F-1 1 ea122831-f1_carhousehold.htm REGISTRATION STATEMENT

As filed with the U.S. Securities and Exchange Commission on June 12, 2020.

Registration No. 333-        

 

 

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

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

 

Car House Holding Co., Ltd.
(Exact name of Registrant as specified in its charter)

 

Not Applicable
(Translation of Registrant’s name into English)

 

British Virgin Islands   5013   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

Building 3, No.16, Science and Technology 4th Road,

Songshan Lake High-Tech Industrial Development Zone

Dongguan, Guangdong, China 523808
Tel: + 86 769 3889-7488

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

 

Puglisi & Associates

850 Library Ave

Suite 204

Newark, DE 19711
(Name, address, including zip code, and telephone number, including area code, of agent for service)

  

Copies to:
     

Richard I. Anslow, Esq.

Jonathan Deblinger, Esq.

Ellenoff Grossman & Schole LLP

1345 Avenue of the Americas

New York, New York 10105

Telephone: (212) 370-1300

 

Fang Liu, Esq.

Bin Hu Karg, Esq.

VCL Law LLP

1945 Old Gallows Road, Suite 630

Vienna, VA 22182

Telephone: (703) 919-7285

 

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.     ☐

 

 

 

  

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 $1.00 per share (2)  $33,206,250   $4,310.18 
Underwriter Warrants (3)  $-   $- 
Ordinary shares underlying Underwriter Warrants (2) (4)  $3,984,750   $517.23 
Total  $37,191,000   $4,827.41 

 

(1) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under 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 in full.
(2) In accordance with Rule 416(a) of the Securities Act, the Registrant is also registering an indeterminate number of additional ordinary shares that may become issuable from time to time to prevent dilution resulting from share splits, share dividends or similar transactions.
(3) In accordance with Rule 457(g) of the Securities Act, because the ordinary shares of the registrant issuable upon exercise of the underwriters’ warrants (the “Underwriter Warrants”) are registered hereby, no separate registration fee is required with respect to the Underwriter Warrants registered hereby.
(4) 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 $3,984,750 (which is equal to 120% of $3,320,625).  Includes ordinary shares underlying Underwriter Warrants that are issuable upon the exercise of the over-allotment option of the underwriters in full.
(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 Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 

 

 

 

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

 

PRELIMINARY PROSPECTUS (Subject to Completion) Dated  June 12, 2020

 

__________ Ordinary Shares

 

 

Car House Holding Co., Ltd.

 

This is the initial public offering of our ordinary shares. We are offering           of our ordinary shares, par value $1.00 per share, on a firm commitment basis.  The estimated initial public offering price is between $         and $         per share. Currently, no public market exists for our ordinary shares.  We have applied to have our ordinary shares listed on the Nasdaq Capital Market (or Nasdaq) under the symbol “CARH.” 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. Haitao Jiang, our founder, Chief Executive Officer 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. 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 — Emerging Growth Company Status.”

 

Investing in our ordinary shares is highly speculative and involves a significant degree of risk.  See “Risk Factors” beginning on page 9 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  $                    $             
Underwriter’s discount and commissions (1)(2)  $   $ 
Proceeds to us, before expenses  $   $ 

 

(1) Represents underwriting discount and commissions equal to 6.85% of the public offering price for the ordinary shares (or $[●] per share) of 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 Network 1 Financial Securities, Inc., as the lead underwriter, exercisable commencing six (6) months after the closing date of the offering and will terminate three (3) years from the effective date of this registration statement entitling the representative to purchase up to 10% of the number of shares sold in this offering at a per share exercise price equal to 120% 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, exercisable one or more times in whole or in part, to purchase up to [●] additional ordinary shares from us at the public offering price, less the underwriting discounts and commissions, within 45 days from the date of this prospectus to cover over-allotments, if any. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable will be $[●], and the total proceeds to us, before expenses, will be $[●]. 

 

The underwriters expect to deliver the ordinary shares to purchasers in the offering on or about             , 2020.

 

Network 1 Financial Securities, Inc.

 

The date of this prospectus is              .

 

 

 

 

TABLE OF CONTENTS

 

    Page
Prospectus Summary   1
Risk Factors   9
Special Note Regarding Forward-Looking Statements   42
Use of Proceeds   43
Capitalization   44
Dilution   45
Enforceability of Civil Liabilities   46
Selected Consolidated Financial Data   47
Management’s Discussion and Analysis of Financial Condition and Results of Operations   48
Industry Overview   70
Business   77
Management   101
Principal Shareholders   105
Related Party Transactions   106
Description of Shares   108
Shares Eligible for Future Sale   118
Taxation   119
Underwriting   125
Expenses Relating to this Offering   132
Legal Matters   132
Experts   132
Where You Can Find Additional Information   132
Index to Consolidated Financial Statements   F-1

 

You should rely only on the information contained in this prospectus or in any related free writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, the ordinary shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ordinary shares.

 

We have not taken any action to permit a public offering of the ordinary shares outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ordinary shares and the distribution of the prospectus outside the United States.

 

Until               , 2020 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 

 

i

 

 

 

PROSPECTUS SUMMARY

 

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

 

This prospectus contains information from a report commissioned by us and prepared by China Research and Intelligence Co., Ltd., an independent market research firm (“CRI”), to provide information on the automotive supply B2B industry in China (“CRI Report”).

 

All references to “we,” “us,” “our,” or similar terms used in this prospectus refer to Car House Holding Co., Limited, a British Virgin Islands business company, including its consolidated 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 “$,” “US$” or “U.S. Dollars” refers to the legal currency of the United States.

 

Our Business

 

We are a business-to-business (“B2B”) e-commerce platform of automotive products and a supplier of auto perfume and auto air fresheners. Since our inception in 2004, we have been specializing in the development, manufacturing and sales of auto perfume and air fresheners. We also operate an online B2B marketplace of automotive products focusing on serving wholesale and retail customers in China. Our business operation currently consists of three aspects: B2B e-commerce platform, automotive products and auto beauty services.

 

B2B E-Commerce Platform. We operate an online marketplace of automotive products. The business model of our platform is an online marketplace serving third-party merchants complemented by direct sales of our own products. As a shopping platform, we provide the infrastructure and services for third-party merchants to complete transactions with customers on our platform. Our online marketplace has grown substantially since we launched our Car House mobile application and our website at www.car-house.cn in April 2016. There are currently approximately 3,100 third party domestic and international merchants that are selling approximately 210,000 types of automotive products on our platform. Our gross merchandise volume (“GMV”) increased from RMB 317 million (approximately $46 million) in the six months ended December 31, 2018 to RMB 456 million (approximately $65 million) in the six months ended December 31, 2019, and from RMB 455 million (approximately $64 million) in the fiscal year ended June 30, 2018 to RMB 590 million (approximately $83 million) in the fiscal year ended June 30, 2019. The majority of purchasers on our platform are wholesale customers such as auto product retailers, car dealers, commercial car care shops and professional detailing businesses and the remaining are retail consumers such as private car owners. As of the date of this prospectus, there are approximately 180,000 wholesale customers that have registered to use our website and mobile application.

 

In addition to third-party merchants’ sales, we also sell our own products, primarily auto perfume and auto air fresheners on our platform and mobile application. For the six months ended December 31, 2019 and 2018, revenue generated from sales of auto perfume and air fresheners on our platform amounted to $6.9 million and $5.8 million, respectively, which accounted for 72% and 60% of the total revenue arising from sales of auto perfume and air fresheners, respectively. For the fiscal year ended June 30, 2019 and 2018, revenue generated from sales of auto perfume and air fresheners on our platform amounted to $14.2 million and $9.5 million, respectively, which accounted for 66% and 45% of the total revenue arising from sales of auto perfume and air fresheners, respectively.

 

Auto Perfume, Air Freshener and Other Products. We began our business in developing, manufacturing and selling auto perfume and air fresheners in 2004. The products we offer primarily include auto perfume and air fresheners that are designed to refresh interior automobile surfaces and improve driving experience. We currently offer 235 types of auto perfume and over 15 types of auto air fresheners. All our auto perfume and air freshener products are developed by our in-house research and development team and manufactured at our facility located in Dongguan, Guangdong Province. We sell our auto perfume and air freshener products primarily to wholesale customers such as auto product retailers, auto dealers, commercial car care shops and professional detailing businesses. As of the date of this prospectus, the majority of our auto perfume and air freshener products are sold through our online marketplace while the remaining are sold through other online marketplaces such as Tmall and Taobao, a marketplace operated by Alibaba Group, and JD.com., respectively. Our 香百年Carori brand is well recognized brand in the auto perfume and air freshener market in China. We were the only auto freshener business that participated in the 2010 Shanghai World Expo and selected as the official partner for the “Auto Changes Life” theme week of the event. 

 

1

 

 

 

Engine Oil. In November 2018, we became the exclusive authorized dealer of Autobacs Seven (China) Car Accessories Trading Co., Ltd. (“Autobacs China”), a retailer of automotive parts and accessories based in Japan, to sell Autobacs fully synthetic engine oil, Autobacs ATF oil, and Autobacs CVTF oil under the brand name “Autobacs” in China (excluding Hong Kong and Taiwan). Such business cooperation gives us additional access to retail and wholesale consumers of automotive products and further broadens our sales channels.

 

Auto Beauty Shops. To support online sales of our products and increase brand awareness, we opened two auto beauty shops in Dongguan and Humen, Guangdong in May 2018. The lease for the Humen shop was terminated in December 2019 and we are actively searching for new retail space for new auto beauty shops. The services we provide include car wash, car maintenance and automotive detailing. In addition to our directly owned auto beauty shops, we plan to expand our auto beauty shop nationwide via brand authorization.

 

We generate revenue through sales of our auto perfume, air fresheners and other products, engine oil sales, fees we charge third party merchants on our online marketplaces and service fees at our auto beauty shops. The fees we charge third party sellers include a membership service fee, a commission of up to 3% of their sales and advertising fees for participating in promotional events of our marketplace. Our net revenue was $16.8 million and $12.5 million for the six months ended December 31, 2019 and 2018, respectively. Our net revenue was $31.0 million and $24.4 million for fiscal year ended June 30, 2019 and 2018, respectively. For the six months ended December 31, 2019, 88.4% of our revenue derived from product sales, 11.0% derived from commissions and other fees paid by third party merchants and 0.6% was from services provided at our auto beauty shops. For fiscal year 2019, 88.2% of our revenue derived from product sales, 9.7% derived from commissions and other fees paid by third party merchants and 2.1% was from services provided at our auto beauty shops. We achieved net income of $1.6 million and $0.4 million in the six months ended December 31, 2019 and 2018, respectively, and $4.4 million and $0.7 million in the fiscal years ended June 30, 2019 and 2018, respectively.

 

In January 2020, the World Health Organization (“WHO”) declared a global public health emergency as the novel coronavirus outbreak, later known as the COVID-19 pandemic, which has continued to spread beyond China. In compliance with the government health emergency rules in place, we temporarily closed our offices in China and ceased production of auto perfume and air freshener products starting January 19, 2020. As the Dongguan area was not the epicenter of the COVID-19 outbreak in China, on February 10, 2020, we resumed production and operations. The three-week temporary closures included seven days of Chinese Spring Festival national holiday. The Company ceased operations for about seven days during the holiday period in previous years as well, so the overall impact period of the ceased operation was about two weeks. Based on historical data, the production volume within these two weeks is about 530,000 pieces, which represents a sales revenue of approximately $1.1 million based on average sales price. The impact of temporary closure of two auto beauty shops was less than $0.1 million based on management’s estimate. There was no material impact on the operations of our B2B E-Commerce Platform and sales of engine oil. In the short term, the COVID-19 pandemic has created uncertainties and risks and we expect our sales in China may decline by about $1.2 million during in the third quarter of fiscal 2020, which was about 14.2% of the projected revenue in the third quarter of fiscal 2020, or 3.6% of total projected revenue in the whole fiscal 2020. In the meantime, we also took active measures to mitigate the negative impacts of the COVID-19 pandemic on our operating results. In February 2020, we developed and launched new products, such as disinfectant auto perfume and air freshener, portable disinfectant spray and others. We sold about a total of approximately 58,000 pieces in February 2020 with a total sales revenue of approximately $0.4 million. From the beginning of March 2020 to the date of this prospectus, we have also received purchase orders of about 537,000 pieces for such new products, which represent approximately $3.9 million revenue from such sales in the following months. Based on the current situation, we do not expect a significant impact of the COVID-19 pandemic on our operations and financial results in a long run, but we are closely monitoring the rapid developments in countries that have become exposed to the COVID-19 pandemic and continually assessing the potential impact on our business. 

 

Our goal is to become a solution provider that integrates online and offline resources to provide one stop shopping for automotive product consumers in China. We distinguish ourselves from many online marketplaces by focusing on automotive products. We also distinguish ourselves from other providers of automotive products by leveraging our ability to integrate online and offline resources and eventually offering more flexibility and convenience for customers’ shopping for automotive products. In order to further develop our business and achieve our objective, we plan to implement a number of growth strategies discussed below under “Our Strategies.”

 

Our Competitive Strengths

 

We believe the following key competitive strengths have contributed to our growth to date and plan to continue leveraging these advantages to capture additional market share:

 

Focus on and Competitive Position in Automotive Products in China. According to the CRI Report, our platform is one of the few online marketplaces in China that focus on automotive products. Our car-house.cn website and mobile application offer a selection of products that serve the needs of customers for this type of products. We believe that such niche focus will distinguish our platform from many other marketplaces in China. Compared to other marketplaces that focus on automotive products, we have competitive advantages in terms of the number of brand names selling on the platform, the number of SKUs and the number of wholesale customers registered with the platform, according to the CRI Report. As of the date of this prospectus, the number of brand names selling on our platform is over 3,200, which is higher than those of our major competitors. Also, the number of our cumulative SKUs is 210,000, which is the highest among major platforms focusing on automotive products. We currently have 180,000 registered wholesale customers in our platform, while the highest number of wholesale customers our competitors have is 90,000.

  

 

2

 

 

 

Industry-Leading Research and Development Capacity. We have dedicated considerable resources to our technology and product research and development efforts. All our auto perfume and air freshener products and the technology infrastructure for our online marketplace are developed by our in-house research and development teams. Our research and development department consists of a team of over 30 professionals focusing on developing technologies related to our auto perfume and air freshener products and a team of over 30 professions dedicated to developing and upgrading our online platform and related mobile application. For the six months ended December 31, 2019 and 2018, we incurred research and development expenses of $573,681 and $412,912, respectively. For the years ended June 30, 2019 and 2018, we incurred research and development expenses of $1,225,896 and $1,422,605, respectively. As of the date of this prospectus, we have obtained 235 patents from the PRC related to technologies used in our auto perfume and air freshener products and 10 software copyright relating to our website and mobile application. We obtained a High and New Technology Enterprise Certification from Guangdong provincial government in November 2016 and therefore have been qualified for a reduced corporate income tax rate at 15% since then until December 2022.

 

Ability to Integrate Online and Offline Resources. When we began our auto perfume and air freshener business in 2004, our products were initially distributed and sold through traditional offline channels to wholesale and retail consumers. After over 15 years of operations, we have been able to build a customer base and brand awareness for automotive products nationwide. By levering such offline resources, we have managed to build and continue to expand a customer base for our online marketplace. Our products and products of third party merchants can also be sold at our auto beauty shops, which gives customers the opportunity to experience such products. Our online marketplace allows us to serve customers outside the coverage of our traditional offline distribution channels. We believe that our ability to integrate online and offline resources facilitates our overall product sales and increases awareness of our brand.

 

Vertical Integration. We manage all aspects of the design, manufacturing and sales of our auto perfume and air freshener products. The vertical integration enables our sales, research and development and production teams to efficiently communicate and better understand customer requirements and industry trends. Our direct ownership of our manufacturing facility also allows us to control production timelines and implement quality control. Such integration, in our view, lays the foundation for improving our customers’ user experience and enhancing our brand image.

 

Proprietary Technology Platform. We have built our own technology platform on www.car-house.cn and related mobile application. This platform enables us to accurately process and fulfill increasingly large numbers of orders at peak periods while maintaining processing speed and quality consistency, as well as powering full supply chain visibility and control. Our technology platform currently has the capacity to process up to 2,000 orders per day. In response to the increasing online shopping through mobile internet, we have invested substantial resources to build a mobile application that is dedicated to providing a positive mobile shopping experience. Through our easy to use mobile application, our customers can browse our product selections as soon as our mobile applications are activated on their mobile devices, and make quick purchase decisions regardless of their locations. Our Android- and iOS-based mobile applications allow customers to quickly and efficiently view, discover, select and purchase our product offerings. We also update our web and mobile application on a regular basis to maintain the security and improve technical features based on technology developments as well as feedback from customers and merchants.

 

Substantial Industry Experience. We have been in the business of auto perfume and air freshener products for over 15 years. Our management team consists of members with an aggregate of over 40 years of experience in the automotive product industry. Mr. Haitao Jiang, our Chief Executive Officer and Chairman, has 20 years of experience in the automotive product industry. Mr. Chonghao Xiao, the co-founder of our operating subsidiary, has 14 years of experience in sales and 12 years of experience in automotive products industry. Mr. Xinglin Fang, manager of our online marketplace department, has approximately 10 years of experience in software development and technology services. Mr. Congsheng Yu, manager of our online marketplace department, has approximately 10 years of experience in automotive products and over 20 years of experience in sales.

 

Our Strategies

 

Our goal is to become an integrated solution provider in the automotive product market in China. We intend to achieve our goal by pursuing the following growth strategies:

 

Integrating Different Segments. In order to increase our overall competitive ability and distinguish ourselves from our competitors in both the auto perfume and air freshener products and e-commerce space, we are dedicated to the integration of the different segments of our business. Specifically, we will continue to leverage our existing customer relationships developed through offline auto perfume and air freshener sales to attract additional customers and maintain existing customers for our online marketplace. We can market our own auto perfume and air freshener products through our marketplace to access customers that are outside the coverage of our traditional marketing channels. More importantly, the combination of online and offline channels for sales of our products will offer our customers the flexibility to purchase our products either online, in the physical stores, or through a combination of both offerings.

 

Exploring Alternative Channels to Expand Customer Base. Since our launch of the car-house marketplace, we have been primarily relying on word-of-mouth referrals, participation in industry events as well as traditional and new media advertising to expand the customer base for our platform. While we continue our efforts through these channels, we are also exploring alternative marketing strategies such as seeking strategic relationships with organizations and social platforms that serve auto product retailers, auto dealers and other wholesale consumers for products. We believe that, such relationships will give us opportunities to interact with our target consumers and increase brand awareness within this group.  

 

 

3

 

 

 

Implementing Strategies to Attract Reliable Third Party Merchants

 

As part of our efforts to further expand product offering on our platform, we plan to attract additional third-party merchants, primarily small and medium size automotive product manufacturers and wholesalers. Among other efforts, we are negotiating strategic cooperation with a major auto part mall in Guangdong through which we will have access to auto parts merchants currently selling in the mall and offer sale opportunities on our platform to these merchants. If such cooperation turns out to be successful, we will expand such model nationwide by entering into cooperation with auto parts malls in other regions of China. We also developed merchants crediting feature based on key criteria such as delivery turnaround time, monthly sales and customer feedback for both our website and mobile application. Such feature will help us select more reliable and reputable third party merchants and improve customers’ shopping experience on our platform.

 

Our Corporate History and Structure

 

Car House Holding Co., Limited was incorporated on December 13, 2018 as a holding company incorporated under the laws of British Virgin Islands. Immediately prior to this offering, we were owned 54.4% by Ocean Wave Holding Limited (“Ocean Wave”), 20% by Autobacs Seven Co. Ltd. (“Autobacs”), 15% by GAT Power Limited, 3.56% by Lotus Ray Holding Limited (“Lotus Ray”) and 3% by IFresh International Limited. We began our operations in China in 2004 and currently conduct our business through our subsidiaries in China.

 

Since our inception in 2004, we have been in the business of manufacturing, sale and research and development of auto perfume and air fresheners. We also launched our automotive products e-commerce business in April 2016 and our auto beauty shop business in May 2018. In September 2017, we entered into a strategic investment agreement with Autobacs, a reputable retailer of automotive parts and accessories based in Japan, pursuant to which Autobacs invested RMB 32.18 million (approximately $4.87 million) in our operating subsidiary Guangdong CarHouse E-Commerce Technology Co., Ltd. for expanding its perfume and online market business. In November 2018, we became the exclusive authorized dealer of Autobacs China to sell Autobacs fully synthetic engine oil, Autobacs ATF oil, and Autobacs CVTF oil under the brand name “Autobacs” in China (excluding Hong Kong and Taiwan). In September 2019, we entered into another investment agreement with Autobacs, pursuant to which Autobacs invested RMB 40.18 million (approximately $5.85 million) in exchange for 10% of our outstanding ordinary shares prior to the consummation of this offering. Upon the completion of this subscription, Autobacs owned 20% of the equity interest of the Company.

 

As of the date of this prospectus, we have the following subsidiaries:

 

  Car House Group Limited (HK) (“CarHouse HK”): our wholly owned subsidiary formed under the law of Hong Kong in December 2018. This subsidiary is a holding company and currently has no business operations.

 

Guangdong CarHouse E-Commerce Technology Co., Ltd. (“Guangdong CarHouse”): our wholly owned subsidiary formed under the law of the People’s Republic of China in July 2004. This subsidiary is currently engaged in the business of design, manufacturing and sales of air freshener products and other automotive products and operations of e-commerce platforms of automotive products.

 

Dongguan CarHouse Business Development Co., Ltd. (“Dongguan CarHouse”): our wholly owned subsidiary formed under the law of the People’s Republic of China in May 2018. This subsidiary is currently engaged in the business of operating auto beauty shops.

 

Guangdong CarHouse currently has two branches, Shipai Branch and Shenzhen Branch. Dongguang CarHouse has one branch, Nancheng Branch. Each of these branches was formed under the law of the PRC. Shipai Branch is engaged in the business of air freshener manufacturing and research and development, Nancheng Branch is engaged in the business of operations of auto beauty shops and Shenzhen Branch conducts research and development for our online market business.

 

 

4

 

 

 

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

 

Upon the consummation of this offering, we anticipate that our ownership and corporate structure will be as follows:

 

5

 

 

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 9, which you should read in its entirety.

