DRS/A 1 filename1.htm DRS/A
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This is a confidential draft No. 3 submission to the U.S. Securities and Exchange Commission on July 8, 2021 and is not being filed under the Securities Act of 1933, as amended.

Registration No. 333-[]

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ICZOOM GROUP INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Cayman Islands   5065   Not applicable

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Room 102, Technology Bldg., International e-Commerce Industrial Park

105 Meihua Road

Futian, Shenzhen China, 518000

Tel: 86 755 86036281

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

 

 

[●]

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

 

 

Copies to:

 

Arila Zhou, Esq.

Hunter Taubman Fischer & Li LLC

1450 Broadway, 26th Floor

New York, NY 10018

Tel: 212-530-2232

 

Anthony W. Basch, Esq.

Kaufman & Canoles, P.C.

Two James Center, 14th Floor

1021 East Cary Street

Richmond, Virginia 23219

Tel: 804-771-5700

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

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  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Class of
Securities to be Registered
  Amount to Be
Registered(1)
  Proposed
Maximum
Offering Price
per Share(2)
  Proposed
Maximum
Aggregate
Offering Price(2)(3)
  Amount of
Registration Fee

Class A Ordinary Shares, par value $0.08 per share sold by the Registrant

  [●]   [●]   [●]   [●]

Underwriters’ compensation warrants(4)

  [●]   [●]   [●]   [●]

Class A Ordinary Shares underlying underwriter’s warrants

  [●]   [●]   [●]   [●]

Total

  [●]   [●]   [●]   [●]

 

 

(1)

Includes [●] Class A Ordinary Shares, par value $0.08 per share (each, a “Class A Ordinary Share”, collectively, “Class A Ordinary Shares”) subject to the underwriter’s option to purchase additional shares.

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(3)

Includes the offering price of any additional Shares that the underwriter has the option to purchase.

(4)

We have agreed to issue upon the closing of this Offering, compensation warrants to Prime Number Capital, LLC (“PNCPS”), as representatives of the underwriters, entitling them to purchase up to 6% of the aggregate Shares being sold in this Offering. The exercise price of the compensation warrants is equal to 125% of the offering price of the Class A Ordinary Shares offered hereby. Assuming a maximum placement and an exercise price of $[●] per Share, we would receive, in the aggregate, $[●] upon exercise of the compensation warrants, of which there can be no guarantee. The compensation warrants are exercisable commencing six (6) months after the date of effectiveness of the Registration Statement of which this prospectus forms a part and will terminate five years after the date of effectiveness. An underwriting discount or spread equal to 7.5% of the aggregate offering price will also be provided to underwriters. The Registration Statement of which this prospectus is a part also covers the Class A Ordinary Shares issuable upon the exercise thereof. For additional information regarding our arrangement with the underwriters, please see “Underwriting” beginning on page 189.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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EXPLANATORY NOTE

On [●], we will effectuate a share [subdivision/consolidation] at a ratio of [●] share[s] into [●] share[s] and [increase/decrease our authorised share capital by [●]] such that our authorised share capital will change from $2,000,000 divided into 15,000,000 Class A Ordinary Shares with a nominal or par value of $0.08 each and 10,000,000 Class B Ordinary Shares with a nominal or par value of $0.08 each, into $[●] divided into [●] Class A Ordinary Shares with a par value of $[●] each and [●] Class B Ordinary Shares with a par value of $[●] (the “2021 Split”). As a result of the 2021 Split, we will have [●] Class A Ordinary Shares and [●] Class B Ordinary Shares issued and outstanding as of [●].

All share numbers, option numbers, warrant numbers, other derivative security numbers and exercise prices appearing in this registration statement will be adjusted to give effect to the 2021 Split, unless otherwise indicated or unless the context suggests otherwise.


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

 

SUBJECT TO COMPLETION, DATED []

 

LOGO

ICZOOM GROUP INC.

$[] Class A Ordinary Shares

[] Class A Ordinary Shares

 

 

This is the initial public offering (the “Offering”) of our Class A ordinary shares, par value $0.08 per share (each, a “Class A Ordinary Share”, collectively, “Class A Ordinary Shares”). We expect that the initial public offering price will be between $[●] and $[●] per share. Prior to this offering, there has been no public market for our Class A Ordinary Shares. We will apply for approval for quotation on the NASDAQ Capital Market under the symbol “IZM” for the Class A Ordinary Shares we are offering. However, there is no assurance that the offering will be closed and our Class A Ordinary Shares will be trading on NASDAQ Capital Market.

As the date hereof, our authorized share capital is $25,000,000 divided into 15,000,000 Class A Ordinary Shares and 10,000,000 Class B ordinary shares, par value $0.08 per share (each, a “Class B Ordinary Share”; collectively, “Class B Ordinary Shares”). As of the date hereof, we have 9,993,743 Class A Ordinary Shares and 7,659,000 Class B Ordinary Shares, issued and outstanding, respectively. Holders of Class A Ordinary Shares and Class B Class A Ordinary Shares have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each Class A Ordinary Share will be entitled to one vote and each Class B Ordinary Share will be entitled to ten votes. The Class A Ordinary Shares are not convertible into shares of any other class. The Class B Ordinary Shares are convertible into Class A Ordinary Shares at any time after issuance at the option of the holder on a one to one basis. The Class B ordinary shares shall automatically convert into fully paid and nonassessable Class A ordinary shares upon the occurrence of certain events as described herein. See “Description of Share Capital—Class B Ordinary Shares”

We are an “emerging growth company” as defined in the Jumpstart Our Business Act of 2012, as amended, and, as such, will be subject to reduced public company reporting requirements.

We anticipate that following the completion of this Offering, our Chief Executive Officer, Lei Xia and our Chief Operating Officer, Duanrong Liu, will beneficially own an aggregate [●]% voting power of the Company given the effect of 1 vote power of each Class A Ordinary Shares and 10 votes of each Class B Ordinary Share. We may be deemed to be a “controlled company” under NASDAQ Marketplace Rules 5615(c); however, we do not intend to avail ourselves of the corporate governance exemptions afforded to a “controlled company” under the NASDAQ Marketplace Rules.

 

 

An investment in our securities is highly speculative, involves a high degree of risk and should be considered only by persons who can afford the loss of their entire investment. See “Risk Factors” beginning on page 20 of this prospectus.

This prospectus does not constitute, and there will not be, an offering of securities to the public in the Cayman Islands.

 

     Per Class A
Ordinary
Share
     Total  

Initial public offering price

   $ [●]      $ [●]  

Underwriting discount and commissions (7.5%) for sales to investors introduced by the underwriter(1)

   $ [●]      $ [●]  

Underwriting discount and commissions (4.0%) for sales to investors introduced by us(1)

   $ [●]      $ [●]  

Assumed proceeds to us, before expenses

   $ [●]      $ [●]  

 

(1)

Offering amounts for underwriter- and company-introduced investors assume sale of 100% of shares at each respective commission rate. Assumed proceeds presumes the sale of half of offered shares at 7.5% commission and half at 4.0% commission rates. See “Underwriting” for a description of compensation payable to the underwriter.

The underwriters are selling our Class A Ordinary Shares in this Offering on a firm commitment basis.

In addition to the underwriting discounts listed above and the expense allowance described in the footnote, we have agreed to issue upon the closing of this Offering, compensation warrants to Prime Number Capital, LLC, as representatives of the underwriters, entitling them to purchase up to 6% of the total number of Class A Ordinary Shares being sold in this Offering. The compensation warrants and underlying Class A Ordinary Shares are registered hereby. The exercise price of the compensation warrants is equal to 125% of the Offering Price of the Class A Ordinary Shares offered hereby. Assuming the exercise of the over-allotment option in full and an exercise price of $[●] per share, we would receive, in the aggregate, $[●] upon exercise of the compensation warrants, of which there can be no guarantee. The compensation warrants are exercisable commencing six months after the date of effectiveness of the Registration Statement of which this prospectus forms a part and will terminate five years after the date of effectiveness. An underwriting discount or spread equal to 7.5% of the Offering Price will also be provided to underwriters. The Registration Statement of which this prospectus is a part also covers the Class A Ordinary Shares issuable upon the exercise thereof. For additional information regarding our arrangement with the underwriters, please see “Underwriting” beginning on page 189.

We have granted the representatives an option, exercisable for forty-five (45) days from the date of this prospectus, to purchase up to an additional 15% of the Class A Ordinary Shares on the same terms as the other shares being purchased by the underwriters from us.

The underwriter expects to deliver the Class A Ordinary Shares to purchasers in the Offering on or about [●].

Neither the SEC nor any state securities commission 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.

Prime Number Capital, LLC

The date of this prospectus is [●]


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TABLE OF CONTENTS

 

Commonly Used Defined Terms

     1  

Forward-Looking Statements

     4  

Prospectus Summary

     5  

Risk Factors

     20  

Use of Proceeds

     58  

Dividend Policy

     60  

Capitalization

     61  

Dilution

     63  

Post-Offering Ownership

     64  

Corporate History and Structure

     65  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     70  

Our Business

     111  

Regulation

     133  

Management

     153  

Executive Compensation

     157  

Related Party Transactions

     160  

Principal Shareholders

     162  

Description of Share Capital

     164  

Shares Eligible for Future Sale

     176  

Taxation

     179  

Enforceability of Civil Liabilities

     187  

Underwriting

     189  

Expenses of the Offering

     195  

Legal Matters

     196  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     197  

Experts

     198  

Interests of Named Experts and Counsel

     199  

Disclosure of Commission Position on Indemnification

     200  

Where You Can Find More Information

     201  

Index to Consolidated Financial Statements

     F-1  

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. Neither we, nor the underwriters have authorized anyone to provide you with different information. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus, or any free writing prospectus, as the case may be, or any sale of shares in the Company.

For investors outside the United States: Neither we, nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in 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 Class A Ordinary Shares and the distribution of this prospectus outside the United States.

This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We did not commission any of such reports. While we believe these industry publications and third-party research, surveys and studies are reliable, you are cautioned not to give undue weight to this information.

All references in this prospectus to “$,” “U.S.$,” “U.S. dollars,” “dollars” and “USD” mean U.S. dollars and all references to “RMB” mean Renminbi, unless otherwise noted. All references to “PRC” or “China” in this prospectus refer to the People’s Republic of China, excluding for the sake of this prospectus only, Hong Kong, Macau and Taiwan.

 

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COMMONLY USED DEFINED TERMS

 

   

“AP” refers to accounts payable.

 

   

“AR” refers to accounts receivable.

 

   

“ASC” refers to Accounting Standards Codification.

 

   

“ASU” refers to Accounting Standards Update.

 

   

“AEO” refers to Authorized Economic Operator.

 

   

“BOM” refers to Bill of Material.

 

   

“Class A Ordinary Shares” refer to our Class A ordinary shares, $0.08 par value per share;

 

   

“Class B Ordinary Shares” refer to our Class B ordinary shares, $0.08 par value per share;

 

   

“Components Zone HK” refers to Components Zone International Limited, a Hong Kong company.

 

   

“CECO” refers to Control of Exemption Clauses Ordinance (Cap. 71, Laws of Hong Kong).

 

   

“CRM” refers to customer relationship management.

 

   

“CSRC” refers to China Securities Regulatory Commission.

 

   

“Competition Ordinance” refers to Competition Ordinance (Cap. 619, Laws of Hong Kong).

 

   

Depending on the context, the terms “we,” “us,” “our company,” “our”, “ICZOOM” and “ICZOOM Cayman” refer to ICZOOM Group Inc., an exempted company with limited liability incorporated under the laws of the Cayman Islands, and its subsidiaries and affiliated companies.

 

   

“DTA” refers to the comprehensive double taxation agreements between Hong Kong and other countries or territories, including the PRC.

 

   

“EW Bank” refers to East West Bank.

 

   

“Ehub” refers to Ehub Electronics Limited, a Hong Kong company.

 

   

“ECO” refers to the Employees’ Compensation Ordinance (Cap. 282, Laws of Hong Kong).

 

   

“FIE” refers to a foreign-invested enterprise.

 

   

“GACC” refers to General Administration of China Customs.

 

   

“ICZOOM HK” refers to Iczoom Electronics Limited, a Hong Kong company.

 

   

“ICZOOM Shenzhen” refers to Shenzhen Iczoom Electronics Co., Ltd., a PRC company.

 

   

“ICZOOM WFOE” refers to Components Zone (Shenzhen) Development Limited, a PRC company.

 

   

“HBI” refers to Horizon Business Intelligence Co., Limited, the former name of ICZOOM Group Inc.

 

   

“Hjet HK” refers to Hjet Industrial Corporation Limited, a Hong Kong company.

 

   

“Hjet Shuntong” refers to Hjet Shuntong (Shenzhen) Co., Ltd., a PRC company.

 

   

“Hjet Supply Chain” refers to Shenzhen Hjet Supply Chain Co., Ltd., a PRC company.

 

   

“Hjet Logistics” refers to Shenzhen Hjet Yun Tong Logistics Co., Ltd., a PRC company.

 

   

“Heng Nuo Chen” refers to Shanghai Heng Nuo Chen International Freight Forwarding Co., Ltd., a PRC company.

 

   

“IMECM” refers to the Formulated Interim Measures for Enterprise Credit Management (decree No. 225 of GACC).

 

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“IoT” refers to Internet of Things.

 

   

“IRO” refers to the Inland Revenue Ordinance (Cap. 112, Laws of Hong Kong).

 

   

“ICP License” refers to a VATS License with the business scope of Internet information service that commercial Internet information services operators are required to obtain.

 

   

“IRD” refers to the Inland Revenue Department of Hong Kong.

 

   

“MRO” refers to maintenance, repair, and operations.

 

   

“M&A Rule” refers to the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors of China.

 

   

“MOFCOM” refers to the Ministry of Commerce of China.

 

   

“MOHRSS” refers to Human Resources and Social Security of China.

 

   

“MPF Scheme” refers to the Mandatory Provident Fund Scheme, a contribution retirement scheme managed by authorized independent trustees.

 

   

“Negative List” refers the Special Administrative Measures for Foreign Investment Access of China.

 

   

“NDRC” refers the National Development and Reform Commission of China.

 

   

“NPC” refers the National People’s Congress of China.

 

   

“ODM” refers to original design manufactures.

 

   

“OEM” refers to original electronic manufactures.

 

   

“OLO” refers to the Occupiers Liability Ordinance (Cap. 314, Laws of Hong Kong).

 

   

“OSHO” refers to the Occupational Safety and Health Ordinance (Cap. 509, Laws of Hong Kong).

 

   

“PBOC” refers to People’s Bank of China.

 

   

“PBOC Notice No. 9” refers to Full-coverage Macro-prudent Management of Cross-border Financing.

 

   

“Pai Ming Shenzhen” refers to Shenzhen Pai Ming Electronics Co., Ltd., a PRC company.

 

   

“POA” refers to the shareholder of Pai Ming Shenzhen’s power of attorney dated December 14, 2020.

 

   

“QEF” refers to a qualified electing fund.

 

   

“SaaS” refers to software-as-a-service.

 

   

“SAFE” refers to China’s State Administration of Foreign Exchange.

 

   

“SAFE Circular 19” refers to the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises.

 

   

“SAFE Circular 37” refers to the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles.

 

   

“SAFE Circular 82” refers to the Circular of the State Administration of Taxation on Issues Concerning the Identification of Chinese-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance with the Actual Standards of Organizational Management.

 

   

“SAIC” refers to State Administration for Industry and Commerce in China and currently known as State Administration for Market Regulation.

 

   

“SAT” refers to PRC State Administration of Taxation.

 

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“SAMR” refers to the former State of Administration of Industry and Commerce of China, which has been merged into the State Administration for Market Regulation.

 

   

“SKU” refers to stock keeping unit.

 

   

“SCNPC” refers to the Standing Committee of the National People’s Congress of China.

 

   

“SKU” refers to stock keeping unit.

 

   

“SOGO” refers to the Sale of Goods Ordinance (Cap. 26, Laws of Hong Kong).

 

   

“SOSO” refers to the Supply of Services (Implied Terms) Ordinance (Cap. 457, Laws of Hong Kong).

 

   

“SPV” refers to special purpose vehicle.

 

   

“Controlling Shareholders” refers to collectively Lei Xia and Duanrong Liu;

 

   

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

 

   

“UED” refers to user experience design.

 

   

“Urgent Notice” refers to the Urgent Notice of the General Office of MOHRSS on Effectively Implementing the Spirit of the Standing Meeting of the State Council and Effectively Conducting the Collection of Social Insurance Premiums in a Stable Manner.

 

   

“VAT” refers to value added taxes.

 

   

“VATS License” refers to two types of telecom operating licenses for operators in China, namely, licenses for basic telecommunications services and licenses for value-added telecommunications services.

 

   

“WFOE” refers to a wholly foreign-owned enterprise.

 

   

All references to “RMB,” “yuan” and “Renminbi” are to the legal currency of China, all references to “HKD” is to the legal currency of Hong Kong, and all references to “USD,” and “U.S. dollars” are to the legal currency of the United States.

 

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FORWARD-LOOKING STATEMENTS

We have made statements in this prospectus, including under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business” and elsewhere that constitute forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

Examples of forward-looking statements include:

 

   

the timing of the development of future services;

 

   

projections of revenue, earnings, capital structure and other financial items;

 

   

the development of future company-owned branches;

 

   

statements regarding the capabilities of our business operations;

 

   

statements of expected future economic performance;

 

   

statements regarding competition in our market; and

 

   

assumptions underlying statements regarding us or our business.

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under the heading “Risk Factors” above. Many factors could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Consequently, you should not place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

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PROSPECTUS SUMMARY

This summary highlights information that we present more fully in the rest of this prospectus. This summary does not contain all of the information you should consider before buying Class A Ordinary Shares in this offering. This summary contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could,” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements. You should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and the notes to those statements. Unless otherwise stated, all references to “us,” “our,” “ICZOOM,” “we,” the “company” and similar designations refer to ICZOOM Group Inc., an exempted company with limited liability incorporated under the laws of the Cayman Islands, and its consolidated subsidiaries. See Note 1 to our consolidated financial statements as of and for the years ended June 30, 2020 and 2019 included elsewhere in this prospectus

Our Company

We, supported by our e-commerce trading platform, are primarily engaged in sales of electronic component products to customers in the People’s Republic of China (“PRC”). These products are primarily used by China based small and medium-sized enterprises (“SMEs”) in the consumer electronic industry, Internet of Things (“IoT”), automotive electronics and industry control segment. In addition to the sales of electronic component products, we also provide services to customers such as temporary warehousing, logistic and shipping, and customs clearance and charge them additional service commission fees.

We primarily generate revenue from sales of electronic components products to customers. In addition, we have certain amount of revenue from service commission fee for services provided to our customers.

Sales of Electronic Components Products

We sell two categories of electronic component products: (i) semiconductor products and (ii) electronic equipment, tools and other products. Our semiconductor products primarily include various integrated circuit, discretes, passive components, optoelectronics, and our equipment, tools and other electronic component products primarily include various electromechanical, maintenance, repair & operations (“MRO”), and various design tool. The selling prices for our semiconductor products range from $0.003 per unit to approximately $15 per unit, and selling prices for our electronic equipment, tools and other products normally range from $0.15 per unit to $21 per unit, depending on different features of stock keep units (each, the “SKU”, collectively, the “SKUs”). For the six months ended December 31, 2020 and for the fiscal years ended June 30, 2020 and 2019, the average selling prices of semiconductor products were $0.16 per unit, $0.23 per unit and $0.26 per unit, respectively, and the average selling prices of equipment, tools and others were $0.87 per unit, $0.27 per unit and $0.67 per unit, respectively.

Service Commission Fees

Our service commission fees consist of (1) fees charged to customers for assisting them with customs clearance when electronic component products are purchased from overseas suppliers; (2) fees charged to customers for providing temporary warehousing and organizing the shipping and delivery after customs clearance.


 

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For those add-on services, we typically charge non-refundable commission fees ranging from 0.2% to 1% based on the value of products. Such revenue is recognized when our customs clearance, warehousing, logistic and delivery services are performed and the customer receive the products. Revenues are recorded net of sales taxes and value added taxes.

Our Business Model

We operate a B2B online platform www.iczoom.com, where our customers can register as members first, and then use the platform to search for or post quotes for their desired electronic component products. By utilizing latest technologies, our platform collects, optimizes and presents product offering information from suppliers of all sizes, all transparent and available to our SME customers to compare and select. Our suppliers have requirements for minimum purchase amount in order for us to obtain favorable prices. We post such requirements and corresponding prices on our platform. Our customer will place an order meeting minimum purchase amount requirement. Once a customer’s order is placed through our platform, we will acquire selected products from a supplier and sell directly to the customer. In addition, our platform can collect and analyze the order information and re-organize single purchase order from different customers into one combo order based on the component part number provided that those orders are within same or close range of delivery schedules. We often can renegotiate further discount from suppliers for those combo orders.

Our registered users can post enquiries if they cannot find their desired products. Our platform can screen product offering information automatically for them to identify a match. If there is no match, we may reach out to suppliers to locate the desired products and then provide the offering information to them.

We also provide add-on services for our customers with commission fees, such services including, but not limit to, temporary warehousing, logistic and shipping, and customs clearance.

Key Facts of Our Business

 

LOGO

(ICZOOM Business Model)

1. Anonymous Product Offering

We take the responsibilities and risks to verify the suppliers and their products. Our platform collects, optimizes and presents product offering information such as price, volume, and the delivery of components,


 

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without revealing the suppliers’ identity so that the suppliers cannot be reached directly by our registered users or using our platform to post fake and unfair offering information. This arrangement allows customers to screen essential product offering information effectively.

2. Real-Time Transaction Information

Our platform captures changes of product offering prices and updates them in a timely manner. The platform also publishes, among others, the most recent transaction details of component part numbers and product trading volume. The transaction information is published on our platform as references on our platform. We have also developed a comprehensive collection of component specs, design and application information from suppliers. This catalog enables customers to screen, compare and cross-reference components efficiently. Since our inception in 2012, our platform has accumulated more than 25 million SKUs for 3,670 brands in multiple electronic industry subdivisions. Because of the information and data we provide, we have substantial amount of visitors to our platform to review and collect product information and more than 20,000 SMEs registered as users on our platform so that they can post enquiries and/or offering information of their products, among which, some become our customers and some become our suppliers. For year ended June 30, 2020, we generated our revenue from a total of 866 customers and purchased products from 835 suppliers. For the six months ended December 31, 2020 and 2019, we generated our revenue from a total of 702 and 603 customers and purchased products from 595 and 510 suppliers, respectively.

3. SaaS Solutions

Our full-fledged software-as-a-service (“SaaS”) suite enables customers to optimize and digitalize their orders. Our SaaS suite includes inventory management, procurement management, customer relationship management (“CRM”), bill of material (“BOM”) management and logistics management. The comprehensive range of services improve customers’ transaction experience, enhance our platform brand image, and empower our business growth.

Awards

Our platform is widely recognized within the industry and has earned 26 awards from various organizations, none of which requires us to pay to participate, including but not limited to the following:

 

  i.

T50 Innovative B2B Companies of China by B2B Branch of China Electronic Commerce Association in 2017;

 

  ii.

T30 Innovative B2B Companies of China by China Industrial Internet Allies in 2018;

 

  iii.

Top 100 B2B Enterprises in China and Outstanding B2B Entrepreneur in China by China B2B Summit Organization in 2019;

 

  iv.

Four consecutive Excellent E-Commerce Platform Award by AspenCore in 2017, 2018, 2019 and 2020.

Our Customers

Our customers are mainly SMEs in the PRC. As the electronics industry is subject to short product life cycles and involves constantly evolving technologies, our platform, with a relatively short inventory turnover period of 3.64 days and 3.92 days as of June 30, 2020 and 2019, respectively, can satisfy our customers’ needs of frequent purchase and timely delivery. Our e-commerce platform provides our customers with comprehensive solutions to improve their shopping experience and eventually save costs for them. We generated revenue from a total of 866 customers and 749 customers for the fiscal years ended June 30, 2020 and 2019, respectively. We


 

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generated revenue from a total of 702 customers and 603 customers for the six months ended December 31, 2020 and 2019, respectively.

Our Suppliers

Our suppliers are mainly authorized distributors from overseas and certain manufactures in China. They have provided accumulated offering information of more than 25 million SKUs from approximately 3,670 brands worldwide on our platform as of the date of this prospectus. We sold about 18,438 SKUs in aggregate in the fiscal year ended June 30, 2020. We sold about 13,419 SKUs and 10,392 SKUs in aggregate for the six months ended December 31, 2020 and 2019, respectively.

For the fiscal year ended June 30, 2020, we made purchases from a total of 835 suppliers approximately 94.1% of which were from Hong Kong, Taiwan and overseas and 5.9% of which were from PRC. For the fiscal year ended June 30, 2019, we made purchase from a total of 619 suppliers, and 82.2% of which were from Hong Kong, Taiwan and overseas and 17.8% of which were from PRC. For the years ended June 30, 2020 and 2019, no single supplier accounted for more than 10% of the Company’s total purchases.

For the six months ended December 31, 2020, we made purchases from a total of 595 suppliers approximately 91.4% of which were from Hong Kong, Taiwan and overseas and 8.6% of which were from PRC. For the six months ended December 31, 2019, we made purchase from a total of 510 suppliers, and 94.5% of which were from Hong Kong, Taiwan and overseas and 5.5% of which were from PRC. For the six months ended December 31, 2020 and 2019, no single supplier accounted for more than 10% of the Company’s total purchases.

Market Opportunities and Competition

The current electronic components business model is a closed market system dominated by vendors, distributors, and traders with no open market infrastructure. This not only leads to complex trading processes but also high transaction cost and a low transaction efficiency caused by information barrier. Despite the size of the market, a significant portion of the business value in the global electronic industry is still handled by distributors and traders, who make high profits from the price differences caused by information barriers.

We aim to address the problems and difficulties that SMEs face through our e-commerce platform:

 

   

Information asymmetry and delay between the customers and suppliers;

 

   

Over-reliance on upstream suppliers which leaves little control and bargain power to SME customers, especially to customers with special requirements and small purchase amount; and

 

   

High distribution costs which make it hard for SMEs to generate economic benefit.

Competition

We believe that we are an advanced e-commerce platform that provides anonymous product offering, real-time transaction information, and SaaS solutions for SMEs in China’s electronics component industry. We may, however, face competition from traditional distributors and traders of the electronic components as well as competition from existing competitors and new market entrants in the electronic component exchange market, including the following, each in its respective aspect:

 

   

electronic components distributors mainly serving the SEMs, including authorized distributors, category distributors, and proprietary platforms,


 

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B2B e-commerce platforms providing one-stop procurement of electronic components for SMEs, and

 

   

SaaS providers offering digital solutions to enterprise procurement management.

