to its interpretation or implementations, it is uncertain how these rules will be interpreted and implemented.

 

On January 26, 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Authenticity and Compliance Verification, or Circular 3, which took effect on the same day. Circular 3 sets out various measures to tighten authenticity and compliance verification of cross-border transactions and cross-border capital flow, which include without limitation requiring banks to verify board resolutions, tax filing form, and audited financial statements before wiring foreign invested enterprises’ foreign exchange distribution above US$50,000, and strengthening genuineness and compliance verification of foreign direct investments.

 

In November 2012, SAFE issued the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, as amended in May 2015 and October 2018, respectively, foreign exchange control methods for direct investments has been improved through cancelling and adjusting certain administrative licensing items for foreign exchange control for direct investments. Approval formalities for account opening and deposit for foreign currency accounts under direct investments and approval formalities for reinvestment of domestic legitimate income of foreign investors have been cancelled. Administration for conversion of foreign currency capital into Renminbi by foreign investment enterprises has also been improved.

 

Our PRC subsidiaries’ distributions to their offshore parents are required to comply with the requirements as described above.

  

Regulations Relating to Funds Transfer to PRC Subsidiaries

 

We are permitted under PRC laws and regulations as an offshore holding company to provide funding to our PRC subsidiaries through loans or capital contributions, subject to satisfaction of applicable government registration, approval and filing requirements.

 

In the event of subsequent changes in the capital of the foreign-invested enterprise such as increase in capital, such foreign-invested enterprise shall complete change filing formalities with competent administrations for market regulation and commerce in accordance with relevant regulations, and registration change formalities shall also be completed with the competent administration of foreign exchange according to the Provisions on Foreign Exchange Control on Direct Investments in China by Foreign Investors. In addition, pursuant to Circular 16, foreign invested enterprise shall use its capital pursuant to the principle of authenticity and self-use within its business scope. The capital of a foreign invested enterprise shall not be used for the following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly used for investment in securities or investments other than banks' principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises).

 

Pursuant to the Provisional Measures on Administration of Foreign Debt (the “Foreign Debt Measures”) issued by the State Development Planning Commission (revised), Ministry of Finance and SAFE in January 2003 and became effective on March 1, 2003, any loans provided by us to our PRC subsidiaries in foreign currencies shall be classified as foreign debt under the Foreign Debt Measures. According to the Foreign Debt Measures, the sum of cumulative accrued amounts of medium-term to long-term foreign loans and balance amounts of short-term foreign loans taken by a foreign investment enterprise shall be limited to the difference between the total project investment amount approved by the government and the amount of registered capital. Foreign investment enterprises may take foreign loans freely within the scope of difference. 

 

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On January 12, 2017, the PBOC issued the Notice of People's Bank of China on Matters Concerning Macro-prudential Management on All-round Cross-border Financing (the “No.9 Notice”), which improved the policy framework of the cross-border financing. The No.9 Notice clarifies the new calculation methods of the upper limit of the risk-weighted balance for all types of cross-border financing, in particular, the upper limit for risk-weighted balance for cross-border financing equals to the capital or the net assets multiplied by the leverage rate of cross-border financing and the macro-prudential adjustment parameters. In the case of our PRC subsidiaries, the capital or the net assets is calculated at the net assets of each subsidiary, the leverage rate for cross-border financing for an enterprise is 2, and the macro-prudential adjustment parameter is 1 (the “All-Round Mode”). Currently, the implementation of the foregoing methodologies in cross-border financing have not been formally determined by the PBOC and the SAFE. In the practice, according to the SAFE Shenzhen Branch, which is the competent local SAFE authority for our PRC subsidiaries, foreign-invested enterprises may choose between the Investment Difference Mode and the All-round Mode, but the enterprise cannot change the methodology once it makes the choice and the enterprise may be required to submit different materials for these two methodologies. Based on the current registered capital and total project investment amount, if we would provide funding to our PRC subsidiaries through loans and use the Investment Difference Mode, our PRC subsidiaries will be required to increase its registered capital and total project investment amount. Alternatively, if we choose to use the All-Round Mode, the amount of loans we can make to our PRC subsidiaries as calculated according to the No.9 Notice will not be more than twice of the net assets of such entities.

 

Moreover, as the debtors of cross-border financing, our PRC subsidiaries are also required to comply with certain registration formalities for execution of foreign debt contracts with the foreign exchange bureau at the locality within fifteen working days after signing the contracts according to the Notice of State Administration of Foreign Exchange on Promulgation of the Administrative Measures on Registration of Foreign Debt which was promulgated by the SAFE in April 2013 and revised in May 2015.