 

  We are an early stage online marketplace of automotive products with a limited operating history. Our limited operating history in the e-commerce industry may not provide an adequate basis to judge our future prospects and results of operations for this segment, and may increase the risk of your investment.
     
 

Our business and operating cash flow may be adversely impacted if we are unable to collect accounts receivable in a timely manner.

     
  Our Chairman and Chief Executive Officer will continue to exert substantial influence over our company.
     
  Our executive officers have limited 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 face intense competition, and if we fail to compete effectively, we may lose market share and customers.
     
  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 British Virgin Islands law, investors may face difficulties in protecting their interests, and investors’ ability to protect their rights through U.S. courts may be limited.

 

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;

  

6

 

 

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.

 

Implications of Being an Emerging Growth Company

 

As a company with less than US$1.07 billion in revenue for the last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012 (as amended by the Fixing America’s Surface Transportation Act of 2015) (the “JOBS Act”). An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also 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. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the previous three year period, issued more than US$1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of our ordinary shares that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

 

Corporate Information

 

Our principal executive offices in China are located at Building 3, No.16, Science and Technology 4th Road, Songshan Lake High-Tech Industrial Development Zone, Dongguan, Guangdong, China. Our telephone number at this address is +86 769 3889-7488. We also have a manufacturing facility located in Shipai, Dongguan, Guangdong and auto beauty shop in Dongguan, Guangdong Province. Our registered agent in the BVI is Vistra (BVI) Limited located at Vistra Corporate Services Center, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands. Investors should submit any inquiries to the address and telephone number of our principal executive offices.

 

Our principal website is www.car-house.cn. The information contained on this website is not a part of this prospectus.  

 

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, including industry data and information from CRI, which have not been independently verified by us, the underwriter or any of their affiliates or advisers. The information in such sources may not be consistent with other information compiled in or outside China.

 

We use U.S. dollars as the reporting currency in our consolidated 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. 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.

 

Except where the context otherwise indicates and for the purpose of this prospectus only:

 

 ·“BVI” means British Virgin Islands;

 

·“BVI Act” means the BVI Business Company Act, 2004 (as amended) of the British Virgin Islands; and

  

·“share capital” or “shares in the capital of” or similar expressions include a reference to shares in a company that does not have a share capital under its governing law, but which is authorized to issue a maximum or unlimited number of shares.

  

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

 

 

7

 

 

 

The Offering

  

Shares Being Offered:                  ordinary shares (or        ordinary shares if the underwriters exercise their over-allotment option in full) on a firm commitment basis.
   
Initial Offering Price: We estimate the initial public offering price for the ordinary shares will be $              per share.
   
Number of Ordinary Shares Outstanding Before the Offering: 56,250 of our ordinary shares are outstanding as of the date of this prospectus. We anticipate that we will increase the number of our ordinary shares available for issue prior to consummation of this offering.
   
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.
   
Underwriter 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.
   
Underwriter Warrants: We have agreed to issue upon the closing of this offering Underwriter Warrants to the underwriters exercisable commencing six (6) months after the closing date of the offering and will terminate three (3) years from the effective date of the registration statement of which this prospectus forms a part entitling the representative to purchase up to 10% of the number of shares sold in this offering at a per share exercise price equal to 120% of the public offering price.
   
Use of Proceeds: Although we will have broad discretion on the use of proceeds we receive in this offering, we plan to use the net proceeds of this offering primarily for data analysis and operation capacity improvement of our e-commerce platform, marketing, upgrading automotive product manufacturing plant and equipment and other general and administrative matters. For more information on the use of proceeds, see “Use of Proceeds” on page 43.
   
Lock-Up: We and all of our directors and officers have agreed with the underwriters not to sell, transfer, hypothecate 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 180 days after the effective date of the registration statement. See “Shares Eligible for Future Sale” and “Underwriting” for more information.
   
Proposed Nasdaq Symbol: CARH
   
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 9.

 

 

8

 

 

RISK FACTORS

 

An investment in our ordinary shares involves significant risks. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ordinary shares. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ordinary shares could decline, and you may lose all or part of your investment. 

 

Risks Related to Our Business and Industry

 

We may incur losses in the future.

 

We had a net income of $1.6 million and $0.4 million for the six months ended December 31, 2019 and 2018, respectively, and a net income of $4.4 million and $0.7 million for the fiscal year ended June 30, 2019 and 2018, respectively. 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 product offering. 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 are an early stage online marketplace of automotive products with a limited operating history. Our limited operating history in the e-commerce industry may not provide an adequate basis to judge our future prospects and results of operations for this segment, and may increase the risk of your investment.

 

We launched our online e-commerce platform in April 2016. Our limited history may not provide a meaningful basis for investors to evaluate our business, financial performance and prospects of our online marketplace business. Potential customers may not be familiar with our market and may have difficulty distinguishing our services from those of our competitors. Convincing potential new customers of the value of our services is critical to increasing the volume of sales facilitated through our platform and to the success of our business. If we fail to educate potential customers about the value of our platform and services, if the market for our services does not develop as we expect, or if we fail to address the needs of our target market, namely wholesale and retail customers of automotive products in China, our business and results of operations will be harmed.

 

If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.

 

We have been growing since we launched our online marketplace in April 2016. To accommodate our growth, we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. We will also need to continue to expand, train, manage and motivate our workforce and manage our relationships with customers and third-party merchants. All of these endeavors involve risks, and will require substantial management effort and significant additional expenditures. We may not be able to manage our growth or execute our strategies effectively, and any failure to do so may have a material adverse effect on our business and prospects.

 

If we are unable to collect accounts receivable in a timely manner, our business and operating cash flow may be adversely impacted.

 

In order to develop and maintain business relationships with our customers and increase our revenue, we provide credit sales. We grant credit terms of 60 to 180 days to long term customers and new customers with multiple chain stores and national recognition. We offer even longer credit terms to customers when such practice becomes necessary for implementing our business development strategies. For instance, to increase the market share of our perfume products, we have been granting credit terms of 120 to 270 days to certain selected key distributors in China starting June 2018. As a result of our credit sales, we have a significant amount of accounts receivable. Our net accounts receivable balance was $12.5 million and $5.2 million as of June 30, 2019 and 2018, respectively, and $12.7 million as of December 31, 2019. For account receivable balances that exceed 10% of the total outstanding accountable receivable balance, there were two customers accounting for 28.3% and 11.7%, respectively, as of December 31, 2019, one customer accounting for 13.3% as of June 30, 2019 and four customers accounting for an aggregate of 61.1% as of June 30, 2018.

 

We are subject to the risk that we may be unable to collect accounts receivable in a timely manner. Such risk is higher as a result of the recent outbreak of COVID-19 and the overall economic downturn resulting therefrom. In particular, wholesale customers of automotive aftermarket products, including auto product retailers, car dealers, commercial car care shops and professional detailing businesses, have been negatively affected by the COVID-19 pandemic given a lack of travel during the outbreak period and business closures required by the government. As a result, our customers may not be able to pay us in a timely fashion and our accounts receivable and allowance for doubtful accounts may accordingly increase.

 

In order to mitigate such risk, we have implemented programs to assess the creditworthiness of our customers before extending credit sales, including collecting personal and business information and conducting background checks. In addition, for customers whose account receivable balances are overdue, we demand letters of undertaking for repayment. However, these mitigating efforts cannot ensure that we will be able to collect accounts receivable. If the accounts receivable cannot be collected in time, or at all, a significant amount of bad debt expense will occur, and our business, financial condition and results of operation will likely be materially and adversely affected. In addition, if the market competition increases in intensity and we extend more credit sales to our customers, the balance of our accounts receivable may further increase, which may adversely affect our financial conditions and results of operation.

 

9

 

 

If we are unable to offer products that attract new customers and new purchases from existing customers at competitive prices, our business, financial condition and results of operations may be materially and adversely affected.

 

Our future growth depends on our ability to continue to attract new customers as well as additional purchases from repeat customers. Constantly changing consumer preferences have affected and will continue to affect the e-commerce industry and the automotive products industry. A change in market trends that results in a decline in demand for high-margin products will have a disproportionately greater adverse effect on our profits. A shift to the demand for our products or a shift to lower margin products due to deteriorating economic conditions could have a material adverse effect on our business, financial condition and results of operations.

 

We must stay abreast of emerging consumers’ preferences and anticipate product trends that will appeal to existing and potential customers. Our website makes recommendations to customers based on their past purchases or on products that they viewed but did not purchase, and we also send e-mails to our customers with product recommendations tailored to their purchaser profiles. Our ability to make individually-tailored recommendations is dependent on our business intelligence system, which tracks, collects and analyzes our users’ browsing and purchasing behavior, to provide accurate and reliable information. If our customers cannot find their desired products on our website at attractive prices, they may lose interest in us and visit our website less frequently or even stop visiting our website altogether, which in turn may materially and adversely affect our business, financial condition and results of operations.

 

Expansion into new product categories may expose us to new challenges and more risks.

 

Since the preferences of our target consumers are constantly changing, we have to evaluate product trends on a regular basis and expand our product offering to maintain our existing customer base and attract new customers. Expansion into new product categories involves new risks and challenges. Our lack of familiarity with these products and lack of relevant customer data relating to these products may make it more difficult for us to keep pace with the evolving customer demands, identify and recruit new third party merchants and manage inventories. If we cannot successfully address challenges in connection with product offering expansion, we may not be able to maintain our relationships with current customers or develop new customers. Our operating results may be adversely affected.

 

We face intense competition, and if we fail to compete effectively, we may lose market share and customers.

 

As a provider of auto perfume and air refresher products, we face competition from companies nationwide, including both Chinese companies and international competitors that operate in China. China’s online marketplace industry is fragmented and highly competitive. We face direct competition from e-commerce platforms that focus on automotive products. Our current or future competitors may have longer operating histories, greater brand recognition, better supplier relationships, larger customer bases, more cost-effective fulfillment capabilities or greater financial, technical or marketing resources than we do. Competitors may leverage their brand recognition, experience and resources to compete with us in a variety of ways, including investing more heavily in research and development and making acquisitions for the expansion of their products and services. Some of our competitors may be able to secure more favorable terms from suppliers, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory policies and devote substantially more resources to their websites and system development than us. To the extent that our competitors lower prices, our ability to maintain profit margins and sales levels may be negatively impacted. In addition, new and enhanced technologies may increase the competition in the online retail market. We believe that competition within our industry will intensify as new competitors face few barriers to entry due to the relatively low cost and technology required to manufacture auto perfume and air refresher products, which could adversely affect our ability to attract new customers and retain existing customers.

 

Increased competition may reduce our profitability, market share, customer base and brand recognition. There can be no assurance that we will be able to compete successfully against current or future competitors, and such competitive pressures may have a material and adverse effect on our business, financial condition and results of operations.

 

If we are unable to provide high quality customer experience, our business and reputation may be materially and adversely affected.

 

The success of our business largely depends on our ability to provide high quality customer experience, which in turn depends on a variety of factors. These factors include our ability to continue to offer authentic products at competitive prices, source products to respond to customer demands and preferences, maintain the quality of our products and services, provide reliable and user-friendly website interface and mobile applications for our customers to browse and purchase products, and provide timely and reliable delivery and superior after-sales service. If our customers are not satisfied with our products or services, or the prices at which we offer the products, or our internet platform is severely interrupted or otherwise fail to meet our customers’ requests, our reputation and customer loyalty could be adversely affected.  

 

10

 

 

We depend on our customer service center and online customer service representatives to provide live assistance to our customers during our business hours. We currently have 6 customer service representatives. If our customer service representatives fail to provide satisfactory service, or if waiting times are too long due to the high volume of calls from customers at peak times, our brand and customer loyalty may be adversely affected. In addition, any negative publicity or poor feedback regarding our customer service may harm our brand and reputation and in turn cause us to lose customers and market share.

 

In addition, the bulk of sales on our online marketplace are conducted by third party merchants. We also rely on such sellers to provide certain aspects of customer service such as exchange and return or products sold by them. Although we regularly review consumers’ feedback on third-party merchants’ post-sale services, we cannot assume that these sellers will be able to address consumers’ concerns in a timely and satisfactory fashion.

 

If we are unable to continue to maintain our customer experience and provide high quality customer service, we may not be able to retain existing customers or attract new customers, which could have a material adverse effect on our business, financial condition and results of operations.

 

If we fail to manage and expand our relationships with third-party merchants, our business and growth prospects may suffer.

 

We currently work with approximately 2,600 third-party merchants. Our third-party merchants include brand owners, brand distributors and resellers. Maintaining strong relationships with these third-party merchants is important to the growth of our business.

 

The prospectus of our marketplace depends significantly on our ability to attract third-party merchants that offer their products on commercially attractive terms. However, our agreements do not ensure the long-term availability of products or the continuation of particular pricing practices or payment terms beyond the end of the contractual term. Our agreements with third-party merchants typically do not restrict them from selling products to other buyers. We cannot assure you that our current third-party merchants will continue to offer products on our internet platform on commercially attractive terms, or at all, after the term of their current agreement expires. Even if we maintain good relationships with our third-party merchants, they may be unable to remain in business due to economic conditions, labor actions, regulatory or legal decisions, natural disasters or other causes. Under such circumstance, the product offering of our marketplace may be materially and adversely affected, which further affects our net revenue and gross profit as a percentage of net revenues.

 

Although we conduct diligence review of the authority of third party sellers from the relevant brands, there is no assurance that these parties always have such authorization. In the event that any third-party merchant does not have authorization from the relevant brands to sell certain products, such merchants may be prevented from products at our internet platform at any time, which may adversely affect our business and net revenues.

 

Our online e-commerce platform is subject to risks associated with third-party sellers.

 

We launched our online e-commerce platform in April 2016. Currently products offered on and sold through our online platform include products of third-parties. We do not have complete control over the storage and delivery of products sold on our online platform by third-party merchants. These sellers use their own facilities to store third products and use their own or third-party delivery systems to deliver products to customers, which makes it more difficult for us to ensure the quality of the products and related delivery service. Although we have implemented quality control measures with regard to product sales by third party sales, we have limited control over their selling activities on our marketplace. If any third-party seller does not control the quality of the products that it sells on our website, or if it does not deliver the products or delivers products that are materially different from what has been advertised, or if it sells counterfeit or unlicensed products on our website, the reputation of our online platform and our brand may be materially and adversely affected and we could face claims that we should be held liable for any losses. In addition, the supplier relationships, customer acquisition dynamics and other requirements for our online e-commerce platform in connection with sales of third party merchants are not within our control, which will likely complicate the management of our business. Our failure to effectively deal with fraudulent activities on our platform could result in a deduction in the ability to attract new customers or retain current customers, damage to our reputation, or a diminution in the value of our brand names.

 

11

 

 

We may be subject to product liability claims if people or properties are harmed by the products sold by us or third party merchants on our platform.

 

We are subject to product liability claims for our products sold through online and offline channels. In addition, the products sold via our platform are manufactured by third-parties and some of these products may be defectively designed or manufactured. As a result, sales of such products on our platform could expose us to product liability claims relating to personal injury or property damage and may require product recalls or other actions. Third-parties subject to such injury or damage may bring claims or legal proceedings against us as the retailer of the product. Although we would have legal recourse against the manufacturers of such products under PRC law, attempting to enforce our rights against the manufacturer may be expensive, time-consuming and ultimately futile.

 

The wide variety of payment methods that we accept subjects us to third-party payment processing-related risks.

 

We accept payments using a variety of methods, including bank transfers, online payments with debit cards issued by major banks in China, and payment through third-party online payment platforms such as Alipay and WeChat Pay. For certain payment methods, including debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins. We may also be subject to fraud and other illegal activities in connection with the various payment methods we offer, including online payment. In addition, we are subject to various rules, regulations and requirements, regulatory or otherwise, governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept debit card payments from our customers, process electronic funds transfers or facilitate other types of online payments, and our business, financial condition and results of operations could be materially and adversely affected.

 

We and third party sellers on our platform depend on third-party delivery service providers to deliver products, and if they fail to provide reliable delivery services, our business and reputation may be materially and adversely affected.

 

We and third party sellers on our marketplace engage third party delivery companies to delivery products sold on our website and mobile application. Interacting with and coordinating the activities of a number of delivery companies are complicated and any major interruptions to or failures in these third-parties’ shipping services could prevent the timely or successful delivery of our products. These interruptions may be due to unforeseen events that are beyond our control or the control of these third-party delivery companies, such as inclement weather, natural disasters, transportation interruptions or labor unrest or shortage. If our products are not delivered on time or are delivered in a damaged state, customers may refuse to accept our products and have less confidence in our services. Thus, we may lose customers, and our financial condition and reputation could suffer. In addition, as local delivery service providers tend to be small companies with limited capital resources, they may be more likely to go bankrupt, go out of business or encounter financial difficulties, in which case we may not be able to retrieve our products in their possession, arrange for delivery of those products by an alternative carrier, receive the payments the delivery service providers collect for us, or hold them accountable for the losses they cause us. Although we generally only pay the delivery service providers after they have performed their services, such payment arrangements may not be sufficient to cover the risks to which we are exposed. In addition, if the delivery service providers cease to provide cash deposits to us or significantly reduce the amount of such deposits, our working capital requirements may increase and our operating cash flow may be materially and adversely affected. Delivery of our products could also be affected or interrupted by the merger, acquisition, insolvency or government shut-down of the delivery companies we engage to make deliveries, especially those local companies with relatively small business scales. The occurrence of any of these problems, alone or together, could damage our reputation and materially and adversely affect our business and results of operations.

 

12

 

 

The proper functioning of our platform is essential to our business. Any failure to maintain the satisfactory performance of our website and systems could materially and adversely affect our business and reputation.

 

The satisfactory performance, reliability and availability of our platform are critical to our success and our ability to attract and retain customers and provide quality customer service. All sales of third party sellers’ products and our direct sale products are made online through our website, and the fulfillment services we provide in connection with our direct sale business are made through our website. Any system interruptions caused by telecommunications failures, computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our website or reduced order fulfillment performance could reduce the volume of products sold and the attractiveness of product offerings on our website. Our servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to system interruptions, website slowdown or unavailability, delays or errors in transaction processing, loss of data or the inability to accept and fulfill customer orders. Security breaches, computer viruses and hacking attacks have become more prevalent in our industry. In the future we may experience such attacks and unexpected interruptions.

 

Additionally, we must continue to upgrade and improve our platform to support our business growth, and failure to do so could impede our growth. However, we may not be successful in executing these system upgrades and improvement strategies. In particular, our systems may experience interruptions during upgrades, and the new technologies or infrastructures may not be fully integrated with the existing systems on a timely basis, or at all. In addition, we experience surges in online traffic and orders associated with promotional activities of third-party sellers typically in March, July, November and December of each year, which can put additional demands on our platform at specific times. If our existing or future platform does not function properly, it could cause system disruptions and slow response times, affecting data transmission, which in turn could materially and adversely affect our business, financial condition and results of operations.

 

The personal data and other confidential information of our customers which we collect or are provided access to may subject us to liabilities imposed by relevant governmental regulations or expose us to risks of cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. Failure to protect confidential information of our customers and network against security breaches could damage our reputation and brand and substantially harm our business and results of operations.

 

A significant challenge to the e-commerce industry is the secure storage of confidential information and its secure transmission over public networks. All customer orders of our online marketplace are made through our website or mobile application. In addition, all online payments are settled through third-party online payment services. We also receive and store certain personal identifiable information and other confidential data about our customers in our system, such as their names, addresses, phone numbers and transaction records. Maintaining complete security for the storage and transmission of confidential information on our platform, such as user names, personal information and billing addresses, is essential to maintaining customer confidence. Hence, we are subject to complex and evolving laws and regulations regarding privacy, data protection and other matters. Many of these laws and regulations are subject to constant evolvement and change and uncertain interpretation. Any violation of these laws could result in investigations, claims, changes to our business practices, increased cost of operations and declines in user growth, retention or engagement, any of which could materially and adversely affect our business, results of operations and financial condition. There are numerous laws regarding privacy and the storing, sharing, use, disclosure and protection of personally identifiable information and user data. Specifically, personally identifiable and other confidential information is increasingly subject to legislation and regulations in numerous Chinese and international jurisdictions, the intent of which is to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. This regulatory framework for privacy issues in China and worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. In addition, there may be limits on the cross-border transmission of user data even to the extent that such transmission is within our company. We could be adversely affected if legislation or regulations are expanded to require changes in business practices or privacy policies, or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, financial condition and results of operations. In addition to laws, regulations and other applicable rules regarding privacy and privacy advocacy, industry groups or other private parties may propose new and different privacy standards. Because the interpretation and application of privacy and data protection laws and privacy standards are still uncertain, it is possible that these laws or privacy standards may be interpreted and applied in a manner that is inconsistent with our practices. Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws, regulations and privacy standards, could result in additional cost and liability for us, damage our reputation, inhibit the use of our platform and harm our business.

 

13

 

 

In addition, the data we possess may make us an attractive target for and potentially vulnerable to, cyber attacks, computer viruses, physical or electronic break-ins or similar disruptions. Furthermore, some of the data we possess is stored on our servers, which are hosted by third parties. While we and our third-party hosting facilities have taken steps to protect confidential information to which we have access, our security measures may be breached in the future. Any accidental or willful security breaches or other unauthorized access to our website and system could cause confidential customer information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liabilities related to the loss of the information, time-consuming and expensive litigation and negative publicity. If our security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, our relationships with our customers could be severely damaged, and we could incur significant liability.

 

We have adopted security policies and measures, including encryption technology, to protect our proprietary data and customer information in the future. However, advances in technology, the expertise of hackers, new discoveries in the field of cryptography or other events or developments could result in a compromise or breach of the technology that we use to protect confidential information. We may not be able to prevent third parties, especially hackers or other individuals or entities engaging in similar activities, from illegally obtaining such confidential or private information we hold as a result of our customers’ visits to our website or mobile application. Such individuals or entities obtaining our customers’ confidential or private information may further engage in various other illegal activities using such information. In addition, we have limited control or influence over the security policies or measures adopted by third-party providers of online payment services through which some of our customers may elect to make payment for purchases. The contracted third-party couriers we use may also violate their confidentiality obligations and disclose or use information about our customers illegally. Any negative publicity on our safety or privacy protection mechanisms and policies, and any claims asserted against us or fines imposed upon us as a result of actual or perceived failures, could have a material and adverse effect on our public image, reputation, financial condition and results of operations. Any breach of our information security measures may occur in the future. If we give third-parties greater access to our platform in the future as part of providing more technology services to third-party sellers and others, it may become more challenging for us to ensure the security of our systems. Any compromise of our information security or the information security measures of our contracted third-party couriers or third-party online payment service providers could have a material and adverse effect on our reputation, business, prospects, financial condition and results of operations.