Our Strengths

We believe that the following are our key competitive strengths that contribute to our growth and, on a combined basis, differentiate us from our competitors:

 

   

first move advantage of building an e-commerce platform that could bring a new trading method on product information and purchase demand, low transaction cost, and transaction efficiency, to the electronic component distribution industry in China,

 

   

tailor-made e-commerce solutions that cater to the specific needs of our customers,

 

   

unique infrastructure for efficient customers management and service post-order until delivery,

 

   

exclusive availability of the anonymous product offering on our platform, and

 

   

visionary founders, experienced management team and strong corporate culture.

Growth Strategies

Since our inception, we have focused on building an e-commerce platform with the low transaction cost and transparent pricing to meet the needs of SMEs in the electronic component market. In order to stay competitive, we will:

 

   

continue to invest in our information engine to support our business.

 

   

strengthen our technology capabilities and enrich our SaaS suite.

 

   

further develop and expand our solutions on our e-commerce platform.

 

   

expand our marketing and sales by enhancing cooperation with suppliers and our services.

Source and Cost of Revenues, Gross Profit, Operating Expenses, and Net Income

Our revenues are primarily derived from sales of electronic component products. For the fiscal years ended June 30, 2020 and 2019, approximately 99.2% and 99.0% of our sales were from sales of electronic component products respectively. In addition, approximately 0.8% and 1.0% of our sales were from the service commission fees, respectively. For the six months ended December 31, 2020 and 2019, approximately 99.4% and 98.9% of our sales were from sales of electronic component products and approximately 0.6% and 1.1% of our sales were from the service commission fees, respectively.

Our cost of revenues primarily consists of third-party products purchase price, tariffs associated with import products from overseas suppliers, inbound freight costs, warehousing and overhead costs and business taxes. Cost of revenue generally changes due to factors including the availability of the third-party products in the market, the purchase price of third-party products, sales volume and product mix changes.

Our gross profit increased by $1,803,152 or 84.3%, from $2,139,113 in the six months ended December 31, 2019 to $3,942,265 in the six months ended December 31, 2020. We have other additional operating expenses consisting of selling expenses, and general and administrative expenses. As a result, we reported a net income of $2,010,446 for the six months ended December 31, 2020, representing a $2,181,078 increase from the net loss of $170,632 for the six months ended December 31, 2019.


 

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Our gross profit increased by $536,889 or 13.2%, from $4,060,372 in fiscal year 2019 to $4,597,261 in fiscal year 2020. We have other additional operating expenses consisting of selling expenses, and general and administrative expenses. As a result, we reported a net income of $591,870 for the fiscal year ended June 30, 2020, representing a $533,850 increase from the net income of $58,020 for the fiscal year ended June 30, 2019.

For the six months ended December 31, 2020 and 2019, our revenues were $127,666,969 and $80,214,687, respectively, and our gross profit were $3,942,265 and $2,139,113, respectively. For the fiscal years ended June 30, 2020 and 2019, our revenues were $165,213,611 and $119,642,451, respectively, and our gross profit were $4,597,261 and $4,060,372, respectively. We currently generate most of our revenues from our platform.

Impacts of COVID-19

Like many others, our operations have been affected by the outbreak and spread of the coronavirus disease 2019 (COVID-19), which in March 2020, was declared a pandemic by the World Health Organization. The COVID-19 outbreak has caused lockdowns, travel restrictions, and closures of businesses. Our business was temporarily impacted by the COVID-19 coronavirus outbreak to a certain extent.

The negative impacts of COVID-19 on our business, financial condition, and results of operations include, but are not limited to, the following:

 

   

Temporary lockdown of business. We temporarily closed our facilities for one month (from the beginning of February until March 1, 2020) as the Chinese government required the nationwide closure of many business activities in the PRC in response to COVID-19. Our on-site work resumed after March 1, 2020.

 

   

Increase in product cost and expense. Given that the productivity of certain components manufacturers has not recovered, a shortage of these products has driven up their prices and extended the period of time for delivery.

 

   

Delay of delivery. Our logistics channels have been negatively impacted by the outbreak, which to certain extent delayed our products delivery. For example, some of our orders have been delayed because the suppliers were impacted by the lock-down in the U.S. However, our product delivery recovered gradually after 1 March, 2020.

 

   

Extended collection time. A few of our customers required additional time to pay us due to the negative business impact of the ongoing COVID-19.

Despite the above-mentioned negative impacts of COVID-19 which were temporary to our business, our customer demands increased during the pandemic. After we resumed our business operation on March 1, 2020, there we received and fulfilled increased sales orders for electronic components products through on our e-commerce platform. As a result, our revenues increased $47,452,282 or 59.2%, from $80,214,687 for the six months ended December 31, 2019, to $127,666,969 for the six months ended December 31, 2020, and increased $45,571,160, or 38.1%, from $119,642,451 for the fiscal year ended June 30, 2019, to $165,213,611 for the fiscal year ended June 30, 2020. Although the negative impact of the COVID-19 coronavirus outbreak on our business seems to be temporary in China, there is still uncertainty both in China and globally and potential disruption to business and the economy. A resurgence could negatively affect the execution of customer contracts, the collection of customer payments, or disruption of the Company’s supply chain. The continued uncertainties associated with COVID-19 may cause the Company’s revenue and cash flows to underperform in the next 12 months. The extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted as of the date of this prospectus.


 

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Research and Development

We maintain an internal dedicated engineering and technology team, who are responsible for (1) software research and development; (2) operational support; and (3) data management and analysis of the e-commerce platform and order fulfillment platform. As of the date of this prospectus, our team consists of 14 full-time R&D personnel, which accounts for 11% of the Company’s employees.

Intellectual Property

Our primary trademark portfolio consists of 19 registered trademarks and 1 intellectual property management system certification. Our trademarks are valuable assets that reinforce the brand and our consumers’ favorable perception of our products.

We currently own 55 registered software copyrights. Our software supports the operation of SaaS platform.

In addition to trademark and software protection, we own 17 domain names, including iczoom.com and iczoom.com.cn.

Our intellectual property is subject to risks of theft and other unauthorized use, and our ability to protect our intellectual property from unauthorized use is limited. In addition, we may be subject to claims that we have infringed the intellectual property rights of others. See “Risk FactorsRisks Relating to Our Business—We may not be able to prevent others from unauthorized use of our intellectual property, which could cause a loss of customers, reduce our revenues and harm our competitive position.

Our Securities and Reverse Split

In October 2020, upon shareholder approval, we effected a reverse split pursuant to which each four Class A Ordinary Shares of a par value of $0.02 each were reverse split into one Class A Ordinary Shares of a par value of $0.08 each and every four Class B Ordinary Shares of a par value of $0.02 each were reverse split into one Class B Ordinary Share of a par value of $0.08 each (the “Reverse Split”). All share numbers, stock option numbers, warrant numbers, other derivative security numbers and exercise prices appearing in this registration statement have been adjusted to give effect to the Reverse Split, unless otherwise indicated or unless the context suggests otherwise.

Our authorized share capital is divided into Class A Ordinary Shares and Class B Ordinary Shares prior to the completion of this Offering. Holders of Class A Ordinary Shares and Class B Ordinary Shares have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each Class A Ordinary Share will be entitled to one vote and each Class B Ordinary Share will be entitled to ten votes. Due to the Class B Ordinary Shares’ voting power, the holders of Class B Ordinary Shares currently and may continue to have a concentration of voting power, which limits the holders of Class A Ordinary Shares’ ability to influence corporate matters. (See “Risk Factors—Our Class B Ordinary Shares have stronger voting power than our Class A Ordinary Shares and certain existing shareholders have substantial influence over our Company and their interests may not be aligned with the interests of our other shareholders.”) Each Class B Ordinary Share is convertible into one Class A Ordinary Share at any time by the holder thereof. Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances. There are no provisions in our amended and restated articles of association that would limit the lifespan of the Class B Ordinary Shares, and the holders of Class B Ordinary Shares are able to hold their Class B Ordinary Shares for any period of time; provided however, in the event of any sale, transfer, assignment or disposition of any Class B Ordinary Shares to any person other than the permitted transferees (as defined in the amended and restated memorandum and articles of association), such Class B Ordinary Shares shall automatically convert into fully paid and nonassessable Class A Ordinary Shares on a one-to-one ratio. (See “Description of Share Capital”).


 

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Unless the context requires otherwise, all references to the number of shares of Class A and Class B Ordinary Shares to be outstanding after our initial public offering is based on 9,993,743 Class A Ordinary Shares and 7,659,000 Class B Ordinary Shares outstanding as of this prospectus, and excludes 12,500,000 Class A Ordinary Shares reserved for issuance under our 2015 Share Option Plan (as amended in October 2020, the “Option Plan”).

Unless otherwise indicated, all information in this prospectus assumes a price to the public in this Offering of $[●] per share.

Summary of Risk Factors

Investing in our Class A Ordinary Shares involves significant risks. You should carefully consider all of the information in this prospectus before making an investment in our Ordinary Shares. Below please find a summary of the principal risks we face, organized under relevant headings. These risks are discussed more fully in the section titled “Risk factors.”

Risks Related to Our Business and Industry

Risks and uncertainties related to our business and industry include, but are not limited to, the following:

 

   

We substantially rely on purchases made by Chinese electronics SMEs, and factors that adversely affect Chinese electronics industry could have a material adverse effect on our business, financial condition, results of operations and prospects

 

   

If we could not maintain existing customers or attract new customers, and face a significant decrease in the number of customers or the volume of customer demand, our business, financial condition, results of operations and prospectus could be materially and adversely impacted

 

   

If we fail to manage our relationships with our suppliers, our business and prospects may be adversely affected.

 

   

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

 

   

We rely on third-party courier service providers to deliver our products, and their failure to provide high-quality courier services to our customers may negatively impact the procurement experience of our customers, damage our market reputation and materially and adversely affect our business and results of operations

 

   

The proper functioning of our e-commerce platform is essential to our business and any failure to maintain the satisfactory performance, security and integrity of our e-commerce platform will materially and adversely affect our business, reputation, financial condition and results of operations.

 

   

We may be unable to effectively manage our rapid growth, which could place significant strain on our management personnel, systems and resources. We may not be able to achieve anticipated growth, which could materially and adversely affect our business and prospects.

Risks Related to Our Corporate Structure

We are also subject to risks and uncertainties related to our corporate structure, including, but not limited to, the following:

 

   

Though our VIE’s main contribution is to hold our ICP license and we generate most, if not all, of our revenue from operations of our WFOE and its subsidiaries, if in the future, our VIE starts to generate substantial revenue, we may have risks about consolidating its financial results and of additional taxes.


 

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We operate our e-commerce platform through Pai Ming Shenzhen by means of Contractual Arrangements. If the PRC courts or administrative authorities determine that these contractual arrangements do not comply with PRC regulations relating to relevant industries, we could be subject to severe penalties or be forced to relinquish our interests in those operations or may not be able to operate our e-commerce platform. In addition, changes in such PRC laws and regulations may materially and adversely affect our business.

Risks Related to Doing Business in China

We face risks and uncertainties related to doing business in China in general, including, but not limited to, the following:

 

   

Adverse changes in political, economic and other policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could materially and adversely affect the growth of our business and our competitive position.

 

   

Uncertainties with respect to the PRC legal system could have a material adverse effect on us.

 

   

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to acquire PRC companies or to inject capital into our PRC subsidiary, limit our PRC subsidiary ability to distribute profits to us, or otherwise materially and adversely affect us.

 

   

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China against us or our management named in the prospectus based on Hong Kong or other foreign laws, and the ability of U.S. authorities to bring actions in China may also be limited.

Risks Related to This Offering and the Ordinary Shares

In addition to the risks described above, we are subject to general risks and uncertainties related to our Ordinary Shares and this offering, including, but not limited to, the following:

 

   

Any future issuances of Class B Ordinary Shares may be dilutive to the voting power of Class A Ordinary Shareholders.

 

   

The dual class structure of our ordinary shares has the effect of concentrating voting control with our founders.

 

   

Recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and an act passed by the US Senate all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors. These developments could add uncertainties to our offering.

 

   

Our Class B Ordinary Shares have stronger voting power than our Class A Ordinary Shares and certain existing shareholders have substantial influence over our Company and their interests may not be aligned with the interests of our other shareholders.

Corporate Information

Our principal executive office is located at Room 102, Technology Bldg., International e-Commerce Industrial Park, 105 Meihua Road, Futian, Shenzhen China, 518000. Our registered agent in Cayman Islands is Vistra (Cayman) Limited, P. O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205 Cayman Islands. Our telephone number is +86 755 86036281. Our website is as follows www.iczoom.com. The information on our website is not part of this prospectus.


 

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Our Corporate Structure

The following charts summarize our corporate legal structure and identify our subsidiaries, our VIE and its subsidiaries as of the date of this prospectus. For more detail on our corporate history please refer to “Corporate History” appearing on page 64 of this prospectus.

 

 

LOGO

For details of each shareholder’s ownership, please refer to the beneficial ownership table in the section captioned “Principal Shareholders.”

For details of our corporate history and VIE arrangement, please see “Corporate History and Structure.”

Controlled Company

Prior to the completion of this Offering, and as long as our officers and directors, either individually or in the aggregate, own at least 50% of the voting power of our Company, we are a “controlled company” as defined under NASDAQ Marketplace Rules.

For so as we are a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules, including:

 

   

an exemption from the rule that a majority of our board of directors must be independent directors;

 

   

an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent directors; and

 

   

an exemption from the rule that our director nominees must be selected or recommended solely by independent directors.


 

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As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

Although we do not intend to rely on the “controlled company” exemption under the NASDAQ listing rules for at least one year after the initial public offering, we could elect to rely on this exemption in the future. If we elect to rely on the “controlled company” exemption, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. See “Risk Factor—As a “controlled company” under the rules of the NASDAQ Capital Market, we may choose to exempt our company from certain corporate governance requirements that could have an adverse effect on our public shareholders.

Compliance with Foreign Investment

All limited liability companies formed and operating in the PRC are governed by the Company Law of the People’s Republic of China, or the Company Law, which was amended and promulgated by the Standing Committee of the National People’s Congress on October 26, 2018 and came into effect on the same day. Foreign invested enterprises must also comply with the Company Law, with exceptions as specified in the relevant foreign investment laws. Under our corporate structure as of the date of this prospectus, 100% of the equity interests of ICZOOM WFOE are entirely and directly held by our company through Components Zone HK. Therefore, ICZOOM WFOE, a wholly foreign-owned enterprise (“WFOE”) of Components Zone HK, should be regarded as a foreign-invested enterprise and comply with both the Company Law and other applicable foreign investment laws.

Emerging Growth Company Status

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

 

   

being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in our SEC filings;

 

   

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 periodic reports, proxy statements and registration statements; and

 

   

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended. However, if certain events occur before the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion or we issue more than $1.00 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company before the end of such five-year period.

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


 

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Foreign Private Issuer Status

We are incorporated under the laws of the Cayman Islands, and more than 50 percent of our outstanding voting securities are not directly or indirectly held by residents of the United States. Therefore, we are a “foreign private issuer,” as defined in Rule 405 under the Securities Act and Rule 3b-4(c) under the Exchange Act. As a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

Notes on Prospectus Presentation

Numerical figures included in this prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them. Certain market data and other statistical information contained in this prospectus are based on information from independent industry organizations, publications, surveys and forecasts. Some market data and statistical information contained in this prospectus are also based on management’s estimates and calculations, which are derived from our review and interpretation of the independent sources listed above, our internal research and our knowledge of the PRC information technology industry. While we believe such information is reliable, we have not independently verified any third-party information and our internal data has not been verified by any independent source.

For the sake of clarity, this prospectus follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English.

Unless otherwise noted, all currency figures in this filing are in U.S. dollars. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

Our reporting currency is U.S. dollar and our functional currency is Renminbi. This prospectus contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Other than in accordance with relevant accounting rules and as otherwise stated, all translations of Renminbi into U.S. dollars in this prospectus were made at the rate of RMB7.0771 to USD1.00, the buying rate on 30 June, 2020 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. Where we make period-on-period comparisons of operational metrics, such calculations are based on the Renminbi amount and not the translated U.S. dollar equivalent. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.


 

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The Offering

 

Issuer:

ICZOOM Group Inc.

 

Securities being Offered:

[●] Class A Ordinary Shares (or [●] Class A Ordinary Shares if the underwriters exercise their over-allotment option in full), par value $0.08 per share

 

Assumed Price per Share:

[●]

 

Over-Allotment:

We have granted to the underwriters the option, exercisable for 45 days from the date of this prospectus, to purchase up to [●] additional Class A Ordinary Shares.

 

Class A Ordinary Shares Outstanding before the Offering

9,993,743

 

Class A Ordinary Shares Outstanding following the consummation of the Offering:

[●] Class A Ordinary Shares (or [●] Class A Ordinary Shares if the Underwriters exercise their over-allotment option in full)

 

Symbol:

We plan to apply to list our Class A Ordinary Shares on the NASDAQ Capital Market under the symbol “IZM”

 

Transfer Agent:

[●]

 

Use of Proceeds

We estimate that we will receive net proceeds from this Offering of $[●] million, based on an assumed price to the public in this Offering of $[●], the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses and assuming no exercise of the over-allotment. We currently intend to allocate the net proceeds as follows: 20% for research and development; 20% for sales and marketing, 10% for logistics and warehousing capabilities, and 50% for working capital. See “Use of Proceeds” for additional information.

 

Risk Factors

Investing in our Class A Ordinary Shares involves a high degree of risk and purchasers of our Class A Ordinary Shares may lose part or all of their investment. See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our Class A Ordinary Shares beginning on page 20.

 

Lock-Up

We, our directors, executive officers, the investors in the Private Placements and substantially all of our existing shareholders are expected to enter into a lock-up agreement with the underwriters not to sell, transfer or dispose of any Class A Ordinary Shares for a period of 180 days after the date of this prospectus. See “Shares Eligible for Future Sales” and “Underwriting.”

 

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Dividend Policy:

We have no present plans to declare dividends and plan to retain our earnings to continue to grow our business.

 

Voting Rights

Shares of Class A Ordinary Share are entitled to one vote per share.

 

  Shares of Class B Ordinary Share are entitled to ten votes per share.

 

  Holders of our Class A Ordinary Share and Class B Ordinary Share will generally vote together as a single class, unless otherwise required by law. Mr. Lei Xia and Ms. Duanrong Liu, who after our initial public offering will control, [●] and [●], respectively, and in aggregation more than [●]% of the voting power of our outstanding ordinary shares, may have the ability to control the outcome of matters submitted to our shareholders for approval, including the election of our directors. See “Description of Share Capital.”

 

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Summary Financial Data

The following selected historical statements of operations for the fiscal years ended June 30, 2020 and 2019, and balance sheet data as of June 30, 2020 and 2019 have been derived from our audited consolidated financial statements for those periods included elsewhere in this prospectus. We also present selected historical unaudited statements of operations for the six months ended December 31, 2020 and 2019, and balance sheet data as of December 31, 2020 (unaudited) have been derived from our consolidated financial statements for those periods 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.

The following table presents our summary consolidated statements of operations for the fiscal years ended June 30, 2020 and 2019 and for the six months ended December 31, 2020 and 2019.

Selected Consolidated Statement of Operations and Comprehensive Income (Loss)

(In U.S. dollars, except number of shares)

 

     For the six months ended
December 31,
    For the years ended June 30,  
     2020
(Unaudited)
     2019
(Unaudited)
    2020      2019  

Revenues

   $ 127,666,969      $ 80,214,687     $ 165,213,611      $ 119,642,451  

Gross profit

   $ 3,942,265      $ 2,139,113     $ 4,597,261      $ 4,060,372  

Operating expenses

   $ 2,136,888      $ 1,859,237     $ 3,621,659      $ 3,309,611  

Income from operations

   $ 1,805,377      $ 279,876     $ 975,062      $ 750,761  

Other income (expenses)

   $ 833,583      $ (181,225   $ 334,681      $ (119,653

Provision for income taxes

   $ 628,514      $ 269,283     $ 718,413      $ 493,088  

Net income (loss)

   $ 2,010,446      $ (170,632   $ 591,870      $ 58,020  

Earnings (loss) per share, basic

   $ 0.11      $ (0.01   $ 0.03      $ 0.00  

Weighted average ordinary shares outstanding

     17,652,743        17,615,243       17,591,661        17,435,099  

Earnings (loss) per share, diluted

   $ 0.10      $ (0.01   $ 0.03      $ 0.00  

Weighted average ordinary shares outstanding, diluted

     19,529,910        17,615,243       19,540,869        19,376,969  

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

 

     As of December 31,      As of June 30,  
     2020
(Unaudited)
     2020      2019  

Cash

   $ 3,906,399      $ 2,615,843      $ 2,281,141  

Total Current Assets

   $ 74,619,438      $ 59,661,649      $ 39,500,893  

Total Assets

   $ 75,225,917      $ 60,314,555      $ 40,287,914  

Total Liabilities

   $ 69,259,087      $ 57,141,236      $ 38,504,638  

Total Shareholders’ Equity

   $ 5,966,830      $ 3,173,319      $ 1,783,276  

Total Liabilities and Shareholders’ Equity

   $ 75,225,917      $ 60,314,555      $ 40,287,914  

 

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RISK FACTORS

Investment in our securities involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below represent our known material risks to our business. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, you may lose all or part of your investment. You should not invest in this offering unless you can afford to lose your entire investment.

Risks Related to Our Business and Industry

We may be unable to effectively manage our rapid growth, which could place significant strain on our management personnel, systems and resources. We may not be able to achieve anticipated growth, which could materially and adversely affect our business and prospects.

Our revenues grew from $119,642,451 in the fiscal year 2019 to $165,213,611 in the fiscal year 2020 and from $80,214,687 for the six months ended December 31, 2019 to $127,666,969 for the same period of 2020, respectively. As of the date of this prospectus, we maintain 10 subsidiaries, 6 of which are located in China (Shenzhen and Shanghai) to serve different customers in various geographic locations. The number of our total employees grew from 93 in fiscal year 2019 to 105 in fiscal year 2020, and continued to grew to 108 as of December 31 2020. As of the date of the prospectus, we have 122 full-time employees. We are actively looking for additional locations to establish new offices and expand our current offices. We intend to continue our expansion in the foreseeable future to pursue existing and potential market opportunities. Our growth has placed and will continue to place significant demands on our management and our administrative, operational and financial infrastructure. Continued expansion increases the challenges we face in:

 

   

recruiting, training, developing and retaining sufficient IT talents and management personnel;

 

   

creating and capitalizing upon economies of scale;

 

   

managing a larger number of customers in several locations;

 

   

maintaining effective oversight of personnel and offices;

 

   

coordinating work among offices and maintaining high resource utilization rates;

 

   

integrating new management personnel and expanded operations while preserving our culture and core values;

 

   

developing and improving our internal administrative infrastructure, particularly our financial, operational, human resources, communications and other internal systems, procedures and controls; and

 

   

adhering to and further improving our high quality and process execution standards and maintaining high levels of customer satisfaction;

 

   

maintaining relationships with third parties, including our warehousing and logistics partners, customs clearance, referral sources and payment processors.

Moreover, as we introduce new services or expand our e-commerce platform, we may face technological and operational risks and challenges with which we are unfamiliar, and it may require substantial management efforts and skills to mitigate these risks and challenges. As a result of any of these problems associated with expansion, our business, results of operations and financial condition could be materially and adversely affected. Furthermore, we may not be able to achieve anticipated growth, which could materially and adversely affect our business and prospects. Therefore, you should not rely on our past results or our historic rate of growth as an indication of our future performance. You should consider our future prospects in light of the risks and

 

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challenges encountered by a company seeking to grow and expand in a competitive industry that is characterized by rapid technological change, evolving industry standards, changing customer preferences and new product and service introductions.

We substantially rely on purchases made by Chinese electronics SMEs, and factors that adversely affect Chinese electronics industry could have a material adverse effect on our business, financial condition, results of operations and prospects.

We derive substantially our revenue from purchases made by SMEs in China that are electronic manufacturers or traders engaging in consumer electronic industry, IoT, automotive electronics, industry control segment. As a result, factors that adversely affect Chinese electronics manufacturers or the Chinese electronics manufacturing industry could also materially and adversely affect our customers’ business, financial condition, results of operations and prospects and subsequently impact them placing orders with us. These factors include, among others:

 

   

a decline in demand for, or negative perception of, or publicity about, Chinese electronic products;

 

   

a downturn in general economic conditions in China or decline in demand by Chinese electronic customers;

 

   

increasing competition from electronics manufacturers in other countries;

 

   

the reduction or elimination of preferential tax treatments and economic incentives for electronics manufacturers in China;

 

   

regulatory restrictions, trade disputes, industry-specific quotas, tariffs, non-tariff barriers and taxes that may have the effect of limiting electronic products exports from China;

 

   

appreciation in the value of the Renminbi against the currencies of other countries and regions that import electronic products from China; and

 

   

rising material and labor costs in China relating to electronics manufacturing.

If we could not maintain existing customers or attract new customers and face a significant decrease in the number of customers or the volume of customer demands, our business, financial condition, results of operations and prospectus could be materially and adversely impacted.

Our continued success requires us to maintain our current customers and develop new relationships. We cannot guarantee that our customers will continue to use our platform in the future or at the current level. For the six months ended December 31, 2020 and for year ended June 30, 2020, we generated our revenue from a total of 702 and 866 customers, respectively. We may be unable to maintain existing customers or to obtain new customers on a profitable basis due to competitive dynamics. In addition, our customers can place orders on our platform at any time once they register as users and we do not have any long-term agreements with the customers. We cannot assure you that our customers will continue to use our platforms after each purchase or that we will be able to attract new customers. Any adverse effect would be exacerbated if we lose our existing customers or if we are unable to attract new customers. Our customers may also choose to pursue alternative electronic components resources, or in lieu of, our platform, either on their own or in collaboration with others, including our competitors. The loss of existing customers or a significant decrease in the volume of customer demand or the price at which we sell our products to customers, could materially adversely affect our business, financial condition, results of operations and prospectus.

If we are unable convert the users on our platform to customers, our revenue and results of operations would be adversely affected.

We generate all of our revenues from the sales of electronic components and service commission fees through our platform. Our customers have to register with our platform before placing any orders or purchasing

 

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any services. We currently have more than 20,000 registered users on our platform, of which 702 and 866 are customers we generated our revenue from for the six months ended December 31 and for the year ended June 30, 2020, respectively. An inability to convert the registered users to customers could have a material adverse effect on our financial condition and results of operations.

We substantially rely on supplies from the oversea suppliers and factories of origin, and factors that adversely affect the imports could have a material adverse effect on our business, financial condition, results of operations and prospectus.