 

Regulations Relating to Taxation in the PRC

 

Enterprise Income Tax

 

In accordance with the PRC Enterprise Income Tax Law (the “EIT Law”, promulgated in March 2007 and last amended in December 2018) and the Regulations on the Implementation of Enterprise Income Tax Law of the PRC (the “EIT Regulations”, promulgated in December 2007 and last amended in April 2019), enterprises are classified as either “resident enterprises” or “non-resident enterprises.” Enterprises that are set up in the PRC under the PRC laws, or that are set up in accordance with the law of the foreign country (region) whose actual administration institution is in PRC, shall be considered as “resident enterprises.” Enterprises established under the law of the foreign country (region) with “de facto management bodies” outside the PRC, but have set up institutions or establishments in PRC or, without institutions or establishments set up in the PRC, have income originating from PRC, shall be considered as “non-resident enterprises.” The Circular Related to Relevant Issues on the Identification of a Chinese holding Company Incorporated Overseas as a Residential Enterprise under the Criterion of De Facto Management Bodies Recognizing issued by the State Administration of Taxation (the Circular 82) promulgated by the State Administration of Taxation on April 22, 2009 and revised in December 2017 provides that a foreign enterprise controlled by a PRC company or a PRC company group will be classified as a “resident enterprise” with its “de facto management bodies” located within China if the following requirements are satisfied: (i) the senior management and core management departments in charge of its daily operations function mainly in China; (ii) its financial and human resources decisions are subject to determination or approval by persons or bodies in China; (iii) its major assets, accounting books, company seals and minutes and files of its board and shareholders’ meetings are located or kept in China; and (iv) half or more than half of the enterprise’s directors or senior management with voting rights reside in China. Although the circular only applies to offshore enterprises controlled by PRC enterprises and not those controlled by PRC individuals or foreigners, the determining criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.

 

A resident enterprise shall pay EIT on its income originating from both inside and outside PRC at an EIT rate of 25%. A non-resident enterprise that has establishments or places of business in the PRC shall pay EIT on its income originating from PRC obtained by such establishments or places of business, and on its income which deriving outside PRC but has an actual connection with such establishments or places of business, at the EIT rate of 25%. A non-resident enterprise that does not have an establishment or place of business in the PRC, or it has an establishment or place of business in the PRC but the income has no actual connection with such establishment or place of business, shall pay EIT on its passive income derived from the PRC at a reduced EIT rate of 10%.

 

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According to the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises (the “SAT Bulletin 7”) which was promulgated by SAT on February 3, 2015 and came into effect on the same day, revised in October 2017 and December 2017, where a non-resident enterprise indirectly transfers equities and other assets of a PRC resident enterprise to avoid the EIT payment obligation by making an arrangement with no reasonable business purpose, such indirect transfer shall be redefined and recognized as a direct transfer in accordance with the provisions of the EIT Law. Where the EIT on the income from the indirect transfer of real estate or equities shall be paid in accordance with the provisions of this Announcement, the entity or individual that directly assumes the obligation to make relevant payments to the transferor according to the provisions of the relevant laws or as agreed upon in the contract shall be the withholding agent. On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source (the “SAT Bulletin 37), which came into effect on December 1, 2017 and revised in June 2018. The SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.

 

Value-added Tax

 

Pursuant to the Provisional Regulations on Business Tax which was promulgated by the State Council in December 1993 and revised in November 2008, organizations and individuals engaging in provision of labour services stipulated in these regulations, transfer of intangible assets or sale of immovables in China shall be taxpayers of business tax and shall pay business tax and the applicable business rate for transportation industry is 3%. In accordance with Circular on Comprehensively Promoting the Pilot Programme of the Collection of Value-added Tax in Lieu of Business Tax (Caishui [2016] No. 36), which was promulgated on March 23, 2016 and came into effect on May 1, 2016 and has been partially abolished, upon approval of the State Council, the pilot programme of the collection of VAT in lieu of business tax shall be promoted nationwide in a comprehensive manner starting from May 1, 2016, and all business tax payers engaged in the building industry, the real estate industry, the financial industry and the life service industry shall be included in the scope of the pilot programme with regard to payment of value-added tax instead of business tax. For transportation service income, the application VAT tax rate is 11%.

  

Pursuant to the Provisional Regulations on Value-added Tax of the PRC (the “VAT Regulations”) last amended in November 2017 and effective on the same day and its implementation rules, all entities or individuals in the PRC engaging in the sale of goods, providing labor services of processing, repairs or maintenance, or selling services, intangible assets or real property in China, or importing goods to China are required to pay value-added tax (the “VAT”). The amount of VAT payable is calculated as “output VAT” minus “input VAT.” The rate of VAT is 17% for those engaging in the sale of goods or labor services or tangible personal property leasing services or importation of goods except as otherwise provided by the VAT Regulations. Furthermore, pursuant to the VAT Regulations, the tax rate of VAT is 11% for the sales of the service of transportation, posting, basic telecommunications, construction and leasing real estate, the sale of real estate and the transfer of land use right, or sell or import the goods listed in the VAT Regulations.

 

In April 2018, MOF and SAT jointly promulgated the Circular of the Ministry of Finance and the State Administration of Taxation on Adjustment of Value-Added Tax Rates, or Circular 32, according to which for VAT taxable sales acts or importation of goods originally subject to value-added tax rates of 17% and 11% respectively, such tax rates shall be adjusted to 16% and 10%, respectively. Circular 32 became effective on May 1, 2018 and shall supersede existing provisions which are inconsistent with Circular 32.

 

In March 2019, MOF, SAT and GAC jointly promulgated the Announcement on Policies for Deepening the VAT Reform, or Circular 39, according to which for general VAT payers’ sales activities or imports that are subject to VAT at an existing applicable rate of 16% or 10%, the applicable VAT rate is adjusted to 13% or 9% respectively. This Announcement came into force on April 1, 2019.