 

Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we and our third-party hosting facilities may not be able to anticipate these techniques or implement adequate preventative measures. In addition, the Administrative Measures for the Security of the International Network of Computer Information Network, effective on December 30, 1997 and amended on January 8, 2011, requires us to report any data or security breaches to the local offices of the PRC Ministry of Public Security within 24 hours of any such breach. The Cyber Security Law of the PRC (effective on June 1, 2017) requires that when we discover that our network products or services are subject to risks such as security defects or bugs, we must take remedial measures immediately, including but not limited to, informing users of the specific risks and reporting such risks to the relevant competent departments. Any security breach, whether actual or perceived, would harm our reputation, and could cause us to lose customers and adversely affect our business and results of operations.

 

Technology employed by hackers constantly evolves, so that the security measures and our third-party system security service providers may not be able to fully anticipate attacks and implement necessary prevention measures or in time.

 

Any deficiencies in China’s internet infrastructure could impair our ability to sell products over our website, which could cause us to lose customers and harm our operating results.

 

Our online marketplace business depends on the performance and reliability of the internet infrastructure in China. The availability of our website depends on telecommunications carriers and other third-party providers for communications and storage capacity, including bandwidth and server storage, among other things. If we are unable to enter into and renew agreements with these providers on acceptable terms, or if any of our existing agreements with such providers are terminated as a result of our breach or otherwise, our ability to provide an efficient online marketplace could be adversely affected. Almost all access to the internet in China is maintained through state-owned telecommunication carriers under administrative control, and we obtain access to end-user networks operated by such telecommunications carriers and internet service providers to give customers access to our website. We have experienced service interruptions in the past, which were typically caused by service interruptions at the underlying external telecommunications service providers, such as the internet data centers and broadband carriers from which we lease services. Service interruptions prevent consumers from accessing our website and placing orders, and frequent interruptions could frustrate customers and discourage them from attempting to place orders, which could cause us to lose customers and harm our operating results.

 

14

 

 

If we fail to adopt new technologies or adapt our website and systems to changing customer requirements or emerging industry standards, our business may be materially and adversely affected.

 

To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our website. The internet and the e-commerce industry are characterized by rapid technological evolution, changes in customer requirements and preferences, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices, any of which could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business, and respond to technological advances and emerging industry standards and practices, such as mobile internet, in a cost-effective and timely way. The development of websites or other proprietary technology entails significant technical and business risks. We may not be able to use new technologies effectively or adapt our website, proprietary technologies and systems to meet customer requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely manner a response to changing market conditions or customer requirements, whether for technical, legal, financial or other reasons, our business, prospects, financial condition and results of operations may be materially and adversely affected.

 

We may not be able to recoup the capital expenditures or investments we make to expand and upgrade technology capabilities.

 

We have invested and will continue to invest significantly in upgrading our technology platform. We expect to continue to invest in our technology capabilities as our business further develops. It is very likely that we incur costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. We may not even be able to recover our capital expenditures or investments, in part or in full, or the recovery of these capital expenditures or investments may take longer than expected. As a result, the carrying value of the related assets may be subject to an impairment charge, which could adversely affect our profitability.

 

Our delivery, return and exchange policies may adversely affect our results of operations.

 

We have adopted shipping policies that do not necessarily pass the full shipping cost on to our customers. We may also be required by laws and regulations to adopt new or amend existing return and exchange policies from time to time. For example, pursuant to the amended Consumer Protection Law, which became effective in March 2014, consumers are generally entitled to return products purchased within seven days upon receipt without giving any reasons when they purchase the products from business operators on the internet. See “PRC Regulations — Regulations Relating to Product Quality and Consumer Protection.” These policies improve customers’ shopping experience and promote customer loyalty, which in turn help us acquire and retain customers. However, these policies also subject us to additional costs and expenses which we may not recoup through increased revenue. Our ability to handle a large volume of returns is unproven. If our return and exchange policy is misused by a significant number of customers, our costs may increase significantly and our results of operations may be materially and adversely affected. If we revise these policies to reduce our costs and expenses, our customers may be dissatisfied, which may result in loss of existing customers or failure to acquire new customers in a timely manner, which may materially and adversely affect our results of operations.

 

If we fail to manage our inventory effectively for our product sale business, our results of operations, financial condition and liquidity may be materially and adversely affected.

 

Our air refresher product business requires us to manage a large volume of inventory effectively. We depend on our forecasts of demand for and popularity of various products to manage our inventory. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. Demand may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product defects, changes in consumer spending patterns, changes in consumer tastes with respect to our products and other factors, and our customers may not order products in the quantities that we expect. It may be difficult to accurately forecast demand, and determine appropriate product or component.

 

15

 

 

If we fail to manage our inventory effectively, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices in order to reduce inventory level, our profit margins might be negatively affected. Any of the above may materially and adversely affect our results of operations and financial condition.

 

Any interruption in the operation of our logistics centers for an extended period may have an adverse impact on our direct sale business.

 

The products we sell directly on our internet platform are stored in our logistics centers. We have logistics centers in Dongguan, Guangdong, China. Our ability to process and fulfill orders accurately and provide high quality customer service depends on the smooth operation of our logistics centers.

 

Our logistic and fulfillment facilities are leased from third parties. If any of the landlords terminate the lease agreements with us, or materially alter any existing arrangements with us, we may be forced to leave the premises and our ability to fulfill customer orders will be adversely affected. Our fulfillment infrastructure may also be vulnerable to damage caused by fire, flood, power outage, telecommunications failure, break-ins, earthquake, human error and other events. The occurrence of any of the foregoing risks could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

The agreements governing the loan facilities Guangdong CarHouse 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, Guangdong CarHouse has the obligation to obtain such lenders’ approvals prior to certain corporate actions. Such corporation actions include, among other events, mergers, equity transfers, reorganization, creation of encumbrance on material assets and other events that affect the ability of Guangdong CarHouse to repay applicable loans. In addition, pursuant to its loan agreements, Guangdong CarHouse has the obligation to notify the lenders prior to certain corporate actions such as involvement in legal proceedings, seized or frozen assets and certain material related party transactions. See “Business – Material Contracts.”

 

The foregoing provisions restrict, among other aspects, the ability of Guangdong CarHouse 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; 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 Guangdong CarHouse, 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 and adversely affect our financial condition and operating results.”

 

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. 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 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.

 

16

 

 

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

 

We have incurred expenses on a variety of different marketing and brand promotion efforts designed to enhance our brand recognition and increase sales of our products. Our marketing and promotional activities may not be well received by customers and may not result in the levels of product sales that we anticipate. We incurred $208,963 and $66,427 in marketing expenses in the six months ended December 31, 2019 and 2018, respectively, and $332,520 and $742,533 in fiscal year ended June 30, 2019 and 2018, respectively. Marketing approaches and tools in the consumer products market in China are evolving. This further requires us to enhance our marketing approaches and experiment with new marketing methods to keep pace with industry developments and customer preferences, which may not be as cost-effective as our marketing activities in the past and may lead to significantly higher marketing expenses in the future. While our existing marketing strategies have helped increase our brand awareness, we cannot assure you that we can continue to produce, or benefit from, such strategies in the future. Failure to refine our existing marketing approaches or to introduce new effective marketing approaches in a cost-effective manner could reduce our market share, cause our net revenue to decline and negatively impact our profitability.

 

Any harm to our brand or reputation may materially and adversely affect our business and results of operations.

 

We believe that the recognition and reputation of our 香百年 Carori and 爱车小屋 brands among our customers and purchasers on our platform have contributed to the growth of our business. Maintaining and enhancing the recognition and reputation of our brand are critical to our business and competitiveness. Many factors, some of which are beyond our control, are important to maintaining and enhancing our brand. These factors include our ability to:

 

provide a compelling online shopping experience to users of our platform;

 

maintain the popularity, attractiveness, diversity, quality and authenticity of the products offered through our platform;

 

maintain or improve customers’ satisfaction with our services;

 

increase brand awareness through marketing and brand promotion activities; and

 

preserve our reputation and goodwill in the event of any negative publicity on customer service, internet security, product quality, price or authenticity, or other issues affecting us or other online retail businesses in China.

 

A public perception that non-authentic, counterfeit or defective goods are sold on our website or that we or third-party service providers do not provide satisfactory customer service, even if factually incorrect or based on isolated incidents, could damage our reputation, diminish the value of our brand, undermine the trust and credibility we have established and have a negative impact on our ability to attract new customers or retain our current customers. If we are unable to maintain our reputation, enhance our brand recognition or increase positive awareness of our website, products sold via our website and services, it may be difficult to maintain and grow our customer base, and our business and growth prospects may be materially and adversely affected.

 

From time to time we may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt our business and adversely affect our financial results.

 

We may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our platform and better serve our customers. 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 such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.

 

17

 

 

Strategic investments or acquisitions may 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 platforms;

 

difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;

 

difficulties in retaining relationships with customers, employees and suppliers of the acquired business;

 

risks of entering markets in which we have limited or no prior experience;

 

regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business;

 

assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;

 

failure to successfully further develop the acquired technology;

 

liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;

 

potential disruptions to our ongoing businesses; and

 

unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.

 

We may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits. In addition, future investment in or acquisition of new businesses or technology may not lead to the successful development of new or enhanced products and services or that any new or enhanced products and services, if developed, will achieve market acceptance or prove to be profitable.

 

Our success is dependent on retaining key personnel who would be difficult to replace.

 

Our success depends largely on the continued services of our key management members. In particular, our success depends on the continued efforts of Mr. Haitao Jiang, our Chief Executive Officer and Chairman. Mr. Jiang has been instrumental in developing our business model and is crucial to our business development. Mr. Jiang may not continue in his present capacities for any particular period of time. The loss of the services of Mr. Jiang could materially and adversely affect our business development. In addition, we rely on officers and directors of our operating entity, such as Chonghao Xiao and Xinglin Fang for key aspects of our operations, including sales, platform design and development. The loss of these key employees would negatively affect our ability to provide satisfactory service, maintain existing customers, capture new market share and increase our revenue.

 

18

 

 

Our executive officers have limited 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, except that one officer serving in the capacity as an independent director of a U.S. public company. Their limited prior experience in operating a U.S. public company 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 stock price.

 

We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.

 

We regard our trademarks, domain names, trade secrets, proprietary technologies and other intellectual property as critical to our business. We rely on a combination of intellectual property laws and contractual arrangements, including confidentiality agreements with our employees, partners and others, to protect our proprietary rights. As of the date of this prospectus, we have obtained 235 patents from the PRC related to technologies used in our auto perfume and air freshener products. We have also registered 155 trademarks with the China Trademark Office and 349 copyright registrations with the PRC. See “Business – Intellectual Property.”

 

It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Policing any unauthorized use of our intellectual property is difficult and costly and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could materially and adversely affect our business, financial condition and results of operations.

 

We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.

 

We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate patents, copyright or other intellectual property rights held by third parties. We have been, and from time to time in the future may be, subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be other third party intellectual property that is infringed by our products, services or other aspects of our business. There could also be existing patents of which we are not aware that our products may inadvertently infringe. Holders of patents purportedly relating to some aspect of our platform or business, if any such holders exist, may seek to enforce such patents against us in China, the United States or any other jurisdictions. Further, the application and interpretation of China’s patent laws and the procedures and standards for granting patents in China are still evolving and are uncertain, and PRC courts or regulatory authorities may not agree with our analysis. If we are found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur significant expenses, and may be forced to divert management’s time and other resources from our business and operations to defend against these third-party infringement claims, regardless of their merits. Successful infringement or licensing claims made against us may result in significant monetary liabilities and may materially disrupt our business and operations by restricting or prohibiting our use of the intellectual property in question.

 

We may be subject to allegations, lawsuits and negative publicity claiming that items listed and content available in our digital economy are pirated, counterfeit or illegal.

 

We may be the subject of allegations that items offered, sold or made available through our online marketplaces by third parties infringe third-party copyright, trademarks and patents or other intellectual property rights. Although we have adopted measures to proactively verify the products sold on our marketplaces for infringement and to minimize potential infringement of third-party intellectual property rights through our intellectual property infringement complaint and take-down procedures, these measures may not always be successful. In the event that alleged counterfeit or infringing products are listed or sold on our marketplaces or allegedly infringing content are made available through our other services, we could face claims and negative publicity relating to these activities or for our alleged failure to act in a timely or effective manner in response to infringement or to otherwise restrict or limit these activities. We may also choose to compensate consumers for any losses, although we are currently not legally obligated to do so. If, as a result of regulatory developments, we are required to compensate consumers, we would incur additional expenses.

 

Measures we take to protect against these potential liabilities could require us to spend substantial additional resources and/or experience reduced revenues. In addition, these measures may reduce the attractiveness of our digital economy to consumers, merchants, brands, retailers and other participants. A merchant or online marketer whose content is removed or whose services are suspended or terminated by us, regardless of our compliance with the applicable laws, rules and regulations, may dispute our actions and commence action against us for damages based on breach of contract or other causes of action, make public complaints or allegations or organize group protests and publicity campaigns against us or seek compensation. Any costs incurred as a result of liability or asserted liability relating to the sale of unlawful goods or other infringement could harm our business.

 

19

 

 

Government regulation especially E-Commerce Law is evolving and unfavorable changes could harm our business.

 

We are subject to general business regulations and laws, as well as regulations and laws specifically governing e-commerce. In August 2018, the Standing Committee of the National People’s Congress promulgated the E-Commerce Law, which became effective on January 1, 2019. The E-Commerce Law generally provides that e-commerce operators must obtain administrative licenses if business activities conducted by the e-commerce operators are subject to administrative licensing requirements under applicable laws and regulations. In addition, the E-Commerce Law imposes a number of new obligations on e-commerce platform operators, including the obligations: (i) to verify and register platform merchants, (ii) to ensure platform cybersecurity, including, but not limited to, data privacy, (iii) to ensure fair dealing and the legitimate rights and interests of consumers on the platform, (iv) to publicize transaction information preservation and transaction rules, and (v) to protect intellectual properties. See “Regulation—Regulations Relating to E-Commerce Industry” for further details. The new regulatory requirements may have a material adverse impact on our business and results of operations. As no detailed interpretation and implementation rules have been promulgated, it remains uncertain how the newly adopted E-Commerce Law will be interpreted and implemented. We cannot assure you that our current business operations satisfy the obligations provided under the E-Commerce Law in all respects. If the PRC governmental authorities determine that we are not in compliance with all the requirements proposed under the E-Commerce Law, we may be subject to fines and/or other sanctions.

  

Any lack of requisite approvals, licenses or permits applicable to our business or failure to comply with any requirements of PRC laws, regulations and policies may have a material and adverse impact on our business, financial condition and results of operations.

 

Our business is subject to governmental supervision and regulation by the relevant PRC governmental authorities, including the Ministry of Commerce (“MOFCOM”), the Ministry of Industry and Information Technology (“MIIT”), the State Administration for Market Regulation (“SAMR”), the State Internet Information Office, and other governmental authorities in charge of the relevant categories of products sold and services provided by us. Together, these government authorities promulgate and enforce regulations that cover many aspects of our operation of e-commerce platform, including entry into this industry, the scope of permissible business activities, licenses and permits for various business activities, and foreign investment. We are required to hold a number of licenses and permits for our business operations. We are in the process of applying for these licenses, permits and filings as permitted by relevant laws, regulations and practice of relevant PRC governmental authorities.

 

As of the date of this prospectus, we have not received any notice of warning or been subject to penalties or other disciplinary actions from relevant governmental authorities regarding our business operations without the required licenses, permits or filings. However, we cannot assure you that we will not be subject to any penalties or disciplinary actions in the future. There exist substantial uncertainties with respect to interpretation and application of existing PRC laws, regulations and policies, and new laws, regulations or policies regulating the internet industry may also be promulgated in the future, which together result in substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses activities of, internet businesses in China, including our business.

 

We may be subject to fines from PRC government due to insufficient payments to the social insurance and housing fund of the employees.

 

Pursuant to the PRC Social Insurance Law of China effective from July 1, 2011, and the PRC Housing Provident Fund Regulation which was amended and became effective on March 24, 2002, employers in China shall register with relevant social insurance agency and housing provident fund management center, and open special housing provident fund accounts for each of their employees, and pay contributions to the social insurance and the housing provident fund for their employees. Such contribution amount payable shall be calculated based on the employee’s actual salary in accordance with the relevant regulations. In case the employer failed to make sufficient payment of the social insurance, it may be subject to fines up to 3 times of underpayment amount. If the employer failed to register with relevant housing provident fund management center or to open special housing provident fund accounts for the employees within the required time window, a fine in the range of RMB 10,000 (approximately $1,418) to RMB 50,000 (approximately $7,091) may be imposed to the employer. In addition, if the employer fails to make sufficient contributions to housing provident fund as required, the housing provident fund management center shall order it to make the payment and deposit within a prescribed time window. If the payment has not been made timely, the housing provident fund management center may request the people’s court for compulsory enforcement. On July 20, 2018, the General Office of the Communist Party of China and the General Office of the State Council jointly issued the Reform Plan on Tax Collection and Administration Systems for Local Offices of the State Administration of Taxation and Local Taxation Bureaus, according to which the collection and administration authorities of social insurance will be transferred from the social insurance departments to competent tax authorities, and the supervision over the payment of social insurance will be significantly strengthened in the way that an enterprise must pay social insurance for its employees based on their overall salary at certain legally required rates.

 

As of the date of this prospectus, we have not received any notice of warning or been subject to penalties or other disciplinary actions from relevant governmental authorities regarding our payment of the social insurance and housing fund of the employees. However, we cannot assure you that we will not be subject to any penalties or disciplinary actions in the future. If we are fined due to insufficient payment of the social insurance and housing fund of the employees, our business operations could be materially and adversely affected.

 

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

 

We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide products and services on our platform.

 

20

 

 

Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus disease (COVID-19).

 

An outbreak of respiratory illness caused by COVID-19 emerged in Wuhan city, Hubei province, PRC in late 2019 and has been expanding within the rest of the PRC, including Guangdong province, where our principal operations and businesses take place, and globally. The new strain of COVID-19 is considered to be highly contagious and poses a serious public health threat. On January 23, 2020, the PRC government announced the lockdown of Wuhan city in an attempt to quarantine the city. Since then, other measures including travel restrictions have been imposed in other major cities in the PRC and throughout the world in an effort to contain the COVID-19 outbreak. The WHO is closely monitoring and evaluating the situation. On March 11, 2020, the WHO declared the outbreak of COVID-19 a pandemic, expanding its assessment of the threat beyond the global health emergency it had announced in January.

  

Any outbreak of such epidemic illness or other adverse public health developments in the PRC or elsewhere in the world may materially and adversely affect the global economy, our markets and our business. In compliance with the government health emergency rules in place, we temporarily closed all offices in China and ceased production operations from January 19, 2020 to February 10, 2020. The management expects a short-term decline in sales in the third quarter of fiscal 2020 due to the temporary closures. However, the pandemic may have impact on our business, depending on the duration and severity of the pandemic’s impact on our employees and customers.  A prolonged disruption or any further unforeseen delay in our operations could continue to result in delays in the shipment of products to our customers, increased costs and reduced revenue.

 

We cannot foresee whether the outbreak of COVID-19 will be effectively contained, nor can we predict the severity and duration of its impact. If the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial condition may be materially and adversely affected as a result of the deteriorating market outlook, the slowdown in regional and national economic growth, weakened liquidity and financial condition of our customers and other factors that we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, cause uncertainties in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and materially and adversely impact our business, financial condition and results of operations.

 

We have identified material weaknesses in our internal control over financial reporting. If we fail to develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.

 

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. We have identified “material weaknesses” and other control deficiencies including significant deficiencies in our internal control over financial reporting. As defined in the standards established by the Public Company Accounting Oversight Board of the United States, or PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

 

One material weakness that has been identified related to our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of the generally accepted accounting principles in the United States (“U.S. GAAP”) and SEC reporting requirements to properly address complex U.S. GAAP accounting issues and to prepare and review our consolidated financial statements and related disclosures to fulfill U.S. GAAP and SEC financial reporting requirements. The other material weakness that has been identified related to our lack of comprehensive accounting policies and procedures manual in accordance with U.S. GAAP. We plan to implement a number of measures to address the material weaknesses upon consummation of our initial public offering, including but not limited to, engaging experienced accounting staff to assist us in establishing appropriate policies and procedures in accordance with U.S. GAAP.

 

21

 

 

Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting as we and they will be required to do after we become a public company. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional deficiencies may have been identified.

 

Upon completion of this offering, we will become subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, will require that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending June 30, 2020.

 

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

  

Recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and an act passed by the US Senate all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.

 

On April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.

 

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

 

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

 

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

 

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess our auditor’s compliance with the applicable professional standards. Our auditor is headquartered in Manhattan, New York, and has been inspected by the PCAOB on a regular basis with the last inspection in May 2018. However, the recent developments would add uncertainties to our offering and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements.

  

We are currently entitled to a preferential tax rate and may not be eligible for such treatment in the future.

 

According to the Enterprise Income Tax Law and Administrative Measures for the Recognition of High and New Technology Enterprise of the PRC, one of our PRC subsidiaries, Guangdong CarHouse, obtained the High and New Technology Enterprise Certification in 2016. As a result, we have received tax incentives of a reduced corporate income tax rate at 15% since 2016. Our High and New Technology Enterprise Certification will expire in December 2022. If we cannot renew our High and New Technology Enterprise Certification after its expiration, or if the relevant tax incentive policies for high and new technology enterprises change, we may be taxed at a higher rate and our net income will be adversely affected.

  

22

 

 

Risks Related to Doing Business in China

 

Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.

 

Our PRC subsidiary is subject to various PRC laws and regulations generally applicable to companies in China. The PRC legal system is based on written statutes. Unlike common law systems, it is a system in which legal cases have limited value as precedents. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past four decades has significantly increased the protections afforded to various forms of foreign or private-sector investment in China.

