F-1 1 ff12020_goxusinc.htm REGISTRATION STATEMENT

As filed with the U.S. Securities and Exchange Commission on January 21, 2020

Registration No. 333-[●]

 

 

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

 

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

 

Goxus Inc.

(Exact name of registrant as specified in its charter)

 

Cayman Islands   7389   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

11th floor, Guanghe Building, No.5 Building,

Lv Di Qi Hang international Part 3, Fangshan District, Beijing

People’s Republic of China

+86-1052878052

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

 

Hunter Taubman Fischer & Li LLC
1450 Broadway, 26th Floor
New York, NY 10018
(212) 530-2206

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

 

With a Copy to:

 

Ying Li, Esq.

Guillaume de Sampigny, Esq.

Hunter Taubman Fischer & Li LLC
1450 Broadway, 26th Floor
New York, NY 10018
212-530-2206

Mitchell S. Nussbaum, Esq.

Loeb & Loeb LLP

345 Park Avenue

New York, NY 10154

212-407-4000

 

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

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.
   
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
   
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
   
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
   
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.  
   
Emerging growth company
   
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.

 

 

 

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

 

 

 

 

CALCULATION OF REGISTRATION FEE

  

Title of Each Class of Securities to Be Registered  Amount
to Be
Registered
   Proposed
Maximum
Offering
Price per
Share
   Proposed
Maximum
Aggregate
Offering
Price(1)
   Amount of
Registration
Fee(2)
 
Ordinary shares, par value $0.0002 per share (“Ordinary Shares”)(3)   1,725,000   $10.00   $17,250,000   $2239.05 
Underwriter Warrants(4)                
Ordinary Shares underlying the Underwriter Warrants(5)   90,000    12.00   $1,080,000   $140.18 
Total   1,815,000       $18,330,000   $2379.23 

  

(1) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act.  Includes the offering price attributable to an additional 225,000 Ordinary Shares, that Network 1 Financial Securities, Inc.  (the “Underwriter”) has the option to purchase to cover over-allotments, if any.

 

(2) Calculated pursuant to Rule 457(o) under the Securities Act, based on an estimate of the proposed maximum aggregate offering price.

 

(3) In accordance with Rule 416(a), we are also registering an indeterminate number of additional Ordinary Shares that shall be issuable pursuant to Rule 416 to prevent dilution resulting from share splits, share dividends or similar transactions.

  

(4)

In accordance with Rule 457(g) under the Securities Act, because the Registrant’s Ordinary Shares underlying the Underwriter warrants (as defined below) are registered hereby, no separate registration fee is required with respect to the warrants registered hereby

 

(5) The Registrant will issue to the Underwriter warrants to purchase a number of Ordinary Shares equal to an aggregate of six percent (6%) of the Ordinary Shares (the “Underwriter Warrants”) sold in the offering (not including any ordinary shares that may be issued upon exercise by the Underwriter of the over-allotment option). The exercise price of the Underwriter Warrants is equal to 120% of the offering price of the Ordinary Shares offered hereby. The Underwriter Warrants are exercisable within five years commencing on the effective date of this offering, at any time, and from time to time, in whole or in part. As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. Resales of shares of Ordinary Shares issuable upon exercise of the Underwriter warrants on a delayed or continuous basis pursuant to Rule 415 under the Securities Act are also registered hereby.

  

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

 

SUBJECT TO COMPLETION DATED JANUARY 21, 2020

 

1,500,000 Ordinary Shares

 

 

Goxus Inc.

 

This is the initial public offering of our Ordinary Shares of Goxus Inc., a Cayman Islands company. We are offering 1,500,000 Ordinary Shares in this offering. Prior to this offering, there has been no public market for our Ordinary Shares. We  currently expect the estimated initial public offering price to be between $8.00 and $10.00 per share.

 

The offering is being made on a “firm commitment” basis by Network 1 Financial Securities, Inc., the underwriter. See “Underwriting.” We have reserved the symbol “GOXS” for purposes of listing our Ordinary Shares on the Nasdaq Capital Market and we have applied to list our Ordinary Shares on the Nasdaq Capital Market. The initial public offering is contingent upon receiving authorization to list the Ordinary Shares on the Nasdaq Capital Market.

 

Investing in our Ordinary Shares involves a high degree of risk, including the risk of losing your entire investment. See “Risk Factors” beginning on page 7 to read about factors you should consider before buying our Ordinary Shares.

 

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

 

   Per Share   Total 
Initial public offering price  $   $         
Underwriter’s discounts(1)  $   $ 
Proceeds to our company before expenses(2)  $             $ 

 

(1)See “Underwriting” in this prospectus for more information regarding our arrangements with the Underwriter.

 

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

 

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. 

 

We have granted the underwriters an option for a period of 45 days to purchase up to an additional 225,000 shares from us at the public offering price less the underwriting discounts to cover over-allotments.

 

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

 

 

Prospectus dated [●], 2020.

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
PROSPECTUS SUMMARY 1
   
SUMMARY FINANCIAL DATA 6
   
RISK FACTORS 7
   
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS 29
   
ENFORCEABILITY OF CIVIL LIABILITY 30
   
USE OF PROCEEDS 31
   
DIVIDEND POLICY 32
   
CAPITALIZATION 33
   
DILUTION 34
   
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 35
   
INDUSTRY 73
   
BUSINESS 79
   
REGULATIONS 98
   
MANAGEMENT 107
   
EXECUTIVE COMPENSATION 111
   
PRINCIPAL SHAREHOLDERS 112
   
RELATED PARTY TRANSACTIONS 113
   
DESCRIPTION OF SHARE CAPITAL 115
   
SHARES ELIGIBLE FOR FUTURE SALE 129
   
TAXATION 130
   
UNDERWRITING 139
   
EXPENSES RELATING TO THIS OFFERING 142
   
LEGAL MATTERS 143
   
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 143
   
EXPERTS 143
   
WHERE YOU CAN FIND MORE INFORMATION 143
   
INDEX TO FINANCIAL STATEMENTS F-1

 

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.

 

i

 

About this Prospectus

 

You should rely only on the information contained in this prospectus or in any related free-writing prospectus. We and the Underwriter have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by us or on our behalf or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the Ordinary Shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted or where the person making the offer or sale is not qualified to do so or to any person to whom it is not permitted to make such offer or sale. 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. For the avoidance of doubt, no offer or invitation to subscribe for Ordinary Shares is made to the public in the Cayman Islands. The information contained in this prospectus is current only as of the date on the front cover of the prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Other Pertinent Information

 

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

 

  “Affiliated Entities” are to Goxus’ subsidiaries, and Goxus BJ and its subsidiaries;
     
  “China” or the “PRC” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau for the purposes of this prospectus only;
     
  “Goxus,” “we,” “us,” or the “Company,” are to one or more of Goxus Inc., an exempted company limited by shares formed under Cayman Islands law, and its Affiliated Entities, as the case may be;
     
  “Goxus BJ” are to our VIE, Goxus (Beijing) Creative and Cultural Co. Ltd., a limited liability company organized under the laws of the PRC, which we control via a series of contractual arrangements between WFOE and SDH;
     
  “Goxus BVI” are to “Goxus (BVI) Ltd.,” Goxus wholly-owned subsidiary, a limited company formed under British Virgin Islands law;
     
   “Goxus Consulting” or “WFOE” are to Goxus’ wholly foreign owned subsidiary, Beijing Goxus International Management Consulting Ltd, a limited liability company organized under the laws of the PRC;
     
   “Goxus HK” are to “Goxus (HK) Cultural Creative Limited”, Goxus’ wholly-owned-subsidiary, a Hong Kong corporation;
     
  “Goxus Suqian” are to Goxus BJ’s wholly owned subsidiary, Suqian Goxus Creative and Cultural Ltd, a limited liability company organized under the laws of the PRC;
     
  “shares,” “Shares,” or “Ordinary Shares” are to the Ordinary Shares of the Company, par value US$0.0002 per share; and
     
  “VIE” are to variable interest entity.

 

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

 

ii

 

PROSPECTUS SUMMARY

 

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements included elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our Ordinary Shares, discussed under “Risk Factors,” before deciding whether to buy our Ordinary Shares. This prospectus contains certain estimates and information from an industry report (“Frost & Sullivan Report”) commissioned by us and prepared by Frost & Sullivan (Beijing) Inc., Shanghai Branch Co. (“Frost & Sullivan”), an independent market research firm, regarding our industries and our market position in China, which have not been independently verified by us, the underwriters or any of their respective affiliates or advisers. The information in such sources may not be consistent with other information compiled in or outside of China.

 

Overview

 

We operate in the Chinese urban-rural design and development market, and provide two main services, (i) urban-rural design services and (ii) comprehensive construction project management consulting services. Urban-rural design and development is the process of designing and shaping the physical features of cities, towns and villages and planning for the provision of municipal services to residents and visitors. Since we started our operations in 2010, we have provided services to over one hundred projects throughout the PRC. Our projects to date covered a broad range of design subjects, including villages, towns, theme parks, neighborhoods, shopping malls and schools. For the majority of our projects, we served as the sub-contractor for construction companies who responded to the government’s request for tender notices and won government contracts through the public bidding process. Approximately 98%, 85% and 98% of our revenue for the fiscal years ended March 31, 2018 and 2019, and six months ended September 30, 2019, respectively, were generated from serving as sub-contractors to construction companies on projects sponsored by the PRC government, primarily by the regional governments at county level.

 

According to the International Monetary Fund (“IMF”), the population of the PRC grew from 1.37 billion in 2014 to 1.40 billion in 2018, and is expected to continue to grow and reach 1.41 billion by the end of 2023. The rising population and recent economic expansion of the PRC have contributed to the acceleration of urbanization in the past years. According to the National Bureau of Statistics of China (“NBS”), from 2014 to 2018, the urbanization rate in the PRC, which measures the percentage of urban population, has increased from 54.3% to 59.8%. According to the Frost & Sullivan Report, it is forecasted that the urbanization rate will reach 66.5% in 2023. In 2019, the National Development and Reform Commission released the “Key Tasks of New Type Urbanization,” the official plan for the urbanization development in the PRC, to further support the urbanization process. Additionally, as stated in the 13th Five-Year Plan for Economic and Social Development of the PRC, which covers the years 2016-2020, the PRC government plans to accelerate the development of counties and villages in the rural areas with the aim of turning them into towns and cities. The market size for urban and rural design and development in the PRC has experienced a steady growth from US$54.2 billion in 2015 to US$76.3 billion in 2018, and based on current governmental policies, we expect this trend to continue.

 

With more than eight years of experience providing urban-rural design services, we have developed our market oriented urban-rural design approach, namely, the “GOXUS Design,” to create high-level strategic and conceptual design schemes for a variety of urban-rural design subjects. Rather than focusing primarily on the functional and aesthetic aspects of a design, our approach strives to bring together what is desirable from a human point of view with what is ecologically feasible and economically sustainable in all our designs. For each of our projects, we first conduct an in-depth feasibility study and create a long-term strategic plan, including brand positioning and future operational planning. To further facilitate the execution and engineering of our designs, we offer ancillary comprehensive construction project management consulting services throughout the construction phase of projects that use our designs.

 

All of our business is conducted by our VIE, Goxus BJ, and its subsidiary, Goxus Suqian, in the PRC. Since 2018, we have started to employ an asset-light business model, a model in which a company has relatively few capital assets compared to its operations, and kept a lean corporate structure to remain flexible and efficient in our operation. Our strategy is to outsource non-essential tasks that do not require our core-competence, which is our ability to create attractive, functional and sustainable urban-rural designs. Thus, to supplement and enhance our ability to efficiently work on government projects, we have built and maintained a network of external resources, including: (1) construction enterprises that we cooperate with to acquire government-sponsored projects; (2) design companies that serve as our subcontractors providing non-essential design services; and (3) project consulting companies and construction material suppliers that serve as our sub-contractors providing comprehensive construction project management related services.

 

With our asset-light model, we do not invest capital or human resources on acquiring/maintaining the construction or engineering credentials required for government contractors, instead we cooperate with and serve as subcontractor to qualified construction companies on acquiring and working on government projects. Almost all urban-rural design and development projects require design proposals as part of bidding materials. When a construction company needs design proposals and chooses us as a design service provider for a project, it sends us an invitation to provide designs for its bids. If we accept an invitation, we first enter into a pre-bidding cooperating agreement with the construction company to secure our service as a subcontractor on the project if the proposal wins the bid, prior to providing any design proposal to be incorporated as part of the bidding materials being submitted to the government by the bidding construction company. Our cooperating agreement also specifies whether we will be providing construction project management consulting services based on the needs and specifics of each project. We do not receive any payment for participating in a bid, but will only receive compensation if and when the cooperating construction company we work with wins the bid and gets paid as a government contractor, who then pays us for our service as its subcontractor; therefore it is crucial for us to invest in the projects offering us the highest rate of return with the best winning prospect.

 

We believe in providing innovative solutions for our clients and have a research and development (“R&D”) team that focuses on conducting research on market dynamics and trends in government-sponsored urban-rural design and development, as well as improving our urban-rural design methods and technologies. As of the date of this prospectus, we own one invention and five utility patents, as well as nine software and 16 work copyright registrations. In December 2016, we were awarded the PRC National High Tech Enterprise certification, which afforded us a favorable income tax rate for the duration of three years. The certificate expired in December 2019, and the Company is currently in the process of renewing the certificate, which is expected to be renewed in March 2020.

  

1

 

We are led by an experienced management team that has demonstrated since our inception its ability to drive growth in revenue and profits. Over the last eight years, we have grown our revenue from $Nil for the fiscal year ended March 31, 2011 to $47,175,847 for the fiscal year ended March 31, 2019, reflecting a compound annual growth rate, or CAGR, of 612%. In that same eight-year period, our net income increased from a net loss of $2,353 to net income of $7,050,224, reflecting a CAGR of 144%. Our revenue for the fiscal year ended March 31, 2019 grew 69.3% to $47.2 million, from $27.9 million for 2018. Our revenue for the six months ended September 30, 2019 grew 21.3% to $24,860,853, from $20,492,200 for the six months ended September 30, 2018. The revenues generated from design services were $12,829,364, $11,274,435, and $7,704,200, or 46.1%, 23.9%, and 31.0% of the total revenues, and from comprehensive construction project management consulting services were $15,030,003, $35,901,412, and $17,156,653, or 53.9%, 76.1%, and 69.0% of the total revenues for the fiscal years ended March 31, 2018 and 2019, and the six months ended September 30, 2019, respectively.

 

Competitive Strengths

 

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

 

Recognition and reputation achieved from our previous success.

 

Innovative approach.

 

Experienced management team.

 

Our asset-light business model.

 

Growth Strategies

 

We intend to further grow our business by pursuing the following strategies: 

 

Attracting and recruiting highly qualified professionals to join our team.

 

Further strengthening research on market dynamics and trends in government-sponsored urban-rural design and development.

 

Further improving urban-rural design methods.

 

Implementing effective resources management to improve operational efficiency and boost core competency.

 

Our Challenges

 

We face challenges, risks and uncertainties in realizing our business objectives and executing our strategies, including those relating to our ability to:

 

  Grow our market share in the PRC urban-rural design and development industry.

 

  Navigate in the fast-changing regulatory environment.

 

  Maintain and improve our relationship with business partners.

 

  Recruit and retain qualified personnel.

 

  Manage our growth effectively and efficiently.

 

  Enhance our brands in a cost-effective manner.

 

Please see “Risk Factors” and other information included in this prospectus for a discussion of these and other risks and uncertainties that we face.

 

Corporate Information

 

Our principal executive offices and headquarters are located at 11th floor, Guanghe Building, No.5 Building, Lv Di Qi Hang international Part 3, Fangshan District, Beijing, China and our phone number is +86-1052878052. Our registered office in the Cayman Islands is located at 4th Floor, Harbour Place, 103 South Church Street, P.O. Box 10240, Grand Cayman KY1-1002, Cayman Islands. We maintain a corporate website at www.goxus.com.cn. The information contained in, or accessible from, our website or any other website does not constitute a part of this prospectus.

 

2

 

Corporate Structure

 

The following diagram illustrates our corporate structure as of the date of this prospectus and upon completion of our initial public offering based on 1,500,000 Ordinary Shares being offered, assuming the Underwriter does not exercise the over-allotment option:

 

 

Implications of Our Being an “Emerging Growth Company”

 

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to larger public companies. In particular, as an emerging growth company, we:

 

  may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations, or “MD&A;”
     
  are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives, which is commonly referred to as “compensation discussion and analysis”;
     
  are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
     
  are not required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on frequency” and “say-on-golden-parachute” votes);
     
  are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and chief executive officer pay ratio disclosure;

 

3

 

  are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act; and
     
  will not be required to conduct an evaluation of our internal control over financial reporting.

 

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

 

Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions until we no longer meet the definition of an emerging growth company. The JOBS Act provides that we would cease to be an “emerging growth company” at the end of the fiscal year in which the fifth anniversary of our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, herein referred to as the Securities Act, occurred, if we have more than $1.07 billion in annual revenues, have more than $700 million in market value of our Ordinary Share held by non-affiliates, or issue more than $1 billion in principal amount of non-convertible debt over a three-year period.

 

Foreign Private Issuer Status

 

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

 

  we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
     
  for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;
     
  we are not required to provide the same level of disclosure on certain issues, such as executive compensation;
     
  we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
     
  we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; and
     
  we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.

 

4

 

THE OFFERING

 

Ordinary Shares offered by us   1,500,000 Ordinary Shares, or 1,725,000 Ordinary Shares if the Underwriter exercises its over-allotment option in full.
     
Price per Ordinary Share   We currently estimate that the initial public offering price will be in the range of $8.00 to $10.00 per Ordinary Share.
     
Ordinary Shares outstanding prior to completion of this offering   15,000,000 Ordinary Shares

  

Ordinary Shares outstanding immediately after this offering  

16,500,000 Ordinary Shares or 16,725,000 Ordinary Shares if the underwriter exercises its over-allotment option in full.

 

     
Listing   We have applied to list our Ordinary Shares on the Nasdaq Capital Market.
     
Nasdaq Capital Market symbol   “GOXS”
     
Transfer Agent   V Stock Transfer LLC
     
Use of proceeds   We intend to use the proceeds from this offering for working capital and general corporate purposes, including the expansion of our business. See “Use of Proceeds” for more information.
     
Lock-up  

All of our directors and officers and our principal shareholders (5% or more shareholders) have agreed with the Underwriter subject to certain exceptions, not to sell, transfer, or dispose of, directly or indirectly, any of our Ordinary Shares or securities convertible into or exercisable or exchangeable for our Ordinary Shares for a period of 180 days after the effective date of this registration statement. See “Shares Eligible for Future Sale” and “Underwriting” for more information.

 

Risk factors   The Ordinary Shares offered hereby involve a high degree of risk. You should read “Risk Factors” for a discussion of factors to consider before deciding to invest in our Ordinary Shares.

 

5

 

SUMMARY FINANCIAL DATA

 

The following tables set forth selected historical statements of operations for the years ended March 31, 2019 and 2018, and balance sheet data as of March 31, 2019 and 2018, which have been derived from our audited financial statements for those periods included elsewhere in this prospectus. The historical consolidated statements of operations data for the six months ended September 30, 2019 and 2018, and the historical consolidated balance sheet data as of September 30, 2019 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in the prospectus.