 

Urban Maintenance and Construction Tax

 

Pursuant to the Provisional Regulation on Urban Maintenance and Construction Tax of the PRC as amended in January 2011, any taxpayer, whether an entity or individual, of consumption tax, value-added tax or business tax shall be required to pay urban maintenance and construction tax based on the total amount of consumption tax, value-added tax or business tax paid by such taxpayer. The tax rate shall be 7% for a taxpayer whose domicile is in an urban area, 5% for a taxpayer whose domicile is in a county or a town, and 1% for a taxpayer whose domicile is not in any urban area or county or town.

 

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Education Surcharge

 

Pursuant to the Provisional Provisions on Imposition of Education Surcharge as amended in January 2011, a taxpayer, whether an entity or individual, of consumption tax, value-added tax or business tax shall pay an education surcharge at a rate of 3% on the total amount of consumption tax, value-added tax or business tax paid by such entity, unless such obliged taxpayer is instead required to pay a rural area education surcharge as stipulated under the Notice of the State Council on Raising Funds for Schools in Rural Areas that promulgated by State Council in December 1984.

 

Dividend Withholding Tax

 

The EIT Law prescribes a standard withholding tax rate of 20% on dividends and other China-sourced income of non-resident enterprises that have not set up institutions or establishments in China, or have set up institutions or establishments but the income obtained by the said enterprises has no actual connection with the set up institutions or establishments. However, the EIT Regulations reduced the rate from 20% to 10% with the implementation date starting from 1 January 2008. Pursuant to the EIT Law and the EIT Regulations, an income tax rate of 10% will normally be applicable to dividends payable to investors that are “non-resident enterprises”, and gains derived by such investors, which (a) do not have an establishment or place of business in mainland China or (b) have an establishment or place of business in mainland China, but the relevant income is not effectively connected with the establishment or place of business to the extent such dividends and gains are derived from sources within mainland China. Such income tax on the dividends may be reduced pursuant to a tax treaty between China and the jurisdictions in which our foreign shareholders reside.

 

Pursuant to the 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 Tax on Income (the “Double Tax Avoidance Arrangement”), and other applicable mainland Chinese laws, if a Hong Kong resident enterprise is determined by the competent tax authority in mainland China 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 mainland China resident enterprise may be reduced to 5% upon receiving approval from in-charge tax authority. However, based on the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties (the “Notice No. 81”) issued in February 2009 by the SAT, if the relevant Chinese 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 Chinese tax authorities may adjust the preferential tax treatment. Based on Notice of the State Administration of Taxation on How to Understand and Determine the “Beneficial Owners” in Tax Agreements (the “Notice No. 601”), issued in October 2009 by the SAT, conduit companies, which are established for the purpose of evading or reducing tax, or transferring or accumulating profits, shall not be recognized as beneficial owners and thus are not entitled to the above-mentioned reduced income tax rate of 5% under the Double Tax Avoidance Arrangement. In February 2018, SAT issued the Announcement of the State Administration of Taxation on Issues Relating to “Beneficial Owner” in Tax Treaties, which became effective on April 1 and “the Notice 601” was repealed simultaneously. The Announcement of the State Administration of Taxation on Issues Relating to “Beneficial Owner” in Tax Treaties stipulates issues relating to determination of “beneficial owner” status in clauses of tax treaties on dividends, interest and royalties.

 

Regulations Relating to Intellectual Property in the PRC

 

Copyright

 

Pursuant to the Copyright Law of the PRC, as amended in 2010, copyright protection extends to cover Internet activities and products disseminated over the Internet. Pursuant to the Regulations on the Protection of Computer Software promulgated by the State Council In December 2001 and most recently amended in January 2013, and the Rules for the Registration of Computer Software Copyright, which was promulgated by the China Copyright Office and came into effect in February 2002, anyone publishes, revises or translates computer software without obtaining the prior approval of the computer software copyright holders shall bear civil liability to the copyright owner because of harming the copyright. The corporate computer software copyright is valid for a term of 50 years until 31 December of the 50th year, starting from the date as of first publication. The computer software copyright owners shall register at the registration institution authorized by the PRC Copyright Office to obtain the computer software copyright registration certificates as preliminary evidence of the computer software copyright being registered.

 

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Trademark

 

Pursuant to the Trademark Law of the PRC, as amended in 2013, which has been amended recently in April 2019 and will become effective from November 2019, and the Implementation Regulations on the Trademark Law of the PRC amended in April 2014, the period of validity of a registered trademark shall be ten years, counted from the day the registration is approved. The trademark registrant may, by concluding a trademark licensing contract, authorize other persons to use the registered trademark. The licensor shall supervise the quality of the goods on which the licensee uses the licensor’s registered trademark, and the licensee shall guarantee the quality of the goods on which the registered trademark is used. Without putting the licensing of the trademark on records, the trademark shall not be used to defend the bona fide third party.

 

Patent

 

Pursuant to the Patent Law of the PRC, as amended in 2008, after the grant of the patent right for an invention or utility model, except where otherwise provided for in the Patent Law, no entity or individual may, without the authorization of the patent owner, exploit the patent, that is, make, use, offer to sell, sell or import the patented product, or use the patented process, or use, offer to sell, sell or import any product which is a direct result of the use of the patented process, for production or business purposes. After a patent right is granted for a design, no entity or individual shall, without the permission of the patent owner, exploit the patent, that is, for production or business purposes, manufacture, offer to sell, sell, or import any product containing the patented design. Once the infringement of a patent is confirmed, the infringer shall, in accordance with the regulations, undertake to cease the infringement, take remedial action, and pay damages, etc.

