F-1 1 goodfaith_f1.htm FORM F-1 goodfaith_f1.htm

As filed with the U.S. Securities and Exchange Commission on March 30, 2023

 

 Registration No. 333-[]

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

FORM F-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

GoodFaith Technology Inc.

(Exact name of registrant as specified in its charter)

 

Cayman Islands

 

 6199

 

Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

1st Floor, Building 5, Lane 55, Chuanhe Road,

Pudong New District, Shanghai,

The People’s Republic of China, 200135

+86-021-68882880

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

 

Cogency Global Inc.

122 East 42nd Street, 18th Floor

New York, NY 10168

(212) 947-7200

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

 

With a Copy to:

 

Ying Li, Esq.

Lisa Forcht, Esq.

Hunter Taubman Fischer & Li LLC

950 Third Avenue, 19th Floor

New York, NY 10022

(212) 530-2206

 

Lawrence S. Venick, Esq.

Loeb & Loeb LLP

2206-19 Jardine House

1 Connaught Place

Central

Hong Kong SAR

Tel: (852) 3923-1111

  

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

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

 

Emerging growth company

 

 

 

 

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

 

 

 

 

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

 

 

 

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

 

 

 

 

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

 

SUBJECT TO COMPLETION

  

PRELIMINARY PROSPECTUS DATED MARCH 30, 2023

    

3,000,000 Ordinary Shares

 

 

GoodFaith Technology Inc.

 

This is an initial public offering of our ordinary shares, par value $0.0001 per share (the “Ordinary Shares”). Prior to this offering, there has been no public market for our Ordinary Shares. We expect the initial public offering price to be in the range of $4.00 to $6.00 per Ordinary Share. The offering is being made on a “firm commitment” basis by A.G.P./Alliance Global Partners (the “Underwriter”). See “Underwriting.” We have reserved the symbol GFCX for purposes of listing our Ordinary Shares on the Nasdaq Capital Market and applied to list our Ordinary Shares on the Nasdaq Capital Market (“Nasdaq”). At this time, Nasdaq has not yet approved our application to list our Ordinary Shares. The closing of this offering is conditioned upon Nasdaq’s final approval of our listing application, and there is no guarantee or assurance that our Ordinary Shares will be approved for listing by Nasdaq.

   

Investing in our Ordinary Shares involves a high degree of risk, including the risk of losing your entire investment. See “Risk Factors” beginning on page 13 to read about factors you should consider before buying our Ordinary Shares.

 

Unless otherwise stated, as used in this prospectus, the terms “we,” “us,” “our,” “GoodFaith Cayman,” “our Company,” and the “Company” refer to GoodFaith Technology Inc., a Cayman Islands exempted company; “Suzhou GoodFaith” refers to Suzhou GoodFaith Information Technology Co., Ltd., a limited liability company organized under the laws of the People’s Republic of China (the “PRC”); and the terms “Beiming Technology,” “Shanghai Yuyi,” and “Shenzhen Xindesheng” refer to Shanghai Beiming Information Technology Co., Ltd., Shanghai Yuyi Information Technology Co., Ltd., and Shenzhen Xindesheng Financial Services Co., Ltd., respectively, all limited liability companies organized under the laws of the PRC that are directly or indirectly wholly owned by Suzhou GoodFaith.

 

We are a holding company incorporated in the Cayman Islands and not a Chinese operating company. As a holding company with no material operations of our own, we conduct all of our operations through the PRC operating entities, Suzhou GoodFaith and its subsidiaries, including Beiming Technology, Shanghai Yuyi, and Shenzhen Xindesheng. Our corporate structure as a Cayman Islands holding company with operations conducted by our PRC subsidiaries, including Suzhou Chuangzhixin Information Technology Co., Ltd. (“GoodFaith WFOE”) and its subsidiaries, involves unique risks to investors. Chinese regulatory authorities could change the rules and regulations regarding foreign ownership in the industry in which the PRC operating entities operate, which would likely result in a material change in our operations and/or a material change in the value of the securities we are offering for sale, including that it could cause the value of such securities to significantly decline or become worthless. Investors in our Ordinary Shares should be aware that they do not directly hold equity interests in the Chinese operating entities, but rather are purchasing equity solely in GoodFaith Technology Inc., our Cayman Islands holding company, which indirectly owns 100% equity interests in the Chinese subsidiaries through its wholly owned British Virgin Islands holding company (GoodFaith Technology Holdings Limited, or “GoodFaith BVI”) and its Hong Kong holding company (GoodFaith Technology Limited, or “GoodFaith HK”). Our Ordinary Shares offered in this offering are shares of our Cayman Islands holding company instead of shares of our subsidiaries in China. This is an offering of Ordinary Shares of the Cayman Islands holding company. You may never hold equity interests in the operating PRC subsidiaries. We do not use a variable interest entity (“VIE”) structure.

 

Under Cayman Islands law, a Cayman Islands exempted company may pay a dividend on its shares out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts due in the ordinary course of business. If we determine to pay dividends on any of our Ordinary Shares in the future, as a holding company, we will depend on receipt of funds from our PRC subsidiaries in the PRC.

 

 

ii

 

  

Current PRC regulations permit GoodFaith WFOE, one of our PRC subsidiaries, to pay dividends to GoodFaith HK, our Hong Kong subsidiary, only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our PRC subsidiaries 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 entities 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 directors. Although the statutory reserves can be used, among other things, 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. For instance, the Circular on Promoting the Reform of Foreign Exchange Management and Improving Authenticity and Compliance Review, or “SAFE Circular 3,” issued on January 26, 2017, provides that banks shall, when dealing with dividend remittance transactions from a domestic enterprise to its offshore shareholders of more than $50,000, review the relevant board resolutions, original tax filing form, and audited financial statements of such domestic enterprise based on the principal of genuine transaction. Furthermore, if our PRC subsidiaries incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. In addition, there can be no assurance that the PRC government will not intervene or impose other restrictions on our ability to transfer or distribute cash within our organization or to foreign investors, which could result in an inability or prohibition on making transfers or distributions outside of mainland China or Hong Kong and adversely affect our business. If we or our PRC subsidiaries are unable to receive all of the revenue from our operations, we may be unable to pay dividends on our Ordinary Shares, should we desire to do so in the future.

 

Cash dividends, if any, on our Ordinary Shares would be paid in U.S. dollars. GoodFaith HK may be considered a non-resident enterprise for tax purposes, so that any dividends GoodFaith WFOE pays to GoodFaith HK may be regarded as China-sourced income and, as a result, may be subject to PRC withholding tax at a rate of up to 10%. See “Material Income Tax Considerations—Enterprise Taxation in Mainland China.”

 

In order for us to pay dividends to our shareholders, we will rely on payments made from Suzhou GoodFaith to GoodFaith WFOE and the distribution of such payments to GoodFaith HK as dividends from GoodFaith WFOE. Certain payments from Suzhou GoodFaith to GoodFaith WFOE are subject to PRC taxes, including business taxes and value-added tax. If Suzhou GoodFaith or its subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict any such party’s ability to pay dividends or make other distributions to us.

 

We are subject to certain legal and operational risks associated with our PRC operating entities’ operations in China, including changes in the legal, political, and economic policies of the Chinese government, the relations between China and the United States, and the Chinese or United States regulations, which could cause the value of our securities to significantly decline or become worthless. PRC laws and regulations governing our current business operations are sometimes vague and uncertain, and therefore, these risks may result in a material change in our PRC operating entities’ operations, significant depreciation of the value of our Ordinary Shares, or a significantly limit or complete hindrance of our ability to offer or continue to offer our securities to investors. 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 the VIE structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. As confirmed by our PRC counsel, AllBright Law Offices (“AllBright”), neither we nor any of our PRC operating entities are subject to cybersecurity review by the Cyberspace Administration of China (“CAC”), pursuant to the Cybersecurity Review Measures, which were jointly promulgated on December 28, 2021 by the CAC, the National Development and Reform Commission (“NDRC”), the Ministry of Industry and Information Technology (“MIIT”), the Ministry of Public Security, Ministry of Stated Security, the Ministry of Finance of the PRC (“MOF”), the Ministry of Commerce of the PRC ( “MOFCOM”), People’s Bank of China (“PBOC”), the State Administration for Market Regulation (“SAMR”), the National Radio and Television Administration, the China Securities Regulation Commission ("CSRC”), the National Administration of State Secrets Protection, and the State Cryptography Administration and took effect on February 15, 2022, because neither we nor any of our PRC operating entities (i) actually purchase any internet products or services and our products and services are not offered directly to individual users, but rather are offered to our institutional clients; (ii) conduct our business based on the encrypted data provided by our institutional clients, which we do not own or have any access to; (iii) utilize data processed in our business that has a bearing on national security; and (iv) are an online platform operator. However, 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 a U.S. exchange or other foreign exchange.

 

On February 17, 2023, the CSRC promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Enterprises (the “Trial Measures”), which will become effective on March 31, 2023. On the same date, the CSRC circulated Supporting Guidance Rules No. 1 through No. 5, Notes on the Trial Measures, Notice on Administration Arrangements for the Filing of Overseas Listings by Domestic Enterprises and relevant CSRC Answers to Reporter Questions (collectively, the “Guidance Rules and Notice”) on the CSRC’s official website. If our registration statement on Form F-1 cannot be declared effective on or before March 31, 2023, or if our registration statement on Form F-1 is declared effective on or before March 31, 2023 but we fail to complete this offering and listing on or before September 30, 2023, we will be required to complete necessary filing procedures pursuant to the Trial Measures. See “Risk Factors—Risks Relating to Doing Business in the PRC—The Chinese government exerts substantial influence over the manner in which we must conduct our business activities. We are currently not required to obtain approval from Chinese authorities to list on U.S exchanges, however, if our PRC subsidiaries or the holding company were required to obtain approval in the future and were denied permission from Chinese authorities to list on U.S. exchanges, we will not be able to continue listing on U.S. exchange and the value of our Ordinary Shares may significantly decline or become worthless, which would materially affect the interest of the investors.” Notwithstanding the foregoing, as of the date of this prospectus, according to our PRC counsel, AllBright, no relevant PRC laws or regulations in effect require that we obtain permission from any PRC authorities to issue securities to foreign investors, and we have not received any inquiry, notice, warning, sanction, or any regulatory objection to this offering from the CSRC, the CAC, or any other PRC authorities that have jurisdiction over our operations. However, based on the advice of our PRC counsel, AllBright, as our PRC Subsidiaries accounted for more than 50% of our consolidated revenues, profit, total assets or net assets for the fiscal year ended December 31, 2022, and the key components of our operations are carried out in the PRC, this offering is considered an indirect offering by domestic companies and we are therefore subject to the filing requirements for this offering under the Trial Measures and Guidance Rules and Notice. However, since these statements and regulatory actions are newly published, it is highly uncertain what the potential impact such modified or new laws and regulations will have on the daily business operations of our subsidiaries, our ability to accept foreign investments, and our listing on a U.S. exchange. If we do not receive or maintain such approval, or inadvertently conclude that such approval is not required, or applicable laws, regulations, or interpretations change such that we are required to obtain approval in the future, we may be subject to an investigation by competent regulators, fines or penalties, or an order prohibiting us from conducting an offering, and these risks could result in a material adverse change in our operations and the value of our Ordinary Shares, significantly limit or completely hinder our ability to offer or continue to offer securities to investors, or cause such securities to significantly decline in value or become worthless. See “Risk Factors - Risks Relating to Doing Business in the PRC,” and “Risk Factors - Risks Relating to This Offering and the Trading Market” for more information.

