F-1/A 1 ea187537-f1a5_lemenghold.htm AMENDMENT NO. 5 TO FORM F-1

As filed on November 1, 2023 with the Securities and Exchange Commission

Registration No. 333-268007

 

 

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

 

AMENDMENT NO. 5

TO

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

 

LEMENG HOLDINGS LIMITED

樂盟控股有限公司

(Exact name of registrant as specified in its charter)

 

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

 

Cayman Islands   7311   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

Unit 408, 4th Floor, Building 51

No. 63, Zhichun Road Haidian District,
Beijing 100089 China
+86 010 82666432 — telephone
+86 769 22767300 — facsimile
  CT Corporation System
111 Eighth Avenue
New York, New York 10011
+1-800-624-0909 — telephone
(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:

 

Anthony W. Basch, Esq.
Benming Zhang, Esq.
Kaufman & Canoles, P.C.
Two James Center, 14th Floor
1021 East Cary Street
Richmond, Virginia 23219
+1-804-771-5700 — telephone
+1-888-360-9092 — facsimile
 

Richard I. Anslow, Esq.
Lijia Sanchez, Esq.
Ellenoff Grossman & Schole LLP

1345 Avenue of the Americas

New York, New York 10105

+1-212-370-1300— telephone

+1-212-370-7889— facsimile

 

 

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

 

If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box, and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

 

Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 7(a)(2)(B) of the Securities Act.

 

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

 

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

 

 

 

 

 

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

 

 

Preliminary Prospectus (Subject to Completion)

Dated November 1, 2023

 

4,000,000 Class B Ordinary Shares 

 

 

Lemeng Holdings Limited

樂盟控股有限公司

 

This is an initial public offering of 4,000,000 Class B ordinary shares, US$0.000000625 par value per share (“Ordinary Shares”, “Class B Shares” or “Shares”), of Lemeng Holdings Limited 樂盟控股有限公司, a Cayman Islands exempted company (together with its subsidiaries, “Lemeng”, “we/us” or “our Company”). Our Shares have one (1) vote per share. We are not offering our Class A ordinary shares, US$0.000000625 par value per share (“Class A Shares”), which have twenty (20) votes per share, in this offering. Upon completion of this offering, we will be deemed to be a “controlled company” as defined by Nasdaq Rule 5615(c)(1); however, we do not intend to avail ourselves of the corporate governance exemptions afforded to controlled companies under the Nasdaq Marketplace Rules for at least one (1) year following completion of this offering. By virtue of his beneficial ownership of the Class A Shares, Baohua Feng will control Company actions requiring the approval of shareholders of ordinary shares, including the election of our Board of Directors, adoption of amendments to our memorandum and articles of association and the approval of merger, consolidation, sale of all or substantially all of our assets and other major corporate transactions, except to the extent such matters require approval by holders of our Class B Shares as a class.

 

Prior to this offering, there has been no public market for our Ordinary Shares. We expect the initial public offering price of our Ordinary Shares to be between $4.00 and $6.00 per share. We intend to apply to list our Ordinary Shares on the Nasdaq Capital Market under the symbol “LIAI”. We cannot assure you that our application will be approved; if it is not approved, we will not complete this offering.

 

We are a Cayman Islands holding company. We are not a Chinese operating company, and do not conduct business operations directly in People’s Republic of China (“PRC” or “China”). All operations in China are conducted through a variable interest entity (“VIE”), Beijing Lemeng Interactive Technology Co., Ltd. (“Lemeng BJ”), and its subsidiaries (collectively, “Lemeng Interactive”). This is an offering of the Shares of the Cayman Islands holding company, which does not conduct operations. You are not investing in Lemeng BJ or Lemeng Interactive, the PRC operating companies, and may never hold equity in the PRC entities. Neither we nor our subsidiaries own any equity in Lemeng BJ or Lemeng Interactive. Instead, we entered into certain contracts (the “VIE Agreements”) dated October 1, 2021 and October 28, 2022, which are used to provide investors exposure to foreign investment in China-based companies where Chinese law prohibits or restricts direct foreign investment in the operating companies. These agreements with our wholly foreign owned entity, Zhejiang Leshen Technology Co., Ltd. (“Leshen” or “WFOE”) require us to consolidate the financial results of Lemeng Interactive for accounting purposes. The VIE structure provides contractual exposure to foreign investment in the VIE rather than replicating an investment and the main contribution of the VIE was to hold an ICP license as the PRC law limits direct foreign investment in internet-based businesses, such as provision of internet information services platform and other value-added telecommunication services.

 

These rights have not been tested in a court of law, and Chinese regulatory authorities could disallow this structure; any adverse action by such courts or regulatory authorities would likely result in a material change in our operations and/or a material change in the value of the securities we are registering for sale, including that such securities could significantly decline in value or become worthless. Because of our corporate structure, we are subject to unique risks to investors due to uncertainty of the interpretation and the application of PRC laws and regulations, including but not limited to limitation on foreign ownership of internet technology companies, and regulatory review of oversea listing of PRC companies through a special purpose vehicle, and the validity and enforcement of the VIE Agreements. We are also subject to the risks of uncertainty about any future actions of the PRC government in this regard. As a result of our indirect ownership in the WFOE and the VIE Agreements, we are regarded as the primary beneficiary of the VIEs under U.S. generally accepted accounting principles (“GAAP”) purposes. The VIE structure provides contractual exposure to foreign investment in the VIE rather than replicating an investment and the main contribution of the VIE was to hold an ICP license as the PRC law limits direct foreign investment in internet-based businesses, such as provision of internet information services platform and other value-added telecommunication services. We may also be subject to sanctions imposed by PRC regulatory agencies including Chinese Securities Regulatory Commission if we fail to comply with their rules and regulations. See “Risk Factors—Risks Relating to Our Contractual Arrangements and Our Corporate Structure (the ‘VIE structure’)” and “Risk Factors—Risks Related to Doing Business in China”.

 

 

 

Lemeng Interactive has maintained cash management policies which dictate the purpose, amount and procedure of cash transfers among Lemeng, the VIE and PRC and non-PRC subsidiaries. Cash transferred of less than RMB10.0 million (US$1.6 million) must be reported to and reviewed by Lemeng’s financial department and the PRC and non-PRC subsidiaries’ and the VIE’s chief executive officer and must be approved by the Chief Financial Officer and Chairman of Lemeng. Cash transfer in excess of RMB10.0 million (US$1.6 million) must be approved by board of directors of Lemeng. Our management monitors the cash position of each entity within our organization regularly and prepare budgets on a monthly basis to ensure each entity has the necessary funds to fulfill its obligation for the foreseeable future and to ensure adequate liquidity. In the event that there is a need for cash or a potential liquidity issue, it will be reported to our Chief Financial Officer and subject to approval by our Board of Directors, we will provide funding to the subsidiaries through loans or capital contributions. Other than Lemeng Interactive, neither we, as a Cayman Islands holding company, or its other subsidiaries has cash management policies dictating how funds are transfer, and each entity needs to comply with applicable law or regulations with respect to transfer of funds, dividends and distributions with other entities. We are permitted under applicable laws and regulations of the Cayman Islands to transfer cash to our subsidiary incorporated in the British Virgin Islands, Lemeng British Virgin Islands (“Lemeng BVI”), through loans or capital contributions without restriction on the amount of the funds; Lemeng BVI is permitted under the laws of the British Virgin Islands to provide funding to its subsidiary incorporated in Hong Kong, Lemeng HK (“Lemeng HK”) through loans or capital contributions without restrictions on the amount of the funds. As a holding company, we may rely on dividends and other distributions on equity paid by our subsidiary in Lemeng BVI, Lemeng HK, Leshen, our WFOE, and the consolidated VIEs in China, Lemeng BJ, for our cash and financing requirements. According to the Companies Ordinance of Hong Kong, a Hong Kong company may only make a distribution out of profits available for distribution. In order for us to pay dividends to our shareholders, we will rely on payments made from Lemeng BJ to WFOE, pursuant to VIE Agreements between them, and the distribution of such payments to Lemeng HK as dividends from WFOE. Certain payments from our Lemeng BJ to WFOE are subject to PRC taxes, including business taxes and Value-Added Tax (“VAT”). We intend to keep any future earnings to re-invest in and finance the expansion of our business, and will consider cash dividends based on our operations, availability of free convertible currencies, and dividends payment will be made at the discretion of our Board of Directors depending on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant. As of the date of this prospectus, there have been no transfers, dividends or distributions made between the holding company, its subsidiaries and consolidated VIEs, or to investors. In the future, cash proceeds raised from overseas financing activities, including this offering, may be transferred by the holding company to WFOE or the consolidated VIE via capital contribution or shareholder loans, as the case may be. As discussed above, other than Lemeng Interactive, we do not maintain cash management policies and procedures as of the date of this prospectus. For more information, please see “Prospectus Summary — Transfers of Cash to and from Our Subsidiaries and VIE”, “Prospectus Summary — Dividend Policy” and “Prospectus Summary — Selected Condensed Consolidated Financial Data” beginning on page 19 of this prospectus and “Summary of Risk Factors — Restrictions of funding on dividend payments from Leshen and Lemeng Interactive under PRC laws” and “Risk Factors — Risks Related to Doing Business in China — We are a holding company, and we rely for funding on dividend payments from Leshen and Lemeng Interactive, which are subject to restrictions under PRC laws.” on page 47 of this prospectus and our consolidated financial statements starting on page F-1 of this prospectus for more information.

 

Pursuant to the exclusive consulting and service agreement between Leshen and Lemeng BJ dated October 1, 2021 (the “Exclusive Consulting and Service Agreement”), Leshen has the exclusive right to provide Lemeng BJ with comprehensive consulting services and other services. Without Leshen’s prior written consent, Lemeng BJ shall not directly or indirectly accept the same or any similar services provided by any third party and shall not establish similar cooperative relationships with any third party regarding the matters contemplated under the Exclusive Consulting and Service Agreement. Lemeng BJ shall pay Leshen a service fee equivalent to the remaining amount after Lemeng BJ’s profit before tax in the corresponding year deducts Lemeng BJ’s losses, if any, in the previous year, the necessary costs, expenses, taxes, and fees incurred in the corresponding year, and the withdraws of the statutory provident fund. To guarantee Lemeng BJ’s performance of its obligations thereunder, the shareholders of Lemeng BJ have pledged all of their equity interests in Lemeng BJ to Leshen pursuant to an equity interest pledge agreement effective on October 1, 2021 and its supplementary agreement dated on October 28, 2022. The Exclusive Consulting and Service Agreement will continue to be effective unless it is terminated by written notice of Leshen. In general, the People’s Bank of China and the State Administration of Foreign Exchange, or SAFE, implement capital control measures that severely restrict the flow of cash into and out of China. The PRC government may continue to strengthen its capital controls and Leshen’s and Lemeng BJ’s dividends and other distributions may be subject to tightened scrutiny in the future. To the extent cash is generated in our PRC subsidiaries, and may need to be used to fund operations outside of mainland China, such funds may not be available due to limitations placed by the PRC government. Furthermore, to the extent assets (other than cash) in our business are located in mainland China or held by a mainland China entity, the assets may not be available to fund operations or for other use outside of mainland China due to interventions in or the imposition of restrictions and limitations on the ability of us and our subsidiaries to transfer assets by the PRC government. If certain PRC laws and regulations, including existing laws and regulations and those enacted or promulgated in the future were to become applicable to our Hong Kong subsidiary in the future, and to the extent cash is generated in our Hong Kong subsidiary and to the extent assets (other than cash) in our business are located in Hong Kong or held by a Hong Kong entity and may need to be used to fund operations outside of Hong Kong, such funds or assets may not be available due to interventions in or the imposition of restrictions and limitations on the ability of us and our subsidiaries to transfer funds or assets by the PRC government. Furthermore, there can be no assurance that the PRC government will not intervene or impose restrictions on our ability to transfer or distribute cash, which could result in an inability or prohibition on making transfers or distributions to entities outside of mainland China and Hong Kong and adversely affect our business. Saved as the foregoing limitations imposed by the PRC government as described hereto, there are currently no limitations on our or our subsidiaries’ ability to transfer cash to investors. It may be impossible, therefore, for the Company (and, therefore, its shareholders) to realize any benefit from the operations of Lemeng BJ. See “Prospectus Summary — Transfers of Cash to and from Our Subsidiaries and VIE”, “Prospectus Summary — Dividend Policy” and “Prospectus Summary — Selected Condensed Consolidated Financial Data” beginning on page 19 and “Summary of Risk Factors — Restrictions of funding on dividend payments from Leshen and Lemeng Interactive under PRC laws” and “Risk Factors — Risks Related to Doing Business in China — We are a holding company, and we rely for funding on dividend payments from Leshen and Lemeng Interactive, which are subject to restrictions under PRC laws.” On page 47 and “Summary of Risk Factors – To the extent cash in the business is in PRC/Hong Kong or in PRC/Hong Kong entities, the funds may not be available to fund operations for other use outside of the PRC/Hong Kong” and “Risk Factors – Risks Related to Doing Business in China – To the extent cash in the business is in PRC/Hong Kong or in PRC/Hong Kong entities, the funds may not be available to fund operations for other use outside of the PRC/Hong Kong” on page 48 of this prospectus and the consolidated financial statements appearing beginning on page F-1.

 

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our Ordinary Shares involves certain risks. See “Risk Factors” beginning on page 24.

 

 

 

The Chinese government may intervene or influence the operation of Lemeng Interactive’s Hong Kong and PRC operating entities and exercise significant oversight and discretion over the conduct of their business and may intervene in or influence their operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in operations and/or the value of our Class B Shares. Further, any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.

 

Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. In addition, the PRC government announced that it would step up supervision of overseas listed PRC businesses. Under the new measures, the PRC government will enhance regulation of cross-border data flows and security, crack down on illegal activity in the securities market and punish fraudulent securities issuance, market manipulation and insider trading. The PRC government will also check sources of funding for securities investment and control leverage ratios. The PRC government has also opened a probe into several U.S.-listed technology companies focusing on anti-monopoly, financial technology regulation and more recently, with the passage of the PRC Data Security Law, how companies collect, store, process and transfer personal data, which could impact our ability to conduct our business, accept foreign investments, or list on a U.S. or other foreign exchange. On October 29, 2021, the Cyberspace Administration of China (“CAC”) published the Draft Outbound Data Transfer Security Assessment Measures (the “Draft Outbound Data Transfer Security Assessment Measures”). On July 7, 2022, the Outbound Data Transfer Security Assessment Measures (the “Outbound Data Transfer Security Assessment Measures”) formally promulgated, which became effective from September 1, 2022. The Outbound Data Transfer Security Assessment Measures stipulates the circumstances under which security assessment of outbound data transfers should be declared, including: (i) outbound transfer of important data, which means any data, the tampering, damage, leakage, or illegal acquisition or use of which, if it happens, may endanger national security, the operation of the economy, social stability, public health and security, by a data processor; (ii) outbound transfer of personal information by a critical information infrastructure operator or a personal information processor who has processed the personal information of more than 1,000,000 people; (iii) outbound transfer of personal information by a personal information processor who has made outbound transfers of the personal information of 100,000 people cumulatively or the sensitive personal information of 10,000 people cumulatively since 1 January of the previous year; or (iv) other circumstances where an application for the security assessment of an outbound data transfer is required as prescribed by the national cyberspace administration authority. On December 28, 2021, the Measures for Cybersecurity Review (2021 version) was promulgated and became effective on February 15, 2022, which iterates that any “online platform operators” controlling personal information of more than one million users which seeks to list in a foreign stock exchange should be subject to cybersecurity review. We are not in possession of personal information of over one million users and we do not expect to have personal information of more than one million users prior to this offering. In view of the above, our PRC legal counsel, Jingtian&Gongcheng, is of the view that we are not subject to the cybersecurity review for this offering under the Measures for Cybersecurity Review (2021 version). As of the date of this prospectus, we have not been involved in any investigations on cybersecurity review initiated by the CAC, and we have not received any warning, sanction or penalty in such respect. However, the Measures for Cybersecurity Review (2021 version) was recently adopted and, therefore, it is uncertain how it will be enacted, interpreted or implemented, and how it will affect us. Since these statements and regulatory actions are new, it is highly uncertain how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our daily business operation, the ability to accept foreign investments and list on an U.S. exchange. As there remains significant uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and regulations, we could be subject to cybersecurity review, and if so, there is no assurance that we would be able to pass such review in relation to this offering in a timely manner or at all. In addition, we could become subject to enhanced cybersecurity review or investigations launched by PRC regulators in the future. Any failure or delay in the completion of the cybersecurity review procedures or any other non-compliance with the related laws and regulations may result in fines or other penalties, including suspension of business, website closure, and revocation of prerequisite licenses, as well as reputational damage or legal proceedings or actions against us, which may have material adverse effect on our business, financial condition or results of operations. See “Risk Factors – Risks Related to Doing Business in China – The recent policy pronouncements by the PRC government regarding business activities of U.S.-listed PRC businesses may negatively impact Lemeng’s existing and future operations in Hong Kong.” on page 44.

 

The Anti-Monopoly Law of the People’s Republic of China, which took effect in 2008 and was amended on June 24, 2022, which amendment became effective August 1, 2022 (the “Anti-Monopoly Law”), established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Under the Anti-Monopoly Law, companies undertaking acquisitions relating to businesses in China must notify the State Council’s anti-monopoly law enforcement authority, in advance of any transaction where the parties’ revenue in the China market exceed certain thresholds and the buyer would obtain control of, or decisive influence over, the target. We also have not implemented monopolistic behaviors including monopoly agreements, abuse of a dominant position and concentration of undertakings that may have the effect to eliminate or restrict competition in the field of platform economy. However, since we anticipate that long term success in China’s market will require consolidation of the many small participants in that market, and our goal is to be one of the survivors of that consolidation, when it happens. Aggressive enforcement of new anti-monopoly regulations could interfere with the VIE’s ability to achieve that goal, which could impact our ability to conduct our business, accept foreign investments, or list on a U.S. or other foreign exchange. As of the date of this prospectus, we have not been involved in any investigations on anti-monopoly initiated by the related governmental regulatory authorities, and we have not received any inquiry, notice, warning, or sanction in such respect.

 

 

 

On February 17, 2023, the China Securities Regulatory Commission (the “CSRC”) issued the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Administrative Measures”) and relevant supporting guidelines (collectively, the “New Administrative Rules Regarding Overseas Listings”), which became effective on March 31, 2023. According to the New Administrative Rules Regarding Overseas Listings, among other things, a domestic company in the PRC that seeks to offer and list securities in overseas markets shall fulfill the filing procedure with the CSRC. When a domestic company seeks to directly offer and list securities in overseas markets, the issuer shall file with the CSRC. When a domestic company seeks to indirectly offer and list securities in overseas markets, the issuer shall designate a major domestic operating entity, which shall, as the domestic responsible entity, file with the CSRC. Initial public offerings or listings in overseas markets shall be filed with the CSRC within 3 working days after the relevant application is submitted overseas. The required filing materials with the CSRC include (without limitation): (i) record-filing reports and related undertakings, (ii) compliance certificates, filing or approval documents from the primary regulators of applicants’ businesses (if applicable), (iii) security assessment opinions issued by related departments (if applicable), (iv) PRC legal opinions issued by domestic law firms (with related undertakings), and (v) prospectus or listing documents. Notwithstanding the foregoing, the Notice on the Arrangement for Filing-based Administration of Overseas Offering and Listing by Domestic Companies provide that a domestic company may make reasonable arrangements to submit the required filings to the CSRC if the registration statement is filed but does not become effective prior to the date of implementation of the Trial Administrative Measures. Accordingly, we timely submitted the required filing materials to the CSRC on June 19, 2023 and we received the first round of comments from the CSRC on August 1, 2023, to which we submitted our responses on August 17, 2023. As of date of this prospectus, we have not completed the Trial Measures process which remains ongoing. According to the Trial Measures, the CSRC will conclude the filing procedures and publish the filing results on the CSRC website within 20 working days after receiving the filing documents if the filing documents are complete and in compliance with stipulated requirements. However, during the filing process, the CSRC may request the Company to supply additional documents or may consult with competent authorities, the time for which will not be counted in the 20 working days. The Company intends to timely complete the relevant filings, while we cannot assure you when the process will be completed. In addition, under the New Administrative Rules Regarding Overseas Listings, a domestic company is prohibited from overseas offering and listing if any of the following circumstances is involved: (1) where such securities offering and listing is explicitly prohibited by provisions in laws, administrative regulations and relevant state rules; (2) where the intended securities offering and listing may endanger national security as reviewed and determined by competent authorities under the State Council in accordance with law; (3) where the domestic company intending to make the securities offering and listing, or its controlling shareholders and the actual controller, have committed crimes such as corruption, bribery, embezzlement, misappropriation of property or undermining the order of the socialist market economy during the latest three years; (4) where the domestic company intending to make the securities offering and listing is suspected of committing crimes or major violations of laws and regulations, and is under investigation according to law, and no conclusion has yet been made thereof; and (5) where there are material ownership disputes over equity held by the domestic company’s controlling shareholder or by other shareholders that are controlled by the controlling shareholder and/or actual controller. Moreover, a domestic company that seeks to offer and list securities in overseas markets shall abide by certain other regulatory requirements as set out in the New Administrative Rules Regarding Overseas Listings, including without limitation to, compliance with national secrecy, foreign investment, cybersecurity, data security, cross-border investment and financing, foreign exchange, and other laws and relevant provisions. Though we believe that none of the situations that would clearly prohibit overseas offerings and listings applies to us, we cannot assure you that we will be able to receive clearance of such filing requirements in a timely manner, or at all.

 

Pursuant to the New Administrative Rules Regarding Overseas Listings, we have to file with the CSRC in accordance with the Trial Administrative Measures with respect to this offering, which may materially delay the progress of the offer of our Ordinary Shares, or even completely hinder our ability to offer or continue to offer our Ordinary Shares if we fail to receive clearance of such filing requirements. Since the New Administrative Rules Regarding Overseas Listings are newly promulgated, and the interpretation and implementation thereof involves uncertainties, we cannot assure that we will be able to complete the relevant filings in a timely manner or fulfill all the regulatory requirements thereunder.

 

On February 24, 2023, the CSRC promulgated the Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies (the “Confidentiality and Archives Administration Provisions”), which also became effective on March 31, 2023. According to the Confidentiality and Archives Administration Provisions, domestic companies that seek overseas offering and listing (either in direct or indirect means) and the securities companies and securities service (either incorporated domestically or overseas) providers that undertake relevant businesses shall institute a sound confidentiality and archives administration system, and take necessary measures to fulfill confidentiality and archives administration obligations. They shall not leak any state secret or working secret of government agencies, or harm national security and public interests. Furthermore, a domestic company that provides accounting archives or copies of accounting archives to any entities, including securities companies, securities service providers and overseas regulators and individuals, shall fulfill due procedures in compliance with applicable regulations. Working papers produced in the mainland China by securities companies and securities service providers in the process of undertaking businesses related to overseas offering and listing by domestic companies shall be retained in mainland China. Where such documents need to be transferred or transmitted to areas outside of mainland China, relevant approval procedures stipulated by regulations shall be followed. We believe that this offering does not involve the leaking of any state secret or working secret of government agencies, or the harming of national security and public interests. However, we may be required to perform additional procedures in connection with the provision of accounting archives. The specific requirements of the relevant procedures are currently unclear and we cannot be certain whether we will be able to perform the relevant procedures.

 

Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our Ordinary Shares, cause significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results of operations and cause our Ordinary Shares to significantly decline in value or become worthless.

 

 

 

 

Furthermore, the Ministry of Commerce (“MOFCOM”) and the National Development and Reform Commission (“NDRC”) promulgated the Special Administrative Measures for Access of Foreign Investment (2021 Edition), or the Negative List (2021), stipulates that if a domestic enterprise engaged in business in the prohibited investment field issues shares abroad and is listed for trading, it shall be examined and approved by the relevant competent authorities of the state. According to a press release issued by the NDRC in relation to the Negative List (2021), the above provisions are only applicable to the direct overseas listing of domestic enterprises engaged in the prohibited investment field. Our PRC legal counsel is of the view that our listing on Nasdaq does not constitute a direct overseas listing of domestic enterprises mentioned in the above press release and therefore we are not subject to the examination and approval by the relevant competent authorities of the state in accordance with the Negative List (2021). As of the date of this prospectus, we also have not been involved in any investigations initiated by the above applicable governmental regulatory authorities, nor have we received any inquiry, notice, warning, or sanction. However, the above regulations and drafts for comments also indicate the intention of the Chinese government to increase its regulation of offshore investment in company’s utilizing the VIE structure to participate in the prohibited investment fields. If relevant governmental authority determines or new future rules provides that we are required to obtain the approval, we would have to apply for such approval. There is no assurance that we will be able to obtain such approval in time or at all. If we fail to obtain the approve as required or in a timely manner, the VIE structure may be deemed illegal and ordered to be cancelled by relevant government authorities, and other administrative measures or penalties may be imposed on us, which could materially and adversely affect our business, financial condition, results of operations and the value of our Class B Shares. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our Class B Shares, cause significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results of operations and cause our Class B Shares to significantly decline in value or become worthless and impact our ability to accept foreign investments, or list on a U.S. or other foreign exchange. See “Risk Factors — Chinese government agencies may exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers, especially those in the technology field. Additional compliance procedures may be required in connection with this offering under PRC rules, regulations or policies.” See “Risk Factors — Our current corporate structure and business operations may be substantially affected by the newly enacted Foreign Investment Law.

 

Our Class B Shares may be prohibited to trade on a national exchange or “over-the-counter” markets under the Holding Foreign Companies Accountable Act (the “HFCAA Act”) if the Public Company Accounting Oversight Board (“PCAOB”) is unable to inspect our auditors for three consecutive years beginning in 2021. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”) and the U.S. House of Representatives introduced the AHFCAA on December 14, 2021 and referred to the House Committee on Financial Services. The AHFCAA was enacted on December 29, 2022, which amends the HFCAA Act and requires the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three consecutive years.

 

Pursuant to the HFCAA, the PCAOB issued a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the PRC, and (2) Hong Kong. In addition, the PCAOB’s report identified the specific registered public accounting firms which are subject to these determinations.

 

The recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the HFCAA 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.

 

On August 26, 2022, the PCAOB signed a Statement of Protocol with the CRSC and the Ministry of Finance of the PRC, which sets out specific arrangements on conducting inspections and investigations by both sides over relevant audit firms within the jurisdiction of both sides, including the audit firms based in mainland China and Hong Kong. This agreement marks an important step towards resolving the audit oversight issue that concern mutual interests, and sets forth arrangements for both sides to cooperate in conducting inspections and investigations of relevant audit firms, and specifies the purpose, scope and approach of cooperation, as well as the use of information and protection of specific types of data. These developments could add uncertainties to our offering.

 

Our auditor is currently subject to PCAOB inspections and the PCAOB is able to inspect our auditor. Our auditor, Onestop Assurance PAC, headquartered in Singapore, and our predecessor auditor, Friedman LLP (“Friedman”) based in New York City, have been inspected by the PCAOB on a regular basis. Our auditor is not headquartered in mainland China or Hong Kong and was not identified in this report as a firm subject to the PCAOB’s determination. Notwithstanding the foregoing, in the future, if there is any regulatory change or step taken by PRC regulators that does not permit Onestop Assurance PAC and Friedman to provide audit documentations located in China or Hong Kong to the PCAOB for inspection or investigation, or the PCAOB expands the scope of the Determination so that we are subject to the HFCAA Act, as the same may be amended, or if the agreement between the PCAOB and the CRSC on August 26, 2022 does not succeed, you may be deprived of the benefits of such inspection which could result in limitation or restriction to our access to the U.S. capital markets and trading of our securities, including trading on the national exchange and trading on “over-the-counter” markets, may be prohibited under the HFCAA Act. See “Risk Factors — The recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable Act (“HFCAA”) 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” for more information.

 

 

 

 

    Per Ordinary
Share
    Total  
Assumed public offering price   $               $    
Underwriting discount and commissions(1)   $       $    
Proceeds to us, before expenses   $       $                

 

(1) The underwriting discount is 7% of the public offering price. Does not include a non-accountable expense allowance equal to 1% of the gross proceeds of this offering, payable to the underwriters, as well as reimbursement of certain expenses of the underwriters. See “Underwriting” of this prospectus for additional information regarding the compensation to be received by the underwriters and our arrangements with the underwriter.

 

This offering is being conducted on a firm commitment basis. The underwriter, Prime Number Capital LLC is obligated to take and pay for all of the Shares if any such Shares are taken. We have granted the underwriters an option for a period of 45 days after the closing of this offering to purchase up to 15% of the total number of our Ordinary Shares to be offered by us pursuant to this offering (excluding Shares subject to this option), solely for the purpose of covering overallotments, at the initial public offering price less the underwriting discount. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable will be $1,610,000 based on an assumed initial public offering price of $5.00 per ordinary share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, and the total proceeds to us, before expenses, will be $21,390,000. If we complete this offering, net proceeds will be delivered to our company on the closing date. We will not be able to use such proceeds in China, however, until we complete certain remittance procedures in China. The underwriters expect to deliver our Shares to purchasers in the offering on or about   , 2023.

 

Neither the Securities and Exchange Commission 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.

 

Sole Book-Running Manager

 

 

The date of this prospectus is                 , 2023.

 

 

 

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY 1
RISK FACTORS 24
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 65
USE OF PROCEEDS 65
DIVIDEND POLICY 66
EXCHANGE RATE INFORMATION 66
CAPITALIZATION 67
DILUTION 68
OPERATING AND FINANCIAL REVIEW AND PROSPECTS 69
BUSINESS 95
REGULATIONS 118
MANAGEMENT 133
RELATED PARTY TRANSACTIONS 141
PRINCIPAL SHAREHOLDERS 143
DESCRIPTION OF SHARE CAPITAL 146
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 159
SHARES ELIGIBLE FOR FUTURE SALE 159
MATERIAL TAX CONSEQUENCES APPLICABLE TO U.S. HOLDERS OF OUR ORDINARY SHARES 162
ENFORCEABILITY OF CIVIL LIABILITIES 169
UNDERWRITING 170
EXPENSES RELATING TO THIS OFFERING 174
LEGAL MATTERS 174
EXPERTS 174
INTERESTS OF NAMED EXPERTS AND COUNSEL 175
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION 176
WHERE YOU CAN FIND MORE INFORMATION 176
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1

 

Neither we nor the underwriter has authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, our Ordinary Shares only in jurisdictions where offers and sales are permitted.

 

The information in this preliminary prospectus is not complete and is subject to change. No person should rely on the information contained in this document for any purpose other than participating in our proposed initial public offering, and only the prospectus issued on       , 2023 is authorized by us to be used in connection with our proposed initial public offering. The preliminary prospectus will only be distributed by us and the underwriters named herein and no other person has been authorized by us to use this document to offer or sell any of our securities.

 

Until       , 2023 (25 days after the commencement of our initial public offering), all dealers that buy, sell, or trade our Ordinary Shares, whether or not participating in our initial public offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriter and with respect to their unsold allotments or subscriptions. 

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our Ordinary Shares. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors” and “Operating and Financial Review and Prospects” included elsewhere in this prospectus.

 

We are a holding company incorporated in the Cayman Islands. Our Class B ordinary shares, $0.000000625 par value per share (“Ordinary Shares”, “Class B Shares” or “Shares”) offered in this prospectus are shares of our Cayman Islands holding company. As a holding company with no material operations of our own, we conduct our operations through a variable interest entity (“VIE”) established in the People’s Republic of China. We do not have any equity ownership of the VIE, instead, we have entered certain contractual arrangements, or “VIE Agreements” with Beijing Lemeng Interactive Technology Co., Ltd. (“Lemeng BJ”), which are used to provide contractual exposure to foreign investment in China-based companies where Chinese law prohibits or restricts direct foreign investment in the Chinese operating companies. Pursuant to the VIE Agreements, the VIE shall pay service fees equal to all of its net profit after tax payments to Leshen Technology Co., Ltd, our wholly owned foreign entity (“Leshen” or “WFOE”), while WFOE has the power to direct the activities of the VIE that can significantly impact the VIE’s economic performance and is obligated to absorb all of losses of the VIE. As such, under the U.S. generally accepted accounting principles (“GAAP”), the Cayman Islands holding company is deemed to have a controlling financial interest in, and be the primary accounting beneficiary of, the VIE for accounting purposes and must consolidate the VIE. However, the VIE Agreements have not been tested in a court of law and may not be effective in providing control over the VIE. We are, therefore, subject to risks due to the uncertainty of the interpretation and application of the laws and regulations of the PRC regarding the VIE and the VIE structure. For a description of our corporate structure and VIE contractual arrangements, see “Risks Relating to Our Contractual Arrangements and Our Corporate Structure (the ‘VIE structure’)”.  

 

Company Overview

 

Lemeng BJ was established in September 2014. It is a fast-growing mobile Internet, big data marketing technology company and a high-tech enterprise. In 2015, Lemeng BJ’s platform with independent intellectual property rights was launched. In 2017, it further transformed into a professional cloud service provider for targeted advertising services based on big data technology and is committed to becoming a leading data technology company. Lemeng BJ had a self-developed programmatic advertising demand side platform (“DSP”), an exclusive vertical media resource supply side platform (“SSP”) traffic pool. Based on the above advantages, Lemeng BJ has customized all process solutions to help companies carry out targeted advertising services based on Internet big data.

 

Historical Timeline

 

Below is a brief timeline of key dates in our Company’s history since its formation.

 

  September 15, 2014: Beijing Lemeng Interactive Technology Co., Ltd. (“Lemeng BJ”) was established.
     
  May 25, 2015: Nanjing Juguang Information Technology Co., Ltd. (“Nanjing Juguang”) was established and 20% of which was owned by Lemeng BJ. In June 2021, Lemeng BJ transferred its 20% equity of Nanjing Junguang to Nanjing Yingbao Network Technology Co., Ltd.
     
  March 22, 2016: Tianjin Lemeng Interactive Technology Co., Ltd. (“Lemeng TJ”) was established and wholly owned by Lemeng BJ.
     
  December 8, 2016: Xinjiang Lemeng Interactive Technology Co., Ltd. (“Lemeng XJ”) was established and wholly owned by Lemeng BJ.
     
  December 8, 2016: Xinjiang Yishen Infinite Network Technology Co., Ltd. (“Yishen”) was established and 51% of which is owned by Lemeng BJ.
     
  March 29, 2019: Tianjin Puyu Network Technology Co., Ltd. (“Puyu”) was established and 51% of which is owned by Lemeng BJ.
     
  February 14, 2020: Lemeng Holdings Limited (“Lemeng”) was established.
     
  February 26, 2020: Lemeng Investment Limited (“Lemeng BVI”) was established and is wholly owned by Lemeng.
     
  April 1, 2020: Lemeng (Hong Kong) Limited (“Lemeng HK”) was established and is wholly owned by Lemeng BVI.
     
  August 26, 2021: Zhejiang Leshen Technology Co., Ltd (“Leshen” or “WFOE”) was established, and it is wholly owned by Lemeng HK.
     
  April 18, 2022: Xinjiang Lexian Network Technology Co., Ltd (“Lexian”) was established, and it is wholly owned by Lemeng BJ. Lexian was deregistered on September 20, 2022.
     
  May 26, 2022: LEMENG US INC. (“Lemeng US”) was established, and it is wholly owned by Lemeng.
     
  June 16, 2022: Xinjiang Jiacheng Network Co., Ltd (“Jiacheng”) was established, and it is wholly owned by Leshen.
     
  May 22, 2023: Zhejiang Shenzhan Technology Co., Ltd (“Shenzhan”) was established, and it is wholly owned by Leshen.

 

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Company Structure

 

We are a Cayman Islands company limited by shares. Our Cayman Islands company is a holding company that does not conduct operations of its own and instead has entered into contractual agreements with legal operating entities in China, which provide investors with exposure to foreign investments in China-based companies where Chinese law prohibits direct foreign investment. Please note that all business operations are conducted through Lemeng BJ and its subsidiaries (collectively, “Lemeng Interactive”), and you are not purchasing equity in such Chinese companies and may never receive equity in such Chinese operating entities.

 

We currently have seven (7) shareholders, who will hold approximately 98.5% of our voting power after completion of the offering, assuming the completion of the offering and that the over-allotment option is not exercised. Of these shareholders, our largest shareholder is Mr. Baohua Feng, Chairman of our Board of Directors and Chief Executive Officer, who controls approximately 77.4% of the voting power of our Company prior to completion of this offering and will control approximately 76.3% after completion of the offering, assuming no exercise of the underwriters’ overallotment option. Mr. Feng has and will continue to have significant influence on the operation of our business. 