 

Domain Name

 

The domain name is protected and regulated under the Measures for the Administration of Domain Names for the Internet promulgated in August 2017 and effective in November 2017. According to these measures, the principle “first come, first serve” is followed for the domain name registration service. After completing the domain name registration, the applicant becomes the holder of the domain name registered by him/it. Any organization or individual may file an application for settlement with the domain names dispute resolution institution or file a lawsuit in the people’s court in accordance with the law if such organization or individual consider its/his legal rights and interests to be infringed by domain names registered or used by others.

 

Regulations Relating to Labor Protection in the PRC

 

Enterprises in China are mainly subject to the following PRC labor laws and regulations: Labor Law of the PRC, PRC Labor Contracts Law, the Social Insurance Law of the PRC, the Regulation of Insurance for Work-Related Injury, the Regulations on Unemployment Insurance, the Provisional Measures on Insurance for Maternity of Employees, the Interim Regulation on the Collection and Payment of Social Insurance Premiums, the Administrative Regulation on Housing Fund and other related regulations, rules and provisions issued by the relevant governmental authorities from time to time.

 

Pursuant to Labor Law of the PRC, which was promulgated in July 1994, effective January 1995, and most recently amended in December 2018, companies must enter into employment contracts with their employees, based on the principles of equality, consent and agreement through consultation. Companies must establish and effectively implement a system of ensuring occupational safety and health, educate employees on occupational safety and health, preventing work-related accident and reducing occupational hazards. Companies must also pay for their employees’ social insurance premium.

 

The principal regulations governing the employment contract is the PRC Labor Contracts Law, which was promulgated in June 2007 and amended in December 2012. Pursuant to the PRC Labor Contracts Law, employers shall establish employment relationship with employees on the date that they start employing the employees. To establish an employment, a written employment contract shall be concluded, or employers will be liable for the illegal actions. Furthermore, the probation period and liquidated damages shall be restricted by the law to safeguard employees’ rights and interests.

 

As required under the Social Insurance Law of the PRC, the Regulation of Insurance for Work-Related Injury, the Regulations on Unemployment Insurance, the Provisional Measures on Insurance for Maternity of Employees and the Administrative Regulation on Housing Fund, enterprises in China are obliged to provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, injury insurance, medical insurance and housing accumulation fund.

 

Regulations Relating to Overseas Listing

 

Under the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, were jointly adopted by six PRC regulatory authorities, including CSRC, in August 2006, and most recently amended in June 2009, a foreign investor is required to obtain necessary approvals when (i) a foreign investor acquires equity in a domestic non-foreign invested enterprise thereby converting it into a foreign-invested enterprise, or subscribes for new equity in a domestic enterprise via an increase of registered capital thereby converting it into a foreign-invested enterprise; or (ii) a foreign investor establishes a foreign-invested enterprise which purchases and operates the assets of a domestic enterprise, or which purchases the assets of a domestic enterprise and injects those assets to establish a foreign-invested enterprise. According to the M&A Rules, where a domestic company or enterprise, or a domestic natural person, through an overseas company established or controlled by it/him, acquires a domestic company which is related to or connected with it/him, approval from MOFCOM is required.

 

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MANAGEMENT

 

Directors and Executive Officers

 

The following table sets forth information regarding our executive officers, directors and director nominees as of the date of this prospectus. Unless otherwise stated, the business address for our directors and executive officers is that of our principal executive offices at 27F, Yantian Modern Industry Service Center, No. 3018 Shayan Road, Yantian District, Shenzhen, China 518081.

 

Name  Age  Position with our company
Jinlong Yang  43  Chairman of the Board of Directors and Chief Executive Officer
Zhuo Wang  31  Director
Jingwei Zhang  31  Chief Financial Officer
Mikael Charette  39  Independent Director Nominee*
Yanhong Xue  47  Independent Director Nominee*
To Wai Suen  45  Independent Director Nominee*

 

*This individual has indicated his or her assent to occupy such position upon the effective date of the registration statement of which this prospectus forms a part.

 

Jinlong Yang has served as our Chief Executive Officer and Chairman of our Board of Directors since April 2018 and the Executive Director and General Manager of MingZhu since August 2012. Mr. Yang has over ten years of experience in the transportation industry. He joined MingZhu as a sales manager in May 2009 and was subsequently promoted to the General Manager, Executive Director and legal representative of MingZhu. Prior to joining MingZhu, Mr. Yang served as an officer at the Exit and Entry Frontier Inspection Stations in Shenzhen, Guangdong, China. Mr. Yang holds a Bachelor of Law degree from the Party School of the Central Committee of the Communist Party of China. We believe Mr. Yang is well qualified to serve on our Board of Directors because of his extensive operating and management experience and knowledge in the transportation industry.