We purchased electronic components from 786 overseas suppliers in fiscal year 2020, which consist approximately 94.1% of total 835 suppliers in fiscal year 2020. We purchased electronic components from 544 overseas suppliers for the six months ended December 31, 2020, which consist approximately 91.4% of total 595 suppliers for the six months ended December 31, 2020. As a result, factors that adversely affect oversea electronics manufacturing industry and import and export of the products could also materially and adversely affect our customers’ business, financial condition, results of operations and prospects and subsequently impact them placing orders with us. These factors include, among others:

 

   

increasing shipping, warehouse storage, labor cost;

 

   

foreign regulatory restrictions, trade disputes, industry-specific quotas, tariffs, non-tariff barriers and taxes that may have the effect of limiting electronic products exports to China;

 

   

PRC regulatory restrictions, trade disputes, industry-specific quotas, tariffs, non-tariff barriers and taxes that may have the effect of limiting electronic products import from other countries and regions;

 

   

appreciation in the value of the Renminbi against the currencies of other countries and regions that export electronic products to China.

If we fail to obtain electronic components from with our suppliers or on terms acceptable to us, our business and prospects may be adversely affected.

We sourced our products from approximately 595 and 835 suppliers in the six months ended December 31, 2020 and in fiscal year 2020, respectively, including some of the top brand-name suppliers in key product categories. It is essentially important for us to procure electronic components from them on terms acceptable to us so that we can offer attractive or wholesale prices to our customers. In order to achieve favorable terms, we need to meet requirements of minimum purchase or combine orders from different customers for same product. We also need to search for products that are not posted on our platform through our suppliers. There can be no assurance that our current suppliers will continue to sell electronic components to us on terms acceptable to us, or that we will be able to establish new or extend current supplier relationships to ensure a steady supply of electronic components in a timely and cost-efficient manner, or to procure electronic components demanded from our suppliers.

Fraudulent activity could negatively impact our results of operations, brand and reputation and cause the use of our platform to decrease.

We are subject to the risk of fraudulent activities associated with suppliers’ information. Our resources and technologies may be insufficient to accurately detect and prevent fraud. Our suppliers are mainly authorized distributors from overseas and certain manufactures in China. Even though we require all suppliers to provide their governing documents and SAIC filings on a regular basis and conduct due diligence on them to ensure their qualifications, we may be unable to identify the genuineness of signatures, the authenticity of documents provided by the suppliers, and any other fraudulent activities conducted by the suppliers. The fraudulent information provided by the suppliers could negatively impact our brand and reputation, discourage customers from using our platform, reduce the amount of orders placed by the customers, and lead us to take additional steps to reduce fraud risk, which could increase our costs. Although we have not experienced any material

 

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business or reputational harm as a result of fraudulent activities conducted by the suppliers in the past, we cannot rule out the possibility that fraudulent activities may materially and adversely affect our business, financial condition and results of operations in the future.

Our business is subject to intense competition, and we may fail to compete successfully against existing or new competitors, which may reduce demand for our services and products.

The electronic components procurement market in China is intensely competitive. We face competition from: (i) offline suppliers, vendors, and traders of electronic components, some of which are authorized distributors possessing significant brand recognition, sales volume and customer bases, and some of which currently sell, or in the future may sell, products or services through their online service platforms, and (ii) information based B2B e-commerce companies. Some of our current and potential competitors have greater financial, technical or marketing resources than we have. In addition, some of our competitors or new entrants may be acquired by, receive investment from or enter into strategic relationships with, well-established and well-financed companies or investors which would help enhance their competitive positions. Some of our competitors may be able to secure merchandise from suppliers on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory availability policies and devote substantially more resources to website and system development than we do.

In addition, we anticipate that China’s electronic components procurement market will continually evolve. As we further develop our e-commerce platform, we will face increasing competitive challenges competing for new customers and retain loyal customers, including:

 

   

sourcing products efficiently;

 

   

pricing our products competitively;

 

   

maintaining the quality of the products sold on our e-commerce platform;

 

   

anticipating and quickly responding to changing technologies and product trends;

 

   

providing quality customer services; and

 

   

conducting effective marketing activities.

There can be no assurance that we will be able to compete successfully against current and future competitors, or that we will be able to address the challenges we face. Our failure to properly respond to increased competition and the above challenges may reduce our operating margins, market share and brand recognition, or force us to incur losses, which will have a material adverse effect on our business, prospects, financial condition and results of operations.

Our success depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.

Our future success heavily depends upon the continued services of our senior executives and other key employees. If one or more of our senior executives or key employees are unable or unwilling to continue in their present positions, it could disrupt our business operations, and we may not be able to replace them easily or at all. In addition, competition for senior executives and key personnel in our industry is intense, and we may be unable to retain our senior executives and key personnel or attract and retain new senior executive and key personnel in the future, in which case our business may be severely disrupted, and our financial condition and results of operations may be materially and adversely affected. If any of our senior executives or key personnel joins a competitor or forms a competing company, we may lose customers, suppliers, know-how and key professionals and staff members to them. Also, if any of our business development managers, who generally keep a close relationship with our customers, joins a competitor or forms a competing company, we may lose customers, and our revenues may be materially and adversely affected. Additionally, there could be unauthorized disclosure or

 

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use of our technical knowledge, practices or procedures by such personnel. Most of our executives and key personnel have entered into employment agreements with us that contain non-competition provisions, non-solicitation and nondisclosure covenants. However, if any dispute arises between our executive officers and key personnel and us, such non-competition, non-solicitation and non-disclosure provisions might not provide effective protection to us, especially in China, where most of these executive officers and key employees reside, in light of the uncertainties with China’s legal system.

Our continued growth depends on our ability to maintain our e-commerce platform as a trusted medium for customers to procure electronic components.

We believe that the market recognition and reputation of our e-commerce platform as a trusted procurement medium have significantly contributed to the recent growth of our business. Many factors, some of which are beyond our control, could harm our reputation, impair our ability to attract new customers and retain existing customers, such as:

 

   

our ability to maintain a convenient and reliable customer experience as consumer preferences and electronic components evolve;

 

   

our ability to increase brand awareness among existing and potential customers;

 

   

the capability of our platform to handle increased traffic and process massive information, to screen the request from customers and to instantly generate and timely track orders;

 

   

our ability to scale the platform and functionalities of technology and network infrastructures;

 

   

efficiency, reliability and quality of our customer service and order fulfillment;

 

   

quality and variety of the products we offer on our online platform;

 

   

the effectiveness of our supplier authentication and verification procedures to screen out counterfeit or pirated, as well as faulty or defective products; and

 

   

any negative media publicity about e-commerce in general or security or product quality problems of other e-commerce websites in China.

 

   

our ability to prevent security breaches, improper access to or disclosure of our data or user data, or other hacking and attacks,

If our e-commerce platform’s reputation as a trusted procurement medium is harmed, it may be more difficult to maintain and grow our base of registered users and customers, which would in turn materially and adversely affect our business, financial condition, results of operations and prospects.

We may be unable to adequately develop our systems, processes and support in a manner that will enable us to meet the demand for our services and sales.

We initiated our online operations 8 years ago and are developing our e-commerce systems on a transactional basis over the Internet on a SaaS basis. Our future success will depend on our ability to improve the infrastructure to respond effectively to the evolving markets, including additional hardware and software, and implement the services efficiently to meet the need of our customers. In the event we are not successful in developing the necessary systems and implementing the necessary provisions on a timely basis, our revenues could be adversely affected, which would have a material adverse effect on our financial condition.

If we are unable to provide superior customer service, our business and reputation may be materially and adversely affected.

The success of our business hinges on our ability to provide superior customer services which include but are not limited to custom clearance, warehousing, shipping and delivery. The convenience of one-stop shop that

 

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we give to our customers are supported by our customer services department and sale department. As we continue to grow in the future, we may have insufficient staff at our customer services department and sale department, and there is no assurance that we will be able to hire more qualified staff or provide sufficient training to them to manage, track, coordinate and handle all services or that an influx of relatively inexperienced personnel will not dilute the quality of our service. If we fail to provide satisfactory service timely, our brand and customer loyalty may be adversely affected. In addition, any negative publicity or poor feedback regarding our service may harm our brand and reputation which in turn may cause us to lose customers and market share.

We rely on third-party courier service providers to deliver our products, and their failure to provide high-quality courier services to our customers may negatively impact the procurement experience of our customers, damage our market reputation and materially and adversely affect our business and results of operations.

We rely on third-party courier service providers to deliver products to our customers. Interruptions to or failures in these couriers’ shipping services could prevent the timely or successful delivery of our products. These interruptions may be due to unforeseen events that are beyond our control or the control of these third-party couriers, such as inclement weather, natural disasters or labor unrest. If our products are not delivered on time or are delivered in a damaged state, customers may refuse to accept our products and have less confidence in our services. Thus, we may lose customers, and our financial condition and market reputation could suffer.

Our profitability will suffer if we are not able to maintain our resource utilization levels and continue to improve our gross margins.

Our gross margin and profitability are significantly impacted by product purchase costs. Customer demand may fall to zero or surge to a level that we cannot cost-effectively satisfy. Although our platform allows us to capture the best offer for to acquire products based on the orders by our customers, it is largely depending on the availability of the offering information provided by suppliers on our platform and such best offer may potentially be less favorable compared to what is in the market. Unless and until our platform can attract significant and substantial suppliers to post offering information and accordingly additional customers, we can better take advantage of our platform to improve our gross margins. In addition, although we try to use all commercially reasonable efforts to accurately estimate service orders and resource requirements from our customers, we may overestimate or underestimate, which may result in unexpected cost and strain or redundancy of our human capital and adversely impact our utilization levels. If we are not able to maintain high resource utilization levels without corresponding cost reductions or price increases, our profitability will suffer.

The proper functioning of our e-commerce platform is essential to our business and any failure to maintain the satisfactory performance, security and integrity of our e-commerce platform will materially and adversely affect our business, reputation, financial condition and results of operations.

The satisfactory performance, reliability and availability of our website, our mobile applications and our network infrastructure are critical to our success and our ability to attract and retain customers and maintain adequate customer service levels. Our net revenues depend significantly on the number of customers who are registered on our e-commerce platform and the volume of orders we fulfill. For orders processed on our e-commerce platform, any system interruptions caused by telecommunications failures and natural disasters that result in the unavailability or slowdown of the platform or reduce order fulfillment performance may reduce the volume of products sold and negatively impact the customer experience on our website. Our servers and data centers may also be vulnerable to computer viruses, hacking, vandalism, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of data or the inability to accept and fulfill customer orders. Occurrence of any of those incidents could damage our reputation and result in a material decrease in our revenues.

We use our own cloud computing system and another provided by a third-party cloud service provider to support our e-commerce platform and substantially all aspects of transaction processing, including enterprise

 

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resource planning, customer relationship management, order management, payment management, logistics management and database management. We periodically upgrade and expand our cloud computing system, and in the future, we may further upgrade and expand our system to support increased transaction volume. Any inability to add additional software and hardware or to develop and upgrade our existing technology, cloud computing system or network infrastructure to accommodate increased traffic on our e-commerce platform or increased sales volume through our cloud computing system, or any failure by the third party service provider to develop, maintain or upgrade its system, may cause unanticipated system disruptions, slower response time, degradation in levels of customer service and impaired quality and speed of order fulfillment, which would have a material adverse effect on our business, reputation, financial condition and results of operations.

We may lose market share and customers if we fail to compete effectively with well-capitalized new entrants and our current competitors.

The electronic components procurement market in China is intensely competitive. We face competitions from large information based B2B e-commerce companies, offline distributors, vendors, and traders of electronic components, many of which possess significant brand recognition, sales volume and customer bases, and some of which currently sell, or in the future may sell, products or services through their online service platforms.

Increased competition may reduce our margins, market share and brand recognition, or result in significant losses. When we set prices, we have to consider how competitors have set prices for the same or similar products. When they cut prices or offer additional benefits to compete with us, we may have to lower our own prices or offer additional benefits or risk losing market share, either of which could harm our financial condition and results of operations.

Some of our current and potential competitors have significantly greater financial, technical or marketing resources than we do. In addition, some of our competitors or new entrants may be acquired by, receive investment from or enter into strategic relationships with, well-established and well-financed companies or investors which would help enhance their competitive positions. Our failure to properly respond to increased competition and the above challenges may reduce our operating margins, market share and brand recognition, or force us to incur losses, which will have a material adverse effect on our business, prospects, financial condition and results of operations.

We may be liable to our customers for damages caused by unauthorized disclosure of sensitive and confidential information, whether through our employees or otherwise.

We are typically required to manage, utilize and store sensitive or confidential data in connection with the services we provide. Under the terms of our service contracts, we are required to keep such information strictly confidential. We use network security technologies, surveillance equipment and other methods to protect sensitive and confidential customer data. We also require our employees to enter into confidentiality agreements to limit access to and distribution of our customers’ sensitive and confidential information as well as our own trade secrets. We can give no assurance that the steps taken by us in this regard will be adequate to protect our customers’ confidential information. If our customers’ proprietary rights are misappropriated by our employees, in violation of any applicable confidentiality agreements or otherwise, our customers may consider us liable for those acts and seek damages and compensation from us. Any such acts could cause us to lose existing and future business and damage our reputation in the market. In addition, we currently do not have any insurance coverage for mismanagement or misappropriation of such information by our subcontractors or employees. Any litigation with respect to unauthorized disclosure of sensitive and confidential information might result in substantial costs and diversion of resources and management attention.

 

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If we fail to prevent security breaches, improper access to or disclosure of our data or user data, or other hacking and attacks, we may lose users, and our business, reputation, financial condition and results of operations may be materially and adversely affected.

We have employed significant resources to develop our security measures against breaches. Although we have not experienced any material disruptions, outages, cyberattacks, attempts to breach our systems, or other similar incidents and do not expect the occurrence of such incidents in the future, our cybersecurity measures may not detect, prevent or control all attempts to compromise our systems, including distributed denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems or that we otherwise maintain. Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification of customer information, or a denial-of-service or other interruption to our business operations. As techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our supporting service providers, we may be unable to anticipate, or implement adequate measures to protect against, these attacks.

We are likely in the future to be subject to these types of attacks. If we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial liabilities, our reputation would be harmed and we could sustain substantial revenue loss from lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber-attacks may target us, our suppliers, customers or other participants, or the internet infrastructure on which we depend. Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel and network protection technologies, train employees, and engage third-party experts and consultants. As we do not carry cybersecurity insurance, we will not be able to mitigate such risks to any third party. Cybersecurity breaches would not only harm our reputation and business, but also could materially decrease our revenue and net income.

We may not be able to prevent others from unauthorized use of our intellectual property, which could cause a loss of customers, reduce our revenues and harm our competitive position.

We rely on a combination of copyright, trademark, software registration, anti-unfair competition and trade secret laws, as well as confidentiality agreements and other methods to protect our intellectual property rights. To protect our trade secrets and other proprietary information, employees, customers, subcontractors, consultants, advisors and collaborators are required to enter into confidentiality agreements. These agreements might not provide effective protection for the trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. Implementation of intellectual property-related laws in China has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as those in the United States or other developed countries, and infringement of intellectual property rights continues to pose a serious risk of doing business in China. Policing unauthorized use of proprietary technology is difficult and expensive. The steps we have taken may be inadequate to prevent the misappropriation of our proprietary technology. Reverse engineering, unauthorized copying, other misappropriation, or negligent or accidental leakage of our proprietary technologies could enable third parties to benefit from our technologies without obtaining our consent or paying us for doing so, which could harm our business and competitive position. Though we are not currently involved in any litigation with respect to intellectual property, we may need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual property may not prove successful and might result in substantial costs and diversion of resources and management attention.

 

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Any lack of requisite approvals, licenses or permits applicable to our business operation may have a material and adverse impact on our business and results of operations.

Our business is subject to intense regulation, and we are required to hold a number of licenses and permits in connection with our business operation, including, but not limited to, the license for value-added telecommunications services, or VATS License, and Customs Declaration Entity Registration Certificate.

We hold all material licenses and permits described above. As of the date of this prospectus, we have not received any notice of warning or been subject to penalties or other disciplinary action from the relevant governmental authorities regarding the conducting of our business without the material approvals, certificates and permits. However, we cannot assure you that we can renew any of the licenses and permits in a timely manner when their current term expires.

New laws and regulations may be enforced from time to time to require additional licenses and permits other than those we currently have. If the PRC government deems us as operating without proper approvals, licenses or permits, promulgates new laws and regulations that require additional approvals or licenses or impose additional restrictions on the operation of any part of our business, we may be required to apply for additional approvals, license or permits, or subject to various penalties, including fines, termination or restrictions of the part of our business or revoking of our business licenses, which may adversely affect our business and materially and adversely affect our business, financial conditions and results of operations.

We may face intellectual property infringement claims that could be time-consuming and costly to defend. If we fail to defend ourselves against such claims, we may lose significant intellectual property rights and may be unable to continue providing our existing services.

Our success largely depends on our ability to use and develop our technology and services without infringing the intellectual property rights of third parties, including copyrights, trade secrets and trademarks. We may be subject to litigation involving claims of violation of other intellectual property rights of third parties. The holders of other intellectual property rights potentially relevant to our service offerings may make it difficult for us to acquire a license on commercially acceptable terms. Also, we may be unaware of intellectual property registrations or applications relating to our services that may give rise to potential infringement claims against us. There may also be technologies licensed to and relied on by us that are subject to infringement or other corresponding allegations or claims by third parties which may damage our ability to rely on such technologies. We are subject to additional risks as a result of our recent and proposed acquisitions and the hiring of new employees who may misappropriate intellectual property from their former employers. Parties making infringement claims may be able to obtain an injunction to prevent us from delivering our services or using technology involving the allegedly infringing intellectual property. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. A successful infringement claim against us, whether with or without merit, could, among others things, require us to pay substantial damages, develop non-infringing technology, or re-brand our name or enter into royalty or license agreements that may not be available on acceptable terms, if at all, and cease making, licensing or using products that have infringed a third party’s intellectual property rights. Protracted litigation could also result in existing or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation, or could require us to indemnify our customers against infringement claims in certain instances. Any intellectual property claim or litigation in this area, whether we ultimately win or lose, could damage our reputation and have a material adverse effect on our business, results of operations or financial condition.

We may need additional capital and any failure by us to raise additional capital on terms favorable to us, or at all, could limit our ability to grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges.

We believe that our current cash, cash flow from operations and borrowings from related parties and banks, should be sufficient to meet our anticipated cash needs for at least the next 12 months. We may, however, require

 

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additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financing covenants that would restrict our operations. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:

 

   

investors’ perception of, and demand for, securities of technology services outsourcing companies;

 

   

conditions of the U.S. and other capital markets in which we may seek to raise funds;

 

   

our future results of operations and financial condition;

 

   

PRC government regulation of foreign investment in China;

 

   

economic, political and other conditions in China; and

 

   

PRC government policies relating to the borrowing and remittance outside China of foreign currency.

Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to grow our business and develop or enhance our product and service offerings to respond to market demand or competitive challenges.

We may incur losses resulting from business interruptions resulting from occurrence of natural disasters, health epidemics and other outbreaks or events.

Our operational facilities may be damaged in natural disasters such as earthquakes, floods, heavy rains, sand storms, tsunamis and cyclones, or other events such as fires. Such natural disasters or other events such as outbreak of the coronavirus may lead to disruption of information systems and telephone service for sustained periods. Damage or destruction that interrupts our provision of outsourcing services could damage our relationships with our customers and may cause us to incur substantial additional expenses to repair or replace damaged equipment or facilities. We may also be liable to our customers for disruption in service resulting from such damage or destruction. Prolonged disruption of our services as a result of natural disasters or other events may also entitle our customers to terminate their contracts with us. We currently do not have insurance against business interruptions.

Fluctuation in the value of the Renminbi and other currencies may have a material adverse effect on the value of your investment.

Our financial statements are expressed in U.S. dollars. However, a majority of our revenues and expenses are denominated in Renminbi (“RMB”). Our exposure to foreign exchange risk primarily relates to the limited cash denominated in currencies other than the functional currencies of each entity. We do not believe that we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. However, the value of your investment in our Class A Ordinary Shares will be affected by the foreign exchange rate between U.S. dollars and RMB because the primary value of our business is effectively denominated in RMB, while the Class A Ordinary Shares will be traded in U.S. dollars.

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. The People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rate and achieve certain exchange rate targets, and through such intervention kept the U.S. dollar-RMB exchange rate relatively stable.

 

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As we may rely on dividends paid to us by our PRC subsidiaries and branches, any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of any dividends payable on our Class A Ordinary Shares in foreign currency terms. For example, to the extent that we need to convert U.S. dollars we receive from this offering into for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. Furthermore, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign exchange losses in the future. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert into foreign currencies.

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

Changes in the value of the RMB against the U.S. dollar are affected by, among other things, changes in china’s political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of (i) any dividends payable on our shares in U.S. dollar terms, (ii) any proceeds receivable upon the exercise of any options granted or may be granted under our incentive plan, (iii) any proceeds receivable upon the exercise of the Representatives’ Warrants, or (iv) any proceeds receivable upon any convertible securities that we may issue in the future in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollar we receive from our offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollar for the purpose of paying dividends on our common stock, exercising options, redeeming the warrants or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

Since July 2005, the RMB is no longer pegged to the U.S. dollar, although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

Uncertainties regarding the growth and sustained profitability of e-commerce in China could adversely affect our net revenues and business prospects and the trading price of our Class A Ordinary Shares.

The continued growth in our revenue and profit is substantially dependent upon the widespread acceptance and use of the Internet as a medium for commerce by businesses. In particular, rapid growth in the use of and interest in the Internet and other online services is still a relatively recent phenomenon, and we cannot assure you that this acceptance and use will continue to develop or that a sufficiently broad base of customers will adopt, and continue to use, the Internet as a medium of commerce. A decline in the popularity of purchasing on the Internet in general, or any failure by us to adapt our e-commerce platform and improve the online shopping experience of our customers in response to trends and consumer requirements, will adversely affect our net revenues and business prospects. As a result, growth in our customer base is dependent on attracting customers

 

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who have historically used traditional channels of commerce to procure IC and other electronic components. For our company to be successful, these customers must accept and adopt new ways of conducting business and exchanging information.

Moreover, concerns about fraud, privacy, lack of trust and other problems may discourage businesses from adopting the Internet as a medium of commerce. If these concerns are not adequately addressed, they may inhibit the growth of online commerce and communications. In addition, if a well-publicized breach of Internet security or privacy were to occur, general Internet usage could decline, which could reduce the use of our services and products and impede our growth. Our business, financial condition, results of operations and prospects will suffer to the extent the Internet, e-commerce and online marketing industries in general, and uses of the Internet as a medium of commerce in particular, do not continue to grow.

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

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal controls over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of auditing our consolidated financial statements for the years ended June 30, 2020 and 2019, we identified several material weaknesses in our internal control over financial reporting and other control deficiencies as of June 30, 2020. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weaknesses identified to date relate to (i) a lack of accounting staff and resources with appropriate knowledge of generally accepted accounting principles in the United States (“U.S. GAAP”) and SEC reporting and compliance requirements; (ii) a lack of sufficient documented financial closing policies and procedures; (iii) lack of risk assessment in accordance with the requirement of COSO 2013 framework and (iv) a lack of an effective review process by the accounting manager which led to material audit adjustments to the financial statements.

Following the identification of the material weaknesses and control deficiencies, we have (i) hired a chief financial officer who has sufficient expertise in U.S. GAAP to improve the quality of U.S. GAAP reports, (ii) implemented regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel; and (iii) continued our efforts to set up the internal audit department, and enhance the effectiveness of the internal control system. We also plan to hire qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework We will also plan to appoint independent directors, establishing an audit committee, and strengthening corporate governance.

The implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct theses material weaknesses or our failure to discover and address any other material weaknesses could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our Ordinary Shares, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud. Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report from management on our internal control over financial

 

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reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending June 30, 2022.

In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm will be required to attest to and report on the effectiveness of our internal control over financial reporting depending on whether we will be an accelerated filer or even large accelerated filers subsequently. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

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

Our insurance coverage may be inadequate to protect us against losses.

Although we maintain labor insurance and property insurance coverage for certain of our facilities and equipment, we do not have any loss of data or business interruption insurance coverage for our operations. If any claims for damage are brought against us, or if we experience any business disruption, litigation or natural disaster, we might incur substantial costs and diversion of resources.

Failure to renew our current leases or locate desirable alternatives for our facilities could materially and adversely affect our business.

All of our offices, warehouses and data centers are presently located on leased premises. At the end of each lease term ranging from April 24, 2021 to December 31, 2022, we may not be able to negotiate an extension of the lease and may therefore be forced to move to a different location, or the rent we pay may increase significantly. This could disrupt our operations and adversely affect our profitability. In addition, we may not be able to obtain new leases at desirable locations on acceptable terms to accommodate our future growth, which could materially and adversely affect our business.

We may incur liability for defective electronic components we sell and products or content displayed on our marketplace platform that infringe on third-party intellectual property rights.

We sell electronic components manufactured by third parties, some of which may be defectively designed or manufactured. For the fiscal years ended in 2020 and 2019 and for six months ended December 31, 2020, we did not receive any order or claims from third parties in this regard and historically our rarely had the allowance for product returns due to the defective electronic components. were immaterial. However, as purchases by our

 

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customers are mostly for industrial purposes, we may still be exposed to product liability claims if the electronics manufactured by our customers are defective due to the electronic components sold by us in the future. Third parties subject to injury or damage caused by such defective electronics may also bring claims or legal proceedings against us. Although we would have legal recourse against the suppliers of such electronic components under PRC law, attempting to enforce our rights against the suppliers may be expensive, time-consuming and ultimately futile. In addition, we do not currently maintain any third-party liability insurance or product liability insurance in relation to products we sell. As a result, any material product liability claim or litigation could have a material and adverse effect on our business, financial condition and results of operations. Even unsuccessful claims could result in the expenditure of funds and managerial efforts in defending them and could have a negative impact on our reputation.

Products we sell may be subject to U.S. export controls, which could subject us to liability or impair our ability to compete in the market.

Products we sell may be subject to U.S. export controls, specifically the Export Administration Regulations, and economic sanctions enforced by the Office of Foreign Assets Control. These regulations provide that certain products may be exported outside of the U.S. only with the required export authorizations, including by license, license exception or other appropriate government authorizations. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products and services to countries, governments, and persons targeted by U.S. sanctions. The potential penalties for violations of the Export Administration Regulations include a monetary fine of up to US$250,000 or twice the value of the transaction, whichever is greater, for any violation and/or a denial of export privileges under the Export Administration Regulations. Although we did not have any penalty assessed against us, we cannot ensure you that we will not be found to be in violation of such export laws in the future, despite the precautions we take, especially if such laws change. If we fail to comply with these laws, we may be adversely affected by reputational harm or loss of access to certain markets.