 

As relevant laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties.

 

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment in China could materially and adversely affect our business and impede our ability to continue our operations.

 

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies.

 

The PRC government extensively regulates the Internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the Internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations. Issues, risks and uncertainties relating to PRC government regulation of the Internet industry include, but are not limited to, the following:

 

The online commerce industry in China is still in an early stage of development and the PRC laws applicable to the industry are still evolving. Due to the lack of clarity under the existing PRC regulatory regime, we may be required to comply with additional legal and licensing requirements. For example, we are providing mobile applications to mobile device users and we are in the process of applying for the valued-added telecommunications business operating license for electronic data interchange business, or the EDI License. It is uncertain if our PRC subsidiary will be required to obtain a separate valued-added telecommunications business operating license for Internet content provision, or the ICP License in addition to the EDI License. Although we believe that we are not required to obtain such separate license which is in line with the current market practice, there can be no assurance that we will not be required to apply for an operating license for our mobile applications in the future.

 

The evolving PRC regulatory system for the Internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office (with the involvement of the State Council Information Office, the MIIT, and the Ministry of Public Security). The primary role of this new agency is to facilitate the policy-making and legislative development in this field to direct and coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to the Internet industry.

 

New laws and regulations may be promulgated that will regulate internet activities, including online retail. If these new laws and regulations are promulgated, additional licenses may be required for our operations. If our operations do not comply with these new regulations at the time they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.

 

23

 

 

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the Internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain new ones.

 

Regulation and censorship of information disseminated over the Internet in China may adversely affect our business, and we may be liable for content that is displayed on our website.

 

China has enacted laws and regulations governing Internet access and the distribution of products, services, news, information, audio-video programs and other content through the Internet. In the past, the PRC government has prohibited the distribution of information through the internet that it deems to be in violation of PRC laws and regulations. If any of our internet information was deemed by the PRC government to violate any content restrictions, we would not be able to continue to display such content and could become subject to penalties, including confiscation of income, fines, suspension of business and revocation of required licenses, which could materially and adversely affect our business, financial condition and results of operations. We may also be subject to potential liability for any unlawful actions of our customers or users of our website or for content we distribute that is deemed inappropriate. It may be difficult to determine the type of content that may result in liability to us, and if we are found to be liable, we may be prevented from operating our website in China.

 

Anti-monopoly and unfair competition claims or regulatory actions against us may result in our being subject to fines as well as constraints on our business.

 

The PRC anti-monopoly enforcement agencies have in recent years strengthened enforcement under the PRC Anti-monopoly Law, including levying significant fines, with respect to concentration of undertakings and cartel activity, mergers and acquisitions, as well as abusive behavior by companies with market dominance. In March 2018, the SAMR was formed as a new governmental agency to take over, among other things, the anti-monopoly enforcement functions from the relevant departments under the MOFCOM, the National Development and Reform Commission (“NDRC”), and the State Administration for Industry and Commerce (“SAIC”), respectively. Since its inception, the SAMR has continued to strengthen its anti-monopoly enforcement. The SAMR issued a new set of guidelines with respect to merger control review in September 2018, and issued the Notice on Anti-monopoly Enforcement Authorization on December 28, 2018, which grants authorizations to the SAMR’s province-level branches for anti-monopoly enforcement within their respective jurisdictions. In June 2019, the SAMR promulgated three supporting regulations of the PRC Anti-Monopoly Law, namely, the Interim Provisions on the Prohibition of Monopoly Agreements which refines the methods and procedures for the determination of monopoly agreements, the Interim Provisions on Prohibiting Acts of Abuse of Market Dominance which clarifies the identification and handling of illegal acts including the consideration for determining the market dominance of the Internet and intellectual property, and the Interim Provisions on Prohibiting Acts of Abuse of Administrative Authority to Eliminate or Restrict Competition which clarifies the types and the methods of handling. These three supporting regulations became effective on September 1, 2019. The SAMR recently has also imposed several administrative penalties on various companies for failing to duly make filings as to their transactions subject to merger control review by the SAMR. The scope of the companies that were penalized is broad, and covers a variety of different industries.

 

The PRC Anti-monopoly Law also provides a private right of action for competitors, business partners or customers to bring anti-monopoly claims against companies. In recent years, an increased number of companies have been exercising their right to seek relief under the PRC Anti-monopoly Law. As public awareness of the rights under the PRC Anti-monopoly Law increases, more companies, including our competitors, business partners and customers may resort to the remedies available under the PRC Anti-monopoly Law, such as through complaints to regulators or as plaintiffs in private ligation, to hinder our business operations and improve their competitive position, regardless of the merits of their claims. Any of the above actions against us could materially and adversely affect our business, operations, reputation, brand and the trading price of our ordinary shares.

 

24

 

 

In light of our market share in the auto air freshener market, we may receive close scrutiny from government agencies under the PRC Anti-monopoly Law in connection with our business practices, investments and acquisitions. Any anti-monopoly lawsuit, regulatory investigations or administrative proceeding initiated against us could result in our being subject to profit disgorgement, heavy fines and various constraints on our business, or result in negative publicity that could harm our reputation and negatively affect the trading prices of our ordinary shares. These constraints could include forced termination of any agreements or arrangements that are determined by governmental authorities to be in violation of anti-monopoly laws, required divestitures and limitations on certain pricing and business practices, which may limit our ability to continue to innovate, diminish the appeal of our services, increase our operating costs and prevent us from pursuing our investment and acquisition strategy. These constraints could also encourage our competitors to develop platforms, websites, products and services that mimic the functionality of our services, which could decrease the popularity of our marketplaces or other businesses we operate, products and services among merchants, consumers and other participants, and cause our revenue and net income to decrease materially. Given the scale and rapid expansion of our business, we may be subject to greater scrutiny, which could in turn increase the likelihood that we will face regulatory action that could result in fines or restrictions on our business as well as negative publicity and adversely affect our reputation and the trading price of our ordinary shares.

 

The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and our results of operations.

 

The PRC Labor Law and the Labor Contract Law require that employers must execute written employment contracts with full-time employees. All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract Law may result in the imposition of fines, compensations and other administrative sanctions, and serious violations may constitute criminal offenses.

 

The PRC Labor Contract Law became effective and was implemented on January 1, 2008, which was amended on December 28, 2012. It has reinforced the protection of employees who, under the PRC Labor Contract Law, have the right, among others, to enter into written labor contracts, to enter into labor contracts with no fixed terms under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts. According to the PRC Social Insurance Law, which became effective on July 1, 2011, and the Administrative Regulations on the Housing Funds, companies operating in China are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance and housing funds plans, and the employers must pay all or a portion of the social insurance premiums and housing funds for their employees.

 

As the interpretation and implementation of these laws and regulations are still evolving, our employment practice may not at all times be deemed in compliance with the new laws and regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely affected.

  

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

 

Currently all of our business operations are conducted in China and a significant portion of our sales are made in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

 

China’s economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures since the late 1970’s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, which are generally viewed as a positive development for foreign business investment, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over the PRC economic growth through allocating resources, controlling payments of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

  

25

 

 

While China’s economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing down. Some of the governmental measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. Any stimulus measures designed to boost the Chinese economy may contribute to higher inflation, which could adversely affect our results of operations and financial condition. For example, certain operating costs and expenses, such as employee compensation and office operating expenses, may increase as a result of higher inflation. In addition, the PRC government has implemented in the past certain measures to control the pace of economic growth. These measures may cause decreased economic activity, which in turn could lead to a reduction in demand for our products and services, and consequently have a material adverse effect on our businesses, financial condition and results of operations.

 

Restrictions on currency exchange or outbound capital flows may limit our ability to utilize our PRC revenue effectively.

 

Substantially all of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but requires approval from or registration with appropriate government authorities or designated banks under the “capital account,” which includes foreign direct investment and loans, such as loans we may secure from our onshore subsidiaries. Currently, our PRC subsidiaries, a foreign invested enterprise, may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the approval of the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions.

 

Since 2016, PRC governmental authorities have imposed more stringent restrictions on outbound capital flows, including heightened scrutiny over “irrational” overseas investments for certain industries, as well as over four kinds of “abnormal” offshore investments, which are:

 

investments through enterprises established for only a few months without substantive operation;

 

investments with amounts far exceeding the registered capital of onshore parent and not supported by its business performance shown on financial statements;

 

investments in targets that are not related to onshore parent’s main business; and

 

investments with abnormal sources of Renminbi funding suspected to be involved in illegal transfer of assets or illegal operation of underground banking.

 

On January 26, 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, which tightened the authenticity and compliance verification of cross-border transactions and cross-border capital flow. In addition, the Outbound Investment Sensitive Industry Catalogue (2018) lists certain sensitive industries that are subject to NDRC pre-approval requirements prior to remitting investment funds offshore, which subjects us to increased approval requirements and restrictions with respect to our overseas investment activity. Since a significant amount of our PRC revenue is denominated in Renminbi, any existing and future restrictions on currency exchange or outbound capital flows may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC, make investments, service any debt we may incur outside of China or pay dividends in foreign currencies to our shareholders, including holders of our ordinary shares.

 

26

 

 

PRC regulations relating to foreign exchange registration of overseas investment by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into these subsidiaries, limit PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

 

On July 4, 2014, SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, which replaced the former Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles (generally known as SAFE Circular 75) promulgated by SAFE on October 21, 2005. On February 13, 2015, SAFE further promulgated the Circular on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Circular 13, which took effect on June 1, 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 direct establishment or indirect control of an offshore entity established for the purpose of overseas investment or financing, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. Qualified local banks will directly examine and accept foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under Circular 37 from June 1, 2015. Moreover, a failure to comply with the various registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.

 

These circulars further require amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease of capital contributed by PRC residents, share transfer or exchange, merger, division or other material events. In the event that a PRC resident holding interests in a special purpose vehicle fails to complete the required SAFE registration, the PRC subsidiary of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, it is unclear how this regulation, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant PRC government authorities, and we cannot predict how these regulations will affect our business operations or future strategy. Failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. This may have a material adverse effect on our business, financial condition and results of operations.

 

According to Circular 37 and Circular 13, our shareholders or beneficial owners who are PRC residents are subject to Circular 37 or other foreign exchange administrative regulations in respect of their investment in our company. To the best of our knowledge, our PRC resident shareholders who directly or indirectly hold shares in our British Virgin Islands holding company and who are known to us have initiated the application for foreign exchange registrations for their foreign investment in our company in accordance with Circular 37 and Circular 13. We have taken steps to notify significant beneficial owners of ordinary shares whom we know are PRC residents of their filing obligations. However, we may not at all times be fully aware or informed of the identities of all our shareholders or beneficial owners that are required to make such registrations, and we may not always be able to compel them to comply with all relevant foreign exchange regulations. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents will at all times comply with, or in the future make or obtain any applicable registrations or approvals required by all relevant foreign exchange regulations. The failure or inability of such individuals to comply with the registration procedures set forth in these regulations may subject us to fines or legal sanctions, restrictions on our cross-border investment activities or our PRC subsidiary’s ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

 

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. We cannot predict how these regulations will affect our business operations or future strategy. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

  

27

 

 

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

 

We are a company incorporated in the British Virgin Islands structured as a holding company conducting our operations in China through our PRC subsidiaries. As permitted under PRC laws and regulations, in utilizing the proceeds of this offering, we may make loans to our PRC subsidiaries subject to the approval from governmental authorities and limitation of amount, or we may make additional capital contributions to our PRC subsidiary. Furthermore, loans by us to our PRC subsidiary to finance its activities cannot exceed the difference between their respective total project investment amount and registered capital or twice of their net worth and capital contributions to our PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System and registration with other governmental authorities in China.

 

The SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or Circular 19, effective on June 1, 2015, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses. According to SAFE Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of bank loans that have been transferred to a third party. Although SAFE Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within the PRC, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether the SAFE will permit such capital to be used for equity investments in the PRC in actual practice. The SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to grant loans to non-associated enterprises. Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from this offering, to our PRC subsidiary, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC. 

 

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

 

28

 

 

Under the PRC Enterprise Income Tax Law, we may be classified as a PRC “resident enterprise” for PRC enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders and has a material adverse effect on our results of operations and the value of your investment.

 

Under the PRC Enterprise Income Tax Law, or the EIT Law, that became effective in January, 2008 and was amended in February, 2017, as well as its implementing rules, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. Under the implementation rules to the EIT Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, a circular, known as SAT Circular 82, issued in April 2009 by the State Administration of Taxation, or the SAT, specifies that certain offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. Further to SAT Circular 82, the SAT issued a bulletin, known as SAT Bulletin 45, which took effect in September 2011, to provide more guidance on the implementation of SAT Circular 82 and clarify the reporting and filing obligations of such “Chinese-controlled offshore incorporated resident enterprises.” SAT Bulletin 45 provides procedures and administrative details for the determination of resident status and administration on post-determination matters. Although both SAT Circular 82 and SAT Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining criteria set forth in SAT Circular 82 and SAT Bulletin 45 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, PRC enterprise groups or by PRC or foreign individuals.

 

We do not believe that we, as a company incorporated in the British Virgin Islands, meet all of the conditions above thus we do not believe that we are a PRC resident enterprise, though all members of our management team as well as the management team of our offshore holding company are located in China. However, if the PRC tax authorities determine that we are a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we will be subject to the uniform 25% enterprise income tax on our world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. 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.”

 

Finally, dividends payable by us to our investors and gains on the sale of our shares may become subject to PRC withholding tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ordinary shares.

 

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

 

Under the PRC Enterprise Income Tax Law and its implementation rules, we, as a non-resident enterprise, that is, an enterprise lawfully incorporated pursuant to the laws of a foreign country (region) that has an office or premises established in China with no actual management functions performed in China, or an enterprise that has income derived from or accruing in China although it does not have an office or premises in 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. Guangdong CarHouse is wholly owned by CarHouse HK. Accordingly, CarHouse HK may qualify for a 5% tax rate in respect of distributions from Guangdong CarHouse. Under the Notice of the State Administration of Taxation on Issues regarding the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009, the taxpayer needs to satisfy certain conditions to enjoy the benefits under a tax treaty. These conditions include: (1) the taxpayer must be the beneficial owner of the relevant dividends, and (2) the corporate shareholder to receive dividends from the PRC subsidiary must have continuously met the direct ownership thresholds during the 12 consecutive months preceding the receipt of the dividends. Further, under Announcement of the State Administration of Taxation on Issues Relating to “Beneficial Owner” in Tax Treaties, which took effect on April 1, 2018, a “Beneficial Owner” shall mean a person who has ownership and control over the income and the rights and property from which the income is derived. To determine the “beneficial owner” status of a resident of the treaty counterparty who needs to enjoy the tax treaty benefits, a comprehensive analysis shall be carried out, taking into account actual conditions of the specific case.

 

29

 

 

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 State Administration of Taxation Circular 60 (“Circular 60”). Circular 60 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 tax treaties for dividends received from our PRC subsidiaries.

 

Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.

 

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the SAT on December 10, 2009, where a foreign investor transfers the equity interests of a resident enterprise indirectly via disposition of the equity interests of an overseas holding company, or an “indirect transfer,” and such overseas holding company is located in a tax jurisdiction that (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the foreign investor shall report the indirect transfer to the competent tax authority. The PRC tax authority will examine the true nature of the indirect transfer, and if the tax authority considers that the foreign investor has adopted an “abusive arrangement” in order to avoid PRC tax, it may disregard the existence of the overseas holding company and re-characterize the indirect transfer and as a result, gains derived from such indirect transfer may be subject to PRC withholding tax at a rate of up to 10%.

 

On February 3, 2015, the SAT issued the Announcement of the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfer by Non-Resident Enterprises, or SAT Bulletin 7, to supersede existing provisions in relation to the “indirect transfer” as set forth in Circular 698, while the other provisions of Circular 698 remain in force. Pursuant to SAT Bulletin 7, where a non-resident enterprise indirectly transfers properties such as equity in PRC resident enterprises without any justifiable business purposes and aiming to avoid the payment of enterprise income tax, such indirect transfer must be reclassified as a direct transfer of equity in PRC resident enterprise. To assess whether an indirect transfer of PRC taxable properties has reasonable commercial purposes, all arrangements related to the indirect transfer must be considered comprehensively and factors set forth in SAT Bulletin 7 must be comprehensively analyzed in light of the actual circumstances. SAT Bulletin 7 also provides that, where a non-PRC resident enterprise transfers its equity interests in a resident enterprise to its related parties at a price lower than the fair market value, the competent tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.

 

On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Matters Concerning Withholding of Income Tax of Non-resident Enterprises as Source, or SAT Bulletin 37, which repealed the entire Circular 698 and the provision in relation to the time limit for the withholding agent to declare to the competent tax authority for payment of such tax of SAT Bulletin 7. Pursuant to SAT Bulletin 37, the income from a property transfer, as stipulated in the second item under Article 19 of the Law on Enterprise Income Tax, shall include the income derived from transferring such equity investment assets as stock equity. The balance of deducting the equity’s net value from the total income from equity transfer shall be taxable income from equity transfer. Where a withholding agent enters into a business contract, involving the income specified in the third paragraph of Article 3 in the Law on Enterprise Income Tax, with a non-resident enterprise, the tax-excluding income of the non-resident enterprise will be treated as the tax-including income, based on which the tax payment will be calculated and remitted, if it is agreed in the contract that the withholding agent shall assume the tax payable. 

 

30

 

 

There has been very limited application of SAT Bulletin 7 and SAT Bulletin 37 because these regulations were newly issued and came into force in February 2015 and in December 2017 respectively. During the effective period of SAT Circular 698, some intermediary holding companies were actually looked through by the PRC tax authorities, and consequently the non-PRC resident investors were deemed to have transferred the PRC subsidiary and PRC corporate taxes were assessed accordingly. It is possible that we or our non-PRC resident investors may become at risk of being taxed under SAT Bulletin 7 and SAT Bulletin 37 and may be required to expend valuable resources to comply with SAT Bulletin 7 and SAT Bulletin 37 or to establish that we or our non-PRC resident investors should not be taxed under SAT Bulletin 7 and SAT Bulletin 37, which may have an adverse effect on our financial condition and results of operations or such non-PRC resident investors’ investment in us.

 

Our PRC subsidiary is subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements.

 

We are a company incorporated in the British Virgin Islands structured as a holding company. We may need dividends and other distributions on equity from our PRC subsidiary to satisfy our liquidity requirements. Current PRC regulations permit our PRC subsidiary to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiary may also allocate a portion of its after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends. Furthermore, if our PRC subsidiary incurs debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our subsidiary to distribute dividends or to make payments to us may restrict our ability to satisfy our liquidity requirements.

 

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

 

The future development of national security laws and regulations in Hong Kong could impact our Hong Kong holding subsidiary.

 

On May 28, 2020, the National People’s Congress of the PRC approved a proposal to impose a new national security law for Hong Kong and authorized the Standing Committee of the National People’s Congress to proceed to work out details of the legislation to be implemented in Hong Kong (the “March Decision”). While the details of the new law are still scarce as of the date of this prospectus, there is a risk that the March Decision may trigger sanctions or other forms of penalties by foreign governments, which may cause economic and other hardship for Hong Kong, including companies such as CarHouse HK, our holding subsidiary which is incorporated in Hong Kong. As the March Decision is new and details of the new law are limited as of the date of this prospectus, it is difficult to predict the impact, in any, the new law will have on CarHouse HK (including, without limitation, the ability of CarHouse HK to pay dividends or make distributions to us), as such impact will depend on future developments, which are highly uncertain and cannot be predicted.

 

Fluctuations in exchange rates could result in foreign currency exchange losses to us.

 

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. In August 2015, the People’s Bank of China, or PBOC, changed the way it calculates the mid-point price of Renminbi against the U.S. dollar, requiring the market-makers who submit for reference rates to consider the previous day’s closing spot rate, foreign-exchange demand and supply as well as changes in major currency rates. In 2017, the value of the Renminbi appreciated by approximately 6.3% against the U.S. dollar; and in 2018, the Renminbi depreciated by approximately 5.7% against the U.S. dollar. From the end of 2018 through the end of April 2019, the value of the Renminbi appreciated by approximately 2.0% against the U.S. dollar. It is difficult to predict how market forces or PRC or U.S. government policy, including any interest rate increases by the Federal Reserve, may impact the exchange rate between the Renminbi and the U.S. dollar in the future. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, including from the U.S. government, which has threatened to label China as a “currency manipulator,” which could result in greater fluctuation of the Renminbi against the U.S. dollar.

 

A substantial percentage of our revenues and costs are denominated in Renminbi, and a significant portion of our financial assets are also denominated in Renminbi while the majority of our debt is denominated in dollars. We are a holding company and we rely on dividends, loans and other distributions on equity paid by our operating subsidiaries in China. Any significant fluctuations in the value of the Renminbi may materially and adversely affect our liquidity and cash flows. If we decide to convert our Renminbi into U.S. dollars for the purpose of repaying principal or interest expense on our outstanding U.S. dollar-denominated debt, making payments for dividends on our ordinary shares or other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount we would receive. Conversely, to the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. From time to time we enter into hedging activities with regard to exchange rate risk. There can be no assurance that our hedging activities will successfully mitigate these risks adequately or at all, and in addition hedging activities may result in greater volatility in our financial results.

 

31

 

 

The approval of the China Securities Regulatory Commission may be required in connection with this offering under a regulation adopted in August 2006, and, if required, we cannot assure you that we will be able to obtain such approval.

  

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the China Securities Regulatory Commission (“CSRC”), prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. In September 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by a special purpose vehicle seeking CSRC approval of its overseas listings. However, substantial uncertainty remains regarding the scope and applicability of the M&A Rules to offshore special purpose vehicles. Currently, there is no consensus among leading PRC law firms regarding the scope and applicability of the CSRC approval requirement.

 

Our PRC counsel, Beijing Haotai Law firm, has advised us based on their understanding of the current PRC law, rules and regulations that the CSRC’s approval is not required for the listing and trading of our ordinary shares on Nasdaq in the context of this offering, given that:

 

  the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation; and

 

  our PRC subsidiaries were not established by a merger with or an acquisition of any PRC domestic companies as defined under the M&A Rules.