 

 

 

iii

 

 

Furthermore, our Ordinary Shares may be prohibited to trade on a national exchange or in the over-the-counter trading market in the United States under the Holding Foreign Companies Accountable Act (the “HFCA” Act), if the Public Company Accounting Oversight Board (United States) (the “PCAOB”) determines that it cannot inspect or fully investigate our auditors for three consecutive years beginning in 2021. As a result, an exchange may determine to delist our securities. Additionally, our securities may be prohibited from trading if our auditor cannot be fully inspected as more stringent criteria have been imposed by the SEC and the PCAOB recently. For example, on December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act, which became effective on January 10, 2022. On December 16, 2021, the PCAOB issued a report on its determinations that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong, a Special Administrative Region of the PRC, because of positions taken by PRC authorities in those jurisdictions. As of the date of the prospectus, our auditor, UHY LLP, which is headquartered in the United States, has been inspected by the PCAOB on a regular basis, with the last inspection in 2019, and is not subject to the determinations announced by the PCAOB on December 16, 2021. On August 26, 2022, the PCAOB signed the Statement of Protocol (the “SOP”) Agreements with the CSRC and the Ministry of Finance of the PRC (the “MOF”). The SOP, together with two protocol agreements (collectively, the “SOP Agreements”) governing inspections and investigations of audit firms based in mainland China and Hong Kong, taking the first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. Pursuant to the fact sheet with respect to the SOP disclosed by the U.S. Securities and Exchange Commission (the “SEC”), the PCAOB shall have independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability to transfer information to the SEC. On December 15, 2022, the PCAOB Board determined that the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB Board will consider the need to issue a new determination. The PCAOB’s December 15, 2022 determination resets the three-year clock for compliance with the HFCA Act. The PCAOB continues to demand complete access in mainland China and Hong Kong moving forward and is making plans to resume regular inspections in early 2023 and beyond, as well as to continue pursuing ongoing investigations and initiate new investigations as needed. The PCAOB has also indicated that it will act immediately to consider the need to issue new determinations with the HFCA Act, if needed. Even though the PCAOB’s December 15, 2022 determination significantly reduces the risk of an involuntary delisting under the HFCA Act, it does not eliminate other requirements for companies with PRC operating entities’ operations in China like us under both the HFCA Act and SEC guidance. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, and on December 29, 2022, legislation entitled “Consolidated Appropriations Act, 2023” (the “Consolidated Appropriations Act”) was signed into law by President Biden, which contained, among other things, an identical provision to the Accelerating Holding Foreign Companies Accountable Act and amended the HFCA Act by requiring 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, thus reducing the time period for triggering the delisting of our Company and the prohibition of trading in our securities if the PCAOB is unable to inspect our accounting firm at such future time. A termination in the trading of our securities due to an involuntary delisting or any restriction on the trading in our securities would be expected to have a negative impact on the Company as well as on the value of our securities, should we face heightened operational and legal risks in relation to HFCA compliance.  See “Risk Factors - Risks Relating to Doing Business in the PRC – A recent joint statement by the SEC and the PCAOB, rule changes by Nasdaq, and an act passed by the U.S. Senate all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.”

  

As of the date of this prospectus, none of our subsidiaries have made any dividends or distributions to our Company and our Company has not made any dividends or distributions to our shareholders. Nonetheless, one of our PRC subsidiaries, Shenzhen Xindesheng, made dividends to its former shareholders for fiscal years from 2019 to 2021 before it was indirectly acquired by our Company on December 31, 2021. Specifically, the revised profit distribution in 2019, 2020, and 2021 were $149,366, $593,648, and nil, respectively. See “Note 10-Shareholders’ Equity-Dividends.” We intend to keep any future earnings to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future. If we determine to pay dividends on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our Hong Kong subsidiary, GoodFaith HK. GoodFaith HK will rely on payments made from Suzhou GoodFaith to GoodFaith WFOE and the distribution of such payments to GoodFaith HK as dividends from GoodFaith WFOE. Our finance department is supervising cash management, following the instructions of our management. Our finance department is responsible for establishing our cash operation plan and coordinating cash management matters among our subsidiaries and departments. Each subsidiary and department initiates a cash request by putting forward a cash demand plan, which explains the specific amount and timing of cash requested, and submitting it to our finance department. The finance department reviews the cash demand plan and prepares a summary for the management of our Company. Management examines and approves the allocation of cash based on the sources of cash and the priorities of the needs. Other than the above, we currently do not have other cash management policies or procedures that dictate how funds are transferred. As of the date of this prospectus, no cash transfer or transfer of other assets has occurred between our Company and our subsidiaries. See “Prospectus Summary-Dividend Distributions” and our unaudited condensed consolidated interim financial statements for the six months ended June 30, 2022 and our audited consolidated financial statements for the fiscal years ended December 31, 2021 and 2020.

  

We are an “emerging growth company” as defined under the federal securities laws and will be subject to reduced public company reporting requirements. Please read the disclosures beginning on page 11 of this prospectus for more information.

 

Our Company is controlled by Qearl's Holdings Limited, which owns 47.3% of the equity interests in GoodFaith Cayman. Qearl’s Holding Limited, a British Virgin Islands company, is ultimately held by Xiaofeng Fei, as to 10% and by Wonder Phoenix Family Trust (the “Trust”), a trust established under the laws of the Cayman Islands by Xiaofeng Fei, where TMF (Cayman) Ltd. is appointed as the trustee and Kai Zhou as the primary beneficiary, as to 90%. As the First Protectors and the First Members of the Investment Committee of the Trust, Xiaofeng Fei and Kai Zhou are invested with the authority to make investment decisions for the Trust. On November 2, 2021, Xiaofeng Fei and Kai Zhou executed an acting-in-concert agreement, which provides that (i) they shall inform and discuss with each other and reach a consensus before exercising voting rights in making decisions for the Trust, and (ii) if no consensus can be reached, the decision made by Kai Zhou prevails. By virtue of the acting-in-concert agreement, Kai Zhou has the ultimate control of the Trust, and consequently, of Qearl’s Holdings Limited and our Company.

 

 

 

 

 

 

 

 

 

 

 

 

Per Share

 

 

Total

Without

Over-

Allotment

Option

 

 

Total

With

Over-

Allotment

Option

 

Initial public offering price

 

$

 

 

 

$

 

 

 

$

 

 

Underwriting discounts

(1)

 

$

 

 

 

$

 

 

 

$

 

 

Proceeds to our Company before expenses(2)

 

$

 

 

 

$

 

 

 

$

 

 

 

 

(1)

Represents underwriting discounts equal to 7.5% per Ordinary Share.

 

 

(2)

We expect our total cash expenses for this offering, including the non-accountable expense allowance and accountable out-of-pocket expenses payable to A.G.P./Alliance Global Partners, the representative of several underwriters (the “Representative”), to be approximately $175,000, exclusive of the above discounts. In addition, we will pay additional items of value in connection with this offering that are viewed by the Financial Industry Regulatory Authority, or FINRA, as underwriting compensation. These payments will further reduce proceeds available to us before expenses. See “Underwriting.”

 

 

This offering is being conducted on a firm commitment basis. The Representative is obligated to take and pay for all of the Ordinary Shares if any such Ordinary Shares are taken. In addition to the underwriting discounts listed above, we have agreed to issue to the Representative or its designated affiliates and to register herein warrants, exercisable for a period of five years after the closing of this offering, to purchase up to 8% of the total number of the Ordinary Shares to be offered by us pursuant to this offering (including the over-allotment shares), solely for the purpose of covering over-allotments shares, at the public offering price less the underwriting discounts (the “Representative’s Warrants”). If the underwriters exercise the over-allotment option in full, the total underwing discounts payable will be $1,293,750 based on an assumed midpoint offering price of $5.00 per Ordinary Share, and the total gross proceeds to us, before underwriting discounts and expenses, will be $17,250,000. See “Underwriting” for additional information regarding total underwriter compensation.

 

The underwriters expects to deliver the Ordinary Shares against payment as set forth under “Underwriting,” on or about [●], 2023.

 

 

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

 

A.G.P 

 

Prospectus dated [●], 2023

 

 

iv

 

  

TABLE OF CONTENTS

 

 

 

Page

 

PROSPECTUS SUMMARY

 

1

 

 

 

 

 

RISK FACTORS

 

13

 

 

 

 

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

46

 

 

 

 

 

ENFORCEABILITY OF CIVIL LIABILITIES

 

47

 

 

 

 

 

USE OF PROCEEDS

 

48

 

 

 

 

 

DIVIDEND POLICY

 

49

 

 

 

 

 

CAPITALIZATION

 

50

 

 

 

 

 

DILUTION

 

51

 

 

 

 

 

CORPORATE HISTORY AND STRUCTURE

 

52

 

 

 

 

 

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

 

54

 

 

 

 

 

INDUSTRY

 

77

 

 

 

 

 

BUSINESS

 

85

 

 

 

 

 

REGULATIONS

 

114

 

 

 

 

 

MANAGEMENT

 

122

 

 

 

 

 

PRINCIPAL SHAREHOLDERS

 

127

 

 

 

 

 

RELATED PARTY TRANSACTIONS

 

128

 

 

 

 

 

DESCRIPTION OF SHARE CAPITAL

 

134

 

 

 

 

 

SHARES ELIGIBLE FOR FUTURE SALE

 

148

 

 

 

 

 

MATERIAL INCOME TAX CONSIDERATIONS

 

150

 

 

 

 

 

UNDERWRITING

 

157

 

 

 

 

 

EXPENSES RELATING TO THIS OFFERING

 

160

 

 

 

 

 

LEGAL MATTERS

 

161

 

 

 

 

 

EXPERTS

 

161

 

 

 

 

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

161

 

 

 

 

 

INDEX TO FINANCIAL STATEMENTS

 

F-1

 

 

v

Table of Contents

  

ABOUT THIS PROSPECTUS

 

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

 

Neither we nor the underwriters have taken any action to permit a public offering of the Ordinary Shares outside the United States or to permit the possession or distribution of this prospectus or any filed free-writing prospectus outside the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about, and observe any restrictions relating to, the offering of the Ordinary Shares and the distribution of this prospectus or any filed free-writing prospectus outside the United States.

 

Conventions that Apply to this Prospectus

 

This prospectus contains information from an industry report commissioned by us and prepared by Frost & Sullivan (Beijing) Inc., Shanghai Branch Co., or “Frost & Sullivan,” an independent research firm, titled “The Intelligent Risk Management Market Study in China,” to provide information regarding our industry and our market position in China. We refer to this report as the “Frost & Sullivan Report.” 

  

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

 

 

“Beihai Beiming” are to Beihai Beiming Investment Co., Ltd., a limited liability company organized pursuant to the laws of the PRC, which is wholly owned by Suzhou GoodFaith (defined below);

 

 

 

 

“China” or the “PRC” are to the People’s Republic of China, including the special administrative regions of Hong Kong and Macau, unless referencing specific laws and regulations adopted by the PRC; and “mainland China” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau for the purposes of this prospectus only. The same legal and operational risks associated with operations in China also apply to operations in Hong Kong; 

 

 

 

 

“elastic computer service” are to a type of cloud computing service provided by third parties, such as Amazon and Alibaba, that enables users to deploy virtual servers within their cloud computing platforms, and elastic computer services allow users to adjust their computing power according to their needs in a flexible and cost-effective manner;

 

 

 

 

“GoodFaith BVI” are to GoodFaith Technology Holdings Limited, a company incorporated under the laws of the British Virgin Islands, which is wholly owned by GoodFaith Cayman (defined below);

 

 

 

 

“GoodFaith Cayman,” “we,” “us,” “our Company,” or the “Company” are to GoodFaith Technology Inc., an exempted company with limited liability incorporated under the laws of the Cayman Islands;

 

 

 

 

“GoodFaith HK” or “our Hong Kong subsidiary” are to GoodFaith Technology Limited, a Hong Kong corporation, which is wholly owned by GoodFaith BVI;

 

 

 

 

“GoodFaith WFOE” are to Suzhou Chuangzhixin Information Technology Co., Ltd., a limited liability company organized under the laws of the PRC, which is wholly owned by GoodFaith HK;

 

 

 

 

“our digital technology,” or “the digital technology” are to the Company's data analytics related technology that processes and analyzes client-provided real-time data based on its algorithmic logic and risk models;

 

 

 

 

“Renminbi” or “RMB” are to the legal currency of China;

 

 

 

 

“shares,” “Shares,” or “Ordinary Shares” are to the ordinary shares of GoodFaith Cayman, par value $0.0001 per share;

 

 

 

 

“Shenzhen Xindesheng” are to Shenzhen Xindesheng Financial Services Co., Ltd., a limited liability company organized pursuant to the laws of the PRC, which is wholly owned by Suzhou GoodFaith (defined below);

 

 

 

 

“Suzhou GoodFaith” are to Suzhou GoodFaith Information Technology Co., Ltd., a limited liability company organized under the laws of the PRC, which is wholly owned by GoodFaith WFOE;

 

 

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“the PRC operating entities,” or “our PRC operating entities” are to Suzhou GoodFaith and its subsidiaries;

 

 

 

 

“the PRC subsidiaries,” or “our PRC subsidiaries” are to GoodFaith WFOE and its subsidiaries;

 

 

 

 

“U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States; and

 

 

 

 

“WFOE” are to wholly foreign-owned enterprise.

 

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

 

Our business is conducted by the PRC operating entities using RMB. Our consolidated financial statements are presented in U.S. dollars. In this prospectus, we refer to assets, obligations, commitments, and liabilities in our consolidated financial statements in U.S. dollars. These dollar references are based on the exchange rate of RMB to U.S. dollars, determined as of a specific date or for a specific period. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of U.S. dollars which may result in an increase or decrease in the amount of our obligations (expressed in dollars) and the value of our assets, including accounts receivable (expressed in dollars).