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

Our business depends on our ability to successfully obtain payment from our customers of the amounts they owe us for products we sold and services we provided. As of June 30, 2020 and 2019, our accounts receivable balance, net of allowance, amounted to approximately $43,990,262 and $26,546,809, respectively. As of December 31, 2020, our accounts receivable balance, net of allowance, amounted to approximately $57,288,245. Since we generally do not require collateral or other security from our customers, we establish an allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding the credit risk of specific customers. However, actual losses on customer receivables balance could differ from those that we anticipate and as a result we might need to adjust our allowance. There is no guarantee that we will accurately assess the creditworthiness of our customers. Macroeconomic conditions, including related turmoil in the global financial system, could also result in financial difficulties for our customers, including limited access to the credit markets, insolvency or bankruptcy, and as a result could cause customers to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. As a result, an extended delay or default in payment relating to a significant account will have a material and adverse effect on the aging schedule and turnover days of our accounts receivable. If we are unable to collect our receivables from our customers in accordance with the contracts with our customers, our results of operations and cash flows could be adversely affected.

Acquisitions, strategic alliances and investments could be difficult to integrate, which may disrupt our business, and lower our results of operations and the value of your investment.

We may enter into selected strategic alliances and potential strategic acquisitions that are complementary to our business and operations, including opportunities that can help us further expand our logistics service offerings and improve our technology system. These strategic alliances with third parties could subject us to a

 

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number of risks, including risks associated with sharing proprietary information, non-performance or default by counterparties, and increased expenses in establishing these new alliances, any of which may materially and adversely affect our business. We may have limited ability to control or monitor the actions of our strategic partners. To the extent a strategic partner suffers any negative publicity as a result of its business operations, our reputation may be negatively affected by virtue of our association with such party.

Provided suitable opportunities, we may pursue strategic alliances and investments in the future. Strategic acquisitions and subsequent integrations of newly acquired businesses would require significant managerial and financial resources and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our growth and business operations. Acquired businesses or assets may not generate expected financial results immediately, or at all, and may incur losses. The cost and duration of integrating newly acquired businesses could also materially exceed our expectations. Any such negative developments could have a material adverse effect on our business, financial condition and results of operations.

If we fail to manage our inventory effectively, our operations and financial condition may be materially and adversely affected.

Although for a substantial majority of electronic components sold on our Online Platform, the whole transaction process only takes a few days to deliver to our customers at most after we purchased from our suppliers, we still bear inventory risk, and we are required to manage our inventory effectively. We depend on our internal business analysis to make purchase decisions and to manage our inventory. Demand for electronic components, however, can change between the time inventory is ordered and the date by which we expect to sell it. Demand may be affected by development of new types of electronic components, changes in production cycles and pricing, defects, changes in customer needs with respect to our electronic components and other factors. We are not entitled to return unsold electronic components to suppliers.

If we fail to manage our inventory effectively, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory value, and significant inventory write-downs or write-offs. In addition, we may be required to lower sale prices in order to reduce inventory level, which may lead to lower gross margins. High inventory level may require us to commit substantial capital resources, preventing us from using the capital for other important purposes. On the other hand, if we underestimate demand of electronic components we sell, or if our suppliers fail to supply electronic components in a timely manner, we may experience inventory shortage, which might result in missed sales, diminished brand loyalty and lost revenues, any of which could harm our business and reputation. Any of the above may materially and adversely affect our results of operations and financial condition.

If we fail to adopt new technologies to cater to changing consumer requirements or emerging industry standards, or if our efforts to invest in the development of new technologies are unsuccessful or ineffective, our business may be materially and adversely affected.

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

 

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reasons, our business, prospects, financial condition and results of operations may be materially and adversely affected.

Risks Relating to Our Corporate Structure

We depend upon the Contractual Arrangements in conducting our business in China, which may not be as effective as direct ownership in providing operational control.

For the six months ended December 31, 2020, we generated $30,839 revenue from Pai Ming Shenzhen. For the fiscal years ended June 30, 2020 and 2019, there was no revenue generating from Pai Ming Shenzhen. However, it is fundamental to our business as Pai Ming Shenzhen holds the ICP license which allows us to provide internet information services through our e-commerce platform according the regulations in China. Our affiliation with Pai Ming Shenzhen is managed through the Contractual Arrangements. For a description of the Contractual Arrangements, see “Contractual Arrangements”. These Contractual Arrangements may not be as effective in providing us with control over Pai Ming Shenzhen as direct ownership. For example, our VIE and its shareholder could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests.

If we had direct ownership of our VIE, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIE, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current Contractual Arrangements, we rely on the performance by our VIE and its shareholder of their obligations under the contracts to exercise control over our VIE. The shareholder of our VIE may not act in the best interests of our company or may not perform its obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through the Contractual Arrangements with our VIE. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “Risk Factor—The shareholder of our VIE may have actual or potential conflicts of interest with us, which may materially and adversely affect our business and financial condition” Therefore, our Contractual Arrangements with our VIE may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

Though our VIE’s main contribution is to hold our ICP license and we generate most, if not all, of our revenue from operations of our WFOE and its subsidiaries, if in the future, our VIE starts to generate substantial revenue, we may have risks about consolidating its financial results and of additional taxes.

For the fiscal years ended June 30, 2020 and 2019, there was no revenue generating from Pai Ming Shenzhen. For the six months ended December 31, 2020, we generated revenue of $30,839 from Pai Ming Shenzhen. However, if in the future, Pai Ming Shenzhen starts to generate substantial revenue, it will be considered a VIE for accounting purposes, and we, through ICZOOM WFOE, are considered the primary beneficiary, thus enabling us to consolidate our financial results in our consolidated financial statements. In the event that in the future a company we hold as a VIE no longer meets the definition of a VIE under applicable accounting rules, or we are deemed not to be the primary beneficiary, we would not be able to consolidate line by line that entity’s financial results in our consolidated financial statements for reporting purposes.

In addition, 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. If Pai Ming Shenzhen starts to

 

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generate substantial revenue in the future, 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.

We conduct our business through Pai Ming Shenzhen by means of Contractual Arrangements. If the PRC government determines that these contractual arrangements do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. In addition, changes in such PRC laws and regulations may materially and adversely affect our business.

Foreign ownership of internet-based businesses, such as provision of internet information services platform and other value-added telecommunication services, are subject to restrictions under current PRC laws and regulations. We are an exempted company with limited liability incorporated under the laws of the Cayman Islands and our wholly-owned PRC subsidiaries are currently considered foreign-invested enterprises. Accordingly, our PRC subsidiaries are not eligible to hold the ICP license which allows us to provide internet information services through our e-commerce platform according the regulations in China. To ensure strict compliance with the PRC laws and regulations, we conduct such business activities through Pai Ming Shenzhen, our VIE. ICZOOM WFOE, our wholly owned subsidiary in China, has entered into a series of contractual arrangements with our VIE and its shareholder, which enable us to (i) exercise effective control over our VIE, (ii) receive substantially all of the economic benefits of our VIE, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in our VIE when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of our VIE and hence consolidate its financial results as our VIE under U.S. GAAP. See “Contractual Arrangement” for further details.

In the opinion of Han Kun Law Offices, our PRC legal counsel, (i) the ownership structures of our WFOE and our VIE in China, both currently and immediately after giving effect to this offering, are not in violation of PRC laws and regulations currently in effect; and (ii) the contractual arrangements between our WFOE, our VIE and its shareholder governed by PRC law are not in violation of PRC laws or regulations currently in effect, and valid and binding upon each party to such arrangements and enforceable against each party thereto in accordance with their terms and applicable PRC laws and regulations currently in effect. However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules; accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide.

If any of our PRC entities 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 any of our PRC entities fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations and failures, including:

 

   

revoking the business and operating licenses of such entities;

 

   

discontinuing or placing restrictions or onerous conditions on our operations;

 

   

imposing fines, confiscating the income from our PRC subsidiary or our VIE, or imposing other requirements with which we or our PRC entities may not be able to comply;

 

   

requiring us and our PRC entities to restructure the relevant ownership structure or operations, including terminating the contractual arrangements with our VIE and deregistering the equity pledge of our VIE, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our VIE; or;

 

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restricting or prohibiting our use of the proceeds from this offering to finance our business and operations in China.

Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If any of these occurrences results in our inability to direct the activities of our VIE that most significantly impact its economic performance and/or our failure to receive the economic benefits from our VIE, we may not be able to consolidate the entity in our consolidated financial statements in accordance with U.S. GAAP.

The shareholder 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 shareholder of our VIE may have actual or potential conflicts of interest with us. The shareholder may refuse to sign or breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements we have with him 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 shareholder 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 the shareholder will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between the shareholder and our company. If we cannot resolve any conflict of interest or dispute between us and the shareholder, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law.

On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which came into effect on January 1, 2020. Along with the Foreign Investment Law, the Implementing Rules of Foreign Investment Law promulgated by the State Council and the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Foreign Investment Law promulgated by the Supreme People’s Court became effective on January 1, 2020. Since the Foreign Investment Law and its current implementation and interpretation rules are relatively new, uncertainties still exist in relation to their further application and improvement. According to the Foreign Investment Law, “foreign investment” refers to investment activities carried out directly or indirectly by foreign natural persons, enterprises, or other organizations, or “foreign investors,” including the following: (i) foreign investors establishing foreign-invested enterprises in China alone or collectively with other investors; (ii) foreign investors acquiring shares, equities, properties, or other similar rights of Chinese domestic enterprises; (iii) foreign investors investing in new projects in China alone or collectively with other investors; and (iv) foreign investors investing through other ways prescribed by laws, regulations, or guidelines of the State Council. The Foreign Investment Law and its current implementation and interpretation rules do not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations or the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign investment. Therefore, there can be no assurance that our control over our consolidated VIE through contractual arrangements will not be deemed as foreign investment in the future.

The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment

 

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in a “negative list”. It is unclear whether the “negative list” to be published pursuant to the Foreign Investment Law will differ from the current Special Administrative Measures for Market Access of Foreign Investment (Negative List) (2020 Version). The Foreign Investment Law provides that foreign-invested entities operating in “restricted” industries will require market entry clearance and other approvals from relevant PRC government authorities. If our control over our consolidated VIE through contractual arrangements are deemed as foreign investment in the future, and any business of our consolidated VIE is “restricted” or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over our consolidated VIE may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our business operations, any of which may have a material adverse effect on our business operation.

Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and business operations.

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 failure to obtain prior approval of the China Securities Regulatory Commission (“CSRC”) for the listing and trading of our Class A Ordinary Shares on a foreign stock exchange could delay this offering or could have a material adverse effect upon our business, operating results, reputation and trading price of our Class A Ordinary Shares.

On August 8, 2006, six Chinese regulatory agencies, including the Ministry of Commerce of China (“MOFCOM”), jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rule”), which became effective on September 8, 2006 and amended on June 22, 2009. The M&A Rule contains provisions that require that an offshore special purpose vehicle (“SPV”) formed for listing purposes and controlled directly or indirectly by Chinese companies or individuals shall obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published procedures specifying documents and materials required to be submitted to it by an SPV seeking CSRC approval of overseas listings. However, the application of the M&A Rule remains unclear with no consensus currently existing among leading Chinese law firms regarding the scope and applicability of the CSRC approval requirement. The CSRC has not issued any such definitive rule or interpretation, and we have not chosen to voluntarily request approval under the M&A Rule. If the CSRC requires that we obtain its approval prior to the completion of this offering, the offering will be delayed until we obtain CSRC approval, which may take several months. There is also the possibility that we may not be able to obtain such approval. If prior CSRC approval was required, we may face regulatory actions or other sanctions from the CSRC or other Chinese regulatory authorities. These authorities may impose fines and penalties upon our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds

 

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from this offering into China, or take other actions that could have a material adverse effect upon our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our Class A Ordinary Shares. The CSRC or other Chinese regulatory agencies may also take actions requiring us, or making it advisable for us, to terminate this offering prior to closing.

Risks Related to Doing Business in China

Adverse changes in political, economic and other policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could materially and adversely affect the growth of our business and our competitive position.

The majority of our business operations are conducted in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. The PRC government exercises significant control over China’s economic growth through strategical allocation of resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies. While the Chinese economy has experienced significant growth in the past decades, growth has been uneven, both geographically and among various sectors of the economy. The growth of the Chinese economy may not continue at a rate experienced in the past, and the impact of COVID-19 on the Chinese economy may continue. Any prolonged slowdown in the Chinese economy may reduce the demand for our services and materially and adversely affect our business and results of operations. Furthermore, any adverse change in the economic conditions in China, in policies of the PRC government or in laws and regulations in China could have a material adverse effect on the overall economic growth of China and market demand for our outsourcing services. Such developments could adversely affect our businesses, lead to reduction in demand for our services and adversely affect our competitive position.

Uncertainties with respect to the PRC legal system could have a material adverse effect on us.

The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. We conduct our business primarily through our subsidiaries established in China. These subsidiaries are generally subject to laws and regulations applicable to foreign investment in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us. Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the Opinions, which was made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems will be taken to deal with the risks and incidents of China-concept overseas listed companies, and cybersecurity and data privacy protection requirements and etc. The Opinions and any related implementing rules to be enacted may subject us to compliance requirement in the future. In addition, some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other government authorities (including local government authorities), thus making strict compliance with all regulatory requirements impractical, or in some circumstances impossible. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into with our business partners, customers and

 

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suppliers. In addition, such uncertainties, including any inability to enforce our contracts, together with any development or interpretation of PRC law that is adverse to us, could materially and adversely affect our business and operations. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other more developed countries. We cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.

Regulation and censorship of information distribution over the Internet in China may adversely affect our business, and we may be liable for information displayed on, retrieved from or linked to our website.

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

We must remit the offering proceeds to China before they may be used to benefit our business in China, and we cannot assure that we can finish all necessary governmental registration processes in a timely manner.

The proceeds of this offering must be sent back to China, before they may be used to benefit our business in China. Any transfer of funds by us to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration or filing with relevant governmental authorities in China. Any foreign loans procured by our PRC subsidiaries is required to be registered with China’s State Administration of Foreign Exchange (“SAFE”) or its local branches or filed with SAFE in its information system or satisfy relevant requirements, and our PRC subsidiaries may not procure loans which exceed the statutory limit for total amount of foreign debt. According to the relevant PRC regulations on foreign-invested enterprises in China, capital contributions to our PRC subsidiaries are subject to the approval of or filing with the Ministry of Commerce in its local branches and registration with a local bank authorized by SAFE.

To remit the proceeds of the offering, we must take the steps legally required under the PRC laws.

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

U.S. regulators’ ability to conduct investigations or enforce rules in China is limited.

The majority of our operations conducted outside of the U.S. As a result, it may not be possible for the U.S. regulators to conduct investigations or inspections, or to effect service of process within the U.S. or elsewhere

 

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outside China on us, our subsidiaries, officers, directors and shareholders, and others, including with respect to matters arising under U.S. federal or state securities laws. China does not have treaties providing for reciprocal recognition and enforcement of judgments of courts with the U.S. and many other countries. As a result, recognition and enforcement in China of these judgments in relation to any matter, including U.S. securities laws and the laws of the Cayman Islands, may be difficult or impossible.

We face uncertainty regarding the PRC tax reporting obligations and consequences for certain indirect transfers of the stock of our operating company.

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued by the PRC State Administration of Taxation (“SAT”) on December 10, 2009, or Circular 698, where a foreign investor transfers the equity interests of a PRC resident enterprise indirectly by way of the sale of equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the foreign investor should report such Indirect Transfer to the competent tax authority of the PRC resident enterprise.

On February 3, 2015, the SAT issued the Announcement of the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfer by Non-Resident Enterprises, or SAT Bulletin 7. SAT Bulletin 7 supersedes the rules with respect to the Indirect Transfer under SAT Circular 698. SAT Bulletin 7 has introduced a new tax regime that is significantly different from the previous one under SAT Circular 698. SAT Bulletin 7 extends the PRC’s tax jurisdiction to not only Indirect Transfers set forth under SAT Circular 698 but also transactions involving transfer of other taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise, being the transferor, or the transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Matters Concerning Withholding of Income Tax of Non-resident Enterprises at Source, or SAT Bulletin 37, which, among others, repealed the SAT Circular 698 on December 1, 2017. SAT Bulletin 37 further details and clarifies the tax withholding methods in respect of income of non-resident enterprises under SAT Circular 698. And certain rules stipulated in SAT Bulletin 7 are replaced by SAT Bulletin 37. Where the non-resident enterprise fails to declare the tax payable pursuant to Article 39 of the PRC Enterprise Income Tax Law, the tax authority may order it to pay the tax due within required time limits, and the non-resident enterprise shall declare and pay the tax payable within such time limits specified by the tax authority; however, if the non-resident enterprise voluntarily declares and pays the tax payable before the tax authority orders it to do so within required time limits, it shall be deemed that such enterprise has paid the tax in time.

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding

 

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obligations if our company is transferee in such transactions, under SAT Bulletin 7 and SAT Bulletin 37. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiary may be requested to assist in the filing under SAT Bulletin 7 and SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 and SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to acquire PRC companies or to inject capital into our PRC subsidiary, limit our PRC subsidiary ability to distribute profits to us, or otherwise materially and adversely affect us.

In July 2014, SAFE has promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities as well as foreign individuals that are deemed as PRC residents for foreign exchange administration purpose) to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities. 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.

If any PRC shareholder who makes direct or indirect investments in offshore special purpose vehicles, or SPV, fails to make the required registration or to update the previously filed registration, the subsidiaries of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contribution into its subsidiary in China. On February 28, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investment and outbound overseas direct investment, including those required under the SAFE Circular 37, will be filed with qualified banks instead of the SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of the SAFE.

We have requested our shareholders that we know are PRC residents and hold direct or indirect interests in us to make the necessary applications, filings and amendments as required under SAFE Circular 37 and other related rules. To our knowledge, Ms. Duanrong Liu, our COO, completed the initial foreign exchange registration. However, we cannot guarantee that all or any of those shareholders will complete the 37 registration before the closing of this Offering. In addition, we may not at all times be fully aware or informed of the identities of all our beneficial owners who are PRC residents, and we may not always be able to compel our beneficial owners to comply with the SAFE Circular 37 requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents will at all times comply with, or in the future make or obtain any applicable registrations or approvals required by, SAFE Circular 37 or other related regulations. Failure by any such shareholders or beneficial owners to comply with SAFE Circular 37 could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary’s ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

 

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Furthermore, as the interpretation and implementation of these foreign exchange regulations has been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant governmental authorities. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

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

We are an offshore holding company conducting our operations in China through our PRC subsidiaries and our VIEs. We may make loans to our PRC subsidiaries and VIEs subject to the approval from governmental authorities and limitation of amount, or we may make additional capital contributions to our wholly foreign-owned subsidiaries in China.

Any loans to our wholly foreign-owned subsidiaries in China, which are treated as foreign-invested enterprises under PRC law, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our wholly foreign-owned subsidiaries in China to finance their activities must be registered with the local counterpart of SAFE. In addition, a foreign invested enterprise shall use its capital pursuant to the principle of authenticity and self-use within its business scope. The capital of a foreign invested enterprise shall not be used for the following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly used for investment in securities or investments other than banks’ principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises).

SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or SAFE Circular 19, effective June 2015, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses. According to SAFE Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although SAFE Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within China, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to

 

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issue loans to non-associated enterprises. Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from this offering, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in China. On October 23, 2019, the SAFE promulgated the Notice of the State Administration of Foreign Exchange on Further Promoting the Convenience of Cross-border Trade and Investment, or the SAFE Circular 28, which, among other things, allows all foreign-invested companies to use Renminbi converted from foreign currency-denominated capital for equity investments in China, as long as the equity investment is genuine, does not violate applicable laws, and complies with the negative list on foreign investment. However, since the SAFE Circular 28 is newly promulgated, it is unclear how SAFE and competent banks will carry this out in practice.

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or VIEs or future capital contributions by us to our wholly foreign-owned subsidiaries in China. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries or VIEs when needed. If we fail to complete such registrations or obtain such approvals, 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.

Governmental control of currency conversion may limit our ability to use our revenues effectively and the ability of our PRC subsidiaries to obtain financing.

The PRC government imposes control on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive a majority of our revenues in Renminbi, which currently is not a freely convertible currency. Restrictions on currency conversion imposed by the PRC government may limit our ability to use revenues generated in Renminbi to fund our expenditures denominated in foreign currencies or our business activities outside China. Under China’s existing foreign exchange regulations, Renminbi may be freely converted into foreign currency for payments relating to current account transactions, which include among other things dividend payments and payments for the import of goods and services, by complying with certain procedural requirements. Our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE, by complying with certain procedural requirements. Our PRC subsidiaries may also retain foreign currency in their respective current account bank accounts for use in payment of international current account transactions. However, we cannot assure you that the PRC government will not at its discretion take measures in the future to restrict access to foreign currencies for current account transactions.

Conversion of Renminbi into foreign currencies, and of foreign currencies into Renminbi, for payments relating to capital account transactions, which principally includes investments and loans, generally requires the approval of SAFE and other relevant PRC governmental authorities. Restrictions on the convertibility of the Renminbi for capital account transactions could affect the ability of our PRC subsidiaries to make investments overseas or to obtain foreign currency through debt or equity financing, including by means of loans or capital contributions from us. We cannot assure you that the registration process will not delay or prevent our conversion of Renminbi for use outside of China.

We may be classified as a “resident enterprise” for PRC enterprise income tax purposes; such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.

The Enterprise Income Tax Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered PRC tax resident enterprises and will generally be subject to the uniform 25% PRC enterprise income tax rate on their global income. In 2009, the SAT issued the

 

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Circular of the State Administration of Taxation on Issues Concerning the Identification of Chinese-Controlled Overseas Registered Enterprises as Resident Enterprises in Accordance with the Actual Standards of Organizational Management, known as SAT Circular 82, which was partially amended by Announcement on Issues concerning the Determination of Resident Enterprises Based on the Standards of Actual Management Institutions issued by SAT on January 29, 2014, and further partially amended by Decision on Issuing the Lists of Invalid and Abolished Tax Departmental Rules and Taxation Normative Documents issued by SAT on December 29, 2017. SAT Circular 82, as amended, provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China, which include all of the following conditions: (i) the location where senior management members responsible for an enterprise’s daily operations discharge their duties; (ii) the location where financial and human resource decisions are made or approved by organizations or persons; (iii) the location where the major assets and corporate documents are kept; and (iv) the location where more than half (inclusive) of all directors with voting rights or senior management have their habitual residence. SAT Circular 82 further clarifies that the identification of the “de facto management body” must follow the substance over form principle. In addition, SAT issued SAT Bulletin 45 on July 27, 2011, effective from September 1, 2011 and partially amended on April 17, 2015, June 28, 2016, and June 15, 2018, respectively, providing more guidance on the implementation of SAT Circular 82. SAT Bulletin 45 clarifies matters including resident status determination, post-determination administration and competent tax authorities. Although both SAT Circular 82 and SAT Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining criteria set forth in SAT Circular 82 and SAT Bulletin 45 may reflect SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or PRC enterprise groups or by PRC or foreign individuals.

Currently, there are no detailed rules or precedents governing the procedures and specific criteria for determining de facto management bodies which are applicable to our company or our overseas subsidiaries. We do not believe that ICZOOM meets all of the conditions required for PRC resident enterprise. The Company is a company incorporated outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside the PRC. For the same reasons, we believe our other entities outside of China are not PRC resident enterprises either. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” There can be no assurance that the PRC government will ultimately take a view that is consistent with ours.

However, if the PRC tax authorities determine that ICZOOM is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. Such 10% tax rate could be reduced by applicable tax treaties or similar arrangements between China and the jurisdiction of our shareholders. For example, for shareholders eligible for the benefits of the tax treaty between China and Hong Kong, the tax rate is reduced to 5% for dividends if relevant conditions are met. In addition, non-resident enterprise shareholders may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ordinary shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. However, it is also unclear whether non-PRC shareholders of the Company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that the Company is treated as a PRC resident enterprise.

Provided that our Cayman Islands holding company, ICZOOM, is not deemed to be a PRC resident enterprise, our shareholders who are not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other disposition of our shares. However, under Circular 7,

 

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where a non-resident enterprise conducts an “indirect transfer” by transferring taxable assets, including, in particular, equity interests in a PRC resident enterprise, indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, or the transferee or the PRC entity which directly owned such taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee would be obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. We and our non-PRC resident investors may be at risk of being required to file a return and being taxed under Circular 7, and we may be required to expend valuable resources to comply with Bulletin 37, or to establish that we should not be taxed under Circular 7 and Bulletin 37.

In addition to the uncertainty in how the new resident enterprise classification could apply, it is also possible that the rules may change in the future, possibly with retroactive effect. If we are required under the Enterprise Income Tax law to withhold PRC income tax on our dividends payable to our foreign shareholders, or if you are required to pay PRC income tax on the transfer of our shares under the circumstances mentioned above, the value of your investment in our shares may be materially and adversely affected. These rates may be reduced by an applicable tax treaty, but it is unclear whether, if we are considered a PRC resident enterprise, holders of our shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. Any such tax may reduce the returns on your investment in our shares.

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiary of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who are granted options or other awards under our equity incentive plan will be subject to these regulations when our company becomes an overseas listed company upon the completion of this offering. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Regulation—Regulation Related to Stock Incentive Plans.”

In addition, SAT has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our employees working in China who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC government authorities. See “Regulation—Regulation Related to Stock Incentive Plans.”

 

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Failure to make adequate contributions to various mandatory social security plans as required by PRC regulations may subject us to penalties.

Under the PRC Social Insurance Law and the Administrative Measures on Housing fund, We are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. If the local governments deem our contribution to be not sufficient, we may be subject to late contribution fees or fines in relation to any underpaid employee benefits, our financial condition and results of operations may be adversely affected.

Currently, certain of our affiliated entities are making contributions to the plans based on the basic salary of our employees which may not be adequate in strict compliance with the relevant regulations. As of the prospectus date, the accumulated impact in this regard was immaterial to our financial condition and results of operations. We have not received any order or notice from the local authorities nor any claims or complaints from our current and former employees regarding our current practice in this regard. As the interpretation of implementation of labor-related laws and regulations are still involving, we cannot assure you that our practice in this regard will not be violate any labor-related laws and regulations regarding including those relating to the obligations to make social insurance payments and contribute to the housing funds and other welfare-oriented payments. If we deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and subject to penalties, and our business, financial condition and results of operations will be adversely affected.