 

However, our PRC legal counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC governmental agencies, including the CSRC, would reach the same conclusion as we do. If it is determined that CSRC approval is required for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek CSRC approval for this offering. These sanctions may include fines and penalties on our operations in the PRC, limitations on our operating privileges in the PRC, delays in or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiaries, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ordinary shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ordinary shares that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ordinary shares we are offering, you would be doing so at the risk that the settlement and delivery may not occur.

 

There are uncertainties under the PRC Securities Law relating to the procedures and time requirement for the U.S. securities regulatory agencies to bring about investigations and evidence collection within the territory of the PRC.

 

On December 28, 2019, the newly amended Securities Law of the PRC (the “PRC Securities Law”) was promulgated, which became effective on March 1, 2020. According to Article 177 of the PRC Securities Law (the “Article 177”), the securities regulatory authority of the State Council may establish a regulatory cooperation mechanism with securities regulatory authorities of another country or region for the implementation of cross-border supervision and administration. Article 177 further provides that overseas securities regulatory authorities shall not engage in activities pertaining to investigating or obtaining evidence directly within the territories of the PRC, and that no Chinese entities or individuals shall provide documents and information in connection with securities business activities to any organizations and/or persons aboard without the prior consent of the securities regulatory authority of the State Council and the competent departments of the State Council. As of the date of this prospectus, we are not aware of any implementing rules or regulations which have been published regarding application of the Article 177.

 

As advised by our PRC counsel, the Article 177 is only applicable in circumstances related to direct investigation or evidence collection conducted by overseas authorities within the territory of the PRC. Our principal business operation is conducted in the PRC. In the event that the U.S. securities regulatory agencies carry out an investigation on us and there is a need to conduct investigation or collect evidence within the territory of the PRC, the U.S. securities regulatory agencies may consider cross-border cooperation with the securities regulatory authority of the PRC by way of judicial assistance, diplomatic channels or regulatory cooperation mechanism established with the securities regulatory authority of the PRC. However, there is no assurance that the U.S. securities regulatory agencies will succeed in establishing such cross-border cooperation in a specific case or establish such cooperation in a timely manner.

 

Furthermore, as the Article 177 is a recently promulgated provision and, as the date of this prospectus, there have not been implementing rules or regulations regarding the application of the Article 177, it remains unclear how it will be interpreted, implemented or applied by the Chinese Securities Regulatory Commission or other relevant government authorities. As such, there are uncertainties as to the procedures and time requirement for the U.S. securities regulatory agencies to conduct investigations and evidence collection within the territory of the PRC. If U.S. securities regulatory agencies are unable to conduct such investigations, they may determine to suspend or de-register our registration with the SEC and our securities may also be delisted from Nasdaq or other applicable trading market.

 

32

 

 

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

 

The M&A Rules discussed in the preceding risk factor and related regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. For example, the M&A Rules require that MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that have or may have impact on the national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand, (iv) or in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. Mergers, acquisitions or contractual arrangements that allow one market player to take control of or to exert decisive impact on another market player must also be notified in advance to the MOFCOM when the threshold under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, or the Prior Notification Rules, issued by the State Council in August 2008 is triggered.

 

In addition, the security review rules issued by the MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOFCOM, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement.

 

In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions. It is unclear whether our business would be deemed to be in an industry that raises “national defense and security” or “national security” concerns. However, the MOFCOM or other government agencies may publish explanations in the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in the PRC, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited. Our ability to expand our business or maintain or expand our market share through future acquisitions would as such be materially and adversely affected.

 

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

 

We are a company incorporated under the laws of the British Virgin Islands, we conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, all our senior executive officers reside within China for a significant portion of the time and all of them are PRC nationals. As a result, it may be difficult for you to effect service of process upon us or those persons inside mainland China. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors as none of them currently resides in the United States or has substantial assets located in the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.

 

The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of written arrangement with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.

 

33

 

 

If relations between the United States and China worsen, our business and operating results may be adversely impacted.

 

The U.S. government has recently made statements and taken certain actions that may lead to significant changes to U.S. and international trade policies, including recently-imposed tariffs affecting certain products manufactured in China. It is unknown whether and to what extent new tariffs (or other new laws or regulations will be adopted, or the effect that any such actions would have on us or our industry and users. Although cross-border business may not be an area of our major focus, if we increase the selling of our products internationally in the future, any unfavorable government policies on international trade, such as capital controls or tariffs, may affect the demand for our products and services, impact the competitive position of our products or prevent us from being able to sell products in certain countries. If any new tariffs, legislation and/or regulations are implemented, or if existing trade agreements are renegotiated or, in particular, if the U.S. government takes retaliatory trade actions due to the recent U.S.-China trade tension, such changes could have an adverse effect on our business, financial condition, results of operations.

 

Risks Related to this Offering and Ownership of Our Ordinary Shares

 

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

 

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

 

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;

  

a limited amount of news and analyst coverage; and

 

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

 

34

 

 

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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

changes in financial estimates by securities research analysts;

 

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

 

additions to or departures of our senior management;

 

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

 

35

 

 

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

 

release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares; and

 

sales or perceived potential sales of additional ordinary shares.

 

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

 

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise through future offerings of our ordinary shares. An aggregate of 56,250 shares were outstanding before the consummation of this offering and             shares will be outstanding immediately after this offering. All of the shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act.

 

You will experience immediate and substantial dilution.

 

The initial public offering price of our shares is expected to be substantially higher than the pro forma net tangible book value per share of our ordinary shares. Assuming the completion of the offering, if you purchase shares in this offering, you will incur immediate dilution of approximately        or approximately           % in the pro forma net tangible book value per share from the price per share that you pay for the shares. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

 

As a company incorporated in the British Virgin 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 a BVI business company incorporated in the British Virgin 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 British Virgin 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.

 

Following this offering, our principal shareholder, founder, Chief Executive Officer and Chairman of our board of directors, Mr. Haitao Jiang, 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.

 

36

 

 

Our management has certain level of discretion over use of proceeds of this offering.

 

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

 

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

 

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

 

We are a foreign private issuer and, as a result, will not be subject to U.S. proxy rules and will be subject to more lenient and less frequent Exchange Act reporting obligations than a U.S. issuer.

 

Upon consummation of this offering, we will report under the Exchange Act as a foreign private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including:

 

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

 

the sections of the Exchange Act that require insiders to file public reports of their stock ownership and trading activities and impose liability on insiders who profit from trades made in a short period of time; and

 

the rules under the Exchange Act that require the filing of quarterly reports on Form 10-Q containing unaudited financial and other specified information and current reports on Form 8-K upon the occurrence of specified significant events.

 

37

 

 

In addition, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year, while U.S. domestic issuers that are not large accelerated filers or accelerated filers are required to file their annual report on Form 10-K within 90 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation FD, aimed at preventing issuers from making selective disclosures of material information. As a result, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.

 

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

 

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

 

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company”, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s 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, which could harm our results of operations and require us to incur significant expenses to defend the suit. 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.

 

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 December 31, 2020. 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.

 

38

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

There can be no assurance that we will not be a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year, which could subject United States investors in our ordinary shares to significant adverse United States income tax consequences.

 

A non-United States corporation, such as our company, will be classified as a PFIC, for U.S. federal income tax purposes for any taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (determined on the basis of a quarterly average) during such year is attributable to assets that produce or are held for the production of passive income.

 

Based on our current composition of assets, subsidiaries and market capitalization (which will fluctuate from time to time), we do not expect to be or become a PFIC for U.S. federal income tax purposes. However, the determination of whether we will be or become a PFIC will depend, in part, upon the value of our goodwill and other unbooked intangibles. Furthermore, the determination of whether we will be or become a PFIC will depend, in part, on the composition of our income and assets. Fluctuations in the market price of our ordinary shares may cause us to become a PFIC for the current or subsequent taxable years. The composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. In addition, because there are uncertainties in the application of the relevant rules, it is possible that the Internal Revenue Service may challenge our classification of certain income and assets as non-passive or our valuation of our tangible and intangible assets.

 

39

 

 

Because determination of PFIC status is a fact-intensive inquiry made on an annual basis that depends upon the composition of our assets and income, no assurance can be given that we are not or will not become classified as a PFIC. If we were to be or become classified as a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation—United States Federal Income Taxation”) may incur significantly increased U.S. federal income tax on gain recognized on the sale or other disposition of our ordinary shares and on the receipt of distributions on the ordinary shares to the extent such gain or distributions is treated as an “excess distribution” under the U.S. federal income tax rules. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds our ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ordinary shares. You are urged to consult your tax advisor concerning the United States federal income tax consequences of acquiring, holding, and disposing of ordinary shares if we are or become classified as a PFIC. For more information, see “Taxation—United States Federal Income Taxation.”

 

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

 

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

 

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 British Virgin Islands law.

 

We are a company incorporated under the laws of the British Virgin Islands. As a result, it may be difficult for investors to enforce judgments obtained in the United States courts against our directors or officers.

 

Our corporate affairs will be governed by our memorandum and articles of association, the BVI Act and the common law of the British Virgin Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under British Virgin Islands law are governed by the BVI Act and the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived from English common law, and while the decisions of the English courts are of persuasive authority, they are not binding on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law may not be as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. In addition, while statutory provisions do exist in BVI law for derivative actions to be brought in certain circumstances, shareholders in BVI companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available with respect to any such action, may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred.

 

40

 

 

The British Virgin Islands courts are also unlikely:

 

to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws where that liability is in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company; and

 

to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.

 

There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will in certain circumstances recognize such a foreign judgment and treat it as a cause of action in itself which may be sued upon as a debt at common law so that no retrial of the issues would be necessary provided that the U.S. judgment:

 

  the U.S. court issuing the judgment had jurisdiction in the matter and the company either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process;

 

  is final and for a liquidated sum;

 

  the judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company;

 

  in obtaining judgment there was no fraud on the part of the person in whose favor judgment was given or on the part of the U.S. court;

 

  recognition or enforcement of the judgment would not be contrary to public policy in the British Virgin Islands; and

 

  the proceedings pursuant to which judgment was obtained were not contrary to natural justice.

 

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 board of directors, management or controlling shareholders than they would as public shareholders of a U.S. company. For a discussion of certain differences between the provisions of the BVI Act, remedies available to shareholders and the laws applicable to companies incorporated in the United States and their shareholders, see “Enforceability of Civil Liabilities” and “Description of Shares.”

 

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

 

We are a British Virgin Islands company and all of our assets are located outside of the United States. The majority of our current operations are conducted in the 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 or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the British Virgin 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 British Virgin Islands and China, see “Enforceability of Civil Liabilities.”

 

41

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that 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 these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:

 

our goals and growth strategies;

 

our expectations regarding demand for and market acceptance of our brand and platforms;

 

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

 

our ability to maintain and improve infrastructure necessary to operate our platforms;

 

competition in the car accessory and online retail industry in China;

 

the expected growth of, and trends in, the markets for our products and services in China;

 

relevant government policies and regulations relating to our corporate structure, business and industry;

 

our expectation regarding the use of proceeds from this offering;

 

general economic and business condition in China and elsewhere; and

 

assumptions underlying or related to any of the foregoing.

 

You should read thoroughly this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

 

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

42

 

 

USE OF PROCEEDS

  

After deducting the estimated underwriter’s discount and offering expenses payable by us, we expect to receive net proceeds of approximately $                 from this offering if the minimum offering is sold and approximately $                 if the maximum offering is sold. The net proceeds from this offering must be remitted to China before we will be able to use the funds to grow our business.

 

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

 

30% for enhancing data analysis and operational capacity of our e-commerce platform;

25% for marketing and promotion of our brand and products;

25% for upgrading manufacturing facility and equipment; and

20% for general administration and working capital.

 

The precise amounts and percentage of proceeds we devote to particular categories of activity, and their priority of use, will depend on prevailing market and business conditions as well as on the nature of particular opportunities that may arise from time to time. Accordingly, we reserve the right to change the use of proceeds that we presently anticipate and describe herein. Pending remitting the offering proceeds to China, we intend to invest our net proceeds in short-term, interest bearing, and investment-grade obligations. 

 

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 — Our management has certain level of discretion over use of proceeds of this offering.”

 

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 satisfaction of applicable government registration and approval requirements. We may extend inter-company loans to our subsidiaries in China or make additional capital contributions to our PRC subsidiaries to fund their capital expenditures or working capital. For an increase of registered capital of our PRC subsidiaries, we need to file at the MOFCOM or its local counterparts. If we provide funding to our PRC subsidiaries through loans, the total amount of such loans may not exceed the difference between the entity’s total investment as approved by the foreign investment authorities and its registered capital or twice of their net worth. Such loans must be registered with SAFE or its local branches, which usually takes up to 20 working days to complete. 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 on loans to, and direct investment in, PRC entities by offshore holding companies and governmental control in currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.” 

 

43

 

 

CAPITALIZATION

 

The following tables set forth our capitalization as of March 31, 2020:

 

on an actual basis; and

 

on a pro forma as adjusted basis to reflect the issuance and sale of          shares at an assumed initial public offering price of $    per share after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

You should read the tables together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 

 

   As of March 31, 2020 
   Actual   As Adjusted 
   (in US$ thousands) 
Equity:        
Ordinary shares, $1.00 par value, 56,250 shares authorized, 56,250 ordinary shares outstanding on an actual basis; and [●] outstanding on an as adjusted basis   56                
Additional paid-in capital   14,632      
Statutory reserve   1,167      
Accumulated other comprehensive loss   (573)     
Retained earnings   8,203      
Total equity   23,485      
           
Total capitalization   23,485      

  

44

 

 

DILUTION

  

If you invest in our ordinary shares, you will incur immediate dilution since the public offering price per share you will pay in this offering is more than the net tangible book value per ordinary share immediately after this offering.

 

The net tangible book value of our ordinary shares as of March 31, 2020 was $       , or $        per share based upon 50,000 ordinary shares outstanding.  Net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of ordinary shares outstanding. Tangible assets equal our total assets less goodwill and intangible assets.

 

The dilution in net tangible book value per share to new investors, represents the difference between the amount per share paid by purchasers of shares in this offering and the pro forma net tangible book value per share immediately after completion of this offering.  After giving effect to the sale of the               shares being sold pursuant to this offering at the midpoint of our offering price range of $              per share and after deducting underwriter’s discount and commission payable by us in the amount of $               , non-accountable expenses of $               payable to the underwriters and estimated offering expenses in the amount of $              , our pro forma net tangible book value would be approximately $              , or $              per share of ordinary shares. This represents an immediate increase in net tangible book value of $               per share to existing shareholders and an immediate decrease in net tangible book value of $               per share to new investors purchasing the shares in this offering.

 

The following table illustrates this per share dilution:

 

   As of
March 31,
2020
 
Public offering price per ordinary share    
Net tangible book value per share as of March 31, 2020  $                
Increase in net tangible book value per share attributable to existing shareholders     
Pro forma net tangible book value per share after this offering     
Dilution per share to new investors     

 

Our adjusted pro forma net tangible book value after the offering, and the decrease to new investors in the offering, will change from the amounts shown above if the underwriter’s over-allotment option is exercised.

 

A $1.00 increase (decrease) in the assumed public offering price would increase (decrease) our pro forma net tangible book value per share after this offering by approximately $        , and increase the value per share to new investors by approximately $        , after deducting the underwriter’s discount and estimated offering expenses payable by us.

 

The following table sets forth, on a pro forma as adjusted basis as of March 31, 2020, the difference between the number of ordinary shares purchased from us, the total cash consideration paid, and the average price per share paid by our existing shareholders and by new public investors before deducting estimated underwriter’s discounts and commissions and estimated offering expenses payable by us, using an assumed public offering price of $         per ordinary share:

 

   Shares Purchased   Total Cash Consideration   Average
Price Per
 
   Number   Percent   Amount   Percent   Share 
Existing shareholders             %  $              %  $        
New investors from public offering        %  $   %  $ 
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.

 

45

 

 

ENFORCEABILITY OF CIVIL LIABILITIES

 

We are a business company incorporated in the British Virgin Islands in order to enjoy the following benefits:

 

political and economic stability;

 

an effective judicial system;

 

a favorable tax system; and

 

the absence of exchange control or currency restrictions; and the availability of professional and support services.

 

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

 

the British Virgin 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

 

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

 

The courts of the British Virgin Islands will not necessarily enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws. Additionally, there is no statutory enforcement in the British Virgin Islands of judgments obtained in the United States, however, the courts of the British Virgin Islands will in certain circumstances recognize such a foreign judgment and treat it as a cause of action in itself which may be sued upon as a debt at common law so that no retrial of the issues would be necessary provided that the U.S. judgment, provided that:

 

  the U.S. court issuing the judgment had jurisdiction in the matter and the company either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process;

 

  is final and for a liquidated sum;

 

  the judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company;

 

  in obtaining judgment there was no fraud on the part of the person in whose favor judgment was given or on the part of the court;

 

  recognition or enforcement of the judgment in the British Virgin Islands would not be contrary to public policy; and

 

  the proceedings pursuant to which judgment was obtained were not contrary to natural justice.

 

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.

 

All of our current operations are conducted in the PRC, and all of our assets are located in the PRC. A majority of our current directors and officers are nationals and residents of the PRC 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. Beijing Haotai Law Firm, our counsel as to PRC laws, have advised us that there is uncertainty as to whether the courts of China 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.

 

We have been advised by Beijing Haotai Law Firm that there is uncertainty as to whether the courts of the PRC would enforce judgments of United States courts or British Virgin Islands courts obtained against us or these persons predicated upon the civil liability provisions of the United States federal and state securities laws. Beijing Haotai Law Firm has further advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the British Virgin Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the British Virgin Islands.

46

 

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

The following selected consolidated income and comprehensive income data for the six months ended December 31, 2019 and 2018, and the years ended June 30, 2019 and 2018, selected consolidated balance sheet data as of December 31, 2019, June 30, 2019 and 2018 and selected consolidated cash flow data for the six months ended December 31, 2019 and 2018, and the years ended June 30, 2019 and 2018 have been derived from our consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Selected Consolidated Financial Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

(All amounts in U.S. dollars)

 

Selected Consolidated Statements of Income: 

 

   For the Six Months Ended   For the Years Ended 
   December 31,   June 30, 
    2019    2018     2019   2018 
Revenues  $16,811,341   $12,544,366   $30,930,083   $24,417,046 
Gross profit  $6,492,812   $4,635,027   $13,659,911   $9,854,827 
Operating expenses  $4,590,288   $4,149,058   $8,424,636   $9,058,673 
Income from operations  $1,902,524   $485,969   $5,235,275   $796,154 
Provision for Income taxes  $193,497   $71,983   $744,583   $96,950 
Net income 
1,580,187   $432,697   $4,415,215   $727,231 

 

Selected Consolidated Balance Sheet Data:

  

   As of December 31,   As of June 30, 
   2019   2019   2018 
Current assets  $ 31,677,413   $ 24,564,824  $ 19,490,670
Total assets  $38,029,898   $35,733,262   $27,723,701 
Current liabilities  $12,623,328   $13,244,154   $11,398,868 
Total liabilities  $14,628,401   $19,787,993   $15,734,488 
Total shareholders’ equity (net assets)  $23,401,497   $15,945,269   $11,989,213 

 

Selected Consolidated Cash Flow Data:

   

   For the Six Months Ended   For the Years Ended 
   December 31,   June 30, 
   2019   2018   2019   2018 
Net cash provided by used in operating activities  $1,647,409   $(1,187,209)  $(604,174)  $(4,289,206)
Net cash used in investing activities  $(260,925)  $(43,767)  $(1,214,463)  $(695,413)
Net cash provided by (used in) financing activities  $4,382,984   $(532,048)  $(877,878)  $6,073,720 
Effect of exchange rate changes on cash  $82,870   $(154,054)  $(134,994)  $131,668 
Net increase (decrease) in cash  $5,852,338   $(1,917,078)  $(2,831,509)  $1,220,769 
Cash at beginning of period/year  $1,395,239   $4,226,748   $4,226,748   $3,005,979 
Cash and cash equivalents at end of period/year  $7,247,577   $2,309,670   $1,395,239   $4,226,748 

  

47

 

 

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

  

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

 

Business Overview

 

We are a B2B e-commerce platform of automotive products and a supplier of auto perfume and auto air fresheners. Since our inception in 2004, we have been specializing in the development, manufacturing and sales of auto perfume and air fresheners. We also operate an online B2B marketplace of automotive products focusing on serving wholesale and retail customers in China. Our business operation currently consists of three aspects: B2B e-commerce platform, automotive products and auto beauty services.

 

B2B E-Commerce Platform. We operate an online marketplace of automotive products. The business model of our platform is an online marketplace serving third-party merchants complemented by direct sales of our own products. As a shopping platform, we provide the infrastructure and services for third-party merchants to complete transactions with customers on our platform. Our online marketplace has grown substantially since we launched our Car House mobile application and our website at www.car-house.cn in April 2016. There are currently approximately 3,100 third party domestic and international merchants that are selling approximately 210,000 types of automotive products on our platform. Our GMV increased from RMB 317 million (approximately $46 million) in the six months ended December 31, 2018 to RMB 456 million (approximately $65 million) in the six months ended December 31, 2019, and from RMB 455 million (approximately $64 million) in the fiscal year ended June 30, 2018 to RMB 590 million (approximately $83 million) in the fiscal year ended June 30, 2019. The majority of purchasers on our platform are wholesale customers such as auto product retailers, car dealers, commercial car care shops and professional detailing businesses and the remaining are retail consumers such as private car owners. As of the date of this prospectus, there are approximately 180,000 wholesale customers that have registered to use our website and mobile application.

 

In addition to third-party merchants’ sales, we also sell our own products, primarily auto perfume and auto air fresheners on our platform and mobile application. For the six months ended December 31, 2019 and 2018, revenue generated from sales of auto perfume and air fresheners on our platform amounted to $6.9 million and $5.8 million, respectively, which accounted for 72% and 60% of the total revenue arising from sales of auto perfume and air fresheners, respectively. For the fiscal year ended June 30, 2019 and 2018, revenue generated from sales of auto perfume and air fresheners on our platform amounted to $14.2 million and $9.5 million, respectively, which accounted for 66% and 45% of the total revenue arising from sales of auto perfume and air fresheners, respectively.