 

Zhuo Wang has served as our director since April 2018. Mr. Wang has nine years of experience in investment and management. Since June 2018, he has been the Marketing Manager of Springview Enterprises Private Limited, a Singapore construction design and building supply company. Since March 2017, he has been serving as a director of China International Corporate Management Limited, a Hong Kong-based consulting firm that provides a range of business solutions to small and medium sized companies in Asia. Since May 2017, Mr. Wang has also been serving as the managing director of China International Securities Limited, a Hong Kong based securities firm, overseeing the firm’s brokerage services business operations and performance. He has been serving as the managing director of China International Corporate Management Limited, a consultancy firm, since March 2017. Since April 2016, Mr. Wang has been serving as the Head of Finance and Operations of Shines International Limited, a management consultancy firm specializing in education. Since October 2012, Mr. Wang has been serving as Head of Finance and Marketing of GGL Enterprises Pte. Ltd., a Singapore based firm that provides building external and interior designs, main contractor services and material supplies for major renovation and building works. In addition, Mr. Want served as directors in the board of various companies, including Belvedere Ventures Pte Ltd, a real estate development and construction company, Sandhurst Global Pte Ltd., a security personnel staffing and systems company, and several holding companies. Mr. Wang holds a Bachelor of Science in Business Management from Babson College in Boston, Massachusetts. We believe Mr. Wang is well qualified to serve on our Board of Directors because of his experience in investment and management.

 

Jingwei Zhang has served as our Chief Financial Officer since April 2018. He has been serving as Financial Director of MingZhu since December 2016 where he oversees all aspects of financial control, manages yearly financial and inter-audits and provides financial, commercial and strategic support to the company. From May 2015 to November 2016, Mr. Zhang served as a corporate accountant of ERI Management, a management advisory firm in Singapore, where he reviewed clients’ accounts to ensure regulatory and U.S. GAAP compliance, assisted clients on cost management and budgeting and provided tax-related consultancy to reduce clients’ potential risks. From Jan 2014 to May 2015, Mr. Zhang served as an accountant at St. Plum-Blossom Press Pty. Ltd., a publisher in Melbourne, Australia, where he was responsible for bookkeeping and preparation of financial statements. Mr. Zhang holds a Bachelor of Business and Commerce in Accounting from Monash University in Melbourne, Australia and an Associate Degree in Business Administration from City University of Hong Kong.

 

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Mikael Charette will serve as a director as of the effective date of the registration statement of which this prospectus forms a part. He has been serving as Vice Chairman and Director of the Canadian Chamber of Commerce in Shanghai since April 2019 where he represents the interest of the Canadian business community in Shanghai. Since April 2019, he has also been serving as the Vice President of Fung & Yu CPA Ltd., a Hong Kong based accounting firm serving clients in Greater China and overseas. Since May 2006, Mr. Charette has also been serving as the President of Well Asia Group, an assets holding and managing company that provides immigration and real estate services to high net worth individuals. For the periods from February 2005 to May 2006 and from January 2009 to December 2015, he served as a partner of Harvey Law Group where he built a successful immigration practice for high net worth individuals and also represented clients in cross-border transactions and advised on market entry issues in China and other Asian countries. Mr. Charette holds a Master in Law degree from City University of Hong Kong and a Juris Doctor degree from University of Victoria in Victoria, Canada. We believe Mr. Charette is well qualified to serve on our Board of Directors because of his extensive experience with legal matters relating to cross-border transactions.

 

Yanhong Xue will serve as a director as of the effective date of the registration statement of which this prospectus forms a part. Ms. Xue has over 20 years of experience in finance and accounting. She has been serving as the Chief Financial Officer of XT Energy Group, Inc. (OTCQB: XTEG) since July 2018. She has also been serving as a Partner at Wall Street CPA Services, LLC, a middle market accounting and advisory firm, since October 2010. While at Wall Street CPA Services, LLC, she served as Chief Financial Officer of General Agriculture Corp. (OTCBB: GELT), an agriculture company, from July 2013 to April 2017, and Chief Financial Officer of China For-Gen Corp., a biotechnology company, and Vice President in Finance of Huifeng Bio-Pharmaceutical Technology (OTCBB: HFGB), a pharmaceutical company. Prior to that, she was a senior manager in the SEC Audit Services department of Acquaella, Chiarelli, Shuster, Berkower & Co., LLP, a certified public accounting & advisory firm, from September 2007 to October 2010. Ms. Xue also served as Manager in the Finance & Accounting Department of China Youth Daily from September 1997 to October 2004. Ms. Xue received a bachelor’s degree in history from Peking University and a master’s degree in accounting from State University of New York at Binghamton. She is a Certified Public Accountant in the State of New York and a member of American Institute of Certified Public Accountants. We believe Ms. Xue is well qualified to serve on our Board of Directors because of her extensive experience with accounting matters and public companies.