 

Each Class A Share of our Company is entitled to twenty (20) votes per share; each Class B Share of our Company is entitled to one (1) vote per share.

 

We anticipate that following the completion of this offering, Baohua Feng will beneficially own an aggregate of 76.3% of the voting power of the Company given the effect of one (1) vote for each Class B Share and twenty (20) votes for each Class A Share and assuming the offering of 4,000,000 Class B Shares. As a result, we may be deemed to be a “controlled company” under Nasdaq Marketplace Rule 5615(c)(1); however, we do not intend to avail ourselves of the corporate governance exemptions afforded to a “controlled company” under the Nasdaq Marketplace Rules for at least one (1) year following completion of this offering.

 

Our current corporate structure is as follows prior to completion of this offering:

 

 

We do not own any of the equity of Lemeng BJ. The equity ownership of Lemeng BJ is owned by the same seven (7) parties who are the shareholders of our Company prior to completion of this offering. As of the date of this prospectus, Lemeng BJ’s shareholders are (a) Baohua Feng, Xiangda Li, Xiwei Tang and Haichuan Tu, four PRC citizens and (b) Shenzhen Lemeng Investment Partnership Co., Ltd, Ningbo Longwin Lightenbright Investment Management Co., Ltd and Dongguan Zhongke Zhongguang Co., Ltd., three PRC legal entities. We newly set up our wholly-owned subsidiary, Lemeng US Inc, on May 26, 2022, which is engaged in the business of digital marketing and aims at forming alliance with local partners to provide digital marketing services to our customers looking for overseas business expansion.

 

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Lemeng BJ owns all of the equity of Lemeng TJ, and Lemeng XJ. Lemeng BJ owns 51% of the equity of Yishen, with 49% owned by Beijing Yishen Infinite Technology Co., Ltd, a PRC entity owned by Wenliang Lu and Dongwei Wang, two PRC citizens. Lemeng BJ owns 51% of the equity of Puyu, with 49% owned by Pengju Zhang, a PRC citizen. Jiacheng and Shenzhan, which were established on June 16, 2022 and on May 22, 2023, respectively, are both owned 100% by Leshen, the WFOE. As determined by the Board of Directors on June 1, 2022, Leshen and Jiacheng shall be responsible for the Company’s non-value added telecommunications services (“non-VATS”) and for signing non-VATS business contracts by transferring the existing non-ATS business contracts from Lemeng-BJ and its subsidiaries to Leshen and Jiacheng. The transfer was effective on July 1, 2022.

 

Contractual Arrangements with the VIE

 

Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunication services, or VATS, and certain other businesses. We are a company incorporated in the Cayman Islands. We currently conduct our VATS business through Lemeng BJ and its subsidiaries.

 

We operate our business mainly through Lemeng BJ, a variable interest entity (“VIE”) in the PRC, and Lemeng BJ’s subsidiaries, based on a series of contractual arrangements (collectively the “VIE Agreements”). As a result of these contractual arrangements, we are considered the primary beneficiary of the VIE for accounting purposes and consolidate their operating results in our financial statements under U.S. GAAP. Such a contractual relationship is not identical to owning such entities directly, and investors in this offering will own shares in a holding company with contracts with operating companies and will not have any equity ownership of such operating companies themselves. The VIE Agreements may not be as effective as direct ownership in providing us with control over the Consolidated Affiliated Entities. Direct ownership would allow us, for example, to directly or indirectly exercise our rights as a shareholder to effect changes in the boards of directors of the Consolidated Affiliated Entities, which, in turn, could affect changes, subject to any applicable fiduciary obligations at the management level. However, under the VIE Agreements, as a legal matter, if the Consolidated Affiliated Entities or the Registered Shareholders fail to perform their respective obligations under the VIE Agreements, we may have to incur substantial costs and expend significant resources to enforce those arrangements and resort to litigation or arbitration and rely on legal remedies under PRC laws. These remedies may include seeking specific performance or injunctive relief and claiming damages, any of which may not be effective. For example, if the Registered Shareholders were to refuse to transfer their equity interest in Lemeng BJ to Leshen or Leshen’s designee when Leshen exercises the call option pursuant to the VIE Agreements, or if they were otherwise to act in bad faith toward us, we might have to take legal action to compel them to perform their respective contractual obligations. In the event we are unable to enforce these VIE Agreements or we experience significant delays or other obstacles in the process of enforcing these VIE Agreements, we may not be able to exert effective control over our Consolidated Affiliated Entities and may lose control over the assets owned by the Consolidated Affiliated Entities. As a result, we may be unable to consolidate the Consolidated Affiliated Entities in our consolidated financial statements, which could materially and adversely affect our financial condition and results of operations. Furthermore, all of these VIE Agreements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC, and such VIE Agreements have not been tested in a court of law. The legal environment in the PRC is not as developed as in some other jurisdictions. As a result, uncertainties in the PRC legal system could limit our ability to enforce these VIE Agreements. In the event we are unable to enforce these VIE Agreements, we may not be able to exert effective control over Lemeng BJ and we may be precluded from operating our business, which would have a material adverse effect on our financial condition and results of operations. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. Accordingly, it is uncertain whether Lemeng, a Cayman Islands holding company, would be able to enforce (directly or through Leshen) the VIE Agreements with Lemeng BJ in a court of law in China, either in in an action directly in China or in seeking to enforce a foreign judgment in China. The costs of seeking to enforce such VIE Agreements could be substantial, and the outcome of such litigation might not result in Lemeng enforcing such VIE Agreements. If such VIE Agreements were not enforced, investors in Lemeng could see the value of their Shares decrease in value or become worthless.

 

Because we do not directly hold equity interests in the VIE, we are subject to risks due to uncertainty of the interpretation and the application of the PRC laws and regulations, including, but not limited to, regulatory review of overseas listing of PRC companies through a special purpose vehicle, and the validity and enforcement of the VIE Agreements. We are also subject to the risks of uncertainty about any future actions of the PRC government in this regard that could disallow the VIE structure, which would likely result in a material change in our operations and a complete hindrance of our ability to offer or continue to offer our securities to investors and the value of our Ordinary Shares may depreciate significantly or become worthless.

 

The following is a summary of VIE Agreements by and among Leshen, Lemeng BJ and the shareholders of Lemeng BJ (the “Registered Shareholders”). For the complete text of these contractual arrangements, please see the copies filed as exhibits to the registration statement filed with the Securities and Exchange Commission (the “SEC”) of which this prospectus forms a part.

 

Exclusive Consulting and Service Agreement

 

Under the Exclusive Consulting and Service Agreement dated October 1, 2021, Leshen has agreed to provide the following services (among others) to Lemeng BJ:

 

the provision of software research and development services;

 

the provision of technical services, applications and implementation, including but not limited to installing, and testing business systems;

 

daily maintenance support, upgrades, monitoring and troubleshooting of computer network equipment, and other technical services;

 

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business consulting;

 

technology development and technology transfer services;

 

market research and consulting services (excluding market research businesses that Chinese law prohibits wholly foreign-owned enterprises from engaging in); and

 

licensing of intellectual property.

 

In consideration of the above-mentioned services provided, Lemeng BJ shall pay Leshen a service fee equivalent to the remaining amount after Lemeng BJ’s profit before tax in the corresponding year deducts Lemeng BJ’s losses, if any, in the previous year, the necessary costs, expenses, taxes, and fees incurred in the corresponding year, and the withdraws of the statutory provident fund.

 

This agreement is signed and effective from October 1, 2021 and will continue to be effective unless it is terminated by written notice of Leshen.

 

Equity Pledge Agreement

 

The shareholders of Lemeng BJ entered into an Equity Pledge Agreement and its supplementary agreement with Leshen, dated October 1, 2021 and October 28, 2022. Under such equity pledge agreement, each of the shareholders of Lemeng BJ pledged its respective equity interest in Lemeng BJ to Leshen to secure obligations under the Exclusive Purchase Right Agreement, Shareholders’ Rights Proxy Agreement, Exclusive Consulting and Service Agreement, and Spouse Consent Letter.

 

Each of such shareholders further agreed not to transfer or pledge such shareholder’s respective equity interest in Lemeng BJ without the prior written consent of Leshen. The Equity Pledge Agreement will remain effective until the shareholders and Lemeng BJ fulfill their obligations and under these VIE Agreements, unless otherwise agreed by Leshen in writing.

 

Exclusive Purchase Right Agreement

 

Under the Exclusive Purchase Right Agreement entered into by Leshen, Lemeng BJ and the shareholders of Lemeng BJ, dated October 1, 2021, and its supplementary agreement dated on October 28, 2022, the shareholders of Lemeng BJ granted Leshen or its designee an option to purchase all or a portion of their respective equity interest in Lemeng BJ for the minimum amount of consideration permitted by PRC law. Under the Exclusive Purchase Right Agreement, Lemeng BJ granted Leshen or its designee an option to purchase all or a portion of the assets (including intellectual property) of Lemeng BJ for the minimum amount of consideration permitted by PRC law.

 

Each shareholder of Lemeng BJ agreed that, as of the effective date of this agreement, before the transfer of all or part of Lemeng BJ’s equity interest to Leshen, if the shareholders obtain dividends, bonuses or residual property from Lemeng BJ, the shareholders shall transfer all the income (after tax) to Leshen.

 

The Exclusive Purchase Right Agreement shall remain in effect until all of the equity interests in or assets of Lemeng BJ have been acquired by Leshen or its designee, and upon the condition that Leshen and its subsidiaries, branches can engage in the business of Lemeng BJ legally.

 

Leshen has the right to unilaterally terminate this agreement immediately by sending written notices to Lemeng BJ and the shareholders of Lemeng BJ at any time without liability for the breach. Unless otherwise mandatory by PRC law, Lemeng BJ and its shareholders has no right to unilaterally terminate this agreement.

 

Shareholders’ Rights Proxy Agreement

 

Under the Shareholders’ Rights Proxy Agreement among Leshen, Lemeng BJ and the shareholders of Lemeng BJ, dated October 1, 2021, and its supplementary agreement dated on October 28, 2022, each of the shareholders of Lemeng BJ has agreed to irrevocably entrust Leshen or its designee to represent it to exercise all the shareholders’ rights to which it is entitled as a shareholder of Lemeng BJ.

 

The Shareholders’ Rights Proxy Agreement is irrevocable, and shall remain effective until (a) Leshen registers with the appropriate agency to be the sole owner of Lemeng BJ, and holds the equity of Lemeng BJ directly, engaging in the business of Lemeng BJ legally under PRC law; or (b) all of the assets of Lemeng BJ has been acquired by Leshen or its designee, which can engage in Lemeng BJ’s business legally; or (c) Lemeng BJ’s shareholder structure changes and Lemeng BJ’s shareholders sign a new Shareholders’ Rights Proxy Agreement to replace this proxy agreement; or d) upon the instruction of Leshen.

 

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Spousal Consent Letter

 

Each spouse of relevant individual shareholders of Lemeng BJ has signed a Spousal Consent Letter. Under the Spousal Consent Letter, the signing spouse has unconditionally and irrevocably agreed that the disposition of the equity interest in Lemeng BJ which is held by and registered under the name of his or her spouse shall be made pursuant to the above-mentioned Equity Pledge Agreement, Exclusive Purchase Right Agreement, Shareholders’ Rights Proxy Agreement, together with the Power of Attorney signed by his or her spouse attached thereto, as amended from time to time.

 

Moreover, the spouse promises that if he or she acquires any equity in Lemeng BJ held by his or her spouse, he or she shall be bound to the above-mentioned VIE Agreements (as amended from time to time). If Leshen requires, the signing spouse shall sign a series of written documents with the same format and contents as the above-mentioned VIE Agreements.

 

Corporate Information

 

Our principal executive office is located at Unit 408, 4th Floor, Building 51, No. 63, Zhichun Road, Haidian District, Beijing 100089 China. The telephone number of our principal executive office is +86 010 82666432. We maintain a website at http://www.lemeng123.com/, on which we will post our key corporate governance documents, including our Board committee charters and our code of ethics. We do not incorporate the information on our website into this prospectus and you should not consider any information on, or that can be accessed through, our website as part of this prospectus. Our registered office in the Cayman Islands is located at c/o Ogier Global (Cayman) Limited, 89 Nexus Way, Camana Bay, Grand Cayman, KY1-9009. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011. 

 

Industry and Market Background

 

The convergence of several key trends is driving the growth of the mobile app economy and fundamentally changing the way that users consume content on their mobile connected devices. We believe these trends will continue to create a significant opportunity for mobile advertising. These trends include:

 

Adoption of faster and more functional mobile connected devices.  Driven by intuitive user interfaces, increased functionality, faster processing speeds, better graphics processors and advanced display technologies with touch capabilities, it has become possible to deliver rich, innovative and engaging consumer media experiences on a wide variety of mobile connected devices.

 

Widespread access to faster wireless networks facilitates consumer consumption of content.  With the growth of mobile connected devices, consumers increasingly expect to have a high-quality online experience everywhere. Expansion of worldwide network penetration, the rise of next-generation networks, such as 5G, and the prevalence of Wi-Fi access are facilitating the consumption of content on mobile connected devices. The combination of increased network access and faster network technologies is enabling the development of rich media content, presenting new opportunities in the mobile ecosystem.

 

Mobile usage has disrupted how content is consumed.  Consumers are increasingly using their mobile devices instead of personal computers or other traditional media to access content. Mobile devices have become an increasingly important part of daily life, with users relying on mobile connectivity to read newspapers, magazines and blogs, watch movies, play games, check sports scores, shop, monitor weather forecasts, conduct banking transactions, find maps and directions and listen to online radio stations.

 

Growth of the mobile app economy.  App developers have created apps as an easy, intuitive, and interactive way to instantly deliver content on mobile devices. Emerging technologies, such as improvements in computer programming languages for structuring and presenting web-based content, have allowed app developers to harness the increasing processing power and functionality of mobile devices and faster networks to deliver more engaging media to users.

 

Advertising industry is being disrupted by mobile advertising.  Traditional advertising media, such as billboards, newspapers, magazines, radio, and television, often suffer from several inherent limitations, including limited ability to target specific audiences, limited ability to measure audience reach and, in some cases, limited geographic range. As consumers spend more time online with personal computers, or PCs, digital advertising has proven to be more effective because it allows for user interaction, provides better measurement, and achieves expanded audience reach. However, even PC-based digital advertising suffers from several significant limitations with respect to personalization, accessibility and location-based targeting, all of which can be provided through mobile advertising.

 

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Our Opportunity and Growth Strategy

 

Given the benefits of mobile advertising as compared to traditional offline advertising and PC-based online advertising, we expect that marketers will continue to shift their advertising budgets to mobile. Lemeng Interactive seeks to become the strategic independent platform partner of choice for developers and advertisers wanting to capitalize on the large and growing mobile advertising opportunity. Lemeng Interactive is committed to enhancing profitability and cash flows through the following strategies:

 

innovate through continued investments in technology and data;

 

deepen Lemeng Interactive’s relationship with app developers;

 

increase Lemeng Interactive’s share of advertising budgets from existing advertisers;

 

acquire new developers and advertisers;

 

increase Lemeng Interactive’s market penetration;

 

expand Lemeng Interactive’s network of third-party providers of tools and services;

 

pursue strategic acquisitions; and

 

provide further insight into the mobile app economy.

 

Competitive Strengths

 

We consider the following to be Lemeng Interactive’s key competitive strengths. Some of our competitors may share these or other competitive strengths:

 

Differentiated platform.  Lemeng Interactive’s platform is specifically designed to deliver mobile advertising at scale, rather than applying traditional online advertising technology or focusing on particular mobile operating systems. Lemeng Interactive’s platform is designed for the mobile environment, where the delivery and targeting of ads must allow for a much larger number of variables than in traditional online advertising. Lemeng Interactive’s platform is capable of accounting for, and efficiently analyzing variables such as wireless connection strength, device operating system and audience profile in real-time to decide which ad to send in response to a specific ad request from an app.

 

Trusted partner for brand advertisers.   Lemeng Interactive has built solid relationships with advertisers. Lemeng Interactive offers its advertisers access to the mobile advertising specialists, who supervise and support advertising campaigns through all stages of planning and execution. Lemeng Interactive believes that it can effectively educate its advertiser clients on the latest mobile trends and help them plan and deliver engaging and effective advertising campaigns that deliver sustainable and measurable results.

 

Powerful network effects that connect Lemeng Interactive’s app developers and advertisers.  We believe that both app developers and advertisers benefit from the use of Lemeng Interactive’s service. As the targeting capability of Lemeng Interactive’s advertising campaigns increases, we believe advertisers will be willing to pay more for Lemeng Interactive’s services, which in turn will attract app developers since those services can help them more effectively generate revenue through the advertising space within their apps.

 

Lemeng Interactive has established relationships which help it maintain and develop a large and stable business scale and level, while the cooperation with these operators helps us mitigate business risks. Furthermore, while complying with relevant law, Lemeng Interactive is able to improve its data analysis model, the analysis and classification of user groups, and the relevance and accuracy of user groups.

 

In addition to our existing business, Lemeng Interactive also has technical expertise and operational experience of independent DSP platform and app development. Based on Lemeng Interactive’s business development needs, Lemeng Interactive can leverage to establish its own advertising platform as required. The Company maintains direct or indirect cooperative relations with mainstream advertising platforms and leading apps in the current market to ensure smooth cooperation.  

 

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PRC Regulatory Permissions

 

We are potentially subject to significant regulation by various agencies of the Chinese government. The WFOE and the VIE and its subsidiaries are required to have, and each has, a business license issued by the PRC State Administration for Market Regulation and its local counterparts. In addition, Lemeng Interactive has obtained ICP license for provision of internet value-added services. As advised by Jingtian&Gongcheng, our PRC legal advisor, the WFOE and the VIE and its subsidiaries have obtained all required business licenses and ICP licenses that are necessary to conduct their business. The following chart sets forth a summary of the licenses and permissions obtained by the WFOE and the VIE and its subsidiaries as of the date of this prospectus, and no permission or approval has been denied:

 

Company   License/Permission   Issuing Authority   Validity
Zhejiang Leshen Technology Co., Ltd   Business License   Changxing County Administration for Market Supervision   Until August 25, 2071
Zhejiang Shenzhan Technology Co., Ltd   Business License   Changxing County Administration for Market Supervision   Long-term
Xinjiang Jiacheng Network Technology Co., Ltd   Business License   Market Supervision Administration of the Fourth Division of Xinjiang Production and Construction Corps   Until June 15, 2052
Beijing Lemeng Interactive Technology Co., Ltd.   Business License   Haidian District Administration for Market Supervision   Until September 14, 2034
  Value-added Telecommunication License   Beijing Communication Administration   Until July 8, 2025
  Value-added Telecommunication License   Ministry of Industry and Information Technology of the PRC   Until February 18, 2026
Tianjin Lemeng Interactive Technology Co., Ltd.   Business License   Wuqing District Administration for Market Supervision   Long-term
  Value-added Telecommunication License   Ministry of Industry and Information Technology of the PRC   Until August 29, 2024
Xinjiang Lemeng Interactive Technology Co., Ltd.   Business License   Kashi District Administration for Market Supervision   Long-term
  Value-added Telecommunication License   Ministry of Industry and Information Technology of the PRC   Until October 14, 2024
Xinjiang Yishen Infinitive Network Technology Co., Ltd.   Business License   Kashi District Administration for Market Supervision   Long-term
  Value-added Telecommunication License   Xinjiang Uygur Autonomous Region Communication Administration   Until October 9, 2026
Tianjin Puyu Network Technology Co., Ltd.   Business License   Tianjin Administration for Market Supervision   Until March 28, 2034

 

We cannot assure you that Lemeng Interactive can successfully update or renew the licenses required for its mobile internet marketing services in a timely manner or that such license is sufficient to conduct all of its present or future mobile internet marketing services. Furthermore, we believe that (i) we are not required to submit an application to the CSRC for its approval of this offering and the listing and trading of our Class B Shares on the Nasdaq under the M&A Rules; and (ii) we are not subject to cybersecurity review with the CAC, under the Measures for Cybersecurity Review (2021 version), which became effective on February 15, 2022, because we are not in possession of personal information of over one million users and we do not expect to have personal information of more than one million users prior to this offering and we do not believe we or Lemeng Interactive would constitute an “operator of critical information infrastructure” or our or Lemeng Interactive’s business and activities would affect or may affect national security. Given the current PRC regulatory environment, there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations and prospects for future PRC laws and regulations, and there can be no assurance that the relevant government agencies will take a view that is not contrary to or otherwise different from the conclusions stated above, and it is uncertain when and whether the WFOE and the VIE and its subsidiaries will be required to obtain permission from the PRC government to list on the U.S. exchanges in the future, and even when such permission is obtained, whether it will be denied or rescinded. We have been closely monitoring regulatory developments in China regarding any necessary approvals from the CSRC, CAC or other PRC governmental authorities. However, there remains significant uncertainty as to the enactment, interpretation and implementation of regulatory requirements related to overseas securities offerings and other capital market activities. If the WFOE and the VIE and its subsidiaries (i) do not receive or maintain such permissions or approvals, should the approval be required in the future by the PRC government, (ii) inadvertently conclude that such permissions or approvals are not required, or (iii) applicable laws, regulations, or interpretations change and we are required to obtain such permissions or approvals in the future, our operations and financial conditions could be materially adversely affected, and our ability to offer securities to investors could be significantly limited or completely hindered and the securities currently being offered may substantially decline in value and be worthless.

 

7

 

 

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. As advised by our PRC legal advisor, based on its understanding of the PRC laws and regulations in effect at the time of this prospectus, (i) the Company are not required to submit an application to the CSRC for its approval of this offering and the listing and trading of our Class B Shares on the Nasdaq under the M&A Rules; (ii) there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations and future PRC laws and regulations, and there can be no assurance that the relevant government agencies will take a view that is not contrary to or otherwise different from the conclusion stated above. Substantial uncertainty remains regarding the scope and applicability of the M&A Rules to offshore special purpose vehicles. Although we believe that CSRC’s approval under the M&A Rules is not required for the listing and trading of our Class B Shares on Nasdaq in the context of this offering, we cannot assure you that relevant PRC governmental agencies, including the CSRC, would reach the same conclusion as we do. As of the date of this prospectus, we have not been involved in any investigations initiated by the CSRC in such respect.

 

On February 17, 2023, the CSRC issued the New Administrative Rules Regarding Overseas Listings, which became effective on March 31, 2023. According to the New Administrative Rules Regarding Overseas Listings, among other things, a domestic company in the PRC that seeks to offer and list securities in overseas markets shall fulfill the filing procedure with the CSRC as per requirement of the Trial Administrative Measures. Where a domestic company seeks to directly offer and list securities in overseas markets, the issuer shall file with the CSRC. Where a domestic company seeks to indirectly offer and list securities in overseas markets, the issuer shall designate a major domestic operating entity, which shall, as the domestic responsible entity, file with the CSRC. Initial public offerings or listings in overseas markets shall be filed with the CSRC within 3 working days after the relevant application is submitted overseas. The required filing materials with the CSRC include (without limitation): (i) record-filing reports and related undertakings, (ii) compliance certificates, filing or approval documents from the primary regulators of applicants’ businesses (if applicable), (iii) security assessment opinions issued by related departments (if applicable), (iv) PRC legal opinions issued by domestic law firms (with related undertakings), and (v) prospectus or listing documents. Notwithstanding the foregoing, the Notice on the Arrangement for Filing-based Administration of Overseas Offering and Listing by Domestic Companies provide that a domestic company may make reasonable arrangements to submit the required filings to the CSRC if the registration statement is filed but does not become effective prior to the date of implementation of the Trial Administrative Measures. Accordingly, we timely submitted the required filing materials to the CSRC on June 19, 2023 and we received the first round of comments from the CSRC on August 1, 2023, to which we submitted our responses on August 17, 2023. As of date of this prospectus, we have not completed the Trial Measures process which remains ongoing. According to the Trial Measures, the CSRC will conclude the filing procedures and publish the filing results on the CSRC website within 20 working days after receiving the filing documents if the filing documents are complete and in compliance with stipulated requirements. However, during the filing process, the CSRC may request the Company to supply additional documents or may consult with competent authorities, the time for which will not be counted in the 20 working days. We are awaiting further comments or approval by the CSRC. Pursuant to the New Administrative Rules Regarding Overseas Listings, we have to file with the CSRC in accordance with the Trial Administrative Measures with respect to this offering, and we cannot assure you that we will be able to get the clearance of filing procedures under the New Administrative Rules Regarding Overseas Listings on a timely basis, or at all. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our ordinary shares, cause significant disruption to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition and results of operations and cause our ordinary shares to significantly decline in value or become worthless.

 

On February 24, 2023, the CSRC promulgated the Confidentiality and Archives Administration Provisions, which also became effective on March 31, 2023. According to the Confidentiality and Archives Administration Provisions, domestic companies that seek overseas offering and listing (either in direct or indirect means) and the securities companies and securities service (either incorporated domestically or overseas) providers that undertake relevant businesses shall institute a sound confidentiality and archives administration system, and take necessary measures to fulfill confidentiality and archives administration obligations. They shall not leak any state secret or working secret of government agencies, or harm national security and public interests. Furthermore, a domestic company that provides accounting archives or copies of accounting archives to any entities, including securities companies, securities service providers and overseas regulators and individuals, shall fulfill due procedures in compliance with applicable regulations. Working papers produced in the mainland China by securities companies and securities service providers in the process of undertaking businesses related to overseas offering and listing by domestic companies shall be retained in mainland China. Where such documents need to be transferred or transmitted to areas outside of mainland China, relevant approval procedures stipulated by regulations shall be followed. We believe that this offering does not involve the leaking of any state secret or working secret of government agencies, or the harming of national security and public interests. However, we may be required to perform additional procedures in connection with the provision of accounting archives. The specific requirements of the relevant procedures are currently unclear and we cannot be certain whether we will be able to perform the relevant procedures.

 

On December 27, 2020, the Ministry of Commerce (“MOFCOM”), and the National Development and Reform Commission (“NDRC”) promulgated the Special Administrative Measures for Access of Foreign Investment (2021 Edition), or the Negative List (2021). The Negative List (2021) stipulates that if a domestic enterprise engaged in business in the prohibited investment field issues shares abroad and is listed for trading, it shall be examined and approved by the relevant competent authorities of the state. According to a press release issued by the NDRC in relation to the Negative List (2021), the above provisions are only applicable to the direct overseas listing of domestic enterprises engaged in the prohibited investment field. Our PRC legal counsel is of the view that our listing on Nasdaq does not constitute a direct overseas listing of domestic enterprises mentioned in the above press release and therefore we are not subject to examination and approval by the relevant competent authorities of the state in accordance with the Negative List (2021). However, it is uncertain that relevant PRC government agencies, including the NDRC, would reach the same conclusion as we do. As of the date of this prospectus, we also have not been involved in any investigations initiated by the above applicable governmental regulatory authorities, nor have we received any inquiry, notice, warning, or sanction in connection with examination or approval as required under the above administrative measures. If the CSRC, the NDRC or other regulatory agencies later promulgate new rules or explanations requiring that we should obtain such approvals for this offering and any follow-on offering, we may be unable to obtain such approvals which could significantly limit or completely hinder our ability to offer or continue to offer securities to our investors. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ordinary shares that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ordinary shares we are offering, you would be doing so at the risk that the settlement and delivery may not occur. Any uncertainties or negative publicity regarding such approval requirements could have a material adverse effect on our ability to complete this offering or any follow-on offering of our securities or the market for and market price of our ordinary shares.

 

8

 

 

On October 29, 2021, the Cyberspace Administration of China (“CAC”) published the Draft Outbound Data Transfer Security Assessment Measures (the “Draft Outbound Data Transfer Security Assessment Measures”). On July 7, 2022, the Outbound Data Transfer Security Assessment Measures (the “Outbound Data Transfer Security Assessment Measures”) formally promulgated, which became effective from September 1, 2022. The Outbound Data Transfer Security Assessment Measures stipulates the circumstances under which security assessment of outbound data transfers should be declared, including: (i) outbound transfer of important data, which means any data, the tampering, damage, leakage, or illegal acquisition or use of which, if it happens, may endanger national security, the operation of the economy, social stability, public health and security, by a data processor; (ii) outbound transfer of personal information by a critical information infrastructure operator or a personal information processor who has processed the personal information of more than 1,000,000 people; (iii) outbound transfer of personal information by a personal information processor who has made outbound transfers of the personal information of 100,000 people cumulatively or the sensitive personal information of 10,000 people cumulatively since January 1 of the previous year; or (iv) other circumstances where an application for the security assessment of an outbound data transfer is required as prescribed by the national cyberspace administration authority. On November 14, 2021, the Cyberspace Administration of China published the Administrative Regulations on Internet Data Security (Draft for Comment), or the “Administrative Regulations Draft”, which reiterates that data handlers that process the personal information of more than one million users listing in a foreign country should apply for a cybersecurity review. On December 28, 2021, the Cybersecurity Review Measures (2021 version) was promulgated and became effective on February 15, 2022, which iterates that any “online platform operators” controlling personal information of more than one million users which seeks to list in a foreign stock exchange should be subject to cybersecurity review. The Cybersecurity Review Measures (2021 version), further elaborates the factors to be considered when assessing the national security risks of the relevant activities, including, among others, (i) the risk of core data, important data or a large amount of personal information being stolen, leaked, destroyed, and illegally used or exited the country; and (ii) the risk of critical information infrastructure, core data, important data or a large amount of personal information being affected, controlled, or maliciously used by foreign governments after listing abroad. Although Lemeng Interactive may be considered as an “online platform operator,” “data processor,” or “data handler” as mentioned in the relevant regulations, we do not believe we or Lemeng Interactive would constitute an “operator of critical information infrastructure” or our or Lemeng Interactive’s business and activities would affect or may affect national security. We are not in possession of personal information of over one million users and we do not expect to have personal information of more than one million users prior to this offering. In view of the above, our PRC legal counsel is of the view that we are not subject to the cybersecurity review for this offering under the Cybersecurity Review Measures (2021 version). As of the date of this prospectus, and as advised by our PRC legal advisor, we have not been involved in any investigations on cybersecurity review initiated by the CAC, and we have not received any warning, sanction or penalty in such respect. However, the Cybersecurity Review Measures (2021 version) was recently adopted, and the Administrative Regulations Draft are in the process of being formulated, we do not know what regulations will be adopted, or how such regulations will affect us and our listing on Nasdaq, and we do not know whether the relevant PRC government agencies, including the CAC, would reach the same conclusion as we do. As there remains significant uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and regulations, we could be subject to cybersecurity review, and if so, there is no assurance we would be able to pass such review in relation to this offering in a timely manner or at all. In addition, we could become subject to enhanced cybersecurity review or investigations launched by PRC regulators in the future. Any failure or delay in the completion of the cybersecurity review procedures or any other non-compliance with the related laws and regulations may result in fines or other penalties, including suspension of business, website closure, and revocation of prerequisite licenses, as well as reputational damage or legal proceedings or actions against us, which may have material adverse effect on our business, financial condition or results of operations. It is uncertain how it will be enacted, interpreted or implemented, and how it will affect us. Since these statements and regulatory actions are new, it is highly uncertain how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our daily business operation, the ability to accept foreign investments and list on an U.S. exchange.

 

The Anti-Monopoly Law of the People’s Republic of China, which took effect in 2008 and was amended on June 24, 2022, which amendment became effective August 1, 2022 (the “Anti-Monopoly Law”), established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Under the Anti-Monopoly Law, companies undertaking acquisitions relating to businesses in China must notify the State Council’s anti-monopoly law enforcement authority, in advance of any transaction where the parties’ revenue in the China market exceed certain thresholds and the buyer would obtain control of, or decisive influence over, the target. We have not implemented monopolistic behaviors including monopoly agreements, abuse of a dominant position and concentration of undertakings that may have the effect to eliminate or restrict competition in the field of platform economy. However, since we anticipate that long term success in China’s market will require consolidation of the many small participants in that market, and our goal is to be one of the survivors of that consolidation, when it happens. Aggressive enforcement of new anti-monopoly regulations could interfere with the VIE’s ability to achieve that goal, which could impact our ability to conduct our business, accept foreign investments, or list on a U.S. or other foreign exchange. As of the date of this prospectus, we have not been involved in any investigations on anti-monopoly initiated by the related governmental regulatory authorities, and we have not received any inquiry, notice, warning, or sanction in such respect.

 

Our business is subject to various government regulations and regulatory interference. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. Furthermore, given recent statements by the Chinese government indicating an intent to exert more oversight and control over offerings that are conducted overseas, although as of the date of this prospectus, we have not been involved in any investigations initiated by the applicable governmental regulatory authorities, nor have we received any inquiry, notice, warning, or sanction in such respect, it is uncertain whether or when we might be required to obtain permission from any related PRC government to list our shares on Nasdaq, and even if such permission is obtained, whether it will be later denied or rescinded, which could significantly limit or completely hinder our ability to conduct our business, accept foreign investments, offer or continue to offer our ordinary shares to investors, list on a U.S. or other foreign exchange and cause the value of our ordinary shares to significantly decline or be worthless.

 

9

 

 

Summary of Risk Factors

 

We recommend that you consider carefully the risks discussed below and under the heading “Risk Factors” beginning on page 24 of this prospectus before purchasing our Ordinary Shares. If any of these risks occur, our business, prospects, financial condition, liquidity, results of operations and ability to make distributions to our shareholders could be materially and adversely affected. In that case, the trading price of our Ordinary Shares could decline, and you could lose some or all your investment. These risks include, among others, the following:

  

  VIE risks. We depend upon the VIE Agreements in conducting our business in China, which may not be as effective as direct ownership in providing operational control. See “Risk Factors - Risks Relating to Our Contractual Arrangements and Our Corporate Structure (the ‘VIE structure’)” on page 34.

 

  PRC government interference. Because Lemeng Interactive operates in China and Hong Kong, the Chinese government exerts substantial influence over the manner in which they must conduct business activities. Laws, interpretations and enforcement in China change quickly and with little advance notice, and the Chinese government may intervene or influence our and Lemeng Interactive’s operations at any time or may exert more control over offerings conducted overseas or investments in China and Hong Kong Based issuers, which could result in material changes in operations and/or the value of the securities we are registering for sale. If Lemeng Interactive was required to obtain approval and was denied permission from Chinese authorities to list on U.S. exchanges, we will not be able to continue listing on U.S. exchange, continue to offer securities to investors, or materially affect the interest of the investors and decrease our price of Ordinary Shares. See “Risk Factors – Risks Related to Doing Business in China - Chinese government agencies may exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers, especially those in the technology field. Additional compliance procedures may be required in connection with this offering under PRC rules, regulations or policies” on page 38.
     
 

To the extent cash in the business is in PRC/Hong Kong or in PRC/Hong Kong entities, the funds may not be available to fund operations for other use outside of the PRC/Hong Kong. To the extent cash in the business is in the PRC and Hong Kong or a PRC or Hong Kong entity, the funds may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of you, your subsidiaries, or the consolidated VIEs by the PRC government to transfer cash. Furthermore, to the extent assets (other than cash) in our business are located in the PRC or held by a PRC entity, the assets may not be available to fund operations or for other use outside of the PRC due to interventions in or the imposition of restrictions and limitations on the ability of us and our subsidiaries to transfer assets by the PRC government. If certain PRC laws and regulations, including existing laws and regulations and those enacted or promulgated in the future were to become applicable to our Hong Kong subsidiary in the future, and to the extent cash is generated in our Hong Kong subsidiary, and to the extent assets (other than cash) in our business are located in Hong Kong or held by a Hong Kong entity and may need to be used to fund operations outside of Hong Kong, such funds or assets may not be available due to interventions in or the imposition of restrictions and limitations on the ability of us and our subsidiaries to transfer funds or assets by the PRC government. Furthermore, there can be no assurance that the PRC government will not intervene or impose restrictions or limitations on our ability to transfer or distribute cash within its organization, which could result in an inability or prohibition on making transfers or distributions to entities outside of mainland China and Hong Kong and adversely affect its business. See “Risk Factors – Risks Related to Doing Business in China – To the extent cash in the business is in PRC/Hong Kong or in PRC/Hong Kong entities, the funds may not be available to fund operations for other use outside of the PRC/Hong Kong on page 48.

     
  PRC oversight may materially affect the value of our securities. Any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment and/or operations in China-based issuers could significantly change our operations, limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. See “Risk Factors – Risks Related to Doing Business in China - Chinese government agencies may exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers, especially those in the technology field. Additional compliance procedures may be required in connection with this offering under PRC rules, regulations or policies” on page 38.