 

Auto Perfume, Air Freshener and Other Products. We began our business in developing, manufacturing and selling auto perfume and air fresheners in 2004. The products we offer primarily include auto perfume and air fresheners that are designed to refresh interior automobile surfaces and improve driving experience. We currently offer 235 types of auto perfume and over 15 types of auto air fresheners. All our auto perfume and air freshener products are developed by our in-house research and development team and manufactured at our facility located in Dongguan, Guangdong Province. We sell our auto perfume and air freshener products primarily to wholesale customers such as auto product retailers, auto dealers, commercial car care shops and professional detailing businesses. As of the date of this prospectus, the majority of our auto perfume and air freshener products are sold through our online marketplace while the remaining are sold through other online marketplaces such as Tmall and Taobao, a marketplace operated by Alibaba Group, and JD.com., respectively. Our 香百年Carori brand is well recognized brand in the auto perfume and air freshener market in China. We were the only auto freshener business that participated in the 2010 Shanghai World Expo and selected as the official partner for the “Auto Changes Life” theme week of the event.

 

Engine Oil. In November 2018, we became the exclusive authorized dealer of Autobacs China, a retailer of automotive parts and accessories based in Japan, to sell Autobacs fully synthetic engine oil, Autobacs ATF oil, and Autobacs CVTF oil under the brand name “Autobacs” in China (excluding Hong Kong and Taiwan). Such business cooperation gives us additional access to retail and wholesale consumers of automotive products and further broadens our sales channels.

 

48

 

 

Auto Beauty Shops. To support online sales of our products and increase brand awareness, we opened two auto beauty shops in Dongguan and Humen, Guangdong in May 2018. The lease for the Humen shop was terminated in December 2019 and we are actively searching for new retail space for new auto beauty shops. The services we provide include car wash, car maintenance and automotive detailing. In addition to our directly owned auto beauty shops, we plan to expand our auto beauty shop nationwide via brand authorization.

 

We generate revenue through sales of our auto perfume, air fresheners and other products, engine oil sales, fees we charge third party merchants on our online marketplaces and service fees at our auto beauty shops. The fees we charge third party sellers include a membership service fee, a commission of up to 3% of their sales and advertising fees for participating in promotional events of our marketplace. Our net revenue was $16.8 million and $12.5 million for the six months ended December 31, 2019 and 2018, respectively. Our net revenue was $31.0 million and $24.4 million for fiscal year ended June 30, 2019 and 2018, respectively. For the six months ended December 31, 2019, 88.4% of our revenue derived from product sales, 11.0% derived from commissions and other fees paid by third party merchants and 0.6% was from services provided at our auto beauty shops. For fiscal year 2019, 88.2% of our revenue derived from product sales, 9.7% derived from commissions and other fees paid by third party merchants and 2.1% was from services provided at our auto beauty shops. We achieved net income of $1.6 million and $0.4 million in the six months ended December 31, 2019 and 2018, respectively, and $4.4 million and $0.7 million in the fiscal years ended June 30, 2019 and 2018, respectively.

 

In January 2020, the WHO declared a global public health emergency as the novel coronavirus outbreak, later known as the COVID-19 pandemic, which has continued to spread beyond China. In compliance with the government health emergency rules in place, we temporarily closed our offices in China and ceased production of auto perfume and air freshener products starting January 19, 2020. As the Dongguan area was not the epicenter of the COVID-19 outbreak in China, on February 10, 2020, we resumed production and operations. The three-week temporary closures included seven days of Chinese Spring Festival national holiday. The Company ceased operations for about seven days during the holiday period in previous years as well, so the overall impact period of the ceased operation was about two weeks. Based on historical data, the production volume within these two weeks is about 530,000 pieces, which represents a sales revenue of approximately $1.1 million based on average sales price. The impact of temporary closure of two auto beauty shops was less than $0.1 million based on management’s estimate. There is no material impact on the operations of our B2B E-Commerce Platform and sales of engine oil. In the short term, the COVID-19 pandemic has created uncertainties and risks and we expect our sales in China may decline by about $1.2 million during in the third quarter of fiscal 2020, which was about 14.2% of the projected revenue in the third quarter of fiscal 2020, or 3.6% of total projected revenue in the whole fiscal 2020. In the meantime, we also took active measures to mitigate the negative impact of the COVID-19 pandemic on our operating results. In February 2020, we developed and launched new products, such as disinfectant auto perfume and air freshener, portable disinfectant spray and others. We sold a total of approximately 58,000 pieces in February 2020 with a total sales revenue of approximately $0.4 million. From the beginning of March 2020 to the date of this prospectus, we have also received purchase orders of about 537,000 pieces for such new products and generated approximately $3.9 million revenue from such sales in the following months. Based on the current situation, we do not expect a significant impact of the COVID-19 pandemic on the Company’s operations and financial results in a long run, but we are closely monitoring the rapid developments in countries that have become exposed to the COVID-19 pandemic and continually assessing the potential impact on our business.

 

Our goal is to become a solution provider that integrates online and offline resources to provide one stop shopping for automotive product consumers in China. We distinguish ourselves from many online marketplaces by focusing on automotive products. We also distinguish ourselves from other providers of automotive products by leveraging our ability to integrate online and offline resources and eventually offering more flexibility and convenience for customers shopping for automotive products. In order to further develop our business and achieve our objective, we plan to implement a number of growth strategies discussed below under “Our Strategies.”

 

Factors Affecting Our Results of Operations and Trend Information

 

Favorable Market Environment

 

We have benefited significantly from the following recent trends and we anticipate that the demand for our products and services will continue to grow:

 

China’s E-Commerce Market 

 

China has been a leading player in the e-commerce industry in terms of scale and diversity. In particular, it has been ranking the first in the world for many years in terms of online retail sales. As shown in the graph below, at the end of 2018, the e-commerce GMV in China reached RMB 31.63 trillion (approximately $4.61 trillion). In particular, B2B e-commerce GMV reached RMB 22.50 trillion (approximately $3.28 trillion), accounting for 71.1% of total e-commerce GMV. China remains the world’s largest online retail market. The compound annual growth rate (“CAGR”) of e-commerce and B2B e-commerce from 2014 to 2018 was 17.9% and 22.5%, respectively.

 

49

 

 

E-Commerce GMV and B2B E-Commerce GMV in China, 2014-2018 

 

 

Source: The Department of Electronic Commerce and Informatization of China’s Ministry of Commerce.

 

China’s Automotive Supply Market

 

As reflected in the table below, in 2018, the market size of automotive supply in China was RMB 197.74 billion (approximately $28.80 billion), representing a CAGR of 19.80% from 2014 to 2018. By sales value, automotive electronics accounted for the largest market share of 32% because of the variety of products and high added value; the market share of automotive decorations such as car perfume and seat cushions was 29%; the market share of automotive beauty and maintenance products such as lubricating oil and car film was 27%; and the market share of other automotive supply was 12%.

 

Market Size of China’s Automotive Supply Industry, 2014-2023

 

  

Market Size

(RMB billion)

 
Year  Electronics   Decorations   Beauty and maintenance   Others   Total 
2014   31.55    26.75    26.45    11.21    95.96 
2015   37.55    32.37    31.52    13.52    114.96 
2016   44.68    39.17    37.58    16.30    137.72 
2017   53.17    47.39    44.79    19.64    164.99 
2018   63.28    57.34    53.39    23.73    197.74 
2019F   73.72    67.67    61.99    27.76    231.13 
2020F   85.88    79.85    71.97    32.48    270.18 
2021F   100.05    94.22    83.55    38.00    315.83 
2022F   116.56    111.18    97.00    44.47    369.21 
2023F   135.79    131.19    112.62    52.02    431.63 
2014-2018 CAGR   19.0%   21.0%   19.2%   20.6%   19.8%
2019-2023F CAGR   16.5%   18.0%   16.1%   17.0%   16.9%

 

Source: The CRI Report.

 

50

 

 

Analysis of China’s Automotive Supply B2B industry

 

The automotive supply B2B platforms in China mainly include: (1) the automotive supply B2B platforms transformed from automotive supply distributors, automotive supply manufacturers, or automobile repair and maintenance businesses, (2) automotive supply B2B platforms established by the enterprises or individuals previously engaged in e-commerce, and (3) the automotive supply B2B platforms affiliated with automobile manufacturers.

 

Although all famous e-commerce websites such as Alibaba, Tmall, JD.com and Suning.com have B2B automotive supply columns but they neither regard B2B automotive supply as their core business nor disclose the GMV of their automotive supply. Therefore, the market research in this section is not based on the B2B automotive supply columns of large e-commerce websites but instead on B2B platforms focusing on automotive supply.

 

As reflected in the table below, in 2018, the GMV of China’s automotive supply B2B industry was RMB 60.77 billion (approximately $8.85 billion), representing a CAGR of 23.30% from 2014 to 2018.

 

GMV of China’s Automotive Supply B2B Industry, 2014-2023

 

  

Market Size

(RMB billion)

 
Year  Electronics   Decorations   Beauty and
maintenance
   Others   Total 
2014   8.84    8.03    6.08    3.36    26.31 
2015   12.02    10.36    8.20    4.06    34.63 
2016   14.30    12.53    9.77    4.89    41.49 
2017   17.02    15.17    11.65    5.89    49.72 
2018   18.98    20.07    13.88    7.83    60.77 
2019F   23.59    21.65    16.12    8.33    69.69 
2020F   27.48    25.55    18.71    9.74    81.49 
2021F   32.02    30.15    21.72    11.40    95.29 
2022F   37.30    35.58    25.22    13.34    111.44 
2023F   48.89    53.79    32.66    18.21    153.54 
2014-2018 CAGR   21.1%   25.8%   22.9%   23.5%   23.3%
2019-2023F CAGR   20.0%   25.5%   19.3%   21.6%   21.8%

 

Source: The CRI Report.

 

China’s Bottled Perfume and Solid Perfume Market

 

By product type, car perfume on the Chinese market is classified into bottled perfume, solid perfume, hanging perfume and perfume refills. In 2018, bottled perfume had the largest share of about 41% on China’s car perfume market and solid perfume had a market share of approximately 16%. As an essential for Chinese car owners, car perfume is mainly sold through agents. The typical practice is for car perfume suppliers to set up one or two general agents in each province and have the general agent distribute car perfume to terminal channels such as supermarkets, B2B platforms, dealers, automobile repair shops and automotive supply stores. Some enterprises also directly sell car perfume to end consumers by opening flagship stores on B2C platforms such as Tmall and JD.com.

 

51

 

 

In 2018, the market size of car perfume in China was approximately RMB 5 billion (approximately $0.73 billion). Specifically, the market size of bottled perfume was about RMB 2.05 billion (approximately $0.30 billion), with GMV of about RMB 610 million (approximately $88.83 million) on the B2B market; the market size of solid perfume was about RMB 800 million (approximately $116.50 million), with GMV of about RMB 240 million (approximately $34.95 million) on the B2B market.

 

Market Size of China’s Bottled Perfume and Solid Perfume

 

  

Market size

(RMB million)

  

GMV of B2B platforms

(RMB million)

 
Year  Bottled Perfume   Solid Perfume   Bottled Perfume   Solid Perfume 
2014   922    371    241    95 
2015   1,126    449    304    120 
2016   1,375    545    384    151 
2017   1,679    660    484    190 
2018   2,050    800    610    240 
2019F   2,429    945    768    301 
2020F   2,879    1,116    967    377 
2021F   3,411    1,318    1,217    472 
2022F   4,042    1,556    1,533    592 
2023F   4,790    1,838    1,930    741 
2014-2018 CAGR   22.1%   21.2%   26.1%   26.0%
2019-2023F CAGR   18.5%   18.1%   25.9%   25.3%

 

Source: The CRI Report.

 

Growth of Our Engine Oil Business

 

In November 2018, we became the exclusive authorized dealer of Autobacs China, a retailer of automotive parts and accessories based in Japan, a retailer of automotive parts and accessories based in Japan, to sell Autobacs fully synthetic engine oil, Autobacs ATF oil, and Autobacs CVTF oil under the brand name “Autobacs” in China. On April 17, 2019, we entered into a framework agreement with Beijing Baijili Information Technology Co., Ltd (“Baijili”) to supply engine oil products for the period from April 17, 2019 to April 16, 2020, which will automatically renew upon expiration. Baijili is a supplier of engine oil products for the biggest mobile transportation platform in China national wide. For the six months ended December 31, 2019, we have recognized RMB 21,280,566 (approximately $3,027,151) of revenue from engine oil products sale to Baijili as compared to Nil for the same period in 2018. For fiscal year of 2019, we have recognized RMB 13,479,939 (approximately $1,975,546) of revenue from engine oil products sale to Baijili. We expect the sale of engine oil products will continue to increase in the second half of fiscal year 2020.

 

Increasing Internet and Mobile Penetration Rates in China

 

We have benefited from the rapid improvement of internet and mobile connectivity in China, in order to better serve our merchants, we developed a WeChat mini program named Car House, so our merchants can promote their products through our Car House WeChat mini program. We have seen an increasing number of merchants and registered end users on our one-stop online shopping platform of automotive products, we expect our online marketplace services revenue will continue increasing in the future.

 

52

 

 

Strategic Cooperation of with Auto Parts Town

 

As the date of this prospectus, we are in discussion with one of the largest auto part towns in Guangdong Province for a strategic cooperation. We have assigned our staff to be on the site of the auto part town to attract potential merchants to our online platform. We expect to increase the types of the commodities available on our platform and enhance the influence and trading activities of our platform through this cooperation. We plan to use this business model to negotiate cooperation with other auto parts town national wide, which we believe will attract more merchants to register on our platform and thus further increase our online marketplace services revenue in the future.

 

Research and Development of New Products for Our Self-Owned Auto Perfume and Air Freshener Brand

 

We have entered into a cooperation with South China Industrial Design Institute (“SCIDI”), and entrusted SCIDI to perform a brand upgrading as well as a comprehensive design for our new products to be launched in 2020. We anticipate that we will release a total of 25 new products at the 2020 Beijing Auto Show in fall 2020. Through our continuing research and development of new products, we believe it will greatly enhance the competitiveness of our self-owned auto perfume and air freshener products.

 

Results of Operations for the Six Months Ended December 31, 2019 and 2018

 

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

 

   For the Six Months Ended December 31,   Variance 
   2019   2018   Amount   % 
Revenue  $16,811,341   $12,544,366   $4,266,975    34.0%
Cost of revenue and business and sales related tax   10,318,529    7,909,339    2,409,190    30.5%
Gross profit   6,492,812    4,635,027    1,857,785    40.1%
                     
OPERATING EXPENSES                    
Selling expenses   1,439,041    1,549,002    (109,961)   (7.1)%
General and administrative expenses   2,577,566    2,187,144    390,422    17.9%
Research and development expenses   573,681    412,912    160,769    38.9%
Total operating expenses   4,590,288    4,149,058    441,230    10.6%
                     
INCOME FROM OPERATIONS   1,902,524    485,969    1,416,555    291.5%
                     
OTHER INCOME (EXPENSES)                    
Interest expense, net   (192,678)   (83,536)   (109,142)   130.7%
Other income, net   63,838    102,247    (38,409)   (37.6)%
Total other income (expense), net   (128,840)   18,711    (147,551)   (788.6)%
                     
INCOME BEFORE INCOME TAX PROVISION   1,773,684    504,680    1,269,004    251.4%
                     
INCOME TAX PROVISION   193,497    71,983    121,514    168.8%
                     
NET INCOME  $1,580,187   $432,697   $1,147,490    265.2%

 

53

 

 

Revenues

 

We have revenue from products sales and revenue from services. Revenue from products sales consists of auto perfume, air freshener and other products as well as engine oil sales. Revenue from services consists of online marketplace services and auto beauty shop services. Revenue from online marketplace services is generated from online platform advertising fees, transaction commissions, membership service fees and other services fee from third party merchants and agents. Our net revenue is presented net of PRC business tax and related surcharges, as well as value-added taxes. Our total revenue increased by $4,266,975 or 34.0%, from $12,544,366 for the six months ended December 31, 2018 to $16,811,341 for the six months ended December 31, 2019. The increase in our revenue was mainly due to the growth of our services revenue as well as sales of engine oil as the exclusive dealer of Autobacs China starting November 2018, as discussed in greater details below.

  

   For the Six Months Ended December 31,   Variance 
   2019   %   2018   %   Amount   % 
Products Sales                        
Auto Perfume, Air Freshener and Other products  $11,621,564    69.2%  $11,297,006    90.2%  $324,558    2.9%
Engine Oil   3,232,777    19.2%   329,257    2.6%   2,903,520    881.8%
Services   1,957,000    11.6%   918,103    7.2%   1,038,897    113.2%
Total Amount  $16,811,341    100.0%  $12,544,366    100.0%  $4,266,975    34.0%

  

Auto perfume, air freshener and other products sales accounted for 69.2% and 90.2% of our total revenue for the six months ended December 31, 2019 and 2018, respectively. Revenue from auto perfume, air freshener and other products, the principal business of the Company, remained relatively stable with an increase by $324,558 or 2.9% from $11,297,006 for the six months ended December 31, 2018 to $11,621,564 for the six months ended December 31, 2019. Sales of auto perfume and air freshener decreased slightly by $30,842 or 0.3% for the six months ended December 31, 2019 as compared to the same period in 2018. The decrease was mainly due to the depreciation of RMB against USD. The average translation rates for the six months ended December 31, 2019 and 2018 were at 1 USD to 6.8605 RMB and at 1 USD to 7.0299 RMB, respectively, which represented a decrease of 2.41%. Since we began our business in developing, manufacturing and selling air fresheners in 2004, we have established our brand name and reputation and developed long-standing relationship with our customers. We have also been actively developing business in overseas markets. Hence, we are able to maintain the sales of our auto perfume and air freshener products throughout the years with stable sales. At the same time, we have continued to develop and launch new products in the market which have boosted our sales revenue. Meanwhile, sales of other products, such as strip LED, road sign and dashboard camera, increased by $355,400 from $1,609,419 for the six months ended December 31, 2019 to $1,964,819 for the same period in 2018, primarily due to the increased sales in overseas markets. During the six months ended December 31, 2019, we expanded our international trade department to focus on the development of business in overseas markets, and overseas revenue increased by $298,295 from 1,537,687 to $1,835,982 in the six months ended December 31, 2019.

 

Engine oil sales accounted for 19.2% and 2.6% of our total revenue for the six months ended December 31, 2019 and 2018, respectively. Revenue from engine oil increased by $2,903,520 or 881.8% from $329,257 in the six months ended December 31, 2018 to $3,232,777 in the six months ended December 31, 2019, primarily due to a framework agreement we entered into with Baijili to supply engine oil products. Baijili is a supplier of engine oil products for the biggest mobile transportation platform in China. In September 2019, we entered into another agreement with Baijili, pursuant to which Baijili will provide promotion services through both online and offline distribution support for us till December 31, 2020. In return, we will give a 2.5% of commission to Baijili in the form of equivalent value of engine oil as promotion service fees when the sales of engine oil reach to certain amount. Based on the agreement, we have paid RMB 1.7 million (approximately $243,972) to Baijili as the security deposit, which is refundable within 30 days upon the completion of the promotion services. As of the date of this prospectus, the promotion activity was slowed down due to the COVID-19 pandemic; no such commission was recognized or paid to Baijili.

  

Services accounted for 11.6% and 7.2% of our total revenue for the six months ended December 31, 2019 and 2018, respectively. Revenue from services increased by $1,038,897 or 113.2% from $918,103 in the six months ended December 31, 2018 to $1,957,000 in the six months ended December 31, 2019, primarily due to the substantial expansion of our online marketplace and mobile application for automotive products. We collect online platform advertising fees, transaction commissions and membership service fees from third party merchants and agents. Revenue from this segment was relatively low during the six months ended December 31, 2018, as we mostly waived the membership fees and transaction commissions in order to attract more merchants and customers during the early stage of this operation. After years of operation, our online platform has attracted increased numbers of users. Third party domestic and international merchants that are selling products on our website and mobile application increased from 2,493 in the six months ended December 31, 2018 to 3,078 in the six months ended December 31, 2019. The wholesale customers that have registered to use our website and mobile application to purchase products increased from 145,119 in the six months ended December 31, 2018 to 177,195 in the six months ended December 31, 2019, of which the active users increased from 123,414 in the six months ended December 31, 2018 to 153,463 in the six months ended December 31, 2019. With the increased registered users and the expansion of our online platform, we started to charge membership fees and transaction commissions in third quarter of fiscal year 2019. Therefore, membership fees and transaction commissions increased significantly in six months ended December 31, 2019 as compared to the same period in 2018 as those fees were mostly waived. Meanwhile, with the increased numbers of end users, our advertising revenue also went up in the six months ended December 31, 2019. Therefore, revenue from this segment increased substantially with the increased numbers of users, as well as increased transaction volumes on our online platform.

 

54

 

 

Cost of Revenue

 

The following table sets forth the breakdown of the Company’s cost of revenue for the six months ended December 31, 2019 and 2018:

 

   For the Six Months Ended December 31,   Variance 
   2019   %   2018   %   Amount   % 
Products Sales                        
Auto Perfume, Air Freshener and Other products  $7,087,424    68.7%  $7,370,547    93.2%  $(283,123)   (3.8)%
Engine Oil   2,831,019    27.4%   140,863    1.8%   2,690,156    1,909.8%
Services   400,086    3.9%   397,929    5.0%   2,157    0.5%
Total Amount  $10,318,529    100.0%  $7,909,339    100.0%  $2,409,190    30.5%

 

Our cost of revenues consists of raw material costs, packing costs, workforce related costs, overhead costs such as rental and utilities, and depreciation and amortization. Our overall cost of revenues was $10,318,529 for the six months ended December 31, 2019, an increase of $2,409,190, or 30.5%, from $7,909,339 for the six months ended December 31, 2018. The increase was mainly attributable to the significant increase in cost of revenue from sales of engine oil, as discussed in greater details below.

 

Cost of revenue from sales of auto perfume, air freshener and other products decreased slightly by $283,123 or 3.8% from $7,370,547 in the six months ended December 31, 2018 to $7,087,424 in the six months ended December 31, 2019. The decrease was mainly due to the reduced unit cost as a result of scale production since we transformed to semi-automated production during the six months ended December 31, 2019.

 

Cost of revenue from sales of engine oil increased by $2,690,156 or 1,909.8% from $140,863 in the six months ended December 31, 2018 to $2,831,019 in the six months ended December 31, 2019. We started to sell engine oil as the exclusive dealer of Autobacs in China in November 2018. The increase in cost of revenue from engine oil sales was in line with the increase in sales.