 

To Wai Suen will serve as a director as of the effective date of the registration statement of which this prospectus forms a part. Mr. Suen has over 18 years of experience in finance and accounting. He has been serving as Chief Financial Officer and corporate secretary of China Smarter Energy Group Holdings Limited, a company listed on the Hong Kong Stock Exchange, since February 2017, where he is responsible for the company’s mergers, acquisitions, investment, finance, internal control, audit, compliance and accounting. For the period from May 2015 to August 2016, Mr. Suen served as Chief Financial Officer and company secretary of China Saite Group Company Limited, a company listed on the Hong Kong Stock Exchange, where he was responsible for the company’s mergers, acquisitions, investment, internal control, audit, compliance and accounting. Prior to that, he held various audit roles, including Staff Accountant, Senior Accountant and Senior Audit Manager, at Deloitte Touche Tohmatsu CPA Ltd. from January 2001 to January 2012 and Deloitte Touche Tohmatsu Limited from February 2012 to July 2013. Mr. Suen has served as a director of a number of investment holding companies, including Rising Group Limited, Rising Development Limited, Rising Manufacturing Limited, each an investment holding company formed under the laws of Hong Kong and Paprika Holdings Limited, an investment holding company formed under the laws of the Cayman Islands. Mr. Suen holds a Bachelor of Arts degree from The Chinese University of Hong Kong and a Bachelor of Commerce degree from The University of Western Australia. He is a member of the Hong Kong Institution of Certified Public Accountant and a Certified Practicing Accountant of Australia. We believe Mr. Suen is well qualified to serve on our Board of Directors because of his extensive experience in accounting and finance.

 

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Board of Directors and Committees

 

Upon the SEC’s declaration of effectiveness of our registration statement on Form F-1, of which this prospectus is a part, our board of directors will consist of five directors, including two executive directors and three independent directors. We will also establish an Audit Committee, a Nominating and Corporate Governance Committee and a Compensation Committee upon the effectiveness of our registration statement on Form F-1, of which this prospectus is a part. We will adopt a charter for each of the three committees. Each of the committees of our board of directors shall have the composition and responsibilities described below.

 

Audit Committee

 

Mikael Charette, Yanhong Xue and To Wai Suen will serve as members of our Audit Committee. Ms. Xue will serve as the chair of the Audit Committee. Each of our Audit Committee members will satisfy the “independence” requirements of the Nasdaq listing rules and meet the independence standards under Rule 10A-3 under the Exchange Act. We have determined that Ms. Xue possesses accounting or related financial management experience that qualifies him as an “audit committee financial expert” as defined by the rules and regulations of the SEC. Our Audit Committee oversees our accounting and financial reporting processes and the audits of our financial statements. Our Audit Committee will perform several functions, including:

 

evaluating the independence and performance of, and assesses the qualifications of, our independent auditor, and engages such independent auditor;

 

approving the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services, and approves in advance any non-audit service to be provided by the independent auditor;

 

monitoring the independence of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law;

 

reviewing the financial statements to be included in our Annual Report on Form 20-F and Current Reports on Form 6-K and reviews with management and the independent auditors the results of the annual audit and reviews of our quarterly financial statements;

 

overseeing all aspects of our systems of internal accounting control and corporate governance functions on behalf of the board;

 

reviewing and approving in advance any proposed related-party transactions and report to the full Board on any approved transactions; and

 

providing oversight assistance in connection with legal, ethical and risk management compliance programs established by management and our board of directors, including Sarbanes-Oxley Act implementation, and makes recommendations to our board of directors regarding corporate governance issues and policy decisions.

 

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Compensation Committee

 

Mikael Charette, Yanhong Xue and To Wai Suen will serve as members of our Compensation Committee. Mr. Charette will serve as the chairman of the Compensation Committee. All of our Compensation Committee members satisfy the “independence” requirements of the Nasdaq listing rules and meet the independence standards under Rule 10A-3 under the Exchange Act. Our Compensation Committee will be responsible for overseeing and making recommendations to our board of our directors regarding the salaries and other compensation of our executive officers and general employees and providing assistance and recommendations with respect to our compensation policies and practices.

 

Nominating and Corporate Governance Committee

 

Mikael Charette, Yanhong Xue and To Wai Suen will serve as members of our Nominating and Corporate Governance Committee. Mr. Charette will serve as the chairman of the Nominating and Corporate Governance Committee. All of our Nominating and Corporate Governance Committee members will satisfy the “independence” requirements of the Nasdaq listing rules and meet the independence standards under Rule 10A-3 under the Exchange Act. Our Nominating and Corporate Governance Committee will be responsible for identifying and proposing new potential director nominees to the board of directors for consideration and reviewing our corporate governance policies.

 

Code of Ethics

 

Effective upon consummation of this offering, we will adopt a code of ethics that applies to all of our executive officers, directors and employees in accordance with the rules of the Nasdaq and the SEC. The code of ethics codifies the business and ethical principles that govern all aspects of our business. We will file a copy of our Code of Ethics as an exhibit to the registration statement of which this prospectus is a part. You will be able to review these documents by accessing our public filings at the SEC’s website at www.sec.gov.

 

Family Relationship

 

There are no family relationships, or other arrangements or understandings between or among any of the directors, director nominees, executive officers or other person pursuant to which such person was selected to serve as a director or officer, except that Mr. Zhuo Wang, our director, is the son of Gui Ling Guo, a director and Vice Chair Person of the board of directors of MingZhu.

 

Controlled Company

 

Upon completion of this offering, Mr. Jinlong Wang, our founder and chairman of our board of directors, will beneficially own approximately % of the aggregate voting power of our outstanding ordinary shares. As a result, we will be a “controlled company” for purposes of the Nasdaq listing rules. As a controlled company, we are permitted to elect to rely on certain exemptions from the obligation to comply with certain corporate governance requirements, including:

 

the requirement that our director nominees be selected or recommended solely by independent directors; and

 

the requirement that we have a nominating and corporate governance committee and a compensation committee that are composed entirely of independent directors with a written charter addressing the purposes and responsibilities of the committees.