Enforcement of stricter labor laws and regulations may increase our labor costs as a result.

China’s overall economy and the average wage have increased in recent years and are 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 who pay for our services, our profitability and results of operations may be materially and adversely affected. The PRC Labor Contract Law and its implementing rules impose requirements concerning contracts entered into between an employer and its employees and establishes time limits for probationary periods and for how long an employee can be placed in a fixed-term labor contract. We cannot assure you that our employment policies and practices do not, or will not, violate the Labor Contract Law or its implementing rules and that we will not be subject to related penalties, fines or legal fees. If we are subject to large penalties or fees related to the Labor Contract Law or its implementing rules, our business, financial condition and results of operations may be materially and adversely affected In addition, according to the Labor Contract Law and its implementing rules, if we intend to enforce the non-compete provision with an employee in a labor contract or non-competition agreement, we have to compensate the employee on a monthly basis during the term of the restriction period after the termination or ending of the labor contract, which may cause extra expenses to us. Furthermore, the Labor Contract Law and its implementation rules require certain terminations to be based upon seniority rather than merit, which significantly affects the cost of reducing workforce for employers. In the event we decide to significantly change or decrease our workforce in the PRC, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our circumstances or in a timely and cost effective manner, thus our results of operations could be adversely affected.

 

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If the chops of our PRC subsidiaries, our VIE and its subsidiaries, are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised.

In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes. The chops of our PRC subsidiaries and VIE are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused by unauthorized persons, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China against us or our management named in the prospectus based on Hong Kong or other foreign laws, and the ability of U.S. authorities to bring actions in China may also be limited.

We are an exempted company with limited liability incorporated under the laws of the Cayman Islands, we conduct a significant portion of our operations in China and the majority of our assets are located in China. In addition, all of our senior executive officers reside within China for a significant portion of the time and many are PRC nationals. As a result, it may be difficult for our Shareholders to effect service of process upon us or those persons inside mainland China. In addition, our PRC legal counsel has advised us that China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.

On July 14, 2006, Hong Kong and the PRC entered into the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the PRC and of the Hong Kong Special Administrative Region Pursuant to Choice of Court Agreements Between Parties Concerned, or the 2006 Arrangement, pursuant to which a party with a final court judgment rendered by a Hong Kong court requiring payment of money in a civil and commercial case pursuant to a choice of court agreement in writing may apply for recognition and enforcement of the judgment in the PRC. Similarly, a party with a final judgment rendered by a PRC court requiring payment of money in a civil and commercial case pursuant to a choice of court agreement in writing may apply for recognition and enforcement of the judgment in Hong Kong. A choice of court agreement in writing is defined as any agreement in writing entered into between parties after the effective date of the 2006 Arrangement in which a Hong Kong court or a PRC court is expressly designated as the court having sole jurisdiction for the dispute. Therefore, it is not possible to enforce a judgment rendered by a Hong Kong court in the PRC if the parties in dispute have not agreed to enter into a choice of court agreement in writing. The 2006 Arrangement became effective on August 1, 2008.

Subsequently on January 18, 2019, Hong Kong and the PRC entered into the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters between the Courts of the Mainland and of the Hong Kong Special Administrative Region, or the Arrangement, pursuant to which, among other things, the scope of application was widened to cover both monetary and non-monetary judgments in most civil and commercial matters, including effective judgments on civil compensation in criminal cases. In addition, the requirement of a choice of court agreement in writing has been removed. It is no longer necessary for parties to agree to enter into a choice of court agreement in writing, as long as it can be shown that there is a connection

 

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between the dispute and the requesting place, such as place of the defendant’s residence, place of the defendant’s business or place of performance of the contract or tort. The 2019 Arrangement shall apply to judgments in civil and commercial matters made on or after its effective date by the courts of both sides. The 2006 Arrangement shall be terminated on the same day when the 2019 Arrangement comes into effect. If a “written choice of court agreement” has been signed by parties according to the 2006 Arrangement prior to the effective date of the 2019 Arrangement, the 2006 Arrangement shall still apply. Although the 2019 Arrangement has been signed, its effective date has yet to be announced. Therefore, there are still uncertainties about the outcomes and effectiveness of enforcement or recognition of judgments under the 2019 Arrangement.

Furthermore, shareholder claims that are common in the U.S., including securities law class actions and fraud claims, generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities. Although the local authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such regulatory cooperation with the securities regulatory authorities in the U.S. have not been efficient in the absence of mutual and practical cooperation mechanism. According to Article 177 of the PRC Securities Law which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Accordingly, without the consent of the competent PRC securities regulators and relevant authorities, no organization or individual may provide the documents and materials relating to securities business activities to overseas parties. See also “—Risks Associated with This Offering—You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law” for risks associated with investing in us as a Cayman Islands company.

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

We are an exempted company with limited liability incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our amended and restated memorandum and articles of association, as amended, the Companies Act (2021 Revision) of the Cayman Islands, which we refer to as the Companies Act below, and the common law of the Cayman Islands. The rights of shareholders to take actions against the 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 of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the U.S. In particular, the Cayman Islands has a less developed body of securities laws than the U.S. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the U.S.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies (other than copies of our amended and restated memorandum and articles of association and register of mortgages and charges, and any special resolutions passed by our shareholders). Under Cayman Islands law, the names of our current directors can be obtained from a search conducted at the Registrar of Companies. Our directors have discretion under our amended and restated memorandum and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

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As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NASDAQ corporate governance requirements; these practices may afford less protection to shareholders than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

As a result of all of the above, our public shareholders may have more difficulties in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the U.S.

Risks Related to this Offering and the Ordinary Shares

We will likely not pay dividends in the foreseeable future.

Dividend policy is subject to the discretion of our Board of Directors and will depend on, among other things, our earnings, financial condition, capital requirements and other factors. We currently do not have or expect to have dividend payment plan in foreseeable future. There is no assurance that our Board of Directors will declare dividends even if we are profitable. The payment of dividends by entities organized in China is subject to limitations as described herein. Under Cayman Islands law, we may only pay dividends out of profits of the Company, or share premium account, and provided always that in no circumstances may a dividend be paid if this would result in us being unable to pay our debts as they fall due in the ordinary course of business. Pursuant to the Chinese enterprise income tax law, dividends payable by a foreign investment entity to its foreign investors are subject to a withholding tax of 10%. Similarly, dividends payable by a foreign investment entity to its Hong Kong investor who owns 25% or more of the equity of the foreign investment entity is subject to a withholding tax of 5%. The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. The transfer to this reserve must be made before distribution of any dividend to shareholders.

Our dual class capital structure may render our shares ineligible for inclusion in certain indices. We cannot predict the impact this may have on the trading price of our Class A Ordinary Shares.

In 2017, FTSE Russell, S&P Dow Jones and MSCI announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices to exclude companies with multiple classes of shares of common stock from being added to such indices. FTSE Russell announced plans to require new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders, whereas S&P Dow Jones announced that companies with multiple share classes, such as ours, will not be eligible for inclusion in the S&P 500, S&P MidCap 400 and S&P SmallCap 600, which together make up the S&P Composite 1500. MSCI also opened public consultations on their treatment of no-vote and multi-class structures and temporarily barred new multi-class listings from its ACWI Investable Market Index and U.S. Investable Market 2500 Index; however, in October 2018, MSCI announced its decision to include equity securities “with unequal voting structures” in its indices and to launch a new index that specifically includes voting rights in its eligibility criteria. We cannot assure you that other stock indices will not take a similar approach to FTSE Russell, S&P Dow Jones and MSCI in the future. Under the announced policies, our dual class capital structure would make us ineligible for inclusion in any of these indices and, as a result, mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track these indices will not invest in our stock. It continues to be somewhat unclear what effect, if any, these policies will have on the valuations of publicly traded companies excluded from the indices, but in certain situations they may depress these valuations compared to those of other similar companies that are included. Exclusion from indices could make our Class A Ordinary Shares less attractive to investors and, as a result, the market price of our Class A Ordinary Shares could be adversely affected.

 

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Any future issuances of Class B Ordinary Shares may be dilutive to the voting power of the holders of Class A Ordinary Shares.

As of the date thereof, our issued and outstanding ordinary shares consist of 9,993,743 Class A ordinary shares and 7,659,000 Class B Ordinary Shares. In respect of matters requiring the votes of shareholders, holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B Ordinary Shares are entitled to ten (10) votes per share based on our dual-class share structure. Each Class B Ordinary Share is convertible into one (1) Class A Ordinary Share (unless otherwise described herein and adjusted as per our amended and restated articles of association) at any time by the holder thereof, while Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances.

The conversion of Class B Ordinary Shares into Class A Ordinary Shares may have a dilutive effect on your percentage ownership and may result in a dilution of your voting power and an increase in the number of Class A Ordinary Shares eligible for future resale in the public market, which may negatively impact the trading price of our Class A Ordinary Shares.

Each Class B Ordinary Share is convertible at the option of the holder of Class B Ordinary Shares at any time into one Class A Ordinary Share (unless otherwise described herein and adjusted as per our amended and restated articles of association). If any such conversions occur, the total number of Class A Ordinary Shares issued and outstanding will be increased and be dilutive to our other shareholders.

If any of these newly issued Class A Ordinary Shares are offered for sale in the public market, the sales could adversely affect the prevailing market price by lowering the bid price of our Class A Ordinary Shares. In addition, issuance of Class A Ordinary Shares pursuant to the conversion of Class B Ordinary Shares may also materially impair our ability to raise capital through the future sale of equity securities because the issuance of the Class A Ordinary Shares would cause further dilution of our securities.

The dual class structure of our ordinary shares has the effect of concentrating voting control with our founders.

Our Class B Ordinary Shares have ten votes per share, and our Class A Ordinary Shares, which are the shares we are offering in our initial public offering, have one vote per share. Our founders, who are our CEO and COO, will together hold approximately 88.44% and [Š]% of the voting power of our outstanding ordinary shares before and after our initial public offering, respectively and therefore be able to control all matters submitted to our shareholders for approval. This concentrated control will limit your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring shareholder approval, until we issue substantial amount of Class A Ordinary Shares over time in the future or our founders select to convert their Class B Ordinary Shares into Class A Ordinary Shares. The conversion of Class B Ordinary Shares to Class A Ordinary Shares will have the effect, over time, of increasing the relative voting power of those holders of Class B Ordinary Shares who retain their shares in the long term.

For a description of the dual class structure, see “Description of Share CapitalAnti-Takeover Provisions.

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

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

 

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The coverage of our business or our ordinary shares by securities or industry analysts or the absence thereof could adversely affect the trading price and trading volume of our ordinary shares.

We intend to apply for the listing of our ordinary shares on NASDAQ Capital Market. However, we cannot assure you that an active trading market for our ordinary shares will develop on that exchange or elsewhere or, if developed, that any such market will be sustained. The trading market for our securities is influenced in part by the research and other reports that industry or securities analysts publish about us or our business or industry from time to time. We do not control these analysts or the content and opinions included in their reports. We may be slow to attract equity research coverage, and the analysts who publish information about our securities will have had relatively little experience with our company, which could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates. If no or few analysts commence equity research coverage of us, the trading price and volume of our securities would likely be negatively impacted. If analysts do cover us and one or more of them downgrade our securities, or if they issue other unfavorable commentary about us or our industry or inaccurate research, our stock price would likely decline. Furthermore, if one or more of these analysts cease coverage or fail to regularly publish reports on us, we could lose visibility in the financial markets. Any of the foregoing would likely cause our stock price and trading volume to decline. Accordingly, we cannot assure you of the likelihood that an active trading market will develop or be maintained, the liquidity of any trading market, your ability to sell your ordinary shares when desired or the price that you may be able to obtain in any such sale.

If we are unable to comply with certain conditions, our Class A Ordinary Shares may not trade on the NASDAQ Capital Market.

We intend to apply to list our Class A Ordinary Shares on the NASDAQ Capital Market. However, there is no guarantee that we will be successful in listing our Class A Ordinary Shares on the NASDAQ Capital Market. In addition, we have relied on an exemption to the blue sky registration requirements afforded to “covered securities.” Securities listed on the NASDAQ Capital Market are “covered securities.” If we were unable to obtain approval for listing, then we would be unable to rely on the covered securities exemption to blue sky registration requirements and we would need to register the offering in each state in which we planned to sell shares. Consequently, we will not complete this Offering until we have met the final conditions.

If we are listed on the NASDAQ Capital Market and our financial condition deteriorates, we may not meet continued listing standards on the NASDAQ Capital Market.

The NASDAQ Capital Market also requires companies to fulfill specific requirements in order for their shares to continue to be listed. If our shares are listed on the NASDAQ Capital Market but are delisted from the NASDAQ Capital Market at some later date, our shareholders could find it difficult to sell our shares. In addition, if our Class A Ordinary Shares are delisted from the NASDAQ Capital Market at some later date, we may apply to have our Class A Ordinary Shares quoted on the Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The Bulletin Board and the “pink sheets” are generally considered to be less efficient markets than the NASDAQ Capital Market. In addition, if our Class A Ordinary Shares are not so listed or are delisted at some later date, our Class A Ordinary Shares may be subject to the “penny stock” regulations. These rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our Class A Ordinary Shares might decline. If our Class A Ordinary Shares are not so listed or are delisted from the NASDAQ Capital Market at some later date or become subject to the penny stock regulations, it is likely that the price of our shares would decline and that our shareholders would find it difficult to sell their shares.

 

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If we are listed on the NASDAQ Capital Market and a limited number of participants in this offering purchase a limited amount of the shares, we may not meet continued listing standards on the NASDAQ Capital Market.

The NASDAQ Capital Market requires companies to have at least 300 round lot holders of unrestricted common stock and at least 150 required round lot holders and to hold unrestricted shares with a value of at least $2,500. There is no guarantee that we could sell our Class A Ordinary Shares to a certain amount of the shareholders or sell our Class A Ordinary Shares with a value of a certain amount. If we failed to comply with this requirement, we may not be able to continue to be listing on the NASDAQ Capital Market.

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

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

The market price for our shares may be volatile.

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

 

   

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

 

   

regulatory uncertainties with regard to our variable interest entity arrangements;

 

   

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

 

   

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

 

   

changes in financial estimates by securities research analysts;

 

   

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

 

   

additions to or departures of our senior management;

 

   

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

 

   

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

 

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release or expiry of lock-up or other transfer restrictions on our outstanding Class A Ordinary Shares; and

 

   

sales or perceived potential sales of additional Class A Ordinary Shares.

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

In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC, and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC, and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.

On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a heightened interest in an issue that has vexed U.S. regulators in recent years.

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

On June 4, 2020, the U.S. President issued a memorandum ordering the President’s Working Group on Financial Markets, or the PWG, to submit a report to the President within 60 days of the memorandum that includes recommendations for actions that can be taken by the executive branch and by the SEC or PCAOB on Chinese companies listed on U.S. stock exchanges and their audit firms, in an effort to protect investors in the U.S.

On August 6, 2020, the PWG released a report recommending that the SEC take steps to implement the five recommendations outlined in the report. In particular, to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate, or NCJs, the PWG recommends enhanced listing standards on U.S. stock exchanges. This would require, as a condition to initial and continued exchange listing, PCAOB access to work papers of the principal audit firm for the audit of the listed company. Companies unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in NCJs may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm. There is currently no legal process under which such a co-audit may be performed in China. The report permits the new listing standards to provide for a transition period until January 1, 2022 for listed companies, but would apply immediately to new listings once the necessary rulemakings and/or standard-setting are effective. The measures in the PWG Report are presumably subject to the standard SEC rulemaking process before becoming effective. On August 10, 2020, the SEC announced that SEC Chairman had directed the SEC staff to prepare proposals in response to the PWG Report, and that the SEC was soliciting public comments and information with respect to these proposals. After we are listed on the Nasdaq Capital Market, if we fail to meet the new listing standards before the deadline specified thereunder due to factors beyond our control, we could face possible de-listing from the NASDAQ Capital Market, deregistration from the SEC and/or other risks, which may materially and adversely affect, or effectively terminate, our ADS trading in the United States.

 

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

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is headquartered in Manhattan, New York, and has been inspected by the PCAOB on a regular basis with the last inspection in May 2018 and an ongoing inspection that started in October 2020. The recent developments would add uncertainties to our offering and we cannot assure you whether the national securities exchange we apply to for listing or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit.

The Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.

On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act requiring a foreign company to certify it is not owned or controlled by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange. On December 2, 2020, the U.S. House of Representatives approved the Holding Foreign Companies Accountable Act. On December 18, 2020, the Holding Foreign Companies Accountable Act was signed into law.

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is headquartered in Manhattan, New York, and has been inspected by the PCAOB on a regular basis with the last inspection in May 2018 and an ongoing inspection that started in October 2020. The recent developments would add uncertainties to our offering and we cannot assure you whether the national securities exchange we apply to for listing or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit.

We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive

 

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compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime. As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

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

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our Class A Ordinary Shares. An aggregate of 9,993,743 Class A Ordinary Shares, and 3,078,548 options are outstanding before the consummation of this offering and [●] Class A Ordinary Shares will be outstanding immediately after this offering with an aggregate of [●] shares issuable upon the exercise of warrants and options. All of the shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act.

Investors in this Offering will experience immediate and substantial dilution.

The Offering Price of our shares is expected to be substantially higher than the pro forma net tangible book value per share of our Class A Ordinary Shares. Assuming the completion of the Offering and an Offering Price of $[●] per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, if you purchase shares in this Offering, you will incur immediate dilution of approximately $[●] or approximately [●]% in the pro forma net tangible book value per share from the price per share that you pay for the shares. Accordingly, if you purchase shares in this Offering, you will incur immediate and substantial dilution of your investment. See “Dilution” beginning on page 62.

We have not finally determined the use of the proceeds from this offering, and we may use the proceeds in ways with which you may not agree.

While we have identified the priorities to which we expect to put the proceeds of this offering, our management will have considerable discretion in the application of the net proceeds received by us. Specifically, we intend to use the net proceeds from this offering for expansion and upgrades of our production lines and warehouse facilities, establishment promotion of overseas sales, and working capital and general corporate purposes. We have reserved the right to re-allocate funds currently allocated to that purpose to our general working capital. If that were to happen, then our management would have discretion over even more of the net proceeds to be received by our company in this offering. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve profitability or increase our stock price. The net proceeds from this offering may be placed in investments that do not produce profit or increase value. See “Use of Proceeds” beginning on page 57.

We will incur increased costs as a result of being a publicly-traded company.

As a company with publicly-traded securities, we will incur additional legal, accounting and other expenses not presently incurred. In addition, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and

 

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Consumer Protection Act of 2010, as well as rules promulgated by the SEC and the national securities exchange on which we list, requires us to adopt corporate governance practices applicable to U.S. public companies. These rules and regulations will increase our legal and financial compliance costs.

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

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

 

   

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

 

   

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

 

   

the date on which we have, during the previous 3-year period, issued more than $1.0 billion in non-convertible debt; or

 

   

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

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

We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our Class A Ordinary Shares.

Based on the anticipated market price of our Class A Ordinary Shares in this offering and expected price of our Class A Ordinary Shares following this offering, and the composition of our income, assets and operations, we do not expect to be treated as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for the current taxable year or in the foreseeable future. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you the U.S. Internal Revenue Service will not take a contrary position. Furthermore, this is a factual determination that must be made annually after the close of each taxable year. If we are a PFIC for any taxable year during which a U.S. holder holds our Class A Ordinary Shares, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder.

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

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

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of the Class A Ordinary Shares of approximately $[●], based upon an assumed initial public offering price of $[●] per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses

Each $0.25 increase (decrease) in the assumed initial public offering price of $[●] per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $[●], assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

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

 

   

Approximately $[●] (or $[●] if the over-allotment option is exercised in full) or 20% for sales and marketing;

 

   

Approximately $[●] (or $[●] if the over-allotment option is exercised in full) or 20% for research and development;

 

   

Approximately $[●] (or $[●] if the over-allotment option is exercised in full) or 10% for logistics and warehousing capabilities; and

 

   

Approximately $[●] (or $[●] if the over-allotment option is exercised in full) or 50% for working capital.

The precise amounts and percentage of proceeds we would devote to particular categories of activity will depend on prevailing market and business conditions as well as particular opportunities that may arise from time to time. This expected use of our net proceeds from this Offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including any unforeseen cash needs. Similarly, the priority of our prospective uses of proceeds will depend on business and market conditions are they develop. Accordingly, our management will have significant flexibility and broad discretion in applying the net proceeds of the 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.

In utilizing the proceeds of this Offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiary and branches only through loans or capital contributions. None of the proceeds of this Offering can be loaned or contributed to our PRC subsidiary without additional government registration or approval. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans or make additional capital contributions to our PRC subsidiary and branches to fund its capital expenditures or working capital. There is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiary. This is because there are no statutory limits on the amount of registered capital for our PRC subsidiary, and we are allowed to make capital contributions to our PRC subsidiary by subscribing for its initial registered capital and increased registered capital, provided that the PRC subsidiary completes the relevant necessary filing and registration procedures in accordance with the applicable laws and regulations. With respect to loans to the PRC subsidiary by us, (i) if the relevant PRC subsidiary determines to adopt the traditional foreign exchange administration mechanism, or the current foreign debt mechanism, the outstanding amount of the loans shall not exceed the difference between the total investment and the registered capital of the PRC subsidiary and there is, in effect, no statutory limits on the amount of loans that we can make to our PRC subsidiary under this circumstance since we can increase the registered capital of our PRC subsidiary by making capital contributions to them, subject to the completion of relevant registrations, and the difference between the total investment and the registered capital will increase accordingly; and (ii) if the

 

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relevant PRC subsidiary determines to adopt the foreign exchange administration mechanism as provided in the Notice of the People’s Bank of China (“PBOC”) on Full-coverage Macro-prudent Management of Cross-border Financing (the “PBOC Notice No. 9”), the risk-weighted outstanding amount of the loans, which shall be calculated based on the formula provided in the PBOC Notice No. 9, shall not exceed 200% of the net asset of the relevant PRC subsidiary. According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of the PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of the PBOC Notice No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiary.

According to the relevant PRC laws and regulations, in terms of capital contributions, it typically takes about eight weeks to complete the relevant filings and registrations. In terms of loans, the SAFE registration process typically takes about four weeks to complete, provided that all the necessary procedures could be successfully consummated by the relevant PRC subsidiary, as case may be, and/or our company. While we currently see no material obstacles to completing the filing and registration procedures with respect to future capital contributions and loans to our PRC subsidiary, we cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Doing Business in China—We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or controlled PRC affiliate or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we receive from this Offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business”, and “Risk Factors—Risks Related to Doing Business in China—However, we cannot assure you that the PRC government will not take measures in the future to restrict access to foreign currencies for current account transactions.” It is likely that we will need to convert some of our net proceeds in U.S. dollars into Renminbi in order to use as proceeds as contemplated in this section. For details of PRC regulations governing foreign currency conversion, see “Government Regulation—Regulation of Foreign Currency Exchange.”

Pending remitting the Offering proceeds to the PRC, we intend to invest our net proceeds in short-term, interest bearing, investment-grade obligations.

Although we may use a portion of the proceeds for the acquisition of, or investment in, companies, technologies, products or assets that complement our business, we have no present understandings, commitments or agreements to enter into any acquisitions or make any investments. We cannot assure you that we will make any acquisitions or investments in the future.

 

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DIVIDEND POLICY

Our board of directors has discretion on whether to distribute dividends. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that the company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if we decide to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are an exempted company with limited liability incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. Our subsidiary in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve funds until the accumulative amount of such statutory reserve funds reaches 50% of its registered capital. Upon contribution to the statutory reserve funds using its post-tax profits, a PRC company may also make further contribution to the discretionary reserve funds using its post-tax profits in accordance with a resolution of the shareholders meeting. Where the shareholders or the board of directors violates the provisions of the preceding paragraphs to distribute profits to the shareholders before making up for the losses and contributing to the statutory reserve funds, the shareholders shall return such distributed profits to the company.

If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of our Ordinary Shares to the depositary, as the registered holder of such Ordinary Shares, and the depositary then will pay such amounts to the holders of our Ordinary Share, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of Share Capital.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2020:

 

   

On an actual basis; and

 

   

On a pro forma basis to give effect to the sale of [●] Class A Ordinary Shares by us in this offering at the assumed initial public offering price of $[●] per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting the estimated underwriting commissions and estimated offering expenses and assuming that the underwriters do not exercise their over-allotment option.

In addition, we currently have 7,659,000 Class B Ordinary Shares issued and outstanding. Holders of Class A Ordinary Shares and Class B Class A Ordinary Shares have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each Class A Ordinary Share will be entitled to 1 vote and each Class B Ordinary Share will be entitled to 10 votes. The Class A Ordinary Shares are not convertible into shares of any other class. The Class B Ordinary Shares are convertible into Class A Ordinary Shares at any time after issuance at the option of the holder on a one to one basis. The Class B Ordinary Shares shall automatically convert into fully paid and nonassessable Class A Ordinary Shares on a one to one ratio upon the occurrence of certain events as described herein. See “Description of Share Capital—Class B Ordinary Shares.” The Class B Ordinary Shares are not being converted as part of this Offering.

You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.” You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.”

 

     As of December 31, 2020  
     Actual      Pro Forma
Adjusted
for IPO
 

Ordinary Shares

     

Class A Ordinary Shares, par value of $0.08 per share, 15,000,000 shares authorized, 9,993,743 issued; Pro forma reflects [    ] share issued and outstanding

   $ 799,499        [ ●] 

Class B Ordinary Shares, par value of $0.08 per share, 10,000,000 shares authorized, 7,659,000 issued; Pro forma reflects [    ] share issued and outstanding

   $ 612,720        [ ●] 

Additional Paid-In Capital

   $ 14,354,312      $ [ ●] 

Statutory Reserves

   $ 490,200      $ [ ●] 

Accumulated Deficit

   $ (9,940,254    $ [ ●] 

Accumulated Other Comprehensive Loss

   $ (349,647    $ [ ●] 

Total shareholder’s equity

   $ 5,966,830      $ [ ●] 

 

(1)   Reflects the sale of Class A Ordinary Shares in this offering at an assumed initial public offering price of $[●] per share, and after deducting the estimated 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. Additional paid-in capital reflects the net proceeds we expect to receive, after deducting the underwriting discounts, non-accountable expense allowance and estimated offering expenses payable by us. We estimate that such net proceeds will be approximately $[●], assuming the Underwriter has not exercised the over-allotment option. The net proceeds of $[●] are calculated as follows: $[●] gross offering proceeds, less underwriting discounts and non-accountable expense allowance of $[●] and estimated offering expenses of $[●]. The pro forma as adjusted total equity of $[●] is the sum of the net proceeds of $[●] and the actual equity of $[●].