 

  Repatriation of offering proceeds to PRC. In utilizing the proceeds of this offering in the manner described in “Use of Proceeds,” as an offshore holding company of our PRC operating subsidiary, we may decide to make loans or additional contributions to our PRC subsidiary or the VIE. Certain governmental registrations, submissions or approvals need to be completed or obtained in this regard. Failure to complete such registrations, submissions or obtain such approvals, our ability to use the proceeds from our initial public offering and to capitalize or otherwise fund our PRC operations may be negatively affected. See “Risk Factors – Risks Related to Doing Business in China – PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to Leshen and Lemeng BJ, which could materially and adversely affect our liquidity and ability to fund and expand our business” on page 46.

 

  PRC regulations pose significant liquidity risks to us. As an offshore holding company, we conduct our operations in mainland China through our subsidiaries with the VIEs. Subject to governmental oversight and regulations, we may make loans or otherwise capitalize the VIEs through our WFOE subsidiary from time to time. If we fail to complete registrations as required by certain PRC regulations, submission or obtain such approvals, our ability to use the proceeds from our initial public 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. See “Risk Factors – Risks Related to Doing Business in China – PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to Leshen and Lemeng BJ, which could materially and adversely affect our liquidity and ability to fund and expand our business” on page 46.

 

  Restrictions of funding on dividend payments from Leshen and Lemeng Interactive under PRC laws. We rely on dividends and other distributions on equity paid by Leshen and Lemeng Interactive to fund any cash and financing requirements we may have, and any limitation on the ability of Leshen and Lemeng Interactive to make payments to us could have a material adverse effect on our ability to conduct our business. See “Risk Factors — Risks Related to Doing Business in China — We are a holding company, and we rely for funding on dividend payments from Leshen and Lemeng Interactive, which are subject to restrictions under PRC laws” on page 47.

 

10

 

 

  Recent SEC, PCAOB, and Nasdaq developments under the HFCAA could add uncertainties to our offering. The recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the HFCAA 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. 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 August 26, 2022, SEC Chairman Gary Gensler released a statement announcing that the PCAOB signed a Statement of Protocol with the CRSC and the Ministry of Finance of the PRC, which sets out specific arrangements on conducting inspections and investigations by both sides over relevant audit firms within the jurisdiction of both sides, including the audit firms based in mainland China and Hong Kong. This agreement marks an important step towards resolving the audit oversight issue that concern mutual interests, and sets forth arrangements for both sides to cooperate in conducting inspections and investigations of relevant audit firms, and specifies the purpose, scope and approach of cooperation, as well as the use of information and protection of specific types of data. These developments could add uncertainties to our offering. See “Risk Factors - The recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable Act (“HFCAA”) 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 page 56.

 

  Possibility to be classified as “Resident Enterprise.” Under the Enterprise Income Tax Law, Lemeng may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders, including repayment of any underpayments and penalties for underpayment. See “Risk Factors – Risks Related to Doing Business in China - We may be deemed a PRC resident enterprise for PRC EIT purposes under the Enterprise Income Tax (“EIT”) Law and be subject to PRC taxation on our global income” on page 52.

 

  Shareholder enforcement risk. Since most of Lemeng Interactive’s operations and assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of Lemeng Interactive, or our directors and executive officers located in China. See “Risk Factors – Risks Related to Doing Business in China - Since Lemeng Interactive’s major operations and assets are in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of our company, Lemeng Interactive or either of our directors or executive officers” on page 49.

 

 

 ●

 

Uncertain PRC legal enforcement. The PRC has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in the PRC. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. Furthermore, these risks may result in a material change in the VIEs’ operations, significant depreciation of the value of our Ordinary Shares, or a complete hindrance of our ability to offer or continue to offer our securities to investors. See “Risk Factors - Risks Related to Doing Business in China - PRC laws and regulations governing our current business operations are sometimes vague and uncertain and any changes in such laws and regulations may impair our ability to operate profitably.”, and “Risk Factors - Risks Relating to Our Contractual Arrangements and Our Corporate Structure (the “VIE structure”) - if the PRC government determines that the VIE Agreements do not comply with applicable regulations, or if these regulations or their interpretations change in the future, we could be subject to severe consequences, including the nullification of the VIE Agreements and the relinquishment of our interest in our Consolidated Affiliated Entities” on page 34.

 

  Reputation risk. If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, this offering and our reputation and could result in a loss of your investment in our shares, especially if such matters cannot be addressed and resolved favorably. See “Risk Factors – Risks Related to Doing Business in China - If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm Lemeng Interactive’s business operations, this offering and our reputation and could result in a loss of your investment in our shares, especially if such matter cannot be addressed and resolved favorably” on page 50.

 

11

 

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

the ability to include 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 disclosure; and

 

an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002.

 

We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company if we have $1.235 billion or more in annual revenue, have $700 million or more in market value of our Ordinary Shares held by non-affiliates or issue $1 billion or more of non-convertible debt over a three-year period.

 

In addition to scaled disclosure and the other relief described above, the JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included in this prospectus, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.

 

Implications of Being a Foreign Private Issuer

 

We are subject to the information reporting requirements of the Exchange Act that are applicable to “foreign private issuers,” and under those requirements we file reports with the SEC. As a foreign private issuer, we are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we are subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. For example, we are not required to issue quarterly reports, proxy statements that comply with the requirements applicable to U.S. domestic reporting companies, or individual executive compensation information that is as detailed as that required of U.S. domestic reporting companies. We also have four months after the end of each fiscal year to file our annual report with the SEC and are not required to file current reports as frequently or promptly as U.S. domestic reporting companies. Our officers, directors and principal shareholders are exempt from the requirements to report transactions in our equity securities and from the short-swing profit liability provisions contained in Section 16 of the Exchange Act. As a foreign private issuer, we are not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. In addition, as a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the Nasdaq Stock Market Listing Rules for domestic U.S. issuers (see “Risk Factors — Risks Related to this Offering and the Ownership of Our Ordinary Shares”). These exemptions and leniencies will reduce the frequency and scope of information and protections available to you in comparison to those applicable to a U.S. domestic reporting company. We intend to take advantage of the exemptions available to us as a foreign private issuer during and after the period we qualify as an “emerging growth company.”

 

12

 

 

Prospectus Conventions

 

Except where the context otherwise requires and for purposes of this prospectus only, “we,” “us,” “our company,” “Company,” “our” and “Lemeng” refer to:

 

Lemeng Holdings Limited (樂盟控股有限公司) (“Lemeng”), a Cayman Islands company, which is the holding company issuing securities hereby;

 

Lemeng Investment Limited(乐盟投资有限公司) (“Lemeng BVI”), wholly owned by Lemeng;

 

  LEMENG US INC. (“Lemeng US”), wholly owned by Lemeng;

 

Lemeng (Hong Kong) Limited(乐盟互动香港有限公司) (“Lemeng HK”), wholly owned by Lemeng BVI; and

 

Zhejiang Leshen Technology Co., Ltd (“Leshen” or “WFOE”), a wholly foreign-owned entity formed by Lemeng HK under the laws of the People’s Republic of China; and
   
 Xinjiang Jiacheng Network Technology Co., Ltd (“Jiacheng”), a wholly owned subsidiary formed by Leshen under the laws of the People’s Republic of China.
   
  Zhejiang Shenzhan Technology Co., Ltd (“Shenzhan”), a wholly owned subsidiary formed by Leshen under the laws of the People’s Republic of China.

 

Except where the context otherwise requires and for purposes of this prospectus only, “Lemeng Interactive” or our “Consolidated Affiliated Entities” refers to:

 

  Beijing Lemeng Interactive Technology Co., Ltd. (北京乐盟互动科技有限公司), a limited liability company incorporated under the laws of China (“Lemeng BJ”);

 

 

Tianjin Lemeng Interactive Technology Co., Ltd. (天津乐盟互动科技有限公司), a PRC company (“Lemeng TJ” when individually referenced), which is a wholly owned subsidiary of Lemeng BJ;

 

 

Xinjiang Lemeng Interactive Technology Co., Ltd. (新疆乐盟互动网络科技有限公司), a PRC company (“Lemeng XJ” when individually referenced), which is a wholly owned subsidiary of Lemeng BJ;

     
  Xinjiang Lexian Network Technology Co., Ltd (新疆乐贤网络科技有限公司), a PRC company (“Lexian” when individually referenced), which was a wholly owned subsidiary of Lemeng BJ. Lexian was deregistered on September 20, 2022;

 

 

Xinjiang Yishen Infinitive Network Technology Co., Ltd. (新疆翼神无限网络科技有限公司), a PRC company (“Yishen”), which is a 51% owned subsidiary of Lemeng BJ; and

 

 

Tianjin Puyu Network Technology Co., Ltd. (天津璞玉网络科技有限公司), a PRC company (“Puyu”), which is a 51% owned subsidiary of Lemeng BJ.

 

This prospectus contains conversions of certain RMB amounts into U.S. dollar amounts at a specified exchange rate solely for the convenience of the reader. The exchange rates in effect as of December 31, 2022, 2021 and 2020 were US$6.9646, US$6.3757 and US$6.5249, respectively. The average exchange rates for the years ended December 31, 2022, 2021 and 2020 were US$6.7261, US$6.4515 and US$6.8976, respectively. We use period-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are converted at their historical exchange rates when the capital transactions occurred. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

 

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. For example, the name of the Chief Executive Officer and Chairman of our Board of Directors will be presented as “Baohua Feng,” even though, in Chinese, Mr. Feng’s name is presented as “Feng Baohua.”

 

We obtained the industry and market data used in this prospectus supplement, the accompanying prospectus, any free writing prospectus or any document incorporated by reference from industry publications, research, surveys and studies conducted by third parties and our own internal estimates based on our management’s knowledge and experience in the markets in which we operate. We did not, directly or indirectly, sponsor or participate in the publication of such materials, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus. We have sought to provide current information in this prospectus and believe that the statistics provided in this prospectus remain up-to-date and reliable, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus.

 

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

 

Certain monetary amounts, percentages, and other figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

 

13

 

 

The Offering

 

Shares offered by us:   4,000,000 Class B Ordinary Shares
     
Shares outstanding prior to completion of Offering:   16,000,000 Class B Ordinary Shares
     
Shares to be outstanding after Offering:   20,000,000 Class B Ordinary Shares (or 20,600,000 Class B Ordinary Shares if the underwriters exercise their option to purchase additional Class B Ordinary Shares in full)
     
Assumed offering price per Share:   We currently estimate that the initial public offering price will be in the range of $4.00 to $6.00 per share.
     
Gross proceeds to us, net of underwriting discounts and commissions but before expenses:   $18,600,000 (or $21,390,000 if the underwriters exercise their option to purchase additional Class B Ordinary Shares in full), based on an initial public offering price of $5.00 per ordinary share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus.
     
Option to purchase additional Shares:  

We have granted to the underwriters an option, exercisable within 45 days from the closing of this offering, to purchase up to an aggregate of 600,000 additional Ordinary Shares.

     
Lock-up:  

We and each of our officers, directors and all shareholders immediately prior to the consummation of this offering shall not offer, pledge, sell, directly or indirectly, any number of Ordinary Shares or similar securities for a period of one hundred and eighty (180) days after the closing of this offering, without the written consent of the representative. See “Shares Eligible for Future Sale” and “Underwriting” for more information.

     
Anticipated Nasdaq Capital Market symbol:   “LIAI” (CUSIP No. G5451D 107)
     
Transfer Agent:   Transhare Corporation
     
Risk factors:   Investing in these securities involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section of this prospectus beginning on page 24 before deciding to invest in our Ordinary Shares.
     
Use of proceeds:   We plan to devote the net proceeds of this offering to working capital, general corporate purposes, investment in complementary technologies, solutions or businesses and repayment of short- and long-term debt. See the “Use of Proceeds” section beginning on page 65.

 

14

 

 

Selected Financial Data

 

The following table sets forth selected historical statements of operations for the six months ended June 30, 2023 and 2022 (unaudited), the fiscal years ended December 31, 2022 and 2021, and balance sheets data as of June 30, 2023 (unaudited), December 31, 2022 and December 31, 2021, which have been derived from our financial statements for those periods, which have been derived from our financial statements for those periods. This information is derived from our consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected for any future period. When you read this historical selected financial data, it is important that you read it along with the historical financial statements and related notes and “Operating and Financial Review and Prospects” included elsewhere in this prospectus.

 

(All amounts in U.S. dollars)

Selected Statements of Operations Information

 

    For the Years Ended
December 31,
    For the Six Months Ended
June 30,
 
    2022     2021     2023     2022  
                (unaudited)     (unaudited)  
Revenues   $ 75,208,645     $ 82,584,146     $ 32,021,707     $ 37,911,560  
Cost of revenues     (67,996,833 )     (72,051,955 )     (28,578,309 )     (33,852,802 )
Gross profit     7,211,812       10,532,191       3,443,398       4,058,758  
                                 
Operating expenses:                                
Selling expenses     344,981       464,544       189,372       285,969  
General and administrative expenses     1,329,152       1,049,275       560,400       504,386  
Provision for doubtful accounts, net of recovery     (763,998     2,150,766       82,016       (88,906 )
Research and development expenses     443,033       310,795       109,687       111,829  
Total operating expenses     1,353,168       3,975,380       941,475       813,278  
                                 
Income from operations     5,858,644       6,556,811       2,501,923       3,245,480  
                                 
Other income (loss):                                
Loss from investment in unconsolidated entity     -       -       -       -  
Impairment loss of investment in unconsolidated entity     -       -       -       -  
Government subsidies     305,467       298,764       82,300       642,422  
Financial expenses     (259,457 )     (188,496 )     (210,995 )     (131,074 )
Other (expenses) income, net     61,485       (40,560     (39,692 )     (16,788 )
Total other income (loss), net     107,495       69,708     (89,003 )     (494,560 )
                                 
Income before income taxes     5,966,139       6,626,519       2,412,920       3,740,040  
                                 
Income tax (benefits) expenses     (1,021,594 )     (61,407 )     27,599       548,374  
                                 
Net income     4,944,545       6,687,926       2,385,321       3,191,666  
Net income (loss) attributable to non-controlling interest     (521,643 )     22,884     35,705       (65,343 )
Net income attributable to Lemeng Holdings Limited   $ 5,466,188     $ 6,665,042     $ 2,349,616     $ 3,257,009  

 

Selected Balance Sheets Information:

 

    As of December 31,     As of
June 30,
 
    2022     2021     2023  
                (unaudited)  
Current assets   $ 56,403,221     $ 50,942,306     $ 60,394,849  
Total Assets   $ 58,551,149     $ 53,874,942     $ 62,590,396  
Current liabilities   $ 22,446,852     $ 19,491,147     $ 25,310,305  
Total Liabilities   $ 22,446,852     $ 19,590,804     $ 25,549,008  
Total liabilities and shareholders’ equity   $ 58,551,149     $ 53,874,942     $ 62,590,396  

  

15

 

 

VIE Financial Information

 

Set forth below is selected consolidated statements of operations and cash flows for the years ended December 31, 2022, 2021 and 2020 and selected balance sheet information as of December 31, 2022, 2021 and 2020 showing financial information for parent company Lemeng Holdings Limited 樂盟控股有限公司, non-VIE subsidiaries, the VIE and VIE’s subsidiaries, eliminating entries and consolidated information. In the tables below column headings correspond to the following entities in the organizational diagram on page 2.

 

“parent” refers to Lemeng Holdings Limited 樂盟控股有限公司, the Cayman Islands holding company;

 

“non-WFOE subsidiaries” refers to the sum of (i) Lemeng Investment Limited, our wholly owned BVI subsidiary, (ii) LEMENG US INC., our wholly owned U.S. subsidiary, and (iii) Lemeng (Hong Kong) Limited, our wholly owned Hong Kong subsidiary;

 
  “WFOE and its subsidiaries” refers to Zhejiang Leshen Technology Co., Ltd (WFOE), a wholly owned PRC subsidiary, Xinjiang Jiacheng Network Co., Ltd and Zhejiang Shenzhan Technology Co., Ltd,  both wholly owned PRC subsidiaries of the WFOE;

 

  “VIE and its subsidiaries” refers to the sum of (i) Beijing Lemeng Interactive Technology Co., Ltd, (ii) Tianjin Lemeng Interactive Technology Co., Ltd, (iii) Xinjiang Lemeng Interactive Technology Co., Ltd, (iv) Xinjiang Yishen Infinitive Network Technology Co., Ltd, (v) Xinjiang Lexian Technology, Co., Ltd, and (vi) Tianjin Puyu Network Technology Co., Ltd; and

 

“VIE” refers to Beijing Lemeng Interactive Technology Co., Ltd.

 

Transfers of Cash to and from Our Subsidiaries and VIE

 

Lemeng Interactive has maintained cash management policies dictating the purpose, amount and procedure of cash transfers among Lemeng, the VIE and PRC and non-PRC subsidiaries. Cash transferred of less than RMB10.0 million (US$1.6 million) must be reported to and reviewed by Lemeng’s financial department and the PRC and non-PRC subsidiaries’ and the VIE’s chief executive officer and must be approved by the Chief Financial Officer and Chairman of Lemeng. Cash transfer in excess of RMB10.0 million (US$1.6 million) must be approved by board of directors of Lemeng. Our management monitors the cash position of each entity within our organization regularly and prepare budgets on a monthly basis to ensure each entity has the necessary funds to fulfill its obligation for the foreseeable future and to ensure adequate liquidity. In the event that there is a need for cash or a potential liquidity issue, it will be reported to our Chief Financial Officer and subject to approval by our board of directors, we will provide funding to the subsidiaries through loans or capital contributions. Other than Lemeng Interactive, neither we, as a Cayman Islands holding company, or its other subsidiaries has cash management policies dictating how funds are transfer, and each entity needs to comply with applicable law or regulations with respect to transfer of funds, dividends and distributions with other entities. We are permitted under applicable laws and regulations of the Cayman Islands to transfer cash to our subsidiary.

 

To transfer cash, Lemeng is permitted under the laws of the Cayman Islands to provide funding to Lemeng BVI through loans or capital contributions without restrictions on the amount of the funds. Lemeng BVI is permitted under the respective laws of the British Virgin Islands to provide funding to Lemeng through dividend distribution without restrictions on the amount of the funds. There are no restrictions on dividends transfers from the British Virgin Islands to the Cayman Islands.

 

16

 

 

To transfer cash, Lemeng is permitted under the laws of the United States to provide funding to Lemeng US through loans or capital contributions without restrictions on the amount of the funds. Lemeng US is permitted under the respective laws of the United States to provide funding to Lemeng through dividend distribution without restrictions on the amount of the funds. There are no restrictions on dividends transfers from the United States to the Cayman Islands.

 

Lemeng BVI is permitted under the laws of the British Virgin Islands to provide funding to Lemeng HK through loans or capital contributions without restrictions on the amount of the funds. Lemeng HK is permitted under the respective laws of Hong Kong to provide funding to Lemeng BVI through dividend distribution without restrictions on the amount of the funds. There are no restrictions on dividends transfers from Hong Kong to the British Virgin Islands.

 

To transfer cash from Lemeng HK to WFOE, Lemeng HK can increase the Leshen’s registered capital, which requires reporting to the local commerce department, or through a shareholder loan, which requires a registration with the PRC State Administration of Foreign Exchange or its local bureau. Aside from the registration with the State Administration of Foreign Exchange, there is no restriction or limitations on such cash transfer or earnings distribution. In practice, under the condition that WFOE is prepared with complete materials, the local AMR will generally approve the application within several business days, and the local bank’s approval for the inward remittances of registered capital can be also completed within a few business days.

 

To transfer cash from WFOE to Jiacheng or Shenzhan, WFOE can increase Jiacheng’s or Shenzhan’s registered capital or through a shareholder loan under the respective laws of PRC without restrictions on the amount of the funds. Jiacheng and Shenzhan are permitted under the respective laws of PRC to provide funding to WFOE through dividend distribution without restrictions on the amount of the funds.

 

To make loans to WFOE or the VIE, according to Matters relating to the Macro-prudential Management of Comprehensive Cross-border Financing, or PBOC 379 promulgated by the People’s Bank of China (“PBOC”), the total cross-border financing of a company shall be calculated using a risk-weighted approach and shall not exceed an upper limit. The upper limit shall be calculated as capital or assets (for enterprises, net assets shall apply) multiplied by a cross-border financing leverage ratio and multiplied by a macro-prudential regulation parameter. The macro-prudential regulation parameter of companies is currently 1, which may be adjusted by the People’s Bank of China and the State Administration of Foreign Exchange in the future, and the cross-border financing leverage ratio is 2 for enterprises. Therefore, the upper limit of the loans that a PRC company can borrow from foreign companies shall be calculated at 2 times the borrower’s net assets. With regards to our WFOE, the upper limit of borrowing from foreign companies shall be 2 times of its net assets, or, as an alternative, the difference between its total investment amount and registered capital, subject to its choice and acceptance by the competent governmental authority.

 

17

 

 

As a result of PRC laws and regulations (noted below) that require annual appropriations of 10% of after-tax income to be set aside in a general reserve fund prior to payment of dividends, WFOE is restricted in that respect, as well as in other respects noted below, in their ability to transfer a portion of their net assets to Lemeng HK as a dividend. We note the following:

 

1.PRC regulations currently permit the payment of dividends only out of accumulated profits, as determined in accordance with accounting standards and PRC regulations;

 

2.

WFOE is required to set aside, at a minimum, 10% of their net income after taxes, based on PRC accounting standards, each year as statutory surplus reserves until the cumulative amount of such reserves reaches 50% of their registered capital; in addition, it may, subject to a resolution of its shareholder, draw a discretionary common reserve from its after-tax profits;

 

  3. Those reserves may not be distributed as cash dividends and may be used to cover losses made in past years, to enhance the company’s productivity and expand its business or to increase its registered capital; and

 

4.The incurrence of debt, specifically the instruments governing such debt, may restrict a subsidiary’s ability to pay shareholder dividends or make other cash distributions.

 

Jiacheng’s and/or Shenzhan’s distributions of dividends to WFOE is also subject to the restrictions set out in Sections 1, 3 and 4 above.

 

As of the date of this prospectus, there has been no payments between WFOE and the VIE. WFOE has not transferred any earnings or cash to Lemeng HK. There has not been any assets or cash transfer among Lemeng, Lemeng BVI and Lemeng HK. As of the date of this prospectus, we have not distributed earnings or settled amounts owed under the VIE Agreements.

 

Subject to the Companies Act (As Revised) of Cayman Islands, which we refer to as the “Companies Act” below, and our memorandum and articles of association, as amended and restated from time to time, our board of directors has discretion as to 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. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided 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.

 

Under the current practice of the Inland Revenue Department of Hong Kong, no tax is payable in Hong Kong in respect of dividends paid by us. The laws and regulations of the PRC do not currently have any material impact on transfer of cash from Lemeng BVI to Lemeng HK or from Lemeng HK to Lemeng BVI. There are no restrictions or limitation under the laws of Hong Kong imposed on the conversion of HK dollar into foreign currencies and the remittance of currencies out of Hong Kong or across borders and to U.S. investors.

 

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

 

The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. Due to the interventions in or the imposition of restrictions and limitations on the ability of the Company, Leshen, and Lemeng BJ by the PRC government to transfer cash, we may experience difficulties in completing the administrative procedures necessary to allow Lemeng BJ to distribute funds to Leshen and for Leshen to distribute to the Company any funds received from Lemeng BJ. If we or our subsidiaries are unable to receive all of the revenues from our operations, we may be unable to pay dividends on our securities.

 

Cash dividends, if any, on our ordinary shares will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10.0%. In order for us to pay dividends to our shareholders, we will rely on payments made from WFOE and Lemeng HK. Certain payments from WFOE to Lemeng HK are subject to PRC taxes, including business taxes and VAT. As of the date of this prospectus, our PRC subsidiary, VIE and its subsidiaries have not made any transfers or distributions.

 

Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC entity. However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including, without limitation, that (a) the Hong Kong entity must be the beneficial owner of the relevant dividends; and (b) the Hong Kong entity must directly hold no less than 25% share ownership in the PRC entity during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong entity must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by WFOE to its immediate holding company, Lemeng HK. 

 

18

 

 

As of the date of this prospectus, WFOE does not have plan to declare and pay dividends to Lemeng HK and we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. Lemeng HK intends to apply for the tax resident certificate when Lemeng WFOE plans to declare and pay dividends to Lemeng HK. See “Risk Factors — Risks Related to Doing Business in China — We are a holding company, and we rely for funding on dividend payments from Leshen and Lemeng Interactive, which are subject to restrictions under PRC laws.” on page 47 of this prospectus.

 

Dividend

 

As of the date of this prospectus, we have not paid any dividends or distributions to our shareholders, there have not been any such dividends, transfers or other distributions among Lemeng, Lemeng US, Lemeng BVI, Lemeng HK, WFOE or their respective shareholders. See “Dividend Policy” on page 66 of this prospectus. See also “Material Tax Consequences Applicable to U.S. Holders of Our Ordinary Shares — Cayman Islands Tax.”

 

Selected Condensed Consolidated Financial Data

 

We have evaluated the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 and determined that we are the primary beneficiary of the VIE, for accounting purposes, based upon such contractual arrangements. Accordingly, under U.S. GAAP, the results of the VIE are consolidated in our financial statements. The following tables present selected condensed consolidating financial data of the Parent (Lemeng Holdings Limited), the Non-WFOE Subsidiaries (Lemeng Investment Limited, LEMENG US INC. and Lemeng Investment Limited, Lemeng (Hong Kong) Limited), WFOE (Zhejiang Leshen Technology Co., Ltd) and its Subsidiaries (Xinjiang Jiacheng Network Co., Ltd and Zhejiang Shenzhan Technology Co., Ltd), the VIE (Beijing Lemeng Interactive Technology Co., Ltd.) and its Subsidiaries (Tianjin Lemeng Interactive Technology Co., Ltd., Xinjiang Lemeng Interactive Technology Co., Ltd., Xinjiang Lexian Network Technology Co., Ltd, Xinjiang Yishen Infinitive Network Technology Co., Ltd. and Tianjin Puyu Network Technology Co., Ltd ). Such financial data include condensed consolidating balance sheets data as of June 30, 2023 (unaudited), December 31, 2022 and 2021 and the related condensed consolidating statements of operations and cash flows data for the six months ended June 30, 2023 and 2022 (unaudited), the years ended December 31, 2022 and 2021.   The Parent records its investments in its subsidiaries under the equity method of accounting. Such investments are presented in the selected condensed consolidating balance sheets of the Parent as “Investments in subsidiaries and VIEs” and the profit of the subsidiaries is presented as “Income for equity method investment” in the selected condensed consolidating statements of operations. You should read this “Selected Condensed Consolidated Financial Data” section together with our consolidated financial statements and the related notes and “Operating and Financial Review and Prospects” included elsewhere in this prospectus.

 

Consolidated Statements of Operations Information

 

    For the Year Ended December 31, 2022  
    Parent     Non-WFOE
Subsidiaries
    WFOE
and its
Subsidiaries
    VIE and its
Subsidiaries
    Eliminations     Consolidated  
                                     
Revenues   $ -     $ -     $ 16,854,491     $ 58,354,154     $ -     $ 75,208,645  
Cost of revenues     -       -       (12,646,382 )     (55,350,451 )     -       (67,996,833 )
Gross profit     -       -       4,208,109       3,003,703       -       7,211,812  
Operating expenses:     -       404,653       33,364       915,151       -       1,353,168  
Income (loss) from operations     -       (404,653 )     4,174,745       2,088,552       -       5,858,644  
Share of income for subsidiaries     5,466,503       5,871,156               -       (11,337,659 )     -  
Share of income for VIE and its subsidiaries     -       -       1,695,934       -       (1,695,934 )     -  
Other income     (315 )     -       477       107,333       -       107,495  
Income before income taxes     5,466,188       5,466,503       5,871,156       2,195,885       (13,033,593 )     5,966,139  
Net income   $ 5,466,188     $ 5,466,503     $ 5,871,156     $ 1,174,291     $ (13,033,593 )   $ 4,944,545  
Net income attributable to non-controlling interests     -       -               (521,643 )     -       (521,643 )
Net income attributable to shareholders   $ 5,466,188     $ 5,466,503     $ 5,871,156     $ 1,695,934     $ (13,033,593 )   $ 5,466,188  

 

19

 

 

    For the Year Ended December 31, 2021  
    Parent     Non-WFOE
Subsidiaries
    WFOE
and its
Subsidiaries
    VIE and its
Subsidiaries
    Eliminations     Consolidated  
                                     
Revenues   $ -     $ -     $ -     $ 82,584,146     $ -     $ 82,584,146  
Cost of revenues     -       -       -       (72,051,955 )     -       (72,051,955 )
Gross profit     -       -       -       10,532,191       -       10,532,191  
Operating expenses:     -       499,755       -       3,475,625       -       3,975,380  
(Loss) Income from operations     -       (499,755 )     -       7,056,566       -       6,556,811  
Share of income for subsidiaries     6,665,042       7,164,797       -       -       (13,829,839 )     -  
Share of income for VIE and its subsidiaries     -       -       7,164,797       -       (7,164,797 )     -  
Other Income     -       -       -       69,708       -       69,708  
Income before income taxes     6,665,042       6,665,042       7,164,797       7,126,274       (20,994,636 )     6,626,519  
Net income   $ 6,665,042     $ 6,665,042     $ 7,164,797     $ 7,187,681     $ (20,994,636 )   $ 6,687,926  
Net income attributable to non-controlling interests     -       -       -       22,884       -       22,884  
Net income attributable to shareholders   $ 6,665,042     $ 6,665,042     $ 7,164,797     $ 7,164,797     $ (20,994,636 )   $ 6,665,042  

 

    For the Six Months Ended June 30, 2023  
    Parent     Non-WFOE
Subsidiaries
    WFOE
and its
Subsidiaries
    VIE and its
Subsidiaries
    Eliminations     Consolidated  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)  
Revenues   $ -     $ -     $ 16,721,496     $ 15,300,211     $ -     $ 32,021,707  
Cost of revenues     -       -       (13,673,855 )     (14,904,454 )     -       (28,578,309 )
Gross profit     -       -       3,047,641       395,757       -       3,443,398  
Operating expenses:     -       303,758       48,834       588,883       -       941,475  
Income  from operations     -       (303,758 )     2,998,807       (193,126 )     -       2,501,923  
Share of income for subsidiaries     2,349,616       2,653,374       -       -       (5,002,990 )     -  
Share of income for VIE and its subsidiaries     -       -       (368,714 )     -       368,714       -  
Other income     -       -       23,281       (112,284 )     -       (89,003 )
Income before income taxes     2,349,616       2,349,616       2,653,374       (305,410 )     (4,634,276 )     2,412,920  
Net income   $ 2,349,616     $ 2,349,616     $ 2,653,374     $ (333,009 )   $ (4,634,276 )   $ 2,385,321  
Net income attributable to non-controlling interests     -       -       -       35,705       -       35,705  
Net income  attributable to shareholders   $ 2,349,616     $ 2,349,616     $ 2,653,374     $ (368,714 )   $ (4,634,276 )   $ 2,349,616  

  

20

 

 

    For the Six Months Ended June 30, 2022  
    Parent     Non-WFOE
Subsidiaries
    WFOE
and its
Subsidiaries
    VIE and its
Subsidiaries
    Eliminations     Consolidated  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)  
Revenues   $ -     $ -     $ -     $ 37,911,560     $ -     $ 37,911,560  
Cost of revenues     -       -       -       (33,852,802 )     -       (33,852,802 )
Gross profit     -       -       -       4,058,758       -       4,058,758  
Operating expenses:     -       248,972       50       564,256       -       813,278  
Income (loss) from operations     -       (248,972 )     (50 )     3,494,502       -       3,245,480  
Share of income for subsidiaries     3,257,009       3,505,981       -       -       (6,762,990 )     -  
Share of income for VIE and its subsidiaries     -       -       3,043,302       -       (3,043,302 )     -  
Other income     -       -       462,729       31,831       -       494,560  
Income before income taxes     3,257,009       3,257,009       3,505,981       3,526,333       (9,806,292 )     3,740,040  
Net income   $ 3,257,009     $ 3,257,009     $ 3,505,981     $ 2,977,959     $ (9,806,292 )   $ 3,191,666  
Net income attributable to non-controlling interests     -       -       -       (65,343 )     -       (65,343 )
Net income attributable to shareholders   $ 3,257,009     $ 3,257,009     $ 3,505,981     $ 3,043,302     $ (9,806,292 )   $ 3,257,009  

 

Consolidated Balance Sheets Information

 

    As of December 31, 2022  
     Parent       Non-VIE
Subsidiaries
    WFOE
and its
Subsidiaries
    VIE and its
Subsidiaries
    Eliminations     Consolidated  
                                     
Current assets   $ 10     $ 4,685     $ 16,502,081     $ 44,028,517     $ (4,132,072 )   $ 56,403,221  
Investments in non-VIE subsidiaries   $ 34,525,736     $ 35,430,459           $     $ (69,956,195 )   $ -  
Equity in the VIE and its subsidiaries Through the VIE Agreements   $ -     $ -     $ 31,398,215     $ -     $ (31,398,215 )   $ -  
Non-current assets   $ 34,525,736     $ 35,889,354     $ 31,398,215     $ 1,689,033     $ (101,354,410 )   $ 2,147,928  
Current Liabilities   $ -     $ 1,368,303     $ 12,469,837     $ 12,740,784     $ (4,132,072 )   $ 22,446,852  
Non-current Liabilities   $ -     $ -     $ -     $ -     $ -     $ -  
Shareholders’ equity attributable to Lemeng Holdings Limited   $ 34,525,746     $ 34,525,736     $ 35,430,459     $ 31,398,215     $ (101,354,410 )   $ 34,525,746  
Non-controlling interests   $ -     $ -     $ -     $ 1,578,551     $ -     $ 1,578,551  

 

    As of December 31, 2021  
    Parent    Non-VIE
Subsidiaries
   WFOE
and its
Subsidiaries
   VIE and its
Subsidiaries
   Eliminations    Consolidated  
                         
Current assets   $ 10     $ -     $ -     $ 50,942,296     $ -     $ 50,942,306  
Investments in non-VIE subsidiaries   $ 32,009,462     $ 32,509,217     $ -     $ -     $ (64,518,679 )   $ -  
Equity in the VIE and its subsidiaries Through the VIE Agreements   $ -     $ -     $ 32,509,217     $ -     $ (32,509,217 )   $ -  
Non-current assets   $ 32,009,462     $ 32,837,030     $ 32,509,217     $ 2,604,823     $ (97,027,896 )   $ 2,932,636  
Current Liabilities   $ -     $ 827,568     $ -     $ 18,663,579     $ -     $ 19,491,147  
Non-current Liabilities   $ -     $ -     $ -     $ 99,657     $ -     $ 99,657  
Shareholders’ equity attributable to Lemeng Holdings Limited   $ 32,009,472     $ 32,009,462     $ 32,509,217     $ 32,509,217     $ (97,027,896 )   $ 32,009,472  
Non-controlling interests   $ -     $ -     $ -     $ 2,274,666     $ -     $ 2,274,666  

  

21

 

 

    As of June 30, 2023  
    Parent     Non-VIE
Subsidiaries
    WFOE
and its
Subsidiaries
    VIE and its
Subsidiaries
    Eliminations     Consolidated  
     (unaudited)       (unaudited)     (unaudited)      (unaudited)      (unaudited)        (unaudited)  
Current assets   $ 10     $ 4,685     $ 19,295,605     $ 49,357,804     $ (8,263,255 )   $ 60,394,849  
Investments in non-VIE subsidiaries   $ 35,485,653     $ 36,694,133     $       $ -     $ (72,179,786 )   $ -  
Equity in the VIE and its subsidiaries Through the VIE Agreements   $ -     $ -     $ 29,909,650     $ -     $ (29,909,650 )   $ -  
Non-current assets   $ 35,485,653     $ 37,219,718     $ 29,909,650     $ 1,669,962     $ (102,089,436 )   $ 2,195,547  
Current Liabilities   $ -     $ 1,738,750     $ 12,511,122     $ 19,323,688     $ (8,263,255 )   $ 25,310,305  
Non-current Liabilities   $ -     $ -     $ -     $ 238,703     $ -     $ 238,703  
Shareholders’ equity   $ 35,485,663     $ 35,485,653     $ 36,694,133     $ 29,909,650     $ (102,089,436 )   $ 35,485,663  
Non-controlling interests   $ -     $ -     $ -     $ 1,555,725     $ -     $ 1,555,725  

 

Consolidated Cash Flows Information

 

    For the Year Ended December 31, 2022  
    Parent     Non-WFOE
Subsidiaries
    WFOE
and its
Subsidiaries
    VIE and its Subsidiaries     Eliminations     Consolidated  
                                     
Net cash provided by (used in) operating activities   $        -     $ (404,653 )   $ (2,153,045 )   $ 412,300     $        -     $ (2,145,398 )
Net cash used in investing activities   $ -     $ -     $ -     $ (104 )   $ -     $ (104 )
Net cash (used in) provided by financing activities   $ -     $ 409,338     $ 2,162,365     $ (541,059 )   $ -     $ 2,030,644  
Effect of exchange rate change on cash and restricted cash   $ -     $ -     $ (349 )   $ (54,233 )   $ -     $ (54,582 )
Net increase (decrease) in cash and restricted cash   $ -     $ 4,685     $ 8,971     $ (183,096 )   $ -     $ (169,440 )

 

   For the Year Ended December 31, 2021 
   Parent   Non-WFOE
Subsidiaries
   WFOE
and its
Subsidiaries
   VIE and its Subsidiaries   Eliminations   Consolidated 
                         
Net cash used in operating activities  $       -   $(499,755)  $            -   $(1,427,205)  $            -   $(1,926,960)
Net cash used in investing activities  $-   $-   $-   $(56)  $-   $(56)
Net cash provided by financing activities  $-   $499,755   $-   $710,997   $-   $1,210,752 
Effect of exchange rate change on cash and restricted cash  $-   $-   $-   $23,919   $-   $23,919 
Net decrease in cash and restricted cash  $-   $-   $-   $(692,345)  $-   $(692,345)

 

    For the Six Months Ended June 30, 2023  
    Parent     Non-WFOE
Subsidiaries
    WFOE
and its
Subsidiaries
    VIE and its Subsidiaries     Eliminations     Consolidated  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)  
Net cash provided by (used in) operating activities   $          -     $ (288,472 )   $ (1,311,786 )   $ (653,593 )   $            -     $ (2,253,851 )
Net cash used in investing activities   $ -     $ -     $ -     $ -     $ -     $ -  
Net cash (used in) provided by financing activities   $ -     $ 288,472     $ 1,310,189     $ 1,364,097     $ -     $ 2,962,758  
Effect of exchange rate change on cash and restricted cash   $ -     $ -     $ 1,713     $ (49,349 )   $ -     $ (47,636 )
Net increase (decrease) in cash and restricted cash   $ -     $ -     $ 116     $ 661,155     $ -     $ 661,271  

 

22

 

 

    For the Six Months Ended June 30, 2022  
    Parent     Non-WFOE
Subsidiaries
    WFOE
and its
Subsidiaries
    VIE and its Subsidiaries     Eliminations     Consolidated  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)  
Net cash provided by (used in) operating activities   $             -     $ (248,972 )   $ 30,728     $ (1,134,284 )   $           -     $ (1,352,528 )
Net cash used in investing activities   $ -     $ -     $ -     $ (108 )   $ -     $ (108 )
Net cash (used in) provided by financing activities   $ -     $ 248,972     $ -     $ 670,089     $ -     $ 919,061  
Effect of exchange rate change on cash and restricted cash   $ -     $ -     $ (15,712 )   $ (4,109 )   $ -     $ (19,821 )
Net increase (decrease) in cash and restricted cash   $ -     $ -     $ 15,016     $ (468,412 )   $ -     $ (453,396 )

 

Long-term Investments Roll-forward

 

    Investment in
Non-VIE
subsidiaries and
VIE and it
subsidiaries
 
       
As of December 31, 2019    $ 18,055,447  
Equity pick-up during the period     5,086,826  
Foreign currency translation adjustment     1,539,377  
As of December 31, 2020     24,681,650  
Equity pick-up during the period     6,665,042  
Foreign currency translation adjustment     662,770  
As of December 31, 2021     32,009,462  
Equity pick-up during the period     5,466,188  
Foreign currency translation adjustment     (2,949,904 )
As of December 31, 2022     34,525,746   
Equity pick-up during the period     2,349,616  
Foreign currency translation adjustment     (1,389,699 )
As of June 30, 2023 (unaudited)   $ 35,485,663  

 

Holding Foreign Companies Accountable Act (the “HFCAA”)

 

Our ordinary shares may be prohibited from trading on a national exchange under the HFCAA if the Public Company Accounting Oversight Board (the “PCAOB”) is unable to inspect our auditors for three consecutive years beginning in 2021. Our current auditor, Onestop Assurance PAC, has been inspected by the PCAOB on a regular basis and it is not subject to the determinations announced by the PCAOB on December 16, 2021. If trading in our ordinary shares is prohibited under the HFCAA in the future because the PCAOB determines that it cannot inspect or fully investigate our auditor at such future time, Nasdaq, or any other exchange, may determine to delist our ordinary shares. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if passed by the U.S. House of Representatives and signed into law, would reduce the period of time for foreign companies to comply with PCAOB audits to two consecutive years instead of three, thus reducing the time period for triggering the prohibition on trading. On August 26, 2022, the PCAOB signed a Statement of Protocol with the CRSC and the Ministry of Finance of the PRC governing inspections and investigations of audit firms based in the PRC and Hong Kong. This agreement marks the first time the PCAOB and SEC have received such detailed and specific commitments from PRC which would allow PCAOB inspections and investigations meeting U.S. standards. See “Risk Factors—Risks Related to Doing Business in China—The recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the HFCAA 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 page 56 of this prospectus.