 

 

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PROSPECTUS SUMMARY

 

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

 

We are a holding company incorporated in the Cayman Islands and not a Chinese operating company. As a holding company with no material operations of our own, we conduct all of our operations through the PRC operating entities, Suzhou GoodFaith and its subsidiaries, including Beiming Technology, Shanghai Yuyi, and Shenzhen Xindesheng. Because of our corporate structure as a Cayman Islands holding company with operations conducted by our PRC subsidiaries, it involves unique risks to investors. Furthermore, Chinese regulatory authorities could change the rules and regulations regarding foreign ownership in the industry in which the company operates, which 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 it could cause the value of such securities to significantly decline or become worthless. Investors in our Ordinary Shares should be aware that they do not directly hold equity interests in the Chinese operating entities, but rather are purchasing equity solely in GoodFaith Technology Inc., our Cayman Islands holding company, which indirectly owns 100% equity interests in the Chinese subsidiaries. Our Ordinary Shares offered in this offering are shares of our Cayman Islands holding company instead of shares of our subsidiaries in China.

 

PCAOB’s Determinations on Public Accounting Firms Headquartered in Mainland China and in Hong Kong

 

Our Ordinary Shares may be prohibited from trading on a national exchange in the United States under the HFCA Act, if the PCAOB is unable to inspect or fully investigate our auditors for three consecutive years beginning in 2021. As a result, an exchange may determine to delist our securities. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, and on December 29, 2022, the Consolidated Appropriations Act was signed into law by President Biden, which contained, among other things, an identical provision to Accelerating Holding Foreign Companies Accountable Act, which reduces the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two. Additionally, our securities may be prohibited from trading if our auditor cannot be fully inspected as more stringent criteria have been imposed by the SEC and the PCAOB recently. For example, on December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act, which became effective on January 10, 2022. On December 16, 2021, the PCAOB issued a report on its determinations that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong, because of positions taken by PRC authorities in those jurisdictions. As of the date of the prospectus, the Company’s auditor, UHY LLP, which is headquartered in the United States, has been inspected by the PCAOB on a regular basis, with the last inspection in 2019, and is not subject to the determinations announced by the PCAOB on December 16, 2021 relating to the PCAOB’s inability to inspect or investigate completely registered public accounting firms headquartered in mainland China or Hong Kong. On August 26, 2022, the PCAOB signed the SOP Agreements with the CSRC and the MOF. The SOP Agreements established a specific, accountable framework to make possible complete inspections and investigations by the PCAOB of audit firms based in mainland China and Hong Kong, as required under U.S. law. On December 15, 2022, the PCAOB Board determined that the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB Board will consider the need to issue a new determination within three years’ time. The PCAOB’s December 15, 2022 determination resets the three-year clock for compliance with the HFCA Act. Even though the PCAOB’s December 15, 2022 determination significantly reduces the risk of an involuntary delisting under the HFCA Act, it does not eliminate other requirements for companies with PRC operating entities’ operations in China like us under both the HFCA Act and SEC guidance. The PCAOB continues to demand complete access in mainland China and Hong Kong moving forward and is making plans to resume regular inspections in early 2023 and beyond, as well as to continue pursuing ongoing investigations and initiate new investigations as needed. The PCAOB has also indicated that it will act immediately to consider the need to issue new determinations with the HFCA Act, if needed. If trading in our Ordinary Shares is prohibited under the HFCA Act in the future because the PCAOB determines that it cannot inspect or fully investigate our auditor at a future time, Nasdaq may determine to delist our Ordinary Shares. A termination in the trading our of securities via an involuntary delisting or any restriction on the trading in our securities would be expected to have a negative impact on the Company as well as on the value of our securities should we face heightened operational and legal risks in relation to HFCA compliance.  See “Risk Factors - Risks Relating to Doing Business in the PRC - A recent joint statement by the SEC and the PCAOB, rule changes by Nasdaq, and an act passed by the U.S. Senate all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.”

   

Our Mission

 

We are committed to providing our clients with efficient and customized pre-approval risk management and post-loan delinquent debt collection products and services in connection with their credit loan businesses, utilizing our proprietary technology infrastructure, innovative business model and extensive experience in credit loan risk management and delinquent debt collection.

 

Business Overview

 

We offer customized pre-approval risk management and post-loan delinquent debt collection products and services to commercial banks and non-bank financial institutions in China in connection with credit loans. We have established a national network of 16 operating centers and 3 administrative offices in over 11 cities across China, where we have also built a broad client base across more than 75 commercial banks and non-bank financial institutions. We are committed to providing products and services that address risk evaluation and solvency assessment during the pre-approval stage and credit loan debt collection during the delinquency stage.

  

 
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Credit loans refer to the loans granted to borrowers based on the creditworthiness of the borrower without any collateral requirement. Based on different financing purposes, credit loans can be categorized into personal credit loans (including personal consumption loans, auto loans, personal business operation loans) and corporate credit loans. We mainly focus on personal credit loans for both of our pre-approval risk management and post-loan debt collection businesses, due to their increasing market demand. In particular, personal credit loans typically involve (i) small principal sums in greater quantities and (ii) standardized credit review processes. Thus, there is a need for banks and financial institutions to process such personal credit loans in bulk and automate the approval process, so as to save time and resources. Additionally, banks and financial institutions are more likely to engage third parties to collect delinquent debts under personal credit loans in an effort to spare their labor and financial resources. Our client base comprises only commercial banks and non-bank financial institutions, and does not include any peer-to-peer lenders.

 

The intelligent risk management industry and credit loan debt collection industry in China have been expanding in recent years. According to Frost & Sullivan, the market size of intelligent risk management services in 2020 reached approximately RMB7.8 billion (approximately $1.2 billion) and is expected to reach approximately RMB22.8 billion (approximately $3.5 billion) by 2025. Similarly, the market size of credit loan debt collection services in 2020 reached RMB65.8 billion (approximately $10.2 billion) and is expected to reach approximately RMB116.0 billion (approximately $17.9 billion) by 2025. With the market sizes expanding, we believe we may have more opportunities to build a sustainable and scalable business with our ever-improving pre-approval and post-loan products and services. We endeavor to efficiently and effectively assist our clients with their pre-approval risk management and post-loan delinquent debt collection in connection with credit loans.

 

Our business is comprised of two segments: (i) the credit loan pre-approval stage: risk evaluation and solvency assessment products and services; and (ii) the credit loan post-loan stage: delinquent debt collection services. Currently, we are focused on providing our products and services to commercial banks, e-commerce platform affiliated finance companies, licensed consumer finance companies and other financial institutions in China which engage in the consumer credit loan business.

 

Before a credit loan is approved, our clients engage us to evaluate the risk of default and assess the solvency of a loan applicant. Our products and services in the pre-approval segment facilitate our clients’ determinations on granting loans. Our clients are charged contingent monthly fees based on the number of verification records we process. During the post-loan stage, when a credit loan is in default, our clients engage us to collect the delinquent receivables. Unlike traditional asset management companies, our delinquent debt collection business follows a “light-asset strategy;” namely, we do not purchase the delinquent loans we collect, but only collect them on behalf of financial institution clients in exchange for commissions based on our collection success. The light-asset strategy reduces our cost of capital and cash flow requirements by avoiding debt acquisitions, while minimizing our exposure to potential bad debts. Because we do not purchase delinquent loans, we have not been, and could not be, required to take an ownership interest in the finance receivables we service. In the pre-approval stage, we utilize our self-developed advanced technology, including artificial intelligence, proprietary technology systems and digital technology, to process and analyze client-provided encrypted and anonymized data to increase our work efficiency and result accuracy. In the post-loan stage, we utilize collection process software purchased from third parties to manage and control our work process. We believe that our technology infrastructure, as we enhance its sophistication, can continue to improve our performance and optimize our financial results.

     

We have experienced substantial growth since the inception of our PRC operating entities. The numbers of our clients were 53, 68 and 75 for the fiscal years ended December 31, 2019, 2020 and 2021, respectively, representing growth of 28% and 10% from the previous periods, respectively. The number of our clients was 64 for the six months ended June 30, 2022, representing a decrease of 2% from the same period in 2021. For the fiscal year ended December 31, 2021, our three largest clients accounted for 49%, 15%, and 13% of our total revenue, respectively. For the six months ended June 30, 2022, our three largest clients accounted for 79%, 7%, and 3% of our total revenue, respectively. In our pre-approval segment, as of December 31, 2019, 2020 and 2021, we processed approximately 75,415,000, 52,900,000, and 63,700,000 verification records, respectively, representing a decrease of 30% and an increase of 20% in the number of verification records processed from the previous periods, respectively. The decrease in 2020 was mainly due to the COVID-19 pandemic. As of June 30, 2022, we processed approximately 28,700,000 verification records, representing an increase of 4% in the number of verification records processed from the same period in 2021. In our post-loan segment, as of December 31, 2019, 2020 and 2021, the total amount of delinquent credit loan debt we successfully collected was approximately RMB0.32 billion (approximately $0.05 billion), RMB5.27 billion (approximately $0.76 billion) and RMB11.03 billion (approximately $1.7 billion), representing growth of 1534% and 109% from the previous periods, respectively. As of June 30, 2022, the total amount of delinquent credit loan debt we successfully collected was approximately RMB7.4 billion (approximately $1.1 billion), representing growth of 85% from the same period in 2021. The total amount of delinquent credit loan debt we were engaged to collect, as of December 31, 2019, 2020 and 2021, was approximately RMB11.0 billion (approximately $1.6 billion), RMB19.6 billion (approximately $2.8 billion) and RMB33.9 billion (approximately $5.2 billion), representing growth of 79% and 73% from the previous periods, respectively. The total amount of delinquent credit loan debt we were engaged to collect, as of June 30, 2022, was RMB24.7 billion (approximately $3.8 billion), representing growth of 81% from the same period in 2021. The monthly average amount of delinquent credit loan debt collected per each collection specialist, as of December 31, 2019, 2020 and 2021, was approximately RMB124,000 (approximately $17,966), RMB668,000 (approximately $96,807) and RMB1,329,000 (approximately $205,969), representing growth of 439% and 99% from the previous periods, respectively. The monthly average amount of delinquent credit loan debt collected per each collection specialist, as of June 30, 2022, was approximately RMB1,277,000 (approximately $197,138), representing an increase of 32% from the same period in 2021.

 

Our total revenue amounted to $20,653,211 for the fiscal year ended December 31, 2021, representing growth of approximately 29.1% compared to the fiscal year ended December 31, 2020. Our total revenue amounted to $24,560,502 for the six months ended June 30, 2022, representing growth of approximately 182.6% from the same period in 2021. Revenue derived from pre-approval risk management services and post-loan delinquent debt collection services accounted for approximately 4.5% and 95.5%, respectively, of our total revenue for the six months ended June 30, 2022; 17.2% and 82.8%, respectively, of our total revenue for the fiscal year ended December 31, 2021; and 15.7% and 84.3%, respectively, of our total revenue for the fiscal year ended December 31, 2020. Our gross profit amounted to $3,611,539 for the fiscal year ended December 31, 2021, representing a decrease of approximately 30.7% compared to the fiscal year ended December 31, 2020. Our gross profit amounted to $5,339,221 for the six months ended June 30, 2022, representing an increase of 292.6% compared to the same period in 2021. Our net income amounted to $403,076 for the fiscal year ended December 31, 2021, representing a decrease of approximately 68.4% compared to the fiscal year ended December 31, 2020. The decrease in net income was primarily attributable to (i) an increase in cost of revenue by approximately 58.0% in 2021, resulting from (a) an increase in salaries and benefits, (b) an increase in management service costs for operating centers, and (c) an increase in data service costs; and (ii) an increase in total other expense by 139.6%, primarily driven by an increase in net expense in 2021 for penalties and interest of under-declared income taxes that were recognized as components of the non-operating expenses. Our net income amounted to $3,165,832 for the six months ended June 30, 2022, representing an increase of approximately  17,528.9% compared to the same period in 2021. The increase in net income was primarily attributable to the substantial growth of our post-loan segment gross profit by 565.2%.

  

 
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By leveraging our technological advancement, innovative approach, and experience, we aim to identify potential risks of credit loan applicants, thereby saving our clients the burden of delinquent debt collection, and effectively increasing their delinquent debt recovery rates. It is our plan to continue to devote our efforts to improving our products and services in order to better service our clients and their expanding needs. In the future, we hope to exploit the synergy between pre-loan and post-loan services, and offer financial institutions one-stop services for risk management and debt collection, which will reduce bank bad debt losses and improve post-loan recovery rates by screening out high-risk applicants and improving the efficiency of banks and other institutions in collecting delinquent loans.

 

Competitive Strengths

 

We believe that the following competitive strengths have contributed to our success and differentiated us from our competitors:

 

 

sophisticated and dynamic risk management capability and competitive delinquent debt collection ability with proven performance and strong relationships with major clients;

 

 

 

 

a portfolio of integrated, complementary products and services to optimize our results;

 

 

 

 

proprietary IT infrastructure and strong technology team;

 

 

 

 

visionary and experienced leadership backed by a strong team of talent;

 

 

 

 

advanced know-how and compliance-oriented business practice; and

 

 

 

 

innovative business model leveraging business development with a light-asset strategy.