 

Although we do not intend to rely on the controlled company exemptions under the Nasdaq listing rules, we could elect to rely on these exemptions in the future, and if so, you would not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

 

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Duties of Directors

 

Under Cayman Islands law, directors and officers owe the following fiduciary duties to act in good faith in what the director or officer believes to be in the best interests of the company as a whole;

 

(ii)duty to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose;

 

(iii)directors should not properly fetter the exercise of future discretion;

 

(iv)duty to exercise powers fairly as between different sections of shareholders;

 

(v)duty not to put themselves in a position in which there is a conflict between their duty to the company and their personal interests; and

 

(vi)duty to exercise independent judgment.

 

In addition to the above, directors also owe a duty of care which is not fiduciary in nature. This duty has been defined as a requirement to act as a reasonably diligent person having both the general knowledge, skill and experience 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 the general knowledge skill and experience which that director has.

 

As set out above, directors have a duty not to put themselves in a position of conflict and this includes a duty not to engage in self-dealing, or to otherwise benefit as a result of their position. However, in some instances what would otherwise be a breach of this duty can be forgiven and/or authorized in advance by the shareholders provided that there is full disclosure by the directors. This can be done by way of permission granted in the memorandum and articles of association or alternatively by shareholder approval at general meetings.

 

Accordingly, as a result of multiple business affiliations, our officers and directors may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. In addition, conflicts of interest may arise when our board evaluates a particular business opportunity with respect to the above-listed criteria. We cannot assure you that any of the afore-mentioned conflicts will be resolved in our favor. Furthermore, each of our officers and directors has pre-existing fiduciary obligations to other businesses of which they are officers or directors.

 

Our company has the right to seek damages if a duty owed by our directors is breached. A shareholder may in certain limited exceptional circumstances have the right to seek damages in our name if a duty owed by our directors is breached. You should refer to “Description of Share Capital — Differences in Corporate Law” for additional information on our standard of corporate governance under Cayman Islands law.

 

Terms of Directors and Officers

 

Our officers are appointed by and serve at the discretion of our board of directors. Our directors are not subject to a set term of office and hold office until the next general meeting called for the election of directors and until their successor is duly appointed or such time as they die, resign or are removed from office by a shareholders’ ordinary resolution. The office of a director will be vacated automatically if, among other things, the director resigns in writing, becomes bankrupt or makes any arrangement or composition with his/her creditors generally or is found to be or becomes of unsound mind.

 

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Employment Agreements

 

We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for an initial term of one year and is subject to successive, automatic one-year extensions unless either party gives notice of non-extension to the other party at least 30 days prior to the end of the applicable term.

 

The executive officers are entitled to a fixed salary and to participate in our equity incentive plans, if any and other company benefits, each as determined by the Board from time to time.

 

We may terminate the executive officer’s employment for cause, at any time, without notice or remuneration, for certain acts, such as conviction or plea of guilty to a felony or grossly negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. In such case, the executive officer will not be entitled to receive payment of any severance benefits or other amounts by reason of the termination, and his right to all other benefits will terminate, except as required by any applicable law. We may also terminate his employment without cause upon 30 days’ advance written notice. In such case of termination by us, we are required to provide the following severance payments and benefits to the executive officer: a cash payment of one month of base salary as of the date of such termination for each year (which is any period longer than six months but no more than one year) and a cash payment of half month of base salary as of the date of such termination for any period of employment no more than six months, provided that the total severance payments shall not exceed twelve months of base salary.

 

The executive officer may terminate his employment at any time with 30 days’ advance written notice if there is any significant change in his duties and responsibilities or a material reduction in his annual salary. In such case, the executive officer will be entitled to receive compensation equivalent to three months of his base salary. In addition, if we or our successor terminates the employment agreements upon a merger, consolidation, or transfer or sale of all or substantially all of our assets with or to any other individual(s) or entity, the executive officer shall be entitled to the following severance payments and benefits upon such termination: (1) a lump sum cash payment equal to three months of base salary at a rate equal to the greater of his annual salary in effect immediately prior to the termination, or his then-current annua1 salary as of the date of such termination; (2) a lump sum cash payment equal to a pro-rated amount of target annual bonus for the year immediately preceding the termination; (3) payment of premiums for continued health benefits under our health plans for three months fo1lowing the termination; and (4) immediate vesting of 100% of the then-unvested portion of any outstanding equity awards held by the executive officer. The employment agreements also contain customary restrictive covenants relating to confidentiality, non-competition and non-solicitation, as well as indemnification of the executive officer against certain liabilities and expenses incurred by him in connection with claims made by reason of him being an officer of our company.

 

Compensation of Directors and Executive Officers 

 

For the fiscal year ended December 31, 2018, we paid an aggregate of RMB 1,196,693 (approximately $181,070) in cash and benefits in-kind granted to or accrued on behalf of all of our directors and members of senior management for their services, in all capacities, and we did not pay any additional compensation to our directors and members of senior management. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors. Our PRC subsidiaries are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund. 

 

Equity Compensation Plan Information

 

We have not adopted any equity compensation plan.

 

Outstanding Equity Awards at Fiscal Year-End

 

As of December 31, 2018, we had no outstanding equity awards.