 

23

 

 

RISK FACTORS

 

Before you decide to purchase our Ordinary Shares, you should understand the high degree of risk involved. You should consider carefully the following risks and other information in this prospectus, including our consolidated financial statements and related notes. If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected. As a result, the trading price of our Ordinary Shares could decline, perhaps significantly.

 

Risks Related to Our Business and Industry

 

Lemeng Interactive may be unable to innovate, adapt and respond timely and effectively to rapidly changing technologies and new market trends in mobile advertising industry.

 

The mobile advertising industry is a fast-growing and rapidly changing industry. Lemeng Interactive’s future success will depend on our ability to continuously innovate and develop to meet evolving marketing needs, and address technological advancements and new market trends in mobile advertising industry. We cannot ensure you that Lemeng Interactive will be able to timely identify and respond to new trends in the future. The introduction of new mobile advertising services is subject to risks and uncertainties. Unexpected technical, operational or other problems could delay or prevent the introduction of new mobile advertising services. Moreover, there can be no assurance that any of our new mobile advertising services will achieve widespread market acceptance. If Lemeng Interactive fails to keep pace with changing technologies and to introduce successful and well-accepted mobile advertising services for Lemeng Interactive’s existing customers and potential customers, or fail to improve and enhance the functionality and performance of our products and services, Lemeng Interactive could lose customers and its competitive position and ability to generate revenue and growth could be adversely affected.

 

Furthermore, the design of mobile devices and operating systems is controlled by third parties with which Lemeng Interactive does not have any formal relationship. These parties frequently introduce new devices, and from time to time they may introduce new operating systems or modify existing ones. Network carriers may also restrict our ability to access specific content on mobile devices. If Lemeng Interactive’s advertisements were unable to work on these devices or operating systems, either because of technological constraints or because a maker of these devices or developer of these operating systems wished to impair our ability to provide advertisements on them or Lemeng Interactive’s ability to fulfill advertising space, or inventory, from developers whose applications are distributed through their controlled channels, our ability to generate revenue could be significantly harmed. Any of these events could materially and adversely affect Lemeng Interactive’s business, results of operations and prospects.

 

Lemeng Interactive’s limited operating history makes it difficult to accurately forecast Lemeng Interactive’s future operating results and evaluate Lemeng Interactive’s business and prospects.

 

Lemeng BJ commenced operations in 2014 and has only a limited operating history. Although Lemeng Interactive experienced substantial revenue growth in its limited operating history, it may not be able to sustain this rate of growth or even maintain our current revenue levels. As a developing company in a rapidly evolving industry, our business prospects depend in large part on its ability to:

 

build a reputation for its advertising services and create trust and long-term relationships with advertisers and media channels;

 

distinguish itself from competitors in its industry;

 

maintain the technological advantages of its advertising platform and keep up with the technological developments or market trend of the rapidly evolving mobile advertising industry;

 

introduce and manage the development of new products and services;

 

respond to evolving industry standards and government regulations that impact its business, particularly in the areas of data collection and data privacy protection;

 

prevent or otherwise mitigate failures or breaches of security or privacy; and

 

attract, hire, integrate and retain qualified and motivated employees.

 

24

 

 

If Lemeng Interactive is unable to meet one or more of these objectives or otherwise adequately address the risks and difficulties that we face, our business may suffer, our revenue may decline and we may not be able to achieve further growth or long-term profitability.

 

If the mobile advertising industry, and in particular the interactive advertising industry, fails to continue to develop, Lemeng Interactive’s profitability and prospects may be materially and adversely affected.

 

Lemeng Interactive’s business and prospects depend on the continuing development of the mobile advertising industry, in particular, the interactive advertising industry, which may be affected by a number of factors, including:

 

technological innovation or new business models of the mobile advertising industry or the changing requirements of media channels;

 

acceptance of mobile advertising, in particular, interactive advertising, as an effective marketing channel and the emergence of other alternative marketing channels; and

 

changes in regulations or policies affecting the mobile advertising industry.

 

Such factors may be beyond our control. There is no assurance that the mobile advertising industry, in particular, interactive advertising, will continue to develop. Lemeng Interactive’s business, financial conditions, results of operations and prospects will be materially and adversely affected if the mobile advertising industry fails to grow or grows more slowly than we expect.

 

We are dependent on Lemeng Interactive’s advertising platform to provide mobile advertising services.

 

We derive significant revenue from technology services through Lemeng Interactive’s advertising platform. As such, any significant interruptions to the advertising platform by hacking, cyberattack or due to telecommunication failures, power shortages, natural disasters or other events which may cause disruptions in Lemeng Interactive’s daily operations may reduce the attractiveness of its services, and result in a potential loss of Lemeng Interactive’s customers and their participation and consequently, its business and results of operations could be adversely affected. In addition, any measures to avoid information and technological system failures may not be effective or successful.

 

It is important that the advertising platform is compatible with a range of mobile technologies, systems and networks. In the event that it is difficult for advertisers and media channels to access and use Lemeng Interactive’s advertising platform on their devices, Lemeng Interactive may lose existing customers and media channels, which will in turn affect our business operation and prospects.

 

Lemeng Interactive’s failure to retain existing advertisers and media channels or attract new advertisers and media channels may negatively impact our revenue and business.

 

To sustain or increase Lemeng Interactive’s revenue, Lemeng Interactive needs to retain existing advertisers and media channels, deepen or expand its relationships with them as well as attract new advertisers and media channels. To retain and attract new advertisers, Lemeng Interactive needs to continue to provide targeted advertising that maximize advertisers’ return on their advertising budget. Lemeng Interactive typically does not have long-term agreements with advertisers and they may have business relationships with a number of advertising platforms at the mean time. If advertisers determine that their expenditures on the advertising platform do not generate sufficient returns, they may reduce their advertising budgets or terminate advertising arrangements with us.

 

To retain and attract new media channels, Lemeng Interactive needs to continue to improve the monetization efficiency of their advertisement inventory. Lemeng Interactive typically does not have long-term agreements with its media channels. If Lemeng Interactive’s media channels are no longer satisfied with the monetization efficiency of their advertisement inventory generated by using its advertising platform, they may reduce or discontinue our access to their advertising space.

 

In the event Lemeng Interactive loses advertisers or media channels, Lemeng Interactive cannot assure you that it will be able to replace them in a timely manner or at all. Lemeng Interactive may not be able to attract new advertisers or media channels. Lemeng Interactive’s failure to retain existing advertisers and media channels or attract new advertisers and media channels may materially and adversely affect our business, financial condition, results of operations and prospects.

 

25

 

 

Failure to maintain relationships with third-party advertising platforms may materially and adversely affect our business to provide advertising services.

 

Lemeng Interactive derives a significant portion of its advertising revenue from intermediary services. Lemeng Interactive typically does not have long-term agreements with such third-party advertising platforms. There is no assurance that Lemeng Interactive will be able to maintain its business relationship with them on mutually acceptable terms or at all. In addition, Lemeng Interactive’s cooperation with such third-party advertising platforms are not exclusive. If Lemeng Interactive fails to maintain its business relationship with them or to attract new third-party advertising platforms to work with Lemeng Interactive, Lemeng Interactive’s access to media channels may be limited, and our business, financial conditions, results of operations and prospects may be materially and adversely affected.

 

In addition, Lemeng Interactive’s business relationship with third-party advertising platforms does not provide Lemeng Interactive with control or oversight over their day-to-day business activities. If any of such third-party advertising platforms engages in activities that violates laws and regulations, Lemeng Interactive’s reputation could be harmed and its business and results of operations could be materially and adversely affected.

 

If Lemeng Interactive does not effectively manage its costs and expenses, Lemeng Interactive may not be able to sustain its profitability.

 

Lemeng Interactive relies on the supply of advertising spaces from media channels to deliver advertisements for advertisers. Lemeng Interactive’s traffic acquisition cost totaled approximately $18.4 million, and $22.8 million for the years ended December 31, 2022 and 2021, respectively, representing 27.4% and 31.8% of our cost of sales for the same periods. The increase in traffic acquisition cost may materially and adversely impact our profitability and our business, financial condition and results of operations.

 

In addition, Lemeng Interactive expended significant resources to grow its business in recent years on enhancing our technology capabilities and Lemeng Interactive expects that it will continue to expend significant resources to expand our business. Lemeng Interactive anticipates continued growth that could require substantial financial and other resources to, among other things:

 

invest in development of its advertising platform and improve its technology capabilities;

 

invest in its engineering and AI team to improve its solutions;

 

cover sales and marketing expenses; and

 

cover expenses relating to data privacy protection.

 

Lemeng Interactive’s expenditures may not yield the anticipated returns or benefits to our business, and if it fails to effectively manage its costs, it may not be able to sustain profitability.

 

Lemeng Interactive may face government actions and civil claims in connection with false, fraudulent, misleading, or otherwise illegal content of advertisements for which we provide advertising services.

 

Under the Advertising Law of the People’s Republic of China (the “Advertising Law”), where an advertising operator provides advertising design, production or agency services with respect to an advertisement when it knows or should have known that the advertisement is false, fraudulent, misleading, or otherwise illegal, the competent PRC authority may confiscate the advertising operator’s advertising revenue from such services, impose penalties, order it to cease dissemination of such false, fraudulent, misleading or otherwise illegal advertisement or correct such advertisement, or suspend or revoke its business licenses under certain serious circumstances.

 

26

 

 

Under the Advertising Law, “advertising operators” include any natural person, legal person or other organization that provides advertising design, production, or agency services to advertisers for their advertising activities. As the advertising services involve provision of design services to advertisers and agency services, Lemeng Interactive is deemed as an “advertising operator” under the Advertising Law. In addition, for advertising content related to certain types of products and services, such as alcohol, cosmetics, pharmaceuticals, and medical procedures, Lemeng Interactive is expected to confirm that the advertisers have obtained requisite government approvals, including, among others, operating qualifications, proof of quality inspection for advertised products, government pre-approval of the content of the advertisements, and filings with the local authorities. Lemeng Interactive cannot ensure that each advertisement for which Lemeng Interactive places with its advertising platform or third-party advertising platform or media channels complies with all PRC laws and regulations relevant to advertising activities, that supporting documentation provided by Lemeng Interactive’s customers is authentic or complete or that it is able to identify and rectify all noncompliance in a timely manner. If Lemeng Interactive provides advertising design, production or agency services with respect to an advertisement when Lemeng Interactive knows or should have known that the advertisement is false, fraudulent, misleading, or otherwise illegal, the competent PRC authority may confiscate Lemeng Interactive’s advertising revenue from such services, impose penalties, order Lemeng Interactive to cease dissemination of such false, fraudulent, misleading or otherwise illegal advertisement or correct such advertisement, or suspend or revoke Lemeng Interactive’s business licenses under certain serious circumstances.

 

Moreover, civil claims may be filed against Lemeng Interactive or administrative penalties may be imposed on Lemeng Interactive for fraud, defamation, subversion, negligence, copyright or trademark infringement, or other violations due to the nature and content of the information for which we provide services. In the event Lemeng Interactive is subject to administrative penalties or civil claims in connection with false, fraudulent, misleading, or otherwise illegal advertising content for which we provide advertising services, our reputation, business, financial condition, results of operations and business prospectus may be materially and adversely affected.

 

If Lemeng Interactive is provided inaccurate or fraudulent data, Lemeng Interactive’s business, financial conditions, results of operations and reputation may be materially and adversely affected.

 

Lemeng Interactive conducts targeted advertising through its system. Therefore, Lemeng Interactive depends on the accuracy and genuineness of data provided by advertisers and media channels in assessing the behavior of visitors to its media channels and evaluating the performance of the advertisements it delivers. Lemeng Interactive’s data collection and analysis capabilities enable Lemeng Interactive to identify unusual traffic and send alerts to the operators of its advertising platform in real-time. However, there is no assurance that such mechanism will always be effective or adequate. If Lemeng Interactive is provided in accurate or fraudulent data, it may not be able to provide precise targeted advertising and its advertisers may refuse to pay Lemeng Interactive’s advertising fees due to the ineffectiveness of their advertising campaigns through Lemeng Interactive, which may result in disputes between Lemeng Interactive and its advertisers or media channels and materially and adversely affect our business, financial conditions, results of operations and reputation.

 

Lemeng Interactive faces intensive competition from well-established internet companies, advertising agents and traditional media.

 

The mobile advertising industry is a rapidly changing, highly competitive and fragmented industry with relatively low entry barriers. With the introduction of new technologies and the influx of new entrants, Lemeng Interactive expects competition to continue and intensify, which could harm our ability to increase revenue and attain or sustain profitability. We believe the principal competitive factors in this industry include:

 

ability to deliver return on marketing expenditure at scale;

 

customer trust;

 

geographic reach;

 

breadth and depth of cooperation with advertisers, media channels and other participants in the mobile advertising industry;

 

comprehensiveness of solutions and service offerings;

 

pricing structure and competitiveness;

 

accessibility and user-friendliness of solutions; and

 

brand awareness.

 

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In addition, mobile advertising platforms face competitive pressure from large and well-established internet companies, which have established stronger and broader presence across the online advertising industry and have significantly more financial, technical, marketing and other resources, more extensive customer base, and longer operating histories and greater brand recognition than we do. These companies have access to consumer information by virtue of their popular consumer-oriented websites and mobile apps, and have the technology designed for use in conjunction with the types of consumer information collected from their websites and mobile apps. These companies may also leverage their positions to make changes to their systems, platforms, exchanges, networks or other products or services that could be harmful to our business and results of operations. Mobile advertising platforms also face competition from advertising agents, who may have their own relationships with media channels and can directly connect advertisers with such sources. Furthermore, mobile advertising platforms continue to compete with traditional media including direct marketing, television, radio, cable and print advertising companies.

 

New technologies and methods of mobile advertising present an evolving competitive challenge, as market participants upgrade or expand their service offerings to capture more marketing spend from advertisers. In addition to existing competitors and their existing service offerings, Lemeng Interactive expects to face competition from new entrants to the mobile advertising industry and new service offerings from existing competitors. If existing or new companies develop, market or resell competitive high-value advertising solutions, acquire one of Lemeng Interactive’s competitors or strategic partners, form a strategic alliance or enter into exclusivity arrangement with one of Lemeng Interactive’s competitors or strategic partners, Lemeng Interactive’s ability to compete effectively could be significantly compromised and its business, results of operations and prospects could be materially and adversely affected.

 

If Lemeng Interactive’s algorithm for assessing and predicting potential target viewer are or become flawed or ineffective, or if Lemeng Interactive’s targeted advertising fails to improve the marketing results for its advertisers, its reputation and market share may be materially and adversely affected.

 

Lemeng Interactive’s ability to attract advertisers to, and build trust in, its advertising services depends significantly on its ability to effectively assess and predict viewer interest in relevant advertisements. Lemeng Interactive uses connection tools and algorithms to collect and analyze viewer data, forecast probability of viewers’ potential engagement with a given advertisement, create and tailor the advertisement based on parameters specified by its advertisers. Lemeng Interactive’s algorithm system takes into account multiple sources of data, including customers’ basic profile, viewers’ behavior data and transaction data.

 

The data Lemeng Interactive collects may not be relevant to all industries, and for certain industries, Lemeng Interactive may not have sufficient data to ensure that our algorithms system would work effectively. Further, Lemeng Interactive does not generally verify the data it gathers, which may be subject to fraud or are otherwise inaccurate. Even if such data are accurate, they may become irrelevant or outdated and as a result, may not reflect a viewer’s genuine interest or accurately predict his or her interaction with a given advertisement. For example, for viewers’ data collected through software development kits (“SDKs”), following the date Lemeng Interactive obtains the relevant data, a viewer’s interest and behavioral pattern may change or he or she may have already completed a transaction and is no longer interested in the marketing message.

 

In addition, Lemeng Interactive anticipates significant growth in the amount of data it processes as it continues to develop interactive advertising services to meet evolving and growing advertisers demands. As the amount of data and variables Lemeng Interactive processes increases, its algorithms system processes increasingly complex calculations and as a result, the likelihood of defect and errors increases. To the extent Lemeng Interactive’s proprietary algorithms system fail to accurately assess or predict a viewer’s interest in and interaction with relevant advertisement, or experience significant errors or defects, advertisers may not achieve their marketing goals in a cost-effective manner or at all, which could make Lemeng Interactive’s platform less attractive to them, result in damages to Lemeng Interactive’s reputation and a decline in our market share and adversely affect Lemeng Interactive’s business and results of operations.

 

Lemeng Interactive may experience systems disruptions, software defects, computer viruses and breakdowns, distributed denial of service attacks, or other hacking and phishing attacks on our systems. Any of these events could damage Lemeng Interactive’s market reputation and materially and adversely affect Lemeng Interactive’s business operation and results of operations.

 

Lemeng Interactive is dependent on the stable operation of its information technology systems including Lemeng Interactive’s advertising platform, telecommunication networks, computer systems, servers and other hardware. Lemeng Interactive’s business success relies on the uninterrupted and secured operation of Lemeng Interactive’s information technology systems and the safekeeping of confidential consumer information and historical online advertising records. Any system outage or data loss or other disruption owing to the events that may be beyond Lemeng Interactive’s control would cause damage to our reputation and expose Lemeng Interactive to liability to third parties.

 

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Lemeng Interactive is susceptible to computer viruses, system breakdowns, power loss or telecommunications failure as a result of hardware deterioration. In addition, Lemeng Interactive’s infrastructure may be subject to distributed denial of service attacks, or other hacking and phishing attacks on Lemeng Interactive’s systems in the future and Lemeng Interactive cannot guarantee that any applicable recovery system, security protocol, network protection mechanisms or other defense procedures are or will be adequate to prevent such network or service interruptions, system failures or data losses. Lemeng Interactive’s infrastructure and systems may also be breached if any vulnerabilities therein are exploited by unauthorized third parties. If Lemeng Interactive fails to repair or maintain its information technology systems in a timely manner, our business may be temporarily disrupted, which could have a material and adverse impact on Lemeng Interactive’s business.

 

Lemeng Interactive’s efforts to expand the advertising services provided through Lemeng Interactive’s advertising platform may not succeed and may reduce our revenue growth rate, which may materially and adversely affect Lemeng Interactive’s business, financial condition and results of operations.

 

Lemeng Interactive derives significant revenue from providing technology services through its advertising platform, and we expect this will continue for the foreseeable future. Lemeng Interactive’s efforts to expand its advertising services provided through its advertising platform may not succeed and may reduce Lemeng Interactive’s revenue growth rate. Further, the introduction of significant technology changes and upgrades of Lemeng Interactive’s advertising platform may not be successful or result in significant revenue.

 

Additionally, if Lemeng Interactive is unable to develop enhancements to and new features for its existing or new solutions and services that keep pace with the changing technology, Lemeng Interactive’s business could be adversely affected. The success of enhancements, new features, solutions and services depends on several factors, including the timely completion, introduction and market acceptance of the feature. Failure in this regard may significantly impair Lemeng Interactive’s revenue growth as well as negatively impact Lemeng Interactive’s operating results if the additional costs are not offset by additional revenue.

 

If Lemeng Interactive is unable to protect its proprietary information or other intellectual property, Lemeng Interactive’s business could be adversely affected.

 

Lemeng Interactive relies on a combination of copyright, trademark and trade secret laws, and contractual restrictions, including through confidentiality, non-disclosure and assignment of copyright or invention assignment agreements with Lemeng Interactive’s key employees and third parties with whom Lemeng Interactive does business, to establish, maintain and protect Lemeng Interactive’s proprietary information and other intellectual property. Lemeng Interactive may not be able to efficiently detect and prevent all misappropriation, unauthorized use or reverse engineering its proprietary information and other intellectual property. For example, contractual restrictions may be breached, and Lemeng Interactive may not succeed in enforcing its rights or have adequate remedies for any breach of laws or contractual restrictions. In addition, Lemeng BJ may not be able to enter into agreements or arrangements with everyone who has access to Lemeng Interactive’s proprietary information or contributes to the development of Lemeng Interactive’s intellectual property. Moreover, Lemeng Interactive’s trade secrets may be disclosed to or otherwise become known or be independently developed by competitors, and in these situations Lemeng Interactive may have no or limited rights to stop others’ use of its information. Furthermore, to the extent that the employees or other third parties with whom Lemeng Interactive does business use intellectual property owned by others in their work for Lemeng Interactive, disputes may arise as to the rights to such intellectual property. If, for any of the above reasons, Lemeng Interactive’s intellectual property is disclosed or misappropriated, it would have an adverse effect on Lemeng Interactive’s business, financial condition and results of operations.

 

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Lemeng Interactive may be subject to claims by third parties for intellectual property infringement.

 

Lemeng Interactive depends to a large extent on its ability to effectively develop and maintain intellectual property rights relating to its business. However, Lemeng Interactive cannot assure you that third parties will not put forward claims that its business infringes upon or otherwise violates patents, copyrights or other intellectual property rights which they hold, whether valid or otherwise. Lemeng Interactive may face allegations that Lemeng Interactive has infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including its competitors, or allegations that Lemeng Interactive is involved in unfair trade practices. Lemeng Interactive’s mobile advertising business may become involved in litigious proceedings relating to allegations of infringement of intellectual property rights, unfair competition, invasion of privacy, defamation and violations of rights of third parties. The validity, enforceability and scope of protection of intellectual property rights, particularly within China, are still evolving. As Lemeng Interactive faces increasing competition and as litigation becomes a more commonly pursued method for resolving commercial disputes in China, Lemeng Interactive faces a higher risk of being the subject of intellectual property infringement claims.

 

Defending against intellectual property claims is costly and can impose a significant burden on our management and resources. Further, there is no guarantee that Lemeng Interactive can obtain favorable final outcomes in all cases. Such intellectual property claims may harm its brand and reputation, even if they are vexatious or do not result in liability. Any resulting liability or expenses, or changes required to Lemeng Interactive’s products or services to reduce the risk of future liability, may have a material adverse effect on Lemeng Interactive’s business, results of operations and prospects.

 

If Lemeng Interactive fails to detect fraud or prevent its customers’ advertisements from appearing on undesirable mobile apps, our reputation will suffer, which would harm its brand and reputation and negatively impact our business, financial condition and results of operations.

 

Lemeng Interactive’s business depends on providing advertisers with a service that they trust, and Lemeng Interactive seeks to take reasonable measures to prevent advertisers’ advertisements from appearing on undesirable mobile apps or on certain mobile apps that they identify. Lemeng Interactive uses proprietary technology to detect click fraud. Lemeng Interactive also uses advertising filter to prevent its customers’ advertisements from appearing on undesirable mobile apps. Preventing and combating fraud requires constant monitoring, and Lemeng Interactive may not always be successful in its efforts to do so. Lemeng Interactive may serve advertising on inventory that is objectionable to its advertisers, and Lemeng Interactive may lose the trust of its advertisers, which would harm its brand and reputation and negatively impact our business, financial condition and results of operations.

 

Any negative publicity with respect to Lemeng Interactive, the mobile advertising industry in general or Lemeng Interactive’s partners may materially and adversely affect Lemeng Interactive’s reputation, business and results of operations.

 

Complaints, litigation, regulatory actions or other negative publicity that arise about the mobile advertising industry in general or Lemeng Interactive in particular, including on the quality, effectiveness and reliability of mobile advertising solutions, privacy and security practices, and marketing content, even if inaccurate, could adversely affect Lemeng Interactive’s reputation and customer confidence in, and the use of, its solutions. Harm to Lemeng Interactive’s reputation and customer confidence can also arise for many other reasons, including employee misconduct, misconduct of Lemeng Interactive’s data and media channels or other counterparties, failure by these persons or entities to meet minimum quality standards or otherwise fulfill their contractual obligations or to comply with applicable laws and regulations. Additionally, negative publicity with respect to Lemeng Interactive’s data, advertising platform or media channels could also affect our business and results of operation to the extent that our business rely on these partners.

 

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Misconduct, errors and failure to function by Lemeng Interactive’s employees and the breach of data privacy regulation or leakage of consumer data could harm Lemeng Interactive’s business and reputation.

 

Lemeng Interactive is exposed to many types of operational risks, including the risk of misconduct and errors by its employees and the breach of data privacy regulation or leakage of consumer data. Lemeng Interactive’s business depends on its employees to process a large set of consumer data and business information relating to its customers. Lemeng Interactive could be materially adversely affected if such data or information was disclosed to unintended recipients or if Lemeng Interactive experiences an operational breakdown whether as a result of human error, a purposeful sabotage or a fraudulent manipulation of its operations or systems. Lemeng Interactive could also be materially adversely affected if its employees absconded with the consumer data or used its know-how to compete with Lemeng Interactive. Any of these occurrences could result in Lemeng Interactive’s diminished ability to operate its business, potential liability to its customers, inability to attract future customers, reputational damage, regulatory intervention and financial harm, which could negatively impact its business and results of operations.

 

Regulatory, legislative or self-regulatory developments for online businesses, including privacy and data protection regimes, are expansive, not clearly defined and rapidly evolving. These laws and regulations could create unexpected costs, subject Lemeng Interactive to enforcement actions for compliance failures, or restrict portions of its business or cause Lemeng Interactive to change its advertising platform or business model.

 

Governments across the world, including the PRC governments, have enacted or are considering enacting legislation relating to online businesses. There may be an increase in legislation and regulation related to online advertising, including mobile advertising business the collection and use of anonymous internet user data and unique device identifiers, such as IP address or mobile unique device identifiers, and other data protection and privacy regulation. These laws and regulations could adversely affect the demand for or effectiveness and value of Lemeng Interactive’s advertising services, force us to incur substantial costs or require Lemeng Interactive to change its business practices in a manner that could adversely affect its business and results of operations or compromise its ability to effectively pursue its growth strategies.

 

In recent years, the PRC government has enacted legislation relating to internet use to protect personal information from any unauthorized disclosure. For example, the PRC Cyber Security Law, promulgated by the Standing Committee of the National People’s Congress (“SCNPC”), stipulate that network operators shall publicize the rules of collection and use, clearly state the purpose, method and scope of information collection and use, and obtain the consent of the user. And without the consent of the user, network operators shall not provide personal information to others, except that the specific individual cannot be identified and cannot be recovered after processing.

 

In addition, SCNPC promulgated the Data Security Law of the People’s Republic of China (the “Data Security Law”) on June 10, 2021, which became effective on September 1, 2021. The Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data processing activities, and introduces a data classification and hierarchical protection system. The classification of data is based on its importance in economic and social development, as well as the degree of harm expected to be caused to national security, public interests, or legitimate rights and interests of individuals or organizations if such data is tampered with, destroyed, leaked, or illegally acquired or used. The security assessment mechanism was also included in the Personal Information Protection Law (the “Personal Information Protection Law”), which was promulgated in August 2021 and became effective on November 1, 2021, for the Chinese government to supervise certain cross-border transfers of personal information.

 

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The above laws and regulations are relatively new and subject to interpretation by the regulator. Although Lemeng Interactive only gains access to limited personal contact information that is necessary for, and relevant to, the services provided, Lemeng Interactive cannot assure you that whether the data Lemeng Interactive obtains and uses may include information that is deemed as “personal information” under the PRC Cyber Security Law and related data privacy and protection laws and regulations. Lemeng Interactive has placed great emphasis on protection of consumer’s data privacy and have established the information security management system adopted rigorous data security measures to prevent its data from unauthorized access or use or being retrieved to establish any connection with the device owners’ identities. Lemeng Interactive strives to comply with all applicable laws and regulations relating to privacy and data collection, processing, use, and disclosure. These laws and regulations are continually evolving, are not always clear, and are not always consistent across the jurisdictions in which Lemeng Interactive does business, and the measures Lemeng Interactive takes to comply with these laws, regulations and industry standards may not always be effective. In addition, there has been an increase in regulatory activities in connection with privacy and data protection in China, and the regulatory landscape is becoming more complex with increasingly strict requirements. Lemeng Interactive may be subject to litigation or enforcement action or reduced demand for the solutions or services if Lemeng Interactive, its suppliers or its clients fail to abide by applicable privacy laws or to provide adequate notice and/or obtain consent from end users. Any proceeding or perception of concerns relating to Lemeng Interactive’s collection, use, disclosure, and retention of data, including its security measures applicable to the data Lemeng Interactive collects, whether or not valid, could adversely affect its reputation, force it to spend significant amounts on defense of these proceedings, distract our management, increase our costs of doing business and inhibit the use of its advertising services, which could materially and adversely affect its business, results of operations and prospects.

 

Actual or alleged failure to comply with data privacy and protection laws and regulations could have a serious adverse effect on Lemeng Interactive’s reputation, and discourage current and potential consumers and users from using its services and adversely affect its business.

 

Lemeng Interactive’s business involves some anonymous personal contact information. Concerns about Lemeng Interactive’s practices with regard to the collection, use or disclosure of personal information or other privacy-related matters, even if unfounded, could damage Lemeng Interactive’s reputation and operations. While Lemeng Interactive adopted some measures to comply with the laws and regulations relating to the protection of personal information in China, Lemeng Interactive cannot guarantee the effectiveness of these measures. Any failure or perceived failure to comply with all applicable data privacy and protection laws and regulations, any failure or perceived failure of its employees to comply with its internal control measures, may result in negative publicity and legal proceedings or regulatory actions against it, and could damage its reputation, discourage current and potential agents, consumers and service providers from using the services and subject it to fines and damages, which could have a material adverse effect on its business and results of operations.

 

Lemeng Interactive’s business is sensitive to general economic conditions, and any severe or prolonged downturn in the global or PRC economy could materially and adversely affect its business and financial condition.

 

Economic conditions in China are sensitive to global economic conditions. Since Lemeng Interactive derives, and expects to continue to derive, all of its revenue from China, its business and prospects may be affected by economic conditions in China. Lemeng Interactive relies on the spending of advertisers and, as a result, users of Lemeng Interactive’s products, for its revenue, which may in turn depend on their level of disposable income, perceived future earnings and willingness to spend. Due to uncertain global economic conditions, particularly the current trade tension between the U.S. and China, its customers may reduce the amount they spend on mobile advertising. In addition, renewed financial turmoil affecting the financial markets, banking systems or currency exchange rates may significantly restrict our ability to obtain financing in the capital markets or from financial institutions on commercially reasonable terms, or at all, which could also materially and adversely affect its business, results of operations and prospects.

 

Lemeng Interactive’s insurance coverage may be inadequate to cover all significant risk exposures.

 

Lemeng Interactive maintains limited insurance policies covering certain potential liabilities. There can be no assurance that such coverage will be available or sufficient to cover all Lemeng Interactive’s risk exposures. If insurance coverage is unavailable or insufficient to cover any such exposures, Lemeng Interactive may incur substantial costs which, in turn, could materially and adversely affect its business, financial condition and results of operations.

 

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Failure to obtain, renew, or retain licenses, permits or approvals or failure to comply with applicable laws and regulations may affect Lemeng Interactive’s ability to conduct our business.