 

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A $0.25 increase in the assumed initial public offering price of $[●] per Ordinary Share would increase each of additional paid-in capital, total shareholders’ equity and total capitalization by $[●] million, while a $0.25 decrease in the assumed initial public offering price of $[●] per Ordinary Share would decrease each of additional paid-in capital, total shareholders’ equity and total capitalization by $[●] million, assuming the number of Class A Ordinary Shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts, non-accountable expense allowance and estimated expenses payable by us.

 

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DILUTION

If you invest in our shares, your interest will be diluted to the extent of the difference between the initial public offering price per ordinary share and the pro forma net tangible book value per ordinary share after the offering.

Holders of Class A Ordinary Shares and Class B Class A Ordinary Shares have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each Class A Ordinary Share will be entitled to 1 vote and each Class B Ordinary Share will be entitled to 10 votes. The Class A Ordinary Share and Class B Ordinary Share are collectively known as ordinary shares. The Class B Ordinary Shares are not being converted as part of this Offering.

Our net tangible book value as of December 31, 2020 was $[●], or $[●] per share. Our pro forma net tangible book value as of [●] was $[●], or $[●] per share. Our pro forma net tangible book value per share set forth below represents our total tangible assets less total liabilities, divided by the number of shares of our share stock outstanding, and assumes no exercise by the underwriter of the over-allotment option.

Dilution results from the fact that the per ordinary share offering price is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding Class A Ordinary Shares. After giving effect to our issuance and sale of [●] Class A Ordinary Shares in this offering at an assumed initial public offering price of $[●] per share, after deducting the estimated underwriting discounts and offering expenses payable by us, the pro forma as adjusted net tangible book value as of [●] would have been $[●], or $[●] per share. This represents an immediate increase in net tangible book value to existing shareholders of $[●] per share. The public offering price per share will significantly exceed the net tangible book value per share. Accordingly, new investors who purchase shares in this offering will suffer an immediate dilution of their investment of $[●] per share. The following table illustrates this per share dilution to the new investors purchasing shares in this offering:

 

     Offering   

Assumed offering price per ordinary share

   $ [●]  

Net tangible book value per ordinary share as of [●]

   $ [●]  

Increase per ordinary share attributable to this offering

   $ [●]  

Pro forma net tangible book value per ordinary share after the offering

   $ [●]  

Dilution per ordinary share to new investors

   $ [●]  

A $0.25 increase (decrease) in the assumed public offering price of $[●] per share would increase (decrease) the pro forma net tangible book value by $[●], the pro forma net tangible book value per share after this offering by $[●] per share and the dilution in pro forma net tangible book value per share to investors in this offering by $[●] per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.

 

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POST-OFFERING OWNERSHIP

The following charts illustrate our pro forma proportionate ownership, upon completion of this offering by present shareholders and investors in this offering, compared to the relative amounts paid by each. The charts reflect payment by present shareholders as of the date the consideration was received and by investors in this offering at the assumed offering price without deduction of commissions or expenses. The charts further assume no changes in net tangible book value other than those resulting from the offering.

Post-Offering Ownership—No Exercise of Over-Allotment Option

 

     Class A Ordinary Shares
Purchased
    Total Consideration     Average Price  
     Amount (#)     Percent (%)     Amount ($)     Percent* (%)     Per Share ($)  

Existing shareholders

     [ ●]      [●]     [ ●]      [●]   $ [ ●] 

New investors

     [ ●]      [●]     [ ●]      [●]   $ [ ●] 

Total

     [ ●]      100.0     [ ●]      100.0   $ [ ●] 

Post-Offering Ownership—Full Exercise of Over-Allotment Option

 

     Class A Shares Purchased     Total Consideration     Average Price  
     Amount (#)     Percent (%)     Amount ($)     Percent* (%)     Per Share ($)  

Existing shareholders

     [ ●]      [●]     [ ●]      [●]   $ [ ●] 

New investors

     [ ●]      [●]     [ ●]      [●]   $ [ ●] 

Total

     [ ●]      100.0     [ ●]      100.0   $ [ ●] 

The number of Class A Ordinary Shares reflected in the discussion and table above is based on [●] Class A Ordinary Shares and [●] Class B Ordinary Shares issued and outstanding as of June 30, 2020 and excludes outstanding share options and warrants (See “Capitalization”).

 

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CORPORATE HISTORY AND STRUCTURE

Our History

ICZOOM Group Inc. (“ICZOOM”), formerly known as Horizon Business Intelligence Co., Limited (“HBI”), was incorporated as an exempted company with limited liability under the laws of Cayman Islands on June 23, 2015. The Company changed to its current name on May 3, 2018.

The Company owns 100% equity interest of the following four companies that incorporated in accordance with the laws and regulations in Hong Kong:

 

  1)

Iczoom Electronics Limited (“ICZOOM HK”), an entity incorporated on May 22, 2012;

 

  2)

Ehub Electronics Limited (“Ehub”), an entity incorporated on September 13, 2012;

 

  3)

Hjet Industrial Corporation Limited (“Hjet HK”), an entity incorporated on August 6, 2013;

 

  4)

Components Zone International Limited (“Components Zone HK”), an entity incorporated on May 19, 2020.

Components Zone (Shenzhen) Development Limited (“ICZOOM WFOE”), was formed on September 17, 2020 as a WFOE in PRC. Its equity interest is 100% owned by Components Zone HK.

ICZOOM, ICZOOM WFOE, Hjet Shuntong (Shenzhen) Co., Ltd. (“Hjet Shuntong”), and Component Zone Shenzhen are currently not engaging in any active business operations and merely acting as holding companies.

Prior to the reorganization described below, Mr. Lei Xia, the chairman of the board of directors and the chief executive officer of the Company, and Ms. Duanrong Liu, a member of the board of directors and the chief operating officer of the Company, were the controlling shareholders of Hjet Shuntong, an entity incorporated on November 8, 2013 in accordance with PRC laws. Hjet Shuntong is currently not engaging in any active business operations and merely acting as holding company. Hjet Shuntong owns 100% of the equity interest of two subsidiaries: (1) Shenzhen Hjet Supply Chain Co., Ltd. (“Hjet Supply Chain”), incorporated on July 3, 2006 in accordance with PRC laws; and (2) Shanghai Heng Nuo Chen International Freight Forwarding Co., Ltd. (“Heng Nuo Chen”), incorporated on March 25, 2015 in accordance with PRC laws.

Hjet Spply Chain in turn owns 100% of the equity interest of two subsidiaries: (1) Shenzhen ICZoom Electronics Co., Ltd. (“ICZOOM Shenzhen”) was incorporated on July 20, 2015 in accordance with PRC laws; (2) Shenzhen Hjet Yun Tong Logistics Co., Ltd. (“Hjet Logistics”) was incorporated on May 31, 2013 in accordance with PRC laws.

Hjet Supply Chain, Heng Nuo Chen, ICZOOM Shenzhen and Hjet Logistics, these four entities are collectively referred to as the “ICZoom Operating Companies” below.

A reorganization of our legal structure was completed on December 16, 2020 (the “Reorganization”). The reorganization involved the incorporation of ICZOOM WFOE, the transfer of the 100% equity interest of ICZOOM operating entities to ICZOOM WFOE, and entering into certain contractual arrangements between ICZOOM WFOE and the shareholders of Shenzhen Pai Ming Electronics Co., Ltd. (“Pai Ming Shenzhen”). Consequently, ICZOOM became the ultimate holding company of all the entities mentioned above.

 

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Our Corporate Structure

The following charts summarize our corporate legal structure and identify our subsidiaries, our VIE and its subsidiaries as of the date of this prospectus. For more detail on our corporate history please refer to “Corporate History” appearing on page 64 of this prospectus.

 

 

LOGO

For details of each shareholder’s ownership, please refer to the beneficial ownership table in the section captioned “Principal Shareholders.”

 

Name   

Background

  

Ownership

ICZOOM HK   

•  A Hong Kong company

•  Incorporated on May 22, 2012

•  Purchase of electronic components from overseas suppliers

   100% owned by ICZOOM
Components Zone HK   

•  A Hong Kong company

•  Incorporated on May 19, 2020

•  A holding company

   100% owned by ICZOOM
Ehub   

•  A Hong Kong company

•  Incorporated on September 13, 2012

•  Purchase of electronic components from overseas suppliers

   100% owned by ICZOOM
Hjet HK   

•  A Hong Kong company

•  Incorporated on August 6, 2013

•  Purchase of electronic components from overseas suppliers

   100% owned by ICZOOM

 

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Name   

Background

  

Ownership

ICZOOM WFOE   

•  A PRC company and deemed a WFOE

•  Incorporated on September 17, 2020

•  Registered capital of $350,000

•  A holding company, Consultancy and information technology support

   100% owned by Components Zone HK
Pai Ming Shenzhen   

•  A PRC company

•  Incorporated on May 9, 2012

•  Registered capital of RMB 1,000,000

•  A variable interest entity.

   VIE of ICZOOM WFOE;
Hjet Shuntong   

•  A PRC company

•  Incorporated on November 8, 2013

•  Registered capital of RMB 2,140,000

•  A holding company.

   100% owned by ICZOOM WFOE
Hjet Supply Chain   

•  A PRC company

•  Incorporated on July 3, 2006

•  Registered capital of RMB 18,700,000

•  Order fulfillment.

   100% owned by Hjet Shuntong
Heng Nuo Chen   

•  A PRC company

•  Incorporated on March 25, 2015

•  Registered capital of RMB 5,000,000

•  Logistics and product shipping.

   100% owned by Hjet Shuntong
ICZOOM Shenzhen   

•  A PRC company

•  Incorporated on July 20, 2015

•  Registered capital of RMB 17,500,000

•  Sales of electronic components through B2B e-commerce platform

   100% owned by Hjet Supply Chain
Hjet Logistics   

•  A PRC company

•  Incorporated on May 31, 2013

•  Registered capital of RMB 2,000,000

•  Logistics and product shipping

   100% owned by Hjet Supply Chain

Contractual Arrangements

Due to legal restrictions on foreign ownership and investment in, among other areas, the development and operation of electronic component exchange in China, including Shenzhen and Shanghai, we operate our businesses in which foreign investment is restricted or prohibited in the PRC through certain PRC domestic companies. As such, Pai Ming Shenzhen is controlled through contractual arrangements in lieu of direct equity ownership by us or any of our subsidiaries. Such contractual arrangements consist of a series of three agreements, along with shareholder’s powers of attorney (“POA”) and irrevocable commitment letters (collectively, the “Contractual Arrangements”), which were signed on December 14, 2020.

The significant terms of the Contractual Arrangements are as follows:

Exclusive Business Cooperation Agreement

Pursuant to the exclusive business cooperation agreement between ICZOOM WFOE and Pai Ming Shenzhen, ICZOOM WFOE has the exclusive right to provide Pai Ming Shenzhen with technical support services, consulting services and other services, including granting use rights of intellectual property rights,

 

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software services, network support, database support, hardware services, technical support, employee training, research and development of technology and market information, business management consulting, marketing and promotion services, customer management and services, lease hardware and device, and the others necessary for Pai Ming Shenzhen’s needs. In exchange, ICZOOM WFOE is entitled to a service fee that equals to all of the consolidated profit after offsetting previous year’s accumulated deficit, operating costs, expenses, taxes, and other contributions and reasonable operation profit of Pai Ming Shenzhen. In addition to the services fees, Pai Ming Shenzhen will reimburse all reasonable costs, reimbursed payments and out-of-pocket expenses, paid or incurred by ICZOOM WFOE in connection with its performance.

Under the exclusive business cooperation agreement, without ICZOOM WFOE’s prior written consent, Pai Ming Shenzhen agrees not to engage in any transaction which may materially affect its asset, business, employment, obligation, right or operation.

The exclusive business cooperation agreement remains effective, unless terminated pursuant to the exclusive business cooperation agreement or upon the written notice of ICZOOM WFOE.

Call Option Agreements

Pursuant to the call option agreements, among ICZOOM WFOE, Pai Ming Shenzhen and the shareholder who owned all of Pai Ming Shenzhen, such shareholder jointly and severally grant ICZOOM WFOE an option to purchase their equity interests in Pai Ming Shenzhen. The purchase price shall be the lowest price then permitted under applicable PRC laws. ICZOOM WFOE or its designated person may exercise such option at any time to purchase all or part of the equity interests in Pai Ming Shenzhen until it has acquired all equity interests of Pai Ming Shenzhen, which is irrevocable during the term of the agreements.

The call option agreements remain in effect until all equity interests held by the shareholder have been transferred or assigned to ICZOOM WFOE and/or any other person designated by ICZOOM WFOE. However, ICZOOM WFOE has the right to terminate these agreements unconditionally upon giving prior written notice to Pai Ming Shenzhen at any time.

Equity Pledge Agreement

Pursuant to the equity pledge agreement among the shareholders who collectively owned all of Pai Ming Shenzhen, such shareholder pledges all of the equity interests in Pai Ming Shenzhen to ICZOOM WFOE as collateral to secure the obligations of Pai Ming Shenzhen under the exclusive business cooperation agreement and call option agreements. These shareholders are prohibited or may not transfer the pledged equity interests without prior consent of ICZOOM WFOE unless transferring the equity interests to ICZOOM WFOE or its designated person in accordance to the call option agreements.

The equity pledge agreement shall come into force the date on which the pledged interests is recorded, which is three days after signing of the Agreement on December 14, 2020, under Pai Ming Shenzhen’s register of shareholders and is registered with competent administration for industry and commerce of Pai Ming Shenzhen until all of the liabilities and debts to ICZOOM WFOE have been fulfilled completely by Pai Ming Shenzhen. Pai Ming Shenzhen and the shareholder who owned all of Pai Ming Shenzhen shall not terminate these agreements in any circumstance for any reason.

Shareholders’ POAs

Pursuant to the shareholder’s POA, the shareholder of Pai Ming Shenzhen give ICZOOM WFOE an irrevocable proxy to act on their behalf on all matters pertaining to Pai Ming Shenzhen and to exercise all of his right as a shareholder of Pai Ming Shenzhen, including the right to execute and deliver shareholder resolutions, to dispose any or equity interests, to nominate, elect, designate, or appoint officers and directors, to supervise

 

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company’s performance, to approve submission of any registration documents, to attend shareholders meetings, to exercise voting rights and all of the other rights, to take legal actions against the harmful actions by directors or officers, to approve the amendments to the articles of association of the company, and any other rights under the articles of association of the company. The POAs shall remain in effect while the shareholder of Pai Ming Shenzhen holds the equity interests in Pai Ming Shenzhen.

Spouse Consent Letter

Pursuant to the Spouse Consent Letters dated December 14, 2020, the spouse of the sole shareholder of Pai Ming Shenzhen, unconditionally and irrevocably agreed not to assert any rights over the equity interest in Pai Ming Shenzhen held by and registered in the name of the spouse. In addition, the spouse agreed to be bound by the VIE Arrangements described here if the spouse obtains any equity interest in Pai Ming Shenzhen for any reason.

Based on the foregoing contractual arrangements, which grant ICZOOM WFOE effective control of Pai Ming Shenzhen and enable ICZOOM WFOE to receive all of their expected residual returns, we account for Pai Ming Shenzhen as a VIE. Accordingly, we consolidate the accounts of Pai Ming Shenzhen for the periods presented herein, in accordance with Regulation S-X-3A-02 promulgated by the SEC and Accounting Standards Codification (“ASC”) 810-10, Consolidation.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

We are a technology-driven company running an ecommerce trading platform and are primarily engaged in sales of electronic component products to customers in the PRC. Major electronic component products we sold to customers through our online e-commerce platform fall into two broad product categories: semiconductor products (such as integrated circuit, power/circuit protection, discretes, passive components, optoelectronics/electromechanical, etc.) and equipment, tools and other electronic component products (such as MRO, and various design tools, etc.). These products are primarily used by customers in the consumer electronic industry, IoT, automotive electronics, industry control segment with primary target customers being China SMEs. In addition to sales of electronic component products, we also provide services to customers to earn service commission fees, such services include, but not limit to, order fulfillment, temporary warehousing, logistic and shipping, and customs clearance, etc.

Built upon our proprietary industry knowledge and coupled with our SaaS suite, we are committed to working with our clients to understand their needs and challenges and offering suitable products and services to help them meet their respective needs. Our mission is to transform the traditional electronic component distribution business by offering SME customers integrated solutions and help them introduce innovative products, reduce their time to market, and enhance their overall competitiveness.

We primarily generate revenue from sales of electronic components products to customers. In addition, we have certain amount of revenue from service commission fee for services provided to our customers including, but not limit to, customs clearance, warehousing and product shipping and delivery services.

Our Organization

The Company, together with its wholly owned subsidiaries and its VIE, is effectively controlled by the same shareholders before and after the Reorganization and therefore the Reorganization is considered as a recapitalization of entities under common control. The consolidation of the Company, its subsidiaries, and its VIEs has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.

Our revenues increased by $47,452,282, or 59.2%, from $ 80,214,687 for the six months ended December 31, 2019, to $127,666,969 for the six months ended December 31, 2020. Revenues from sales of electronic component products accounted for 99.4% and 98.9% of our total revenues for the six months ended December 31, 2020 and 2019, respectively. Revenues from service commission fees accounted for 0.6% and 1.1% of our total revenues for the six months ended December 31, 2020 and 2019, respectively.

Our revenues increased by $45,571,160, or 38.1%, from $119,642,451 for the fiscal year ended June 30, 2019, to $165,213,611 for the fiscal year ended June 30, 2020. Revenues from sales of electronic component products accounted for 99.2% and 99.0% of our total revenues for the fiscal years ended June 30, 2020 and 2019, respectively. Revenues from service commission fees accounted for 0.8% and 1.0% of our total revenues for the fiscal years ended June 30, 2020 and 2019, respectively.

 

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The following tables illustrate the amount and percentage of our revenue for the six months ended December 31, 2020 and 2019 and for the years ended June 30, 2020 and 2019, respectively:

 

     For the six months ended December 31,  
     2020     2019     Variances  
     Amount      % of
total
revenue
    Amount      % of
total
revenue
    Amount     %  

Revenues

              

Sales of electronic components

   $ 126,881,524        99.4   $ 79,371,199        98.9   $ 47,510,325       59.9

Service commission fee

     785,445        0.6     843,488        1.1     (58,043     (6.9 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

   $ 127,666,969        100.0   $ 80,214,687        100.0   $ 47,452,282       59.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

     For the years ended June 30,  
     2020     2019     Variances  
     Amount      % of
total
revenue
    Amount      % of
total
revenue
    Amount      %  

Revenues

               

Sales of electronic components

   $ 163,971,645        99.2   $ 118,452,218        99.0   $ 45,519,427        38.4

Service commission fee

     1,241,966        0.8     1,190,233        1.0     51,733        4.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue

   $ 165,213,611        100.0   $ 119,642,451        100.0   $ 45,571,160        38.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Key Factors That Affect Our Results of Operations

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

Effectiveness of Risk Management

The success of our business relies heavily on our ability to effectively evaluate customers’ credit profiles and the likelihood of default. We have devised and implemented a systematic credit assessment model and disciplined risk management approach to minimize customers’ default risk and mitigate the impact of default. Specifically, our assessment model and risk management capabilities enable us to select high-quality SME customers whose financial conditions and background meet our selection criteria. There can be no assurance that our risk management measures will allow us to identify or appropriately assess whether customer payments due will be collected when due. If our risk management approach is ineffective, or if we otherwise fail or are perceived to fail to manage the impact of default, our reputation and market share could be materially and adversely affected, which would severely impact our business and results of operations.

Our Ability to Attract Additional Customers and Increase the Spending Per Customer

Our major customers are China’s SMEs running their businesses in the consumer electronic industry, Internet of Things, automotive electronics, and industry control segment, etc. We currently sell our electronic component products to these customers in 19 provinces in China, with significant customers located in Guangdong Province, Jiangsu Province, Liaoning Province, Beijing City and Shanghai City in China. We plan to expand our business to extended geographic areas to cover 80% of the provinces in China within the next 1-2 years. For the years ended June 30, 2020 and 2019, we had total 866 and 749 customers, respectively, and for the six months ended December 31, 2020 and 2019, we had total 702 and 603 customers, respectively. No single customer accounted for more than 10% of our total revenue in either period. Our top 10 customers in the aggregate accounted for 25.9% and 32.0% of our total revenues for the years ended June 30, 2020 and 2019, respectively. For the six months ended December 31, 2020 and 2019, our top 10 customers in aggregate accounted for 25.0% and 27.4% of the total revenue, respectively.

 

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Our dependence on a small number of larger customers could expose us to the risk of substantial losses if a single large customer stops purchasing our products, purchases fewer of our products or goes out of business and we cannot find substitute customers on equivalent terms. If any of our significant customers reduces the quantity of the products it purchases from us or stops purchasing from us, our net revenues could be materially and adversely affected. Therefore, the success of our business in the future depends on our effective marketing efforts to expand our distribution network in the PRC in an effort to increase our geographic penetration. The success of expansion will depend upon many factors, including our ability to form relationships with, and manage an increasing number of, customers and optimize our distribution network. If our marketing efforts fail to convince customers to accept our products, we may find it difficult to maintain the existing level of sales or to increase such sales. Should this happen, our net revenues would decline and our growth prospectus would be severely impaired.

Our Ability to Increase Awareness of Our Brand and Develop Customer Loyalty

Our brand is integral to our sales and marketing efforts. We will promote our company brand to enhance customer recognition of our company brand; at the same time, we will increase our customers’ stickiness through our SaaS services. We believe that maintaining and enhancing our brand name recognition in a cost-effective manner is critical to achieving widespread acceptance of our electronic component products and is an important element in our effort to increase our customer base. Successful promotion of our brand name will depend largely on our marketing efforts and ability to provide reliable and quality products at competitive prices. Brand promotion activities may not necessarily yield increased revenue, and even if they do, any increased revenue may not offset the expenses we will incur in marketing activities. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract new customers or retain our existing customers, in which case our business, operating results and financial condition, would be materially adversely affected.

Our ability to establish and retain long-term strategic relationship with suppliers

We source our products from various suppliers, mainly including some of the top brand-name suppliers in electronic component product categories. Maintaining good relationships with these suppliers and procuring products from suppliers on favorable terms are important to the growth of our business. With the growth of our e-commerce platform, we expect we will be able to continuously provide more demand information to our suppliers. However, there can be no assurance that our current suppliers will continue to sell electronic component products to us on terms acceptable to us, or that we will be able to establish new or extend current supplier relationships to ensure a steady supply of electronic component products in a timely and cost-efficient manner. If we are unable to develop and maintain good relationships with suppliers, we may not be able to offer products demanded by our customers, or to offer them in sufficient quantities and at prices acceptable to them. In addition, if our suppliers cease to provide us with favorable pricing or payment terms or exchange privileges, our working capital requirements may increase and our operations may be materially and adversely affected. Any deterioration in our relationship with major suppliers, or a failure to timely resolve disputes with or complaints from our major suppliers, could materially and adversely affect our business, prospects and results of operations.

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

Because orders from SMEs are often very complicated and the order amount is small, the cost of serving them for the existing traditional business model is relatively high. We reduce our operating cost through our advanced e-commerce business model and effectively serve SMEs at an effective low cost. Our business growth is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, secure new contracts with customers and our ability to control costs and expenses to improve our operating efficiency. Our inventory costs (including third-party electronic component product purchase costs, tariffs, inbound freight and shipping costs, warehouse lease and overhead costs and business taxes) have a direct impact on our profitability. The inventory purchase costs are subject to price volatility and other inflationary pressures,

 

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which may, in turn, result in an increase in the amount we pay for sourced products. Price increases may adversely impact our financial results. In addition, our staffing costs (including payroll and employee benefit expense) and administrative expenses also have a direct impact on our profitability. Our ability to drive the productivity of our staff and enhance our operating efficiency affects our profitability. To the extent that the costs we are required to pay to our suppliers and our staffs exceed our estimates, our 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.

Our Ability to Compete Successfully

The electronic component procurement market in China is intensely competitive. We face competition from large information based B2B e-commerce companies, offline distributors, vendors, and traders of electronic components, many of which possess significant brand recognition, sales volume and customer bases, and some of which currently sell, or in the future may sell, products or services through their online service platforms. Some of our current and potential competitors have significantly greater financial, technical or marketing resources than we do. In addition, some of our competitors or new entrants may be acquired by, receive investment from or enter into strategic relationships with, well-established and well-financed companies or investors which would help enhance their competitive positions. Our failure to properly respond to increased competition and the above challenges may reduce our operating margins, market share and brand recognition, or force us to incur losses, which will have a material adverse effect on our business, prospects, financial condition and results of operations.

A Severe or Prolonged Slowdown in The Global or Chinese Economy Could Materially and Adversely Affect Our Business and Our Financial Condition

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

COVID-19

In December 2019, a novel strain of coronavirus was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. The COVID-19 outbreak has been causing lockdowns, travel restrictions, and closures of businesses across the globe. Due to the outbreak of COVID-19, in early February 2020, the Chinese government required the nationwide closure of many business activities in the PRC to prevent the spread of COVID-19 and protect public health. As a result, we temporarily closed our facilities for one month (from the beginning of February until March 1, 2020). In addition, some of our existing customers has experienced financial distress and disruption of business, which resulted in delay on their payments.

As of the date of this prospectus, the spread of COVID-19 in China appears to have slowed down and most provinces and cities have resumed business activities under the guidance and support of the local

 

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government. Nevertheless, a resurgence could negatively affect the execution of our sales contract and fulfillment of customer orders and the collection of the payments from customers on a timely manner. We will continue to monitor and modify the operating strategies in response to the COVID-19. The extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted at this point.

Key Financial Performance Indicators

In assessing our financial performance, we consider a variety of financial performance measures, including growth in net revenue and gross profit, our ability to control costs and operating expenses to improve our operating efficiency and net income. Our review of these indicators facilitates timely evaluation of the performance of our business and effective communication of results and key decisions, allowing our business to respond promptly to competitive market conditions and different demands and preferences from our customers. The key measures that we use to evaluate the performance of our business are set forth below and are discussed in greater details under “Results of Operations”.

 

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For the six months ended December 31, 2020 and 2019

Net Revenue

Our net revenue is driven by changes in the number of customers, sales volume, selling price, and mix of products sold.