 

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PRINCIPAL SHAREHOLDERS

 

The following table sets forth information regarding the beneficial ownership of our ordinary shares as of the date of this prospectus by our officers, directors, director nominees and 5% or greater beneficial owners of ordinary shares.

 

We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Unless otherwise indicated, the person identified in this table has sole voting and investment power with respect to all shares shown as beneficially owned by him, subject to applicable community property laws.

  

    Prior to Offering    After Offering 
Name and Address of Beneficial Owner(1)   Amount and Nature of Beneficial Ownership    Approximate Percentage of Outstanding Shares(2)    Amount and Nature of Beneficial Ownership    Approximate Percentage of Outstanding Shares(3) 
5% or Greater Shareholders                    
Alpha Global (BVI) Limited(4)   600    60.0%         %
Excelsior Investment Limited(5)   140    14.0%         %
Exquisite Elite Limited (6)   250    25.0%         %
                     
Executive Officers, Directors and Director Nominees                    
Jinlong Yang(7)   600    60.0%         %
Jingwei Zhang   -    -          %
Zhuo Wang (8)   250    25.0%         %
Mikael Charette   -    -          %
Yanhong Xue   -    -          %
To Wai Suen   -    -          %
All directors, director nominees and executive officers as a group (6 individuals)   850    85%         %

 

 

(1)Unless otherwise noted, the business address of each of the following entities or individuals is 27F, Yantian Modern Industry Service Center, No. 3018 Shayan Road, Yantian District, Shenzhen, Guangdong, China 518081.
(2)Applicable percentage of ownership is based on 1,000 ordinary shares outstanding as of the date of this prospectus.
(3)Applicable percentage of ownership is based on               ordinary shares outstanding immediately after the offering.
(4)Jinlong Yang, our Chief Executive Officer and Chairman of our board of directors, is the sole shareholder and director of Alpha Global (BVI) Limited, a limited company formed under the laws of the British Virgin Islands and holds the voting and dispositive power over the ordinary shares held by Alpha Global (BVI) Limited. The address of Alpha Global (BVI) Limited is Ritter House, Wickhams Cay II, PO Box 3170, Road Town, Torla VG1110, British Virgin Islands.
(5)Gui Ling Guo, a director and Vice Chair Person of the board of directors of MingZhu and mother of Zhuo Wang, our director, is the sole shareholder and director of Excelsior Investment Limited, a limited company incorporated under the laws of Hong Kong, and holds the voting and dispositive power over the ordinary shares held by Excelsior Investment Limited. The address of Excelsior Investment Limited is FLAT/RM 6 8/F, K Wah Centre, 191 Java Road North Point, Hong Kong.
(6)Zhuo Wang, our director, is a director and holder of 86% of the outstanding shares of Exquisite Elite Limited, a British Virgin Islands company, and holds the voting and dispositive power over the ordinary shares held by Exquisite Elite Limited. The address of Exquisite Elite Limited is Vistra Corporation Service Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands.
(7)Consists of 600 ordinary shares directly held by Alpha Global (BVI) Limited, of which Jinlong Yang, our Chief Executive Officer and Chairman of our board of directors, is the sole shareholder and director. Mr. Yang holds the voting and dispositive power over the ordinary shares held by Alpha Global (BVI) Limited.
(8)Consists of 250 ordinary shares directly held by Exquisite Elite Limited, of which Zhuo Wang, our director, is a director and holder of 86% of its outstanding shares. Mr. Wang holds the voting and dispositive power over the ordinary shares held by Exquisite Elite Limited.

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RELATED PARTY TRANSACTIONS

 

Before the completion of this offering, we intend to adopt an audit committee charter, which will require the committee to review all related-party transactions on an ongoing basis and all such transactions be approved by the committee.

 

Set forth below are the related party transactions of our company, which are identified in accordance with the rules prescribed under Form F-1 and Form 20-F and may not be considered as related party transactions under PRC law.

 

Sales to related parties

 

In November 2017, MingZhu disposed some of its own trucks to MingZhu Logistics at a total amount of $557,356 and a net gain of $11,237. The amount of such receivables was fully settled by December 31, 2017.

 

Related party balances

 

The amount due from related parties consists of the following:

 

Related Party   Relationship   Nature   December 31,
2018
    December 31,
2017
 
MingZhu Logistics   Mr. Jinlong Yang’s family member as sole shareholder   Lending with no interests   $ 51,603     $ 177,498  
Excelsior Investment Limited   Shareholder   Advance for tax in relation with share transfer     52       -  
            $ 51,655     $ 177,498  

 

The Company has collected all amount due from related parties in January 2019.

 

The amount due to related parties consists of the following:

 

Related Party  Relationship  Nature  December 31,
2018
   December 31,
2017
 
Fushun Dongxiang Renhe Nongzi Co., Ltd.  Mr. Jinlong Yang’s family member as sole shareholder  Loans with no interests  $-   $494,589 
Exquisite Elite Limited  Shareholder  Advances for payment of professional fee   -    722,620 
Mr. Jinlong Yang  Chairman and Chief Executive Officer  Advances for operational purpose   193,032    1,458,113 
Mr. Zuojie Dai  Manager of MingZhu Pengcheng  Advances for operational purpose   -    503,124 
         $193,032   $3,178,446