 

The licensing requirements within the PRC mobile advertising and the value-added services industry are constantly evolving and Lemeng Interactive may be subject to more stringent regulatory requirements due to changes in the political or economic policies in China. The failure to obtain and/or maintain the licenses and permits required to conduct our business may subject Lemeng Interactive to various penalties, including confiscation of revenues, imposition of fines and/or restrictions on their business operations, or the discontinuation of their operations. Any such disruption in the business operations of Lemeng’s consolidated VIE could materially and adversely affect Lemeng’s business, financial condition and results of operations. See “Regulations” for more details. However, Lemeng Interactive cannot assure you that we will be able to successfully maintain these value-added telecommunication licenses or complete the updating and renewal of the filing records of its value-added telecommunication licenses with local counterparts of the Ministry of Industry and Information Technology, or the MIIT, on a timely basis. Failure to do so may materially and adversely affect our business, financial condition, results of operations and prospects.

 

Besides, as of the date of this prospectus, Lemeng’s WFOE, Leshen, is in process of obtaining the registration certificate of foreign exchange. Lemeng cannot assure you that Leshen will be able to successfully obtain the above certificate on a timely basis. Failure to do so may adversely affect Lemeng’s business, results of operations and prospects.

 

Failure to comply with regulations on the operation and management of telecommunications services could have an adverse effect on Lemeng Interactive’s reputation, and discourage current and potential partners from cooperating with Lemeng Interactive and adversely affect Lemeng Interactive’s business.

 

According to the Administrative Measures on Telecommunications Business Permits promulgated by the MIIT on July 3, 2017, telecommunications business operators shall report their business operation, service quality and other information to the license issuing authority in the first quarter of each year, and the telecommunication administration shall, according to the random inspection, daily supervision and punishment records, establish a list of bad telecommunication business operations (“Bad List”) and a list of dishonest telecommunication business operations (“Dishonest List”). If a telecommunications business operator fails to submit the annual report information within the time limit required by the administration, it shall be listed in the Bad List. If a telecommunications business operator included in the Bad List is again ordered by the telecommunications administration to suspend business for rectification or revoke its business license, or under other circumstances specified by the MIIT within three years, it shall be included in the Dishonest List. One of Lemeng BJ’s subsidiaries, Lemeng XJ failed to submit on time and has been included in the Bad List. Lemeng XJ has completed the supplementary submission and could be removed from the Bad List after being confirmed by the telecommunications administration. As of the date of this prospectus, Lemeng Interactive has not received any order or notice or penalty from the local authorities nor any claims or complaints from any other third parties. The record of being listed in the Bad List and any failure to comply with all applicable regulations on the operation and management of telecommunications services, may result in a bad social reputation and have a material adverse effect on our results of operations.

 

Failure to comply with regulations on online publishing services could have an adverse effect on Lemeng Interactive’s business operations and financial condition.

 

Some mobile games jointly operated by Yishen have been launched online without the approval of the competent authorities and do not obtain the International Standard Book Number (“ISBN”). According to Administrative Provisions on Online Publishing Services and relevant regulations, an entity providing online publishing services must, before launching its games online, file an application to the competent publication administrative departments of corresponding province, autonomous region or municipality directly under the Central Government, and upon examination and approval, the application will be submitted to the State Administration of Press, Publication, Radio, Film and Television for approval. If any entity arbitrarily launches online games without approval and does not obtain the ISBN, the entity shall be ordered to stop operating related online games and be subject to a fine that is five to ten times the illegal operating income if such operating income is more than RMB 10,000, or a fine less than RMB 50,000 if such operating income is less than RMB 10,000. If the competent authority orders Yishen to stop operating related mobile games, it could have an adverse effect on Lemeng Interactive’s business operations and financial condition.

 

Lemeng Interactive may be involved in legal and other proceedings arising out of its operations from time to time and may face significant liabilities as a result.

 

Lemeng Interactive may be involved in disputes arising from its operations. These disputes may lead to various legal or other proceedings and may result in substantial costs, damages to Lemeng Interactive’s brand and reputation and a diversion of resources and management’s attention. In addition, Lemeng Interactive may have disagreements with regulatory bodies in the course of its operations which may subject it to administrative proceedings and unfavorable decrees that result in pecuniary liabilities or otherwise disrupt the business operations. We cannot assure you that Lemeng Interactive will not be involved in any major disputes or legal or other proceedings in the future. Furthermore, Lemeng Interactive seeks to structure its business in a tax efficient manner. If any of Lemeng Interactive’s arrangements is successfully challenged by the relevant tax authorities, Lemeng Interactive may incur additional tax liabilities, which could adversely affect Lemeng Interactive’s financial condition or results of operations. In addition, from time to time, Lemeng Interactive’s directors and senior management may be parties to litigation or other legal proceedings. Even though Lemeng Interactive may not be directly involved in such proceedings, such proceedings may affect Lemeng Interactive’s reputation and, consequently, adversely impact Lemeng Interactive’s business.

 

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The global coronavirus COVID-19 pandemic may materially and adversely affect Lemeng Interactive’s results of operations and financial condition.

 

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. Many businesses and social activities in China and other countries and regions were severely disrupted in 2020. This pandemic has also caused market panics, which materially and negatively affected the global financial markets, such as the plunge of global stocks on major stock exchanges in March 2020. Such disruption slowdown of the world’s economy in 2020 and beyond had, and may continue to have, a material adverse effect on its results of operations and financial condition. Some of the customers and vendors experienced significant business disruptions and suspension of operations due to quarantine measures to contain the spread of the pandemic, which increased the likelihood of default from the customers. As of the date of this prospectus, the COVID-19 pandemic is generally considered under control in China. In light of the current circumstances, based on available information, Lemeng Interactive estimates its financial results were adversely affected in fiscal year 2022. However, the extent to which the COVID-19 pandemic may impact Lemeng Interactive’s business, operations and financial results from this point forward will depend on numerous evolving factors that Lemeng Interactive cannot accurately predict at this time. Lemeng Interactive is closely monitoring the development of the COVID-19 pandemic and continuously evaluating any further potential impact on its business, results of operations and financial condition. If the outbreak persists or escalates, Lemeng Interactive may be subject to further negative impact on its business operations and financial condition.

 

Risks Relating to Our Contractual Arrangements and Our Corporate Structure (the “VIE structure”)

 

If the PRC government determines that the VIE Agreements do not comply with applicable regulations, or if these regulations or their interpretations change in the future, we could be subject to severe consequences, including the nullification of the VIE Agreements and the relinquishment of our interest in our Consolidated Affiliated Entities.

 

Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunications services and other related businesses. Under the Special Administrative Measures for Access of Foreign Investment (2021 Edition) (“Negative List (2021)”), Lemeng Interactive’s mobile internet marketing services fall into the value-added telecommunications services which is considered restricted. To comply with PRC laws and regulations, we conduct its mobile internet marketing services in China through Lemeng BJ and its subsidiaries, based on the VIE structure and a series of VIE Agreements by and among WFOE, Lemeng BJ and the Registered Shareholders. As a result of these VIE Agreements, we consolidate or combine their results of operations into our financial statements. Lemeng BJ and its subsidiaries hold the licenses, approvals and key assets that are essential for the operations of Lemeng Interactive’s mobile internet marketing services.

 

However, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. The relevant PRC regulatory authorities have broad discretion in determining whether the VIE structure violates PRC laws and regulations. If we are found in violation of any PRC laws or regulations, or if the VIE structure is disallowed by the relevant governmental authorities, or if the VIE Agreements among WFOE, Lemeng BJ and the Registered Shareholders are determined as illegal or invalid by any PRC court, arbitral tribunal or regulatory authorities, the relevant governmental authorities would have broad discretion in dealing with such violation, including, without limitation:

 

revoke the agreements constituting the VIE Agreements;

 

revoke Lemeng Interactive’s business and operating licenses related to Lemeng BJ’s mobile internet marketing services business;

 

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require Lemeng Interactive to discontinue or restrict operations related to its mobile internet marketing services business;

 

restrict Lemeng Interactive’s right to collect revenue generated from its mobile internet marketing services business;

 

restrict or prohibit our use of the proceeds from overseas offering to finance our PRC Consolidated Affiliated Entities’ business and operations;

 

levy fines on Lemeng Interactive and/or confiscate the proceeds that they deem to have been obtained through noncompliant operations;

 

require us to restructure the operations in such a way as to compel us to establish a new enterprise, re-apply for the necessary licenses or relocate our businesses, staff and assets related to mobile internet marketing our business;

 

impose additional conditions or requirements with which we may not be able to comply; or

 

take other regulatory or enforcement actions that could be harmful to our business.

 

Furthermore, any of the assets under the name of any record holder of equity interest in our Consolidated Affiliated Entities, including such equity interest, may be put under court custody in connection with litigation, arbitration or other judicial or dispute resolution proceedings against that record holder. We cannot be certain that the equity interest will be disposed of in accordance with the VIE Agreements. In addition, new PRC laws, rules and regulations may be introduced to impose additional requirements that may impose additional challenges to our corporate structure and VIE Agreements. The occurrence of any of these events or the imposition of any of these penalties may result in a material and adverse effect on our ability to conduct the business. In addition, if the imposition of any of these penalties causes us to lose the rights to direct the activities of our consolidated affiliated entity and its subsidiary or the right to receive their economic benefits, we would no longer be able to consolidate the Consolidated Affiliated Entities, which could effectively eliminate the assets, revenue and net income from our balance sheet and adversely affect our results of operations, which would most likely require us to cease conducting our business and would result in the delisting of our Ordinary Shares from Nasdaq Capital Market and a significant impairment in the market value of our Ordinary Shares.

 

The VIE Agreements may not be as effective in providing operational control as direct ownership and the Consolidated Affiliated Entities or the Registered Shareholders may fail to perform their obligations under the VIE Agreements.

 

We conduct mobile internet marketing services business in China through the Consolidated Affiliated Entities, based on a series of VIE Agreements by and among WFOE, Lemeng BJ and the Registered Shareholders. Lemeng Interactive’s revenue and cash flow from its mobile internet marketing services related businesses are attributed to the Consolidated Affiliated Entities. The VIE Agreements may not be as effective as direct ownership in providing us with control over the Consolidated Affiliated Entities. Direct ownership would allow us, for example, to directly or indirectly exercise our rights as a shareholder to effect changes in the boards of directors of the Consolidated Affiliated Entities, which, in turn, could affect changes, subject to any applicable fiduciary obligations at the management level. However, under the VIE Agreements, as a legal matter, if the Consolidated Affiliated Entities or the Registered Shareholders fail to perform their respective obligations under the VIE Agreements, we may have to incur substantial costs and expend significant resources to enforce those arrangements and resort to litigation or arbitration and rely on legal remedies under PRC laws. These remedies may include seeking specific performance or injunctive relief and claiming damages, any of which may not be effective. For example, if the Registered Shareholders were to refuse to transfer their equity interest in Lemeng BJ to Leshen or Leshen’s designee when Leshen exercises the call option pursuant to the VIE Agreements, or if they were otherwise to act in bad faith toward us, we might have to take legal action to compel them to perform their respective contractual obligations. In the event we are unable to enforce these VIE Agreements or we experience significant delays or other obstacles in the process of enforcing these VIE Agreements, we may not be able to exert effective control over our Consolidated Affiliated Entities and may lose control over the assets owned by the Consolidated Affiliated Entities. As a result, we may be unable to consolidate the Consolidated Affiliated Entities in our consolidated financial statements, which could materially and adversely affect our financial condition and results of operations.

 

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The VIE Agreements may be subject to scrutiny by the PRC tax authorities and additional taxes may be imposed. A finding that we owe additional taxes could substantially reduce our consolidated net income and the value of your investment.

 

According to applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to challenge by the PRC tax authorities, additional taxes and interest may be imposed. We would be subject to adverse tax consequences if the PRC tax authorities were to determine that transactions under the VIE Agreements between WFOE and Lemeng BJ were not conducted on an arm’s-length basis as the PRC tax authorities have the authority to make special tax adjustments on Lemeng BJ’s ’s tax position. Such adjustments may adversely affect us by increasing Lemeng BJ’s tax expenses without reducing the tax expenses of WFOE, subjecting Lemeng BJ to late payment fees and other penalties for under-payment of taxes. Our consolidated results of operations may be adversely affected if Lemeng BJ’s tax liabilities increase or if it is subject to late payment fees or other penalties.

 

The Registered Shareholders may potentially have a conflict of interest with us, and they may breach their contracts with us or cause such contracts to be amended in a manner contrary to our interests.

 

We conduct mobile internet marketing services business through the Consolidated Affiliated Entities. The Registered Shareholders may potentially have a conflict of interest with us, and they may breach their contracts with us if they believe it would further their own interest or if they otherwise act in bad faith. We cannot assure you that when conflicts of interest arise between us and Lemeng BJ, the shareholders will act completely in our interests or that the conflicts of interest will be resolved in our favor.

 

In addition, the Registered Shareholders may breach or cause Lemeng BJ to breach the VIE Agreements. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we may invoke the right under the equity pledge agreements with the shareholders of Lemeng BJ to enforce the equity pledge in the case of the shareholders’ breach of the VIE Agreements. For individuals who are also our directors and officers, we rely on them to abide by the laws of the Cayman Islands, which provide that directors and officers owe a fiduciary duty to the company that requires them to act in good faith and in what they believe to be the best interests of the company and not to use their position for personal gains.

 

The Registered Shareholders may also be involved in personal disputes with third parties or other incidents that may have an adverse effect on their respective equity interests in Lemeng BJ and the validity or enforceability of the VIE Agreements with Lemeng BJ and the Registered Shareholders. For example, in the event that any individual shareholder of Lemeng BJ divorces his or her spouse, the spouse may claim that the equity interest of Lemeng BJ held by such shareholder is part of their community property and should be divided between such shareholder and his or her spouse. If such claim is supported by the court, the relevant equity interest may be obtained by the shareholder’s spouse or another third party who is not subject to obligations under the VIE Agreements, which could result in a requirement that we deconsolidate the financial results of Lemeng Interactive. Similarly, if any of the equity interests of Lemeng BJ is inherited by a third party with whom the current VIE Agreements are not binding, we could lose our ability to consolidate the financial results of Lemeng Interactive or to incur unpredictable costs to seek to maintain such consolidation, which could cause significant disruption to our business and operations and harm our financial condition and results of operations.

 

Although under the current VIE Agreements, (i) Lemeng BJ’s shareholders’ spouses have executed Spousal Consent Letters under which the spouses agree not to assert any rights over the equity interest in Lemeng BJ held by these shareholders, and (ii) it is expressly provided that Lemeng BJ and its shareholders shall not assign any of their respective rights or obligations to any third party without the prior written consent of our WFOE, we cannot assure you that these undertakings and arrangements will be complied with or effectively enforced. If Lemeng BJ or the Registered Shareholders breach their contracts with us or otherwise have disputes with us, we may have to initiate legal proceedings, which involve significant uncertainty. Such disputes and proceedings may significantly disrupt our business operations, adversely affect our ability to consolidate Lemeng Interactive’s financial results and otherwise result in negative publicity. There is also substantial uncertainty as to the outcome of any such legal proceedings.

 

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We conduct our mobile internet marketing services in the PRC through the Consolidated Affiliated Entities by way of the VIE Agreements, but certain of the terms of the VIE Agreements may not be enforceable under PRC laws.

 

All the agreements which constitute the VIE Agreements are governed by PRC laws and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these agreements would be interpreted in accordance with PRC laws and disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions and uncertainties in the PRC legal system could limit our ability to enforce the VIE Agreements. Meanwhile, there are very few precedents and little formal guidance as to how VIE Agreements in the context of a consolidated affiliate entity should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration if legal action becomes necessary. In addition, under PRC laws, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that we are unable to enforce the VIE Agreements, or if we suffer significant time delays or other obstacles in the process of enforcing them, it would be very difficult to exert effective control over the Consolidated Affiliated Entities, and our ability to conduct our business and our financial condition and results of operations may be materially and adversely affected.

 

If we exercise the option to acquire equity ownership of Lemeng BJ, the ownership transfer may subject us to certain limitations and substantial costs.

 

Pursuant to the Regulations for the Administration of Foreign-Invested Telecommunications Enterprises (the “FITE Regulations”) promulgated by the State Council, foreign investors are not allowed to hold more than 50% of the equity interests of any company providing value-added telecommunications services, including Internet Content Provider (“ICP”) services. In addition, foreign-invested telecommunication enterprises should meet the requirements as prescribed in the relevant regulations. If the PRC laws allow foreign investors to invest in value-added telecommunications enterprises in China, we cannot assure you that we could meet the requirements as prescribed and could pass the examination and approval of the competent telecommunications authorities.

 

Pursuant to the VIE Agreements, WFOE, or its designated person, has the exclusive right to purchase all or any part of the equity interests in Lemeng BJ from the Registered Shareholders at the lowest price allowed by the laws and regulations of the PRC at the time of exercise and the Registered Shareholders shall return all amount of purchase price they have received to WFOE. If such a transfer takes place, the competent tax authority may require WFOE to pay enterprise income tax for ownership transfer income with reference to the market value, in which case the amount of tax could be substantial.

 

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

 

On March 15, 2019, the National People’s Congress (“NPC”) promulgated the PRC Foreign Investment Law, which took effect on January 1, 2020. Since it is relatively new, substantially uncertainties exist in relation to its interpretation and implementation. The PRC Foreign Investment Law does not explicitly classify whether consolidated affiliated entities based on 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 other methods prescribed by 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, at which time it will be uncertain whether the contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment in the PRC and if yes, how the VIE Agreements should be dealt with.

 

The PRC 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 in the Negative List (2021). The PRC Foreign Investment Law provides that (i) foreign-invested entities operating in “restricted” industries are required to obtain market entry clearance and other approvals from relevant PRC government authorities; and (ii) foreign investors shall not invest in any industries that are “prohibited” under the Negative List (2021). If VIE Agreements with Lemeng BJ are deemed as foreign investment in the future, and any business of Lemeng BJ is “restricted” or “prohibited” from foreign investment under the Negative List (2021) effective at the time, we may be deemed to be in violation of the PRC Foreign Investment Law, the VIE Agreements with Lemeng BJ may be deemed as invalid and illegal, and we may be required to unwind such VIE Agreements and/or restructure our business operations, any of which may have a material adverse effect on our business operation.

 

The Negative List (2021) also stipulates that if a domestic enterprise engaged in business in the prohibited investment field issues shares abroad and is listed for trading, it shall be examined and approved by the relevant competent authorities of the state. According to a press release issued by the National Development and Reform Commission (“NDRC”) in relation to the Negative List (2021), the above provisions are only applicable to the direct overseas listing of domestic enterprises engaged in the prohibited investment field. However, if relevant governmental authority determines or new future rules provides that we are required to obtain the approval, we would have to apply for such approval. There is no assurance that we will be able to obtain such approval in time or at all. If we fail to obtain the approve as required or in a timely manner, the VIE structure may be deemed illegal and ordered to be cancelled by relevant government authorities, and other administrative measures or penalties may be imposed on us, which could materially and adversely affect our business, financial condition, results of operations and the value of our Ordinary Shares.

 

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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, business operations and the value of our Ordinary Shares.

 

Risks Related to Doing Business in China

 

Chinese government agencies may exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers, especially those in the technology field. Additional compliance procedures may be required in connection with this offering under PRC rules, regulations or policies.

 

We are potentially subject to significant regulation by various agencies of the Chinese government. The WFOE and the VIE and its subsidiaries are required to have, and each has, a business license issued by the PRC State Administration for Market Regulation and its local counterparts. In addition, Lemeng Interactive has obtained ICP license for provision of internet value-added services. We cannot assure you that Lemeng Interactive can successfully update or renew the licenses required for its mobile internet marketing services in a timely manner or that such license is sufficient to conduct all of its present or future mobile internet marketing services.

 

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. Substantial uncertainty remains regarding the scope and applicability of the M&A Rules to offshore special purpose vehicles. Although we believe that CSRC’s approval under the M&A Rules is not required for the listing and trading of our Class B Shares on Nasdaq in the context of this offering, we cannot assure you that relevant PRC governmental agencies, including the CSRC, would reach the same conclusion as we do.

 

On February 17, 2023, the CSRC issued the New Administrative Rules Regarding Overseas Listings, which became effective on March 31, 2023. According to the New Administrative Rules Regarding Overseas Listings, among other things, a domestic company in the PRC that seeks to offer and list securities in overseas markets shall fulfill the filing procedure with the CSRC as per requirement of the Trial Administrative Measures. When a domestic company seeks to directly offer and list securities in overseas markets, the issuer shall file with the CSRC. When a domestic company seeks to indirectly offer and list securities in overseas markets, the issuer shall designate a major domestic operating entity, which shall, as the domestic responsible entity, file with the CSRC. Initial public offerings or listings in overseas markets shall be filed with the CSRC within 3 working days after the relevant application is submitted overseas. The required filing materials with the CSRC include (without limitation): (i) record-filing reports and related undertakings, (ii) compliance certificates, filing or approval documents from the primary regulators of applicants’ businesses (if applicable), (iii) security assessment opinions issued by related departments (if applicable), (iv) PRC legal opinions issued by domestic law firms (with related undertakings), and (v) prospectus or listing documents. Pursuant to the New Administrative Rules Regarding Overseas Listings, we have to file with the CSRC in accordance with the Trial Administrative Measures with respect to this offering, and we cannot assure you that we will be able to get the clearance of filing procedures under the New Administrative Rules Regarding Overseas Listings on a timely basis, or at all. On February 24, 2023, the CSRC promulgated the Confidentiality and Archives Administration Provisions, which also became effective on March 31, 2023. According to the Confidentiality and Archives Administration Provisions, domestic companies that seek overseas offering and listing (either in direct or indirect means) and the securities companies and securities service (either incorporated domestically or overseas) providers that undertake relevant businesses shall institute a sound confidentiality and archives administration system, and take necessary measures to fulfill confidentiality and archives administration obligations. They shall not leak any state secret or working secret of government agencies, or harm national security and public interests. Furthermore, a domestic company that provides accounting archives or copies of accounting archives to any entities, including securities companies, securities service providers and overseas regulators and individuals, shall fulfill due procedures in compliance with applicable regulations. Working papers produced in the mainland China by securities companies and securities service providers in the process of undertaking businesses related to overseas offering and listing by domestic companies shall be retained in mainland China. Where such documents need to be transferred or transmitted to areas outside of mainland China, relevant approval procedures stipulated by regulations shall be followed. We believe that this offering does not involve the leaking of any state secret or working secret of government agencies, or the harming of national security and public interests. However, we may be required to perform additional procedures in connection with the provision of accounting archives. The specific requirements of the relevant procedures are currently unclear and we cannot be certain whether we will be able to perform the relevant procedures. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our ordinary shares, cause significant disruption to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition and results of operations and cause our ordinary shares to significantly decline in value or become worthless.

 

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On December 27, 2020, the MOFCOM, and the NDRC promulgated the Special Administrative Measures for Access of Foreign Investment (2021 Edition), or the Negative List (2021). The Negative List (2021) stipulates that if a domestic enterprise engaged in business in the prohibited investment field issues shares abroad and is listed for trading, it shall be examined and approved by the relevant competent authorities of the state. According to a press release issued by the NDRC in relation to the Negative List (2021), the above provisions are only applicable to the direct overseas listing of domestic enterprises engaged in the prohibited investment field. However, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we should obtain such approvals for this offering and any follow-on offering, we may be unable to obtain such approvals which could significantly limit or completely hinder our ability to offer or continue to offer securities to our investors. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ordinary shares that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ordinary shares we are offering, you would be doing so at the risk that the settlement and delivery may not occur. Any uncertainties or negative publicity regarding such approval requirements could have a material adverse effect on our ability to complete this offering or any follow-on offering of our securities or the market for and market price of our ordinary shares.

 

On October 29, 2021, the Cyberspace Administration of China (“CAC”) published the Draft Outbound Data Transfer Security Assessment Measures (the “Draft Outbound Data Transfer Security Assessment Measures”). On July 7, 2022, the Outbound Data Transfer Security Assessment Measures (the “Outbound Data Transfer Security Assessment Measures”) formally promulgated, which became effective from September 1, 2022. The Outbound Data Transfer Security Assessment Measures stipulates the circumstances under which security assessment of outbound data transfers should be declared, including: (i) outbound transfer of important data, which means any data, the tampering, damage, leakage, or illegal acquisition or use of which, if it happens, may endanger national security, the operation of the economy, social stability, public health and security, by a data processor; (ii) outbound transfer of personal information by a critical information infrastructure operator or a personal information processor who has processed the personal information of more than 1,000,000 people; (iii) outbound transfer of personal information by a personal information processor who has made outbound transfers of the personal information of 100,000 people cumulatively or the sensitive personal information of 10,000 people cumulatively since 1 January of the previous year; or (iv) other circumstances where an application for the security assessment of an outbound data transfer is required as prescribed by the national cyberspace administration authority. On November 14, 2021, the Cyberspace Administration of China published the Administrative Regulations on Internet Data Security (Draft for Comment), or the “Administrative Regulations Draft”, which reiterates that data handlers that process the personal information of more than one million users listing in a foreign country should apply for a cybersecurity review. On December 28, 2021, the Cybersecurity Review Measures (2021 version) was promulgated and became effective on February 15, 2022, which iterates that any “online platform operators” controlling personal information of more than one million users which seeks to list in a foreign stock exchange should be subject to cybersecurity review. The Cybersecurity Review Measures (2021 version), further elaborates the factors to be considered when assessing the national security risks of the relevant activities, including, among others, (i) the risk of core data, important data or a large amount of personal information being stolen, leaked, destroyed, and illegally used or exited the country; and (ii) the risk of critical information infrastructure, core data, important data or a large amount of personal information being affected, controlled, or maliciously used by foreign governments after listing abroad. Although Lemeng Interactive may be considered as an “online platform operator,” “data processor,” or “data handler” as mentioned in the relevant regulations, we do not believe we or Lemeng Interactive would constitute an “operator of critical information infrastructure” or our or Lemeng Interactive’s business and activities would affect or may affect national security, however, the Cybersecurity Review Measures (2021 version) was recently adopted, and the Administrative Regulations Draft are in the process of being formulated, we do not know what regulations will be adopted or how such regulations will affect us and our listing on Nasdaq. As there remains significant uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and regulations, we could be subject to cybersecurity review, and if so, we may not be able to pass such review in relation to this offering. In addition, we could become subject to enhanced cybersecurity review or investigations launched by PRC regulators in the future. Any failure or delay in the completion of the cybersecurity review procedures or any other non-compliance with the related laws and regulations may result in fines or other penalties, including suspension of business, website closure, and revocation of prerequisite licenses, as well as reputational damage or legal proceedings or actions against us, which may have material adverse effect on our business, financial condition or results of operations. As of the date of this prospectus, we have not been involved in any investigations on cybersecurity review initiated by the CAC or related governmental regulatory authorities, and we have not received any inquiry, notice, warning, or sanction in such respect.

 

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Our business is subject to various government regulations and regulatory interference. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. Furthermore, given recent statements by the Chinese government indicating an intent to exert more oversight and control over offerings that are conducted overseas, although as of the date of this prospectus, we have not been involved in any investigations initiated by the applicable governmental regulatory authorities, nor have we received any inquiry, notice, warning, or sanction in such respect. With the promulgation of the new filing-based administrative rules for overseas offering and listing by domestic companies in China, we have to file with the CSRC with respect to this offering, and we cannot assure you that we will be able to get the clearance of filing procedures under the New Administrative Rules Regarding Overseas Listings on a timely basis, or at all. Apart from that, it is uncertain whether or when we might be required to obtain other permission from any related PRC government to list our shares on Nasdaq, and even if such permission is obtained, whether it will be later denied or rescinded, which could significantly limit or completely hinder our ability to offer or continue to offer our ordinary shares to investors and cause the value of our ordinary shares to significantly decline or be worthless. If the WFOE and the VIE and its subsidiaries (i) do not receive or maintain such permissions or approvals, should the approval be required in the future by the PRC government, (ii) inadvertently conclude that such permissions or approvals are not required, or (iii) applicable laws, regulations, or interpretations change and we are required to obtain such permissions or approvals in the future, our operations and financial conditions could be materially adversely affected, and our ability to offer securities to investors could be significantly limited or completely hindered and the securities currently being offered may substantially decline in value and be worthless.

 

If Lemeng Interactive fails to prevent security breaches, improper access to or disclosure of Lemeng Interactive’s data or user data, or other hacking and attacks, Lemeng Interactive may lose users, and its business, reputation, financial condition and results of operations may be materially and adversely affected.

 

Lemeng Interactive has employed significant resources to develop its security measures against breaches. Although Lemeng Interactive has not experienced any material disruptions, outages, cyberattacks, attempts to breach its systems, or other similar incidents and do not expect the occurrence of such incidents in the future, Lemeng Interactive’s cybersecurity measures may not detect, prevent or control all attempts to compromise its 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 its systems or that it otherwise maintains. Breaches of its cybersecurity measures could result in unauthorized access to its systems, misappropriation of information or data, deletion or modification of customer information, or a denial-of-service or other interruption to its business operations. As techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against Lemeng Interactive or its supporting service providers, Lemeng Interactive may be unable to anticipate, or implement adequate measures to protect against, these attacks.

 

Lemeng Interactive is likely in the future to be subject to these types of attacks. If Lemeng Interactive is unable to avert these attacks and security breaches, it could be subject to significant legal and financial liabilities, its reputation would be harmed and it could sustain substantial revenue loss from lost sales and customer dissatisfaction. Lemeng Interactive may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber-attacks may target Lemeng Interactive, its suppliers, customers or other participants, or the internet infrastructure on which it depends. Actual or anticipated attacks and risks may cause Lemeng Interactive 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 Lemeng Interactive does not carry cybersecurity insurance, it will not be able to mitigate such risks to any third party. Cybersecurity breaches would not only harm Lemeng Interactive’s reputation and business, but also could materially decrease its revenue and net income.

 

The VIE or the holding company may be subject to approval or other requirement from PRC authorities in connection with this offering, and, if required, we cannot assure you that we will be able to obtain such approval or satisfy such requirement. If we failed to obtain such approval or satisfy such requirement, we may not able to continue listing on U.S. exchange, continue to offer securities to investors, or materially affect the interest of the investors and the value of our Ordinary Shares may decrease or become worthless.

 

Our company, our subsidiaries, and the VIEs are currently not required to obtain permission or approval from the PRC authorities including CSRC or CAC for the VIE’s operation, nor have we, our subsidiaries, or VIE applied for or received any denial for the VIE’s operation. However, 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 similar matters. The Opinions and any related implementing rules to be enacted may subject us to compliance requirement in the future. On February 17, 2023, the CSRC promulgated the Trial Administrative Measures and relevant five guidelines, which became effective on March 31, 2023. According to the Overseas Listing Trial Measures, PRC domestic companies that seek to offer and list securities in overseas markets, either in direct or indirect means, are required to fulfill the filing procedure with the CSRC and report relevant information. Among other things, if a domestic enterprise intends to indirectly offer and list securities in an overseas market, the record-filing obligation is with a major operating entity incorporated in the PRC and such filing obligation shall be completed within three working days after the overseas listing application is submitted. Pursuant to the New Administrative Rules Regarding Overseas Listings, we have to file with the CSRC in accordance with the Trial Administrative Measures with respect to this offering, and we cannot assure you that we will be able to get the clearance of filing procedures under the New Administrative Rules Regarding Overseas Listings on a timely basis, or at all. Moreover, we could be subject to the filing requirement for future share offering, major changes in our company and other scenario as required under the Trial Administrative Measures.

 

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Given the current regulatory environment in the PRC, we are still subject to the uncertainty of interpretation and enforcement of the rules and regulations in the PRC, which can change quickly with little advance notice, and any future actions of the PRC authorities. It is uncertain when and whether we will be required to obtain permission from the PRC government to list on U.S. exchanges or enter into VIE agreements (including retroactively), and even if such permission is obtained, whether it will be denied or rescinded. As a result, our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry.

 

Furthermore, there are substantial uncertainties regarding the interpretation and application of the laws and regulations governing our and Lemeng Interactive’s business, or the enforcement and performance of the VIE Agreements and the VIE structure. These laws and regulations may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. Due to the uncertainty and complexity of the regulatory environment, we cannot assure you that we and Lemeng Interactive would always be in full compliance with applicable laws and regulations, the violation of which may have adverse effect on our and on Lemeng Interactive’s business and reputation. If the PRC government determines that the VIE Agreements and the VIE structure do not comply with applicable laws, it could revoke Lemeng Interactive’s business and operating licenses, require Lemeng Interactive to discontinue or restrict the VIEs’ operations, restrict Lemeng Interactive’ right to collect revenues, require Lemeng Interactive to restructure the operations, impose additional conditions or requirements with which Lemeng Interactive may not be able to comply, impose restrictions on our business operations, or take other regulatory or enforcement actions against Lemeng Interactive that could be harmful to their business. Any of these or similar occurrences could significantly disrupt our or Lemeng Interactive’s business operations or restrict Lemeng Interactive from conducting a substantial portion of their business operations, which could materially and adversely affect Lemeng Interactive’s business, financial condition and results of operations. In addition, if the PRC government determines that the contractual arrangements constituting part of the VIE structure do not comply with PRC regulations, or if these regulations change or are interpreted differently in the future, the securities we are registering may decline in value or become worthless if the determinations, changes, or interpretations result in your inability to assert contractual control over the assets of Leshen or Lemeng Interactive, which conducts all or substantially all of our operations.

 

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

 

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

 

The PRC legal system is a civil law system based on written statutes. Prior court decisions are encouraged to be used for reference but it remains unclear to what extent the prior court decisions may impact the current court ruling as the encouragement policy is new and there is limited judicial practice in this regard. Since a large number of 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 the enforcement of these laws, regulations and rules involves uncertainties.

 

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past four decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.

 

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

 

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

 

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We are also subject to the legal and operational risks associated with being based in and having substantially all operations in China. These risks may result in material changes in operations, or a complete hindrance of Lemeng’s ability to offer or continue to offer its securities to investors, and could cause the value of Lemeng’s securities to significantly decline or become worthless. Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued an announcement to crack down on illegal activities in the securities market and promote the high-quality development of the capital market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws. On December 28, 2021, Cybersecurity Review Measures (2021 version) was issued, which became effective on February 15, 2022. The Anti-Monopoly Law, which took effect in 2008 and was amended on June 24, 2022, which amendment became effective August 1, 2022 (the “Anti-Monopoly Law”), established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. As of the date of this prospectus, the above regulations have not impacted our ability to conduct the business, accept foreign investments, or list on a U.S. or other foreign exchange; however, there are uncertainties in the interpretation and enforcement of these new laws and guidelines, which could materially and adversely impact our overall business and financial outlook.

  

The Chinese government exerts substantial influence over the manner in which we must conduct our business activities and may intervene or influence our operations at any time, which could result in a material change in our operations and the value of our Class B Shares.

 

The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to securities regulation, data protection, cybersecurity and mergers and acquisitions and other matters. The central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

 

Government actions in the future could significantly affect economic conditions in China or particular regions thereof and could require us to materially change our operating activities or divest ourselves of any interests we hold in Chinese assets. Our business may be subject to various government and regulatory interference in the provinces in which we operate. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. Our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to our business or industry.

 

Given recent statements by the Chinese government indicating an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers, any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or become worthless.

 

The CSRC may exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers, especially those in the technology field. Additional compliance procedures may be required in connection with this offering. As a result, we face uncertainty about future actions by the PRC government that could significantly affect our ability to offer or continue to offer securities to investors and cause the value of our securities to significantly decline or be worthless.

 

On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued a document to crack down on illegal activities in the securities market and promote the high-quality development of the capital market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws. Since this document is relatively new, uncertainties still exist in relation to how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our Chinese operations.

 

Further, Chinese government continues to exert more oversight and control over Chinese technology firms. On July 2, 2021, Chinese cybersecurity regulator announced, that it had begun an investigation of Didi Global Inc. (NYSE: DIDI) and two days later ordered that the company’s application be removed from smartphone application stores. On July 5, 2021, the Chinese cybersecurity regulator launched the same investigation on two other Internet platforms, China’s Full Truck Alliance of Full Truck Alliance Co. Ltd. (NYSE: YMM) and BOSS Zhipin of Kanzhun Limited (Nasdaq: BZ). On July 24, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly released the Guidelines for Further Easing the Burden of Excessive Homework and Off-campus Tutoring for Students at the Stage of Compulsory Education, pursuant to which foreign investment in such firms via mergers and acquisitions, franchise development, and variable interest entities are banned from this sector.

 

Therefore, China Securities Regulatory Commission and other Chinese government agencies may exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers, especially those in the technology filed. Additional compliance procedures may be required in connection with this offering and Lemeng Interactive’s business operations, and, if required, we cannot predict whether Lemeng Interactive will be able to obtain such approval. As a result, we face uncertainty about future actions by the PRC government that could significantly affect our ability to offer or continue to offer securities to investors and cause the value of our Ordinary Shares to significantly decline or be worthless.