 

Cost of revenue from services increased by $2,157 or 0.5% from $397,929 in the six months ended December 31, 2018 to $400,086 in the six months ended December 31, 2019. As the operation of our online platform has become more mature and stabilized, cost of revenue from services remained relatively stable during the six months ended December 31, 2019 as compared to the same period of last year.

 

Gross Profit

 

The following table sets forth the breakdown of the Company’s gross profit for the six months ended December 31, 2019 and 2018:

 

   For the Six Months Ended December 31,   Variance 
   2019   %   2018   %   Amount   % 
Products Sales                        
Auto Perfume, Air Freshener and Other products  $4,534,140    69.8%  $3,926,459    84.7%  $607,681    15.5%
Engine Oil   401,758    6.2%   188,394    4.1%   213,364    113.3%
Services   1,556,914    24.0%   520,174    11.2%   1,036,740    199.3%
Total Amount  $6,492,812    100.0%  $4,635,027    100.0%  $1,857,785    40.1%

 

Our overall gross profit increased by $1,857,785 or 40.1% from $4,635,027 in the six months ended December 31, 2018 to $6,492,812 in the six months ended December 31, 2019, while gross profit margin increased slightly by 1.7% from 36.9% in the six months ended December 31, 2018 to 38.6% in the six months ended December 31, 2019.

 

The increase in gross profit and gross margin was mainly due to the contribution from our services segment. Gross profit of services segment was $1,556,914 and $520,174 for the six months ended December 31, 2019 and 2018, respectively. The gross margins were 79.6% and 56.7% for the six months ended December 31, 2019 and 2018, respectively, primarily as a result of the sharp increase in revenue as we started to charge membership fees and transaction commissions which were mostly waived previously in the six months ended December 31, 2018. The increase in gross margin was partially offset by the lower margin from engine oil segment which was 12.4% during the six months ended December 31, 2019. As above-mentioned, we entered into a framework agreement with Baijili, and we made bulk sales to this customer amounted to $3,027,151 during the six months ended December 31, 2019 as compared to $Nil in the same period in 2018. Therefore, the gross margin from this segment is relatively low as compared to our other segments.

 

55

 

 

Expenses

 

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

 

   For the Six Months Ended December 31, 
   2019   2018   Variance 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
                         
Total revenue  $16,811,341    100.0%  $12,544,366    100.0%  $4,266,975    34.0%
Operating expenses:                              
Selling expenses   1,439,041    8.6%   1,549,002    12.3%   (109,961)   (7.1)%
General and administrative expenses   2,577,566    15.3%   2,187,144    17.4%   390,422    17.9%
Research and development expenses   573,681    3.4%   412,912    3.3%   160,769    38.9%
Total operating expenses  $4,590,288    27.3%  $4,149,058    33.1%  $441,230    10.6%

 

Selling Expenses

 

Our selling expenses primarily include expenses incurred for various sales activities, payroll and sales commission expense paid to our sales and marketing personnel, business travel expenses, advertising and trade shows, shipping charges and other expenses related to sales activities. Selling expenses decreased by $109,961 or 7.1% from $1,549,002 in the six months ended December 31, 2018 to $1,439,041 in the six months ended December 31, 2019. This decrease in selling expenses can be attributable primarily due to a decrease in online platform promotion expenses by $161,011. During the six months ended December 31, 2018, we gave more rewards on the promotion of our online platform as we tried to attract more users. The decrease was partially offset by the increased advertising expenses by $77,900 because of the increase promotion activities in order to enhance our brand awareness and attract more customers during the six months ended December 31, 2019. As a percentage of revenues, our selling expenses accounted for 8.6% and 12.3% of our total revenue for the six months ended December 31, 2019 and 2018, respectively.

 

General and Administrative Expenses

 

Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, entertainment expenses, bad debt expenses, office expenses, rental and professional service expenses. General and administrative expenses increased by $390,422 or 17.9% from $2,187,144 in the six months ended December 31, 2018 to $2,577,566 in the six months ended December 31, 2019, primarily due to increased bad debt expenses of $367,044. Our net accounts receivable was $12,722,360 as of December 31, 2019 as compared to $12,485,626 as of June 30, 2019. The management periodically evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. Due to the recent COVID-19 outbreak in China, many of our customers’ businesses were adversely affected during this period, which resulted in slow collection of accounts receivable. Therefore, we provided more bad debt allowance in accordance with our bad debt policy. The increase was also attributable to the increased professional fees in relation to accounting services by $321,035, due to increase in services fees incurred in the six months ended December 31, 2019 for preparation of our initial public offering. The increase was partially offset by the decreased entertainment and welfare expenses of $290,741 as a result of our control over the operating expenditures. As a percentage of revenues, general and administrative expenses were 15.3% and 17.4% of our revenue for the six months ended December 31, 2019 and 2018, respectively.

 

56

 

 

Research and Development Expenses

 

Our research and development expenses consist primarily of salaries and related expenditures for research and development projects. Research and development expenses increased by $160,769 or 38.9% from $412,912 in the six months ended December 31, 2018 to $573,681 in the six months ended December 31, 2019, primarily due to an increase in salaries expenses as well as expenses incurred for patent and trademarks registration. As a percentage of revenues, research and development expenses were 3.4% and 3.3% of our revenue for the six months ended December 31, 2019 and 2018, respectively.

 

Interest Expense, Net

 

Interest expense primarily consists of interest expense on our short-term bank loans. Net interest expense increased by $109,142 or 130.7% from $83,536 in the six months ended December 31, 2018 to $192,678 in the six months ended December 31, 2019. The increase was mainly due to the increased interest expense on short-term bank loans as the there was an increased average balance of short-term bank loans for the six months ended December 31, 2019 as compared to the same period in 2018.

 

Provision for Income Taxes

 

Our provision for income taxes was $193,497 in the six months ended December 31, 2019, an increase of $121,514 or 168.8% from $71,983 in the six months ended December 31, 2018. Under the EIT Law, domestic enterprises and Foreign Investment Enterprises (the “FIE”) are usually subject to a unified 25% enterprise income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on case-by-case basis. Our subsidiary, Guangdong CarHouse, was incorporated in the PRC and is subject to corporate income tax at a reduced rate of 15% starting from 2016 when it was obtained the High and New Technology Enterprise Certification from the local government to November 2019. The High and New Technology Enterprise Certification was renewed in December 2019 and will expire in December 2022. The increase in income tax is attributable to the increased taxable income in the six months ended December 31, 2019.

 

Net Income

 

As a result of the foregoing, we reported a net income of $1,580,187 for the six months ended December 31, 2019, an increase of $1,147,490 or 265.2%, as compared to a net income of $432,697 for the six months ended December 31, 2018.

 

Results of Operations for the Years Ended June 30, 2019 and 2018

 

The following table summarizes the results of our operations during the fiscal years ended June 30, 2019 and 2018, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such years.

 

   For the years ended
June 30,
   Variance 
   2019   2018   Amount   % 
Revenue  $30,930,083   $24,417,046   $6,513,037    26.7%
Cost of revenue and business and sales related tax   17,270,172    14,562,219    2,707,953    18.6%
Gross profit   13,659,911    9,854,827    3,805,084    38.6%
                     
OPERATING EXPENSES                    
Selling expenses   3,600,897    4,103,857    (502,960)   (12.3)%
General and administrative expenses   3,597,843    3,532,211    65,632    1.9%
Research and development expenses   1,225,896    1,422,605    (196,709)   (13.8)%
Total operating expenses   8,424,636    9,058,673    (634,037)   (7.0)%
                     
INCOME FROM OPERATIONS   5,235,275    796,154    4,439,121    557.6%
                     
OTHER INCOME (EXPENSES)                    
Interest expense, net   (198,554)   (269,263)   70,709    (26.3)%
Other income, net   123,077    297,290    (174,213)   (58.6)%
Total other income (expense), net   (75,477)   28,027    (103,504)   (369.3)%
                     
INCOME BEFORE INCOME TAX PROVISION   5,159,798    824,181    4,335,617    526.1%
                     
INCOME TAX PROVISION   744,583    96,950    647,633    668.0%
                     
NET INCOME  $4,415,215   $727,231   $3,687,984    507.1%

 

57

 

 

Revenues

 

We have revenue from products sales and revenue from services. Revenue from products sales consists of auto perfume, air freshener and other products as well as engine oil sales. Revenue from services consists of online marketplace services and auto beauty shop services. Revenue from online marketplace services is generated from online platform advertising fees, transaction commissions, membership service fees and other services fee from third party merchants and agents. Our net revenue is presented net of PRC business tax and related surcharges, as well as value-added taxes. Our total revenue increased by $6,513,037 or 26.7%, from $24,417,046 for the fiscal year ended June 30, 2018, to $30,930,083 for the fiscal year ended June 30, 2019. The increase in our revenue was mainly due to the growth of our services revenue as well as sales of engine oil as the exclusive dealer of Autobacs China starting November 2018, as discussed in greater details below.

  

   For the Years Ended June 30,   Variance 
   2019   %   2018   %   Amount   % 
Products Sales                        
Auto Perfume, Air Freshener and Other products  $25,306,602    81.8%  $24,083,264    98.6%  $1,223,338    5.1%
Engine Oil   1,975,546    6.4%   377    -%   1,975,169    523,917.5%
Services   3,647,935    11.8%   333,405    1.4%   3,314,530    994.1%
Total Amount  $30,930,083    100.0%  $24,417,046    100.0%  $6,513,037    26.7%

  

Auto perfume, air freshener and other products sales accounted for 81.8% and 98.6% of our total revenue for fiscal year 2019 and 2018, respectively. Revenue from auto perfume, air freshener and other products remained relatively stable with an increase by $1,223,338 or 5.1% from $24,083,264 in fiscal year 2018 to $25,306,602 in fiscal year 2019. Sales of auto perfume and air freshener increased by $565,131 in fiscal year 2019 as compared to the same period in 2018. Since we began our business in developing, manufacturing and selling air fresheners in 2004, we have well established our brand name and reputation as well as developed long-standing relationship with our customers, hence, we are able to maintain the sales of our auto perfume, air freshener and other products throughout the years with stable sales. Meanwhile, sales of other products, such as strip LED, road sign and dashboard camera, increased by $658,207 in fiscal year 2019 as compared to the same period in 2018, primarily due to the increased sales to overseas markets. During the year ended June 30, 2019, we expanded our international trade department which focuses on the development of business in overseas markets, and overseas revenue increased by $565,025 in fiscal year 2019.

 

Engine oil sales accounted for 6.4% and 0.0% of our total revenue for fiscal year 2019 and 2018, respectively. Revenue from engine oil increased by $1,975,169 or 523,917.5% from $377 in fiscal year 2018 to $1,975,546 in fiscal year 2019, primarily due to a framework agreement we entered into with Baijili to supply engine oil products.

 

58

 

 

Services accounted for 11.8% and 1.4% of our total revenue for fiscal year 2019 and 2018, respectively. Revenue from services increased by $3,314,530 or 994.1% from $333,405 in fiscal year 2018 to $3,647,935 in fiscal year 2019, primarily due to the substantial expansion of our online marketplace and mobile application for automotive products. We collect online platform advertising fees, transaction commissions and membership service fees from third party merchants and agents. Our online platform was still in early stage of operation in fiscal year 2018, and we waived the membership fees and transaction commissions in order to attract more merchants and customers. After years of operation, our online platform has attracted increased numbers of users. Third party domestic and international merchants that are selling products on our website and mobile application increased from 2,336 in fiscal year 2018 to 2,579 in fiscal year 2019. The wholesale customers that have registered to use our website and mobile application to purchase products increased from 130,419 in fiscal year 2018 to 151,175 in fiscal year 2019, of which the active users increased from 110,083 in fiscal year 2018 to 129,592 in fiscal year 2019. Hence, with the increased registered users and the expansion of our online platform, we started to charge membership fees and transaction commissions in fiscal year 2019 while waived such fees in prior fiscal years, and with the increased numbers of end users, our advertising revenue also went up significantly in fiscal year 2019. Therefore, revenue from this segment increased substantially with the increased numbers of users as well as increased transaction volumes on our online platform. The increase was also due to increased revenue from auto beauty shop services by $652,924 from $10,574 in fiscal year 2018 to $663,498 in fiscal year 2019. To support online sales of our products and increase brand awareness, we opened two auto beauty shops in Dongguan and Humen, Guangdong in May 2018. The lease for the Humen shop was terminated in December 2019 and we are actively searching for new retail space for new auto beauty shops.

 

Cost of Revenue

 

The following table sets forth the breakdown of the Company’s cost of revenue for the years ended June 30, 2019 and 2018:

 

    For the Years Ended June 30,     Variance  
    2019     %     2018     %     Amount     %  
Products Sales                                                
Auto Perfume, Air Freshener and Other products   $ 14,697,199       85.1 %   $ 14,367,856       98.7 %   $ 329,343       2.3 %
Engine Oil     1,635,106       9.5 %     246       - %     1,634,860       664,577.2 %
Services     937,867       5.4 %     194,117       1.3 %     743,750       383.1 %
Total Amount   $ 17,270,172       100.0 %   $ 14,562,219       100.0 %   $ 2,707,953       18.6 %

 

Our cost of revenues consists of raw material costs, packing costs, workforce related costs, overhead costs such as rental and utilities, and depreciation and amortization. Our overall cost of revenues was $17,270,172 for the year ended June 30, 2019, an increase of $2,707,953, or 18.6%, from $14,562,219 for the year ended June 30, 2018. The increase was mainly attributable to the significant increase in cost of revenue from sales of engine oil, as discussed in greater details below.

 

Cost of revenue from sales of auto perfume, air freshener and other products increased by $329,343 or 2.3% from $14,367,856 in fiscal year 2018 to $14,697,199 in fiscal year 2019. The percentage of increase in cost of revenue was proportional to the percentage of increase in sales.

 

Cost of revenue from sales of engine oil increased by $1,634,860 or 664,577.2% from $246 in fiscal year 2018 to $1,635,106 in fiscal year 2019. We started to sell engine oil as the exclusive dealer of Autobacs in China in November 2018. The increase in cost of revenue from engine oil sales was in line with the increase in sales.

 

59

 

 

Cost of revenue from services increased by $743,750 or 383.1% from $194,117 in fiscal year 2018 to $937,867 in fiscal year 2019. The increase was primarily due to the increased cost of revenue from auto beauty shop services by $706,090 from $105,655 in fiscal year 2018 to $811,745 in fiscal year 2019. The increase was mainly due to the increase in rental expenses, as we opened two auto beauty shops in Dongguan and Humen, Guangdong in May 2018. The lease for the Humen shop was terminated in December 2019 and we are actively searching for new retail space for new auto beauty shops. Meanwhile, the operation of our online platform has become more mature and stabilized, and cost of revenue from online marketplace services only increased slightly in fiscal year 2019.

 

Gross Profit

 

The following table sets forth the breakdown of the Company’s gross profit for the years ended June 30, 2019 and 2018:

 

   For the Years Ended June 30,   Variance 
   2019   %   2018   %   Amount   % 
Products Sales                        
Auto Perfume, Air Freshener and Other products  $10,609,403    77.7%  $9,715,408    98.6%  $893,995    9.2%
Engine Oil   340,440    2.5%   131    -%   340,309    259,777.9%
Services   2,710,068    19.8%   139,288    1.4%   2,570,780    1,845.7%
Total Amount  $13,659,911    100.0%  $9,854,827    100.0%  $3,805,084    38.6%

 

Our overall gross profit increased by $3,805,084 or 38.6% from $9,854,827 in fiscal year 2018 to $13,659,911 in fiscal year 2019, while gross profit margin increased by 3.8% from 40.4% in fiscal year 2018 to 44.2% in fiscal year 2019.

 

The increase in gross profit and gross margin was mainly due to the contribution from our services segment. Gross profit of services segment was $2,710,068 and $139,288 for the years ended June 30, 2019 and 2018, respectively. The gross margins were 74.3% and 41.8% for the years ended June 30, 2019 and 2018, respectively, primarily as a result of the sharp increase in revenue as we started to charge membership fees and transaction commissions which were waived previously in fiscal year 2018. The increase was also attributable to increased revenue generated from advertising services which has a higher gross margin. 52% of our online marketplace service was generated from advertising services in fiscal year 2019 as compared to 26.4% in fiscal year 2018. The increase in gross margin was partially offset by the lower margin from engine oil segment which was 17.2% during the year ended June 30, 2019. As above-mentioned, we entered into a framework agreement with Baijili, and we made bulk sales to this customer amounted to RMB 13,479,939 (approximately $1,975,546) during the year ended June 30, 2019. The gross margin from this segment is relatively low as compared to our other segments.

 

60

 

 

Expenses

 

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

 

   For the years ended June 30, 
   2019   2018   Variance 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
                         
Total revenue  $30,930,083    100.0   $24,417,046    100.0   $6,513,037    26.7%
Operating expenses:                              
Selling expenses   3,600,897    11.6    4,103,857    16.8    (502,960)   (12.3)%
General and administrative expenses   3,597,843    11.6%   3,532,211    14.5%   65,632    1.9%
Research and development expenses   1,225,896    4.0%   1,422,605    5.8%   (196,709)   (13.8)%
Total operating expenses  $8,424,636    27.2%  $9,058,673    37.1%  $(634,037)   (7.0)%

 

Selling Expenses

 

Our selling expenses primarily include expenses incurred for various sales activities, payroll and sales commission expense paid to our sales and marketing personnel, business travel expenses, advertising and trade shows, shipping charges and other expenses related to sales activities. Selling expenses decreased by $502,960 or 12.3% from $4,103,857 in fiscal year 2018 to $3,600,897 in fiscal year 2019. This decrease in selling expenses can be attributable primarily due to a decrease in advertising and trade shows expenses by $1,166,395. During the year ended June 30, 2018, we focused on promotion activities in order to enhance our brand awareness and attract more customers. Since we established stable relationships with our customers, we had decreased expenditures related to promotions in the year ended June 30, 2019. The decrease was partially offset by the increased salary and welfare expenses by $564,766 because of the increase sales commissions which was in line with the increase in our revenue during the year ended June 30, 2019. As a percentage of revenues, our selling expenses accounted for 11.6% and 16.8% of our total revenue for the years ended June 30, 2019 and 2018, respectively.

 

General and Administrative Expenses

 

Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, entertainment expenses, bad debt expenses, office expenses, rental and professional service expenses. General and administrative expenses increased by $65,632 or 1.9% from $3,532,211 in fiscal year 2018 to $3,597,843 in fiscal year 2019, primarily due to increased bad debt expenses of $142,958, in accordance with our bad debt policy. The increase was partially offset by the decrease in professional fees in relation to accounting services by $113,373, due to increase in services fees incurred in fiscal year 2018 for preparation of our initial public offering. As a percentage of revenues, general and administrative expenses were 11.6% and 14.5% of our revenue in 2019 and 2018, respectively.

 

61

 

 

Research and Development Expenses 

 

Our research and development expenses consist primarily of salaries and related expenditures for research and development projects. Research and development expenses decreased by $196,709 or 13.8% from $1,422,605 in fiscal year 2018 to $1,225,896 in fiscal year 2019, primarily due to a decrease in research and development expenses incurred for the development of our online platform and mobile application, as the development of our online platform and mobile application already substantially completed in prior fiscal years. As a percentage of revenues, research and development expenses were 4.0% and 5.8% of our revenue in 2019 and 2018, respectively.

 

Interest Expense, Net 

 

Interest expense primarily consists of interest expense on our short-term bank loans and short-term borrowings from third parties. Interest expense, net decreased by $70,709 or 26.3% from $269,263 in fiscal year 2018 to $198,554 in fiscal year 2019. The decrease in interest expense was attributable to the decreased interest expense on short-term borrowings from third parties as we paid off all interest bearing loans from third parties during the year ended June 30, 2019. The decrease was partially offset by the increased interest expense on short-term bank loans as the there was an increased average balance of short-term bank loans for the year ended June 30, 2019 as compared to the same period in 2018.

 

Other Income, Net

 

Our net other income primarily consists of government subsidies and gains on sales of plastic and carton waste, and other items with value of small dollar amount. Net other income decreased by $174,213 or 58.6% from $297,290 in fiscal year 2018 to $123,077 in fiscal year 2019. The decrease was primarily due to less government subsidies we received during the year ended June 30, 2019.

 

Provision for Income Taxes

 

Our provision for income taxes was $744,583 in fiscal year 2019, an increase of $647,633 or 668.0% from $96,950 in fiscal year 2018. Under the EIT, domestic enterprises and the FIEs are usually subject to a unified 25% enterprise income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on case-by-case basis. Our subsidiary, Guangdong CarHouse, was incorporated in the PRC and is subject to corporate income tax at a reduced rate of 15% starting from 2016 when it was obtained the High and New Technology Enterprise Certification from the local government to November 2019. The High and New Technology Enterprise Certification was renewed in December 2019 and will expire in December 2022. The increase in income tax is attributable to the increased taxable income in the six months ended December 31, 2019.

 

Net Income

 

As a result of the foregoing, we reported a net income of $4,415,215 for the fiscal year ended June 30, 2019 as compared to a net income of $727,231 for the fiscal year ended June 30, 2018.

 

62

 

 

Liquidity and Capital Resources

 

Liquidity and Capital Resources of Operating Subsidiaries

 

To date, our operating subsidiaries have financed our operations primarily through cash flow from operations and bank loans, when necessary. We plan to support our future operations primarily from cash generated from our operations and cash on hand.

 

As of December 31, 2019, we had $7,247,577 in cash and cash equivalents at bank as compared to $1,395,239 as of June 30, 2019. As of December 31, 2019, we had $12,722,360 accounts receivable balance and $315,729 loan receivable from third parties. Based on the agreements, loan receivable from third parties is expected to be repaid by June 30, 2020. The collection of such receivables will make cash available use in our operation as working capital, if necessary.

 

As of December 31, 2019, we had positive working capital of $18,924,396. Our working capital requirements are influenced by the level of our operations, the numerical volume and dollar value of our sales contracts, the progress of execution on our customer contracts, and the timing of accounts receivable collections.