 

    For the six months ended December 31,     For the fiscal year ended June 30,  
    2020     2019     Variances     %     2020     2019     Variances     %  

Sales of electronic components:

               

Sales of semiconductor products

    87.4     81.1         83.5     82.7    

Sales of equipment, tools and others

    12.0     17.8         15.6     16.3    
 

 

 

   

 

 

       

 

 

   

 

 

     

Total sales of electronic component products

    99.4     98.9         99.2     99.0    

Service commission fee

    0.6     1.1         0.8     1.0    
 

 

 

   

 

 

       

 

 

   

 

 

     

Total revenue

    100.0     100.0         100.0     100.0    
 

 

 

   

 

 

       

 

 

   

 

 

     

Number of customers for electronic component products

    602       534       68       12.7     779       624       155       24.8

Number of customers for services

    100       69       31       44.9     87       125       (38     (30.4 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total number of customers *

    702       603       99       16.4     866       749       117       15.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock-keeping unit (SKUs) sold-Semiconductor

    8,891       6,301       2,590       41.1     11,721       9,655       2,066       21.4

Stock-keeping unit (SKUs) sold-Equipment and tools

    4,528       4,091       437       10.7     6,717       6,734       (17     (0.3 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total SKUs

    13,419       10,392       3,027       29.1     18,438       16,389       2,049       12.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sales volume for semiconductor (Unit)

    712,762,961       329,566,129       383,196,832       116.3     602,267,569       382,074,535       220,193,034       57.6

Sales volume for equipment, tools and others (Unit)

    17,647,126       11,672,818       5,974,308       51.2     97,580,149       29,025,017       68,555,132       236.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total sales volume of electronic component products

    730,410,087       341,238,947       389,171,140       114.0     699,847,718       411,099,552       288,748,166       70.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average selling price of semiconductor

  $ 0.16     $ 0.20       (0.04     (20.7 )%    $ 0.23     $ 0.26     $ (0.03     (11.5 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average selling price of equipment, tools and others

  $ 0.87     $ 1.23       (0.36     (29.0 )%    $ 0.27     $ 0.67     $ (0.40     (59.7 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues from sales of electronic component products accounted, for 99.4% and 98.9% of our total revenues for the six months ended 31, 2020 and 2019, and 99.2% and 99.0% of our total revenues for the fiscal years ended June 30, 2020 and 2019, respectively. Electronic component products sold to customers by us fall into two categories: (i) semiconductor products and (ii) electronic equipment, tools and other products. Our

 

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semiconductor products primarily include various integrated circuit, power/circuit protection, discretes, passive components, optoelectronics/electromechanical and our equipment, tools and other electronic component products primarily include various MRO, and design tools.

Total SKUs sold to customers increased by 29.1% from 10,392 different SKUs for the six months ended December, 2019 (including 6,301 different variety of semiconductor products and 4,091 different variety of equipment and tools products) to 13,419 different products for the six months ended December 31, 2020 (including 8,891 different variety of semiconductor products and 4,528 different variety of equipment and tools products). The increase in variety of product offerings enabled us to target more customers to meet their needs and increase our sales volume by 114.0% or 389.2 million units, from 341.2 million units of various electronic component products sold for the six months ended December 31, 2019 to 730.4 million units of various electronic component products sold for the six months ended December 31, 2020. We measure the number of customers by referencing each customer’s name from the revenue breakdown and removing the orders under the same names made in such fiscal year. Thus, the number of customers for our electronic component products increased by 12.7% from 534 customers for the six months ended December 31, 2019 to 602 for the six months ended December 31, 2020. We also count the number of the repeat customers, measured by the number of the customers who made orders in the current period with transaction records with us in the last five fiscal years. And the number of repeat customers for the six months ended December 31, 2020 was 476, increased by 126, or 36.0% from 350 for the six months ended December 31, 2019. The repeat customer accounted for 67.8% and 58.0% of our total number of customers for the six months ended December 31, 2020 and 2019, respectively. The increased percentage of the repeat customers reflects the higher satisfactions and loyalty of our existing customers who made orders on our platform, as one of the indicators of the performance of our services and business. On the other hand, due to changes in product mix sold, average selling price of semiconductor products decreased by $0.04 per unit or 20.7%, and average selling price of equipment and tool products decreased by $0.36 per unit or 29.0% per unit, when comparing the six months ended December 31, 2019 to the six months ended December 31, 2020, respectively. These combined factors led to a 59.9% increase in our total revenue from sales of electronic component products from the period for the six months ended December 31, 2019 to the period for the six months ended December 31, 2020.

Total SKUs sold to customers increased by 12.5% from 16,389 different SKUs in fiscal year 2019 (including 9,655 different variety of semiconductor products and 6,734 different variety of equipment and tools products) to 18,438 different products in fiscal year 2020 (including 11,721 different variety of semiconductor products and 6,717 different variety of equipment and tools products). The increase in variety of product offerings enabled us to target more customers to meet their needs and increase our sales volume by 70.2% or 288.7 million units, from 411.1 million units of various electronic component products sold in fiscal year 2019 to 699.8 million units of various electronic component products sold in fiscal year 2020. The number of customers for our electronic component products increased by 24.8% from 624 customers in fiscal year 2019 to 779 in fiscal year 2020. The number of the repeat customers in fiscal year 2020 was 419, increased by 138, or 49.1% from 281 in fiscal year 2019. The repeat customers accounted for 48.4% and 37.5% of the total customers for the years ended June 30, 2020 and 2019. The increased percentage of the repeat customers reflects the higher satisfactions and loyalty of our existing customers who made orders on our platform, as one of the indicators of the performance of our services and business. Our management references to the number of repeat customers to monitor our customers’ satisfaction levels and takes it into consideration for the future development of the business. On the other hand, due to changes in product mix sold, the average selling price of semiconductor products decreased by $0.03 per unit or 11.5%, and average selling price of equipment and tool products decreased by $0.91 per unit or 39.5% per unit, when comparing fiscal year 2020 to fiscal year 2019. These combined factors led to a 38.4% increase in our total revenue from sales of electronic component products from fiscal year 2019 to fiscal year 2020.

Service commission fee revenue from providing customs clearance, temporary warehousing, and logistic and shipping services to customers accounted for 0.6% and 1.1% of our total revenues for the six months ended December 31, 2020 and 2019, and 0.8% and 1.0% of our total revenues for the fiscal years ended June 30, 2020 and 2019, respectively. We earn a commission fee ranging from 0.2% to 1% based on the value of the

 

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merchandise that customers purchase from suppliers and such commission fee is not refundable. Number of customers for our services increased by 44.9% from 69 customers for the six months ended December 31, 2019 to 100 for the six months ended December 31, 2020. Number of customers for our services decreased by 30.4% from 125 customers in fiscal year 2019 to 87 in fiscal year 2020. However, total merchandise value involved in the transactions increased; as a result, our service commission fee earned increased by 4.3% from fiscal year 2019 to fiscal year 2020.

Gross Profit

Gross profit is equal to net revenue minus cost of goods sold. Cost of goods sold primarily includes inventory costs (third-party products purchase price, tariffs, inbound freight costs, warehouse lease and overhead costs and business taxes) and sales taxes. Cost of goods sold generally changes as affected by factors including the availability of the third-party products in the market, the purchase price of third-party products, sales volume and product mix changes. Our cost of revenues accounted for 97.2% and 96.6% of our total revenue for the fiscal year 2020 and 2019, respectively, and accounted for 96.9% and 97.3% of our total revenue for the six months ended December 31, 2020 and 2019, respectively. We expect our cost of revenues to increase as we further expand our operations in the foreseeable future.

Our gross margin was 3.1% for the six months ended December 31, 2020, increased by 0.4% from the gross margin of 2.7% for the six months ended December 31, 2019. Our gross margin increase in the period was primarily attributable to the decrease in the third party-product purchase cost. In addition, our gross profit and gross margin were also affected by sales of different product mix during each reporting period. In the six months ended December 31, 2020, we earned more revenue from products with lower costs and higher margin. These factors led to the decrease in our costs of revenue and increase in our gross profit and gross margin. See detailed discussion under “Results of Operation”.

Our gross margin was 2.8% for fiscal year 2020, a decrease by 0.6% from gross margin of 3.4% in fiscal year 2019, primarily attributable to the increase in third-party product purchase cost. In addition, our gross profit and gross margin is also affected by sales of different product mix during each reporting period. Our gross margin increases when more revenue comes from products with lower costs and higher margin, while our gross margin decreases when more revenue comes from products with higher costs and lower margin. In fiscal year 2020, we earned more revenue from products with higher costs and lower margin. These factors led to the increase in our costs of revenue and decrease in our gross profit and gross margin. See detailed discussion under “Results of Operation”.

Although our total sales volume increased by 70.2% from 411.1 million units sold in 2019 to 699.8 million units sold in fiscal year 2020, average selling price of semiconductor products decreased by $0.03 per unit or 11.5%, and average selling price of equipment and tool products decreased by 59.7% or $0.40 per unit, when comparing fiscal year 2020 to fiscal year 2019. Such decrease of the average selling price of semiconductor products and equipment and tool products was because of the change in product mix and lower priced products were sold to customers. The product mix change is determined by market conditions. As we adjusted our product mix from time to time based on the market demands, which had driven the decrease in average selling price not only during the fiscal year ended June 30, 2020 and 2019, but also during the six months ended December 31, 2020 and 2019. However, we are unable to predict with reasonable certainty whether such price decrease will continue to be a trend. If it is, we do not believe it is likely to have a material impact on our future operating results or financial condition because the variety of the SKUs we provide can minimize the impact of the price decrease and product costs and other factors that contribute to our future operating results may offset such a decrease in response to the market conditions. See detailed discussion under “Results of Operation”.

Operating Expenses

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

 

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Our selling expenses primarily include salary and welfare benefit expenses paid to our sales personnel, warehouse rental expense, shipping and delivery expenses, tariff expenses, expenses incurred for our business travel, meals and other sales promotion and marketing activities related expenses.

Our selling expenses accounted for 0.7% and 1.0% of our total revenue for six months ended December 31, 2020 and 2019, respectively. Our selling expenses increased in the six months ended December 31, 2020 as compared to the six months ended December 31, 2019, as affected by the increase of payroll expense to our newly recruited marketing team members to meet the fast growing business and the increased shipping and delivery expense in line with the increased sales volume.

Our selling expenses accounted for 0.9% and 1.3% of our total revenue for the years ended June 30, 2020 and 2019, respectively. Our selling expenses decreased during the fiscal year 2020 as compared to fiscal year 2019 as affected by shifting our marketing strategy and efforts from offline to online platform, as well as reduced business travel and sales promotion due to COVID-19 impact. Nevertheless, if we continue to expand our business and promote our products to customers located at extended geographic areas, we still expect our overall selling expenses, including but not limited to, brand promotion expenses and salaries, to increase in the foreseeable future and facilitate the growth of our business.

Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, depreciation and amortization, bad debt reserve expenses, office supply and utility expenses, business travel and meals expenses, and professional service expenses. General and administrative expenses were 1.3% and 1.5% of our revenue for the years ended June 30, 2020 and 2019, respectively, and 1.0% and 1.3% of our revenue for the six months ended December 31, 2020 and 2019, respectively. Our research and development expenses are included in general and administrative expenses. Our research and development activities primarily relate to development and implementation of our e-commerce platform and software. Our research and development expenses primarily consist of salaries, welfare and insurance expenses paid to our employees involved in the research and development activities, materials and supplies used in the research and development activities, depreciation, and other miscellaneous expenses. Research and development expenses were 0.03% and 0.01% of our revenue for the six months ended December 31, 2020 and 2019, respectively, and 0.1% and 0.1% of our revenue for the years ended June 30, 2020 and 2019, 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 plan to 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. As we continue to develop and implement our e-commerce platform and software in order to optimize our inventory management and provide more friendly services to satisfy customer demand, we expect our research and development expenses to continue to increase in the foreseeable future.

 

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Results of Operations

Comparison of Results of Operations for the Six Months Ended December 31, 2020 and 2019

The following table summarizes our operating results as reflected in our statements of operations during the six months ended December 31, 2020 and 2019, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

     For six months ended December 31,  
     2020     2019     Variances  
     Amount     % of
total
revenue
    Amount     % of
total
revenue
    Amount     %  

Revenues

            

Sales of electronic components

   $ 126,881,524       99.4   $ 79,371,199       98.9   $ 47,510,325       59.9

Service commission fee

     785,445       0.6     843,488       1.1     (58,043     (6.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     127,666,969       100.0     80,214,687       100.0     47,452,282       59.2

Cost of revenues

     123,724,704       96.9     78,075,574       97.3     45,649,130       58.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     3,942,265       3.1     2,139,113       2.7     1,803,152       84.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

            

Selling expenses

     861,088       0.7     796,087       1.0     65,001       8.2

General and administrative expenses

     1,275,800       1.0     1,063,150       1.3     212,650       20.0

Total operating expenses

     2,136,888       1.7     1,859,237       2.3     277,651       14.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     1,805,377       1.4     279,876       0.3     1,525,501       545.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses)

            

Foreign exchange gain

     1,133,406       0.9     50,769       0.1     1,082,637       2,132.5

Interest expenses

     (359,088     (0.3 )%      (230,815     (0.3 )%      (128,273     55.6

Interest income

     32,882       0.0     90,054       0.1     (57,172     (63.5 )% 

Subsidy income

     161,740       0.1     16,701       0.0     145,039       868.4

Other income (expenses) net

     (135,357     (0.1 )%      (107,934     (0.1 )%      (27,423     25.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses)

     833,583       0.7     (181,225     (0.2 )%      1,014,808       (560.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provisions

     2,638,960       2.1     98,651       0.1     2,540,309       2575.0

Provision for income taxes

     628,514       0.5   $ 269,283       0.3     359,231       133.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 2,010,446       1.6   $ (170,632     (0.2 )%    $ 2,181,078       (1,278.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Revenue

Total revenue increased by $47,452,282, or 59.2%, to $127,666,969 for the six months ended December 31, 2020 from $80,214,687 for the six months ended December 31, 2019. The increase was largely attributable to increased product offering variety by 29.1%, increased number of customers for our electronic component products and services by 16.4%, increased sales volume by 114.0% from 341.1 million units sold for the six months ended December 31, 2019 to 730.4 million units sold for the six months ended December 31, 2020, offset by decreased average unit selling price of our electronic component products when sales mix changed, as discussed in details below.

 

     For the six months ended December 31,  
     2020     2019     Variances  
     Amount      % of
total
revenue
    Amount      % of
total
revenue
    Amount      %  

Sales of electronic components

               

Revenue from sales of semiconductor

   $ 111,529,726        87.4   $ 65,006,426        81.1   $ 46,463,300        71.4

Revenue from sales of equipment, tools and others

     15,351,798        12.0     14,304,773        17.8     1,047,025        7.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal of sales of electronic component products

   $ 126,881,524        99.4   $ 79,371,199        98.9   $ 47,510,325        59.9

Service commission fee

     785,445        0.6     843,488        1.1     58,043        (6.9 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue

   $ 127,666,969        100.0   $ 80,214,687        100.0   $ 47,452,282        59.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

(1) Revenue from sales of electronic component products

Revenue from sales of electronic components increased by $47,510,325 or 59.9%, to $126,881,524 for the six months ended December 31, 2020 from $79,371,199 for the six months ended December 31, 2019.

Our electronic component products sold to customers fall into two categories: semiconductor products and electronic equipment, tools and other products.

 

     For the six months ended December 31,  
     2020      2019      Change     % of
change
 

Sales of electronic component products:

          

Semiconductor:

          

Integrated circuits

   $ 68,232,292      $ 36,133,568      $ 32,098,724       88.8

Power/ circuit protection

     8,405,795        5,485,499        2,920,296       53.2

Discretes

     14,557,949        11,416,442        3,141,507       27.5

Passive components

     7,793,587        3,687,800        4,105,787       111.3

Optoelectronics/ electromechanical

     7,072,610        4,015,932        3,056,678       76.1

Other semiconductor products

     5,467,493        4,327,185        1,140,308       26.4
  

 

 

    

 

 

    

 

 

   

 

 

 

Sub-total of semiconductor sales

     111,529,726        65,066,426        46,463,300       71.4
  

 

 

    

 

 

    

 

 

   

 

 

 

Equipment and tools:

          

Equipment

     8,162,663        8,462,956        (300,293     (3.5 )% 

Tools and others

     7,189,135        5,841,817        1,347,318       23.1

Sub-total of equipment and tools

     15,351,798        14,304,773        1,047,025       7.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales of electronic component products

   $ 126,881,524      $ 79,371,199      $ 47,510,325       59.9
  

 

 

    

 

 

    

 

 

   

 

 

 

Our semiconductor products primarily include various integrated circuit, power/circuit protection, discretes, passive components, optoelectronics/ electromechanical, etc. Total SKUs of semiconductor products available to

 

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be sold to customers increased by 2,590 SKUs, or 41.1% from 6,301 SKUs for the six months ended December 31, 2019 to 8,891 SKUs for the six months ended December 31, 2020. The increase in product offerings enabled us to target more customers to meet their needs and increase our sales volume of semiconductor products by 116.3% or 383.2 million units, from 329.6 million units of various semiconductor products sold for the six months ended December 31, 2019 to 712.8 million units of various semiconductor products sold for the six months ended December 31, 2020. Number of customers for semiconductor products increased by 13.3% from 504 customers for the six months ended December 31, 2019 to 571 for the six months ended December 31, 2020. Additionally, due to changes in product mix sold, average selling price of semiconductor products decreased by $0.04 per unit or 20.0%, from $0.20 per unit for the six months ended December 31, 2019 to $0.16 per unit for the six months ended December 31, 2020. These combined factors led to an increase in sales of semiconductor products by $46,463,300 or 71.4%, from $65,066,426 for the six months ended December 31, 2019 to $111,529,729 for the six months ended December 31, 2020.

Our equipment, tools and other electronic component products primarily include various MROs, and design tools, etc. Total SKUs of equipment and tools available to be sold to customers also increased by 437 SKUs, or 10.7% from 4,091 different SKUs for the six months ended December 31, 2019 to 4,528 SKUs for the six months ended December 31, 2020. Our broad variety of product offerings enabled us to target more customers to meet their needs and increase our sales volume of equipment and tools product by 51.2% or 6.0 million units, from 11.7 million units of various equipment and tools products sold for the six months ended December 31, 2019 to 17.6 million units of various equipment and tools products sold for the six months ended December 31, 2020. Number of customers for equipment, tools and other electronic component products increased by 33.0% from 88 customers for the six months ended December 31, 2019 to 117 for the six months ended December 31, 2020. Additionally, due to changes in product mix sold, average selling price of equipment and tools products decreased by $0.36 per unit or 29.0%, from $1.23 per unit for the six month ended December 31, 2019 to $0.87 per unit for the six month ended December 31, 2020. These combined factors led to an increase in sales of equipment and tools products by $1,047,025 or 7.3%, from $14,304,773 for the six month ended December 31, 2019 to $15,351,799 for the six months ended December 31, 2020.

The product mix change is driven by the market conditions. As we adjust our product mix from time to time based on market demands which had driven the decrease in average selling price during the six months ended December 31, 2020 and 2019, however, we are unable to predict with reasonable certainty whether such price decrease will continue to be a trend If it is, we do not believe it is like to have a material impact on future operating results or financial condition because the variety of the SKUs we provide can minimize the impact of the price decrease and product costs and other factors that contribute to our future operating results may offset such a decrease in response to the market conditions.

The number of our repeat customers for the six months ended December 31, 2020 was 412, increased by 43.6% from 287 for the six months ended December 31, 2019. Sales to repeat customers accounted for approximately 88% and 86% of the total revenue, while sales to new customers accounted for approximately 12% and 14% of the total revenue for the six months ended December 31, 2020 and 2019, respectively.

(2) Service commission fees

Service commission fees decreased by $58,043 or 6.9%, to $785,445 for the six months ended December 31, 2020 from $843,488 for the six months ended December 31, 2019.

We provide customs clearance when customers purchase electronic component products directly from overseas suppliers, as well as temporary warehousing, and logistic and shipping services after the customs clearance. For these add-on services, we earn a commission fee ranging from 0.2% to 1% based on the value of the merchandise that customers purchase from suppliers, and such commission fee is not refundable. Number of customers for our services increased by 44.9% from 69 customers for the six months ended December 31, 2019 to 100 for the six months ended December 31, 2020. However, total merchandise value involved in the transactions decreased, and

 

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as a result, our service commission fee earned decreased by 6.9% from $843,488 for the six months ended December 31, 2019 to $785,445 for the six months ended December 31, 2020.

Cost of Revenues. Our cost of revenues primarily consists of third-party products purchase price, tariffs associated with import products from overseas suppliers, inbound freight costs, warehousing and overhead costs and business taxes. Cost of revenue generally changes as affected by factors including the availability of the third-party products in the market, the purchase price of third-party products, sales volume and product mix changes.

The following table sets forth the breakdown of our cost of revenues for the six months ended December 31, 2020 and 2019:

 

     For the six months ended December 31,  
     2020     2019              
     Amount      % of
total cost
    Amount      % of
total cost
    Variances     %  

Third-party products purchase costs

   $ 122,335,153        98.9   $ 76,711,404        98.3   $ 45,623,749       59.5

Tariffs

     849,359        0.7     873,678        1.1     (24,318     (2.8 )% 

Inbound shipping and delivery costs

     264,317        0.2     223,463        0.3     40,855       18.3

Warehouse lease and overhead costs

     242,036        0.2     242,789        0.3     (753     (0.3 )% 

Business taxes

     33,839        0.0     24,240        0.0     9,599       39.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total cost of revenues

   $ 123,724,704        100.0   $ 78,075,574        100.0   $ 45,649,130       58.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total cost of revenue increased by $45,649,130, or 58.5%, from $78,075,574 for the six months ended December 31, 2019 to $123,724,704 for the six months ended December 31, 2020. The increase in our cost of revenue was largely attributable to increased third- party product purchase costs by $45,623,748 or 59.5%, when sales volume of our electronic component products increased by 114.0% from 341.2 million units sold for the six months ended December 31, 2019 to 734.4 million units sold in the six months ended December 31, 2020 and number of customers for our electronic component products increased by 16.4% from 603 customers for the six months ended December 31, 2019 to 702 customers for the six months ended December 31, 2020.

Cost of revenue related to tariffs associated with our purchase of products from overseas suppliers decreased by $24,318 or 2.8%, from $873,678 for the six months ended December 31, 2019, to $849,359 for the six months ended December 31, 2020. The tariffs are primarily affected by the value of the products and tariff rate charged on the products imported into China from overseas. More products with lower tariffs rate charged were imported to China and sold when comparing the tariffs in the six months ended December 31, 2020 to the same period in 2019.

Cost of revenue related to warehouse lease and overhead costs slightly decreased by $753 or 0.3%, because of decreased utility costs.

Cost of revenue related to inbound shipping and delivery of purchased third-party products to our warehouse increased by $40,588 or 18.3% and business taxes increased by $9,599 when comparing the six months ended December 31, 2020 to the six months ended December 31, 2019.

Gross profit

Our gross profit increased by $1,803,152 or 84.3%, from $2,159,113 for the six months ended December 31, 2019 to $3,942,265 for the six months ended December 31, 2020. Our gross margin increased by 0.42%, from 2.67% for the six months ended December 31, 2019 to 3.09% for the six months ended December 31, 2020. Our gross margin increased in the period are primarily attributable to the decrease in the average third party product

 

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purchase cost per unit. In addition, our gross profit and gross margin is also affected by sales of different product mix during each reporting period. In the six months ended December 31, 2020, we earned more revenue from products with lower costs and higher margin. Our average third party purchased cost per unit decreased by 21.6% from $0.19 per units for the semiconductor products for the six months ended December 31, 2019 to $0.15 per unit for the six months ended December 31, 2020, and decreased by 28.1% from $1.19 per units for equipment and tools products for the six months ended December 31, 2019 to $0.86 per units for the six months ended December 31, 2020. These factors led to the decrease in our costs of revenue and increase in our gross profit and gross margin.

Operating expenses

The following table sets forth the breakdown of our operating expenses for the six months ended December 31, 2020 and 2019:

 

     For the six months ended December 31,  
     2020     2019     Variances  
     Amount      % of
total
revenue
    Amount      % of
total
revenue
    Amount      %  

Total revenues

   $ 127,666,969        100.0   $ 80,214,687        100.0   $ 47,452,282        59.2

Operating expenses:

               

Selling expenses

     861,088        0.7     796,087        1.0     65,001        8.2

General and administrative expenses

     1,275,800        1.0     1,063,150        1.3     212,650        20.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

   $ 2,136,888        1.7   $ 1,859,237        2.3   $ 277,651        14.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Selling expenses

Our selling expenses primarily include salary and welfare benefit expenses paid to our sales personnel, office rental expense, shipping ad delivery expenses, customs clearance, and expenses incurred for our business travel, meals and other sales promotion and marketing activities related expenses.

 

     For the six months ended December 31,  
     2020     2019     Variances  
     Amount      %     Amount      %     Amount     %  

Salary and employee benefit expenses

   $ 575,309        66.8   $ 563,558        70.8   $ 11,751       2.1

Lease expense

     60,373        7.0     56,556        7.1     3,817       6.7

Shipping and delivery expenses

     67,128        7.8     15,230        1.9     51,898       340.8

Sales promotion

     86,599        10.1     73,081        9.2     13,518       18.5

Business travel and meals expenses

     21,868        2.5     32,704        4.1     (10,836     (33.1 )% 

Customs clearance

     7,839        0.9     14,625        1.8     (6,786     (46.4 )% 

Utility and office expenses

     20,771        2.4     18,794        2.4     1,978       10.5

Depreciation and amortization

     9,214        1.1     12,489        1.6     (3,276     (26.2 )% 

Other sales promotion related expenses

     11,987        1.4     9,050        1.1     2,937       32.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total selling expenses

   $ 861,088        100.0   $ 796,087        100.0   $ 65,001       8.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Our selling expenses increased by $65,001 or 8.2%, from $796,087 for the six months ended December 31, 2019 to $861,088 for the six months ended December 31, 2020, primarily attributable to the following: (i) shipping and delivery expenses increased by $51,898 or 340.8%, from $15,230 for the six months ended December 31, 2019 to $67,128 for the six months ended December 31, 2020, primarily because our sales volume increased significantly; (ii)sales promotion expenses increased by $13,518 or 18.5%, from $73,081 for the six months ended December 31, 2019 to $86,599 for the six months ended December 31, 2020, primarily because we

 

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organized more offline marketing activities to attract new customers and promote our brand after we resumed our business activities following the Covid-19 lockdown; and (iii) salary and employee benefit expenses increased by $11,751 or 2.1%, from $563,558 for the six months ended December 31, 2019 to $575,309 for the six months ended December 31, 2020, due to our increased hiring of sales personnel in 2020 to handle increased sales orders when sales volume increased. These above-mentioned factors combined led to the increase in our selling expenses for the six months ended December 31, 2020 as compared to that for the six months ended December 31, 2019. Our selling expenses accounted for 0.7% and 1.0% of our total revenue for the six months ended December 31, 2020 and 2019, respectively.