  

Selected Statements of Operations Information:

  

   For the six months ended
September 30,
   For the years ended
March 31,
 
   2019   2018   2019    2018   
   (Unaudited)   (Unaudited)         
Revenue                
  Revenue from third-party customers  $21,905,571   $18,667,458   $37,934,941   $27,859,367 
  Revenue from related party customers   2,955,282    1,824,782    9,240,906    - 
Total revenue   24,860,853    20,492,240    47,175,847    27,859,367 
Cost of revenue   17,367,684    15,109,282    34,322,930    15,877,256 
Gross profit   7,493,169    5,382,958    12,852,917    11,982,111 
                     
Operating expenses                    
Selling expenses   142,647    187,078    413,636    398,533 
General and administrative expenses   1,909,205    1,950,149    3,616,696    3,272,092 
Total operating expenses   2,051,852    2,137,227    4,030,332    3,670,625 
                     
Income from operations   5,441,317    3,245,731    8,822,585    8,311,486 
                     
Other income (expenses)                    
Interest expense   (105,912)   (118,792)   (237,680)   (79,182)
Interest income   9,705    13,849    22,612    9,008 
Subsidy income   -    6,984    88,388    357,794 
Total other income (expense), net   (96,207)   (97,959)   (126,680)   287,620 
                     
Income before income taxes   5,345,110    3,147,772    8,695,905    8,599,106 
                     
Provision for income taxes   1,287,615    540,541    1,645,681    1,504,023 
                     
Net income   4,057,495    2,607,231    7,050,224    7,095,083 
                     
Other comprehensive income (loss)                    
Foreign currency translation adjustment   (1,128,650)   (984,315)   (639,971)   608,619 
Comprehensive income  $2,928,845   $1,622,916   $6,410,253   $7,703,702 

 

Selected Balance Sheet Information:

  

   September 30,
2019
   March 31,
2019
   March 31,
2018
 
   (Unaudited)         
Balance Sheet Data:            
Cash and cash equivalent  $8,777,536   $3,796,748   $9,464,531 
Total assets  $29,466,863   $24,085,327   $16,033,709 
Total liabilities  $10,280,023   $7,827,332   $6,185,967 
Total equity  $19,186,840   $16,257,995   $9,847,742 

 

6

 

RISK FACTORS

 

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

 

Risks Related to Our Business

 

Our business is susceptible to fluctuations in the urban-rural design and development market of China.

 

As of the date of this prospectus, we conduct all of our business in China. Our business depends substantially on the conditions of the PRC market of urban-rural design and development. Demand for our services in China has grown rapidly in the recent years, but such growth is often coupled with seasonal fluctuations. Fluctuations of demand with respect to urban-rural design and development services in China are caused by economic, social, political and other factors. To the extent fluctuations in the market adversely affect the demand for our services, our financial condition and results of operations may be materially and adversely affected.

 

Our business depends on our clients (mostly construction companies) acquiring government projects through public bidding process, the results of which can be unpredictable.

 

Beginning in 2018, we started employing an asset-light model, which allows us to invest and grow our core-competencies, but also requires us to maintain good relationships with our clients, mostly construction companies, in order to serve as their subcontractor on government projects. In China, government projects are awarded through public bidding process, the results of which can be influenced by many factors that are beyond our control, such as the perspectives and preferences of the key decision makers, the competitiveness of competing proposals, changes in the scope of project specifications, and the financial position of our clients who ultimately determine their bid prices. Furthermore, our design services only get compensated if the cooperating construction companies win the bids; therefore, it is essential for us to achieve a high winning ratio on the bids that we participate in. If we fail to maintain good relationships with our clients or achieve a high winning ratio on the bids that we participate in, then our business prospects and profitability could be adversely affected.

 

Demand for our services is cyclical and may be vulnerable to sudden economic downturns and reductions in government and private industry spending.

 

The urban-rural design and development services market is related to the construction industry, which is particularly cyclical and is strongly influenced by government policies. In addition, the urban-rural design and development services market is sensitive to business cycles, the macroeconomic environment, government investments and property development. Therefore, demand for our services is cyclical and may be vulnerable to sudden economic downturns, interest rate fluctuations and reductions in government and private industry spending that result in clients delaying, curtailing or canceling proposed and existing projects.

 

Where economies are weakening, regional governments may face budget deficits that prohibit them from funding proposed and existing projects, and our clients may demand more favorable pricing or other terms while their ability to pay our invoices or to pay them in a timely manner may be adversely affected. If economic conditions are uncertain and/or weaken and/or government spending is reduced, our revenue and profitability could be adversely affected.

 

7

 

A large portion of our annual revenue was generated from a few large projects, therefore if we fail to receive our full contractual amounts from these projects, it would be difficult for us to replace the lost revenue, which could adversely affect our business and operating results.

 

For the six months ended September 30, 2019, our five largest projects generated an aggregate of $18,209,532, which accounted for 73.2% of our total revenue. In particular, our largest project, for which we served as a sub-contractor to Beiwang Construction Group Co., Ltd., accounted for 45.6% of our total revenue for the six months ended September 30, 2019. For the year ended March 31, 2019, our five largest projects generated an aggregate of $35,694,395, which accounted for 75.7% of our total revenue. In particular, our largest project, for which we served as a sub-contractor to Beiwang Construction Group Co., Ltd., accounted for 29.80% of our total revenue for the year ended March 31, 2019. For the year ended March 31, 2018, our three largest projects accounted for 77.3% of our total revenue. In particular, our largest project, for which we served as a sub-contractor to Beijing Zhongnongfutong Co., Ltd., accounted for 44.47% of our total revenue for the year ended March 31, 2018. We expect that due to our relative small size, the same revenue pattern will continue for the foreseeable future. If we fail to receive the full contractual amounts from one or a few of our largest contracts for any reason or cause, the lost revenue would be difficult for us to replace, which could adversely affect our business and operating results.

 

For the fiscal year ended March 31, 2019, a substantial portion of our revenue was generated from related parties, and because of the unsustainable nature of such businesses, our operating results may be adversely affected if we are not able to acquire new businesses from unrelated parties.

 

For the fiscal year ended March 31, 2019, we generated a total of $9,240,906 ($5,954,887 for design services and $3,286,019 for construction project management consulting services) from two related parties, both of which are controlled by a relative of our CEO, Mr. Xingpeng Zhao. This revenue accounted for almost 20%, a substantial portion of our total revenue. For the six months ended September 30, 2019, we generated a total of $2,955,282 ($709,258 for design services, $1,642,791 for project materials management services and $603,233 for management of onsite construction process services) from one related party, which is controlled by a relative of our CEO, Mr. Xingpeng Zhao. This revenue accounted for almost 11.9% of our total revenue for the six months ended September 30, 2019. However, services to our related parties are unlikely to be recurring in the future and our operating results may be adversely affected if we are not able to generate business from other sources.

 

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

 

The rapid growth of the Chinese economy has slowed down since 2012 and such slowdown may continue. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa, which have resulted in volatility in oil and other markets. There have also been concerns on the relationship among China and other Asian countries, which may result in or intensify potential conflicts in relation to territorial disputes. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition. In addition, continued turbulence in the international markets may adversely affect our ability to access capital markets to meet liquidity needs.

 

Our failure to meet contractual schedule or performance requirements that we have guaranteed could adversely affect our operating results.

 

In some circumstances, we can incur additional costs, liquidated or other damages if we do not achieve project completion by a scheduled date. If we or a sub-contractor of ours subsequently fails to complete the project as scheduled and the matter cannot be satisfactorily resolved with the client, we may be responsible for cost impacts to the client resulting from any delay or the cost to complete the project. Our costs generally increase from schedule delays and/or could exceed our projections for a particular project. In addition, project performance can be affected by a number of factors beyond our control, including unavoidable delays from governmental inaction, public opposition, inability to obtain financing, weather conditions, unavailability of vendor materials, changes in the project scope of services requested by our clients, industrial accidents, environmental hazards, labor disruptions and other factors. Material performance problems for existing and future contracts could cause actual results of operations to differ from those anticipated by us and also could cause us to suffer damage to our reputation within our industry and client base.

 

In conducting our business, we depend on other contractors, subcontractors and equipment and material providers. If these parties fail to satisfy their obligations to us or other parties or if we are unable to maintain these relationships, our revenue, profitability and growth prospects could be adversely affected.

 

We depend on contractors, subcontractors and equipment and material providers in conducting our business. There is a risk that we may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, or our failure to extend existing task orders or issue new task orders under a subcontract. Also, to the extent that we cannot acquire equipment and materials at reasonable costs, or if the amount we are required to pay exceeds our estimates, our ability to complete a project in a timely fashion or at a profit may be impaired. In addition, if any of our subcontractors fail to deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services, our ability to fulfill our obligations as a prime contractor may be jeopardized; we could be held responsible for such failures and/or we may be required to purchase the supplies or services from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the supplies or services are needed.

 

8

 

Furthermore, our cooperating construction company only compensates us for our services as a subcontractor if and when it wins the bid and gets paid as a government contractor. If the cooperating construction company fails to win the bid, we will not receive any remuneration for our related work and expenses. Even if the cooperating construction company wins the bid, there is a risk that it may fail to pay us timely or pay us at all, which may have a negative impact on both our revenues and our profit margins.

  

We also rely on relationships with other contractors. Our future revenue and growth prospects could be adversely affected if other contractors eliminate or reduce their subcontracts with us, or if a government agency terminates or reduces these other contractors’ programs, does not award them new contracts or refuses to pay under a contract. In addition, due to “pay when paid” provisions that are common in subcontracts in China, we could experience delays in receiving payment if the prime contractor experiences payment delays.

 

Our ability to grow and to compete in our industry will be harmed if we do not retain the continued services of our key personnel and identify, hire and retain additional qualified personnel.

 

The urban-rural design and development industry is a labor-intensive industry and it requires experienced and skilled personnel. Further, given urban-rural design is an inter-disciplinary subject, it is even harder for companies to recruit and retain talent with necessary experience and skills. There is strong competition for qualified personnel in this industry. We may not be able to continue to attract and retain qualified personnel, such as designers, architects and project managers. Our planned growth may place increased demands on our resources and will likely require the addition of key personnel and the development of additional expertise by existing personnel. If we were to lose some or all of these personnel, they would be difficult to replace. Loss of the services of, or failure to recruit, key personnel could limit our ability to complete existing projects successfully and to compete for new projects.

 

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

 

Our revenue for the fiscal year ended March 31, 2019, was approximately US$47.20 million, an increase of 69.3% from US$27.86 million for the fiscal year ended March 31, 2018. We intend to continue to expand our services and operations. This expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological and other resources. Our planned expansion will also place significant demands on us to maintain the quality of our services to ensure that our brand does not suffer as a result of any deviations, whether actual or perceived, in the quality of our services. In order to manage and support our growth, we must continue to improve our existing operational, administrative and technological systems and our financial and management controls, and recruit, train and retain additional qualified service professionals as well as other administrative and marketing personnel. We may not be able to effectively and efficiently manage the growth of our operations, recruit and retain qualified personnel and integrate new expansion into our operations. As a result, our quality of service may deteriorate and our results of operations or profitability could be adversely affected.

 

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

 

The urban-rural design and development market in the PRC is considered both fragmented and highly competitive. Competing companies may have significantly greater financial and other resources than we have and may offer services that are more attractive to prospective clients; increased competition would have a negative impact on both our revenues and our profit margins.

 

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

 

In December 2016, Goxus BJ was approved as a National High Tech Enterprise. This certification entitles Goxus BJ to a favorable tax rate of 15%, rather than the unified rate of 25% if it was not so certified. The certification was valid for three years and expired in December 2019. The Company is in the process of applying for renewal of this certificate, which is expected to be granted in March 2020. In the event Goxus BJ were to lose the benefit of the favorable tax rate in the future, we could see significant increases in the amount of taxes we pay, meaning that our operating results could be materially harmed, even in the absence of a decrease in our operations.

 

9

 

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

 

We believe our GOXUS (“光合”) brand is associated with a well-recognized urban-rural design and development service provider in the market that it operates. Our brand is integral to our sales and marketing efforts. We have obtained trademark registrations for our brand GOXUS in the PRC. Our continued success in maintaining and enhancing our brand and image depends to a large extent on our ability to create urban-rural designs that meet the needs of the regional or local governments, as well as our ability to respond to competitive pressures. If we are unable to satisfy clients’ needs or if our public image or reputation were otherwise diminished, our business transactions with our clients may decline, which could in turn adversely affect our results of operations.

 

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

 

We believe our patents, trademarks, copyright, and other intellectual property rights are critical to our success. Any unauthorized use of our trademarks and other intellectual property rights could harm our competitive advantages and business. Historically, China has not protected intellectual property rights to the same extent as the United States or the Cayman Islands, and infringement of intellectual property rights continues to pose a serious risk of doing business in China. Monitoring and preventing fraudulent or unauthorized use is difficult. The measures we take to protect our intellectual property rights may not be adequate. Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us. If we are unable to adequately protect our brand, trademarks in the registration process and other intellectual property rights, we may lose these rights and our business may suffer materially.

 

If we are unable to protect the confidentiality of our trade secrets or proprietary information, our business and competitive position could be harmed.

 

We try to protect our trade secret and proprietary information using commonly accepted physical and technological security measures, including adopting a strict data use policy and entering into confidentiality agreements with employees, advisors, collaborators, vendors, and other third parties. However, we cannot provide any assurances that these measures provide adequate protection for our trade secrets or proprietary information. We may suffer data security breaches and the unauthorized access to, misuse or acquisition of, personal data or other sensitive and confidential information as the result of intentional or inadvertent breaches or other compromises by our employee, customers or service providers. Any data security breach or incident, whether external or internal in origin, can result in the information stored on our networks and systems being improperly accessed or acquired, publicly disclosed, lost, or stolen, which could subject us to liability to our customers, suppliers and business partners, and result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers, potential liability and competitive disadvantage.

 

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

 

We will be subject to reporting obligations under the U.S. securities laws upon the closing of this offering. The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. As we are an “emerging growth company,” we are not required to include a management report on our internal controls over financial reporting in our annual report. But we are still required to establish and maintain internal controls over financial reporting, disclosure controls and to comply with other requirements of the Sarbanes-Oxley Act and the rules promulgated by the U.S. Securities and Exchange Commission (or the SEC) thereunder. Our management cannot guarantee that our internal controls and disclosure procedures will prevent all possible errors or all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management’s override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

 

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

 

10

 

There can be no assurance that we will not be classified as a passive foreign investment company (“PFIC”).

 

Based upon our current and projected income, assets and activities, there can be no assurance that we will not be classified as such in the future. Such classification may have materially adverse tax consequences for our U.S. shareholders. One method of avoiding such tax consequences is by making a “qualified electing fund” election for the first taxable year in which the Company is a PFIC. However, such an election is conditioned upon our furnishing our U.S. shareholders annually with certain tax information. We do not presently prepare or provide such information, and such information may not be available to our U.S. shareholders if we are subsequently determined to be a PFIC. You are advised to consult with your own tax advisor regarding the particular tax consequences related to the ownership and disposition of our Ordinary Shares under your own particular factual circumstances.

 

We are controlled by a small group of our existing shareholders, whose interests may differ from other shareholders.

 

As of the date of this prospectus, our executive officers, directors and affiliates beneficially own approximately 75% of our outstanding 15,000,000 Ordinary Shares. Further, our chief executive officer, Mr. Xingpeng Zhao, owns 5,351,400, or approximately 35.68% of the outstanding Ordinary Shares and is our largest single shareholder. These shareholders will have significant influence in determining the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations, the sale of all or substantially all of our assets, election of directors and other significant corporate actions. They will also have significant influence in preventing or causing a change in control. In addition, without the consent of these shareholders, we may be prevented from entering into certain transactions, which may be beneficial to our other shareholders. The interests of these shareholders may differ from the interests of the other shareholders.

 

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

 

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

 

Risks Relating to Our Corporate Structure

 

Our corporate structure, in particular our VIE arrangements (the “VIE Arrangements”), are subject to significant risks, as set forth in the following risk factors.

 

Because we conduct our business through Goxus BJ, a VIE, if we fail to comply with applicable law, we could be subject to severe penalties and our business could be materially and adversely affected.

 

We operate our business through Goxus BJ, a VIE, through a series of contractual arrangements, as a result of which, under United States generally accepted accounting principles, the assets and liabilities of Goxus BJ are treated as our assets and liabilities and the results of operations of Goxus BJ are treated in all aspects as if they were the results of our operations. There are uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of the contractual arrangements between WFOE and Goxus BJ.

 

On or around September 2011, various media sources reported that the China Securities Regulatory Commission (the “CSRC”) had prepared a report proposing pre-approval by a competent central government authority of offshore listings by China-based companies with variable interest entity structures that operate in industry sectors subject to foreign investment restrictions. However, it is unclear whether the CSRC officially issued or submitted such a report to a higher level government authority or what any such report provides, or whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or what they would provide.

 

11

 

If WFOE, Goxus BJ, or their ownership structure or the contractual arrangements are determined to be in violation of any existing or future PRC laws, rules or regulations, or WFOE or Goxus BJ fails to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

 

revoking the business and operating licenses of WFOE or Goxus BJ;

 

discontinuing or restricting the operations of WFOE or Goxus BJ;

 

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

 

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

 

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

 

imposing fines.

 

We cannot assure you that the PRC courts or regulatory authorities may not determine that our corporate structure and contractual arrangements violate PRC laws, rules or regulations. If the PRC courts or regulatory authorities determine that our contractual arrangements are in violation of applicable PRC laws, rules or regulations, our contractual arrangements will become invalid or unenforceable, and Goxus BJ will not be treated as a VIE entity and we will not be entitled to treat Goxus BJ’s assets, liabilities and results of operations as our assets, liabilities and results of operations, which could effectively eliminate the assets, liabilities, revenue and net income of Goxus BJ from our balance sheet and statement of income. This would most likely require us to cease conducting our business and would result in the delisting of our Ordinary Shares from Nasdaq Capital Market and a significant impairment in the market value of our Ordinary Shares. 

 

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

 

We have relied and expect to continue to rely on contractual arrangements with Goxus BJ, its subsidiaries and shareholders to operate our business in China. For a description of these contractual arrangements, see “Business—Corporate History and Structure.These contractual arrangements may not be as effective in providing us with control over Goxus BJ and its subsidiaries as direct ownership. We have no direct or indirect equity interests in Goxus BJ or any of its subsidiaries.

 

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

 

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

 

12

 

If any of our Affiliated Entities becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy assets held by such entity, which could materially and adversely affect our business, financial condition and results of operations.

 

We currently conduct our operations in China through our contractual arrangements. As part of these arrangements, substantially all of our assets that are significant to the operation of our business are held by our Affiliated Entities. If any of these entities becomes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. In addition, if any of our Affiliated Entities undergoes a voluntary or involuntary liquidation proceeding, its equity owner or unrelated third-party creditors may claim rights relating to some or all of these assets, which would hinder our ability to operate our business and could materially and adversely affect our business, our ability to generate revenue and the market price of our Ordinary Shares.

 

Our shareholders are subject to greater uncertainties because we operate through a VIE structure

 

Investment in the PRC by foreign investors and foreign-invested enterprises must comply with the Catalogue of Industries for Encouraging Foreign Investment (2019 Version) (“the Catalogue”) and Special Administrative Measures for the Access of Foreign Investment (2019) (“the Negative List”), both of which came into effect on July 30, 2019. They classify foreign investment projects are classified into the following categories: encouraged nationwide, encouraged in mid-west areas, permitted, restricted, restricted for a transitional period and prohibited. Any industry not listed in the Negative List is a permitted industry unless otherwise prohibited or restricted by other PRC laws or regulations. Currently, the urban-rural design and development industry falls within the permitted category in accordance with the Catalogue and the Negative List.