 

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We may be subject to PRC laws relating to the collection, use, sharing, retention, security, and transfer of confidential and private information, such as personal information and other data. These laws continue to develop, and the PRC government may adopt other rules and restrictions in the future. Non-compliance could result in penalties or other significant legal liabilities.

 

The Cybersecurity Law, which was adopted by the National People’s Congress on November 7, 2016 and came into force on June 1, 2017, and the Cybersecurity Review Measures (2020 Version), which were promulgated on April 13, 2020, provide that personal information and important data collected and generated by a critical information infrastructure operator in the course of its operations in China must be stored in China, and if a critical information infrastructure operator purchases internet products and services that affect or may affect national security, it should be subject to cybersecurity review by the CAC. In addition, a cybersecurity review is required where critical information infrastructure operators, or the “CIIOs,” purchase network-related products and services, which products and services affect or may affect national security. On December 28, 2021, the Cybersecurity Review Measures (2021 Version) was promulgated and became effective on February 15, 2022 and the Cybersecurity Review Measures (2020 Version) was repealed at the same time. The Cybersecurity Review Measures (2021 Version) iterates that the procurement of any network product or service by CIIOs or the conducting of data processing activities by online platform operators, that affects or may affect national security, shall be subject to a cybersecurity review and any online platform operators controlling personal information of more than 1 million users which seeks to list in a foreign stock exchange should also be subject to cybersecurity review.

 

On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the Data Security Law which took effect on September 1, 2021. The Data Security Law requires that data shall not be collected by theft or other illegal means, and it also provides that a data classification and hierarchical protection system. The data classification and hierarchical protection system protects data according to its importance in economic and social development, and the damages it may cause to national security, public interests, or the legitimate rights and interests of individuals and organizations if the data is falsified, damaged, disclosed, illegally obtained or illegally used, which protection system is expected to be built by the state for data security in the near future. And on November 14, 2021, the CAC published the Administrative Regulations Draft. The Administrative Regulations Draft provide that data processing operators engaging in data processing activities that affect or may affect national security must be subject to the cybersecurity review. According to the Cybersecurity Review Measures (2021 Version) and the Administrative Regulations Draft, a cybersecurity review is conducted by the CAC, to assess potential national security risks that may be brought about by any procurement, data processing, or overseas listing. The state establishes a data classification protection system. According to the impact and importance of data on national security, public interests or the legitimate rights and interests of individuals and organizations, data are divided into general data, important data and core data, and different protection measures are taken for different levels of data. The state focuses on the protection of personal information and important data, and strictly protects core data. The Cybersecurity Review Measures (2021 Version) and the Administrative Regulations Draft further require that online platform operators and data processing operators that possess personal data of at least one (1) million users must apply for a cybersecurity review, if they plan to conduct listings in foreign countries.

 

While the Cybersecurity Review Measures (2021 Version) was recently adopted and the Administrative Regulations Draft has been released for public comment, and their implementation provisions and anticipated adoption or effective date remains substantially uncertain and may be subject to change. Due to the lack of further interpretations, the exact scope of what constitute a “CIIO,” “online platform operators,” “data processors,” or “data handlers” remains unclear. Further, the PRC government authorities may have wide discretion in the interpretation and enforcement of these laws. It also remains uncertain whether any future regulatory changes would impose additional restrictions on companies like Lemeng Interactive. We do not believe our or Lemeng Interactive’s business and activities would affect or may affect national security or we and Lemeng Interactive are among the “operators of critical information infrastructure” as mentioned above. However, as of the date of this prospectus, Lemeng Interactive has not received any notice from any authorities identifying it as a CIIO or an online platform operator or requiring it to undertake a cybersecurity review by the CAC. Further, Lemeng Interactive has not been subject to any penalties, fines, suspensions, investigations from any competent authorities for violation of the regulations or policies that have been issued by the CAC to date. As the interpretation or implementation of those rules and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the Cybersecurity Review Measures (2021 Version) and the Administrative Regulations Draft, there is no assurance that Lemeng Interactive would not be subject to the cybersecurity review or other governmental procedures under those rules. If any such new laws, regulations, rules, or implementation and interpretation come into effect, Lemeng Interactive expects to take all reasonable measures and actions to comply. We cannot assure you that Lemeng Interactive can fully or timely comply with such laws should they be deemed applicable to its operations. Lemeng Interactive may be required to suspend new user registration in China or experience other disruptions to its operations should it be required to have a cybersecurity review by the CAC. Any cybersecurity review could also result in negative publicity with respect to Lemeng Interactive and diversion of its managerial and financial resources. There is no certainty as to how such review or prescribed actions would impact its operations and it cannot guarantee that any clearance can be obtained or any actions that may be required for our listing on the Nasdaq Capital Market and the offering as well can be taken in a timely manner, or at all.

 

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The regulatory requirements with respect to cybersecurity and data privacy are constantly evolving and can be subject to varying interpretations, and significant changes, resulting in uncertainties about the scope of Lemeng Interactive’s responsibilities in that regard. Failure to comply with the cybersecurity and data privacy requirements in a timely manner, or at all, may subject Lemeng Interactive to government enforcement actions and investigations, fines, penalties, suspension or disruption of our operations, among other things.

 

The recent policy pronouncements by the PRC government regarding business activities of U.S.-listed PRC businesses may negatively impact Lemeng’s existing and future operations in Hong Kong.

 

On June 30, 2020, the Standing Committee of the NPC promulgated the Law of the PRC on Safeguarding National Security in Hong Kong. The interpretation of the Law of the PRC on Safeguarding National Security in Hong Kong involves a degree of uncertainty.

 

Recently, the PRC government announced that it would step up supervision of overseas listed PRC businesses. Under the new measures, the PRC government will enhance regulation of cross-border data flows and security, crack down on illegal activity in the securities market and punish fraudulent securities issuance, market manipulation and insider trading. The PRC government will also check sources of funding for securities investment and control leverage ratios. The PRC government has also opened a probe into several U.S.-listed technology companies focusing on anti-monopoly, financial technology regulation and more recently, with the passage of the PRC Data Security Law, how companies collect, store, process and transfer personal data. Currently these laws (other than the Law of the PRC on Safeguarding National Security in Hong Kong) are expected to apply to mainland China domestic businesses, rather than businesses in Hong Kong which operate under a different set of laws from mainland China. However, there can be no assurance that the government of Hong Kong will not enact similar laws and regulations applicable to companies operating in Hong Kong.

 

Given the PRC government’s significant oversight over the conduct of business operations in mainland China and in Hong Kong, and in light of the PRC government’s recent extension of authority not only in mainland China but into Hong Kong, there are risks and uncertainties which we cannot foresee for the time being, and rules and regulations in the PRC can change quickly with little or no advance notice. For example, the government of Hong Kong may enact similar laws and regulations to those in mainland China, which may seek to exert control over offerings conducted overseas by Hong Kong companies. If any or all of the foregoing were to occur, it could affect Lemeng’s operations and limit or hinder our ability to offer securities to overseas investors or remain listed in the U.S., which could cause the value of the securities we are registering for sale to significantly decline or become worthless.

 

Increases in labor costs and enforcement of stricter labor laws and regulations in China may adversely affect our business and our profitability.

 

China’s overall economy and the average wage in China have increased in recent years and are expected to continue to grow. The average wage level for Lemeng Interactive’s employees has also increased in recent years. Lemeng Interactive expects that its labor costs, including wages and employee benefits, will continue to increase. Unless Lemeng Interactive can pass on these increased labor costs to those who pay for its services, its profitability and results of operations may be materially and adversely affected.

 

In addition, Lemeng Interactive has been subject to stricter regulatory requirements in terms of entering into labor contracts with employees and paying various statutory employee benefits, including pensions insurance, housing provident fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of its employees. Pursuant to the PRC Labor Contract Law and its implementation rules, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employee’s probation and unilaterally terminating labor contracts. In addition, enterprises are forbidden to force laborers to work beyond the time limit and employers shall pay laborers for overtime work in accordance with the laws and regulations. In the event that Lemeng Interactive decides to terminate some of its employees or otherwise change its employment or labor practices, the PRC Labor Contract Law and its implementation rules may limit its ability to effect those changes in a desirable or cost-effective manner, which could adversely affect its business and results of operations.

 

We cannot assure you that Lemeng Interactive has complied, or as the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that Lemeng Interactive will be able to comply with all labor-related law and regulations, including those relating to obligations to make social insurance payments, to contribute to the housing provident fund, and to make overtime payment and other similar payment payable by Lemeng Interactive to its employees. If it is deemed to have violated relevant labor laws and regulations, Lemeng Interactive could be required to provide additional compensation to employees and be subject to orders by competent labor authorities for rectification, and failure to comply with the orders may further subject us to administrative fines. In such an event, our business, financial condition and results of operations will be adversely affected.

 

Our business may be negatively affected by the potential obligations if Lemeng Interactive fails to comply with social insurance and housing provident fund related laws and regulations.

 

Lemeng Interactive is required by PRC labor laws and regulations to pay various statutory employee benefits, including pensions insurance, medical insurance, work-related injury insurance, unemployment insurance, maternity insurance and housing provident fund, to designated government agencies for the benefit of its employees and associates. In October 2010, SCNPC promulgated the Social Insurance Law of PRC, effective on July 1, 2011 and amended on December 29, 2018. On April 3, 1999, the State Council promulgated the Regulations on the Administration of Housing Provident Fund, which was amended on March 24, 2002 and March 24, 2019. Companies registered and operating in China are required under the Social Insurance Law of PRC and the Regulations on the Administration of Housing Provident Fund to apply for social insurance registration and housing provident fund deposit registration within thirty (30) days of their establishment and to pay for their employees different social insurance including pension insurance, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to the extent required by law. Lemeng Interactive could be subject to orders by competent labor authorities for rectification if it fails to comply with such social insurance and housing provident fund related laws and regulations, and failure to comply with the orders may further subject Lemeng Interactive to administrative fines. The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee benefits, and employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties.

 

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Lemeng Interactive engages third-party human resources agencies to pay social insurance and housing provident fund for some of its employees. Any failure to make such contribution by these third-party agents may directly expose Lemeng Interactive to penalties imposed by the local authorities and/or legal claims raised by its employees. And some of Lemeng BJ’s subsidiaries have not completed the social insurance registration and the housing fund registration that have no employees, and Lemeng Interactive did not make contributions in full for the social insurance fund and housing provident fund for its employees as required under the relevant PRC laws and regulations. Although Lemeng Interactive has not received any order or notice from the local authorities nor any claims or complaints from its current and former employees regarding its non-compliance in this regard, Lemeng Interactive cannot assure you that Lemeng Interactive will not be subject to any order to rectify non-compliance in the future, nor can Lemeng Interactive assures you that there are no, or will not be any, employee complaints regarding social insurance payment or housing provident fund contributions against Lemeng Interactive, or that it will not receive any claims in respect of social insurance payment or housing provident fund contributions under the PRC laws and regulation. In addition, Lemeng Interactive may incur additional costs to comply with such laws and regulations by the PRC Government or relevant local authorities. Any such development could materially and adversely affect its business, financial condition and results of operations.

 

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

 

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

 

Lemeng Interactive’s rights to use its leased properties could be challenged by property owners or other third parties, which may disrupt its operations and incur relocation costs.

 

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

 

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Lemeng may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.

 

In connection with this offering, we will become subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment of bribes to government officials. We have operations, agreements with third parties, and provide services in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants or agents of our WFOE or the VIEs, because these parties are not always subject to our control. We are in process of implementing an anticorruption program, which prohibits the offering or giving of anything of value to foreign officials, directly or indirectly, for the purpose of obtaining or retaining business.

 

However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants or agent of our WFOE or the VIEs may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

 

Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for Lemeng Interactive’s services and materially and adversely affect our competitive position.

 

Substantially all of Lemeng Interactive’s business operations are conducted in China. Accordingly, its business, results of operations, financial condition and prospects are subject to economic, political and legal developments in China. The PRC government exercises significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. These government involvements have been instrumental in China’s significant growth in the past 30 years. In response to the recent global and Chinese economic downturn, the PRC government has adopted policy measures aimed at stimulating the economic growth in China. If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth or if any aspect of the PRC government’s policies limits the growth of our industry or otherwise negatively affects Lemeng Interactive’s business, its growth rate or strategy, our results of operations could be adversely affected as a result.

 

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

 

We are an offshore holding company conducting our operations in China through Leshen and Lemeng BJ. We may make loans to Leshen and Lemeng BJ subject to the approval from or registration with governmental authorities and limitation on amount, we may make additional capital contributions to our wholly foreign-owned subsidiaries in China, we may establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, or we may acquire offshore entities with business operations in China in an offshore transaction.

 

Most of the aforementioned ways of making loans or investments in PRC entities are subject to PRC regulations, registrations, submission or approvals. For example, any loans to Leshen and Lemeng BJ are subject to applicable foreign loan registrations with the local counterpart of the State Administration of Foreign Exchange (“SAFE”) and limitation on amount under PRC law. If we decide to finance Leshen by means of capital contributions, these capital contributions are subject to submission of information to and registration with certain PRC government authorities, including MOFCOM or its local counterparts and the State Administration of Market Regulation (“SAMR”) through its Enterprise Registration System, the National Enterprise Credit Information Publicity System and the local counterpart of SAFE. In addition, an FIE shall use its capital pursuant to the principle of authenticity and self-use within its business scope.

 

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SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Mode of Management of Settlement of Foreign Exchange Capital of Foreign Invested Enterprises, or SAFE Circular 19, effective June 2015 and amended in December 2019, in replacement of a former regulation. 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 (unless otherwise permitted in the business license), the repayment of inter-enterprise loans or the repayment of bank loans that have been transferred to a third party. Although SAFE Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within 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. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in China in actual practice. 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 issue loans to non-associated enterprises. Specifically, SAFE Circular 16 provides that the capital of an FIE shall not be used for the following purposes: (i) directly or indirectly used for payment beyond the business scope of such FIE or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly used for investment in securities or investments in financial management 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). 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 Leshen, 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. On April 10, 2020, the SAFE promulgated the Circular on Optimizing Administration of Foreign Exchange to Support the Development of Foreign-related Business, or SAFE Circular 8, under which eligible enterprises are allowed to make domestic payments by using their capital funds, foreign loans and the income under capital accounts of overseas listing without providing the evidentiary materials concerning authenticity of each expenditure in advance, provided that their capital use shall be authentic and conforms to the prevailing administrative regulations on the use of income under capital accounts. However, since the SAFE Circular 28 and SAFE Circular 8 are relatively new, it is unclear how SAFE and competent banks will carry them 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, submission or obtain the necessary government approvals on a timely basis, or at all, with respect to future loans by us to Leshen or the VIE or its subsidiaries or with respect to future capital contributions by us to Leshen. If we fail to complete such registrations, submission or obtain such approvals, our ability to use the proceeds from our initial public 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.

 

We are a holding company, and we rely for funding on dividend payments from Leshen and Lemeng Interactive, which are subject to restrictions under PRC laws.

 

We are a holding company incorporated in the Cayman Islands, and we operate our core businesses through Leshen and Lemeng Interactive. Therefore, the availability of funds for us to pay dividends to our shareholders and to service our indebtedness depends upon dividends received from Leshen and Lemeng Interactive. If they incur debt or losses, their ability to pay dividends or other distributions to us may be impaired. As a result, our ability to pay dividends and to repay our indebtedness will be restricted. PRC laws require that dividends be paid only out of the after-tax profit of Lemeng Interactive or Leshen, calculated according to PRC accounting principles, which differ in many aspects from generally accepted accounting principles in other jurisdictions. PRC laws also require enterprises established in the PRC to set aside part of their after-tax profits as statutory reserves. These statutory reserves are not available for distribution as cash dividends. In addition, restrictive covenants in bank credit facilities or other agreements that we, Leshen or Lemeng Interactive may enter into in the future may also restrict their ability to pay dividends to us. Due to the imposition of restrictions and limitations on the ability of the Company, Leshen, and Lemeng Interactive by the PRC government to transfer cash, we may experience difficulties in completing the administrative procedures necessary to allow Lemeng Interactive to distribute funds to Leshen and for Leshen to distribute to the Company any funds received from Lemeng Interactive. These restrictions on the availability of our funding may impact our ability to pay dividends to our shareholders and to service our indebtedness.

 

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Our business may be materially and adversely affected if any of the VIEs or our PRC Subsidiary declares bankruptcy or becomes subject to a dissolution or liquidation proceeding.

 

The Enterprise Bankruptcy Law of the PRC, or the Bankruptcy Law, came into effect on June 1, 2007. The Bankruptcy Law provides that an enterprise will be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts.

 

The VIE and its subsidiaries hold certain assets that are important to our business operations. If any of the VIE or its subsidiaries undergoes a voluntary or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

According to the SAFE’s Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment, effective on December 17, 2012, and lastly amended in 2019, and the Provisions for Administration of Foreign Exchange Relating to Inbound Direct Investment by Foreign Investors, effective on May 13, 2013 and lastly amended in 2019, if our PRC Subsidiary undergoes a voluntary or involuntary liquidation proceeding, prior approval from the SAFE for remittance of foreign exchange to our shareholders abroad is no longer required, but we still need to conduct a registration process with the SAFE local branch. It is not clear whether “registration” is a mere formality or involves the kind of substantive review process undertaken by SAFE and its relevant branches in the past.

 

To the extent cash in the business is in the PRC and Hong Kong or a PRC or Hong Kong entity, the funds may not be available to fund operations or for other use outside of the PRC/Hong Kong.

 

To the extent cash is generated in our PRC Subsidiaries, and may need to be used to fund operations outside of mainland China, such funds may not be available due to limitations placed by the PRC government. Furthermore, to the extent assets (other than cash) in our business are located in the PRC or held by a PRC entity, the assets may not be available to fund operations or for other use outside of the PRC due to interventions in or the imposition of restrictions and limitations on the ability of us and our subsidiaries to transfer assets by the PRC government. If certain PRC laws and regulations, including existing laws and regulations and those enacted or promulgated in the future were to become applicable to our Hong Kong Subsidiary in the future, and to the extent cash is generated in our Hong Kong Subsidiary, and to the extent assets (other than cash) in our business are located in Hong Kong or held by a Hong Kong entity and may need to be used to fund operations outside of Hong Kong, such funds or assets may not be available due to interventions in or the imposition of restrictions and limitations on the ability of us and our subsidiaries to transfer funds or assets by the PRC government. Furthermore, there can be no assurance that the PRC government will not intervene or impose restrictions or limitations on our ability to transfer or distribute cash, which could result in an inability or prohibition on making transfers or distributions to entities outside of mainland China and Hong Kong and adversely affect its business. Saved as the foregoing limitations imposed by the PRC government as described hereto, there are currently no limitations on our or our subsidiaries’ ability to transfer cash to investors.

 

Lemeng Interactive’s financial statements are prepared under different accounting standards than our consolidated financial statements.

 

Lemeng Interactive prepares the financial statements for each of its subsidiaries that are PRC legal entities in accordance with the requirements of generally accepted accounting principles in China, or PRC GAAP. These financial statements drive how we calculate the taxes payable for operations of these subsidiaries. By contrast, we prepare the consolidated financial statements for Lemeng in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The process of consolidating the financial statements and changing from PRC GAAP to U.S. GAAP requires us to make certain adjustments on consolidation. This can result in some discrepancies between the financial statements used to prepare our tax filings in China and the financial statements audited by our independent registered accounting firm and subsequently filed with the SEC. We intend to continue reporting in this manner following the completion of the offering. To the extent the discrepancies between PRC GAAP and U.S. GAAP are material, we could find, for example, that a PRC subsidiary or VIE shows taxable income for which payment of taxes is due, while our U.S. GAAP-audited financial statements show taxable loss.

 

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, Euro and other foreign currencies 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, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from our initial public offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying 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. In addition, fluctuations of the RMB against other currencies may increase or decrease the cost of imports and exports, and thus affect the price-competitiveness of our products against products of foreign manufacturers or products relying on foreign inputs.

 

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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 the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

 

Since Lemeng Interactive’s major operations and assets are in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of our company, Lemeng Interactive or either of our directors or executive officers.

 

Lemeng Interactive conduct substantially all of their operations in China and substantially all of our operations are in the PRC. In addition, most of our executive officers and directors are non-residents of the U.S., and substantially all the assets of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us, Lemeng Interactive or any of these persons. See “Enforceability of Civil Liabilities.”

 

Uncertainties with respect to the PRC legal system could adversely affect us.

 

The PRC legal system has inherent uncertainties that could limit the legal protection available to our Shareholders. As substantially all Lemeng Interactive’s business operations are in China, Lemeng Interactive is principally governed by PRC laws, rules and regulations. The PRC Government has been developing a commercial law system and has made significant progress in promulgating laws and regulations relating to economic affairs and matters, such as corporate organization and governance, foreign investments, commerce, taxation and trade.

 

However, many of these laws and regulations are relatively new, and because of the limited volume of published decisions, their implementation and interpretation involve uncertainties and may not be as consistent and predictable as in other jurisdictions. In addition, the PRC legal system is based in part on government policies and administrative rules that may have a retroactive effect. As a result, Lemeng Interactive may not be aware of any violation of these policies and rules until sometime after such violation has occurred. Furthermore, the legal protection available to our Shareholders under these laws, rules and regulations may be limited. Any litigation or regulatory enforcement action in China may be protracted and may result in substantial costs and diversion of resources and management attention.

 

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 cyber security and data privacy protection requirements and similar matters. The Opinions and any related implementing rules to be enacted may subject us to compliance requirement in the future.

 

There are uncertainties under the PRC laws relating to the procedures and time requirement for the U.S. regulators to bring about investigations and evidence collection within the territory of the PRC.

 

On December 28, 2019, the newly amended Securities Law of the PRC (the “PRC Securities Law”) was officially promulgated, which became effective on March 1, 2020. According to Article 177 of the PRC Securities Law (the “Article 177”), the securities regulatory authority of the State Council may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration. Article 177 further provides that the overseas securities regulatory authorities may not carry out investigations and evidence collection directly within the territory of the PRC, and that no Chinese entity or individual is allowed to provide any documents or materials related to securities business activities to overseas agencies without prior consent of the securities regulatory authority of the State Council and the competent departments of the State Council. Moreover, the Civil Procedure Law of the PRC, promulgated in 1991 and last amended in 2017, provides that except for the request for and provision of judicial assistance in accordance with international treaties concluded or participated by the PRC, or via diplomatic channels, no foreign agency or individual may, without the consent of the competent authorities of the PRC, carry out investigation or collect evidence within the territory of the PRC.

 

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It is our understanding that (i) the Article 177 is applicable in the circumstances related to direct investigation or evidence collection conducted by overseas authorities within the territory of the PRC (in such case, the foregoing activities are required to be conducted through collaboration with or by obtaining prior consent of competent PRC authorities) and (ii) as of the date of this prospectus, we are not aware of any implementing rules or regulations which have been published regarding application of the Article 177.

 

Our principal business operation is conducted in the PRC. In the event that the U.S. regulators carry out investigation on us and there is a need to conduct investigation or collect evidence within the territory of the PRC, the U.S. regulators may not be able to carry out the investigation or evidence collection directly in the PRC under the PRC laws. The U.S. regulators may consider cross-border cooperation with securities regulatory authority of the PRC by way of judicial assistance, diplomatic channels or regulatory cooperation mechanism established with the securities regulatory authority of the PRC. However, there is no assurance that the U.S. regulators could succeed in establishing such cross-border cooperation in a specific case or could establish the cooperation in a timely manner.

 

Furthermore, as the Article 177 is relatively new and there is no implementing rules or regulations which have been published regarding application of the Article 177, it remains unclear how the law will be interpreted, implemented or applied by the Chinese Securities Regulatory Commission or other relevant government authorities. As such, there are uncertainties as to the procedures and time requirement for the U.S. regulators to bring about investigations and evidence collection within the territory of the PRC. If U.S. regulators are unable to conduct such investigations, such U.S. regulators may determine to suspend and ultimately delist our ordinary shares from the Nasdaq Capital Market or choose to suspend or de-register our SEC registration.

 

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm Lemeng Interactive’s business operations, this offering and our reputation and could result in a loss of your investment in our shares, especially if such matter cannot be addressed and resolved favorably.

 

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

 

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit our ability to inject capital into our PRC subsidiary, limit Lemeng Interactive’s ability to distribute profits to us, or otherwise adversely affect us.

 

The SAFE promulgated the Notice on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to material change of capitalization or structure of the PRC resident itself (such as capital increase, capital reduction, share transfer or exchange, merger or spin off).

 

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As of the date of this prospectus, some of our shareholders who are Chinese residents who hold such shares through a Hong Kong enterprise have not completed the registration according to the laws and regulations of foreign exchange. Although such shareholders have promised to complete registration at the time they pay the company’s capital contribution prior to completion of this offering, there can be no assurance such registration will be completed in a timely manner.

 

We have requested PRC residents whom we know hold direct or indirect interests in our company to make the necessary applications, filings and amendments as required under Circular 37 and other related rules. However, we cannot assure you that the registration will be duly and timely completed with the local SAFE branch or qualified banks. In addition, we may not be informed of the identities of all of the PRC residents holding direct or indirect interests in our company. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, 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.

 

Failure to comply with the Individual Foreign Exchange Rules relating to the overseas direct investment or the engagement in the issuance or trading of securities overseas by our PRC resident shareholders may subject such shareholders to fines or other liabilities.

 

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

 

We may not be fully informed of the identities of all our beneficial owners who are PRC residents. For example, because the investment in or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in brokerage accounts, it is unlikely that we will know the identity of all of our beneficial owners who are PRC residents. Furthermore, we have no control over any of our future beneficial owners and we cannot assure you that such PRC residents will be able to complete the necessary approval and registration procedures required by the Individual Foreign Exchange Rules.

 

It is uncertain how the Individual Foreign Exchange Rules will be interpreted or enforced and whether such interpretation or enforcement will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether the failure by any of our PRC resident shareholders to make the required registration will subject our PRC subsidiary to fines or legal sanctions on their operations, delay or restriction on repatriation of proceeds of this offering into the PRC, restriction on remittance of dividends or other punitive actions that would have a material adverse effect on our business, results of operations and financial condition.

 

If Lemeng Interactive’s subsidiaries were to lose their favorable tax treatments, we could face higher tax rates than we currently pay for much of our revenues.

 

Since Lemeng BJ was approved as an HNTE in December 2019, Lemeng BJ is entitled to a reduced income tax rate of 15% beginning December 2019 and is able to enjoy the reduced income tax rate in the next three years. Since Lemeng TJ was approved as an HNTE in November 2018, Lemeng TJ is entitled to a reduced income tax rate of 15% beginning November 2018 and is able to enjoy the reduced income tax rate in the next three years which expired in 2021 and Lemeng TJ submitted the applying documents to qualify for the same preferential tax rate in 2021 and has obtained the qualification in October 2021 and is entitled to the preferential tax treatment in the next three years. In addition, each of Lemeng XJ and Yishen were exempt from corporate income tax from January 1, 2017 through December 31, 2021 due to their establishment in the Kashi special development zones. Starting from January 1, 2022, these two entities are entitled to a preferential tax rate of 9% into next five years due to their establishment in the Kashi special development zone. Xinjiang Jiacheng, located in Kashi special development zones, is currently exempt from corporate income tax in China from January 1, 2022 to December 31, 2024.

 

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For the years ended December 31, 2022, 2021 and 2020, the total taxes payable by Lemeng BJ, Lemeng TJ, Lemeng XJ, Jiacheng and Yishen would have collectively increased by $1,323,661, $1,827,453 and $1,482,859, respectively if these favorable tax treatments did not apply. For the six months ended June 30, 2023 and 2022, the total taxes payable by Lemeng BJ, Lemeng TJ, Lemeng XJ and Yishen would have collectively increased by $720,308 and $533,702, respectively, if these favorable tax treatments did not apply. In the event Lemeng BJ or Lemeng TJ were to lose the benefit of the favorable tax rate in the future, we could see significant increases in the amount of taxes we pay, meaning that our operating results could be materially harmed, even in the absence of a decrease in our operations. Similarly, Lemeng XJ and Yishen have lost their 100% tax exemption beginning January 1, 2022 and will pay taxes at a 9% tax rate of income tax for the next five years, after which their operations may be materially harmed by further increased taxes payable, even in the absence of a decrease in operations.

 

If Lemeng Interactive fails to maintain the requisite licenses and approvals required under the complex regulatory environment applicable to its mobile internet marketing services business in China, or if Lemeng Interactive is required to take compliance actions that are time-consuming or costly, Lemeng Interactive’s business, financial condition and results of operations related to its mobile internet marketing services may be materially and adversely affected.

 

Lemeng Interactive has obtained ICP license for provision of internet value-added services, which are essential to the operation of Lemeng Interactive’s mobile internet marketing services and are generally subject to regular review or periodic renewal. We cannot assure you that Lemeng Interactive can successfully update or renew the licenses required for its mobile internet marketing services in a timely manner or that such license is sufficient to conduct all of its present or future mobile internet marketing services.

 

Considerable uncertainties exist regarding the interpretation and implementation of existing and future laws and regulations governing Lemeng Interactive’s business activities. We cannot assure you that Lemeng Interactive will not be found in violation of any future laws and regulations or any of the laws and regulations currently in effect due to changes in the relevant authorities’ interpretation of these laws and regulations. If Lemeng Interactive fails to complete, obtain or maintain any of the required licenses or approvals or make the necessary filings, Lemeng Interactive may be subject to various penalties, such as confiscation of the revenue that were generated through the unlicensed internet activities, the imposition of fines and the discontinuation or restriction of its operations. Any such penalties may disrupt Lemeng Interactive’s business operations and materially and adversely affect Lemeng Interactive’s business, financial condition and results of operations.

 

We may be deemed a PRC resident enterprise for PRC Enterprise Income Tax (“EIT”) purposes under the EIT Law and be subject to PRC taxation on our global income.

 

Pursuant to the EIT Law, which came into effect on January 1, 2008 and was lastly amended on December 29, 2018, an enterprise established outside of China whose “de facto management body” is located in China is considered a “PRC resident enterprise” and will generally be subject to the uniform enterprise income tax rate, or EIT rate, of 25% on its global income. The Regulation on the Implementation of the Enterprise Income Tax Law of the PRC defines “de facto management body” as the organization body that effectively exercises management and control over aspects such as the business operations, personnel, accounting and properties of the enterprise.

 

On April 22, 2009, the State Taxation Administration (“STA” and previously known as the State Administration on Taxation or “SAT”) released the Notice Regarding the Determination of Chinese Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies (“Circular 82”), as lastly amended on December 29, 2017, which sets out the standards and procedures for determining whether the “de facto management body” of an enterprise registered outside of China and controlled by PRC enterprises or PRC enterprise groups is located within China. Under Circular 82, a foreign enterprise controlled by a PRC enterprise or PRC enterprise group is considered a PRC resident enterprise if all of the following apply: (i) the senior management and core management departments in charge of daily operations are located mainly within China; (ii) financial and human resources decisions are subject to determination or approval by persons or bodies in China; (iii) major assets, accounting books, company seals and minutes and files of board and shareholders’ meetings are located or kept within China; and (iv) at least half of the enterprise’s directors with voting rights or senior management reside within China. Further to Circular 82, the SAT issued Chinese-Controlled Offshore Incorporated Resident Enterprises Income Tax Regulation (“Bulletin 45”), which took effect on September 1, 2011 and lastly amended on June 15, 2018, to provide more guidance on the implementation of Circular 82 and clarify the reporting and filing obligations of such “Chinese-controlled offshore incorporated resident enterprises.” Bulletin 45 provides procedures and administrative details for the determination of resident status and administration of post-determination matters. Although Circular 82 and Bulletin 45 explicitly provide that the above standards apply to enterprises which are registered outside of China and controlled by PRC enterprises or PRC enterprise groups, Circular 82 may reflect SAT’s criteria for determining the tax residence of foreign enterprises in general. If our global income were to be taxed under the EIT Law, our financial condition and results of operations may be materially and adversely affected.

 

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You may be subject to PRC income tax on dividends from us or on any gain realized on the sale or other disposition of our Shares under PRC law.

 

Under the EIT Law, subject to any applicable tax treaty or similar arrangement between China and your jurisdiction of residence that provides for a different income tax arrangement, PRC withholding tax at the rate of 10% is normally applicable to dividends from sources within China payable to investors that are non-PRC resident enterprises, which do not have an establishment or place of business in China, or which have such establishment or place of business if the relevant income is not effectively connected with the establishment or place of business. Any gain realized on the transfer of shares by such investors is subject to 10% PRC income tax if such gain is regarded as income derived from sources within China unless a treaty or similar arrangement otherwise provides. Under the PRC Individual Income Tax Law and its implementation rules, dividends from sources within China paid to foreign individual investors who are not PRC residents are generally subject to a PRC withholding tax at a rate of 20%, and gains from PRC sources realized by such investors on the transfer of shares are generally subject to 20% PRC income tax, in each case, subject to any reduction or exemption set forth in applicable tax treaties and PRC laws.

 

As substantially all of Lemeng Interactive’s business operations are in China, it is unclear whether dividends we pay with respect to our Shares, or the gain realized from the transfer of our Shares, would be treated as income derived from sources within China and as a result be subject to PRC income tax if we are considered a PRC resident enterprise. If PRC income tax is imposed on gains realized from the transfer of our Shares or on dividends paid to our non-PRC resident investors, the value of our investors’ investment in our Shares may be materially and adversely affected. Furthermore, our Shareholders whose jurisdictions of residence have tax treaties or arrangements with China may not qualify for benefits under such tax treaties or arrangements.

 

The heightened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on Lemeng Interactive’s business operations, Lemeng Interactive’s acquisition or restructuring strategy or the value of your investment in us.

 

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises (“SAT Circular 698”) issued by the SAT in December 2009 with retroactive effect from January 1, 2008, where a nonresident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas non-public holding company (an “Indirect Transfer”), and such overseas holding company is located in a tax jurisdiction that (i) has an effective tax rate of less than 12.5% or (ii) does not impose income tax on foreign income of its residents, the non-resident enterprise, being the transferor, must report to the competent tax authority of the PRC resident enterprise this 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.

 

On March 28, 2011, the SAT released the SAT Public Notice (2011) No. 24 (“SAT Public Notice 24”), which became effective on April 1, 2011, to clarify several issues related to Circular 698. According to SAT Public Notice 24, the term “effective tax” refers to the effective tax on the gain derived from disposition of the equity interests of an overseas holding company; and the term “does not impose income tax” refers to the cases where the gain derived from disposition of the equity interests of an overseas holding company is not subject to income tax in the jurisdiction where the overseas holding company is a resident.

 

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On February 3, 2015, the SAT issued (“SAT Circular 7”), which abolished certain provisions in SAT Circular 698, as well as certain other rules providing clarification on SAT Circular 698. SAT Circular 7 provided comprehensive guidelines relating to, and also heightened the PRC tax authorities’ scrutiny over, indirect transfers by a nonresident enterprise of PRC taxable assets. Under SAT Circular 7, the PRC tax authorities are entitled to reclassify the nature of an indirect transfer of PRC taxable assets, when a non-resident enterprise transfers PRC taxable assets indirectly by disposing of equity interests in an overseas holding company directly or indirectly holding such PRC taxable assets, by disregarding the existence of such overseas holding company and considering the transaction to be a direct transfer of PRC enterprise income taxes and without any other reasonable commercial purpose. However, SAT Circular 7 contains certain exemptions, including (i) where a non-resident enterprise derives income from the indirect transfer of PRC taxable assets by acquiring and selling shares of an overseas listed holding company which holds such PRC taxable assets on a public market; and (ii) where there is an indirect transfer of PRC taxable assets, but if the non-resident enterprise had directly held and disposed of such PRC taxable assets, the income from the transfer would have been exempted from enterprise income tax in the PRC under an applicable tax treaty or arrangement.

 

In October 17, 2017, the STA promulgated the Announcement on Matters Concerning Withholding and Payment of Income Tax of Non-resident Enterprises from Source (the “STA Circular 37”), which came into force and replaced the STA Circular 698 and certain other regulations on December 1, 2017 and partly amended on June 15, 2018. The STA Circular 37 does, among other things, simplify procedures of withholding and payment of income tax levied on non-resident enterprises.

 

Lemeng Interactive has conducted and may conduct acquisitions involving changes in corporate structures, and historically our Shares were transferred by certain then shareholders to our current shareholders. We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing obligations on Lemeng Interactive or require Lemeng Interactive to provide assistance for the investigation of PRC tax authorities with respect thereto. Any PRC tax imposed on a transfer of our Shares or any adjustment of such gains would cause us to incur additional costs and may have a negative impact on the value of your investment in us.