 

Growth Strategies

 

Our goal is to become a leading business service provider that offers a comprehensive range of financial services across the risk management and delinquent credit loan debt collection field in China. Specifically, we plan to implement the following strategies:

 

 

expand our client base and enhance our brand recognition;

 

 

 

 

increase investment to improve our information technology and data analytic capabilities;

 

 

 

 

selectively pursue strategic investments and acquisitions; and

 

 

 

 

continue to recruit and retain talent to grow and maintain our team.

 

Corporate Information

 

Our principal executive office is located at 1st Floor, Building 5, Lane 55, Chuanhe Road, Pudong New District, Shanghai, China, and our phone number is +86-021-68882880. Our registered office in the Cayman Islands is located at Sertus Chambers, Governors Square, Suite # 5-204, 23 Lime Tree Bay Avenue, P.O. Box 2547, Grand Cayman, KYI-1104, Cayman Islands, and the phone number of our registered office is +1 284-495-8295. We maintain a corporate website at www.cxgoodfaith.com. The information contained in, or accessible from, our website or any other website does not constitute a part of this prospectus. Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168.

  

 
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Corporate Structure

 

We are a Cayman Islands exempted company incorporated on May 13, 2021. Exempted companies are Cayman Islands’ companies conducting business mainly outside the Cayman Islands and, as such, are exempt from complying with certain provisions of the Companies Act (as Revised). The following diagram illustrates our corporate structure as of the date of this prospectus and upon completion of our initial public offering (“IPO”) based on a proposed number of 3,000,000 Ordinary Shares being offered, assuming no exercise of the underwriters’ over-allotment option. For more detail on our corporate history, refer to “Corporate History and Structure.”

 

 

Notes:

 

 

(1)

Represents 9,460,000 Ordinary Shares held by Xiaofeng Fei and the Trust, together holding 100% of the equity interests in Qearl’s Holdings Limited, an investment holding company incorporated in the British Virgin Islands, as of the date of this prospectus. Specifically, Qearl’s Holdings Limited is held by (i) Wonder Phoenix Holdings Limited, as to 10%, which is in turn wholly owned by Xiaofeng Fei; and (ii) Wonder Phoenix Family Limited, as to 90%, which is in turn wholly owned by the Trust, a trust established under the laws of the Cayman Islands by Xiaofeng Fei, as settlor, with TMF (Cayman) Ltd. being appointed as the trustee and Kai Zhou as the primary beneficiary. As the First Protectors and the First Members of the Investment Committee of the Trust, Xiaofeng Fei and Kai Zhou are invested with the authority to make investment decisions for the Trust. On November 2, 2021, Xiaofeng Fei and Kai Zhou executed an acting-in-concert agreement, which provides that (a) they shall inform and discuss with each other and reach a consensus before exercising voting rights in making decisions for the Trust, and (b) if no consensus can be reached by the Parties, the decision made by Kai Zhou prevails. Through the acting-in-concert agreement, Kai Zhou has the ultimate control of the Trust, and, therefore, of Qearl’s Holdings Limited.

 

 

 

 

(2)

Represents 5,840,000 Ordinary Shares held by Xiaowei Wang, the 100% owner of Gread Cause Holdings Limited, an investment holding company incorporated in the British Virgin Islands, as of the date of this prospectus.

 

 

 

 

(3)

Represents 1,200,000 Ordinary Shares held by Xu Dai, the 100% owner of Cloud Light Holdings Limited, an investment holding company incorporated in the British Virgin Islands, as of the date of this prospectus.

 

 

 

 

(4)

Represents an agreement of 3,500,000 Ordinary Shares held by four shareholders, each one of which holds less than 5% of our Ordinary Shares, as of the date of this prospectus.

 

Investors are purchasing securities of our holding company, GoodFaith Cayman, instead of securities of our PRC subsidiaries. We do not use a VIE structure.

 

Summary of Risk Factors 

 

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

 

 
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Risks Relating to Doing Business in the PRC

 

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

  

 

China’s economic, political and social conditions, laws and regulations, as well as possible interventions and influences of any government policies and actions, are uncertain and could have a material adverse effect on our business, operations and the value of our Ordinary Shares (see page 13 of this prospectus);

 

 

 

 

PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Rules and regulations in China can change quickly with little advance notice. Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protection available to you and us. Any changes in such laws and regulations may impair our ability to operate profitably (see page 13 of this prospectus); 

 

 

 

 

The Chinese government exerts substantial influence over the manner in which we must conduct our business activities. We are currently not required to obtain approval from Chinese authorities to list on U.S exchanges, however, if our PRC subsidiaries or the holding company were required to obtain approval in the future and were denied permission from Chinese authorities to list on U.S. exchanges, we will not be able to continue listing on U.S. exchange and the value of our ordinary shares may significantly decline or become worthless, which would materially affect the interest of the investors (see page 14 of this prospectus); 

 

 

 

 

We may become subject to a variety of laws and regulations in the PRC regarding privacy, data security, cybersecurity, and data protection. We may be liable for improper use or appropriation of personal information provided by our customers (see page 15 of this prospectus);

 

 

 

 

One of our subsidiaries is subject to various evolving Hong Kong laws and regulations regarding data security or antimonopoly conduct, which could subject it to government enforcement actions and investigations, fines, penalties, and suspension or disruption of its operations (see page 17 of this prospectus);

 

 

 

 

You may experience difficulties in effecting service of legal process, enforcing foreign judgments, or bringing actions in China against us or our management named in the prospectus based on foreign laws (see page 17 of this prospectus);

 

 

 

 

PRC regulations relating to offshore investment activities by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ abilities to increase their registered capital or distribute profits to us, or may otherwise adversely affect us (see page 18 of this prospectus);

 

 

 

 

U.S. regulatory bodies may be limited in their ability to conduct investigations or inspections of our operations in China (see page 17 of this prospectus);

   

 

PRC regulation of parent/subsidiary loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business (see page 19 of this prospectus);

 

 

 

 

Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment (see page 20 of this prospectus);

 

 

 

 

Under the PRC Enterprise Income Tax Law, we may be classified as a PRC “resident enterprise” for PRC enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders and have a material adverse effect on our results of operations and the value of your investment (see page 20 of this prospectus);

 

 

 

 

We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies (see page 21 of this prospectus);

 

 

 

 

Our PRC subsidiaries are subject to restrictions on paying dividends or making other payments to us, and there is no assurance that the PRC government will not intervene or impose restrictions on our ability to transfer cash out of or to mainland China and Hong Kong, which may have a material adverse effect on our ability to conduct our business (see page 22 of this prospectus);

 

 

 

 

Governmental control of currency conversion may affect the value of your investment and our payment of dividends (see page 22 of this prospectus);

 

 

 

 

There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of GoodFaith WFOE, and dividends payable by GoodFaith WFOE to our offshore subsidiaries may not qualify to enjoy certain treaty benefits (see page 22 of this prospectus);

 

 

If we become directly subject to the scrutiny, criticism, and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, Ordinary Share price, and reputation (see page 23 of this prospectus);

 

 

 

 

The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC (see page 23 of this prospectus);

 

 

 

 

A recent joint statement by the SEC and the PCAOB, rule changes by Nasdaq, and an act passed by the U.S. Senate all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering (see page 23 of this prospectus);

 

 

 

 

The approval of the CSRC may be required in connection with this offering under a regulation adopted in August 2006, and, if required, we cannot assure you that we will be able to obtain such approval, in which case we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek CSRC approval for this offering (see page 25 of this prospectus);

 

 

 

 

The M&A Rules (as defined below) and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China (see page 26 of this prospectus); and

 

 

 

 

Because we are a Cayman Islands exempted company and all of our business is conducted in the PRC, you may be unable to bring an action against us or our officers and directors or to enforce any judgment you may obtain (see page 26 of this prospectus).

     

 
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Risks Related to Our Business and Industries

 

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

  

 

The financial sector in China is subject to changes in regulations. Non-compliance with new financial regulations or new licensing requirements may materially affect our business operations and financial results (see page 27 of this prospectus);

 

 

 

 

The industries we are in are still evolving, which makes it difficult to effectively assess our future prospects (see page 27 of this prospectus);

 

 

 

 

We operate a socially sensitive business and public complaints against the pre-approval and post-loan industry in general, or against us in particular, may materially and adversely affect our business, financial condition, and results of operations (see page 28 of this prospectus);

 

 

 

 

Our revenue would be adversely affected if our clients develop or adopt an alternative to our services (see page 28 of this prospectus);

 

 

 

 

Our operating history, and our experience in risk evaluation and the debt collection business, may not provide an adequate basis to judge our future prospects and results of operations (see page 28 of this prospectus); 

 

 

 

 

Fraudulent activity could negatively impact our operating results, brand, and reputation, and cause the use of our risk evaluation services to decrease (see page 29 of this prospectus);

 

 

 

 

Market, economic and other conditions in China may adversely affect the demand for our products and services (see page 29 of this prospectus);

 

 

 

 

Our employees, including collection specialists, may violate our compliance policies and government rules and regulations during the repayment and collection management process (see page 29 of this prospectus);

 

 

We rely on our advanced technology, including artificial intelligence, our proprietary technology system, and digital technology, to offer risk evaluation and solvency assessment products and services. If our assessment model or the underlying algorithm lacks accuracy or fails to achieve clients’ goals, our reputation and market share would be materially and adversely affected, which would severely impact our business and results of operations (see page 30 of this prospectus);

 

 

We rely on third parties to provide basic verification services to our clients. If such third parties, or critical staff of such third parties, are unable or unwilling to continue in their present positions, our business may be severely disrupted (see page 30 of this prospectus);

 

 

Credit and other information we receive from third parties about borrowers may be inaccurate or may not accurately reflect a prospective borrower’s creditworthiness, which may compromise the accuracy of our credit assessment (see page 30 of this prospectus);

 

 

 

 

If our pre-approval risk evaluation and solvency assessments business do not achieve sufficient market acceptance, our financial results and competitive position will be harmed (see page 30 of this prospectus);

 

 

 

 

We face increasing competition, and if we do not compete effectively, our operating results could be harmed (see page 31 of this prospectus);

 

 

 

 

Any harm to our brand or reputation may materially and adversely affect our business and results of operations (see page 31 of this prospectus);

 

 

We may not be able to manage the repayment and collection of consumer receivables efficiently and a decline in our ability to manage the repayment and collection of consumer receivables could adversely affect our ability to generate revenue and reputation (see page 33 of this prospectus);

 

 

Our ability to protect the confidential information of various parties, including loan applicants and delinquent debtors, may be adversely affected by cyberattacks, computer viruses, physical or electronic break-ins or similar disruptions (see page 33 of this prospectus); and

 

 

 

 

We face risks related to natural disasters, health epidemics, and other outbreaks, which could significantly disrupt our operations (see page 38 of this prospectus).

 

 
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Risks Relating to this Offering and the Trading Market

 

In addition to the risks described above, we are subject to general risks and uncertainties relating to this offering and the trading market, including, but not limited to, the following:

 

 

There has been no public market for our Ordinary Shares prior to this offering, and you may not be able to resell our Ordinary Shares at or above the price you pay for them, or at all (see page 39 of this prospectus);

 

 

 

 

You will experience immediate and substantial dilution in the net tangible book value of Ordinary Shares you purchased (see page 39 of this prospectus);

 

 

 

 

If we fail to implement and maintain an effective system of internal controls or fail to remediate the material weaknesses in our internal control over financial reporting that have been identified, we may fail to meet our reporting obligations or be unable to accurately report our results of operations or prevent fraud, and investor confidence and the market price of our Ordinary Shares may be materially and adversely affected (see page 39 of this prospectus);

 

 

We will incur substantial increased costs as a result of being a public company(see page 40 of this prospectus);

 

 

 

 

Substantial future sales of our Ordinary Shares or the anticipation of future sales of our Ordinary Shares in the public market could cause the price of our Ordinary Shares to decline (see page 40 of this prospectus);

 

 

 

 

We do not intend to pay dividends for the foreseeable future (see page 40 of this prospectus);

 

 

 

 

If securities or industry analysts do not publish research or reports about our business, or if they publish a negative report regarding our Ordinary Shares, the price of our Ordinary Shares and trading volume could decline (see page 41 of this prospectus);

 

 

 

 

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 (see page 41 of this prospectus);

 

 
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If we cease to qualify as a foreign private issuer, we would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers, and we would incur significant additional legal, accounting and other expenses that we would not incur as a foreign private issuer (see page 41 of this prospectus);

 

 

 

 

As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to a domestic U.S. issuer, and are exempt from certain Nasdaq corporate governance standards applicable to U.S. issuers, which may limit the information publicly available to our investors and afford them less protection than if we were a U.S. issuer (see page 42 of this prospectus);

 

 

 

 

If we cannot continue to satisfy the listing requirements and other rules of the Nasdaq Capital Market, our securities may be delisted, which could negatively impact the price of our securities and your ability to sell them (see page 42 of this prospectus);

 

 

 

 

Anti-takeover provisions in our amended and restated memorandum and articles of association may discourage, delay, or prevent a change in control (see page 43 of this prospectus);

 

 

 

 

Because we are an “emerging growth company,” we may not be subject to requirements that other public companies are subject to, which could affect investor confidence in us and our Ordinary Shares (see page 43 of this prospectus);

 

 

 

 

The laws of the Cayman Islands may not provide our shareholders with benefits comparable to those provided to shareholders of corporations incorporated in the United States (see page 43 of this prospectus);

 

 

 

 

If we are classified as a passive foreign investment company, United States taxpayers who own our Ordinary Shares may have adverse United States federal income tax consequences (see page 44 of this prospectus); and

 

 

 

 

Our pre-IPO shareholders will be able to sell their shares upon completion of this offering subject to restrictions under Rule 144 under the Securities Act (see page 44 of this prospectus).