 

However, the Company opted for a VIE structure instead of direct ownership due to restrictions on certain share transfer under Article 141 of the Company Law of the People’s Republic of China (“the Company Law”), which was promulgated on December 29,1993 and last amended on October 26, 2018. According to Article 141, directors, supervisors and senior management of a “company limited by share” shall not transfer more than 25% of their shares in the company during their term of appointment or transfer their shares within one year from the date on which the shares of the company are listed on a stock exchange. The aforesaid persons also cannot transfer their shares in the company within half a year after leaving their position. Goxus BJ is registered as “a company limited by share” in the PRC, therefore a transfer of shares in Goxus BJ is subject to the limitations under Article 141 of the Company Law. Goxus BJ’s shareholders, Xingpeng Zhao, Yanli Bai, Huafeng Yang, Hongtao Zhai, Jinhong Li, and Zhonglei Tian, have served as its directors and/or supervisors since its inception, as such these shareholders cannot transfer more than 25% of their shares in Goxus BJ during their term of appointment. As a result, Goxus Consulting is currently unable to control Goxus BJ through direct ownership but can only exert control over Goxus BJ via the VIE structure. Accordingly, our corporate structure and VIE contractual arrangements may be subject to greater scrutiny and by various PRC government authorities, and subject our shareholders to greater uncertainty with regard to the legality of their share ownership.

 

Contractual arrangements in relation to our VIE may be subject to scrutiny by the PRC tax authorities and they may determine that we or our VIE owe additional taxes, which could negatively affect our financial condition and the value of your investment.

 

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

 

13

 

Any failure by our consolidated VIEs or their shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

 

We, through our wholly foreign-owned enterprise in the PRC, have entered into a series of contractual arrangements with our consolidated VIE and its shareholders. For a description of these contractual arrangements, see “Business—Corporate History and Structure.” If our consolidated VIE or its shareholders fail to perform their respective obligations under these contractual arrangements, we may incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of our consolidated VIE were to refuse to transfer their equity interests in the consolidated VIE to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

 

All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the U.S. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and formal guidelines as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated VIE and relevant rights and licenses held by it which we require in order to operate our business, and our ability to conduct our business may be negatively affected. See “Risk Factors Risks Related to Doing Business in China – Uncertainties with respect to the PRC legal system could adversely affect us.”

 

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

 

The shareholders of our VIE may have actual or potential conflicts of interest with us. For example, the interest of the shareholders of our VIE may potentially differ from us concerning matters such as whether to distribute dividends or to fund our offshore operations. Furthermore, our 5% beneficial shareholders, Xingpeng Zhao (our CEO), Yuhong Zhao, Hongtao Zhai (our director nominee) and Yanli Bai, are also major shareholders of our VIE. Conflicts of interest may arise between their roles as directors, officers and/or major beneficial owners of Goxus and as shareholders of our VIE. For example, occasions may arise when the fiduciary duties these individuals owe to us under Cayman Islands law conflict with the fiduciary duties they owe to our VIE under PRC law. In addition, as such, these shareholders may refuse to sign or breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIE, which would have a material and adverse effect on our ability to effectively control our VIE and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with our VIE to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. As of the date of this prospectus, we are not aware of any actual conflicts of interests between us and the shareholders of our VIE. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot effectively resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings or exercise our option under the Exclusive Option Agreement to purchase all of their equity ownership in our VIE as permitted by the then applicable PRC laws. These actions could result in disruption of our business and subject us to substantial uncertainty.

 

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

 

Any funds we transfer to our PRC subsidiary and VIE, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, the combined amount of offshore capital contributions and loans cannot exceed the FIE’s approved total investment amount. Any capital contributions to our PRC subsidiary must be filed with MOFCOM or its local counterparts, and registered with a local bank authorized by the State Administration of Foreign Exchange, or SAFE. In addition, (a) any loan provided by us to WFOE, which is a FIE, cannot exceed the difference between its total investment amount and registered capital, and must be registered with SAFE or its local counterparts, and (b) any loan provided by us to our VIE which is a domestic PRC entity, over a certain threshold, must be approved by the relevant government authorities and must be registered with SAFE or its local counterparts. Given that the registered capital and total investment amount of WFOE are currently the same, if we seek to make a capital contribution to WFOE we must first apply to increase both its registered capital and total investment amount, while if we seek to provide a loan to WFOE, we must first increase its total investment amount. Although we currently do not have any immediate plans to utilize the proceeds from this offering to make capital contribution into WFOE or provide any loan to WFOE or to our VIE, if we seek to do so in the future, we may not be able to obtain the required government approvals or complete the required registrations on a timely basis, if at all. If we fail to receive such approvals or complete such registrations, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business. 

 

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On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the RMB fund converted from their foreign exchange capitals for expenditure beyond their business scopes, providing entrusted loans or repaying loans between non-financial enterprises. Violations of these Circulars could result in severe monetary or other penalties. SAFE Circular 19 and relevant foreign exchange regulatory rules may significantly limit our ability to use RMB converted from the net proceeds of this offering to fund the establishment of new entities in China by our consolidated affiliates, to invest in or acquire any other PRC companies through our PRC subsidiaries or consolidated affiliates or to establish new consolidated affiliates in the PRC, which may adversely affect our business, financial condition and results of operations.

 

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

 

We are incorporated in the Cayman Islands and conduct our operations primarily in China. Substantially all of our assets are located outside of the United States and the proceeds of this offering will primarily be held in banks outside of the United States. In addition, all of our directors and officers reside outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe we have violated your rights, either under United States federal or state securities laws or otherwise, or if you have a claim against us. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may not allow you to enforce a judgment against our assets or the assets of our directors and officers. See “Enforceability of Civil Liabilities.”

 

We have identified several significant deficiencies in our internal control over financial reporting. If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud.

 

We will be subject to reporting obligations under U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting.

 

Our management may conclude that our internal controls over financial reporting are not effective. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

 

Prior to this offering, we have been a private company with limited accounting personnel with U.S. GAAP experience and other resources with which to adequately address our internal control over our financial closing and reporting process and other procedures. During the course of preparing our consolidated financial statements as of and for the two years ended March 31, 2018 and 2019, and the six months ended September 30, 2019, in connection with this offering, we identified a number of control deficiencies, which include significant deficiencies, in our internal control over financial reporting. Many of the deficiencies noted below were communicated to us from our independent registered public accounting firm as observations which stemmed from their audit. However, as noted in their report, their audit included consideration of internal control over financial reporting as a basis for designing the audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of our internal control over financial reporting. The significant deficiencies identified include: (1) a lack of formal internal controls over financial closing and reporting processes; (2) a lack of a formal risk assessment process; (3) a lack of accounting personnel with knowledge of U.S. GAAP and SEC financial reporting requirements; (4) a lack of regular preparation of U.S. GAAP consolidated management accounts; and (5) the absence of an audit committee. It is important to note that we did not undertake a comprehensive assessment of our internal controls for purposes of identifying and reporting control deficiencies as we will be required to do after we are a public company. Had we undertaken such an assessment, additional significant deficiencies and/or material weaknesses may have been identified.

 

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We plan to take a number of measures to tackle the control deficiencies identified, including: (1) preparing a comprehensive accounting policies and procedures manual that covers U.S. GAAP and ensuring that accounting personnel are familiar with and follow the manual; (2) establishing a risk assessment process that complies with the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission, a private sector organization dedicated to improving the quality of financial reporting; (3) hiring additional accounting personnel with external reporting experience, including knowledge of the SEC reporting requirements and U.S. GAAP, and investor relations personnel; (4) developing formal procedures to prepare U.S. GAAP consolidated financial information on a monthly basis; and (5) establishing an audit committee complying with SEC and applicable Nasdaq Global Market requirements.

 

We plan to remediate these significant deficiencies in time to meet the deadline for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. If, however, we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting. Moreover, effective internal controls over financial reporting are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our Ordinary Shares. Furthermore, we anticipate that we will incur considerable costs and devote significant management time and efforts and other resources to comply with Section 404 of the Sarbanes-Oxley Act.

 

Risks Relating to Doing Business in the PRC

 

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

 

Although the Chinese economy has grown steadily in the past decade, there is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the People’s Bank of China and financial authorities of some of the world’s leading economies, including the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa, which have resulted in volatility in oil and other markets. There have also been concerns on the relationship among China and other Asian countries, which may result in or intensify potential conflicts in relation to territorial disputes. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The EIT Law and its implementing rules provide that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” under PRC tax laws. The implementing rules promulgated under the EIT Law define the term “de facto management bodies” as a management body which substantially manages, or has control over the business, personnel, finance and assets of an enterprise. In April 2009, the State Administration of Taxation, or SAT, issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management bodies” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met: (i) the places where senior management and senior management departments that are responsible for daily production, operation and management of the enterprise perform their duties are mainly located within the territory of China; (ii) financial decisions (such as money borrowing, lending, financing and financial risk management) and personnel decisions (such as appointment, dismissal and salary and wages) are decided or need to be decided by organizations or persons located within the territory of China; (iii) main property, accounting books, corporate seal, the board of directors and files of the minutes of shareholders’ meetings of the enterprise are located or preserved within the territory of China; and (iv) one half (or more) of the directors or senior management staff having the right to vote habitually reside within the territory of China.

 

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

 

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

 

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

 

Under the EIT Law and its implementation rules, the profits of a foreign invested enterprise generated through operations, which are distributed to its immediate holding company outside the PRC, will be subject to a withholding tax rate of 10%. Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, a withholding tax rate of 10% may be lowered to 5% if the PRC enterprise is at least 25% held by a Hong Kong enterprise for at least 12 consecutive months prior to distribution of the dividends and is determined by the relevant PRC tax authority to have satisfied other conditions and requirements under the Double Tax Avoidance Arrangement and other applicable PRC laws.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We are not in compliance with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase its registered capital or distribute profits to us, or may otherwise adversely affect us.

 

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

 

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

 

As of the date of this prospectus, some of our shareholders who are subject to the SAFE Circular 37 and Individual Foreign Exchange Rules have not completed the initial registrations with the qualified banks as required by the regulations. We have requested our shareholders who are Chinese residents to make the necessary applications, filings, and amendments as required under Circular 37 and other related rules; however, we may not be informed of the identities of all the PRC residents holding direct or indirect interest in our company, and we have no control over any of our beneficial owners. Thus, we cannot provide any assurance that our current or future PRC resident beneficial owners have complied or will comply with our request to make or obtain any applicable registrations or continuously comply with all registration procedures set forth in these SAFE regulations. Such failure or inability of our PRC residents beneficial owners to comply with these SAFE regulations may subject us or our PRC residents beneficial owners to fines and legal sanctions (up to RMB300,000 for institutions or RMB50,000 for individuals), restrict our cross-border investment activities, or limit our PRC subsidiary’s ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent us from being able to make distributions or pay dividends, as a result of which our business operations and our ability to distribute profits to you could be materially adversely affected.

 

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

 

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

 

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

 

China’s economy has experienced increases in labor costs in recent years, which is expected to continue to grow. The average wage level for our employees has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to pass on these increased labor costs to our customers by increasing prices for our products or services, our profitability and results of operations may be materially and adversely affected.

 

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

 

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

 

Risks Relating to this Offering and the Trading Market

 

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

 

Prior to this offering, there has not been a public market for our Ordinary Shares. We have applied to list our Ordinary Shares on the Nasdaq Capital Market. An active public market for our Ordinary Shares, however, may not develop or be sustained after the offering, in which case the market price and liquidity of our Ordinary Shares will be materially and adversely affected.

  

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

 

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

 

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

 

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

 

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

 

The initial public offering price of our Ordinary Shares is substantially higher than the (pro forma) net tangible book value per share of our Ordinary Shares. Consequently, when you purchase our Ordinary Shares in the offering, upon completion of the offering you will incur immediate dilution of $7.12 per share, assuming an initial public offering price of $9.00, the midpoint of the range set forth on the cover page of this prospectus, assuming the Underwriter does not exercise its over-allotment option. See “Dilution.” In addition, you may experience further dilution to the extent that additional Ordinary Shares are issued upon exercise of outstanding options we may grant from time to time.

 

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

 

Upon consummation of this offering, we will incur significant legal, accounting and other expenses as a public company 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.

 

Compliance with these rules and regulations increases our legal and financial compliance costs and makes some corporate activities more time-consuming and costlier. We have incurred additional costs in obtaining director and officer liability insurance. In addition, we 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 an “emerging growth company,” as defined in the JOBS Act and will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior September 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. 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 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.

 

After we are no longer an “emerging growth company,” or until five years following the completion of our initial public offering, whichever is earlier, we expect to incur significant additional expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a public company, we have been required to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures.

 

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.

 

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

 

Sales of substantial amounts of our Ordinary Shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our Ordinary Shares to decline. An aggregate of 15,000,000 Ordinary Shares is outstanding before the consummation of this offering and 16,500,000 Ordinary Shares will be outstanding immediately after the consummation of this offering assuming the Underwriter does not exercise the over-allotment option. Sales of these shares into the market could cause the market price of our Ordinary Shares to decline.

 

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

 

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

 

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

 

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

 

  actual or anticipated fluctuations in our revenue and other operating results;
     
  the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
     
  actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
     
  announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

  price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
     
  lawsuits threatened or filed against us; and
     
  other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

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

 

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

 

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

 

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

 

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

 

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

 

We will seek to have our securities approved for listing on the Nasdaq Capital Market upon consummation of this offering. We cannot assure you that we will be able to meet those initial listing requirements at that time. Even if our securities are listed on the Nasdaq Capital Market, we cannot assure you that our securities will continue to be listed on the Nasdaq Capital Market.

 

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

 

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

 

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

 

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

 

Some provisions of our memorandum and articles of association, which will become effective on or before the completion of this offering, may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including, among other things, the following:

 

  provisions that authorize our board of directors to issue shares with preferred, deferred or other special rights or restrictions without any further vote or action by our shareholders; and
     
  provisions that restrict the ability of our shareholders to call meetings and to propose special matters for consideration at shareholder meetings.

 

Our board of directors may decline to register transfers of Ordinary Shares in certain circumstances.

 

Except in connection with the settlement of trades or transactions entered into through the facilities of a stock exchange or automated quotation system on which our Ordinary Shares are listed or traded from time to time, our board of directors may, in its sole discretion, decline to register any transfer of any Ordinary Share which is not fully paid up or on which we have a lien. Our directors may also decline to register any transfer of any share unless (i) the instrument of transfer is lodged with us, accompanied by the certificate for the shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; (ii) the instrument of transfer is in respect of only one class of shares; (iii) the instrument of transfer is properly stamped, if required; (iv) in the case of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four; (v) the shares conceded are free of any lien in favor of us; or (vi) a fee of such maximum sum as the Nasdaq Capital Market may determine to be payable, or such lesser sum as our board of directors may from time to time require, is paid to us in respect thereof.

 

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

 

This, however, is unlikely to affect market transactions of the Ordinary Shares purchased by investors in the public offering. Once the Ordinary Shares have been listed, the legal title to such Ordinary Shares and the registration details of those Ordinary Shares in the Company’s register of members will remain with DTC/Cede & Co. All market transactions with respect to those Ordinary Shares will then be carried out without the need for any kind of registration by the directors, as the market transactions will all be conducted through the DTC systems.

 

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

 

For as long as we remain an “emerging growth company,” as defined in the JOBS Act, we will elect to take advantage of certain exemptions from various reporting requirements that are applicable to other 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, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of shareholder approval of any golden parachute payments not previously approved. Because of these lessened regulatory requirements, our shareholders would be left without information or rights available to shareholders of more mature companies. 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 our share price may be more volatile. See “Implications of Our Being an Emerging Growth Company.”

 

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

 

Our corporate affairs are governed by our memorandum and articles of association, by the Companies Law (2018 Revision) of the Cayman Islands and by the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands and from English common law. Decisions of the Privy Council (which is the final Court of Appeal for British overseas territories such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions of the English courts, and particularly the Supreme Court and the Court of Appeal are generally of persuasive authority but are not binding in the courts of the Cayman Islands. Decisions of courts in other Commonwealth jurisdictions are similarly of persuasive but not binding authority. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws relative to the United States. Therefore, our public shareholders may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

 

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

 

Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. These rights, however, may be provided in a company’s articles of association. Our articles of association allow our shareholders holding shares representing in aggregate not less than 10% of our voting share capital in issue, to requisition a general meeting of our shareholders, in which case our directors are obliged to call such meeting. Advance notice of at least 21 clear days is required for the convening of our annual general shareholders’ meeting and at least 14 days’ notice any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists of at least one shareholder present or by proxy, representing not less than one-third of the total issued shares carrying the right to vote at a general meeting of the Company.

 

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

 

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

 

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

 

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

 

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

 

Depending on the amount of cash we raise in this offering, together with any other assets held for the production of passive income, it is possible that, for our 2019 taxable year or for any subsequent year, more than 50% of our assets may be assets which produce passive income, In which case we would be deemed a PFIC, which could have adverse US federal income tax consequences for US taxpayers who are shareholders. We will make this determination following the end of any particular tax year. Although the federal income tax law is unclear with regards to the treatment of VIEs, because we control Goxus BJ’s management decisions, and also because we are entitled to the economic benefits associated with Goxus BJ, we are treating Goxus BJ as our wholly-owned subsidiary for U.S. federal income tax purposes. For purposes of the PFIC analysis, in general, according to Internal Revenue Code Section 1297(c), a non-U.S. corporation is deemed to own its pro rata share of the gross income and assets of any entity in which it is considered to own at least 25% of the stock by value. Although we do not technically own any stock in Goxus BJ, the control of Goxus BJ’s management decisions, the entitlement to economic benefits associated with Goxus BJ, and the inclusion of Goxus BJ as part of the consolidated group (in accordance with Accounting Standards Codification (ASC) Topic 810, “Consolidation,”) is akin to holding a stock interest in Goxus BJ, and therefore we consider our interest in Goxus BJ as a deemed stock interest. As a result, the income and assets of Goxus BJ should be included in the determination of whether or not we are a PFIC in any taxable year.

 

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

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

 

Our pre-IPO shareholders may be able to sell their Ordinary Shares under Rule 144 after completion of this offering. Because these shareholders have paid a lower price per Ordinary Share than participants in this offering, when they are able to sell their pre-IPO shares under Rule 144, they may be more willing to accept a lower sales price than the IPO price. This fact could impact the trading price of the stock following completion of the offering, to the detriment of participants in this offering. We issued a total of 15,000,000 Ordinary Shares to our pre-IPO shareholders. Under Rule 144, before our pre-IPO shareholders can sell their shares, in addition to meeting other requirements, they must meet the required holding period, as well as the lock-up period required as part of our underwriting agreement with the Underwriter. We do not expect any of the Ordinary Shares to be sold pursuant to Rule 144 during the pendency of this offering.

 

Recently introduced economic substance legislation of the Cayman Islands may adversely impact us or our operations.

 

The Cayman Islands, together with several other non-European Union jurisdictions, have recently introduced legislation aimed at addressing concerns raised by the Council of the European Union (the “EU”) as to offshore structures engaged in certain activities which attract profits without real economic activity. With effect from January 1, 2019, the International Tax Co-operation (Economic Substance) Law, 2018 (the “Substance Law”) came into force in the Cayman Islands introducing certain economic substance requirements for in-scope Cayman Islands entities which are engaged in certain “relevant activities,” which in the case of exempted companies incorporated before January 1, 2019, will apply in respect of financial years commencing July 1, 2019, onwards. On March 12, 2019, the EU, as part of this ongoing initiative, announced the results of its assessment of the 2018 implementation efforts by various countries under its review. Cayman Islands was not on the announced list of non-cooperative jurisdictions, but was referenced in the report (along with 33 other jurisdictions) as being among countries requiring adjustments to their legislation to meet the EU concerns by December 31, 2019, to avoid being moved to the list of non-cooperative jurisdictions.

 

Based on the Substance Law and announced guidance currently in effect, it is anticipated that we will be subject to limited substance requirements applicable to a holding company. At present, it is unclear what we will be expected to do in order to satisfy these requirements, but to the extent we are required to increase our substance in Cayman Islands, it could result in additional costs, which we do not presently expect to be material. Although it is presently anticipated that the Substance Law (including the ongoing EU review of Cayman Islands’ implementation of such law), will have little material impact on us or our operations, as the legislation is new and remains subject to further clarification, adjustment, interpretation and the EU review, it is not currently possible to ascertain the precise impact of these developments on us.