 

Laws and regulations governing the internet industry and related businesses in China are evolving and may involve significant uncertainty.

 

The PRC government extensively regulates the internet industry, including the foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. With regard to the mobile advertising industry in China, various regulatory authorities of the PRC central government, such as the State Council, the MIIT, the State Administration for Market Regulation (the “SAMR”), the MOC, the National Press and Publication Administration, and the Ministry of Public Security, are empowered to promulgate and implement regulations governing various aspects of the internet and the mobile advertising industries. There exist inconsistencies and ambiguities in the regulations promulgated by different government authorities.

 

Risks and uncertainties relating to PRC regulation of internet businesses include new laws, regulations or policies may be promulgated or announced that will regulate internet activities, including mobile advertising businesses. If these new laws, regulations or policies are promulgated, additional licenses may be required for Lemeng Interactive’s operations. If Lemeng Interactive’s operations do not comply with these new regulations after they become effective, or if Lemeng Interactive fails to obtain any licenses required under these new laws and regulations, Lemeng Interactive could be subject to penalties and its business operations could be disrupted.

 

There are uncertainties relating to the regulation of the internet industry in China, including evolving licensing requirements. This means that permits, licenses or operations of the VIE may be subject to challenge, or Lemeng Interactive may fail to obtain or renew permits or licenses that applicable regulators may deem necessary for its operations. If Lemeng Interactive fails to maintain or obtain the required permits or licenses, we may be subject to various penalties, including fines and discontinuation of, or restriction on, our operations. Any penalty may disrupt Lemeng Interactive’s business operations and may have a material adverse effect on our results of operations.

 

The interpretation and application of existing or future PRC laws, regulations and policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including Lemeng Interactive’s mobile advertising business. We cannot assure you that Lemeng Interactive will be able to maintain its existing licenses or obtain any new licenses required under any existing or new laws or regulations. There are also risks that Lemeng Interactive may be found to be in violation of existing or future laws and regulations given the uncertainty and complexity of China’s regulation of Internet businesses. If current or future laws, rules or regulations regarding Internet-related activities are interpreted in such a way as to render our ownership structure and/or business operations illegal or non-compliant, Lemeng Interactive’s business could be severely impaired and we could be subject to severe penalties.

 

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We rely on dividends paid by WFOE for our cash needs, and any limitation on the ability of WFOE to pay dividends to us could have a material adverse effect on our ability to conduct our business.

 

We conduct substantially all of our business through WFOE and Lemeng Interactive. We rely on the dividends received from WFOE to pay dividends to our Shareholders. Currently, PRC regulations permit the payment of dividends only out of distributable profits determined in accordance with the accounting standards and regulations in China, which differ in many aspects from generally accepted accounting principles in other jurisdictions. WFOE is required to allocate certain percentages of any accumulated profits after tax each year to their statutory common reserve fund as required under the PRC Company Law, until the aggregate accumulated statutory common reserve funds exceed 50% of its registered capital. These reserve funds cannot be distributed as cash dividends. In addition, if WFOE incurs debt on its own or enter into certain agreements in the future, the instruments governing the debt or such other agreements may restrict its ability to pay dividends or make other distributions to us. Therefore, these restrictions on the availability and usage of our major source of funding may materially and adversely affect our ability to pay dividends to our Shareholders.

 

The PRC government’s control over currency conversion may limit our foreign exchange transactions, including dividend payments on our Shares.

 

The Renminbi is not presently a freely convertible currency, and conversion and remittance of foreign currencies are subject to PRC foreign exchange regulations. There is no assurance that, under a certain exchange rate, we will have sufficient foreign currencies to meet our foreign exchange requirements. Under the current PRC foreign exchange control system, foreign exchange transactions under the current account conducted by us, including the payment of dividends following completion of the Offering, do not require prior approval from the SAFE, but we are required to present documentary evidence of such transactions and conduct such transactions at designated foreign exchange banks within China that have the requisite licenses to carry out foreign exchange business. Foreign exchange transactions under the capital account conducted by us, however, must be approved or subject to registration in advance by the SAFE, its branches, or competent banks. There is no assurance that we will be able to receive these approvals or complete the registration in time, or at all. This could restrict the ability of our PRC subsidiary to obtain debt or equity financing in foreign currencies.

 

The existing foreign regulations allow WFOE, following completion of the Offering, to pay dividends in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. However, there is no assurance that the PRC Government will continue to adopt this policy going forward. The PRC Government may also restrict its access to foreign currencies for current account transactions at its discretion. Any insufficiency of foreign currencies may impair WFOE’s ability to obtain sufficient foreign currencies for dividend payments to us or to satisfy any other foreign exchange requirements.

 

Fluctuations in the value of Renminbi and other currencies could have an adverse effect on Lemeng Interactive’s business, financial condition and results of operations.

 

The value of the Renminbi against the U.S. dollar and other currencies fluctuates, is subject to changes resulting from the PRC government’s policies and depends to a large extent on domestic and international economic and political developments as well as supply and demand in the local market. It is difficult to predict how market forces and the PRC government’s policies will continue to impact Renminbi exchange rates going forward. The Renminbi may appreciate or depreciate significantly in value against the U.S. dollar or other foreign currencies in the long term, depending on the fluctuation of the basket of currencies against which it is currently valued, or it may be permitted to enter into a full float, which may also result in significant appreciation or depreciation of the Renminbi against the U.S. dollar or other foreign currencies.

 

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Even though substantially all of Lemeng Interactive’s revenue and expenses are denominated in RMB, fluctuations in exchange rates may nonetheless in the future adversely affect the value of Lemeng Interactive’s net assets and earnings. In particular, proceeds from the Offering are made in U.S. dollars. Any unfavorable movement in the exchange rate of the Renminbi against the U.S. dollar may adversely affect the value of our proceeds from the Offering. In addition, any unfavorable movement in the exchange rate of the Renminbi against other foreign currencies may also lead to an increase in our costs, which could adversely affect our business, financial condition and results of operations.

 

You may experience difficulties in effecting service of process or enforcing foreign judgments against us, Lemeng Interactive and our respective executive officers and directors residing in China.

 

Substantially all of Lemeng Interactive’s assets are located in China and all of Lemeng Interactive’s directors and senior management reside in China. Therefore, it may not be possible to effect service of process or elsewhere outside of China upon us, Lemeng Interactive or our respective directors or senior management. Moreover, China has not entered into treaties for the reciprocal recognition and enforcement of court judgments with Japan, the United Kingdom, the United States and many other countries. As a result, recognition and enforcement in China of a court judgment obtained in other jurisdictions may be difficult or impossible.

 

PRC laws and regulations establish more complex procedures for some acquisitions of PRC companies by foreign investors, which could make it difficult for us to pursue growth through acquisitions in China.

 

A number of PRC laws and regulations, including the M&A Rules, the Anti-Monopoly Law, and the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM on August 25, 2011 and effective from September 1, 2011 (“Security Review Rules”), have established procedures and requirements that are expected to make the review of certain merger and acquisition activities by foreign investors in China more time consuming and complex. These include requirements in some instances to notify MOFCOM in advance of any transaction in which foreign investors take control of a PRC domestic enterprise, or to obtain approval from MOFCOM before overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control or security review.

 

The Security Review Rules prohibits foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. If we are found to be in violation of the Security Review Rules and other PRC laws and regulations with respect to the merger and acquisition activities in China, or fail to obtain any of the required approvals, the relevant regulatory authorities would have broad discretion in dealing with such violations, including levying fines, confiscating our income, revoking Lemeng Interactive’s business and operating licenses, requiring us to restructure or unwind the relevant contractual arrangement or business operations. Any of these actions could cause significant disruption to our business operations and may materially and adversely affect our business, financial condition and results of operations. Furthermore, if the business of any target company we plan to acquire falls into the ambit of security review, we may not be able to successfully acquire such company either by equity or asset acquisition, capital contribution or any contractual arrangement. WFOE or Lemeng Interactive may grow its business in part by acquiring other companies operating in its industry. Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit WFOE or Lemeng Interactive’s ability to complete such transactions, thus affecting its ability to expand its business or maintain its market share.

  

The recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable Act (“HFCAA”) all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.

 

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

 

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

 

On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act (“HFCAA”) 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 securities exchange or in the over the counter trading market in the U.S. 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.

 

On March 24, 2021, the SEC announced that it had adopted interim final amendments to implement congressionally mandated submission and disclosure requirements of the Act. The interim final amendments will apply to registrants that the SEC identifies as having filed an annual report on Forms 10-K, 20-F, 40-F or N-CSR with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. The SEC will implement a process for identifying such a registrant and any such identified registrant will be required to submit documentation to the SEC establishing that it is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in the registrant’s annual report regarding the audit arrangements of, and governmental influence on, such a registrant.

 

On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”), and the U.S. House of Representatives introduced the AHFCAA on December 14, 2021 and referred to the House Committee on Financial Services. The AHFCAA was enacted on December 29, 2022 and reduced the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two and, thus, would reduce the time before our securities may be prohibited from trading or delisted.

 

On December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the Holding Foreign Companies Accountable Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions.

 

On December 16, 2021, PCAOB announced the PCAOB Holding Foreign Companies Accountable Act determinations (the “PCAOB determinations”) relating to the PCAOB’s inability to inspect or investigate completely registered public accounting firms headquartered in mainland China of the PRC or Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in the PRC or Hong Kong.

 

On August 26, 2022, the SEC announced that the PCAOB signed a Statement of Protocol with the CRSC and the Ministry of Finance of the PRC, which sets out specific arrangements on conducting inspections and investigations by both sides over relevant audit firms within the jurisdiction of both sides, including the audit firms based in mainland China and Hong Kong. This agreement marks an important step towards resolving the audit oversight issue that concern mutual interests, and sets forth arrangements for both sides to cooperate in conducting inspections and investigations of relevant audit firms, and specifies the purpose, scope and approach of cooperation, as well as the use of information and protection of specific types of data.

 

If the PCAOB, SEC and CRSC are unable to agree on a framework under the Statement of Protocol, 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 Shares to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

 

Our predecessor auditor, Friedman LLP, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess our auditor’s compliance with the applicable professional standards. Friedman LLP is headquartered in New York, New York and has been subject to inspection by the PCAOB on a regular basis. Our current auditor, Onestop Assurance PAC, an independent registered public accounting firm, has been retained to audit the financial statements starting December 31, 2022. Onestop Assurance PAC is subject to PCAOB inspections and the PCAOB is able to inspect our auditor.

 

However, the recent developments would add uncertainties to our offering and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. It remains unclear what further actions the SEC, the PCAOB or Nasdaq will take to address these issues and what impact those actions will have on U.S. companies that have significant operations in the PRC and have securities listed on a U.S. stock exchange (including a national security exchange or over-the-counter stock market). In addition, any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory access to audit information could create some uncertainty for investors, the market price of our ordinary shares could be adversely affected, and we could be delisted if we and our auditor are unable to meet the PCAOB inspection requirement or being required to engage a new audit firm, which would require significant expense and management time.

 

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Risks Related to Our Corporate Structure and Operation

 

We will incur additional costs as a result of becoming a public company, which could negatively impact our net income and liquidity.

 

Upon completion of this offering, we will become a public company in the United States. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules and regulations implemented by the SEC and the Nasdaq Capital Market require significantly heightened corporate governance practices for public companies. We expect that these rules and regulations will increase our legal, accounting and financial compliance costs and will make many corporate activities more time-consuming and costly.

 

We do not expect to incur materially greater costs as a result of becoming a public company than those incurred by similarly sized foreign private issuers. If we fail to comply with these rules and regulations, we could become the subject of a governmental enforcement action, investors may lose confidence in us and the market price of our Ordinary Shares could decline.

 

The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies.

 

Upon completion of this offering, we will be a publicly listed company in the United States. As a publicly listed company, we will be required to file periodic reports with the SEC upon the occurrence of matters that are material to our company and shareholders. In some cases, we will need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them advantages in competing with our company. Similarly, as a U.S.-listed public company, we will be governed by U.S. laws that our non-publicly traded competitors are not required to follow. To the extent compliance with U.S. laws increases our expenses or decreases our competitiveness against such companies, our public listing could affect our results of operations.

 

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 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.

 

As a foreign private issuer, we are permitted to rely on exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. If we opt to rely on such exemptions in the future, such decision might afford less protection to holders of our Ordinary Shares.

 

Section 5605(b)(1) of the Nasdaq Listing Rules requires listed companies to have, among other things, a majority of its board members to be independent, and Section 5605(d) and 5605(e) require listed companies to have independent director oversight of executive compensation and nomination of directors. As a foreign private issuer, however, we are permitted to follow home country practice in lieu of the above requirements. Our Board of Directors could make such a decision to depart from such requirements by ordinary resolution.

 

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The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our Board to consist of independent directors or the implementation of a nominating and corporate governance committee. Since a majority of our Board of Directors would not consist of independent directors if we relied on the foreign private issuer exemption, fewer Board members would be exercising independent judgment and the level of Board oversight on the management of our company might decrease as a result. In addition, we could opt to follow Cayman Islands law instead of the Nasdaq requirements that mandate that we obtain shareholder approval for certain dilutive events, such as an issuance that will result in a change of control, certain transactions other than a public offering involving issuances of 20% or greater interests in the company and certain acquisitions of the shares or assets of another company. For a description of the material corporate governance differences between the Nasdaq requirements and Cayman Islands law, see “Description of Share Capital — Differences in Corporate Law”.

 

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 Class B shareholders.

 

Our founding shareholder and Chief Executive Officer, Baohua Feng, beneficially owns more than 76.3% of our total voting power through his ownership of 10,395,200 Class A Shares, which have twenty (20) votes per share, compared with one (1) vote per share for our Class B Shares. Upon the closing of this offering, Mr. Feng will continue to own a controlling interest in our Company and we will meet the definition of a “controlled company” under the corporate governance standards for Nasdaq listed companies. As such, we will be eligible to utilize certain exemptions from the corporate governance requirements of the Nasdaq Stock Market. We are a “controlled company” within the meaning of Nasdaq Listing Rule 5615(c). As a controlled company, we qualify for, and our Board of Directors, the composition of which is and will be controlled by this shareholder, may rely upon exemptions from several of Nasdaq’s corporate governance requirements, including requirements that:

 

a majority of the board of directors consist of independent directors;

 

compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee comprised solely of independent directors; and

 

  director nominees be selected or recommended to the board of directors by a majority of its independent directors or by a nominating and corporate governance committee that is composed entirely of independent directors.

 

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.

 

Accordingly, to the extent that we may choose to rely on one or more of these exemptions, our shareholders would not be afforded the same protections generally as shareholders of other Nasdaq-listed companies for so long as these shareholders are collectively able to control the composition of our Board and our Board determines to rely upon one or more of such exemptions.

 

We do not intend to rely on the “controlled company” exemption under the Nasdaq listing rules for at least one (1) year following completion of this offering. However, we may elect to avail ourselves of these exemptions in the future.

 

An insufficient amount of insurance could expose us to significant costs and business disruption.

 

While we have purchased insurance, including export transportation, product liability and account receivable insurance, to cover certain assets and property of our business, the amounts and scope of coverage could leave our business inadequately protected from loss. For example, our subsidiaries do not have coverage of business interruption insurance. If we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or accidents or business interruption, our results of operations could be materially and adversely affected. For the scope of coverage of our insurance, see “Business—Our Insurance Coverage”.

 

Risks Related to Our Initial Public Offering and Ownership of Our Ordinary Shares

 

We are an “emerging growth company,” and we cannot be certain whether the reduced reporting requirements applicable to emerging growth companies will make our Ordinary Shares less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and 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 could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues reach $1.235 billion, if we issue $1.0 billion or more in non-convertible debt in a three year period, or if the market value of our Ordinary Shares held by non-affiliates exceeds $700 million as of any December 31 before that time, in which case we would no longer be an emerging growth company as of the following June 30. We cannot predict if investors will find our Ordinary Shares less attractive because we may rely on these exemptions. If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary Shares and our share price may be more volatile. Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies.

 

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Because we have elected to use the extended transition period for complying with new or revised accounting standards for an “emerging growth company” our financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates.

 

We have elected to use the extended transition period for complying with new or revised accounting standards under Section 107(b) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates. Consequently, our financial statements may not be comparable to companies that comply with public company effective dates. Because our financial statements may not be comparable to companies that comply with public company effective dates, investors may have difficulty evaluating or comparing our business, performance or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity of our Ordinary Shares. We cannot predict if investors will find our Ordinary Shares less attractive because we plan to rely on this exemption. If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary Shares and our share price may be more volatile.

 

Certain recent public offerings of companies with public floats comparable to our public float have experienced extreme volatility that was seemingly unrelated to the underlying performance of the respective company. We may experience similar volatility, which may make it difficult for prospective investors to assess the value of our Ordinary Shares.

 

Our Ordinary Shares may be subject to extreme volatility that is seemingly unrelated to the underlying performance of our business. Recently, companies with comparable public floats and initial public offering sizes have experienced instances of extreme stock price run-ups followed by rapid price declines, and such stock price volatility was seemingly unrelated to the respective company’s underlying performance. Although the specific cause of such volatility is unclear, our public float may amplify the impact of the actions taken by a few shareholders on the price of our Ordinary Shares, which may cause our share price to deviate, potentially significantly, from a price that better reflects the underlying performance of our business. Should our Ordinary Shares experience run-ups and declines that are seemingly unrelated to our actual or expected operating performance and financial condition or prospects, prospective investors may have difficulty assessing the rapidly changing value of our Ordinary Shares. In addition, investors of our Ordinary Shares may experience losses, which may be material, if the price of our Ordinary Shares declines after this offering or if such investors purchase Ordinary Shares prior to any price decline.

 

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Ordinary Shares may decline.

 

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 independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in preparing our consolidated financial statements as of and for the years ended December 31, 2022 and 2021 we and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting, as defined in the standards established by the PCAOB and other control deficiencies. Following the identification of the material weaknesses and control deficiencies, we have taken and planned to continue to take remedial measures. However, the implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting. Our failure to correct the material weaknesses or our failure to discover and address any other material weaknesses or control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud.

 

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with annual report on Form 20-F for the year ending December 31, 2024, if we become a public company, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly, and complicated.

 

In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 20-F following the date on which we are no longer an “emerging growth company,” which may be up to five full years following the date of this offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Ordinary Shares could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management resources.

 

Our management team lacks experience in managing a U.S. public company and complying with laws applicable to such company, the failure of which may adversely affect our business, financial conditions and results of operations.

 

Our current management team lacks experience in managing a U.S. publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to U.S. public companies. Prior to the completion of this offering, we mainly operate our businesses as a private company in the PRC. As a result of this offering, our company will become subject to significant regulatory oversight and reporting obligations under the federal securities laws and the scrutiny of securities analysts and investors, and our management currently has no experience in complying with such laws, regulations and obligations. Our management team may not successfully or efficiently manage our transition to becoming a U.S. public company. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial conditions and results of operations.

 

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The requirements of being a public company may strain our resources and divert management’s attention.

 

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual and current reports with respect to our business and operating results. In addition, as long as we are listed on the Nasdaq Capital Market, we are also required to file semi-annual financial statements.

 

We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. While it is impossible to determine the amounts of such expenses in advance, we expect that we will incur expenses of between $500,000 and $1 million per year that we did not experience prior to commencement of this offering.

 

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.

 

We also expect that being a public company and these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

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

 

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

 

actual or anticipated fluctuations in our revenue and other operating results;

 

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

lawsuits threatened or filed against us; and

 

other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

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

 

We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.

 

If this offering prices above the assumed price per share or if we increase the aggregate offering size with an immediately effective post-effective amendment, we could raise more funds than currently assumed. To the extent (i) we raise more money than required for the purposes explained in the section titled “Use of Proceeds” or (ii) we determine that the proposed uses set forth in that section are no longer in the best interests of our Company, we cannot specify with any certainty the particular uses of such net proceeds that we will receive from our initial public offering. However, we will advise shareholders as required in our annual reports on Form 20-F of any changes in application of funds and will file a current report on Form 6-K to the extent we determine such changes in application must be disclosed more quickly.

 

Our management will have broad discretion in the application of such net proceeds, including working capital, possible acquisitions, and other general corporate purposes, and we may not spend or invest these proceeds in a way with which our shareholders agree. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from our initial public offering in a manner that does not produce income or that loses value.

 

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

 

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

 

There may not be an active, liquid trading market for our Ordinary Shares.

 

Prior to this offering, there has been no public market for our Ordinary Shares. An active trading market for our Ordinary Shares may not develop or be sustained following this offering. You may not be able to sell your shares at the market price, if at all, if trading in our shares is not active. The initial public offering price was determined by negotiations between us and the underwriters based upon a number of factors which are described in the “Underwriting” section. The initial public offering price may not be indicative of prices that will prevail in the trading market.

 

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

 

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our Ordinary Shares. An aggregate of 16,000,000 shares will be outstanding before the consummation of this offering and between 20,000,000 and 20,600,000 shares will be outstanding immediately after this offering, depending on whether the underwriters exercise their overallotment option to purchase up to 600,000 Shares. 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. See “Shares Eligible for Future Sale.”

 

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You will experience immediate and substantial dilution.

 

The initial public offering price of our shares is substantially higher than the pro forma net tangible book value per share of our Ordinary Shares. If you purchase shares in this offering, you will incur immediate dilution of approximately $2.45 or approximately 49% in the pro forma net tangible book value per share from the price per share that you pay for the Ordinary Shares. Assuming exercise in full of the underwriters’ overallotment option, if you purchase shares in this offering, you will incur immediate dilution of approximately $2.45 or approximately 49% in the pro forma net tangible book value per share from the price per share that you pay for the Ordinary Shares. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

 

We are subject to liability risks stemming from our foreign status, which could make it more difficult for investors to sue or enforce judgments against our company.

 

Most of our operations and assets are located in the PRC. In addition, most of our executive officers and directors are non-residents of the U.S., and much of the assets of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.

 

In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a Cayman Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The Cayman Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.

 

Lastly, under the law of the Cayman Islands, there is little statutory law for the protection of minority shareholders. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, our Memorandum and Articles of Association. Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the Memorandum and Articles of Association.

 

There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the Cayman Islands for business companies is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the constituent documents of the corporation. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s Memorandum and Articles of Association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.

 

Our Board of Directors may decline to register transfers of Ordinary Shares in certain circumstances.

 

Our Board of Directors may refuse to register the transfer of a Share to any person. They may do so in their absolute discretion, without giving any reason for their refusal, and irrespective of whether the Share is fully paid or our Company has no lien over it.

 

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If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal. The registration of transfers may be suspended and the register closed at such times and for such periods as our Board of Directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any calendar year.

 

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

 

Cayman Islands law provides shareholders with only limited rights to requisition a general meeting and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our Memorandum and Articles of Association allow our shareholders holding shares representing in aggregate not less than 10% of our voting share capital in issue, to requisition an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting.

 

Our Articles of Association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders. Advance notice of at least five (5) clear days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists of at least one or more shareholders present in person or by proxy, representing not less than one-third of the outstanding shares carrying the right to vote at such general meeting. In the event we do not have quorum within 15 minutes of the time appointed for the meeting, or if at any time during the meeting it becomes inquorate, then: (a) if the meeting was requisitioned by the shareholders, it shall be cancelled; (b) in any other case, the meeting shall stand adjourned to the same time and place seven days hence, or to such other time or place as is determined by the directors. If a quorum is not present within 15 minutes of the time appointed for the adjourned meeting, then the shareholders present in person or by proxy shall constitute a quorum. Because our Class A Shares are entitled to twenty (20) votes and our Class B Shares are entitled to one (1) votes, the presence of holders of the Class A Shares will have a significant impact on whether any meeting of shareholders has quorum.

 

There may be difficulties in protecting your interests under the laws of the Cayman Islands.

 

Our corporate affairs are governed by, among other things, our Memorandum of Association, Articles of Association, the Cayman Islands Companies Act and common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The laws of the Cayman Islands relating to the protection of the interests of minority shareholders differ in some respects from those in other jurisdictions. Such differences may mean that the remedies available to the minority shareholders may be different from those they would have under the laws of other jurisdictions.

 

Certain facts, forecasts and statistics contained in this prospectus are derived from a third-party report and publicly available official sources and they may not be reliable.

 

Certain facts, forecasts and other statistics contained in this prospectus relating to China, the PRC economy and the industry in which we operate have been derived from various official government publications or other third-party reports. We have taken reasonable care in the reproduction or extraction of the official government publications or other third-party reports for the purpose of disclosure in this prospectus, however, we cannot guarantee the quality or reliability of such source materials. They have not been prepared or independently verified by us, the underwriters or any of their respective affiliates or advisers and, therefore, we make no representation as to the accuracy of such statistics, which may not be consistent with other information compiled within or outside the PRC. Due to possibly flawed or ineffective collection methods or discrepancies between published information and market practice, such statistics in this prospectus may be inaccurate or may not be comparable to statistics produced with respect to other economies. Further, there is no assurance that they are stated or compiled on the same basis or with the same degree of accuracy as the case may be in other jurisdictions. In all cases, investors should give consideration as to how much weight or importance they should attach to or place on such facts.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We do not undertake to update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations, other than required by the federal securities laws or other applicable laws.

 

USE OF PROCEEDS

 

We expect to receive net proceeds of approximately $17,432,832 ($20,000,000 offering, less underwriting discount of $1,400,000, accountable expense allowance of $200,000, non-accountable expense allowance of $200,000 and offering expenses of approximately $1,438,597), based on an assumed initial public offering price of $5.00 per ordinary share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus and assuming no exercise of the underwriters’ overallotment option.

 

The net proceeds from this offering must be remitted to China before we will be able to use the funds to grow our business. We are permitted under PRC laws and regulations to provide funding to our PRC subsidiary or the VIE, through capital contributions or foreign loans, subject to approvals from or registrations or submission with relevant PRC government authorities. We plan to use the capital contribution or foreign loans to fund our PRC subsidiary or the VIE. We expect that a properly submitted application will be approved and relevant registration and submission could be completed in the ordinary course of business; however, we cannot guarantee such an approval, registration and submission will occur or be timely.

 

We currently anticipate using approximately 50% of the gross proceeds from this offering for working capital and general corporate purposes, including product development, sales and marketing activities, expansion of existing and future market. In addition, we may also use 30% of the net proceeds to acquire or invest in technologies, solutions or businesses that complement our business; however, as of the date of this prospectus we have not identified any acquisition targets and are not engaged in any related negotiations. We intend to use the remaining net proceeds to repay short-term financings and long-term debt. As of June 30, 2023, we had a short-term borrowing balance of $6,732,819. The average interest rate incurred in the six months ended June 30, 2023 was 4.47%. Short-term borrowing consisted of loans from various lenders which mature from January 2023 through December 31, 2023. If the underwriters exercise their overallotment option, we anticipate using all of such proceeds for working capital and general corporate purposes.

 

Pending use of the net proceeds, we intend to invest our net proceeds in short-term, interest bearing, investment-grade obligations. These investments may have a material adverse effect on the U.S. federal income tax consequences of an investment in our Ordinary Shares. It is possible that we may become a passive foreign investment company for U.S. federal income taxpayers, which could result in negative tax consequences to you. These consequences are discussed in more detail in “Material Tax Consequences Applicable to U.S. Holders of Our Ordinary Shares.”

 

The foregoing represents our current intentions with respect of the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of this offering. The occurrence of unforeseen events or changed business conditions may result in application of the proceeds of this offering in a manner other than as described in this prospectus.

 

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DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our Ordinary Shares. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant.

 

Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either its profit or share premium account, but a dividend may not 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. Dividends can be declared and paid out of funds lawfully available to us, which include the share premium account. According to our Articles of Association, except as otherwise provided by the rights attached to Shares, all dividends shall be declared and paid according to the amounts paid up on the Shares on which the dividend is paid. All dividends shall be apportioned and paid proportionately to the amount paid up on the Shares during the time or part of the time in respect of which the dividend is paid. But if a Share is issued on terms providing that it shall rank for dividend as from a particular date that Share shall rank for dividend accordingly. For further information, see “Material Tax Consequences Applicable to U.S. Holders of Our Ordinary Shares — Cayman Islands Tax.”

 

If we determine to pay dividends on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from Lemeng Interactive and our operations in overseas subsidiaries.

 

EXCHANGE RATE INFORMATION

 

The functional currency of the Company’s operations in the PRC is the Chinese Yuan or Renminbi (“RMB”). The consolidated financial statements are translated to U.S. dollars using the period end rates of exchange for assets and liabilities, equity is translated at historical exchange rates, and average rates of exchange (for the period) are used for revenues and expenses and cash flows. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income loss. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

All of the Company’s revenue transactions are transacted in its functional currency. The Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

 

The exchange rates as of June 30, 2023 and December 31, 2022 and for the six months ended June 30, 2023 and 2022 are as follows:

 

        For the six months ended
 
    June 30,     December 31,     June 30,  
   

2023

   

2022

    2023     2022  
Foreign currency   Balance Sheet     Balance Sheet     Profits/Loss     Profits/Loss  
RMB:1USD     7.2258       6.9646       6.9291       6.4835  

 

Lemeng makes no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. We do not currently engage in currency hedging transactions.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2023 on an actual and a pro forma as adjusted basis giving effect to the completion of the offering at an assumed public offering price of $5.00 per share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, and to reflect the application of the proceeds after deducting the estimated underwriting fees. 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 June 30, 2023

 

    Actual     As adjusted
(Offering with
Over-allotment
option not
 exercised)(1)
 
             
Class A Ordinary Shares, 13,296,000 shares issued and outstanding as at June 30, 2023     8       8  
Class B Ordinary Shares,  2,704,000 shares issued and outstanding as at June 30, 2023 ; 6,704,000 shares issued and outstanding, as adjusted assuming the over-allotment option is not exercised;     2       5  
Additional paid-in capital     6,224,405       22,884,946  
Statutory reserve     1,845,434       1,845,434  
Retained earnings     30,424,762       30,424,762  
Accumulated other comprehensive loss     (3,008,948 )     (3,008,948 )
Total shareholders’ equity     35,485,663       52,146,207  
Non-controlling interest     1,555,725       1,555,725  
Total capitalization     37,041,388       53,701,932  

 

(1) Reflects the sale of Class B Shares in this offering at an assumed initial public offering price of $5.00 per share, the midpoint of the estimated public offering price range, and after deducting the estimated underwriting discounts and estimated offering expenses payable by us, assuming the underwriters’ over-allotment option is not exercised. 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 and estimated offering expenses payable by us. We estimate that such net proceeds will be approximately $16,660,544 assuming the underwriters do not exercise the over-allotment option. The net proceeds of $16,660,544 are calculated as follows: $20,000,000 gross offering proceeds, less underwriting discounts and commissions of $1,400,000, underwriter non-accountable expense allowance of $200,000, accountable expense of $200,000, and other estimated offering expenses of $1,539,456. The pro forma as adjusted total equity of $52,146,207 is the sum of the net proceeds of $16,660,544 and the adjusted equity of $35,485,663.

 

 

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DILUTION

 

If you invest in our Ordinary 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. 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 Ordinary Shares. Our net tangible book value attributable to shareholders on June 30, 2023 was $33,496,899, or approximately $2.09 per Ordinary Share outstanding as of June 30, 2023. Net tangible book value per Ordinary Share represents the amount of total assets less intangible assets, goodwill, deferred offering costs and total liabilities, divided by the number of Ordinary Shares outstanding as of June 30, 2023

 

Upon completion of this offering, we will have 20,000,000 Ordinary Shares outstanding. Our post offering pro forma net tangible book value, which gives effect to receipt of the net proceeds from the offering and issuance of additional shares in the offering, but does not take into consideration any other changes in our net tangible book value after June 30, 2023, will be approximately $50,924,308 or $2.55 per Ordinary Share. This would result in dilution to investors in this offering of approximately $2.45 per Ordinary Share or approximately 50% from the $5.00, the midpoint of estimated offering price of $4.00 to $6.00 per Ordinary Share. Net tangible book value per Ordinary Share would increase to the benefit of present shareholders by $0.46 per share attributable to the purchase of the Ordinary Shares by investors in this offering.

 

The following table sets forth the estimated adjusted net tangible book value per Ordinary Share after the offering and the dilution to persons purchasing Ordinary Shares based on the foregoing offering assumptions.

 

    Per Ordinary Share  
initial public offering price per ordinary share   $ 5  
Net tangible book value per ordinary share as of June 30, 2023*   $ 2.09  
Increase in pro forma net tangible book value per ordinary share attributable to new investors purchasing ordinary shares in this offering   $ 0.46  
Pro forma net tangible book value per ordinary share after this offering   $ 2.55  
Dilution per ordinary share to new investors in this offering   $ 2.45  

 

As of June 30, 2023, the number of issued and outstanding Class A Shares and Class B Shares e are 13,296,000 Class A Shares and 2,704,000 Class B Shares issued and outstanding, respectively.

 

A US$1.00 increase (decrease) in the assumed public offering price of $5.00 per share (the midpoint of the estimated initial public offering price range shown on the cover page of this prospectus) would increase (decrease) our pro forma adjusted net tangible book value after giving effect to the offering by $3.68 million, the pro forma net tangible book value per Ordinary Share and per share by $0.18($0.17) per Ordinary Share and the dilution in pro forma net tangible book value per Ordinary Share to new investors in this offering by $2.27($2.63) per Ordinary Share, assuming no change to the number of shares offered by us as set forth on the cover page of this prospectus, and after deducting the estimated underwriting fee and commissions and estimated offering expenses payable by us.

 

Post-Offering Ownership

 

The following chart illustrates our pro forma proportionate ownership, upon completion of the 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 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.

 

    Shares Purchased     Total Consideration     Average Price  
    Amount     Percent     Amount     Percent     Per Share  
Existing shareholders     16,000,000       80 %   $ 10       0.01 %   $ 0.000000625  
New investors     4,000,000       20 %   $ 20,000,000       99.99 %   $ 5  
Total     20,000,000       100.00 %   $ 20,000,010       100.00 %   $ 1.00  

 

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OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

 

Overview

 

Since the Company was established in September 2014, we have focused on proprietary technology to drive our mobile advertising service company. We provide customer-tailored mobile advertising services based on big data technology and we are certified as a high-tech enterprise. We possess a proprietary DSP programmatic advertising platform to centralize and aggregate advertising slot purchasing in various media forms from multiple sources, and a proprietary DMP built with big data obtained from telecom operators, other mainstream media and exclusive vertical media advertisement resources. As a result, we have been able to provide customized full-service solutions to help companies implement precise marketing plans based on Internet big data. We are committed to providing customers with accurate and efficient integrated marketing promotion services in the field of mobile Internet through accurate control of products and channels while improving the advertising conversion rate and accuracy of advertising.

 

We have developed advanced interactive advertising campaigns to connect consumers with advertisements that satisfy the needs of our advertiser clients through interactive activities while providing rewards by third-party suppliers to the users, such as a free mobile plan, data top up and virtual goods to further increase the depth of user engagement and the effectiveness of product advertising.

 

Through big data integration and multi-dimensional in-depth analysis, our operation team has formed customer product portraits and channel user portraits, forming hundreds of label dimensions including user model, system, operator, network, population attributes, hobbies, location-based services (“LBS”), time, region and keyword orientation. Through the mainstream media flow and media resources (information flow, news information, video media and search engine), combined with the advertising market flow, around the industry of mainstream advertisers such as finance, e-commerce, games, e-sports, the channels in the flow pool are graded, and the formed advertisements are released through the optimal channel.

 

We launched our online platform supported by self-owned intellectual property in 2015. In 2017, we became a professional cloud service provider of targeted advertising business based on big data technology and are committed to becoming a leading data technology company.

 

We provide big data marketing service to our customers through communications on their needs to help them find and obtain users. We focus on providing service in the following four areas:

 

1.App Advertising Support: Helping customers promote their own apps on the internet or mobile devices;

 

2.Bank Advertising Support: Helping banks to promote their credit cards and financial products to users;

 

3.Telecom Advertising Support: Helping telecom operators such as China Mobile, China Unicom and China Telecom promote their apps and package promotions; and

 

4.Game Joint Operation Services: Helping mobile game developers target gamers.

 

At the same time, based on our ability in software development, we provide customized software development services for customers.