 

Impact of the COVID-19 Pandemic on Our Operations and Financial Performance

 

In the beginning of February 2020, we had to temporarily suspend our services due to government restrictions. Throughout the COVID-19 pandemic, we managed to promptly implement a series of response measures, including having our full work force resuming work remotely by the end of February. We fully resumed our operation on March 10, 2020 and the COVID-19 impact on our operating results and financial performance for fiscal year 2020 seems to be temporary. During the fiscal year ended December 31, 2021, the COVID-19 pandemic did not have a material impact on the operating entities’ respective financial positions and operating results. Although, during the six months ended June 30, 2022, the COVID-19 pandemic adversely affected our pre-approval risk assessment business, our post-loan debt collection business benefited from the pandemic, and overall, the COVID-19 pandemic did not have a material impact on our operating entities’ financial positions and operating results. Specifically, the COVID-19 subvariant (Omicron) outbreak hit China in March 2022, spreading more quickly and easily than previous strains. As a result, a new round of lockdowns, quarantines, or travel restrictions has been imposed upon different provinces or cities in China by the relevant local government authorities. As a result, during the six months ended June 30, 2022, our revenue from the pre-approval risk management products and services decreased by 25% compared with the same period in 2021. Meanwhile, the COVID-19 pandemic has led to a rise in overdue loans, and, consequently, our post-loan debt collection business has grown significantly. Our revenue derived from the post-loan debt collection services increased by 226% for the six months ended June 30, 2022, compared to the same period in 2021. Overall, our revenue in the first half of 2022 increased by 182.6% over the same period in 2021.

 

In early December 2022, the PRC government announced a nationwide relaxation of its zero-COVID policy, resulting in a surge in COVID-19 infections across the PRC after related restrictions were lifted. As of the date of this prospectus, although the spread of COVID-19 appears to be under control, the extent to which the COVID-19 pandemic may impact our future financial results will depend on future developments which are uncertain and unpredictable, including the duration, spread, severity, and recurrence of COVID-19 and any COVID-19 variants, the effectiveness of efforts to contain or treat cases, and future actions that may be taken in response to these developments. In addition, the COVID-19 pandemic has also caused heightened uncertainty in the global economy. The global spread of COVID-19 pandemic in major countries of the world, including China, may also result in global economic distress, and the extent to which it may affect our results of operations will depend on future developments of the COVID-19 pandemic, which are highly uncertain and difficult to predict. There may be potential impacts on our results of operations if the pandemic and the resulting disruption were to extend over a prolonged period. Consequently, the COVID-19 pandemic may continue to adversely affect our business, financial condition, and results of operations in the current and future years. See “Risk Factors-Risks Related to Our Business and Industries—We face risks related to natural disasters, health epidemics, and other outbreaks, which could significantly disrupt our operations.” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Business Overview—COVID-19 Affecting Our Results of Operations.

   

Permissions or Approval Required from the PRC Authorities for Our Operations and Offering

 

As of the date of this prospectus, our PRC subsidiaries have obtained all necessary licenses, permissions, or approvals that are required for conducting our operations in China, such as business licenses and value-added telecommunications business licenses. However, it is uncertain whether we or our PRC subsidiaries will be required to obtain additional approvals, licenses, or permits in connection with our business operations pursuant to evolving PRC laws and regulations, and whether we would be able to obtain and renew such approvals on a timely basis or at all. Failing to do so could result in a material change in our operations, and the value of our Ordinary Shares could depreciate significantly or become worthless.

 

As of the date of this prospectus, our PRC counsel, AllBright, has advised us that, neither we nor our PRC subsidiaries (1) are required to obtain permission from any of the PRC authorities to operate and issue our Ordinary Shares to foreign investors, (2) are subject to approval requirements from the CSRC, the CAC, or any other entity to approve our operations in addition to the aforementioned necessary permissions, or (3) have been denied permissions by any PRC authorities to operate and issue our Ordinary Shares to foreign investors. 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” (the “Opinions”), which were 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. These opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and incidents facing China-concept overseas-listed companies and the demand for cybersecurity and data privacy protection. On February 17, 2023, the CSRC issued the Trial Measures, which will become effective on March 31, 2023. On the same date, the CSRC circulated the Guidance Rules and Notice on the CSRC’s official website. Pursuant to the Trial Measures and the Guidance Rules and Notice, beginning March 31, 2023, PRC domestic enterprises that have submitted valid applications for overseas offerings and listing but have not obtained the approval from the relevant overseas regulatory authority or overseas stock exchanges shall complete filings with the CSRC prior to their overseas offerings and listings. “Regulations—Regulations Relating to M&A and Overseas Listing.”

 

According to the Notice on the Administrative Arrangements for the Filing of the Overseas Securities Offering and Listing by Domestic Companies from the CSRC, or “the CSRC Notice,” the domestic companies that have already been listed overseas before the effective date of the Trial Measures (namely, March 31, 2023) shall be deemed as existing issuers (the “Existing Issuers”). Existing Issuers are not required to complete the filing procedures immediately, and they shall be required to file with the CSRC for any subsequent offerings. Further, according to the CSRC Notice, domestic companies that have obtained approval from overseas regulatory authorities or securities exchanges (for example, the effectiveness of a registration statement for offering and listing in the U.S. has been obtained) for their indirect overseas offering and listing prior March 31, 2023 but have not yet completed their indirect overseas issuance and listing, are granted a six-month transition period from March 31, 2023 to September 30, 2023. Those that complete their indirect overseas offering and listing within such six-month period are deemed as Existing Issuers and are not required to file with the CSRC for their indirect overseas offerings and listings. Within such six-month transition period, however, if such domestic companies fail to complete their indirect overseas issuance and listing, they shall complete the filing procedures with the CSRC. Based on the foregoing, if the effectiveness of our registration statement on Form F-1 cannot be declared on or before March 31, 2023, or if the effectiveness of our registration statement on Form F-1 is declared on or before March 31, 2023 but we fail to complete this offering and listing on or before September 30, 2023, we will be required to complete necessary filing procedures pursuant to the Trial Measures.

 

 
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On February 24, 2023, the CSRC, together with the MOF, National Administration of State Secrets Protection and National Archives Administration of China, revised the Provisions on Strengthening Confidentiality and Archives Administration for Overseas Securities Offering and Listing, which were issued by the CSRC and National Administration of State Secrets Protection and National Archives Administration of China in 2009, or the “Provisions.” The revised Provisions were issued under the title the “Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies”, and will come into effect on March 31, 2023 together with the Trial Measures. One of the major revisions to the revised Provisions is expanding their application to cover indirect overseas offering and listing, as is consistent with the Trial Measures. The revised Provisions require that, among other things, (a) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals or entities including securities companies, securities service providers and overseas regulators, any documents and materials that contain state secrets or working secrets of government agencies, shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level; and (b) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals and entities including securities companies, securities service providers and overseas regulators, any other documents and materials that, if leaked, will be detrimental to national security or public interest, shall strictly fulfill relevant procedures stipulated by applicable national regulations. As of the date of this prospectus, the revised Provisions have not come into effect. On or after March 31, 2023, any failure or perceived failure by our Company or our PRC subsidiaries to comply with the above confidentiality and archives administration requirements under the revised Provisions and other PRC laws and regulations may result in the relevant entities being held legally liable by competent authorities, and referred to the judicial organ to be investigated for criminal liability if suspected of committing a crime.

   

According to the Trial Measures and the revised Provisions, we may be required to comply with the filing requirements under the Trial Measures in connection with this offering. Regardless of whether this offering will be subject to any filing requirements with the CSRC under the Trial Measures and the revised Provisions, any future securities offerings and listings outside of mainland China by our Company, including, but not limited to, follow-on offerings, secondary listings, and going private transactions, will be subject to the filing requirements with the CSRC under the Trial Measures, and we cannot assure you that we will be able to comply with such filing requirements in a timely manner, or at all.

 

As the Trial Measures have just recently been released, uncertainties remain as to proper practices and interpretations and implementations with respect thereto which may subject us to additional procedural requirements in this offering and future financial activities. If it is determined that any approval, filing, or other administrative procedure from the CSRC or other PRC governmental authorities is required for this offering, or any future offering or listing, we cannot assure you that we can obtain the required approval or accomplish the required filings or other regulatory procedures in a timely manner, or at all. In addition, if the CSRC or other regulatory authorities later promulgate new rules or explanations requiring that we obtain their approvals or accomplish the required filing or other regulatory procedures for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding such approval requirements could materially and adversely affect our business, prospects, financial condition, reputation, and the trading price of our Ordinary Shares. See “Regulations— Regulations Relating to M&A and Overseas Listing” and “Risk Factors—Risks Relating to Doing Business in the PRC—The Chinese government exerts substantial influence over the manner in which we must conduct our business activities. We are currently not required to obtain approval from Chinese authorities to list on U.S exchanges, however, if our PRC subsidiaries or the holding company were required to obtain approval in the future and were denied permission from Chinese authorities to list on U.S. exchanges, we will not be able to continue listing on U.S. exchange and the value of our Ordinary Shares may significantly decline or become worthless, which would materially affect the interest of the investors.” 

 

The Cybersecurity Review Measures, which became effective on February 15, 2022, provides that, in addition to critical information infrastructure operators (“CIIOs”) that intend to purchase Internet products and services, online platform operators engaging in data processing activities that affect or may affect national security must be subject to cybersecurity review by the Cybersecurity Review Office of the PRC. According to the Cybersecurity Review Measures, a cybersecurity review assesses potential national security risks that may be brought about by any procurement, data processing, or overseas listing. The Cybersecurity Review Measures further requires that CIIOs and data processing operators that possess personal data of at least one million users must apply for a review by the Cybersecurity Review Office of the PRC before conducting listings in foreign countries. As of the date of this prospectus, neither we nor any of our PRC subsidiaries have received any notice from any authorities identifying any of our PRC subsidiaries as a CIIO or requiring any of our PRC subsidiaries to go through a cybersecurity review or network data security review by the CAC. As confirmed by our PRC counsel, AllBright, neither we nor any of our PRC subsidiaries are subject to cybersecurity review by the CAC, because neither we nor any of our PRC subsidiaries (i) actually purchase any internet products or services and our products and services are not offered directly to individual users, but rather are offered to our institutional clients; (ii) conduct our business based on the encrypted data provided by our institutional clients, which we do not own or have any access to; (iii) utilize data processed in our business that has a bearing on national security; and (iv) we are not an online platform operator. There remains uncertainty, however, as to how the Cybersecurity Review Measures will be interpreted or implemented 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. For further details, see “Risk Factors-Risks Relating to Doing Business in the PRC-We may become subject to a variety of laws and regulations in the PRC regarding privacy, data security, cybersecurity, and data protection. We may be liable for improper use or appropriation of personal information provided by our customers.

 

The main legislation in Hong Kong concerning data security is the Personal Data (Privacy) Ordinance (Cap. 486 of the Laws of Hong Kong) (the “PDPO”), which regulates the collection, usage, storage, and transfer of personal data and imposes a statutory duty on data users to comply with the six data protection principles contained therein. As of the date of this prospectus, we confirm that we and our Hong Kong subsidiary, GoodFaith HK, have complied with the laws and requirements in respect of data security in Hong Kong. However, the laws on cybersecurity and data privacy are constantly evolving and can be subject to varying interpretations, resulting in uncertainties about the scope of our responsibilities in that regard. Failure to comply with the cybersecurity and data privacy requirements in a timely manner, or at all, may subject us or our Hong Kong subsidiary to consequences, including government enforcement actions and investigations, fines, penalties, and suspension or disruption of our Hong Kong subsidiary’s operations. In addition, the Competition Ordinance (Cap. 619 of the Laws of Hong Kong) prohibits and deters undertakings in all sectors from adopting anti-competitive conduct which has the object or effect of preventing, restricting, or distorting competition in Hong Kong. It provides for general prohibitions in three major areas of anti-competitive conduct described as the first conduct rule, the second conduct rule, and the merger rule. As of the date of this prospectus, we and our Hong Kong subsidiary have complied with all three areas of anti-competition laws and requirements in Hong Kong. As confirmed by our Hong Kong counsel, Ince & Co, neither the data security nor antimonopoly laws and regulations in Hong Kong restrict our ability to accept foreign investment or impose limitations on our ability to list on any U.S. stock exchange under Hong Kong laws and regulations. See “Risk Factors-Risks Relating to Doing Business in the PRC-One of our subsidiaries is subject to various evolving Hong Kong laws and regulations regarding data security or antimonopoly conduct, which could subject it to government enforcement actions and investigations, fines, penalties, and suspension or disruption of its operations.”