 

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

  assumptions about our future financial and operating results, including revenues, income, expenditures, cash balances and other financial items;
     
  our ability to execute our growth, and expansion, including our ability to meet our goals;
     
  current and future economic and political conditions;
     
  our ability to compete in an industry with low barriers to entry;
     
  our ability to continue to operate through our VIE structure;
     
  our capital requirements and our ability to raise any additional financing which we may require;
     
  our ability to attract clients and further enhance our brand recognition;
     
  our ability to hire and retain qualified management personnel and key employees in order to enable us to develop our business;
     
  trends and competition in the urban-rural design industry; and
     
  other assumptions described in this prospectus underlying or relating to any forward-looking statements.

 

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

 

Industry Data and Forecasts

 

This prospectus contains data related to the urban-rural design and development industry in the PRC. These industry data include projections that are based on a number of assumptions which have been derived from industry and government sources which we believe to be reasonable. The urban-rural design industry may not grow at the rate projected by industry data, or at all. The failure of the industry to grow as anticipated is likely to have a material adverse effect on our business and the market price of our Ordinary Shares. In addition, the rapidly changing nature of the urban-rural design industry subjects any projections or estimates relating to the growth prospects or future condition of our industries to significant uncertainties. Furthermore, if any one or more of the assumptions underlying the industry data turns out to be incorrect, actual results may, and are likely to, differ from the projections based on these assumptions.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

 

We were incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We incorporated under the laws of the Cayman Islands because of certain benefits associated with being a Cayman Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. The Cayman Islands, however, has a less developed body of securities laws as compared to the United States and provides significantly less protection for investors than the United States. Additionally, Cayman Islands companies may not have standing to sue in the Federal courts of the United States.

 

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

 

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

 

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

 

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

 

Grandall Law Firm (NanJing) has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. There are no treaties or other forms of reciprocity between the PRC and the United States for the mutual recognition and enforcement of court judgments. Grandall Law Firm (NanJing) has further advised us that under PRC law, PRC courts will not enforce a foreign judgment against us or our officers and directors if the court decides that such judgment violates the basic principles of PRC law or national sovereignty, security or public interest, thus making the recognition and enforcement of a U.S. court judgment in the PRC difficult.

 

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USE OF PROCEEDS

 

Based upon an assumed initial public offering price of $9 per Ordinary Share (the mid-point of the range set forth on the cover page of this prospectus), we estimate that we will receive net proceeds from this offering, after deducting the underwriting discounts, non-accountable expense allowance and the estimated offering expenses payable by us, of approximately $11,798,911 assuming the Underwriter does not exercise its over-allotment option.

 

We plan to use the net proceeds we receive from this offering for the following purposes:

  

  

Use of Net Proceeds

Approximate in US$ 1,000

 
Marketing and Brand Enhancing 35%  $4,130 
Resource Management Software Development 15%  $1,770 
Research and Development 20%  $2,360 
Personnel Training and Recruitment 30%  $3,539 

 

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have some flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. To the extent that the net proceeds we receive from this offering are not immediately used for the above purposes, we intend to invest our net proceeds in short-term, interest-bearing bank deposits or debt instruments.

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DIVIDEND POLICY

 

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

 

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

 

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

 

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

 

The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in complying with the administrative requirements necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our subsidiaries and affiliates in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations, we may be unable to pay dividends on our Ordinary Shares.

 

Cash dividends, if any, on our Ordinary Shares will be paid in U.S. dollars. Goxus HK may be considered a non-resident enterprise for tax purposes, so that any dividends our PRC subsidiary pay to Goxus HK may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10%. See “Taxation—People’s Republic of China Enterprise Taxation.”

 

In order for us to pay dividends to our shareholders, we will rely on payments made from Goxus Suqian to Goxus BJ and indirectly to Goxus Consulting, and the distribution of such payments to Goxus HK as dividends from Goxus Consulting. Certain payments from Goxus BJ to Goxus Consulting are subject to PRC taxes, including business taxes and value-added taxes. In addition, if Goxus BJ or its subsidiaries or branches incur debt on their own behalves in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

 

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

 

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CAPITALIZATION

 

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

  

  on an actual basis; and
     
  on an as adjusted basis to reflect the issuance and sale of the Ordinary Shares by us in this offering at the initial public offering price of $9 per Ordinary Share, the midpoint of the range set forth on the cover page of this prospectus, after deducting the estimated discounts, non-accountable expense allowance and the estimated offering expenses payable by us.

 

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

 

The actual and as adjusted information set forth in the table, assuming the Underwriter does not exercise its over-allotment option, and excludes warrants to purchase up to 90,000 Ordinary Shares issuable to the Underwriter in connection with this offering.

 

   September 30, 2019 
   Actual   As adjusted 
   $   $ 
Equity        
Share capital $0.0002 par value, 250,000,000 Ordinary Shares authorized, 15,000,000 Ordinary Shares issued and outstanding; 16,500,000 Ordinary Shares issued and outstanding as adjusted   3,000    3,300 
Additional paid-in capital(1)   2,377,329    14,175,940 
Statutory reserve   1,236,150    1,236,150 
Retained earnings   16,924,008    16,924,008 
Accumulated other comprehensive loss   (1,353,647)   (1,353,647)
Total shareholders’ equity   19,186,840    30,985,751 
           
Total capitalization   19,186,840    30,985,751 

 

(1) Pro forma additional paid in capital reflects the net proceeds we expect to receive, after deducting the underwriting discounts, non-accountable expense allowance and other estimated expenses payable by us. We expect to receive net proceeds of approximately $11,798,911 from the offering, with estimated offering amount of approximately $13,500,000, less estimated underwriting discounts of $810,000 and offering estimated expenses of approximately $891,089.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $9 per Ordinary Share would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by $1.41 million, assuming the number of Ordinary Shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts, non-accountable expense allowance and estimated expenses payable by us.

 

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DILUTION

 

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

 

Our net tangible book value as of September 30, 2019, was $19,186,840, or $1.28 per Ordinary Share. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting the net tangible book value per Ordinary Share (as adjusted for the offering) from the initial public offering price per Ordinary Share and after deducting the underwriting discounts, non-accountable expense allowance and the estimated offering expenses payable by us.

 

After giving effect to our sale of 1,500,000 Ordinary Shares offered in this offering based on the initial public offering price of $9.00 per Ordinary Share, the midpoint of the range set forth on the cover page of this prospectus, after deduction of the estimated discounts to the Underwriter, non-accountable expense allowance and the estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2019 would have been $30,985,751, or $1.88 per outstanding Ordinary Share. This represents an immediate increase in net tangible book value of $0.60 per Ordinary Share to the existing shareholders, and an immediate dilution in net tangible book value of $7.12 per Ordinary Share to investors purchasing Ordinary Shares in this offering.

 

The following table illustrates this dilution to new investors purchasing ordinary shares in this offering: 

 

  

Offering Amount

Post-Offering(1)

   Full Exercise of Over-allotment Option 
Assumed Initial public offering price per Ordinary Share  $9.00   $9.00 
Net tangible book value per Ordinary Share as of September 30, 2019  $1.28   $1.28 
As adjusted net tangible book value per Ordinary Share attributable to payments by new investors  $0.60   $0.69 
Pro forma net tangible book value per Ordinary Share immediately after this offering  $1.88   $1.97 
Amount of dilution in net tangible book value per Ordinary Share to new investors in the offering  $7.12   $7.03 

 

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

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $9.00 per ordinary share would increase (decrease) our pro forma as adjusted net tangible book value as of September 30, 2019 after this offering by approximately $0.09 per ordinary share, and would increase (decrease) dilution to new investors by $0.91 per ordinary share, assuming that the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts, non-accountable expense allowance and estimated offering expenses payable by us. An increase of 1.0 million ordinary shares in the number of ordinary shares we are offering would increase our pro forma as adjusted net tangible book value as of September 30, 2019 after this offering by approximately $0.38 per ordinary share, and would increase dilution to new investors by approximately $0.38 per ordinary share, and a decrease of 1.0 million ordinary shares in the number of ordinary shares we are offering would decrease our pro forma as adjusted net tangible book value as of September 30, 2019 after this offering by approximately $0.43 per ordinary share, and would decrease dilution to new investors by approximately $0.43 per ordinary share, assuming the assumed initial public offering price per ordinary share, as set forth on the cover page of this prospectus remains the same, and after deducting the estimate underwriting discounts, non-accountable expense allowance and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

 

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value per ordinary share after the offering would be $1.97, the increase in net tangible book value per ordinary share to existing shareholders would be $0.69, and the immediate dilution in net tangible book value per ordinary share to new investors in this offering would be $7.03. 

 

The table and discussion above is based on 15,000,000 ordinary shares outstanding as of September 30, 2019.

 

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

  

34

 

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

 

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

  

Overview

 

We operate in the Chinese urban-rural design and development market, and provide two main services, (i) urban-rural design services, and (ii) comprehensive construction project management consulting services. Urban-rural design and development is the process of designing and shaping the physical features of cities, towns and villages and planning for the provision of municipal services to residents and visitors. Our projects to date covered a broad range of design subjects, including villages, towns, theme parks, neighborhoods, shopping malls and schools. For a majority of our projects, we served as the sub-contractor for construction companies who responded to a government request for tender notices and won government contracts through a public bidding process.

 

We report our revenue from two main revenue streams, namely, (i) urban-rural design services, and (ii) comprehensive construction project management consulting services. Our design services create high-level strategic and conceptual design schemes for a variety of urban-rural design subjects; and our comprehensive construction project management consulting services further facilitate and ensure the successful completion of the engineering and construction of a project based on our designs. We consider ourselves successful when our customers are happy with our design and our project management consulting services.

 

Urban-rural Design Services

 

Our urban-rural design process consists of pre-bidding and post-bidding periods. During the pre-bidding period, we conduct conceptual and preliminary design in order to prepare the design proposal to be submitted to local government for bidding. During this process, we perform a feasibility study, create a master plan as the design framework, and use the conceptual design work as the basis to create extended preliminary designs, including functional, physical, architectural, spatial designs for buildings, facilities, landscapes, and other structures in the subject area. All work product resulting from the concept and preliminary designs become part of the bidding proposal and are submitted by our cooperating construction company, with other bidding materials to local governments, in response to their request for tender notices. If our proposal fails to win the bid, then our work stops here. Given the contingency and uncertainty of the pre-bidding period, we do not capitalize related contract acquisition costs. Instead, our efforts and associated contract acquisition costs on all bid and proposal are expensed as incurred.

 

The post-bidding period starts when our proposal is chosen as the winning bid. We enter into a formal design contract with our cooperating construction company, pursuant to which, our performance obligations primarily include preparing the construction drawings to illustrate the planned locations, exterior shape, interior layout, interior and exterior decorations, detailing, fixtures and construction requirements of the designs of the design areas. We may outsource certain construction drawing work to our preapproved third-party design service providers.

 

We approach each design project as a unique challenge and we always leverage our technical and management expertise to provide innovative design solutions to our customers.

 

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Comprehensive Construction Project Management Consulting Services

 

In connection with the urban-rural design services provided to the customers, in order to facilitate and ensure the successful completion of the engineering and construction of the projects based on our designs, pursuant to our pre-bidding agreement, we may enter into contracts with certain customers to provide comprehensive construction project management consulting services, which include project material management services and on-site project construction process management consulting services.

 

For project materials management services, we select materials and equipment to be used for a project, conduct price checks of the required construction materials, negotiate the purchase of materials and equipment as required by the construction company according to the requirements of the design, select suppliers and purchase materials from suppliers on behalf of the construction company, supervise and manage the performance of the procurement contracts; and ensure timely delivery of materials and equipment according to the construction progress.

 

For on-site construction process management consulting service arrangements, our performance obligations primarily include design related work management, construction scheduling management, contract and sub-contracting management, construction cost management, quality management and materials management. Through such services, we help the customers to optimize the efficiency of the construction phase of a project, ensure the integrity of the implementation of the designs, optimize the use of capital; and timely resolve on-site construction issues based on the designs.

 

Our Organization

 

Goxus Inc. (“Goxus”) was established under the laws of the Cayman Islands on November 15, 2018 as a holding company.

 

Goxus owns 100% equity interest of Goxus (BVI) Ltd. (“Goxus BVI”), a limited liability company formed under the laws of the British Virgin Islands (“BVI”) on November 16, 2018.

 

Goxus BVI owns 100% of the equity interests of Goxus (HK) Cultural Creative Limited (“Goxus HK”), a company formed under the laws of Hong Kong on November 29, 2018.

 

On December 18, 2018, Goxus HK established a wholly foreign-owned enterprise (“WFOE”) Beijing Goxus International Management Consulting Co., Ltd (“Goxus Consulting”) in the People’s Republic of China (the “PRC” or “China”).

 

Goxus, Goxus BVI, Goxus HK and Goxus Consulting are currently not engaging in any active business operations and merely acting as holding companies.

 

A reorganization of our legal structure (“Reorganization”) was completed on June 14, 2019. Prior to the Reorganization, Mr. Xingpeng Zhao, our Chairman and Board of Directors, was the ultimate controlling shareholder of the following entities: (1) Goxus (Beijing) Creative and Cultural Co. Ltd. (“Goxus BJ”), formed in Beijing on September 25, 2010; and (2) Suqian Goxus Creative and Cultural Ltd. (“Goxus Suqian”), formed in Suqian City, Jiangsu Province, China, on May 20, 2017.

 

The Reorganization involved the formation of Goxus, Goxus BVI, Goxus HK and Goxus Consulting, and contractual agreements between Goxus Consulting and Goxus BJ. Consequently, Goxus became the ultimate holding company of all other entities mentioned above.

 

On June 14, 2019, Goxus Consulting entered into a series of contractual arrangements with the owners of Goxus BJ. These agreements include an Exclusive Purchase Agreement, Exclusive Business Cooperation Agreement, Equity Pledge Agreements and Power of Attorneys (collectively “VIE Agreements”). Pursuant to the above VIE Agreements, Goxus Consulting has the exclusive right to provide Goxus BJ consulting services related to business operations including technical and management consulting services. All the above contractual arrangements obligate Goxus Consulting to absorb all of the risk of loss and receive all income from business activities of Goxus BJ. In essence, Goxus Consulting has gained effective control over Goxus BJ. Therefore, the Company believes that Goxus BJ should be considered as a Variable Interest Entity (“VIE”) under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”.

 

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The Company together with its wholly-owned subsidiaries, WFOE and its VIE, are effectively controlled by the same shareholders before and after the Reorganization and therefore the Reorganization is considered as an acquisition of entities under common control. The accounts of the Company, its subsidiaries and VIE have been accounted for at historical cost as of the beginning of the first period presented in the accompanying consolidated financial statements.

 

Our revenues increased by $19,316,480, or 69.3%, from $27,859,367 for the fiscal year ended March 31, 2018, to $47,175,847 for the fiscal year ended March 31, 2019. Our revenues increased by $4,368,613, or 21.3%, from $20,492,240 for the six months ended September 30, 2018, to $24,860,853 for the six months ended September 30, 2019. Revenues from our design services accounted for 31.0%, 23.9% and 46.1% of our total revenues for the six months ended September 30, 2019, and for the fiscal years ended March 31, 2019 and 2018, respectively, revenues from our comprehensive project management consulting services (including management of project materials and management of project construction process) accounted for 69.0%, 76.1% and 53.9% of our total revenue for the six months ended September 30, 2019 and for the years ended March 31, 2019 and 2018, respectively.

 

From time to time, we provide design and project management consulting services to related parties. For the six months ended September 30, 2019 and for the years ended March 31, 2019 and 2018, revenue from providing design and project management consulting services to related parties amounted to $2,955,282, $9,240,906 and $Nil, accounted for 11.9%, 19.6% and 0.0% of our total revenue, respectively.

 

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

 

   For the six months ended September 30,   For the years ended March 31, 
   2019   2018   2019   2018 
   Amount   % of revenue   Amount   % of revenue   Amount   % of revenue   Amount   % of revenue 
                                 
Revenue from urban-rural design services  $7,704,200    31.0%  $4,172,773    20.4%  $11,274,435    23.9%  $12,829,364    46.1%
Revenue from comprehensive construction project management consulting services   17,156,653    69.0%  $16,319,467    79.6%   35,901,412    76.1%   15,030,003    53.9%
Total revenue  $24,860,853    100.0%  $20,492,240    100.0%  $47,175,847    100.0%  $27,859,367    100.0%

 

The following table illustrates the amount and percentage of our revenue derived from our customer types:

  

   For the six months ended September 30,   For the years ended March 31, 
   2019   2018   2019   2018 
   Amount   % of revenue   Amount   % of revenue   Amount   % of revenue   Amount   % of revenue 
                                 
Revenue from third-party customers  $21,905,571    88.1%  $18,667,458    91.1%  $37,934,941    80.4%  $27,859,367    100.0%
Revenue from related party customers   2,955,282    11.9%   1,824,782    8.9%   9,240,906    19.6%   -    0.0%
Total revenue  $24,860,853    100.0%  $20,492,240    100.0%  $47,175,847    100.0%  $27,859,367    100.0%

 

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Key Factors that Affect Our Results of Operations

 

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

 

Number of Fixed-Price Contracts with Our Customers

 

Our revenues primarily consist of design service fees and consulting services fees. All of our contracts with customers for these services are fixed-price contracts in which our service scope and performance obligations have been clearly identified. Our customers do not allow subsequent amendments of executed contracts to revise contract prices unless there are significant service scope adjustments. Historically, we have not entered into any contract amendment to revise the contract price due to significant service scope adjustments. Demand for our services is cyclical and may be vulnerable to sudden economic downturns and reductions in government and private industry spending, which may result in customers delaying, curtailing or canceling proposed and existing projects. The number of contracts we may obtain from our customers is largely driven by the government’s needs for urban-rural development, the amount of service fees we charge, the effectiveness of our marketing and brand promotion efforts, our ability to maintain the consistency and quality of our design and project management consulting services, as well as our ability to respond to competitive pressures. Our ability to obtain customer contracts for our consulting services directly affects our revenue and profitability.

 

Our business and operating results could be adversely affected by losses under fixed-price contracts.

 

Our urban-rural design services and comprehensive construction project management consulting services are performed under fixed-price contracts with our customers. Fixed-price contracts require us to either perform all work under the contracts for a specified lump-sum or to perform an estimated number of units of work at an agreed price per unit, with the total payment determined by the actual number of units performed. For the six months ended September 30, 2019 and for the years ended March 31, 2019 and 2018, substantially all of our revenue was comprised of fixed-price contracts. Fixed-price contracts expose us to a number of risks not inherent in cost-reimbursable contracts, including underestimation of costs, ambiguities in specifications, unforeseen increases in or failures in estimating the cost of raw materials, equipment or labor, problems with new technologies, delays beyond our control, fluctuations in profit margins, failures of subcontractors to perform and economic or other changes that may occur during the contract period. Losses under fixed-price could be substantial and adversely impact our results of operations.

 

Our failure to meet contractual schedule or performance requirements could adversely affect our operating results.

 

Our urban-rural design services and comprehensive construction project management consulting services have contracted time schedules, deadlines and performance requirements as specified in the customer contracts. In some circumstances, we can incur liquidated or other damages if we do not achieve project completion by a scheduled date. If we fail to complete the project as scheduled and the matter cannot be satisfactorily resolved with our customers, we may be responsible for cost impacts to the customers resulting from any delay or the cost to complete the project. Our costs generally increase from schedule delays and/or could exceed our projections for a particular project. In addition, project performance can be affected by a number of factors beyond our control, including unavoidable delays from governmental inaction, public opposition, weather conditions, unavailability of vendor materials, changes in the project scope of services requested by our customers, industrial accidents, environmental hazards, labor disruptions and other factors. Material performance problems for existing and future contracts could cause actual results of operations to differ from those anticipated by us and also could cause us to suffer damage to our reputation within our industry and client base.  