 

As of December 31, 2019, we had approximately $3.3 million bank loans outstanding. We expect that we will be able to renew all of the existing bank loans upon their maturity based on past experience and the Company’s good credit history. Subsequently, on March 11, 2020 and March 17, 2020, we have secured another two bank loans with Bank of Dongguan, which provided us additional funding of RMB 7.0 million (approximately $1,004,592) and RMB 8 million (approximately $1,148,106) for working capital purposes, with a maturity date of March 10, 2021 and March 25, 2021, respectively.

 

On October 25, 2019, Guangdong CarHouse, together with its sole shareholder CarHouse HK, passed a resolution to increase the registered capital of Guangdong CarHouse from RMB 42,501,522 (approximately $6,189,422) to RMB 81,800,000 (approximately $11,912,390). The increased registered capital of Guangdong CarHouse was full received by December 24, 2019. In addition, in December 2019, RMB 2,243,061 (approximately $323,948) shareholder loan to Haitao Jiang, our Chairman and Chief Executive Officer, was converted to additional capital contribution to Guangdong CarHouse.

 

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

 

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

 

Substantially all of our current operations are conducted in China and all of our revenue, expenses, cash and cash equivalents are denominated in RMB. Due to the PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars, we may have difficulty distributing any dividends outside of China. On April 8, 2018, the Company’s Board of Directors approved a resolution to pay a cash dividend of RMB 6,071,646 (approximately $0.9 million) to its major shareholders at the time of record, out of the retained earnings balance of Guangdong CarHouse. RMB 1,153,613 (approximately $0.2 million) individual income tax was withheld and paid by the Company during the year ended June 30, 2018. After the deduction of individual income tax, RMB 4,918,033 (approximately $0.7 million) was payable to its shareholders. As of December 31, 2019, a total of RMB 4,376,725 (approximately $0.6 million) had been paid and RMB 541,308 (approximately $0.1 million) was outstanding as of December 31, 2019. We do not plan to further pay any dividends out of our restricted net assets in the foreseeable future.

  

Liquidity and Capital Resources of the Holding Company

 

The Company is a holding company which was established under the laws of the British Virgin Islands on December 13, 2018. It has no operating business activities because substantially all of our current operations are conducted in China.

 

On September 2, 2019, the Company, CarHouse HK, Guangdong CarHouse and three original shareholders of the Company entered into an investment agreement. Pursuant to the agreement, Autobacs, one of the original shareholders, shall subscribe 6,250 new ordinary shares of the Company with a total payment of RMB 40,182,667. The Company has received the RMB 40,182,667 (approximately $5,684,444) of subscription payment on October 21, 2019. Upon the completion of this subscription, Autobacs owned 20% of the equity interest of the Company. 

 

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

  

63

 

 

We have limited financial obligations denominated in U.S. dollars, thus the foreign currency restrictions and regulations in the PRC on the dividends distribution will not have a material impact on our liquidity, financial condition, and results of operations.

 

Cash Flows

 

Six Months Ended December 31, 2019 and 2018

 

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

 

   For the Six Months Ended December 31, 
   2019   2018 
         
Net cash provided by (used in) operating activities  $1,647,409   $(1,187,209)
Net cash used in investing activities   (260,925)   (43,767)
Net cash provided by (used in) financing activities   4,382,984    (532,048)
Effect of exchange rate changes on cash   82,870    (154,054)
Net increase (decrease) in cash   5,852,338    (1,917,078)
Cash, beginning of period   1,395,239    4,226,748 
Cash and cash equivalents, end of period  $7,247,577   $2,309,670 

 

Operating Activities

 

Net cash provided operating activities was $1,647,409 in the six months ended December 31, 2019, mainly derived from a net income of $1,580,187 for the period, and net changes in our operating assets and liabilities, which mainly included an increase in accounts receivable of $802,571 because we strengthened our sales and marketing efforts and increased sales of our products and services, an increase in inventory of $944,350 as well as an increase in accounts payable to third party and related party of $1,787,317 due to the increased purchase.

 

Net cash used in operating activities was $1,187,209 in the six months ended December 31, 2018, mainly derived from a net income of $432,697 for the period, and net changes in our operating assets and liabilities, which mainly included an increase in accounts receivable of $1,489,436 because we strengthened our sales and marketing efforts and increased sales of our products and services. The increase in inventory of $1,776,829 was because we started engine oil business in the six months ended December 31, 2018 and stocked up our inventory so that we can meet the increasing demand from our customers, and an increase in accounts payable to third party and related party of $1,376,280 due to the increased purchase.

 

Based on the assessment of customers’ credit and ongoing relationships, our payment terms typically range from 3 months to 9 months. Days sales outstanding for the six months ended December 31, 2019 and 2018 were 136 and 82 days, respectively, which are within the payment term or repaid in advance. Historically, there was no significant instances of slow payment that the receivables remain outstanding for lengthy periods over the payment term. The management periodically evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. The Company does not believe it has a material collection risk under its business model that will have a negative impact on its collectability. Due to the travel ban and temporary closure of business in China caused by COVID-19 pandemic, the collection of accounts receivable has slowed down in February and March 2020. Along with the forecast of our customers’ business operations, we believe that the collection from our customers will accelerate gradually. The management periodically evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. An additional $388,184 provisions for doubtful accounts of accounts receivable has been provided for the period ended December 31, 2019. We believe that the outstanding balance of accounts receivable will be collected within the next six months.

 

Investing Activities

 

Net cash used in investing activities amounted to $260,925 for the six months ended December 31, 2019, mainly due to purchase of property and equipment of $268,037.

 

Net cash used in investing activities amounted to $43,767 for the six months ended December 31, 2018, mainly due to purchase of property and equipment of $379,020, partially offset by the repayments from loans to third parties of $349,829.

  

64

 

 

Financing Activities

 

Net cash provided by financing activities amounted to $4,382,984 for the six months ended December 31, 2019, primarily consist of proceeds from short-term bank loans of $3,271,739 for working capital purposes. On the other hand, we also repaid $3,556,238 short-term bank loans upon loan maturity. In addition, we received $5,684,444 capital contribution from Autobacs during the six months ended December 31, 2019.

 

Net cash used in financing activities amounted to $532,048 for the six months ended December 31, 2018, primarily consist of proceeds from one-year bank loans of $1,020,334 for working capital purposes. On the other hand, we repaid $772,538 short-term bank loans to upon loan maturity. In addition, we repaid $276,948 to a related party and repaid $291,524 to short-term borrowings due to third parties.

 

Years Ended June 30, 2019 and 2018

 

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

 

   For the years ended
June 30,
 
   2019   2018 
         
Net cash used in operating activities  $(604,174)  $(4,289,206)
Net cash used in investing activities   (1,214,463)   (695,413)
Net cash provided by (used in) financing activities   (877,878)   6,073,720 
Effect of exchange rate changes on cash   (134,994)   131,668 
Net increase (decrease) in cash   (2,831,509)   1,220,769 
Cash, beginning of year   4,226,748    3,005,979 
Cash, end of year  $1,395,239   $4,226,748 

 

Operating Activities

 

Net cash used in operating activities was $604,174 in fiscal year 2019, mainly derived from a net income of $4,415,215 for the year, and net changes in our operating assets and liabilities, which mainly included an increase in accounts receivable of $7,690,183 because we strengthened our sales and marketing efforts and increased sales of our products and services, an increase in inventory of $2,021,133 because we started engine oil business in fiscal year 2019, we stocked up our inventory so that we can timely meet the increasing demand from our customers, an increase in accounts payable to third party and related party of $2,828,302 due to the increased purchase as well as an increase in tax payable of $787,059.

 

Net cash used in operating activities was $4,289,206 in fiscal year 2018, mainly derived from a net income of $727,231 for the year, and net changes in our operating assets and liabilities, which mainly included an increase in accounts receivable of $1,048,192 because we strengthened our sales and marketing efforts and increased sales of our products and services. The increase in inventory of $3,323,058 was because we purchased a large amount of raw material during the year ended June 30, 2018 when the prices were relatively low, a large of amount of finished goods yet to be delivered to the customers and a decrease in other payables of $1,197,748.

 

Based on the assessment of customers’ credit and ongoing relationships, our payment terms typically range from 3 months to 9 months. Days sales outstanding for the years ended June 30, 2019 and 2018 were 100 and 65 days, respectively, which are within the payment term or repaid in advance. Historically, there was no significant instances of slow payment that the receivables remain outstanding for lengthy periods over the payment term. The Company does not believe it has a material collection risk under its business model that will have a negative impact on its collectability. The Company’s business has continued to grow and demands for its products and services has been increasing. As of the date of this prospectus, a total of $12,107,637, or 97% of accounts receivable balance as of June 30, 2019 has been collected.

 

Investing Activities

 

Net cash used in investing activities amounted to $1,214,463 for fiscal year 2019, including purchase of property and equipment of $1,624,816 and repayments from loans to third parties of $425,008.

 

Net cash used in investing activities amounted to $695,413 for fiscal year 2018, including purchase of property and equipment of $1,166,488, repayments from loans to third parties of $838,188 and payments made for loan to third parties of $367,113.

  

Financing Activities

 

Net cash used in financing activities amounted to $877,878 for the year ended June 30, 2019, primarily consist of proceeds from short-term bank loans of $3,663,863 (RMB 25 million), from banks as working capital for one year. On the other hand, we also repaid $2,469,443 (RMB 16.9 million) short-term bank loans to upon loan maturity. In addition, we repaid $1,978,486 (RMB 13.5 million) short-term borrowings due to third parties during the year ended June 30, 2019.

  

65

 

 

Net cash provided by financing activities amounted to $6,073,720 for the year ended June 30, 2018, primarily consist of proceeds from one-year bank loans of $2,612,812 (RMB 17 million) for working capital purposes. On the other hand, we repaid $1,844,338 (RMB 12.0 million) short-term bank loans to upon loan maturity for the year ended June 30, 2018. In addition, the Company received $797,890 from a related party as loan for fund the Company’s operations, and capital contribution of $4,865,725 from one of the original shareholders of Guangdong CarHouse for the year ended June 30, 2018.

 

Contractual Obligations

 

As of December 31, 2019, our contractual obligation is as follows:

 

       Less than   1-2   2-3   3-4 
Contractual obligations  Total   1 year   years   years   years 
Short-term bank loans (1)  $3,300,804   $3,300,804   $-   $-   $- 
Future lease payments (2)   3,387,819    1,284,633    1,306,456    590,956    205,774 
Total  $6,688,623   $4,585,437   $1,306,456   $590,956   $205,774 

 

  (1) As of December 31, 2019, our contractual obligation to repay outstanding short-term bank loans totaled $3,300,804.

 

  (2) The Company leases its offices, stores and plant for its headquarters and local branches, which are classified as operating leases in accordance with Topic 842. As of December 31, 2019, our future lease payments totaled 3,387,819.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as of December 31, 2019.

  

Seasonality

 

We have historically achieved our highest sales levels during March, July, November and December of each year. This pattern is largely due to national industry events in March and July and promotional activities of nationwide online marketplace in November. Our primary customers such as auto product retailers generally increase their sales efforts in December to meet their annual performance goal, which facilitates sales of our products.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements are prepared in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates as a result of changes in our estimates.

 

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this prospectus.

 

66

 

 

Revenue Recognition 

 

We have revenue from products sales and revenue from services.

 

With adoption of ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”), revenue is now recognized when all of the following five steps are met: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy the performance obligation.  

 

Under ASC 606, revenue is recognized when control of promised goods or services is transferred to our customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods or services. Control is the ability to direct the use of, and obtain substantially all of the remaining benefits from the specified good and service. We evaluate whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. In accordance with ASC 606, when we act as a principal, that we obtain control of the specified goods or services before they are transferred to the customers, the revenues should be recognized in the gross amount of consideration to which it expects to be entitled in exchange for the specified goods or services transferred. When we act as an agent and its obligation is to facilitate third parties in fulfilling their performance obligation for specified goods or services, revenues should be recognized in the net amount for the amount of commission which we earn in exchange for arranging for the specified goods or services to be provided by other parties.

 

Under ASC 606, if the consideration promised in a contract includes a variable amount, the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer should be estimated. An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items. The promised consideration also can vary if an entity’s entitlement to the consideration is contingent on the occurrence or nonoccurrence of a future event. An amount of variable consideration should be estimated by using either the expected value or the most likely amount, and only to the extent that it is probable that that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. All the information (historical, current, and forecast) that is reasonably available to the entity should be considered and a reasonable number of possible consideration amounts should be identified.

 

Revenue from Products Sales

 

Revenue from products sales consists of auto perfume, air freshener and other products as well as engine oil sales through various online channels (e.g. JD.com, Tmall, and the Company’s website at www.car-house.cn) and offline market. All of our contracts have a single performance obligation satisfied at a point in time and the transaction price is stated in the contract, usually as a price per unit. We recognize product revenues from sales through the online channels and offline market on a gross basis as we control these products in advance of transferring to the customers. We act as a principal since we are responsible for fulfilling the promise to provide the specified goods, is subject to inventory risk, and has the discretion in establishing prices. Based on the assessment of customers’ credit and ongoing relationships, the payment terms of our products sales typically range from 3 months to 9 months.

  

67

 

 

Auto Perfume, Air Freshener and Other Products

 

We sell auto perfume, air freshener and other products primarily to wholesale customers such as auto product retailers, auto dealers, commercial car care shops and professional detailing businesses domestically and internationally. For domestic sales, revenue is recognized at the point of delivery of the related products and control is transferred. For international sales, we sell goods under free on board (“FOB”) shipping point term, and revenue is recognized when product is loaded on the ships and control is deemed as transferred. We provide sales volume rebates to qualified distributors based on the volume sold by such distributors in a certain period, which are accounted for as variable consideration. Sales volume rebates are accrued when the products are sold to distributors. Revenue is recognized net of sales volume rebate. At the inception of each contract that includes sales rebates, we evaluate whether the sales volume are considered probable of being reached and to the extent that a significant reversal of cumulative revenue would not occur in future periods, estimates the amount to be included in the transaction price using the most likely amount method. At the end of each subsequent reporting period, we re-evaluate the probability of achieving such sales volume and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. We grant the customers from online channel the right to return goods within seven days of receipt with no question asked; historically, the customer returns were immaterial. Therefore, we do not believe an accrual for return allowances is necessary for the six months ended December 31, 2019 and 2018.

 

Engine Oil

 

We sell engine oil product primarily to wholesale customers domestically, and revenue is recognized at the point of delivery of the related products and control is transferred. We do not routinely permit customers to return products and historically, customer returns have been immaterial. Therefore, we do not believe an accrual for return allowances is necessary for the six months ended December 31, 2019 and 2018.

 

Revenue from Services

 

Revenue from services consists of online marketplace services and auto beauty shop services. Revenue from online marketplace services that is provided through our online marketplace, www.car-house.cn, and mobile app named Car House, is recognized on a net basis, where we generally are acting as agent and its performance obligation is to arrange for the provision of the specified goods or services by those third-party sellers. However, we are not responsible for fulfilling the promise to provide the specified goods or services sold on our platform by those third-party sellers, and does not bear inventory risk nor have the discretion in establishing prices. In addition, we do not have the ability to control the related shipping services when utilized by the third-party sellers. On the other hand, the third-party sellers on our platform are responsible for fulfilling the promise to provide the specified goods or service, and they are subject to inventory risk and also have the discretion in establishing prices.

 

Online Marketplace Services

 

We provide the infrastructure and services for third party merchants to complete transactions with customers on our online platform. The majority of purchasers on this platform are wholesale customers such as auto product retailers, car dealers, commercial car care shops and professional detailing businesses and the remaining are retail consumers such as private car owners. We collect online platform advertising fees, transaction commissions and membership service fees from third party merchants and agents. Transaction commissions and membership service fees are collected in advance, and advertising fees are collected within the service period, which is usually between three to five months. Revenue generated from advertising service is recognized when services have been provided and the receipts of advertising services are confirmed by customers. Advertising fees collected before providing services are recorded as deferred revenue on the consolidated balance sheets. Revenue generated from transaction commission is recognized at the point when the online sales of third party merchant is completed, which is charged based on a fixed commission rate. Revenue generated from online platform membership service fees is recognized on a straight-line basis over the period during which the membership services are provided.

  

Auto Beauty Shop Services

 

We provide auto beauty services including car wash, car maintenance and automotive detailing. Revenue generated from auto beauty shop services is recognized when related services are rendered to customers.

 

Contract Balances

 

We do not have any contract assets since revenue is recognized when control of the promised goods or services is transferred and the payment from customers is not contingent on a future event. Our contract liability, which is reflected in its unaudited condensed consolidated balance sheets as deferred revenue, represents our unsatisfied performance obligations revenues collected but not earned as of December 31, 2019 and June 30, 2019. This is primarily composed of revenue for online platform membership service fees received in advance from online marketplace services.

 

Disaggregation of Revenues

 

We disaggregate revenue from contracts by products and services, as we believe it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. Our disaggregation of revenues for the six months ended December 31, 2019 and 2018 is disclosed in Note 13 accompanying our unaudited condensed consolidated financial statements for the six months ended December 31, 2019 and 2018.

 

68

 

  

Income Taxes

 

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

 

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the six months ended December 31, 2019 and 2018. We do not believe there was any uncertain tax provision at December 31, 2019 and June 30, 2019.

 

Our operating subsidiaries in China are subject to the income tax laws of the PRC. As of December 31, 2019, the tax years ended December 31, 2015 through December 31, 2019 for our PRC subsidiaries remain open for statutory examination by PRC tax authorities.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of the Company’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Its mandatory effective dates are as follows: 1. Public business entities that meet the definition of an SEC filer for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; 2. All other public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years; and 3. All other entities (private companies, not-for-profit organizations, and employee benefit plans) for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. On November 15, 2019, FASB issued ASU 2019-10 which provides a framework to stagger effective dates for future major accounting standards (including ASC 326 Financial instrument-credit losses) and amends the effective dates to give implementation relief to certain type of entities: 1. Public business entities that meet the definition of an SEC filer, excluding entities eligible to be Smaller Reporting Companies, or SRC, as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; and 2. All other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As an “emerging growth company,” or EGC, the Company has elected to take advantage of the extended transition period provided in the Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards applicable to private companies. We will adopt ASU 2016-13 and its related amendments effective July 1, 2023, and we are in the process of evaluating the potential effect on our unaudited condensed consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220)”. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. We do not expect that the adoption of this ASU will have a material impact on our financial statements.

   

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” to improve the effectiveness of disclosures in the notes to financial statements related to recurring or nonrecurring fair value measurements by removing amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, policies for timing of transfers between different levels for fair value measurements, and the valuation processes for Level 3 fair value measurements. The new standard requires disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We do not expect that the adoption of this ASU will have a material impact on our financial statements.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The Board is issuing this Update as part of its initiative to reduce complexity in accounting standards (the “Simplification Initiative”). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The specific areas of potential simplification in this Update were submitted by stakeholders as part of the Simplification Initiative. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We do not expect that the adoption of this ASU will have a material impact on our financial statements.

 

We do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our unaudited condensed consolidated financial position, statements of operations and cash flows.

  

69

 

 

INDUSTRY OVERVIEW

 

We have engaged CRI to prepare a commissioned industry report that analyzes the PRC automotive supply B2B industry. All information and data presented in this section have been derived from CRI 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.

 

Overview

 

Automotive supply refers to products used in the fields of automobile modification, automotive beauty, automotive decoration and so on. Automotive supply mainly includes automotive electronics and electrical products, automotive safety products, automotive beauty and maintenance products and automotive decorations.

 

Industry Chain

 

The upstream of automotive supply B2B platforms is the manufacturers of automotive supply, agencies for overseas brands, the franchised outlets of automotive beauty and maintenance and relevant consultation and service providers.

 

The midstream is automotive supply B2B platforms that connect the automotive supply in the upstream and the micro, small and medium-sized customers in the downstream, cut complicated intermediate links and optimize information matching for the supply chain. When delivering products from upstream suppliers to downstream customers, these platforms obtain transaction data that are valuable to upstream suppliers. In contrast, the traditional business model is characterized with circulation links and high costs. As a result, retail prices are much higher than factory prices. B2B platforms disclose information, simplify transactions and optimize the allocation of information and resources based on big data analysis and the prices of automotive supply on these platforms are more reasonable.

 

The downstream is mainly automotive beauty stores, automobile repair and maintenance shops and auto dealerships. It also includes the wholesalers and retailers of automotive supply.

 

Industry Chain of China’s Automotive Supply Industry 

 

 

Source: The CRI Report.

 

70

 

 

China’s E-Commerce Market 

 

China has been a leading player in the e-commerce industry in terms of scale and diversity. In particular, it has been ranking the first in the world for many years in terms of online retail sales. At the end of 2018, the e-commerce GMV in China reached RMB 31.63 trillion (approximately $4.78 trillion). In particular, B2B e-commerce GMV reached RMB 22.50 trillion, accounting for 71.1% of total e-commerce GMV. China remains the world’s largest online retail market.

 

E-Commerce GMV and B2B E-Commerce GMV in China, 2014-2018 

 

 

Source: The Department of Electronic Commerce and Informatization of China’s Ministry of Commerce.

 

China’s Automotive Supply Market

 

In 2018, the market size of automotive supply in China was RMB 197.74 billion (approximately $29.88 billion), representing a CAGR of 19.80% from 2014 to 2018. By sales value, automotive electronics accounted for the largest market share of 32% because of the variety of products and high added value; the market share of automotive decorations such as car perfume and seat cushions was 29%; the market share of automotive beauty and maintenance products such as lubricating oil and car film was 27%; and the market share of other automotive supply was 12%. 

 

Market Size of China’s Automotive Supply Industry, 2014-2023

 

   Market Size (RMB billion) 
Year  Electronics   Decorations   Beauty and maintenance   Others   Total 
2014   31.55    26.75    26.45    11.21    95.96 
2015   37.55    32.37    31.52    13.52    114.96 
2016   44.68    39.17    37.58    16.30    137.72 
2017   53.17    47.39    44.79    19.64    164.99 
2018   63.28    57.34    53.39    23.73    197.74 
2019F   73.72    67.67    61.99    27.76    231.13 
2020F   85.88    79.85    71.97    32.48    270.18 
2021F   100.05    94.22    83.55    38.00    315.83 
2022F   116.56    111.18    97.00    44.47    369.21 
2023F   135.79    131.19    112.62    52.02    431.63 
2014-2018 CAGR   19.0%   21.0%   19.2%