   

To operate business activities in Hong Kong, every company must register its business with the Business Registration Office of the Inland Revenue Department in Hong Kong and make an application for business registration within one month of the commencement of business. Any person who fails to comply is subject to a maximum fine of HK$5,000 and one year of imprisonment. As of the date of this prospectus, we confirm that our Hong Kong subsidiary has obtained a valid business registration certificate. As of the date of this prospectus, our Hong Kong counsel, Ince & Co, has advised us that neither we nor our Hong Kong subsidiary is required to obtain any permission or approval from Hong Kong authorities to offer the securities being registered to foreign investors outside Hong Kong. However, it is uncertain whether we or our Hong Kong subsidiary will be required to obtain additional permissions or approval from Hong Kong authorities to operate its business or offer securities to foreign investors in the future, and whether we would be able to obtain such permissions or approvals. If we are unable to obtain such permissions or approval if required in the future because applicable laws, regulations, or interpretations change, or inadvertently conclude that such permissions or approval are not required, then the value of our Ordinary Shares may depreciate significantly or become worthless.

  

For the six months ended June 30, 2022 and the fiscal years ended December 31, 2021 and 2020, our PRC operating entities did not make full social insurance and housing fund contributions for all employees as required under the relevant laws and regulations. As of June 30, 2022 and December 31, 2021 and 2020, our PRC operating entities had outstanding social insurance payments payable in the aggregate amount of approximately $1,960,235, $1,525,543, and $443,175, respectively. Our current shareholders have agreed to compensate us for the relevant fines, any outstanding sum, and any related costs and expenses arising from such noncompliance if imposed by the competent PRC authorities, and we have taken measures to implement our policy on the payment of social insurance and housing fund contributions for employees for the purpose of compliance with relevant PRC laws and regulations starting from June 2022. See “Risk Factors-Risks Related to Our Businesses and Industries-Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.” In addition, As of June 30, 2022 and December 31, 2021 and 2020, Shenzhen Xindesheng, one of our PRC operating entities, had under-declared tax payable in the aggregate amount of approximately $2,330,793, $1,333,138, and $1,008,399, respectively. Although Shenzhen Xindesheng has not received any notice from the PRC tax authorities regarding the outstanding tax payment as of the date of this prospectus, it is possible that the Company may be subject to fines, late fees, and other penalties even if the Company makes such tax payments. To address issues that may arise from Shenzhen Xindesheng’s previous failure to make adequate income tax payments, the Company issued a letter of commitment stating that Suzhou GoodFaith and its subsidiaries (including Shenzhen Xindesheng) would pay any unpaid taxes before September 30, 2022. On September 21, 2022, the under-declared income taxes and associated interest for fiscal years from 2017 to 2021 as of June 30, 2022 were fully paid, and we have confirmed that any associated tax penalty has been exempted by the local tax authority as of the date of this prospectus. See “Risk Factors-Risks Related to Our Businesses and Industries-One of our PRC operating entities failed to make adequate income tax as required by PRC regulations previously, which may subject us to penalties.” As advised by our PRC counsel, AllBright, given the remedial measure we have taken to address our failure to make adequate income tax payments and make full contributions to the social insurance plans, the aforementioned noncompliance is unlikely to affect any permissions or approvals required for our operations in the PRC.

     

 
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Dividend Distributions, Cash Transfer, and Tax Consequences 

 

We intend to keep any future earnings to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future. If we determine to pay dividends on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our Hong Kong subsidiary, GoodFaith HK. GoodFaith HK will rely on payments made from Suzhou GoodFaith to GoodFaith WFOE and the distribution of such payments to GoodFaith HK as dividends from GoodFaith WFOE. Our finance department is supervising cash management, following the instructions of our management. Our finance department is responsible for establishing our cash operation plan and coordinating cash management matters among our subsidiaries and departments. Each subsidiary and department initiates a cash request by putting forward a cash demand plan, which explains the specific amount and timing of cash requested, and submitting it to our finance department. The finance department reviews the cash demand plan and prepares a summary for the management of our Company. Management examines and approves the allocation of cash based on the sources of cash and the priorities of the needs. Other than the above, we currently do not have other cash management policies or procedures that dictate how funds are transferred. As of the date of this prospectus, none of our subsidiaries have made any dividends or distributions to our Company and our Company has not made any dividends or distributions to our shareholders. Nonetheless, Shenzhen Xindesheng, one of our PRC subsidiaries, made dividends to its former shareholders for fiscal years from 2019 to 2021 before it was indirectly acquired by our Company on December 31, 2021. Specifically, the revised profit distribution in 2019, 2020, and 2021 were $149,366, $593,648, and nil, respectively. See “Note 10-Shareholders’ Equity-Dividends.”

 

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

 

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

  

Current PRC regulations permit GoodFaith WFOE to pay dividends to GoodFaith HK only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our PRC subsidiaries 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 entities 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 directors. Although the statutory reserves can be used, among other things, 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. For instance, the Circular on Promoting the Reform of Foreign Exchange Management and Improving Authenticity and Compliance Review, or “SAFE Circular 3,” issued on January 26, 2017, provides that banks shall, when dealing with dividend remittance transactions from a domestic enterprise to its offshore shareholders of more than $50,000, review the relevant board resolutions, original tax filing form, and audited financial statements of such domestic enterprise based on the principal of genuine transaction. Furthermore, if our PRC subsidiaries incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. In addition, there can be no assurance that the PRC government will not intervene or impose other restrictions on our ability to transfer or distribute cash within our organization or to foreign investors, which could result in an inability or prohibition on making transfers or distributions outside of mainland China or Hong Kong and adversely affect our business. If we or our PRC subsidiaries are unable to receive all of the revenue from our operations, we may be unable to pay dividends on our Ordinary Shares, should we desire to do so in the future.

 

Cash dividends, if any, on our Ordinary Shares would be paid in U.S. dollars. GoodFaith HK may be considered a non-resident enterprise for tax purposes, so that any dividends GoodFaith WFOE pays to GoodFaith HK may be regarded as China-sourced income and, as a result, may be subject to PRC withholding tax at a rate of up to 10%. See “Material Income Tax Considerations—Enterprise Taxation in Mainland China.”

 

In order for us to pay dividends to our shareholders, we will rely on payments made from Suzhou GoodFaith to GoodFaith WFOE and the distribution of such payments to GoodFaith HK as dividends from GoodFaith WFOE. Certain payments from Suzhou GoodFaith to GoodFaith WFOE are subject to PRC taxes, including business taxes and Value-Added Tax. If Suzhou GoodFaith and its subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict any such party’s ability to pay dividends or make other distributions to us.

 

Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC entity. The 5% withholding tax rate, however, does not automatically apply and certain requirements must be satisfied, including, without limitation, the requirement 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 any dividends paid by GoodFaith WFOE to its immediate holding company, GoodFaith HK. As of the date of this prospectus, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. GoodFaith HK intends to apply for the tax resident certificate if and when GoodFaith WFOE plans to declare and pay dividends to GoodFaith HK. See “Risk Factors-Risks Relating to Doing Business in the PRC-There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of GoodFaith WFOE, and dividends payable by GoodFaith WFOE to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.” 

 

 
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Implications of Being an “Emerging Growth Company”

 

As a company with less than $1.235 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act.” An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to larger public companies. In particular, as an emerging growth company, we:

  

 

may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations, or “MD&A;”

 

 

 

 

are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives, which is commonly referred to as “compensation discussion and analysis”;

 

 

 

 

are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;

 

 

 

 

are not required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on frequency” and “say-on-golden-parachute” votes);

 

 

 

 

are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;

 

 

 

 

are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act; and

 

 

 

 

will not be required to conduct an evaluation of our internal control over financial reporting until our second annual report on Form 20-F following the effectiveness of our initial public offering.

 

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

 

Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions until we no longer meet the definition of an emerging growth company. The JOBS Act provides that we would cease to be an “emerging growth company” at the end of the fiscal year in which the fifth anniversary of our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act occurred, if we have more than $1.235 billion in annual revenue, have more than $700 million in market value of our Ordinary Shares held by non-affiliates, or issue more than $1 billion in principal amount of non-convertible debt over a three-year period.

  

Foreign Private Issuer Status

 

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

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 
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THE OFFERING

 

Ordinary Shares offered by us

 

3,000,000 Ordinary Shares, or 3,450,000 Ordinary Shares if the underwriters exercise their over-allotment option in full

 

 

 

Price per Ordinary Share

 

We currently estimate that the initial public offering price will be in the range of $4.00 to $6.00 per Ordinary Share.

 

 

 

Ordinary Shares outstanding prior to completion of this offering

 

20,000,000 Ordinary Shares

 

Ordinary Shares outstanding immediately after this offering

 

23,000,000 Ordinary Shares assuming no exercise of the underwriters’ over-allotment option and excluding 240,000 Ordinary Shares underlying the Representative’s Warrants

 

23,450,000 Ordinary Shares assuming full exercise of the underwriters’ over-allotment option and excluding 276,000 Ordinary Shares underlying the Representative’s Warrants

 

 

 

Listing

 

We have applied to have our Ordinary Shares listed on the Nasdaq Capital Market. At this time, Nasdaq has not yet approved our application to list our Ordinary Shares. The closing of this offering is conditioned upon Nasdaq’s final approval of our listing application, and there is no guarantee or assurance that our Ordinary Shares will be approved for listing by Nasdaq.

 

 

 

Nasdaq Capital Market symbol

 

“GFCX”

 

 

 

Transfer Agent

 

Transhare Corporation

 

 

 

Over-allotment Option

 

We have granted to the underwriters an option, exercisable within 45 days after the closing of the Offering, to purchase up to an aggregate of 450,000 additional Ordinary Shares.

 

 

 

Use of proceeds

 

We intend to use the proceeds from this offering for the establishment of more subsidiaries wholly owned by us and operating centers; development of technology including updating the service systems and expanding product and service offerings; our business expansion and growth; recruitment of new talent; and for working capital and other general corporate purposes. See Use of Proceeds” on page 48 for more information.

 

 

 

Lock-up

 

All of our directors and officers and our principal shareholders (5% or more shareholders) have agreed with the Underwriter, subject to certain exceptions, not to sell, transfer, or dispose of, directly or indirectly, any of our Ordinary Shares or securities convertible into or exercisable or exchangeable for our Ordinary Shares for a period of six (6) months from the closing date of this offering. In addition, for a period of six months from the closing date of this offering, subject to certain exceptions, we have agreed with the underwriters not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right, or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any Ordinary Shares or any securities convertible into or exercisable or exchangeable for our Ordinary Shares or file or cause to be filed with the SEC any registration statement relating to the offering of any of our securities..    See Shares Eligible for Future Sale” and Underwriting” for more information.

 

 

 

Risk factors

 

The Ordinary Shares offered hereby involve a high degree of risk. You should read “Risk Factors,” beginning on page 13 for a discussion of factors to consider before deciding to invest in our Ordinary Shares.

 

 

 

Representative’s Warrants

 

The registration statement of which this prospectus is a part also registers for sale the Representative’s Warrants to purchase Ordinary Shares equal to 8% of the total number of Ordinary Shares sold in this offering, including the number of Ordinary Shares upon the exercise of the underwriters’ over-allotment option, as a portion of the underwriting compensation payable to the underwriters in connection with this offering. The Representative’s Warrants will be exercisable for a period of five years after the date of commencement of sales of Ordinary Shares in this offering at a per share exercise price of $6.50 (130% of the public offering price of the Ordinary Shares, based on an assumed midpoint initial 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). Please see “Underwriting—Representative’s Warrants” for a description of these warrants.

 

 
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RISK FACTORS

 

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

  

Risks Relating to Doing Business in the PRC

 

China’s economic, political and social conditions, laws and regulations, as well as possible interventions and influences of any government policies and actions, are uncertain and could have a material adverse effect on our business, operations and the value of our Ordinary Shares.

 

The PRC government authorities may strengthen oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers like us. Such actions taken by the PRC government authorities may intervene or influence our operations at any time, which are beyond our control. Any such action may adversely affect our operations and significantly limit or completely hinder our ability to offer or continue to offer our Ordinary Shares to investors and reduce the value of such securities.

 

Furthermore, our Company, our PRC operating entities, and our investors may face uncertainty about future actions by the government of China that could significantly affect our PRC operating entities’ financial performance and operations. As of the date of this prospectus, neither our Company nor our PRC operating entities have received or were denied permission from Chinese authorities to list on U.S. exchanges. However, there is no guarantee that our Company or our PRC operating entities will receive or not be denied permission from Chinese authorities to list on U.S. exchanges in the future.