 

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

 

Our business growth is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, secure new contracts and our ability to control costs and expenses to improve our operating efficiency. Staffing costs (including payroll and employee benefit expense paid to architectural and engineering designer and project manager) and administrative expenses have a direct impact on our profitability. The expenses relating to compensations of our staff, particularly of the design and project management personnel, generally increase as the number of customer contract and work volume expand, while other expenses, particularly those relating to administrative functions, are relatively fixed. Our ability to drive the productivity of our staff and enhance our operating efficiency affects our profitability. In addition, in performing our design and comprehensive construction project management consulting services, we may outsource certain jobs to third-party design firms and other subcontractors. To the extent that we cannot acquire these subcontractors at reasonable costs, or if the costs we are required to pay exceeds our estimates, our ability to complete a project in a timely fashion or at a profit may be impaired. If we fail to implement initiatives to control costs and improve our operating efficiency over time, our profitability will be negatively impacted. 

 

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

 

We are engaged in a highly competitive business. The markets we serve are highly fragmented and we compete with a large number of regional, national and international companies. These competitors may have greater financial and other resources than we do. Others are smaller and more specialized, and concentrate their resources in particular areas of expertise. The extent of our competition varies according to the particular geographic area. The degree and type of competition we face is also influenced by the type and scope of a particular project. Our customers make competitive determinations based upon qualifications, experience, performance, reputation, technology, customer relationships and ability to provide the relevant services in a timely, safe and cost-efficient manner. Increased competition may result in our inability to win bids for future projects and loss of revenue, profitability and market share.

 

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

 

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

 

Key Financial Performance Indicators

 

Our key financial performance indicators consist of the number of fixed-price customer contracts for our urban-rural design services and our comprehensive construction project management consulting services, the service fees we charge our customers and our ability to collect the service fees on a timely manner, and our ability to control costs and improve our operating efficiency over time, which significantly impact our net revenues, cost of revenues and operating expenses, as discussed in greater detail under “Results of Operations” below.

 

We derived net revenues from our two revenue streams in terms of percentages of our total net revenues from operations as follows for the six months ended September 30, 2019 and 2018, and for the fiscal years ended March 31, 2019 and 2018:

  

   For the six months ended September 30,   For the years ended
March 31,
 
   2019   2018   2019   2018 
   % of total revenue   % of total revenue   % of total revenue   % of total revenue 
                 
Revenue from urban-rural design services   31.0%   20.4%   23.9%   46.1%
Revenue from comprehensive construction project management consulting services:                    
Management of project materials   50.0%   55.4%   52.9%   27.7%
Management of onsite construction process   19.0%   24.2%   23.2%   26.2%
Total revenue   100.0%   100.0%   100.0%   100.0%
                     
Number of design projects   29    13    23    15 
Number of projects involved with materials management   3    5    7    4 
Number of projects involved with on-site construction process management   7    5    5    4 

 

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Revenue

 

Revenues from our urban-rural design services accounted for 23.9% and 46.1% of our total revenues for the fiscal years ended March 31, 2019 and 2018, respectively. The number of design projects increased from 15 projects in fiscal year ended March 31, 2018 to 23 projects in fiscal year ended March 31, 2019, but the size and complexity of the design projects in terms of work volume decreased as reflected in decreased average service fees for design project from $855,291 per project in fiscal year ended March 31, 2018 to $490,193 per project in fiscal year ended March 31, 2019. Revenues from our urban-rural design services accounted for 31.0% and 20.4% of our total revenues for the six months ended September 30, 2019 and 2018, respectively. The number of design projects increased from 13 projects in the six months ended September 30, 2018 to 29 projects in the six months ended September 30, 2019, however, 7 out of the 29 design projects in the six months ended September 30, 2019 were relatively small, which led to the size and complexity of the design projects in terms of work volume decreased as reflected in decreased average service fees for design project from $320,983 per project in the six months ended September 30, 2018 to $265,662 per project in the six months ended September 30, 2019.

 

Under our comprehensive construction project management consulting services, we provide two types of consulting services to our customers: (1) management of project materials, and (2) management of on-site construction process.

 

Revenues from services related to project materials management accounted for 52.9% and 27.7% of our total revenues for the fiscal years ended March 31, 2019 and 2018, respectively. The number of construction projects that we were engaged to provide project materials management services for increased from four projects in fiscal year ended March 31, 2018 to seven projects in fiscal year ended March 31, 2019, which led to increased work volume and increased average amount of service fees from $1,930,603 per project in fiscal year ended March 31, 2018 to $3,563,181 per project in fiscal year ended March 31, 2019. Revenues from services related to project materials management accounted for 50.0% and 55.4% of our total revenues for the six months ended September 30, 2019 and 2018, respectively. The number of construction projects that we were engaged to provide project materials management services for decreased from five projects in the six months ended September 30, 2018 to three projects in the six months ended September 30, 2019, however, the size of the projects was relatively larger in the six months ended September 30, 2019 as compared to six months ended September 30, 2018, which led to increased work volume and increased average amount of service fees from $2,271,839 per project in the six months ended September 30, 2018 to $4,142,173 per project in the six months ended September 30, 2019.  

 

Revenue from services related to on-site construction process management accounted for 23.2% and 26.2% of our total revenue for the years ended March 31, 2019 and 2018, respectively. We provided on-site construction process management consulting services for five projects in fiscal year ended March 31, 2019 as compared to four projects in fiscal year ended March 31, 2018. However, in fiscal year ended March 31, 2018, two projects were relatively small and accordingly we charged lower amount of consulting service fees. In contrast, the five projects in fiscal year ended March 31, 2019 were relatively large in scale and more complex, for which we put in more effort and accordingly charged higher service fees. As a result, the average project management consulting service revenue increased from $1,826,898 per project in fiscal year ended March 31, 2018 to $2,191,829 per project in fiscal year ended March 31, 2019. Revenue from services related to onsite construction process management accounted for 19.0% and 24.2% of our total revenue for the six months ended September 30, 2019 and 2018, respectively. We provided onsite construction process management consulting services for seven projects in the six months ended September 30, 2019 as compared to five projects in the six months ended September 30, 2018. However, in the six months ended September 30, 2019, six projects were relatively small and accordingly we charged lower amount of consulting service fees. In contrast, among the five projects in the six months ended September 30, 2018, three projects were relatively large in scale and more complex, for which we put in more effort and accordingly charged higher service fees. As a result, the average project management consulting service revenue decreased from $992,055 per project in the six months ended September 30, 2018 to $675,734 per project in the six months ended September 30, 2019.

 

Cost of revenue

 

Our cost of revenues consists of salary, welfare and insurance costs for our designers and project management personnel associated with providing services to our customers, costs associated with outsourcing certain services to subcontractors, direct material purchases costs and business taxes. Our cost of revenue also includes certain research and development costs associated with research on market dynamics and trends in government-sponsored urban-rural design and development as well as improving urban-rural design methods and related subjects. Our cost of revenue, and fluctuations in such cost, generally correlates directly with project work volumes and revenue. Our cost of revenues accounted for 72.8%, 57.0%, 69.9% and 73.7% of our total revenue for the years ended March 31, 2019 and 2018 and for the six months ended September 30, 2019 and 2018, respectively. We expect our cost of revenues to increase as we further expand our operations, driven in large part by an expected increase in work volume when the number of design and comprehensive construction project management consulting services contracts with customers increase in the foreseeable future.

  

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Operating expenses

 

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

 

Our selling expenses primarily include expenses incurred for our brand promotion and advertising, payroll expense paid to our sales and marketing personnel as well as business travel, meals and other expenses related to our sales and marketing activities. As a percentage of revenues, our selling expenses accounted for 0.9%, 1.4%, 0.6% and 0.9% of our total revenue for the years ended March 31, 2019 and 2018 and for the six months ended September 30, 2019 and 2018, respectively. We expect that our overall sales and marketing expenses, including but not limited to, advertising expenses, brand promotion expenses and salaries, will continue to increase in the foreseeable future if our business further grows.

  

Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, business consulting expense, travel and transportation expense for our management team, meals and entertainment expenses, office rental and decoration expense, bad debt reserve on our accounts receivable when the collection becomes remote, depreciation expenses and other office expenses. As a percentage of revenues, general and administrative expenses were 7.6%, 11.7%, 7.6% and 9.6% of our revenue in fiscal years ended March 31, 2019 and 2018 and in the six months ended September 30, 2019 and 2018, respectively. We expect our general and administrative expenses, including, but not limited to, salaries and business consulting expenses, to continue to increase in the foreseeable future, as we hire additional personnel and incur additional expenses in connection with the expansion of our business operations. We expect our professional fees for legal, audit, and advisory services to increase as we become a public company upon the completion of this offering.

 

Results of Operations

 

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

 

The following table summarizes the results of our operations during the six months ended September 30, 2019 and 2018, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods:

 

   For the six months ended September 30, 
   2019   2018   Change 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
                         
Revenue                        
Revenue from third-party customers  $21,905,571    88.1%  $18,667,458    91.1%  $3,238,113    17.3%
Revenue from related party customers   2,955,282    11.9%   1,824,782    8.9%   1,130,500    62.0%
Total revenue   24,860,853    100.0%   20,492,240    100.0%   4,368,613    21.3%
Cost of revenue   17,367,684    69.9%   15,109,282    73.7%   2,258,402    14.9%
Gross profit   7,493,169    30.1%   5,382,958    26.3%   2,110,211    39.2%
                               
Operating expenses                              
Selling expenses   142,647    0.6%   187,078    0.9%   (44,431)   (23.7)%
General and administrative expenses   1,909,205    7.6%   1,950,149    9.6%   (40,944)   (2.1)%
Total operating expenses   2,051,852    8.2%   2,137,227    10.5%   (85,375)   (4.0)%
                               
Income from operations   5,441,317    21.9%   3,245,731    15.8%   2,195,586    67.6%
                               
Other income (expenses)                              
Interest expense   (105,912)   (0.4)%   (118,792)   (0.6)%   12,880    (10.8)%
Interest income   9,705    0.0%   13,849    0.1%   (4,144)   (29.9)%
Subsidy income   -    0.0%   6,984    0.0%   (6,984)   (100.0)%
Total other income (expense), net   (96,207)   (0.4)%   (97,959)   (0.5)%   1,752    (1.8)%
                               
Income before income taxes   5,345,110    21.5%   3,147,772    15.3%   2,197,338    69.8%
                               
Income tax provision   1,287,615    5.2%   540,541    2.6%   747,074    138.2%
                               
Net income  $4,057,495    16.3%  $2,607,231    12.7%  $1,450,264    55.6%

 

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Revenues. Total revenues increased by $4,368,613, or 21.3%, to $24,860,853 for the six months ended September 30, 2019 from $20,492,240 for the six months ended September 30, 2018. The increase in our revenue was due to more project design and onsite construction process management consulting services during the six months ended September 30, 2019 as compared to six months ended September 30, 2018. 

 

Our revenue by service type is as follows:

 

   For the six months ended September 30, 
   2019   2018   Change 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
                         
Revenue from project design and solutions  $7,704,200    31.0%  $4,172,773    20.4%  $3,531,427    84.6%
Revenue from comprehensive project management consulting services  $17,156,653    69.0%  $16,319,467    79.6%   837,186    5.1%
Total revenue  $24,860,853    100.0%  $20,492,240    100.0%  $4,368,613    21.3%

 

Revenue from Urban-rural Design Services

 

   For the six months ended September 30, 
   2019   2018   Change 
Project design service price range  Number of project design completed   Revenue Amount   Number of project design completed   Revenue Amount   Number of project design completed   Amount 
$10,000 to $100,000 per design project   7   $346,381    5   $277,931    2   $68,450 
$100,001 to $500,000 per design project   17    3,850,803    6    1,641,148    11    2,209,655 
$500,001 to $1,000,000 per design project   4    2,407,390    1    839,823    3    1,567,567 
$1,000,001 to $1,500,000 per design project   1    1,099,626    1    1,413,871    -    (314,245)
$1,500,001 to $2,000,000 per design project   -    -    -    -    -    - 
$2,000,000 + plus per design project   -    -    -    -    -    - 
Total   29   $7,704,200    13   $4,172,773    16   $3,531,427 
                               
Average design service fee per project   29   $265,662    13   $320,983    16   $(55,321)

 

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Our revenues from Urban-rural design services increased by $3,531,427 or 84.6% from $4,172,773 in the six months ended September 30, 2018 to $7,704,200 in the six months ended September 30, 2019 primarily due to an increase in the number of design projects from 13 projects in the six months ended September 30, 2018 to 29 projects in the six months ended September 30, 2019. Our project design services largely depend on the number of design projects, the size, complexity and design scope of each individual project as required by our customers.

 

In general, we charge higher design service fees on large and more complex design projects than we do on small and simpler design projects, and our design revenue varies due to different project mix for each reporting period. Depending on the different design scope and tasks, it normally takes us one month to complete a less complicated design project, and takes us up to six months to complete the design for a larger and more complicated project.

 

The number of design projects we completed increased from 13 project designs in the six months ended September 30, 2018 to 29 project designs in the six months ended September 30, 2019. However, in terms of design project mix, we undertook and completed more large-project designs with higher design services fees in the six months ended September 30, 2018 than we did in the six months ended September 30, 2019. In the six months ended September 30, 2018, we completed three comprehensive design projects, one associated with school building construction drawings and interior decoration design solutions for Yanghe Zhongjia Middle School, one associated with urban ecological city development, and the other associated with community revitalization and construction. These three large projects helped us to generate an aggregate approximately $2.7 million in design service fees. In contrast, for the six months ended September 30, 2019, most of the design projects we undertook were associated with standalone brand designs, individual museum, hotel, train station, or shopping center construction drawings and interior decoration designs that were relatively small in project size and design scope and less complicated. We only undertook and completed two comprehensive design projects associated with urban ecological city development or community revitalization and construction. As a result of changes in design project mix, our average design service fee for the six months ended September 30, 2018 amounted to $320,983 per project, and our average design service fee for the six months ended September 30, 2019 amounted to $265,662 per project. Therefore, the increase in our design service fee revenue by $3,531,427 or 84.6% was primarily affected by an increase in the number of design service projects from 13 projects in the six months ended September 30, 2018 to 29 projects in the six months ended September 30, 2019, offset to a certain extent, by a decrease in average design service fees per project. However, we do not expect such trends to continue in the near future, and as our business continues to grow and expand, we expect to obtain more contracts for larger scale design projects that offer higher service fees. 

 

For the six months ended September 30, 2019, we provided design services to one related-party customer, Jiangsu Paizhen Construction Development Co., Ltd., an entity controlled by a relative of our Company’s CEO, in the amount of $709,258, which accounted for approximately 9.2% of our total design service revenue for the six months ended September 30, 2019. For the six months ended September 30, 2018, we provided design services to two related-party customers, Jiangsu Paizhen Construction Development Co., Ltd., and Guanghe Jiye Cultural Development Group Co., Ltd., both entities were controlled by a relative of our Company’s CEO, in the amount of $45,717 and $1,673,155, respectively, which accounted for an aggregate of approximately 41.2% of our total design service revenue for the six months ended September 30, 2018. The design service fees charged to related parties were determined using the same standard we use for our third-party customers. The related parties for which we provided design services during the six months ended September 30, 2019 and 2018 were located in the provincial geographic areas (Jiangsu Province and Beijing) where we are currently conducting business. As we plan to expand our operations to other geographic areas, we expect to provide design services to a growing number of third party customers and do not expect to continue to derive a substantial amount of design service revenue from related parties in future periods.

 

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Revenue from Comprehensive Construction Project Management Consulting Services

 

Under our comprehensive construction project management consulting services, we provide two types of consulting services to our customers: (1) management of project materials, and (2) management of onsite construction process.

 

Our revenue from comprehensive construction project management consulting services consists of the following:

 

   For the six months ended September 30, 
   2019   2018   Change 
   Amount   Amount   Amount   % 
Revenue from comprehensive construction project management consulting services:                
Management of project materials  $12,426,518   $11,359,193   $1,067,325    9.4%
Management of onsite construction process   4,730,135    4,960,274    (230,139)   (4.6)%
Total revenue  $17,156,653   $16,319,467   $837,186    5.1%
                     
Number of project involved with materials management   3    5    (2)   (40.0)%
Number of project involved with onsite construction process management   7    5    2    40.0%

 

  (1) Revenue from Management of Project Materials

 

In connection with the urban-rural design services provided to the customers, in order to facilitate and ensure the successful completion of the engineering and construction of the projects based on our designs, we also utilize our relationship with many construction material suppliers and enter into project materials management service contracts with selected construction companies. Our services include selecting materials and equipment to be used for a project, conducting price checks of the required construction materials, negotiating the purchase of materials and equipment as required by the construction company according to the requirements of the design, selecting suppliers and purchase materials from suppliers on behalf of the construction company, supervising and managing the performance of the procurement contracts; and ensuring timely delivery of materials and equipment according to the construction progress. 

 

It normally takes us from one month up to nine months to complete project materials management services, depending on the progress of construction of each individual project. For the six months ended September 30, 2019 and 2018, we provided design services to 29 and 13 customers, respectively, among which, three and five customers further engaged us to provide project materials management services, respectively. Revenue from project materials management services increased by $1,067,325 or 9.4%, from $11,359,193 in the six months ended September 30, 2018, to $12,426,518 in the six months ended September 30, 2019, primarily due to an increase in the average amount of service fees from $2,271,839 per project in the six months ended September 30, 2018 to $4,142,173 per project in the six months ended September 30, 2019 because the size of the projects were relatively larger in the six months ended September 30, 2019 as compared to the six months ended September 30, 2018, which led to increased work volume and an increase in the average amount of service fees, offset by a decrease in the number of projects we were engaged to provide project materials management services, from five projects in the six months ended September 30, 2018 to three projects in the six months ended September 30, 2019.

 

For the six months ended September 30, 2019, we provided project materials management services to a related-party, Jiangsu Paizhen Construction Development Co., Ltd., controlled by a relative of our Company’s CEO. Total revenue from such services amounted to $1,642,791, which accounted for 9.6% of our total project management consulting service revenue for the six months ended September 30, 2019. There was no such related-party service revenue in the six months ended September 30, 2018. The project materials management consulting service fee we charged to related parties was determined using the same standard we use for our third-party customers. The related party for which we provided project materials management consulting service during the six months ended September 30, 2019 was located in the provincial geographic area (Jiangsu Province) where we are currently conducting business. However, as we plan to expand our operations to other geographic areas, we expect to focus on providing more design and comprehensive construction project management consulting services to third party customers and do not expect to continue to derive a substantial amount of project materials management service revenue from both third-party and related party customers in future periods.

 

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  (2) Revenue from Management of Onsite Construction Process

 

In connection with the urban-rural design services provided to the customers, in order to facilitate and ensure the successful completion of the engineering and construction of the projects based on our designs, pursuant to the pre-bidding agreement, we also enter into contracts with selected construction company customers to provide comprehensive onsite construction process management consulting services to them. Our services primarily include design related work management, construction scheduling management, contract and sub-contracting management, construction cost management, quality management and materials management. Through such services, we help the construction company customers optimize the efficiency of the construction phase of a project, ensure the integrity of the implementation of the designs, optimize the use of capital, and timely resolve on-site construction issues based on the designs. Our revenue from onsite construction process management consulting services decreased by $230,139 or 4.6%, from $4,960,274 in the six months ended September 30, 2018 to $4,730,135 for the six months ended September 30, 2019. Our average consulting service fee for providing comprehensive on-site construction management consulting services is affected by different project mix including project sizes, service scopes, and duration of the construction period. Projects with larger scale and longer duration normally require us to put in more effort to manage the workflow in order to satisfy our contracted performance obligations for which we charge higher consulting service fees than those with shorter durations and smaller scope sizes. Depending on the project mix, our average consulting service fee may be different for each reporting period. We provided onsite construction process management for seven projects in the six months ended September 30, 2019 as compared to five projects in the six months ended September 30, 2018. However, in the six months ended September 30, 2019, the six projects were relatively small and accordingly we charged a lower consulting fees. In contrast, among the five projects in the six months ended September 30, 2018, three projects were relatively large in scale and more complex, for which we put in more effort and accordingly charged higher service fees. As a result, the average project management consulting service revenue decreased from $992,055 per project in the six months ended September 30, 2018 to $675,734 per project in the six months ended September 30, 2019, which led to our total revenue from management of onsite construction process decrease by 4.6%. As our business continues to grow and expand, we expect to obtain a growing number of larger scale government-sponsored urban-rural development projects offering higher consulting services fees.