General and administrative expenses

Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, depreciation and amortization, bad debt reserve expenses, office supply and utility expenses, business travel and meals expenses, and professional service expenses.

 

     For the six months ended December 31,  
     2020     2019     Variances  
     Amount      %     Amount      %     Amount     %  

Salary and employee benefit expenses

   $ 557,224        43.7   $ 452,180        42.5   $ 105,044       23.2

Stock-based compensation expenses

     244,354        19.2     270,965        25.5     (26,611     (9.8 )% 

Rent expense

     31,188        2.4     29,286        2.8     1,902       6.5

Depreciation and amortization

     62,627        4.9     62,132        5.8     495       0.8

Transportation, travel and meals expenses

     60,290        4.7     44,314        4.2     15,976       36.1

Office supply and utility expenses

     31,328        2.5     39,502        3.7     (8,174     (20.7 )% 

Professional service fee

     136,244        10.7     103,682        9.8     32,562       31.4

Bank charges

     48,600        3.8     39,504        3.7     9,096       23.0

Insurance

     8,166        0.6     13,079        1.2     (4,914     (37.6 )% 

Research and development expenses

     41,959        3.3     4,639        0.4     37,319       804.4

Others

     53,820        4.2     3,867        0.4     49,953       1291.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total general and administrative expenses

   $ 1,275,800        100.0   $ 1,063,150        100.0   $ 212,650       20.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Our general and administrative expenses increased by $212,650 or 20.0% from $1,063,150 for the six months ended December 31, 2019 to $1,275,800 for the six months ended December 31, 2020, primarily attributable to (i) an increase in our salaries, welfare expenses and insurance expenses paid to administration employees by $105,044, or 23.2%. The number of our administrative employees increased from 32 for the six months ended December 31, 2019 to 48 for the six months ended December 31, 2020, which led to an increase in our salary and employee benefit expenses in six months ended December 31, 2020; (ii) stock-based compensation expenses decreased by $26,611 or 9.8% because some of our outstanding options were fully matured by June 30, 2020 and there were no additional options granted to employees during the six months ended December 31, 2020. The first batch of options were granted to employees in fiscal year 2016, which were fully matured in fiscal year 2020. As a result, the compensation expense was lower for the six months ended December 31, 2020 as compared to the six month ended December 31,2019; (iii) our professional consulting expenses increased by $37,319 for the six months ended December 31, 2020 as compared to that for the six months ended December 31, 2019, as we increased the consultation with professional service providers for legal structure setup and business strategy in order to prepare for our intended listing in overseas market; (iv) our business travel, transportation and meals expenses increased by $15,976, or 36.1%, from $44,314 for the six months ended December 31, 2019 to $68,751 for the six months ended December 31, 2020, primarily as a result of increased employees for the business development; and (v) our research and development expenses increased by $37,319 or 804.4%, from $4,639 for the six months ended December 31, 2019 to $41,959 for the six months ended December 31, 2020, due to increased research and development activities to improve our SaaS suite and platform and to enhance customer experience.

 

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The overall increase in our general and administrative expenses for the six months ended December 31, 2020 as compared to for the six months ended December 31, 2019 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 1.0% and 1.3% of our revenue for the six months ended December 31, 2020 and 2019, respectively.

Other income (expenses)

Other income (expenses) primarily included interest income, interest expenses, foreign exchange gain or loss, government subsidiary income, gain or loss from disposal of fixed assets, other non-operating income or expenses.

 

     For six months ended December 31,  
     2020     2019     Variances  
     Amount     Amount     Amount     %  

Interest expense

   $ (359,088   $ (230,815   $ (128,273     55.6

Interest income

     32,882       90,054       (57,172     (63.5 )% 

Subsidy income

     161,740       16,701       145,039       868.4

Foreign transaction gain

     1,133,406       50,769       1,082,637       2,132.5

Other income (expense), net

     (135,357     (107,934     (27,423     25.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other income (expense), net

   $ 833,583     $ (181,225   $ 1,014,808       (560.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net other income (expense) increased by $1,014,808, from net other expense of $181,225 for the six months ended December 31, 2019 to net other income of $833,583 for the six months ended December 31, 2020. The increase was attributable to the following factors:

 

(i)

Foreign exchange gain increased by $1,082,637 or 2,132.5%, from $50,769 for the six months ended December 31, 2019 to $1,133,406 for the six months ended December 31, 2020, due to favorable USD, Euro, and other currency exchange rates against RMB on our foreign currency denominated account receivables.

 

(ii)

Interest expenses on our short-term bank loans and bankers’ acceptance notes payable increased by $128,273, from $230,815 for the six months ended December 31, 2019 to $359,088 for the six months ended December 31, 2020, due to our increased bank borrowings during the six months ended December 31, 2020 to support our working capital needs. We had the weighted average bank borrowing of $10.9 million for the six months ended December 31, 2020, increased by $4.53 million from the weighted average bank borrowing of $ 6.4 million for the six months ended December 31, 2019. As we borrowed and carried higher amount of bank loans, our interest expenses increased accordingly.

 

(iii)

Interest income decreased by $57,172, from $90,054 for the six months ended December 31, 2019 to $32,822 for the six months ended December 31, 2020. Our interest income was generated from our large bank deposit and our short-term investment to purchase interest-bearing wealth management financial products from the PRC banks to earn interest income. The decrease in our interest income was largely due to lower average short term investment we held with PRC banks during the six months ended December 31, 2020 as compared to the same period of 2019.

 

(iv)

Our subsidy income primarily include local government’s subsidy in terms of tax refund and interest expense subsidy to encourage import and export business activities and support technology enterprises engaged in e-commerce business like us. Subsidy income increased by $145,039, or 868.4% when comparing six months ended December 31, 2020, to six months ended December 31, 2019. The increase was mainly due to more refund and interest expense subsidy granted by the government to cope with the Covid-19 outbreak.

 

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Provision for Income Taxes

Our provision for income taxes was $628,514 for the six months ended December 31, 2020, an increase of $359,231, or 133.4%, from $269,283 for the six months ended December 31, 2019 due to our increased taxable income of our major operating entities Hjet Supply Chain, Ehub and Hjet HK. Our other operating entities including ICZOOM HK, Components Zone HK, ICZOOM Shenzhen, Hjet Logistics, Heng Nuo Chen and Pai Ming Shenzhen suffered recurring net operating loss, and a full valuation allowance has been applied against the net operating loss from these entities for the six months ended December 31, 2020 and 2019.

Net Income (Loss)

As a result of the foregoing, we reported a net income of $2,010,446 for the six months ended December 31, 2020, representing a $2,181,079 increase from the net loss of $170,632 for the six months ended December 31, 2019.

Comparison of Results of Operations for the Fiscal Years Ended June 30, 2020 and 2019

The following table summarizes our operating results as reflected in our statements of income during the fiscal years ended June 30, 2020 and 2019, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

     For the years ended June 30,  
     2020     2019     Variances  
     Amount     % of
total
revenue
    Amount     % of
total
revenue
    Amount     %  

Revenues

            

Sales of electronic components

   $ 163,971,645       99.2   $ 118,452,218       99.0   $ 45,519,427       38.4

Service commission fee

     1,241,966       0.8     1,190,233       1.0     51,733       4.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     165,213,611       100.0     119,642,451       100.0     45,571,160       38.1

Cost of revenues

     160,616,350       97.2     115,582,079       96.6     45,034,271       39.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     4,597,261       2.8     4,060,372       3.4     536,889       13.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

            

Selling expenses

     1,498,158       0.9     1,521,074       1.3     (22,916     (1.5 )% 

General and administrative expenses

     2,123,501       1.3     1,788,537       1.5     334,964       18.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     3,621,659       2.2     3,309,611       2.8     312,048       9.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     975,602       0.6     750,761       0.6     224,841       29.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses)

            

Interest expenses, net

     (744,046     (0.5 )%      (661,372     (0.6 )%      (82,674     12.5

Interest income

     102,359       0.1     14,377       0.0     87,982       612.0

Foreign exchange gain

     889,356       0.5     363,538       0.3     525,818       144.6

Subsidy income

     26,113       0.0     12,516       0.0     13,597       108.6

Other income (expenses) net

     60,899       0.1     71,288       0.1     (10,389     (14.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses)

     334,681       0.2     (199,653     (0.2 )%      534,334       (267.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provisions

     1,310,283       0.8     551,108       0.5     759,175       137.8

Provision for income taxes

     718,413       0.4     493,088       0.4     225,325       45.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 591,870       0.4   $ 58,020       0.0   $ 533,850       920.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Revenue. Total revenue increased by $45,571,160, or 38.1%, to $165,213,611 for the fiscal year 2020 from $119,642,451 for the fiscal year 2019. The increase was largely attributable to increased product offering variety by 12.5%, increased number of customers for our electronic component products and services by 15.6%, increased sales volume by 70.2% from 411.1 million units sold in 2019 to 699.8 million units sold in 2020, offset by decreased average unit selling price of our electronic component products when sales mix changed, as discussed in details below.

 

    For the years ended June 30,  
    2020      2019      Variances  
    Amount      % of
total
revenue
     Amount      % of
total
revenue
     Amount      %  

Sales of electronic components

                

Revenue from sales of semiconductor

    $137,981,015        83.5%        $98,893,346        82.7%        $39,087,669        39.5%  

Revenue from sales of equipment, tools and others

    25,990,630        15.7%        19,558,872        16.3%        6,431,758        32.9%  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal of sales of electronic component products

    163,971,645        99.2%        118,452,218        99.0%        45,519,427        38.4%  

Service commission fee

    1,241,966        0.8%        1,190,233        1.0%        51,733        4.3%  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

    $165,213,611        100.0%        $119,642,451        100.0%        $45,571,160        38.1%  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1)

Revenue from sales of electronic component products

Revenue from sales of electronic components increased by $45,519,427 or 38.4%, to $163,971,645 for the fiscal year 2020 from $118,452,218 for the fiscal year 2019.

Our electronic component products sold to customers fall into two categories: semiconductor products and electronic equipment, tools and other products.

 

     For the years ended June 30,  
     2020      2019      Change      % of
change
 

Sales of electronic component products:

           

Semiconductor:

           

Integrated circuits

     $ 79,312,766        $ 40,485,559        $38,827,207        95.9%  

Power/ circuit protection

     10,025,174        19,934,688        (9,909,514)        (49.7)%  

Discretes

     22,683,681        14,120,430        8,563,251        60.6%  

Passive components

     9,366,104        7,477,865        1,888,239        25.3%  

Optoelectronics/ electromechanical

     8,813,314        9,107,446        (294,132)        (3.2)%  

Other semiconductor products

     7,779,976        7,767,358        12,618        0.2%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total of semiconductor sales

     137,981,015        98,893,346        39,087,669        39.5%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equipment and tools:

           

Equipment

     14,250,154        10,575,559        3,674,595        34.7%  

Tools and others

     11,740,476        8,983,313        2,757,163        30.7%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total of equipment and tools

     25,990,630        19,558,872        6,431,758        32.9%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total sales of electronic component products

     $163,971,645        $118,452,218        $45,519,427        38.4%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Our semiconductor products primarily include various integrated circuit, power/circuit protection, discretes, passive components, optoelectronics/ electromechanical, etc. Total SKUs of semiconductor products available to

 

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be sold to customers increased by 2,066 SKUs, or 21.4% from 9,655 different SKUs in fiscal year 2019 to 11,721 SKUs in fiscal year 2020. The increase in product offerings enabled us to target more customers to meet their needs and increase our sales volume of semiconductor products by 57.6% or 220.2 million units, from 382.1 million units of various semiconductor products sold in fiscal year 2019 to 602.3 million units of various semiconductor products sold in fiscal year 2020. Number of customers increased by 24.8% from 624 customers in fiscal year 2019 to 779 in fiscal year 2020. Sales to existing customers accounted for approximately 80% and 69% of the total revenue, while sales to new customers accounted for approximately 20% and 31% of the total revenue for the years ended June 30, 2020 and 2019, respectively. On the other hand, in terms of average selling price, due to changes in product mix sold, average selling price of semiconductor products decreased by $0.03 per unit or 11.5%, from $0.26 per unit in fiscal year 2019 to $0.23 per unit in fiscal year 2020. These combined factors led to an increase in sales of semiconductor products by $39,087,669 or 39.5%, from $98,893,346 in fiscal year 2019 to $137,981,015 in fiscal year 2020.

Our equipment, tools and other electronic component products primarily include various MROs, and design tools, etc. Total SKUs of equipment and tools available to be sold to customers only slightly decreased by 17 SKUs, or 0.3% from 6,734 different SKUs in fiscal year 2019 to 6,717 SKUs in fiscal year 2020. Our broad variety of product offerings enabled us to target more customers to meet their needs and increase our sales volume of equipment and tools product by 236.2% or 68.6 million units, from 29 million units of various equipment and tools products sold in fiscal year 2019 to 97.6 million units of various equipment and tools products sold in fiscal year 2020 Number of customers increased by 24.8% from 624 customers in fiscal year 2019 to 779 in fiscal year 2020. The average purchase amount per customers was $210,490 in fiscal year 2020, increased by approximately 10.9% from $189,827 in fiscal year 2019. By provided one stop solutions to our customers, we enhance our client loyalty. Our customer retention rate in fiscal year 2020 was 55.94%, increased by 4.3% from 51.55% in fiscal year 2019. Sales to existing customers accounted for approximately 80% and 69% of the total revenue, while sales to new customers accounted for approximately 20% and 31% of the total revenue for the years ended June 30, 2020 and 2019, respectively. On the other hand, in terms of average selling price, due to changes in product mix sold, average selling price of equipment and tools products decreased by $0.40 per unit or 59.7%, from $0.67 per unit in fiscal year 2019 to $0.27 per unit in fiscal year 2020. These combined factors led to an increase in sales of equipment and tools products by $6,431,758 or 32.9%, from $19,558,872 in fiscal year 2019 to $25,990,630 in fiscal year 2020.

The product mix change is driven by the market conditions. As we adjust our product mix from time to time based on market demands which had driven the decrease in average selling price during fiscal years ended December 31, 2020 and 2019, we are unable to predict with reasonable certainty whether such price decrease will continue to be a trend If it is, we do not believe it is likely to have a material impact on future operating results or financial condition because the variety of the SKUs we provide can minimize the impact of the price decrease and product costs and other factors that contribute to our future operating results will may offset such a decrease in response to the market conditions.

 

  (2)

Service commission fees

Service commission fees increased by $51,733 or 4.3%, to $1,241,966 for the fiscal year 2020 from $1,190,233 for the fiscal year 2019.

We provide customs clearance when customers purchase electronic component products directly from overseas suppliers, as well as temporary warehousing, and logistic and shipping services after the customs clearance. We earn a commission fee ranging from 0.2% to 1% based on the value of the merchandise that customers purchase from suppliers, and such commission fee is not refundable. Number of customers for our services decreased by 30.4% from 125 customers in fiscal year 2019 to 87 in fiscal year 2020. However, total merchandise value involved in the transactions increased, as a result, our service commission fee earned increased by 4.3% from fiscal year 2019 to fiscal year 2020.

 

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For the fiscal years ended June 30, 2020 and 2019, the number of our repeat customers were 419 and 281, respectively. The revenue generated from repeat customer accounted for 80% and 69% of the total revenue in the fiscal year 2020 and 2019, respectively, while revenue generated from the new customer accounted for 20% and 31% of the total revenue in the fiscal year 2020 and 2019.

Cost of Revenues. Our cost of revenues primarily consists of third-party products purchase price, tariffs associated with import products from overseas suppliers, inbound freight costs, warehousing and overhead costs and business taxes. Cost of revenue generally changes as affected by factors including the availability of the third-party products in the market, the purchase price of third-party products, sales volume and product mix changes.

The following table sets forth the breakdown of our cost of revenues for the fiscal years ended June 30, 2020 and 2019:

 

     For the years ended June 30,  
     2020     2019    

 

   

 

 
     Amount      % of
total
cost
    Amount      % of
total
cost
    Variances     %  

Third-party products purchase costs

   $ 158,211,459        98.5   $ 112,034,697        96.9   $ 46,176,762       41.2

Tariffs

     1,548,698        1.0     2,721,833        2.4     (1,173,136     (43.1 )% 

Inbound shipping and delivery costs

     351,415        0.2     311,730        0.3     39,685       12.7

Warehouse lease and overhead costs

     455,395        0.3     478,049        0.4     (22,654     (4.7 )% 

Business taxes

     49,383        0.0     35,770        0.0     13,613       38.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total cost of revenues

   $ 160,616,350        100.0   $ 115,582,079        100.0   $ 45,034,271       39.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total cost of revenue increased by $45,034,271, or 39.0%, from $115,582,079 in fiscal year 2019 to $160,616,350 in fiscal year 2020. The increase in our cost of revenue was largely attributable to increased third-party product purchase costs by $46,176,762 or 41.2%, when sales volume of our electronic component products increased by 70.2% from 411.1 million units sold in 2019 to 699.8 million units sold in 2020 and number of customers for our electronic component products increased by 24.8% from 624 customers in fiscal year 2019 to 779 customers in fiscal year 2020.

Cost of revenue related to tariffs associated with our purchase of products from overseas suppliers decreased by $1,173,136 or 43.1%, from $2,721,833 in fiscal year 2019, to $1,548,698 in fiscal year 2020, due to decreased purchase of electronic components from overseas suppliers as affected by the COVID-19 outbreak and impact, which caused transportation and logistics disruptions across boarder and accordingly we reduced the purchase from overseas suppliers.

Cost of revenue related to warehouse lease and overhead costs slightly decreased by $22,654 or 4.7%, because of decreased utility costs when we temporarily closed our facilities for approximately one month from the beginning of February 2020 to March 1, 2020, in response to COVID-19 outbreak and spread in China.

Cost of revenue related to inbound shipping and delivery of purchased third-party products to our warehouse only slightly increased by $39,685 or 12.7% and business taxes increased by $13,613 when comparing fiscal year 2020 to fiscal year 2019.

Gross profit

Our gross profit increased by $536,889 or 13.2%, from $4,060,372 in fiscal year 2019 to $4,597,261 in fiscal year 2020. Our gross margin decreased by 0.6%, from 3.4% in fiscal year 2019 to 2.8% in fiscal year 2020. Our gross profit and gross margin were affected by changes in selling price and third-party product purchase costs,

 

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changes in sales volume and the sales of different product mix during each reporting period. Although our total sales volume increased by 70.2% from 411.1 million units sold in 2019 to 699.8 million units sold in 2020, due to changes in product mix sold, average selling price of semiconductor products decreased by $0.03 per unit or 11.5%, and average selling price of equipment and tool products decreased by 59.7% or $0.40 per unit, when comparing fiscal year 2020 to fiscal year 2019. Our gross margin increases when more revenue comes from products with lower costs and higher margin, while our gross margin decreases when more revenue comes from products with higher costs and lower margin. In fiscal year 2020, more revenue derived from products with higher costs and lower margin. As a result, although gross profit increased by $0.54 million, our gross margin decreased by 0.6% in fiscal year 2020 as compared to fiscal year 2019.

Operating expenses

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

 

     For the years ended June 30,  
     2020     2019     Variances  
     Amount      % of
total
revenue
    Amount      % of
total
revenue
    Amount     %  

Total revenues

   $ 165,213,611        100.0   $ 119,642,451        100.0   $ 45,571,160       38.1

Operating expenses:

              

Selling expenses

     1,498,158        0.9     1,521,074        1.3     (22,916     (1.5 )% 

General and administrative expenses

     2,123,501        1.3     1,788,537        1.5     334,964       18.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

   $ 3,621,659        2.2   $ 3,309,611        2.8   $ 312,048       9.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Selling expenses

Our selling expenses primarily include salary and welfare benefit expenses paid to our sales personnel, office rental expense, shipping ad delivery expenses, customs clearance, expenses incurred for our business travel, meals and other sales promotion and marketing activities related expenses.

 

     For the years ended June 30,  
     2020     2019     Variances  
     Amount      %     Amount      %     Amount     %  

Salary and employee benefit expenses

   $ 826,739        55.2   $ 771,289        50.7   $ 55,450       7.2

Lease expense

     110,813        7.4     92,028        6.1     18,785       20.4

Shipping and delivery expenses

     270,196        18.0     274,707        18.1     (4,511     (1.6 )% 

Sales promotion

     123,089        8.2     175,039        11.5     (51,950     (29.7 )% 

Business travel and meals expenses

     46,041        3.1     79,992        5.3     (33,951     (42.4 )% 

Customs clearance

     20,790        1.4     30,898        2.0     (10,108     (32.7 )% 

Utility and office expenses

     74,195        5.0     67,944        4.5     6,251       9.2

Depreciation and amortization

     23,773        1.6     21,648        1.4     2,125       9.8

Other sales promotion related expenses

     2,522        0.2     7,529        0.5     (5,007     (66.5 )% 
  

 

 

      

 

 

    

 

 

   

 

 

   

 

 

 

Total selling expenses

   $ 1,498,158        100.0   $ 1,521,074        100.0   $ (22,916     (1.5 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Our selling expenses decreased by $22,916 or 1.5%, from $1,521,074 in fiscal year 2019 to $1,498,158 for fiscal year 2020, primarily attributable to (i) sales promotion expenses decreased by $51,950 or 29.7%, from $175,039 in fiscal year 2019 to $123,089 in fiscal year 2020, and business travel and meals expense decreased by $33,951 or 42.4%, from $79,992 in fiscal year 2019 to $46,041 in fiscal year 2020. Primarily because we shifted our

 

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marketing efforts from offline to online, we thus reduced sales promotion and travel related expenses. In addition, as affected by the outbreak and spread of COVID-19, we temporarily suspended our facilities and reduced our sales activities for about one month from the beginning of February to March 1, 2020, this also led to decreased sales promotion expenses and business travel and meals expenses in fiscal year 2020; (ii) customs clearance expenses decreased by $10,108 or 32.7%, from $30,898 in fiscal year 2019 to $20,790 in fiscal year 2020 because of decreased purchase of electronic components from overseas suppliers as affected by the COVID-19 spread worldwide; and (iii) on the other hand, our salary and employee benefit expense increased by $55,450 or 7.2%, from $771,289 in fiscal year 2019 to $826,739 in fiscal year 2020 due to our increased headcount of sales personnel in 2020 to handle increased sales volume. These above-mentioned factors combined led to the decrease in our selling expenses in fiscal year 2020 as compared to fiscal year 2019. As a percentage of revenues, our selling expenses accounted for 0.9% and 1.3% of our total revenue for the years ended June 30, 2020 and 2019, respectively.

General and Administrative Expenses

Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, depreciation and amortization, bad debt reserve expenses, office supply and utility expenses, business travel and meals expenses, and professional service expenses.

 

     For the years ended June 30,  
     2020     2019    

 

    Variances  
     Amount      %     Amount      %     Amount     %  

Salary and employee benefit expenses

   $ 738,430        34.8   $ 530,005        29.6   $ 208,425       39.3

Stock-based compensation expenses

     609,222        28.7     704,180        39.4   $ (94,958     (13.5 )% 

Rent expense

     61,510        2.9     56,054        3.1     5,456       9.7

Depreciation and amortization

     110,106        5.2     76,845        4.3     33,261       43.3

Bad debt reserve expenses

     15,363        0.7     —          0.0     15,363       100.0

Transportation, travel and meals expenses

     68,751        3.2     106,322        5.9     (37,571     (35.3 )% 

Office supply and utility expenses

     71,114        3.3     71,566        4.0     (452     (0.6 )% 

Professional service fee

     235,616        11.1     113,235        6.3     122,381       108.1

Bank charges

     82,404        3.9     45,284        2.5     37,120       82.0

Insurance

     24,552        1.2     11,651        0.7     12,901       110.7

Research and development expenses

     101,129        4.8     67,115        3.8     34,014       50.7

Others

     5,304        0.2     6,280        0.4     (976     (15.5 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total general and administrative expenses

   $ 2,123,501        100.0   $ 1,788,537        100.0   $ 334,964       18.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Our general and administrative expenses increased by $334,964 or 18.73% from $1,788,537 in fiscal year 2019 to $2,123,501 in fiscal year 2020, primarily attributable to (i) an increase in our salaries, welfare expenses and insurance expenses paid to administrative employees by $208,425, or 39.3%. The number of our administrative employees increased from 25 in fiscal year 2019 to 30 in fiscal year 2020. In addition, in early fiscal 2019, we adjusted the employee salary base to reflect inflation. These factors led to an increase in our salary and employee benefit expenses in fiscal year 2020; (ii) stock-based compensation expenses decreased by $94,958 or 13.5% because we granted more option shares to qualified employees as stock-based compensation in fiscal year 2019 than in fiscal year 2020. Pursuant to our 2015 Equity Incentive Plan (the “Plan”) for the purpose of providing incentive and rewards to employees and executives, from 2016 to early 2020, we granted stock options to purchase 2,302,113 ordinary shares to 108 employees. In fiscal year 2019, 88,500 shares were granted to employees, but in fiscal year 2020, only 67,575 shares were granted. This led to lower stock-based compensation expenses in fiscal year 2020 than in fiscal year 2019; (iii) our depreciation and amortization expenses increased by $33,261; (iv) our professional consulting expenses increased by $122,381 in fiscal year 2020 as compared to fiscal year 2019, as we consulted with professional service providers for legal structure setup and business

 

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strategy in fiscal year 2020 to prepare for listing in overseas market; (v) our business travel, transportation and meals expenses decreased by $37,571, or 35.3%, from $106,322 in fiscal year 2019 to $68,751 in fiscal year 2020, primarily as a result of the temporary closure of our facility for about one month from the beginning of February to March 1, 2020, in response to the COVID-19 outbreak and spread in China, as discussed above; and (vi) our research and development expenses increased by $34,014 or 50.7%, from $67,115 in fiscal year 2019 to $101,129 in fiscal year 2020, due to increased research and development activities to improve our SaaS suite and platform and to enhance customer experience.

The overall increase in our general and administrative expenses in fiscal year 2020 as compared to fiscal year 2019 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 1.3% and 1.5% of our revenue for the years ended June 30, 2020 and 2019, respectively.

Other income (expenses)

Other income (expenses) primarily included interest income, interest expenses, foreign exchange gain or loss, government subsidiary income, gain or loss from disposal of fixed assets, other non-operating income or expenses.

 

     For the years ended June 30,  
     2020      2019      Variances  
     Amount      Amount      Amount      %  

Interest expense

   $ (744,046    $ (661,372    $ (82,674      12.5

Interest income

     102,359        14,377        87,982        612.0

Foreign transaction gain

     889,356        363,538        525,818        144.6

Other income (expense)

     87,012        83,804        3,208        3.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other income (expense), net