 

PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Rules and regulations in China can change quickly with little advance notice. Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protection available to you and us. Any changes in such laws and regulations may impair our ability to operate profitably.

 

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

 

The PRC legal system is based on written statutes. Unlike common law systems, it is a system in which legal cases have limited value as precedents. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The legislation over the past three decades has significantly increased the protection afforded to various forms of foreign or private-sector investment in China. Our Company is subject to various PRC laws and regulations generally applicable to companies in China. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, however, the interpretations of many laws, regulations, and rules are not always uniform and enforcement of these laws, regulations, and rules involve uncertainties.

  

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, however, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy in the PRC legal system 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 uncertainties over the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment in China could materially and adversely affect our business and impede our ability to continue our operations.

 

For example, 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 were 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. These opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and incidents facing China-concept overseas-listed companies and the demand for cybersecurity and data privacy protection. On February 17, 2023, the CSRC issued the Trial Measures, which will become effective on March 31, 2023.On the same date, the CSRC circulated the Guidance Rules and Notice on CSRC’s official website. Pursuant to the Trial Measures, beginning March 31, 2023, PRC domestic enterprises that have submitted valid applications for overseas offerings and listing but have not obtained the approval from the relevant overseas regulatory authority or overseas stock exchanges shall complete filings with the CSRC prior to their overseas offerings and listings. “Regulations—Regulations Relating to M&A and Overseas Listing.” The Opinions, the Trial Measures, the Guidance Rules and Notice, and any related implementing rules to be enacted may subject us to compliance requirements in the future. Uncertainties regarding the enforcement of laws and the fact that rules and regulations in China can change quickly with little advance notice, along with the risk that the Chinese government may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers could result in a material change in our operations, financial performance and/or the value of our Ordinary Shares or impair our ability to raise money.

 

 
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The Chinese government exerts substantial influence over the manner in which we must conduct our business activitiesWe are currently not required to obtain approval from Chinese authorities to list on U.S exchanges, however, if our PRC subsidiaries or the holding company were required to obtain approval in the future and were denied permission from Chinese authorities to list on U.S. exchanges, we will not be able to continue listing on U.S. exchange and the value of our Ordinary Shares may significantly decline or become worthless, which would materially affect the interest of the investors.

 

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 taxation, environmental regulations, land use rights, property 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. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.

 

For example, the Chinese cybersecurity regulator announced on July 2, 2021 that it had begun an investigation of Didi Global Inc. (NYSE: DIDI) and two days later ordered that the company’s app be removed from smartphone app stores.

 

As such, the Company’s business segments may be subject to various government and regulatory interference in the provinces in which they operate. The Company could be subject to regulation by various political and regulatory entities, including various local and municipal agencies and government sub-divisions. The Company may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. The Chinese government may intervene or influence our operations at any time with little advance notice, which could result in a material change in our operations and in the value of our ordinary shares. 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 become worthless.

 

As of the date of this prospectus, our PRC counsel, AllBright, has advised us that neither we nor our PRC subsidiaries are currently required to obtain permission from any of the PRC government authorities, nor have we received any denial to list on the U.S. exchange. However, our operations could be adversely affected, directly or indirectly, if we or our PRC subsidiaries inadvertently conclude that such permissions are not required, or if applicable laws, regulations, or interpretations change and we or our PRC subsidiaries are required to obtain such permissions in the future. As a result, our Ordinary Shares may decline in value dramatically or even become worthless should we become subject to new requirement to obtain permissions from the PRC government to list on U.S. exchange in the future.

  

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 Severe and Lawful Crackdown on Illegal Securities Activities, which was available to the public on July 6, 2021. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies. These opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity and data privacy protection. On February 17, 2023, the CSRC issued the Trial Measures, which will become effective on March 31, 2023. On the same date, the CSRC circulated the Guidance Rules and Notice on the CSRC’s official website. Pursuant to the Trial Measures, beginning March 31, 2023, domestic enterprises that have submitted valid applications for overseas offerings and listings but have not obtained the approval from the relevant overseas regulatory authority or overseas stock exchange shall complete filings with the CSRC prior to their overseas offerings and listings. See “Regulations—Regulations Relating to M&A and Overseas Listing.”

 

According to the CSRC Notice, the domestic companies that have already been listed overseas before the effective date of the Trial Measures (namely, March 31, 2023) shall be deemed as Existing Issuers. Existing Issuers are not required to complete the filing procedures immediately, and they shall be required to file with the CSRC for any subsequent offerings. Further, according to the CSRC Notice, domestic companies that have obtained approval from overseas regulatory authorities or securities exchanges (for example, the effectiveness of a registration statement for offering and listing in the U.S. has been obtained) for their indirect overseas offering and listing prior March 31, 2023 but have not yet completed their indirect overseas issuance and listing, are granted a six-month transition period from March 31, 2023 to September 30, 2023. Those that complete their indirect overseas offering and listing within such six-month period are deemed as Existing Issuers and are not required to file with the CSRC for their indirect overseas offerings and listings. Within such six-month transition period, however, if such domestic companies fail to complete their indirect overseas issuance and listing, they shall complete the filing procedures with the CSRC. Based on the foregoing, if the effectiveness of our registration statement on Form F-1 cannot be declared on or before March 31, 2023, or if the effectiveness of our registration statement on Form F-1 is declared on or before March 31, 2023 but we fail to complete this offering and listing on or before September 30, 2023, we will be required to complete necessary filing procedures pursuant to the Trial Measures.

 

On February 24, 2023, the CSRC, together with the MOF, National Administration of State Secrets Protection and National Archives Administration of China, revised the Provisions issued by the CSRC and National Administration of State Secrets Protection and National Archives Administration of China in 2009. The revised Provisions were issued under the title the “Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies”, and will come into effect on March 31, 2023 together with the Trial Measures. One of the major revisions to the revised Provisions is expanding their application to cover indirect overseas offering and listing, as is consistent with the Trial Measures. The revised Provisions require that, among other things, (a) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals or entities including securities companies, securities service providers and overseas regulators, any documents and materials that contain state secrets or working secrets of government agencies, shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level; and (b) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals and entities including securities companies, securities service providers and overseas regulators, any other documents and materials that, if leaked, will be detrimental to national security or public interest, shall strictly fulfill relevant procedures stipulated by applicable national regulations. As of the date of this prospectus, the revised Provisions have not come into effect. On or after March 31, 2023, any failure or perceived failure by our Company or our PRC subsidiaries to comply with the above confidentiality and archives administration requirements under the revised Provisions and other PRC laws and regulations may result in the relevant entities being held legally liable by competent authorities, and referred to the judicial organ to be investigated for criminal liability if suspected of committing a crime.

 

The Opinions, the Trial Measures, the Guidance Rules and Notice, the revised Provisions, and any related implementation rules to be enacted may subject us to additional compliance requirement in the future. While we are currently not subject to any circumstance that may cause our filing documents to be deemed as unqualified by the CSRC, the interpretations and implementation of the Trial Measures remain uncertain in several respects at this time, considering that the Trial Measures have just been released and have not yet been formally implemented. Therefore, there is no guarantee that our filing documents will meet the standards of the CSRC if we are required to file with CSRC, which could impede our ability to continue this offering. If it is determined that any approval, filing, or other administrative procedure from the CSRC or other PRC governmental authorities is required for this offering, or any future offering or listing, we cannot assure you that we can obtain the required approval or accomplish the required filings or other regulatory procedures in a timely manner, or at all. If we fail to obtain the relevant approval or complete the filings and other relevant regulatory procedures in a timely manner, we may face sanctions by the CSRC or other PRC regulatory agencies, which may include fines and penalties on our operations in China, limitations on our operating privileges in China, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiaries in China, delay of or restriction on the repatriation of the proceeds from this offering into China, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our Ordinary Shares. The CSRC or other PRC regulatory authorities may also take actions requiring us, or making it advisable for us, to halt our offerings before settlement and delivery of the shares offered. Consequently, if investors engage in market trading or other activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory authorities later promulgate new rules or explanations requiring that we obtain their approvals or accomplish the required filing or other regulatory procedures for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding such approval requirements could materially and adversely affect our business, prospects, financial condition, reputation, and the trading price of our Ordinary Shares.

 

 
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Moreover, On January 4, 2022, thirteen PRC regulatory agencies, namely, the CAC, the NDRC, the Ministry of Industry and Information Technology, the Ministry of Public Security, the Ministry of State Security, the MOF, MOFCOM, SAMR, CSRC, the PBOC, the National Radio and Television Administration, National Administration of State Secrets Protection and the National Cryptography Administration, jointly adopted and published the Measures for Cybersecurity Review (2021), which became effective on February 15, 2022. The Measures for Cybersecurity Review (2021) required that, among other things, in addition to any “operator of critical information infrastructure,” or any “operator of network platform” holding personal information of more than one million users which seeks to list in a foreign stock exchange should also be subject to cybersecurity review. The aforementioned policies and any related implementation rules to be enacted may subject us to additional compliance requirement in the future. While we believe that our operations are not affected by these opinions, as these opinions were recently issued, official guidance and interpretation of the opinions remain unclear in several respects at this time. Therefore, we cannot assure you that we will remain fully compliant with all new regulatory requirements of these opinions or any future implementation rules on a timely basis, or at all.

 

We may become subject to a variety of laws and regulations in the PRC regarding privacy, data security, cybersecurity, and data protection. We may be liable for improper use or appropriation of personal information provided by our customers.

 

According to our PRC counsel, AllBright, we may become subject to a variety of laws and regulations in the PRC regarding privacy, data security, cybersecurity, and data protection. These laws and regulations are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly with respect to foreign laws. In particular, there are numerous laws and regulations regarding privacy and the collection, sharing, use, processing, disclosure, and protection of personal information and other user data. Such laws and regulations often vary in scope, may be subject to differing interpretations, and may be inconsistent among different jurisdictions.

 

We expect to obtain information about various aspects of our operations as well as regarding our employees and third parties. We also maintain information about various aspects of our operations as well as regarding our employees. The integrity and protection of our customer, employee and company data is critical to our business. Our customers and employees expect that we will adequately protect their personal information. We are required by applicable laws to keep strictly confidential the personal information that we store and use, and to take adequate security measures to safeguard such information.

  

The PRC Criminal Law, as amended by its Amendment 7 (effective on February 28, 2009) and Amendment 9 (effective on November 1, 2015), prohibits institutions, companies and their employees from selling or otherwise illegally disclosing a citizen’s personal information obtained during the course of performing duties or providing services or obtaining such information through theft or other illegal ways. On November 7, 2016, the SCNPC issued the Cyber Security Law of the PRC, or Cyber Security Law, which became effective on June 1, 2017.

 

Pursuant to the Cyber Security Law, network operators must not, without users’ consent, collect their personal information, and may only collect users’ personal information necessary to provide their services. Providers are also obliged to provide security maintenance for their products and services and shall comply with provisions regarding the protection of personal information as stipulated under the relevant laws and regulations.

 

The Civil Code of the PRC (issued by the PRC National People’s Congress on May 28, 2020 and effective from January 1, 2021) provides main legal basis for privacy and personal information infringement claims under the Chinese civil laws. PRC regulators, including the CAC, the MIIT, and the Ministry of Public Security have been increasingly focused on regulation in the areas of data security and data protection.

 

The PRC regulatory requirements regarding cybersecurity are constantly evolving. For instance, various regulatory bodies in China, including the Cyberspace Administration of China, the Ministry of Public Security and the SAMR, have enforced data privacy and protection laws and regulations with varying and evolving standards and interpretations. In April 2020, the Chinese government promulgated Cybersecurity Review Measures, or the “2020 Review Measures,” which came into effect on June 1, 2020. According to the 2020 Review Measures, operators of critical information infrastructure must pass a cybersecurity review when purchasing network products and services which do or may affect national security.