 

For the six months ended September 30, 2019 and 2018, we provided project management consulting services to a related-party, Jiangsu Paizhen Construction Development Co., Ltd., controlled by a relative of our Company’s CEO. Total revenue from such services amounted to $603,233 and $105,910, which accounted for 3.5% and 0.6% of our total project management consulting service revenue for six months ended September 30, 2019 and 2018, respectively. The comprehensive on-site construction management consulting service fee we charged to related parties was determined using the same standard we use for our third-party customers. The related party for which we provided on-site construction process management consulting service during the six months ended September 30, 2019 and 2018 was located in the provincial geographic area (Jiangsu Province) where we are currently conducting business. However, as we plan to expand our operations to other geographic areas, we expect to provide more comprehensive construction project management consulting services to third party customers and do not expect to derive a substantial amount of consulting service revenue from related parties in future periods.

  

Cost of Revenues

 

   For the six months ended September 30, 
   2019   2018   Change 
   Amount   % of total revenue   Amount   % of total revenue   Amount   % 
                         
Cost of revenue associated with urban-rural design services  $3,362,450    13.6%  $2,268,795    11.1%  $1,093,655    48.2%
Cost of revenue associated with comprehensive construction project management consulting services:                              
Management of project materials   11,465,286    46.1%   10,454,479    51.0%   1,010,807    9.7%
Management of onsite construction process   2,539,948    10.2%   2,386,008    11.6%   153,940    6.5%
Total cost of revenue  $17,367,684    69.9%  $15,109,282    73.7%  $2,258,402    14.9%

 

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Our cost of revenues consists of salary, welfare and insurance cost for our project management personnel, cost associated with outsourcing certain services to subcontractors, direct material purchases costs and business taxes. Our cost of revenue also includes certain research and development costs associated with research on market dynamics and trends in government-sponsored urban-rural design and development as well as improving urban-rural design methods and related subjects. Our cost of revenue, and fluctuations in these costs, generally correlate directly with related project work volumes and revenue. Comparative increases and/or decreases in cost of revenue were generally consistent with corresponding changes in reporting operating revenue.

 

   For the six months ended September 30, 
   2019   2018   Change   % of change 
                 
Salary, employee benefit and other professional service fee  $1,756,361   $779,901   $976,460    125.2%
Subcontract costs   15,405,217    14,181,606    1,223,611    8.6%
Research and development costs   129,091    69,375    59,716    86.1%
Business taxes   77,015    78,400    (1,385)   (1.8)%
Total cost of revenue  $17,367,684   $15,109,282   $2,258,402    14.9%

 

Our overall cost of revenue increased by $2,258,402 or 14.9% from $15,109,282 in the six months ended September 30, 2018 to $17,367,684 in the six months ended September 30, 2019. This included (i) an increase in salary, employee benefit and other professional service fee by $976,460; (ii) an increase in research and development costs of $59,716 because for post-bidding period projects we increased the research activities associated with analysis of market dynamics and trends in government-sponsored urban-rural design and development as well as improving urban-rural design methods in order to provide customized design and construction project management services to customers; (iii) an increase in subcontract costs by $1,223,611 which was largely affected by the increase of subcontract costs from our project materials management and project design services, especially from project materials management services, which is discussed in greater detail below. The total number of design projects increased from 13 projects to 29 projects, the total number of projects in which we provided project materials management decreased from five projects to three projects, and the number of projects for which we provided construction process management consulting services increased from five to seven, when comparing the six months ended September 30, 2019 to the six months ended September 30, 2018. Our cost of revenue accounted for 69.9% and 73.7% of our total revenue for the six months ended September 30, 2019 and 2018, respectively.

 

The increase in cost of revenue was largely affected by the increase in subcontract costs. Because we are conducting our business under an asset-light business model, pursuant to which we have relatively few capital assets compared to our operations, and we have kept a lean corporate structure to remain flexible and efficient in our operation, we have adopted a strategy to outsource non-essential tasks that do not require our core-competence to external parties to supplement and enhance our ability to efficiently work on government projects. As a result, for the six months ended September 30, 2019 and 2018, more tasks, which we do not deem as “essential” that require our core-competence, were outsourced to third party services providers, including: (1) design companies that serve as our subcontractors providing non-essential design services; and (2) project consulting companies and construction material suppliers that serve as our sub-contractors providing comprehensive construction project management related services.

 

Cost of Revenue Associated with Urban-Rural Design Services

 

   For the six months ended September 30, 
Cost of revenue associated with design services  2019   2018   Change   % of change 
Salary, employee benefit and other professional service fee  $1,581,531   $683,292   $898,239    131.5%
Subcontract costs   1,757,053    1,569,538    187,515    11.9%
Business taxes   23,866    15,965    7,901    49.5%
Total cost of revenue associated with design services  $3,362,450   $2,268,795   $1,093,655    48.2%

 

The cost of revenues associated with urban-rural design services increased by $1,093,655 or 48.2% from $2,268,795 in the six months ended September 30, 2018 to $3,362,450 in the six months ended September 30, 2019, which was consistent with a corresponding increase in design project work volumes and revenues by 84.6%. As discussed above, the number of design projects increased from 13 projects in the six months ended September 30, 2018 to 29 design projects in the six months ended September 30, 2019, as a result, we assigned an increased number of designers and professional employees to work on design services, which led to an increase in salary and employee benefit costs of $898,239 or 131.5%. On the other hand, subcontract costs increased by $187,515 or 11.9% due to the fact that we outsourced some of construction drawings services to third-party design firms, which led to a higher amount of subcontract costs in the six months ended September 30, 2019. The overall increase in our costs of revenue associated with our design services reflected these combined factors.

 

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Cost of Revenue Associated with comprehensive construction project management consulting services

 

Under our comprehensive construction project management consulting services, we provide two types of consulting services to our customers: (1) management of project materials, and (2) management of onsite construction process. Our cost of revenue associated with comprehensive construction project management consulting services consists of the following:

 

  (1) Cost of Revenue Associated with management of project materials

 

   For the six months ended September 30, 
Cost of revenue associated with project materials management  2019   2018   Change   % of change 
Material costs  $11,426,791   $10,411,021   $1,015,770    9.8%
Business taxes   38,495    43,458    (4,963)   (11.4)%
Total cost of revenue associated with project materials management  $11,465,286   $10,454,479   $1,010,807    9.7%

 

The cost of revenues associated with project materials management services increased by $1,010,807 or 9.7%, from $10,454,479 in the six months ended September 30, 2018 to $11,465,286 in the six months ended September 30, 2019, which was consistent with a corresponding increase in project materials management work volumes and revenues by 9.4%. As discussed above, for the six months ended September 30, 2019 and 2018, we engaged in three and five projects to perform project materials management services, respectively. In addition, our project materials management services included larger and more comprehensive urban ecological town renovation and upgrade projects. Material purchase costs increased by $1,015,770 or 9.8%, and business taxes decreased by $4,963.

 

  (2) Cost of Revenue Associated with management of onsite construction process

 

   For the six months ended September 30, 
Cost of revenue associated with onsite construction process management  2019   2018   Change   % of change 
Salary, employee benefit and other professional service fee  $303,920   $165,984   $137,936    83.1%
Subcontract costs   2,221,374    2,201,047    20,327    0.9%
Business taxes   14,654    18,977    (4,323)   (22.8)%
Total cost of revenue associated with onsite construction process management  $2,539,948   $2,386,008   $153,940    6.5%

 

The cost of revenues associated with management of onsite construction process increased by $153,940 or 6.5%, from $2,386,008 in the six months ended September 30, 2018 to $2,539,948 in the six months ended September 30, 2019. As discussed above, we provided onsite construction process management services for seven projects in the six months ended September 30, 2019 as compared to five projects in the six months ended September 30, 2018. As a result of an increase in the number of projects, we put more effort on project management and monitoring. This led to an increase in salary and employee benefit costs of $137,936. In addition, we outsourced some of the project monitoring and management services to third-party consulting firms, which led to increased subcontract costs by $20,327.

 

Gross profit

 

Our overall gross profit increased by $2,110,211 or 39.2% from $5,382,958 in the six months ended September 30, 2018 to $7,493,169 in the six months ended September 30, 2019, while gross profit margin increased by 3.8% from 26.3% in six months ended September 30, 2018 to 30.1% in the six months ended September 30, 2019.

 

The following provide further breakdown of our gross profit by service types:

 

   For the six months ended September 30, 
   2019   2018   Change 
   Amount   GP%   Amount   GP%   Amount   GP% 
Gross profit associated with design services  $4,341,751    56.4%  $1,903,978    45.6%  $2,437,773    10.8%
Gross profit associated with comprehensive construction project management consulting services:                              
Management of project materials   961,231    7.7%   904,714    8.0%   56,517    (0.3)%
Management of onsite construction process   2,190,187    46.3%   2,574,266    51.9%   (384,079)   (5.6)%
Total gross profit  $7,493,169    30.1%  $5,382,958    26.3%  $2,110,211    3.8%

 

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Our gross profit associated with urban-rural design services increased by $2,437,773, from $1,903,978 in the six months ended September 30, 2018 to $4,341,751 in the six months ended September 30, 2019, primarily due to increased revenue and work volume by $3,531,427 or 84.6%. Gross profit margin increased from 45.6% in the six months ended September 30, 2018 to 56.4% in the six months ended September 30, 2019. As discussed above, during the six months ended September 30, 2019, most of the design projects we undertook were associated with standalone brand designs, individual museum, hotel, train station, or shopping center construction drawings and interior decoration designs with relatively small project size and design scope and were less complicated. As a result, it took a shorter duration for us to complete the design projects and reduced our service outsourcing to external third-parties. In general, services outsourced or subcontracted to third parties have higher costs and lower profit margin than services performed in-house or by internal employees. In the six months ended September 30, 2019, we used more qualified internal employees to perform the design services and reduced our outsourcing or subcontracting, which led to an increase in gross margin associated with our design services.

 

Our gross profit associated with project materials management services increased by $56,517, from $904,714 in the six months ended September 30, 2018 to $961,231 in the six months ended September 30, 2019, primarily due to increased work volume and revenue associated with fulfillment of the project materials management services. However, due to increased material purchases to meet the desired design concept and requirements, gross profit margin associated with project materials management services decreased from 8.0% in the six months ended September 30, 2018 to 7.7% in the six months ended September 30, 2019, which to a certain extent was affected by increased construction material market selling price due to inflation.

 

Our gross profit associated with management of onsite construction process decreased by $384,079, from $2,574,266 in six months ended September 30, 2018 to $2,190,187 in the six months ended September 30, 2019, which was consistent with corresponding decrease in project management consulting service work volume and revenues by 4.6%. Gross profit margin decreased from 51.9% in the six months ended September 30, 2018 to 46.3% in the six months ended September 30, 2019 due to increased salary and employee benefit costs of $137,936 as discussed above. During the six months ended September 30, 2019, we provided onsite construction process management services for seven projects as compared to five projects in the six months ended September 30, 2018. As a result of the increased number of projects, we put more effort on project management and monitoring. In addition, our subcontract costs also increased by $20,327 or 0.9%. Due to the increase in salary and employee benefit costs and subcontract costs, our gross margin associated with onsite construction process management consulting services decreased for the six months ended September 30, 2019.

 

Operating expenses

 

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

 

   For the six months ended September 30, 
   2019   2018   Change 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
Total revenue  $24,860,853    100.0%  $20,492,240    100.0%  $4,368,613    21.3%
Operating expenses:                              
Selling expenses   142,647    0.6%   187,078    0.9%   (44,431)   (23.7)%
General and administrative expenses   1,909,205    7.7%   1,950,149    9.5%   (40,944)   (2.1)%
Total operating expenses  $2,051,852    8.3%  $2,137,227    10.4%  $(85,375)   (4.0)%

 

Selling expenses

 

Our selling expenses primarily include expenses incurred for our brand promotion and advertisings, payroll expense paid to our sales and marketing personnel as well as business travel, meals and other expenses related to our sales and marketing activities.

 

   For the six months ended September 30, 
   2019   2018   Change 
   Amount   %   Amount   %   Amount   % 
Salary expenses to sales and marketing personnel  $141,808    99.4%  $142,601    76.3%  $(793)   (0.6)%
Advertising expenses   822    0.6%   39,922    21.3%   (39,100)   (97.9)%
Travel, meals and other sales and marketing related expenses   17    0.0%   4,555    2.4%   (4,538)   (99.6)%
Total selling expenses  $142,647    100.0%  $187,078    100.0%  $(44,431)   (23.7)%

 

Total selling expenses decreased by $44,431 or 23.7% from $187,078 for the six months ended September 30, 2018 to $142,647 for the six months ended September 30, 2019. This decrease in selling expenses can be attributed primarily to a decrease in advertising expenses by $39,100 and a decrease in travel, meals and other marketing expense by $4,538 during the six months ended September 30, 2019. As a percentage of revenues, our selling expenses accounted for 0.6% and 0.9% of our total revenue for the six months ended September 30, 2019 and 2018, respectively.

 

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General and Administrative Expenses

 

Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, research and development expenses incurred on design and construction projects during the pre-bidding periods, business consulting expense, travel and transportation expense for our management team, meals and entertainment expenses, office rental and decoration expense, bad debt reserve on our accounts receivable when the collection becomes remote, depreciation expenses and other office expenses.

 

   For the six months ended September 30, 
   2019   2018   Change 
   Amount   %   Amount   %   Amount   % 
Payroll and employee welfare and insurance expenses  $778,407    40.9%  $1,138,849    58.4%  $(360,442)   (31.6)%
Consulting fees   339,884    17.8%   94,440    4.8%   245,444    259.9%
Research and development expense   4,371    0.2%   83,496    4.3%   (79,125)   (94.8)%
Travel and transportation related expenses   13,933    0.7%   67,441    3.5%   (53,508)   (79.3)%
Meals and entertainment expenses   38,306    2.0%   35,756    1.8%   2,550    7.1%
Rental expense   26,037    1.4%   151,872    7.8%   (125,835)   (82.9)%
Office decoration expenses   263,562    13.8%   276,861    14.2%   (13,299)   (4.8)%
Depreciation and amortization   170,669    8.9%   29,288    1.5%   141,381    482.7%
Audit fee   192,965    10.1%   -    0.0%   192,965    100.0%
Utility, employee training, conference and other office expenses   81,071    4.2%   72,146    3.7%   8,925    12.4%
Total general and administrative expenses  $1,909,205    100.0%  $1,950,149    100.0%  $(40,944)   (2.1)%

 

Our general and administrative expenses decreased by $40,944 or 2.1% from $1,950,149 for the six months ended September 30, 2018 to $1,909,205 for the six months ended September 30, 2019, primarily due to a decrease in salary and employee welfare expense by $360,442 due to decreased number of administrative employees, a decrease in our rental expense by $125,835, offset by an increase in our depreciation and amortization expense by $141,381 and an increase in audit fee by $192,965. On August 29, 2018, we purchased an office building of 2,355.26 square meters at a purchase price of $5,926,183 (RMB 43.75 million including tax) as our headquarter office in Beijing. In connection with the purchase of our office building, we terminated most of our office lease agreements, which led to a decrease in our rental expense by $125,835 during six months ended September 30, 2019 as compared to six months ended September 30, 2018. In addition, prior to the office building purchase, we had entered into multiple office lease agreements and each individual office was equipped with employees to perform the same administrative roles and function. After the office building purchase, we consolidated and centralized our offices to cut down the number of administrative employees to improve our work efficiency. This led to decrease in total number of administrative employees and accordingly our salary and employee benefit expenses decreased by $360,442 for six months ended September 30, 2019 as compared to six months ended September 30, 2018. On the other hand, the purchase of the office building led to our increased fixed asset balance, and our depreciation and amortization expense increased by $141,381 during six months ended September 30, 2019 as compared to six months ended September 30, 2018. During six months ended September 30, 2019, in connection with our intended IPO, we incurred increased audit fee of $192,965. Our consulting expense associated with consulting with external experts for our business expansion strategy also increased by $245,444 during the six months ended September 30, 2019 as compared to six months ended September 30, 2018. Our research and development expense decreased by $79,125. In order to provide customized design and construction project management services to customers, we incurred certain costs associated with research and development activities such as feasibility study and economic planning during the project pre-bidding period. Given the contingency and uncertainty of the pre-bidding process, we do not capitalize such contract acquisition costs but record such research and development costs as general and administrative expenses. The overall change in our general and administrative expense comparing six months ended September 30, 2019 to six months ended September 30, 2018 were due to the above factors. General and administrative expenses were 7.6% and 9.6% of our revenue in the six months ended September 30, 2019 and 2018, respectively.

 

Interest Expense

 

   For the six months ended September 30, 
   2019   2018   Change   % 
Daily weighted average loan balance  $2,276,748   $2,495,319   $(218,571)   (8.8)%
Interest expense for the period  $105,912   $118,792   $(12,880)   (10.8)%

 

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Our interest expense decreased by $12,880 or 10.8%, from $118,792 in the six months ended September 30, 2018 to $105,912 in the six months ended September 30, 2019. The decrease in interest expense was primarily because we carried lower average loan balances during the six months ended September 30, 2019 compared to the six months ended September 30, 2018. As of March 31, 2018, we had total outstanding short-term and long-term bank loans of RMB 17.2 million. During the six months ended September 30, 2018, we only repaid RMB 1 million short-term bank loan and repaid RMB 221,091 long-term bank loan, as a result, we carried total of RMB 16.0 million loans as of September 30, 2018, with the weighted average loan balance we carried for the six months ended September 30, 2018 of $2,495,319 (RMB 16,257,753) per day. As of March 31, 2019, we carried a total of RMB 15.8 million outstanding bank loans (including short-term bank loans, current portion of long-term bank loan and long-term bank loan of $2,235,017, $83,485 and $31,514, respectively). During the six months ended September 30, 2019, we repaid total of RMB 266,957 long-term bank loans. As a result, the weighted average loan balance we carried during the six months ended September 30, 2019 amounted to $2,276,748 (RMB 15,626,233) per day. Based on the above, our lower interest expense for the six months ended September 30, 2019 was derived from lower weighted average loan balance we carried during the six months ended September 30, 2019 which led us to pay lower amount of interest expenses to the banks. 

 

Interest Income

 

Our interest income decreased by $4,144 or 29.9%, from $13,849 in the six months ended September 30, 2018 to $9,705 in the six months ended September 30, 2019. The decrease of our interest income was because we have maintained lower average daily bank deposit balance with the PRC banks to generate interest income.

 

Subsidy Income

 

Our subsidy income primarily includes government subsidies as an incentive to encourage urban-rural development service providers like us to expand their businesses. Total government subsidy amounted to $Nil and $6,984 for the six months ended September 30, 2019 and 2018, respectively.