 

PRC Regulatory Permissions

 

We are potentially subject to significant regulation by various agencies of the Chinese government. The WFOE and the VIE and its subsidiaries are required to have, and each has, a business license issued by the PRC State Administration for Market Regulation and its local counterparts. In addition, Lemeng Interactive has obtained ICP license  for provision of internet value-added services. As advised by our PRC legal advisor the WFOE and the VIE and its subsidiaries have obtained the required business licenses and Lemeng Interactive has obtained the necessary ICP license to conduct its business. We cannot assure you that Lemeng Interactive can successfully update or renew the licenses required for its mobile internet marketing services in a timely manner or that such license is sufficient to conduct all of its present or future mobile internet marketing services.

 

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The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. As advised by our PRC legal advisor, based on its understanding of the PRC laws and regulations in effect at the time of this prospectus, (i) the Company will not be required to submit an application to the CSRC for its approval of this offering and the listing and trading of our Class B shares on the Nasdaq under the M&A Rules; (ii) there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations and future PRC laws and regulations, and there can be no assurance that the relevant government agencies will take a view that is not contrary to or otherwise different from the conclusion stated above. Substantial uncertainty remains regarding the scope and applicability of the M&A Rules to offshore special purpose vehicles. Although we believe that CSRC’s approval under the M&A Rules is not required for the listing and trading of our Class B Shares on Nasdaq in the context of this offering, we cannot assure you that relevant PRC governmental agencies, including the CSRC, would reach the same conclusion as we do. As of the date of this prospectus, we have not been involved in any investigations initiated by the CSRC in such respect.

 

On February 17, 2023, the CSRC issued the New Administrative Rules Regarding Overseas Listings, which became effective on March 31, 2023. According to the New Administrative Rules Regarding Overseas Listings, among other things, a domestic company in the PRC that seeks to offer and list securities in overseas markets shall fulfill the filing procedure with the CSRC as per requirement of the Trial Administrative Measures. When a domestic company seeks to directly offer and list securities in overseas markets, the issuer shall file with the CSRC. When a domestic company seeks to indirectly offer and list securities in overseas markets, the issuer shall designate a major domestic operating entity, which shall, as the domestic responsible entity, file with the CSRC. Initial public offerings or listings in overseas markets shall be filed with the CSRC within 3 working days after the relevant application is submitted overseas. The required filing materials with the CSRC include (without limitation): (i) record-filing reports and related undertakings, (ii) compliance certificates, filing or approval documents from the primary regulators of applicants’ businesses (if applicable), (iii) security assessment opinions issued by related departments (if applicable), (iv) PRC legal opinions issued by domestic law firms (with related undertakings), and (v) prospectus or listing documents. Pursuant to the New Administrative Rules Regarding Overseas Listings, we will have to file with the CSRC in accordance with the Trial Administrative Measures with respect to this offering., and we cannot assure you that we will be able to get the clearance of filing procedures under the New Administrative Rules Regarding Overseas Listings on a timely basis, or at all. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our ordinary shares, cause significant disruption to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition and results of operations and cause our ordinary shares to significantly decline in value or become worthless.

 

On February 24, 2023, the CSRC promulgated the Confidentiality and Archives Administration Provisions, which also became effective on March 31, 2023. According to the Confidentiality and Archives Administration Provisions, domestic companies that seek overseas offering and listing (either in direct or indirect means) and the securities companies and securities service (either incorporated domestically or overseas) providers that undertake relevant businesses shall institute a sound confidentiality and archives administration system, and take necessary measures to fulfill confidentiality and archives administration obligations. They shall not leak any state secret or working secret of government agencies, or harm national security and public interests. Furthermore, a domestic company that provides accounting archives or copies of accounting archives to any entities, including securities companies, securities service providers and overseas regulators and individuals, shall fulfill due procedures in compliance with applicable regulations. Working papers produced in the mainland China by securities companies and securities service providers in the process of undertaking businesses related to overseas offering and listing by domestic companies shall be retained in mainland China. Where such documents need to be transferred or transmitted to areas outside of mainland China, relevant approval procedures stipulated by regulations shall be followed. We believe that this offering does not involve the leaking of any state secret or working secret of government agencies, or the harming of national security and public interests. However, we may be required to perform additional procedures in connection with the provision of accounting archives. The specific requirements of the relevant procedures are currently unclear and we cannot be certain whether we will be able to perform the relevant procedures.

 

On December 27, 2020, the MOFCOM, and the NDRC promulgated the Special Administrative Measures for Access of Foreign Investment (2021 Edition), or the Negative List (2021). The Negative List (2021) stipulates that if a domestic enterprise engaged in business in the prohibited investment field issues shares abroad and is listed for trading, it shall be examined and approved by the relevant competent authorities of the state. According to a press release issued by the NDRC in relation to the Negative List (2021), the above provisions are only applicable to the direct overseas listing of domestic enterprises engaged in the prohibited investment field. Our PRC legal counsel is of the view that our listing on Nasdaq does not constitute a direct overseas listing of domestic enterprises mentioned in the above press release and therefore we are not subject to examination and approval by the relevant competent authorities of the state in accordance with the Negative List (2021). However, it is uncertain that relevant PRC government agencies, including the NDRC, would reach the same conclusion as we do. As of the date of this prospectus, we also have not been involved in any investigations initiated by the above applicable governmental regulatory authorities, nor have we received any inquiry, notice, warning, or sanction in connection with examination or approval as required under the above administrative measures. If the CSRC, the NDRC or other regulatory agencies later promulgate new rules or explanations requiring that we should obtain such approvals for this offering and any follow-on offering, we may be unable to obtain such approvals which could significantly limit or completely hinder our ability to offer or continue to offer securities to our investors. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ordinary shares that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ordinary shares we are offering, you would be doing so at the risk that the settlement and delivery may not occur. Any uncertainties or negative publicity regarding such approval requirements could have a material adverse effect on our ability to complete this offering or any follow-on offering of our securities or the market for and market price of our ordinary shares.

 

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On October 29, 2021, the Cyberspace Administration of China (“CAC”) published the Draft Outbound Data Transfer Security Assessment Measures (the “Draft Outbound Data Transfer Security Assessment Measures”). On July 7, 2022, the Outbound Data Transfer Security Assessment Measures (the “Outbound Data Transfer Security Assessment Measures”) formally promulgated, which became effective from September 1, 2022. The Outbound Data Transfer Security Assessment Measures stipulates the circumstances under which security assessment of outbound data transfers should be declared, including: (i) outbound transfer of important data, which means any data, the tampering, damage, leakage, or illegal acquisition or use of which, if it happens, may endanger national security, the operation of the economy, social stability, public health and security, by a data processor; (ii) outbound transfer of personal information by a critical information infrastructure operator or a personal information processor who has processed the personal information of more than 1,000,000 people; (iii) outbound transfer of personal information by a personal information processor who has made outbound transfers of the personal information of 100,000 people cumulatively or the sensitive personal information of 10,000 people cumulatively since 1 January of the previous year; or (iv) other circumstances where an application for the security assessment of an outbound data transfer is required as prescribed by the national cyberspace administration authority. On November 14, 2021, the Cyberspace Administration of China published the Administrative Regulations on Internet Data Security (Draft for Comment), or the “Administrative Regulations Draft”, which reiterates that data handlers that process the personal information of more than one million users listing in a foreign country should apply for a cybersecurity review. On December 28, 2021, the Cybersecurity Review Measures (2021 version) was promulgated and became effective on February 15, 2022, which iterates that any “online platform operators” controlling personal information of more than one million users which seeks to list in a foreign stock exchange should be subject to cybersecurity review. The Cybersecurity Review Measures (2021 version), further elaborates the factors to be considered when assessing the national security risks of the relevant activities, including, among others, (i) the risk of core data, important data or a large amount of personal information being stolen, leaked, destroyed, and illegally used or exited the country; and (ii) the risk of critical information infrastructure, core data, important data or a large amount of personal information being affected, controlled, or maliciously used by foreign governments after listing abroad. Although Lemeng Interactive may be considered as an “online platform operator,” “data processor,” or “data handler” as mentioned in the relevant regulations, we do not believe we or Lemeng Interactive would constitute an “operator of critical information infrastructure” or our or Lemeng Interactive’s business and activities would affect or may affect national security. We are not in possession of personal information of over one million users and we do not expect to have personal information of more than one million users prior to this offering. In view of the above, our PRC legal counsel is of the view that we are not subject to the cybersecurity review for this offering under the Cybersecurity Review Measures (2021 version). As of the date of this prospectus, and as advised by our PRC legal advisor, we have not been involved in any investigations on cybersecurity review initiated by the CAC, and we have not received any warning, sanction or penalty in such respect. However, the Cybersecurity Review Measures (2021 version) was recently adopted, and the Administrative Regulations Draft are in the process of being formulated, we do not know what regulations will be adopted, or how such regulations will affect us and our listing on Nasdaq, and we do not know whether the relevant PRC government agencies, including the CAC, would reach the same conclusion as we do. As there remains significant uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and regulations, we could be subject to cybersecurity review, and if so, there is no assurance we would be able to pass such review in relation to this offering in a timely manner or at all. In addition, we could become subject to enhanced cybersecurity review or investigations launched by PRC regulators in the future. Any failure or delay in the completion of the cybersecurity review procedures or any other non-compliance with the related laws and regulations may result in fines or other penalties, including suspension of business, website closure, and revocation of prerequisite licenses, as well as reputational damage or legal proceedings or actions against us, which may have material adverse effect on our business, financial condition or results of operations.

 

Our business is subject to various government regulations and regulatory interference. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. Furthermore, given recent statements by the Chinese government indicating an intent to exert more oversight and control over offerings that are conducted overseas, although as of the date of this prospectus, we have not been involved in any investigations initiated by the applicable governmental regulatory authorities, nor have we received any inquiry, notice, warning, or sanction in such respect, it is uncertain whether or when we might be required to obtain permission from any related PRC government to list our shares on Nasdaq, and even if such permission is obtained, whether it will be later denied or rescinded, which could significantly limit or completely hinder our ability to offer or continue to offer our ordinary shares to investors and cause the value of our ordinary shares to significantly decline or be worthless.

 

Our Organization

 

Lemeng Holdings Limited (“Lemeng”) was incorporated under the laws of the Cayman Islands on February 20, 2020 as an exempted company with limited liability. We newly set up our wholly-owned subsidiary, Lemeng US Inc, on May 26, 2022, which is engaged in the business of digital marketing and aims at forming alliance with local partners to provide digital marketing services to our customers looking for overseas business expansion.

 

Lemeng owns 100% equity interest of Lemeng Investment Limited (“Lemeng BVI”), an entity incorporated on February 26, 2020 in accordance with the laws and regulations in British Virgin Islands.

 

On May 26, 2022, Lemeng established a subsidiary in America, Lemeng US Inc. which is engaged in the business of digital marketing and aims at forming alliance with local partners to provide digital marketing services to our customers looking for overseas business expansion.

 

Lemeng BVI owns 100% equity interest of Lemeng (Hong Kong) Limited (“Lemeng HK”), an entity incorporated on April 1, 2020 in accordance with the laws and regulations in Hong Kong.

 

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Zhejiang Leshen Technology Co., Ltd (“Leshen” or “WFOE”) was formed on August 26, 2021, as a WFOE in the PRC. Jiacheng, which was formed on June 16, 2022, is owned 100% by Leshen, the WFOE. As determined by the Board of Directors on June 1, 2022, Leshen and Jiacheng shall be responsible for the Company’s non-value added telecommunications services (“non-VATS”) and for signing non-VATS business contracts by transferring the existing non-ATS business contracts from Lemeng-BJ and its subsidiaries to Leshen and Jiacheng. The transfer is effective on July 1, 2022.

 

Beijing Lemeng Interactive Technology Co., Ltd. (“Lemeng BJ”) is a limited liability company incorporated on September 15, 2014 under the laws of China. In 2016, Lemeng BJ established several subsidiaries in China, including Tianjin Lemeng Interactive Technology Co., Ltd. (“Lemeng TJ”), Xinjiang Lemeng Interactive Network Technology Co., Ltd. (“Lemeng XJ”) and Tianjin Puyu Network Technology Co., Ltd. (“Puyu”). On February 25, 2019, Lemeng BJ acquired 51% shares of Xinjiang Yishen Infinite Network Technology Co., Ltd. (“Yishen”). On April 18, 2022, Xinjiang Lexian Network Technology Co., Ltd (“Lexian”) was established and was a wholly owned subsidiary of Lemeng BJ until September 20, 2022 when it was deregistered. Lemeng BJ and its subsidiaries are primarily engaged in powering clients with trusted and impactful advertising products through provides Internet accurate positioning marketing service based on big data technology in the PRC.

 

As PRC laws and regulations prohibit and restrict foreign ownership of internet value-added businesses, the Company operates its websites and conducts some of its business in the PRC through the VIE and the subsidiaries of the VIE. On October 1, 2021 and October 28, 2022, Leshen entered into a series of VIE Agreements with the owners of Lemeng BJ. These agreements include an Exclusive Technical Consulting and Service Agreement, an Equity Pledge Agreement and its supplementary agreement, an Exclusive Option Agreement and its supplementary agreement, a Shareholder’s Rights Proxy Agreement and its supplementary agreement and a Spousal Consent Letter (collectively “VIE Agreements”). Pursuant to the VIE Agreements, WFOE has the exclusive right to provide Lemeng BJ with comprehensive technical support, consulting services and other services in relation to the Principal Business during the term of this Agreement. All the VIE Agreements obligate WFOE to absorb a majority of the risk of loss from business activities of Lemeng BJ and entitle WFOE to receive a majority of their residual returns. For accounting purposes, WFOE is the considered primary beneficiary of Lemeng BJ and its subsidiaries, and has contractual rights to receive all of their expected residual returns. Therefore, Lemeng BJ should be considered as a VIE under the Statement of FASB ASC 810 “Consolidation”.

 

Lemeng together with its wholly-owned subsidiaries Lemeng BVI, Lemeng HK and WFOE and its VIE were effectively controlled by the same shareholders before and after the reorganization and therefore the reorganization is considered under common control. The consolidation of the Company has been accounted for at historical cost and prepared on the basis as if the Reorganization had become effective as of the beginning of the first period presented in the consolidated financial statements.

 

The VIE contractual arrangements

 

Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunication services, or VATS, and certain other businesses. Lemeng is a company incorporated in the Cayman Islands. The Company currently conduct the Company’s VATS business through Lemeng BJ and its subsidiaries.

 

The Company operates business mainly through Lemeng BJ, a variable interest entity (“VIE”) in the PRC and Lemeng BJ’s subsidiaries, based on a series of VIE Agreements. As a result of these VIE Agreements, the Company is considered the primary beneficiary of the Company’s VIE for accounting purposes and consolidates their operating results in the Company’s financial statements under U.S. GAAP.

 

The following is a summary of VIE Agreements by and among Leshen, Lemeng BJ and the shareholders of Lemeng BJ. Each of the VIE Agreements is described in detail below:

 

Exclusive Technical Consulting and Service Agreement

 

Under the Exclusive Technical Consulting and Service Agreement dated October 1, 2021, Leshen has agreed to provide the following services (among others) to Lemeng BJ:

 

the provision of software research and development services;

 

the provision of technical services, applications and implementation, including but not limited to installing, and testing business systems;

 

daily maintenance support, upgrades, monitoring and troubleshooting of computer network equipment, and other technical services

 

business consulting;

 

technology development and technology transfer services;

 

market research and consulting services (excluding market research businesses that Chinese law prohibits wholly foreign-owned enterprises from engaging in); and

 

licensing of the intellectual property.

 

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This agreement was effective from October 1, 2021 and will continue to be effective unless it is terminated by written notice of Leshen.

 

Equity Pledge Agreement

 

The shareholders of Lemeng BJ entered into an Equity Pledge Agreement and its supplementary agreement with Leshen, dated October 1, 2021 and October 28, 2022. Under such equity pledge agreement, each of the shareholders of Lemeng BJ pledged its respective equity interest in Lemeng BJ to Leshen to secure such shareholder’s obligations under the Exclusive Option Agreement, Shareholders’ Rights Proxy Agreement, Exclusive Technical Consulting and Service Agreement, and Spouse Consent Letter.

 

Each of such shareholders further agreed not to transfer or pledge his or her respective equity interest in Lemeng BJ without the prior written consent of Leshen. The equity pledge agreement will remain effective until the shareholders fulfill their obligations and Leshen discharges all the shareholders’ obligations under these VIE Agreements in writing.

 

Exclusive Option Agreement

 

Under the Exclusive Option Agreement entered into by Leshen, Lemeng BJ and the shareholders of Lemeng BJ, dated October 1, 2021, and its supplementary agreement dated on October 28, 2022, the shareholders of Lemeng BJ granted Leshen or its designee an option to purchase all or a portion of their respective equity interest in Lemeng BJ for the minimum amount of consideration permitted by PRC law. Under the Exclusive Option Agreement, Lemeng BJ granted Leshen or its designee an option to purchase all or a portion of the assets (including intellectual property) of Lemeng BJ for the minimum amount of consideration permitted by PRC law.

 

Each of shareholders of Lemeng BJ agreed that, as of the effective date of this agreement, but before the transfer of all or part of Lemeng BJ’s equity interest to Leshen, if the shareholders obtain dividends, bonuses or residual property from Lemeng BJ, the shareholders shall transfer all the income (after tax) to Leshen.

 

The exclusive option agreement shall remain in effect until all of the equity interests in or assets of Lemeng BJ have been acquired by Leshen or its designee, and upon the condition that Leshen and its subsidiaries, branches can engage in the business of Lemeng BJ legally.

 

Leshen has the right to unilaterally terminate this agreement immediately by sending written notices to Lemeng BJ and the shareholders of Lemeng BJ at any time without liability for the breach. Unless otherwise mandatory by Chinese law, Lemeng BJ and its shareholders has no right to unilaterally terminate this agreement.

 

Shareholders’ Rights Proxy Agreement

 

Under the Shareholders’ Rights Proxy Agreement among Leshen, Lemeng BJ and the shareholders of Lemeng BJ, dated October 1, 2021, and its supplementary agreement dated on October 28, 2022, each of the shareholders of Lemeng BJ has agreed to irrevocably entrust Leshen or its designee to represent it to exercise all the shareholders’ rights to which it is entitled as a shareholder of Lemeng BJ.

 

The Shareholders’ Rights Proxy Agreement is irrevocable, and shall remain effective until (a) Leshen registers with the appropriate agency to be the sole owner of Lemeng BJ, and holds the equity of Lemeng BJ directly, engaging in the business of Lemeng BJ legally under Chinese law; or (b) all of the assets of Lemeng BJ has been acquired by Leshen or its designee, and Leshen can engage in Lemeng BJ’s business legally; or (c) Lemeng BJ’s structure changes and Lemeng BJ signs a new Shareholders’ Voting Rights Proxy Agreement to replace this proxy agreement; or (d) upon the instruction of Leshen.

 

Spousal Consent Letter

 

Each spouse of relevant individual shareholders of Lemeng BJ has signed a Spousal Consent Letter. Under the Spousal Consent Letter, the signing spouse has unconditionally and irrevocably agreed that the disposition of the equity interest in Lemeng BJ which is held by and registered under the name of his or her spouse shall be made pursuant to the above-mentioned Equity Pledge Agreement, Exclusive Option Agreement, Shareholders’ Rights Proxy Agreement and Power of Attorney signed by his or her spouse, as amended from time to time.

 

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Moreover, the spouse promises that if he or she acquires any equity in Lemeng BJ held by his or her spouse, he or she shall be bound to the Exclusive Technical Consulting and Service Agreement (as amended from time to time) signed between Leshen and his or her spouse. If Leshen requires, the signing spouse shall sign a series of written documents with the same format and contents as the transaction documents and the Exclusive Technical Consulting and Service Agreement.

 

Risks in relation to the VIE structure

 

Lemeng believes that the contractual arrangements with its VIE and their respective shareholders are in compliance with PRC laws and regulations and are legally enforceable. On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, effective on January 1, 2020. The Foreign Investment Law has a catch-all provision under the definition of “foreign investment” which includes investments made by foreign investors in China through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. In the event that the State Council in the future promulgates laws and regulations that deem investments made by foreign investors through contractual arrangements as “foreign investment,” the Company’s ability to use the VIE Agreements with Lemeng BJ and the Company’s ability to conduct business through Lemeng BJ could be severely limited. However, uncertainties in the PRC legal system could limit Lemeng’s ability to enforce the VIE Agreements. If the legal structure and VIE Agreements were found to be in violation of PRC laws and regulations, the PRC government could:

 

revoke the business and operating licenses of the Company’s PRC subsidiary and VIE;

 

discontinue or restrict the operations of any related-party transactions between the Company’s PRC subsidiary and VIE;

 

limit the Company’s business expansion in China by way of entering into contractual arrangements;

 

impose fines or other requirements with which the Company’s PRC subsidiary and VIE may not be able to comply;

 

require the Company or the Company’s PRC subsidiary and VIE to restructure the relevant ownership structure or operations; or

 

Restrict or prohibit the Company’s use of the proceeds of the additional public offering to finance.

 

Lemeng’s ability to conduct its Internet online advertising, game promotion and game distribution may be negatively affected if the PRC government was to carry out any aforementioned actions. As a result, Lemeng may not be able to consolidate its VIE in its consolidated financial statements and it may lose the ability to receive economic benefits from the VIE. Lemeng, however, does not believe such actions would result in the liquidation or dissolution of the Company, its PRC subsidiary and VIE.

 

Our revenues decreased by $5,889,853, or 15.5%, from $37,911,560 for the six months ended June 30, 2022, to $32,021,707 for the six months ended June 30, 2023. Revenues from advertising services accounted for 99.9% and 99.7% of our total revenues for the six months ended June 30, 2023 and 2022, respectively, revenues from game joint operation services accounted for 0.1% and 0.3% of our total revenues for the six months ended June 30, 2023 and 2022, respectively.

 

Our revenues decreased by $7,375,501, or 8.9% from $82,584,146 for the year ended December 31, 2021, to $75,208,645 for the year ended December 31, 2022. Revenues from advertising services accounted for 99.4% and 99.4% of our total revenues for the years ended December 31, 2022 and 2021, revenues from game joint operation services accounted for 0.1% and 0.2% of our total revenues for the years ended December 31, 2022 and 2021, respectively.

 

Factors Affecting Our Results of Operations

 

Impact of COVID-19 Outbreak

 

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic—the first pandemic caused by a coronavirus. The outbreak has reached almost every country, resulting in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. The Chinese government has ordered quarantines, travel restrictions, and the temporary closure of stores and facilities. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing businesses.

 

During the fiscal year ended December 31, 2022, COVID-19 has had negative impacts on the Company’s operations, in part due to strict quarantine control measures. There are still uncertainties of COVID-19’s future impact, and the extent of the impact will depend on a number of factors, including the duration and severity of the pandemic; and the macroeconomic impact of government measures to contain the spread of COVID-19 and related government stimulus measures.

 

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Government policies may impact our business and operating results.

 

We have not seen any impact of unfavorable government policies upon our business in recent years. However, our business and operating results will be affected by the overall economic growth and government policies in the PRC, and our products are currently eligible for certain favorable government tax incentive and other incentives. Unfavorable changes in government policies and these incentives could affect the demand for our products and could materially and adversely affect our results of operations. However, we will seek to adjust as required if and when government policies shift.

 

Exchange rate fluctuations may significantly impact our business and profitability.

 

All of our operations are in the PRC. Thus, our revenue and operating results may be impacted by exchange rate fluctuations between RMB and U.S. dollars. For the years ended December 31, 2022, 2021, and 2020, we had an unrealized foreign currency translation (loss) gain of $(1,619,249), $1,330,665 and $667,895 respectively, because of changes in the exchange rates.

 

Results of Operations

 

Comparison of Results of Operations for the Six Months Ended June 30, 2023 and 2022

 

The following table summarizes our results of operations for the six months ended June 30, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

    For the Six Months Ended June 30,  
    2023     2022     Variance  
    Amount     % of
revenue
    Amount     % of
revenue
    Amount     %  
                                     
Revenues   $ 32,021,707       100.0     $ 37,911,560       100.0     $ (5,889,853 )     (15.5 )
Cost of revenues     (28,578,309 )     (89.2 )     (33,852,802 )     (89.3 )     5,274,493       (15.6 )
Gross profit     3,443,398       10.8       4,058,758       10.7       (615,360 )     (15.2 )
                                                 
Operating expenses:                                                
Selling expenses     189,372       0.6       285,969       0.8       (96,597 )     (33.8 )
General and administrative expenses     560,400       1.8       504,386       1.3       56,014       11.1  
Provision for doubtful accounts, net of recovery     82,016       0.3       (88,906 )     (0.2 )     170,922       (192.3 )
Research and development expenses     109,687       0.3       111,829       0.3       (2,142 )     (1.9 )
Total operating expenses     941,475       2.9       813,278       2.2       128,197       15.8  
                                                 
Income from operations     2,501,923       7.8       3,245,480       8.5       (743,557 )     (22.9 )
                                                 
Other income (loss):                                                
Government subsidies     82,300       0.3       642,422       1.7       (560,122 )     (87.2 )
Financial expenses     (210,995 )     (0.7 )     (131,074 )     (0.3 )     (79,921 )     61.0  
Other (expenses) income, net     39,692       0.1       (16,788 )     0.0       56,480       (336.4 )
Total other income (loss), net     (89,003 )     (0.3 )     494,560       1.4       (583,563 )     (118.0 )
                                                 
Income before income taxes     2,412,920       7.5       3,740,040       9.9       (1,327,120 )     (35.5 )
                                                 
Income tax expenses (benefits)     27,599       0.1       548,374       1.4       (520,775 )     (95 )
                                                 
Net income     2,385,321       7.4       3,191,666       8.5       (806,345 )     (25.3 )
Net income (loss) attributable to non-controlling interest     35,705       0.1       (65,343 )     (0.2 )     101,048       (154.6 )
Net income attributable to Lemeng Holdings Limited   $ 2,349,616       7.3     $ 3,257,009       8.7     $ (907,393 )     (27.9 )

 

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Revenue

 

Currently, we have three types of revenue streams derived from our three major services: advertising services, software customization development services and game joint operation services. Total revenue for the six months ended June 30, 2023 decreased by $5,889,853, or 15.5%, to $32,021,707 from $37,911,560 for the same period in 2022. The decrease in our revenues was primarily attributable to the decrease in the revenue generated from advertising services due to weaker economic conditions from the COVID-19 pandemic in China which negatively affected our business operations and our business development opportunities as well. We aim to increase our revenue by expanding our overseas advertising resources to attract a broader customer base.

 

The following table sets forth the breakdown of our revenue for the six months ended June 30, 2023 and 2022, respectively:

 

    For the Six Months Ended June 30,  
    2023    2022    Variance  
    Amount    %    Amount    %    Amount    %  
                                
Advertising services   $ 31,992,534       99.91     $ 37,802,160       99.71     $ (5,809,626 )     (15.37 )
Software customization development services     2,483       0.01       -       -       2,483       -  
Game joint operation services     26,690       0.08       109,400       0.29       (82,710 )     (75.60 )
Total   $ 32,021,707       100.00     $ 37,911,560       100.00     $ (5,889,853 )     (15.54 )

 

Our revenue is mainly derived from revenue from advertising services. The Company and its customers sign advertising service contracts to provide advertising services for customers’ requirements. According to the price in the framework agreement signed by both parties and the services provided in each month, the Company prepares the monthly statement, and confirms the revenue with the customers. The Company offers settlement periods ranging from 1 to 3 months for different customers. Revenue from advertising services accounted for 99.91% and 99.71% of our total revenues for the six months ended June 30, 2023 and 2022, respectively. Revenue from advertisement services decreased by $5,809,626, or 15.37% from $37,802,160 for the six months ended June 30, 2022, to $31,992,534 for the same period in 2023. The decrease in revenue in the first half of 2023 compared to the same period in 2022 was due to lower orders from customers due to weaker economic recovery from the pandemic in China.

 

Cost of Revenue

 

The following table sets forth the breakdown of our cost of revenue for the six months ended June 30, 2023 and 2022, respectively

 

    For the Six Months Ended June 30,  
    2023     2022     Variance  
    Amount     %     Amount     %     Amount     %  
                                     
Advertising services   $ 28,576,511       99.99       33,852,802       100.00       (5,276,291 )     (15.59 )
Game joint operation services     1,798       0.01                       1,798          
Total   $ 28,578,309       100.00       33,852,802       100.00       (5,274,493 )     (15.59 )

 

The Company’s cost of revenues consists primarily of the traffic acquisition cost (“TAC”), and the purchase price of online services/assets associated with the Company’s targeted marketing solution.

 

Cost of revenue from advertisement services decreased by $5,276,291, or 15.59%, to $28,576,511 six months ended June 30, 2023 from $33,852,802 for the same period in 2022. This decrease was largely in line with the 15.5% decrease in revenue in 2023 compared to 2022.

 

Gross Profit

 

Total gross profit was $ 3,443,398 for the six months ended June 30, 2023, a decrease of $615,360, from$ 4,058,758 for the same period in 2022. Gross profit margin increased by 0.1%, to 10.8% for the six months ended June 30, 2023, from 10.7% for the same period in 2022. Our gross profit and gross margin by product types were as follows:

 

    For the Six Months Ended June 30,  
    2023     2022     Variance  
    Gross
profit
    Margin
%
    Gross
profit
    Margin
%
    Gross
profit
    Margin
%
 
    (Unaudited)           (Unaudited)                    
Advertising services   $ 3,416,023       10.7     $ 3,949,358       10.4     $ (533,335 )     0.3  
Software customization development services     2,483       100.0       -       -       2,483       100.0  
Game joint operation services     24,892       93.3       109,400       100.0       (84,508 )     (6.7 )
Total   $ 3,443,398       10.8     $ 4,058,758       10.7     $ (615,360 )     0.1  

 

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Gross profit for advertisement services decreased by $533,335 to $3,416,023 for the six months ended June 30, 2023, as compared to $3,949,358 for the same period in 2022. Gross profit margin of 10.7% for the six months ended June 30, 2023 keeps flat with 10.4% for the same period in 2022.  

 

Operating Expenses

 

    For the Six Months Ended June 30,  
    2023     2022     Variance  
    Amount     %     Amount     %     Amount     %  
      (Unaudited)             (Unaudited)                    
Selling expenses   $ 189,372       20.1     $ 285,969       32.9     $ (96,597 )     (33.8 )
General and administrative expenses     560,400       59.5       504,386       58.1       56,014       11.1  
Provision for doubtful accounts, net of recovery     82,016       8.7       (88,906 )     (11.0 )     170,922       (192.3 )
Research and development expenses     109,687       11.7       111,829       12.9       (2,142 )     (1.9 )
Total operating expenses   $ 941,475       100.0     $ 813,278       100.0     $ 128,197       15.8  

 

Selling Expenses

 

Selling expenses consist primarily of costs in salary and welfare expenses for selling staff, facilities costs, depreciation expenses, professional fees, and other miscellaneous expenses incurred in connection with general operations. Selling expenses were $189,372 for the six months ended June 30, 2023, a decrease of $96,597, or 33.8%, from $285,969 for the same period in 2022. The decrease was mainly due to a decrease of $82,172 in average sales team salaries and commissions.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of costs in salary and welfare expenses for our general administrative and management staff, facilities costs, depreciation expenses, professional fees, rental expenses, accounting fees, and other miscellaneous expenses incurred in connection with general operations. Our general and administrative expenses were $560,400 for the six months ended June 30, 2023, an increase of $56,014 or 11.1%, from $504,386 for the same period in 2022. The increase was mainly due to an increase in consulting fees by $134,503 in connection with the initial public offering.

 

Provision for doubtful accounts, net of recovery

 

Our provision for doubtful accounts, net of recovery was $82,016 for the six months ended June 30, 2023, an increase of $170,922 or 192.3%, from provision of doubtful accounts of $(88,906) for the same period in 2022. The bad debts are accrued according to aging analysis method.

 

Lemeng establishes a provision for doubtful accounts when there is objective evidence that Lemeng may not be able to collect amounts due. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends, its relationship with the clients and economic conditions. The allowance is based on management’s best estimates of specific losses on individual customer exposures, as well as the historical trends of collections.

 

Pursuant to Accounting Standards Codification 310-10-35-41, account balances are charged off against the provision for doubtful accounts when the accounts receivables and other receivables are deemed uncollectible. Lemeng deemed accounts receivables and other receivables as uncollectible after all means of collection have been exhausted and the likelihood of collection is not probable. Based on its historical experience, the Company can collect the receivables with an account age of less than one year in the next year. Lemeng makes a provision for doubtful accounts when the outstanding balance is over 365 days past due.

 

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The table below sets forth the age analysis of Lemeng’s gross accounts receivable as of as of June 30, 2023:

 

Six Months Ended June 30,   0-90 days     90-180 days     180-365 days     >365 days     Total  
2023 (USD)   $ 16,880,237     $ 822,136     $ 31,063,712     $ 8,535,214     $ 57,301,299  

 

From July 1, 2023 to September 30, 2023, the subsequent settlement of Lemeng’s accounts receivable as of June 30, 2023 is shown in the following table:

 

Six Months Ended June 30,   0-90 days     90-180 days     180-365 days     >365 days     Total  
2023 (USD)   $ 2,892,684     $ 179,958     $ 8,905,386     $ 8,001,188     $ 19,979,216  

 

The table below sets forth the accounts receivable balance net of subsequent settlements:

 

Six Months Ended June 30,   0-90 days     90-180 days     180-365 days     >365 days     Total  
2023 (USD)   $ 13,987,553     $ 642,178     $ 22,158,326     $ 534,026     $ 37,322,083  

 

The table below sets forth the percentage of provision for doubtful accounts for each aging group of Lemeng’s accounts receivable as of June 30, 2023:

 

Six Months Ended June 30,  

0-90 days

%

   

90-180 days

%

   

180-365 days

%

   

>365 days

%

 
2023 (USD)     0       0       0       100  

 

The table below sets forth the provision of doubtful accounts for each aging group of Lemeng’s accounts receivable as of June 30, 2023:

 

Six Months Ended June 30,   0-90 days     90-180 days     180-365 days     >365 days     Total  
2023 (USD)   $      -     $      -     $        -     $ 534,026     $ 534,026  

 

Lemeng’s provision for doubtful accounts against its gross accounts receivable as of June 30, 2023 was $534,026 based on the Company’s accounting policy for bad debt provision, compared to $405,425 as of the same period in prior year.

 

Research and Development Expenses

 

Research and development expenses decreased by $2,142, or 1.9%, to $109,687 for the six months ended June 30, 2023, from $111,829 for the same period in 2022. The main reason is due to a decrease in the research and development staff's salary and social security contribution by $13,116.

 

Government subsidies

 

We receive various government subsidies from time to time, such as the “VAT input tax additional deduction of 10% resulted in a VAT reduction” and “Special Fund Subsidy”. We cannot predict the likelihood or amount of any future subsidies.

 

For the six months ended June 30, 2023, government subsidies were $82,300, including the VAT input tax super-deduction of 10% resulted in a VAT reduction of $69,311 and special fund subsidy of $12,989 For the six months ended June 30, 2022, government subsidies were $ 642,422, including the VAT input tax super-deduction of 10% resulted in a VAT reduction of $ 154,076 and special fund subsidy of $ 488,346.

 

Financial expenses

 

Financial expenses increased by $79,921, or 61%, to $210,955 for the six months ended June 30, 2023, from $131,074 for the same period in 2022.The increase was mainly due to an increase in bank handling fees by $79,921 in connection with the addition in the short term loans.

 

Income tax expense

 

Our income tax expense was $27,599 for the six months ended June 30, 2023, a decrease of $520,775, or 95%, from income tax expense $548,374 for the same period in 2022. The decrease was due to a decrease in our profits and due to tax holidays enjoyed by our operating entities as well.

 

Net Income

 

As a result of the foregoing, our net income for the six months ended June 30, 2023 and 2022 was $ 2,385,321 and $ 3,191,666, respectively.

 

78

 

 

Net income attributable to non-controlling interest

 

Non-controlling interests are recognized to reflect the portion of their equity that is not attributable, directly or indirectly, to the Company as the controlling shareholder. For the Company’s consolidated subsidiaries, VIE and VIE’s subsidiaries, non-controlling interests represent a minority shareholder’s 49% ownership interest in Yishen and Puyu. Net loss income attributable to non-controlling interest was $35,705 and Net income attributable to non-controlling interest was $65,343 for the six months ended June 30, 2023 and 2022, respectively.

 

Comparison of Results of Operations for the Years Ended December 31, 2022 and 2021

 

The following table summarizes our results of operations for the years ended December 31, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

    For the Years Ended December 31,  
    2022     2021     Variance  
    Amount     % of
revenue
    Amount