 

Provision for Income Taxes

 

Our provision for income taxes was $1,287,615 in the six months ended September 30, 2019, an increase of $747,074 or 138.2% from $540,541 in the six months ended September 30, 2018 due to our increased taxable income. Our principal business is performed through our VIE, Goxus BJ and its subsidiary Goxus Suqian, in the PRC, and is therefore subject to PRC income tax, which is computed according to the relevant laws and regulations in the PRC. Goxus BJ, the Company’s main operating subsidiary and VIE in PRC, was approved as a HNTE and is entitled to a reduced income tax rate of 15% beginning December 2016, which is valid for three years. EIT is typically governed by the local tax authority in PRC. Each local tax authority at times may grant tax holidays to local enterprises as a way to encourage entrepreneurship and stimulate local economy. The corporate income taxes for the six months ended September 30, 2019 and 2018 were reported at a blended reduced rate as a result of Goxus BJ being approved as a HNTE and enjoying a 15% reduced income tax rate, but Goxus Suqian is subject to a 25% income tax rate. The impact of the tax holiday noted above decreased foreign taxes by $47,508 and $231,527 for the six months ended September 30, 2019 and 2018, respectively. The benefit of the tax holidays on net income per share (basic and diluted) $0.00 and $0.02 for the six months ended September 30, 2019 and 2018, respectively.

 

Net Income

 

As a result of the foregoing, we reported a net income of $4,057,495 in the six months ended September 30, 2019, representing a $1,450,264 increase from a net income of $2,607,231 in the six months ended September 30, 2018.

 

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Comparison of Results of Operations for the Years Ended March 31, 2019 and 2018

 

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

 

   For the years ended March 31, 
   2019   2018   Change 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
                         
Revenue  $47,175,847    100.0%  $27,859,367    100.0%  $19,316,480    69.3%
Cost of revenue   34,322,930    72.8%   15,877,256    57.0%   18,445,674    116.2%
Gross profit   12,852,917    27.2%   11,982,111    43.0%   870,806    7.3%
                               
Operating expenses                              
Selling expenses   413,636    0.9%   398,533    1.4%   15,103    3.8%
General and administrative expenses   3,616,696    7.6%   3,272,092    11.7%   344,604    10.5%
Total operating expenses   4,030,332    8.5%   3,670,625    13.1%   359,707    9.8%
                               
Income from operations   8,822,585    18.7%   8,311,486    29.9%   511,099    6.1%
                               
Other income (expenses)                              
Interest expense   (237,680)   (0.5)%   (79,182)   (0.3)%   (158,498)   200.2%
Interest income   22,612    0.0%   9,008    0.0%   13,604    151.0%
Subsidy income   88,388    0.2%   357,794    1.3%   (269,406)   (75.3)%
Total other income (expense), net   (126,680)   (0.3)%   287,620    1.0%   (414,300)   (144.0)%
                               
Income before income taxes   8,695,905    18.4%   8,599,106    30.9%   96,799    1.1%
                               
Income tax provision   1,645,681    3.5%   1,504,023    5.4%   141,658    9.4%
                               
Net income  $7,050,224    14.9%  $7,095,083    25.5%  $(44,859)   (0.6)%

 

Revenues. Total revenues increased by $19,316,480, or 69.3%, to $47,175,847 for the year ended March 31, 2019 from $27,859,367 for the year ended March 31, 2018. The increase in our revenue was due to more project design, project materials management and on-site construction process management consulting services during the year ended March 31, 2019 as compared to the year ended March 31, 2018.

 

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Our revenue by service type is as follows:

 

   For the years ended March 31, 
   2019   2018   Change 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
                         
Revenue from urban-rural design services  $11,274,435    23.9%  $12,829,364    46.1%  $(1,554,929)   (12.1)%
Revenue from comprehensive construction project management consulting services  $35,901,412    76.1%  $15,030,003    53.9%  $20,871,409    138.9%
Total revenue  $47,175,847    100.0%  $27,859,367    100.0%  $19,316,480    69.3%

 

Revenue from Urban-rural Design Services

 

   For the years ended March 31 
   2019   2018   Change 
Project design service price range  Number of project design completed   Revenue Amount   Number of project design completed   Revenue Amount   Number of project design completed   Amount 
$10,000 to $100,000 per design project   6   $393,591    8   $298,872    (2)  $94,719 
$100,001 to $500,000 per design project   12    3,562,786    -    -    12    3,562,786 
$500,001 to $1,000,000 per design project   3    2,306,937    2    1,857,453    1    449,484 
$1,000,001 to $1,500,000 per design project   1    1,243,889    3    3,842,560    (2)   (2,598,671)
$1,500,001 to $2,000,000 per design project   -    -    -    -    -    - 
$2,000,000 + plus per design project   1    3,767,232    2    6,830,479    (1)   (3,063,247)
Total   23   $11,274,435    15   $12,829,364    8   $(1,554,929)
                               
Average design service fee per project   23   $490,193    15   $855,291    8   $(365,098)

 

Our revenues from Urban-rural design services decreased by $1,554,929 or 12.1% from $12,829,364 in fiscal year ended March 31, 2018 to $11,274,435 in fiscal year ended March 31, 2019. Our project design services largely depend on the size, complexity and design scope of each individual project as required by our customers.

 

In general, we charge higher design service fees on large and more complex design projects than we do on small and simpler design projects, and our design revenue varies due to different project mix for each reporting period. Depending on the different design scope and tasks, it normally takes us one month to complete a less complicated design project, and takes us up to six months to complete the design for larger and more complicated project.

 

The number of design projects we completed increased from 15 project designs in fiscal year ended March 31, 2018 to 23 project designs in fiscal year ended March 31, 2019. However, in terms of design project mix, we undertook and completed more large-project designs with higher design services fees in fiscal year ended March 31, 2018 than we did in fiscal year ended March 31, 2019. In fiscal year ended March 31, 2018, we completed two comprehensive design projects, one associated with urban ecological city development, and the other associated with community revitalization and construction. These two large projects helped us to generate an aggregate of design service fees of approximately $6.8 million. In contrast, we only undertook and completed one comprehensive design project associated with urban ecological city development or community revitalization and construction in fiscal year ended March 31, 2019, which generated design service fees of approximately $3.8 million. Our other design service projects in fiscal year ended March 31, 2019 and 2018 were for less complicated designs. Our average design service fee for each reporting period is affected by the design scope, size and varying degrees of complexity of each project. As a result of changes in design project mix, our average design service fee per project for fiscal years ended March 31, 2018 and 2019 amounted to $855,291 and $490,193, respectively. Although the number of design service project increased from 15 projects in fiscal year ended March 31, 2018 to 23 projects in fiscal year ended March 31, 2019, due to a decrease in the average service fee per project, our total design service fee revenue decreased by $1,554,929 or 12.1%. However, we do not expect such trend to continue in the near future, and as our business continues to grow and expand, we expect to obtain more contracts for larger scale design projects that offer higher service fees.

 

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For the year ended March 31, 2019, we provided design services to two related-party customers, Jiangsu Paizhen Construction Development Co., Ltd., and Guanghe Jiye Cultural Development Group Co., Ltd. Both entities are controlled by a relative of our Company’s CEO, in the aggregate amount of $5,954,887, accounted for approximately 52.8% of our total design service revenue for the year ended March 31, 2019. There was no design services provided to related-party during the fiscal year ended March 31, 2018. The design service fees charged to related parties were determined using the same standard we use for our third-party customers. The two related parties for which we provided design services during fiscal year 2019 were located in the provincial geographic areas (Jiangsu Province and Beijing area) where we are currently conducting business. As we plan to expand our operations to other geographic areas, we expect to provide design services to a growing number of third party customers and do not expect to derive a substantial amount of design service revenue from related parties in future periods.

 

Revenue from Comprehensive Construction Project Management Consulting Services

 

Under our comprehensive construction project management consulting services, we provide two types of consulting services to our customers: (1) management of project materials, and (2) management of on-site construction process.

 

Our revenue from comprehensive construction project management consulting services consists of the following:

 

   For the years ended March 31, 
   2019   2018   Change 
   Amount   Amount   Amount   % 
Revenue from comprehensive construction project management consulting services:                
Management of project materials  $24,942,269   $7,722,410   $17,219,859    223.0%
Management of on-site construction process   10,959,143    7,307,593    3,651,550    50.0%
Total revenue  $35,901,412   $15,030,003   $20,871,409    138.9%
                     
Number of project involved with materials management   7    4    3    75.0%
Number of project involved with on-site construction process management   5    4    1    25.0%

 

(1)Revenue from Management of Project Materials

 

In connection with the urban-rural design services provided to the customers, in order to facilitate and ensure the successful completion of the engineering and construction of the projects based on our designs, we also utilize our relationship with many construction material suppliers and enter into project materials management service contracts with selected construction companies. Our services include selecting materials and equipment to be used for a project, conducting price checks of the required construction materials, negotiating the purchase of materials and equipment as required by the construction company according to the requirements of the design, selecting suppliers and purchase materials from suppliers on behalf of the construction company, supervising and managing the performance of the procurement contracts; and ensuring timely delivery of materials and equipment according to the construction progress.

 

53

 

It normally takes us from one month up to nine months to complete project materials management services, depending on the progress of construction of each individual project. For the fiscal years ended March 31, 2019 and 2018, we provided design services to 23 and 15 customers, respectively, among which, seven and four customers further engaged us to provide project materials management services, respectively. Revenue from project materials management services increased by $17,219,859 or 223.0%, from $7,722,410 in fiscal year ended March 31, 2018, to $24,942,269 in fiscal year ended March 31, 2019, primarily due to an increase in the number of projects we were engaged to provide project materials management services, from four projects in fiscal year ended March 31, 2018 to seven projects in fiscal year ended March 31, 2019, and increased average amount of service fee from $1,930,603 per project in fiscal year ended March 31, 2018 to $3,563,181 per project in fiscal year ended March 31, 2019.

 

(2)Revenue from Management of On-site Construction Process

 

In connection with the urban-rural design services provided to the customers, in order to facilitate and ensure the successful completion of the engineering and construction of the projects based on our designs, pursuant to the pre-bidding agreement, we also enter into contracts with selected construction company customers to provide comprehensive on-site construction process management consulting services to them. Our services primarily include design related work management, construction scheduling management, contract and sub-contracting management, construction cost management, quality management and materials management. Through such services, we help the construction company customers optimize the efficiency of the construction phase of a project, ensure the integrity of the implementation of the designs, optimize the use of capital, and timely resolve on-site construction issues based on the designs. Our revenue from on-site construction process management consulting services increased by $3,651,550 or 50.0%, from $7,307,593 in fiscal year ended March 31, 2018 to $10,959,143 for fiscal year ended March 31, 2019. We provided on-site construction process management for five projects in fiscal year ended March 31, 2019 as compared to four projects in fiscal year ended March 31, 2018. Our average consulting service fee for providing comprehensive on-site construction management consulting services is affected by different project mix including project sizes, service scopes, and durations of the construction period. Projects with larger scale and longer duration normally require us to put in more efforts to manage the workflow in order to satisfy our contracted performance obligations for which we charge higher consulting service fees than those with shorter durations and smaller sizes. Depending on the project mix, our average consulting service fee may be different for each reporting period. In fiscal year ended March 31, 2018, two projects were completed in a shorter time frame and accordingly we charged a lower amount of consulting service fees. In contrast, five projects in fiscal year ended March 31, 2019 were of larger scale and longer duration, for which we put in more efforts and accordingly charged higher service fees. As a result, the average project management consulting service revenue increased from $1,826,898 per project in fiscal year ended March 31, 2018 to $2,191,829 per project in fiscal year ended March 31, 2019. We expect such trend to continue in the near future. As our business continues to grow and expand, we expect to obtain a growing number of larger scale government-sponsored urban-rural development projects offering higher consulting services fees.

 

For the year ended March 31, 2019, we provided project management consulting services to a related-party, Jiangsu Paizhen Construction Development Co., Ltd., controlled by a relative of our Company’s CEO. Total revenue from such services amounted to $3,286,019, which accounted for 9.2% of our total project management consulting service revenue for fiscal year ended March 31, 2019. There was no related-party service revenue in fiscal year ended March 31, 2018. The comprehensive on-site construction management consulting service fee we charged to related parties was determined using the same standard we use for our third-party customers. The related party for which we provided on-site construction process management consulting service during fiscal year 2019 was located in the provincial geographic area (Jiangsu Province) where we are currently conducting business. However, as we plan to expand our operations to other geographic areas, we expect to provide more comprehensive construction project management consulting services to third party customers and do not expect to derive a substantial amount of consulting service revenue from related parties in future periods.

 

Cost of Revenues

 

   For the years ended March 31, 
   2019   2018   Change 
   Amount   % of total revenue   Amount   % of total revenue   Amount   % 
                         
Cost of revenue associated with urban-rural design services  $5,571,652    11.8%  $6,577,792    23.6%  $(1,006,140)   (15.3)%
Cost of revenue associated with comprehensive construction project management consulting services:                              
Management of project materials   23,102,251    49.0%   6,838,663    24.6%   16,263,588    237.8%
Management of on-site construction process   5,649,027    12.0%   2,460,801    8.8%   3,188,226    129.6%
Total cost of revenue  $34,322,930    72.8%  $15,877,256    57.0%  $18,445,674    116.2%

 

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Our cost of revenues consists of salary, welfare and insurance cost for our project management personnel, cost associated with outsourcing certain services to subcontractors, direct material purchases costs and business taxes. Our cost of revenue also includes certain research and development costs associated with research on market dynamics and trends in government-sponsored urban-rural design and development as well as improving urban-rural design methods and related subjects. Our cost of revenue, and fluctuations in these costs, generally correlate directly with related project work volumes and revenue. Comparative increases and/or decreases in cost of revenue were generally consistent with corresponding changes in reporting operating revenue.

 

   For the years ended March 31, 
   2019   2018   Change   % of change 
                 
Salary, employee benefit and other professional service fee  $2,728,277   $1,152,736   $1,575,541    136.7%
Subcontract costs   31,204,379    14,528,878    16,675,501    114.8%
Research and development costs   199,067    79,057    120,010    151.8%
Business taxes   191,207    116,585    74,622    64.0%
Total cost of revenue  $34,322,930   $15,877,256   $18,445,674    116.2%

 

Our overall cost of revenue increased by $18,445,674 or 116.2% from $15,877,256 in fiscal year ended March 31, 2018 to $34,322,930 in fiscal year ended March 31, 2019. This included (i) an increase in salary, employee benefit and other professional service fee by $1,575,541, (ii) an increase in research and development costs of $120,010 because for post-bidding period projects we increased the research activities associated with analysis of market dynamics and trends in government-sponsored urban-rural design and development as well as improving urban-rural design methods in order to provide customized design and construction project management services to customers, (iii) an increase in subcontract costs by $16,675,501 which was largely affected by the increase of subcontract costs from our project materials management and on-site construction process management services, especially from project materials management services, which is discussed in greater detail below, and (iv) an increase in business taxes by $74,622, primarily due to increased project work volumes and revenue. The total number of design projects increased from 15 projects to 23 projects, the total number of projects in which we provided project materials management increased from four projects to seven projects, and the number of projects for which we provided construction process management consulting services increased from four to five, when comparing fiscal year ended March 31, 2019 to fiscal year ended March 31, 2018. Our cost of revenue accounted for 72.8% and 57.0% of our total revenue for the years ended March 31, 2019 and 2018, respectively.

 

The increase in cost of revenue was largely affected by the increase in subcontract costs. Because we are conducting our business under an asset-light business model, pursuant to which we have relatively few capital assets compared to our operations, and we have kept a lean corporate structure to remain flexible and efficient in our operation, we have adopted a strategy to outsource non-essential tasks that do not require our core-competence to external parties to supplement and enhance our ability to efficiently work on government projects. As a result, for the years ended March 31, 2019 and 2018, more tasks, which we do not deem as “essential” that require our core-competence, were outsourced to third party services providers, including: (1) design companies that serve as our subcontractors providing non-essential design services; and (2) project consulting companies and construction material suppliers that serve as our sub-contractors providing comprehensive construction project management related services.

 

Cost of Revenue Associated with Urban-Rural Design Services

 

   For the years ended March 31, 
Cost of revenue associated with design services  2019   2018   Change   % of change 
Salary, employee benefit and other professional service fee  $2,437,964   $1,038,505   $1,399,459    134.8%
Subcontract costs   3,102,817    5,483,509    (2,380,692)   (43.4)%
Business taxes   30,871    55,778    (24,907)   (44.7)%
Total cost of revenue associated with design services  $5,571,652   $6,577,792   $(1,006,140)   (15.3)%

 

The cost of revenues associated with urban-rural design services decreased by $1,006,140 or 15.3% from $6,577,792 in fiscal year ended March 31, 2018 to $5,571,652 in fiscal year ended March 31, 2019, which was consistent with a corresponding decrease in design project work volumes and revenues by 12.1%. As discussed above, the number of design projects increased from 15 projects in fiscal year ended March 31, 2018 to 23 design projects in fiscal year ended March 31, 2019, as a result, we assigned an increased number of designers and professional employees to work on design services, which led to an increase in salary and employee benefit costs of $1,399,459 or 134.8%. On the other hand, subcontract costs decreased by $2,380,692 or 43.4% due to the fact that we used more internal designers and employees to work on design service contracts in fiscal year ended March 31, 2019. In contrast, in fiscal year ended March 31, 2018, we undertook and completed larger project designs with higher design services fee and we outsourced some of construction drawings services to third-party design firms, which led to a higher amount of subcontract costs in fiscal year ended March 31, 2018. The overall decrease in our costs of revenue associated with our design services reflected these combined factors.

 

55

 

Cost of Revenue Associated with comprehensive construction project management consulting services

 

Under our comprehensive construction project management consulting services, we provide two types of consulting services to our customers: (1) management of project materials, and (2) management of on-site construction process. Our cost of revenue associated with comprehensive construction project management consulting services consists of the following:

 

(1)Cost of Revenue Associated with management of project materials

 

   For the years ended March 31, 
Cost of revenue associated with project materials management  2019   2018   Change   % of change 
Material costs  $22,969,512   $6,802,693   $16,166,819    237.7%
Business taxes   132,739    35,970    96,769    269.0%
Total cost of revenue associated with project materials management  $23,102,251   $6,838,663   $16,263,588    237.8%

 

The cost of revenues associated with project materials management services increased by $16,263,588 or 237.8%, from $6,838,663 in fiscal year ended March 31, 2018 to $23,102,251 in fiscal year ended March 31, 2019, which was consistent with a corresponding increase in project materials management work volumes and revenues by 223.0%. As discussed above, for the years ended March 31, 2019 and 2018, seven and four customers engaged us to perform project materials management services, respectively. In addition, our project materials management services included larger and more comprehensive urban ecological town renovation and upgrade projects. Material purchase costs increased by $16,166,819 or 237.7%, and business taxes increased by $96,769.

 

(2)Cost of Revenue Associated with management of on-site construction process

 

   For the years ended March 31, 
Cost of revenue associated with on-site construction process management  2019   2018   Change   % of change 
Salary, employee benefit and other professional service fee  $489,380   $193,287   $296,093    153.2%
Subcontract costs   5,132,050    2,242,675    2,889,375    128.8%
Business taxes   27,597    24,839    2,758    11.1%
Total cost of revenue associated with on-site construction process management  $5,649,027   $2,460,801   $3,188,226    129.6%

 

The cost of revenues associated with management of on-site construction process increased by $3,188,226 or 129.6%, from $2,460,801 in fiscal year ended March 31, 2018 to $5,649,027 in fiscal year ended March 31, 2019, which was consistent with a corresponding increase in comprehensive construction project management consulting service work volumes and revenues by 50.0%. As discussed above, in fiscal year ended March 31, 2018, two projects were completed in a shorter timeframe and accordingly we charged a lower amount of project management consulting service fees. In contrast, five projects in fiscal year ended March 31, 2019 were associated with larger scale and longer duration, in which we put more efforts on project management and monitoring. This led to an increase in salary and employee benefit costs of $296,093. In addition, we outsourced some of the project monitoring and management services to third-party consulting firms, which led to increased subcontract costs by $2,889,375.

 

56

Gross profit

 

Our overall gross profit increased by $870,806 or 7.3% from $11,982,111 in fiscal year ended March 31, 2018 to $12,852,917 in fiscal year ended March 31, 2019, while gross profit margin decreased by 15.8% from 43.0% in fiscal year ended March 31, 2018 to 27.2% in fiscal year ended March 31, 2019.

 

The following provide further breakdown of our gross profit by service types:

 

   For the years ended March 31, 
   2019   2018   Change 
   Amount   GP%   Amount   GP%   Amount   GP% 
Gross profit associated with design services  $5,702,783    50.6%  $6,251,572    48.7%  $(548,789)   1.9%
Gross profit associated with comprehensive construction project management consulting services:                              
Management of project materials   1,840,018    7.4%   883,747    11.4%   956,271    (4.0)%
Management of on-site construction process   5,310,116    48.5%   4,846,792    66.3%   463,324    (17.8)%
Total gross profit  $12,852,917    27.2%  $11,982,111    43.0%  $870,806    (15.8)%

 

Our gross profit associated with urban-rural design services decreased by $548,789, from $6,251,572 in fiscal year ended March 31, 2018 to $5,702,783 in fiscal year ended March 31, 2019, primarily due to decreased revenue and work volume by $1,554,929 or 12.1%. Gross profit margin increased from 48.7% in fiscal year ended March 31, 2018 to 50.6% in fiscal year ended March 31, 2019 primarily due to decreased subcontract costs by 43.4% as discussed above. In general, services outsourced or subcontracted to third parties have higher costs and lower profit margin than services performed in-house or by internal employees. In fiscal year ended March 31, 2019, we hired more qualified employees to perform the design services and reduced our outsourcing or subcontracting, this led to an increase in gross margin associated with our design services.

 

Our gross profit associated with project materials management services increased by $956,271, from $883,747 in fiscal year ended March 31, 2018 to $1,840,018 in fiscal year ended March 31, 2019, primarily due to increased work volume and revenue associated with fulfillment of the project materials management services. However, due to increased material purchases to meet the desired design concept and requirements, gross profit margin associated with project materials management services decreased from 11.4% in fiscal year ended March 31, 2018 to 7.4% in fiscal year ended March 31, 2019, affected by increased construction material market selling price due to inflation to certain extent.

 

Our gross profit associated with management of on-site construction process increased by $463,324, from $4,846,792 in fiscal year ended March 31, 2018 to $5,310,116 in fiscal year ended March 31, 2019, which was consistent with corresponding increase in project management consulting service work volumes and revenues. Gross profit margin decreased from 66.3% in fiscal year ended March 31, 2018 to 48.5% in fiscal year ended March 31, 2019 due to increased subcontract costs by 128.8% as discussed above. In general, services outsourced or subcontracted to third parties have higher costs and lower profit margin than services performed in-house or by internal employees. In fiscal year ended March 31, 2019, we increased outsourcing or subcontracting of some of the project management consulting services to third parties, this led to our gross margin associated with on-site construction process management consulting services to decrease.

 

57

 

 

Operating expenses

 

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

 

   For the years ended March 31, 
   2019   2018   Change 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
Total revenue  $47,175,847    100.0%  $27,859,367    100.0%  $19,316,480    69.3%
Operating expenses:                              
Selling expenses   413,636    0.9%   398,533    1.4%   15,103    3.8%
General and administrative expenses   3,616,696    7.6%   3,272,092    11.7%   344,604    10.5%
Total operating expenses  $4,030,332    8.5%  $3,670,625    13.1%  $359,707    9.8%

 

Selling expenses

 

Our selling expenses primarily include expenses incurred for our brand promotion and advertisings, payroll expense paid to our sales and marketing personnel as well as business travel, meals and other expenses related to our sales and marketing activities.

 

   For the years ended March 31, 
   2019   2018   Change 
   Amount   %   Amount   %   Amount   % 
Salary expenses to sales and marketing personnel  $343,018    82.9%  $267,632    67.2%  $75,386    28.2%
Advertising expenses   54,155    13.1%   120,793    30.3%   (66,638)   (55.2)%
Travel, meals and other sales and marketing related expenses   16,463    4.0%   10,108    2.5%   6,355    62.9%
Total selling expenses  $413,636    100.0%  $398,533    100.0%  $15,103    3.8%

 

Total selling expenses increased by $15,103 or 3.8% from $398,533 for the year ended March 31, 2018 to $413,636 for the year ended March 31, 2019. This increase in selling expenses can be attributed primarily to an increase in salary and employee welfare benefit expenses of $75,386 resulting from our hiring of additional sales and marketing personnel to promote our business, an increase in business travel, meals and entertainment expenses for marketing and promotion activities by $6,355, and offset by a decrease in advertising expense of $66,638 resulting from decreased advertising campaigns during the year ended March 31, 2019. As a percentage of revenues, our selling expenses accounted for 0.9% and 1.4% of our total revenue for the years ended March 31, 2019 and 2018, respectively.

 

General and Administrative Expenses

 

Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, research and development expenses incurred on design and construction projects during the pre-bidding periods, business consulting expense, travel and transportation expense for our management team, meals and entertainment expenses, office rental and decoration expense, bad debt reserve on our accounts receivable when the collection becomes remote, depreciation expenses and other office expenses.

 

   For the years ended March 31, 
   2019   2018   Change 
   Amount   %   Amount   %   Amount   % 
Payroll and employee welfare and insurance expenses  $1,955,584    54.1%  $2,060,945    63.0%  $(105,361)   (5.1)%
Consulting fees   140,935    3.9%   122,043    3.7%   18,892    15.5%
Research and development expense   

97,746

    

2.7

%   

221,479

    

6.8

%   

(123,733

)   

(55.9

)%
Travel and transportation related expenses   143,159    3.9%   114,764    3.5%   28,395    24.7%
Meals and entertainment expenses   97,966    2.7%   48,081    1.5%   49,885    103.8%
Rental expense   169,415    4.7%   308,873    9.4%   (139,458)   (45.2)%
Office decoration expenses   543,498    15.0%   370,394    11.3%   173,104    46.7%
Depreciation and amortization   172,232    4.8%   64,486    2.0%   107,746    167.1%
Bad debt reserve (recovery)   136,654    3.8%   (228,494)   (7.0)%   365,148    (159.8)%
Utility, employee training, conference and other office expenses   159,507    4.4%   189,521    5.8%   (30,014)   (15.8)%
Total general and administrative expenses  $3,616,696    100.0%  $3,272,092    100.0%  $344,604    10.5%

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Our general and administrative expenses increased by $344,604 or 10.5% from $3,272,092 for the year ended March 31, 2018 to $3,616,696 for the year ended March 31, 2019, primarily due to (1) an increase in office decoration expense by $173,104 and an increase in depreciation expense of $107,746, because we purchased an office building of 2,355.26 square meters at a purchase price of $5,926,183 (RMB 43.75 million including tax) on August 29, 2018 as our headquarter office in Beijing. As a result, we incurred office decoration expense and increased the depreciation on the purchased building accordingly. In connection with the purchase of our office building, we terminated most of our office lease agreements, which led to a decrease in our rental expense by $139,458 compared to fiscal year ended March 31, 2018; (2) an increase in our bad debt reserve by $365,148, resulted from a bad debt reserve recovery of $228,494 for the year ended March 31, 2018 to a bad debt reserve expense of $136,654 for the year ended March 31, 2019. Our bad debt reserve related to our estimate and judgement on the collectability of our accounts receivable after our performance obligations under the design and comprehensive construction project management consulting services have been satisfied. For the year ended March 31, 2017, we estimated the collection of approximately RMB 1.5 million (or $228,494) accounts receivable became remote and we accrued a bad debt reserve for the year ended March 31, 2017. After our continuous collection effort and follow up with the customers, such amount was collected during the year ended March 31, 2018 and accordingly prior year bad debt reserve was reversed in the same amount in 2018. For the year ended March 31, 2019, based on our management’s assessment of the collectability of our outstanding accounts receivable, we accrued $136,654 bad debt reserve. This led to the fluctuation and change in our bad debt reserve expense when comparing fiscal year ended March 31, 2019 to fiscal year ended March 31, 2018; (3) our travel and transportation expense increased by $28,395 and our meals and entertainment expense increased by $49,885 when comparing fiscal year ended March 31, 2019 to fiscal year ended March 31, 2018 due to our expanded business operation; and (4) on the other hand, our salaries, welfare expenses and insurance expenses decreased by $229,094 or 10.0%. Prior to the office building purchase, we had entered into multiple office lease agreements and each individual office was equipped with employees to perform the same administrative roles and function. After the office building purchase, we consolidated and centralized our offices to cut down the number of administrative employees to improve our work efficiency. This led to decrease in total number of administrative employees and accordingly our salary and employee benefit expenses also decreased for fiscal year ended March 31, 2019. The centralization of our office also helped us to reduce utility and other office expense by $30,014; (5) our research and development expense also decreased by $123,733. In order to provide customized design and construction project management services to customers, we incurred certain costs associated with research and development activities such as feasibility study and economic planning during the project pre-bidding period. Given the contingency and uncertainty of the pre-bidding process, we do not capitalize such contract acquisition costs but record such research and development costs as general and administrative expenses. The overall change in our general and administrative expense comparing fiscal year ended March 31, 2019 to fiscal year ended March 31, 2018 were due to the above factors. General and administrative expenses were 7.6% and 11.7% of our revenue in fiscal year ended March 31, 2019 and 2018, respectively.

 

Interest Expense

 

   For the years ended March 31, 
   2019   2018   Change   % 
Daily weighted average loan balance  $2,571,917   $1,104,235   $1,467,682    132.9%
Interest expense for the year  $237,680   $79,182   $158,498    200.2%

 

Our interest expense increased by $158,498 or 200.2%, from $79,182 in fiscal year ended March 31, 2018 to $237,680 in fiscal year ended March 31, 2019. The increase in interest expense was primarily because we carried higher average loan balances during fiscal year 2019 compared to fiscal year 2018. From March 31, 2017 to March 20, 2018, we borrowed an aggregate of RMB 17.2 million loans from the banks, net of repayments. We increased bank borrowing of RMB 1 million in April 2017, RMB 1.5 million in June 2017 and an additional RMB 15 million from the bank in March 2018. Although as of March 31, 2018, we carried a total of RMB 17.2 million outstanding bank loans (including short-term bank loans, current portion of long-term bank loan and long-term bank loan of $2,549,699, $73,947 and $122,991, respectively), the weighted average loan balance we carried for the year ended March 31, 2018 was only $1,104,235 (RMB 7,319,056) per day. For the year ended March 31, 2019, we repaid a RMB 1 million bank loan upon maturity on April 26, 2018, and then we borrowed an additional RMB 15 million bank loan in February and March 2019 and repaid RMB 15 million loans upon maturity in February and March 2019 as well. As a result, the weighted average loan balance we carried during fiscal year ended March 31, 2019 amounted to $2,571,917 (RMB 17,260,907) per day. As of March 31, 2019, we carried a total of RMB 15.8 million outstanding bank loans (including short-term bank loans, current portion of long-term bank loan and long-term bank loan of $2,235,017, $83,485 and $31,514, respectively). Based on the above, our higher interest expense for the year ended March 31, 2019 was derived from higher weighted average loan balance we carried during the year which led us to pay higher amount of interest expenses to the banks.

  

Interest Income

 

Our interest income increased by $13,604 or 151.0%, from $9,008 in fiscal year ended March 31, 2018 to $22,612 in fiscal year ended March 31, 2019. The increase interest income was because we have maintained higher average daily bank deposit balance with the PRC banks to generate interest income.

 

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Subsidy Income

 

Our other income primarily includes government subsidies as an incentive to encourage urban-rural development service providers like us to expand their businesses. Total government subsidy amounted to $88,388 and $357,794 for the years ended March 31, 2019 and 2018, respectively.

 

Provision for Income Taxes

 

Our provision for income taxes was $1,645,681 in fiscal year ended March 31, 2019, an increase of $141,658 or 9.4% from $1,504,023 in fiscal year ended March 31, 2018 due to our increased taxable income. Our principal business is performed through our VIE, Goxus BJ and its subsidiary Goxus Suqian, in the PRC, and is therefore subject to PRC income tax, which is computed according to the relevant laws and regulations in the PRC. Goxus BJ, the Company’s main operating subsidiary and VIE in PRC, was approved as a HNTE and is entitled to a reduced income tax rate of 15% beginning December 2016, which is valid for three years. EIT is typically governed by the local tax authority in PRC. Each local tax authority at times may grant tax holidays to local enterprises as a way to encourage entrepreneurship and stimulate local economy. The corporate income taxes for the years ended March 31, 2019 and 2018 were reported at a blended reduced rate as a result of Goxus BJ being approved as a HNTE and enjoying a 15% reduced income tax rate, but Goxus Suqian is subject to a 25% income tax rate. The impact of the tax holiday noted above decreased foreign taxes by $522,707 and $654,408 for the years ended March 31, 2019 and 2018, respectively. The benefit of the tax holidays on net income per share (basic and diluted) $0.03 and $0.04 for the years ended March 31, 2019 and 2018, respectively.

 

Net Income

 

As a result of the foregoing, we reported a net income of $7,050,224 for the fiscal year ended March 31, 2019, representing a $44,859 decrease from a net income of $7,095,083 for the fiscal year ended March 31, 2018.

 

B. Liquidity and Capital Resources

 

Liquidity and Cash Flows for the Six Months Ended September 30, 2019 Compared to the Six Months Ended September 30, 2018

 

As of September 30, 2019, we had $8,777,536 in cash on hand as compared to $3,796,748 as of March 31, 2019. We also had $9,730,429 in third-party accounts receivable and $1,256,203 in related-party accounts receivable. Our accounts receivable includes balances due from customers when our services have been rendered, our performance obligations have been satisfied, and our fees have been billed but not been collected as of the balance sheet dates.   

 

As of September 30, 2019, most of our accounts receivable were aged less than 3 months. As of December 31, 2019, 88% or $8.5 million of the March 31, 2019 accounts receivable from third parties and 100% of the March 31, 2019 accounts receivable from related parties have been collected, the remaining March 31, 2019 accounts receivable are expected to be collected before the end of 2020. For accounts receivable balance as of September 30, 2019, approximately 65%, or $6.5 million of accounts receivable were from third party customers and 61% or $0.77 million of the accounts receivable were from related party customers have been subsequently collected as of December 31, 2019. The remaining balance of approximately $3.4 million accounts receivable from third party customers and approximately $0.49 million accounts receivable from related party customers is expected to be collected by the end of 2020. The collection of our accounts receivable will make cash available for use in our operation as working capital, if necessary.

 

Allowance for doubtful accounts movement is as follows:

 

   September 30,
2019
   March 31,
2019
 
Beginning balance  $214,312   $83,055 
Additions   -    136,653 
Reductions   -    - 
Foreign currency translation adjustments   (12,818)   (5,396)
Ending balance  $201,494   $214,312 

 

As of September 30, 2019, we also had contract assets of $2,018,015 representing revenue recognized in excess of amounts billed and unbilled receivables. We have an unconditional right to payment subject to the passage of time. Such contract assets will be reclassified to accounts receivable when they are billed under the terms of the contract. In addition, we also had contract liabilities of $732,833 as of September 30, 2019, which represent amounts billed to customers in excess of revenue recognized to date. We anticipate that substantially all incurred costs associated with contract assets as of September 30, 2019 will be billed and collected within one year.

 

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As of September 30, 2019, we had outstanding short-term bank loans of $2,101,341, current portion of long-term loan of $70,723. These bank loans will mature between January to June 2020. 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. We believe that we can use our bank borrowings to support our working capital needs whenever necessary.

 

As of September 30, 2019, we had working capital of $12,037,729. Our working capital requirements are influenced by the level of our operations, the numerical volume and dollar value of our sales contracts, the progress of execution on our customer contracts, and the timing of accounts receivable collections.

 

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

 

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

 

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

 

   For the six months ended
September 30,
 
   2019   2018 
Net cash provided by operating activities  $5,709,532   $1,677,408 
Net cash used in investing activities   (175,087)   (4,186,799)
Net cash used in financing activities   (117,980)   (185,005)
Effect of exchange rate change on cash   (435,677)   (678,745)
Net increase (decrease) in cash   4,980,788    (3,373,141)
Cash, beginning of period   3,796,748    9,464,531 
Cash, end of period  $8,777,536   $6,091,390 

   

Operating Activities

 

Net cash provided by operating activities was $5,709,532 for the six months ended September 30, 2019, primarily consisted of the following:

 

  Net income of $4,057,495 for the period;

 

  An increase in accounts receivable of $1,291,445 (including accounts receivable of $889,340 from third-party customers and $402,105 accounts receivable from a related-party customer) because we provided increased design services and comprehensive construction project management consulting services to customers. Approximately 65%, or $6.5 million of the September 30, 2019 balance for accounts receivable from third party customers and approximately $0.77 million or 61% of the September 30, 2019 balance for accounts receivable from related party customers have been subsequently collected as of December 31, 2019. The remaining balance is expected to be collected by the end of 2020. The collection of our accounts receivable will make cash available use in our operation as working capital, if necessary.
     
  An increase in contract assets of $910,945 which represents revenue recognized in excess of amounts billed. We have an unconditional right to payment subject only to the passage of time. Such contract assets will be reclassified to accounts receivable when they are billed under the terms of the contract. We anticipate that substantially all incurred cost associated with contract assets as of September 30, 2019 will be billed and collected within one year.

 

  A decrease in due from related parties by $203,420. Due from related parties were comprised of cash advances to our principal shareholders and entities controlled by our CEO and controlling shareholder, Mr. Xingpeng Zhao, during our normal course of business. These advances are non-interest bearing and due on demand.

 

  An increase of accounts payable by $2,806,994 because we undertook an increased number of project materials management services for customers, we purchased the construction and decoration materials from various suppliers and we have not received the supplier invoices as of the balance sheet date which led to our unsettled outstanding accounts payable increase; and

 

  An increase in taxes payable by $374,298 due to increased taxable income for the six months ended September 30, 2019.

 

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Net cash provided by operating activities was $1,677,408 in the six months ended September 30, 2018, primarily consisted of:

 

  Net income of $2,607,231 for the period;

 

  An increase in accounts receivable of $1,292,668 (including accounts receivable of $1,092,133 from third-party customers and $200,535 accounts receivable from a related-party customer) because we provided increased design services and comprehensive construction project management consulting services to customers. We have substantially collected the September 30, 2018 accounts receivable during subsequent period;
     
  An increase in contract assets of $1,847,546 which represents revenue recognized in excess of amounts billed. We have an unconditional right to payment subject only to the passage of time. Such contract assets will be reclassified to accounts receivable when they are billed under the terms of the contract.

 

  A decrease in due from related parties by $527,299 because we have collected back such receivables from related parties. Due from related parties comprised of cash advances to our principal shareholders and entities controlled by our CEO and controlling shareholder, Mr. Xingpeng Zhao, during our normal course of business. These advances are non-interest bearing and due on demand.  

 

  An increase of accounts payable by $1,393,735 because we undertook an increased number of project materials management services for customers, we purchased the construction and decoration materials from various suppliers and we have not received the supplier invoices as of the balance sheet date which led to our unsettled outstanding accounts payable to increase.

 

  An increase of advance from related party customer by $822,679. During the six months ended September 30, 2018, we provided project management consulting services to a related-party, Guanghe Jiye Cultural Development Group Co., Ltd, controlled by a relative of our Company’s CEO, and we received advance payment of approximately $0.8 million (RMB 5.36 million) from this related party during the six months ended September 30, 2018, which represents our unfulfilled performance obligation as of September 30, 2018.

  

Investing Activities