 

 
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In November 2016, the SCNPC passed China’s first Cybersecurity Law (“CSL”), which became effective in June 2017. The CSL is the first PRC law that systematically lays out the regulatory requirements on cybersecurity and data protection, subjecting many previously under-regulated or unregulated activities in cyberspace to government scrutiny. The legal consequences of violation of the CSL include penalties of warning, confiscation of illegal income, suspension of related business, winding up for rectification, shutting down the websites, and revocation of business license or relevant permits. In April 2020, the Cyberspace Administration of China and certain other PRC regulatory authorities promulgated the 2020 Review Measures, which became effective in June 2020. Pursuant to the 2020 Review Measures, operators of critical information infrastructure must pass a cybersecurity review when purchasing network products and services which do or may affect national security. On July 10, 2021, the Cyberspace Administration of China issued a revised draft of the Measures for Cybersecurity Review for public comments (“Draft Measures”), which required that, in addition to “operator of critical information infrastructure,” any “data processor” carrying out data processing activities that affect or may affect national security should also be subject to cybersecurity review, and further elaborated 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. The Cyberspace Administration of China has said that under the proposed rules companies holding data on more than 1,000,000 users must now apply for cybersecurity approval when seeking listings in other nations because of the risk that such data and personal information could be “affected, controlled, and maliciously exploited by foreign governments,” The cybersecurity review will also investigate the potential national security risks from overseas IPOs. On December 28, 2021, the CAC, NDRC, MIIT, Ministry of Public Security, Ministry of Stated Security, MOF, MOFCOM, PBOC, SAMR, National Radio and Television Administration, CSRC, National Administration of State Secrets Protection, and State Cryptography Administration jointly promulgated the Cybersecurity Review Measures, or the “Cybersecurity Review Measures,” which took effect on February 15, 2022, and will replace the original Cybersecurity Review Measures promulgated on April 13, 2020. Pursuant to the Cybersecurity Review Measures, if critical information infrastructure operators purchase network products and services, or network platform operators conduct data processing activities that affect or may affect national security, they will be subject to cybersecurity review. A network platform operator holding more than one million users/users’ individual information also shall be subject to cybersecurity review before listing abroad. The cybersecurity review will evaluate, among others, the risk of critical information infrastructure, core data, important data, or a large amount of personal information being influenced, controlled or maliciously used by foreign governments and risk of network data security after going public overseas. We do not know what additional regulations will be adopted or how such regulations will affect us and our listing on Nasdaq. In the event that the Cyberspace Administration of China determines that we are subject to these regulations, we may be required to delist from Nasdaq and we may be subject to fines and penalties. On June 10, 2021, the SCNPC promulgated the PRC Data Security Law, which took effect on September 1, 2021. The Data Security Law also sets forth the data security protection obligations for entities and individuals handling personal data, including that no entity or individual may acquire such data by stealing or other illegal means, and the collection and use of such data should not exceed the necessary limits. The costs of compliance with, and other burdens imposed by, CSL and any other cybersecurity and related laws may limit the use and adoption of our products and services and could have an adverse impact on our business. Further, if the Cybersecurity Review Measures mandates clearance of cybersecurity review and other specific actions to be completed by companies like us, we face uncertainties as to whether such clearance can be timely obtained, or at all.

 

On August 20, 2021, the SCNPC promulgated the PRC Personal Information Protection Law, which took effect in November 2021. The Personal Information Protection Law provides that any entity involving processing of personal information (“Personal Information Processer”)shall take various measures to prevent the disclosure, modification or losing of the personal information processed by such entity, including, but not limited to, formulating a related internal management system and standard of operation, conducting classified management of personal information, taking safety technology measures to encrypt and de-identify the processed personal information, providing regular safety training and education for staff and formulating a personal information safety emergency accident plan. The Personal Information Protection Law further provides that a Personal Information Processer shall conduct a prior evaluation of the impact of personal information protection before the occurrence of various situations, including, but not limited to, processing of sensitive personal information (personal information that, once leaked or illegally used, may lead to discrimination against an individual or serious harm to an individual’s personal or property safety, including information on an individual’s ethnicity, religious beliefs, personal biological characteristics, medical health, financial accounts, personal whereabouts), using personal information to make automated decisions and providing personal information to any overseas entity. The Company’s business involves the processing of personal information of customers using our products or receiving our services, which may be deemed as sensitive personal information. If the Company does not take adequate measures to review and improve its mechanisms in protecting personal information pursuant to the new Personal Information Protection Law, such failure of personal information protection compliance could subject the Company to penalties, damage its reputation and brand and harm its business and results of operations.

 

Under the new PRC Data Security Law enacted in September, we are advised by PRC counsel, AllBright, that neither we nor any of our PRC subsidiaries are subject to the cybersecurity review by the CAC for this offering, given that: (i) our products and services are not offered directly to individual users, but rather are offered through our institutional clients; (ii) we do not possess a large amount of personal information in our servers, instead we are only given access to servers of our clients, where the data is encrypted and stored; and (iii) data processed in our business does not have a bearing on national security and thus may not be classified as core or important data by the authorities. However, there remains uncertainty as to how the Cybersecurity Review Measures will be interpreted or implemented 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. If any such new laws, regulations, rules, or implementation and interpretation comes into effect, we will take all reasonable measures and actions to comply and to minimize the adverse effect of such laws on us.

 

We believe that we have complied with the data privacy and personal information requirements of the CAC, as of the date of this prospectus. Neither the CAC nor any other PRC regulatory agency or administration has contacted our Company in connection with the operations of our PRC operating entities. As advised by AllBright, our PRC counsel, we are currently not required to obtain regulatory approval from the CAC nor from any other PRC authority for our PRC operating entities’ operations.

 

 
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Nonetheless, we cannot assure you that PRC regulatory agencies, including the CAC, would take the same view as we do, and there is no assurance that we can fully or timely comply with such laws. In the event that we are subject to any mandatory cybersecurity review and other specific actions required by the CAC, we face uncertainty as to whether any clearance or other required actions can be timely completed, or at all. Given such uncertainty, we may be further required to suspend our relevant business, shut down our website, or face other penalties, which could materially and adversely affect our business, financial condition, and results of operations. 

 

One of our subsidiaries is subject to various evolving Hong Kong laws and regulations regarding data security or antimonopoly conduct, which could subject it to government enforcement actions and investigations, fines, penalties, and suspension or disruption of its operations.

  

Our Hong Kong subsidiary, GoodFaith HK, operates in Hong Kong and is thus subject to laws and regulations in Hong Kong in respect of data privacy, data security, and data protection. The main legislation in Hong Kong concerning data security is the PDPO, which regulates the collection, usage, storage, and transfer of personal data and imposes a statutory duty on data users to comply with the six data protection principles contained therein. Pursuant to section 33 of the PDPO, the PDPO is applicable to the collection and processing of personal data if such activities take place in Hong Kong, or if the personal data is collected by a data user whose principal place of business is in Hong Kong. As of the date of this prospectus, we confirm that our Hong Kong subsidiary has complied with the laws and requirements in respect of data security in Hong Kong. Our directors confirm that: (i) each of our directors and our Hong Kong subsidiary has not been involved in any litigation or regulatory action relating to any breach of the PDPO; and (ii) they are not aware of any non-compliance incidents relating to any breach of the PDPO since the date of incorporation of our Hong Kong subsidiary. Since our PRC subsidiaries conduct substantially all of their business operations in mainland China, we believe that the incumbent data security statutory requirements under Hong Kong laws do not materially affect their business. However, the laws on cybersecurity and data privacy are constantly evolving and can be subject to varying interpretations, resulting in uncertainties about the scope of our responsibilities in that regard. Failure to comply with the cybersecurity and data privacy requirements in a timely manner, or at all, may subject us or our Hong Kong subsidiary to consequences, including, but not limited to, government enforcement actions and investigations, fines, penalties, and suspension or disruption of our Hong Kong subsidiary’s operations.

 

The Competition Ordinance (Cap. 619 of the Laws of Hong Kong) prohibits and deters undertakings in all sectors from adopting anti-competitive conduct which has the object or effect of preventing, restricting, or distorting competition in Hong Kong. It provides for general prohibitions in three major areas of anti-competitive conduct described as the first conduct rule, the second conduct rule, and the merger rule. The first conduct rule prohibits undertakings from making or giving effect to agreements or decisions or engaging in concerted practices that have as their object or effect the prevention, restriction, or distortion of competition in Hong Kong. The second conduct rule prohibits undertakings that have a substantial degree of market power in a market from engaging in conduct that has as its object or effect the prevention, restriction, or distortion of competition in Hong Kong. The merger rule prohibits mergers that have or are likely to have the effect of substantially lessening competition in Hong Kong. The scope of application of the merger rule is limited to carrier licenses issued under the Telecommunications Ordinance (Cap. 106 of the Laws of Hong Kong).As of the date of this prospectus, we and our Hong Kong subsidiary have complied with all three areas of anti-competition laws and requirements in Hong Kong. Our Hong Kong subsidiary has not engaged in any concerted practices that have an object or effect to prevent, restrict, or distort competition in Hong Kong. Additionally, neither we nor our Hong Kong subsidiary possesses a substantial degree of market power in the Hong Kong market that could trigger the second conduct rule. The merger rule is equally not applicable to us or our Hong Kong subsidiary since neither we nor our Hong Kong subsidiary holds any carrier license issued under the Telecommunications Ordinance.

 

Accordingly, as confirmed by our Hong Kong counsel, Ince & Co, the data security or antimonopoly laws and regulations in Hong Kong do not, as of the date of this prospectus, restrict our ability to accept foreign investment or impose limitations on our ability to list on any U.S. stock exchange under Hong Kong laws and regulations.

 

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

 

As a company incorporated under the laws of the Cayman Islands, we conduct a majority of our operations in China and a majority of our assets are located in China. In addition, almost all our senior executive officers reside within China for a significant portion of the time and are PRC nationals. As a result, it may be difficult for you to effect service of process upon those persons inside mainland China. It may be difficult for you to enforce judgements obtained in U.S. courts based on civil liability provisions of the U.S. federal securities laws against us and our officers and directors, as none of them currently resides in the U.S. or has substantial assets in the U.S. 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 U.S. or any state.

 

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

  

U.S. regulatory bodies may be limited in their ability to conduct investigations or inspections of our operations in China.

 

The SEC, the U.S. Department of Justice and other U.S. authorities may also have difficulties in bringing and enforcing actions against us or our directors or executive officers in the PRC. The SEC has stated that there are significant legal and other obstacles to obtaining information needed for investigations or litigation in China. China has recently adopted a revised securities law that became effective on March 1, 2020, Article 177 of which provides, among other things, that no overseas securities regulator is allowed to directly conduct investigations or evidence collection activities within the territory of the PRC. Accordingly, without governmental approval in China, no entity or individual in China may provide documents and information relating to securities business activities to overseas regulators when it is under direct investigation or evidence discovery conducted by overseas regulators, which could present significant legal and other obstacles to obtaining information needed for investigations and litigation conducted outside of China.

 

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

 

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

 

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

 

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

 

Our PRC operating entities did not make adequate social insurance and housing fund contributions for all employees as required by PRC regulations previously, which may subject us to penalties.

 

According to the PRC Social Insurance Law and the Regulations on the Administration of Housing Funds, companies operating in China are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance (collectively known as “social insurance”), and housing funds plans, and the employers must pay all or a portion of the social insurance premiums and housing funds for their employees. For more details, please see “Regulations-Regulations on Employment and Social Welfare.” The requirement of social insurance and housing fund contributions has not been implemented consistently by the local governments in China, given the different levels of economic development in different locations.

 

Pursuant to the PRC Social Insurance Law and the Regulations on Administration of Housing Funds, an enterprise is required, within a prescribed time limit, to register with the relevant social security authority and housing fund management center, and to open the relevant accounts and make timely contributions for their employees; failure to do so may subject the enterprise to order for rectification, and certain fines if the enterprise fails to rectify in time. For the six months ended June 30, 2022 and the fiscal years ended December 31, 2021 and 2020, our PRC operating entities did not make full social insurance and housing fund contributions for all employees as required under the relevant laws and regulations. As of June 30, 2022 and December 31, 2021 and 2020, our PRC operating entities had outstanding social insurance payments payable in the aggregate amount of approximately $1,960,235, $1,525,543, and $443,175, respectively. They may be required to make up the social insurance contributions, as well as to pay late fees at the rate of 0.05% per day of the outstanding amount from the due date. If our PRC operating entities fail to make up for the shortfalls within the prescribed time limit, the relevant administrative authorities will impose a fine of one to three times the outstanding amount upon them. With respect to the housing fund, our PRC operating entities may be required to pay and deposit housing funds in full and on time within the prescribed time limit. If they fail to do so, relevant authorities could file applications to competent courts for compulsory enforcement of payment and deposit. As a result, our business, financial condition, and results of operations may be adversely affected. We have taken measures to implement our policy on the payment of social insurance and housing fund contributions for employees for the purpose of compliance with relevant PRC laws and regulations starting from June 2022.

  

PRC regulations relating to offshore investment activities by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ abilities to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

 

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

 

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

 

As of the date of this prospectus, our current shareholders have completed the initial registrations with the qualified banks as required by the regulations. We may not be informed of the identities of all the PRC residents holding direct or indirect interest in our Company, however, and we have no control over any of our future beneficial owners. Thus, we cannot provide any assurance that our current or future PRC resident beneficial owners will comply with our request to make or obtain any applicable registrations or continuously comply with all registration procedures set forth in these SAFE regulations. Such failure or inability of our PRC residents beneficial owners to comply with these SAFE regulations may subject us or our PRC resident beneficial owners to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ abilities to distribute dividends to or obtain foreign-exchange-dominated loans from us, or prevent us from being able to make distributions or pay dividends, as a result of which our business operations and our ability to distribute profits to you could be materially and adversely affected.

  

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

 

Under PRC laws and regulations, we are permitted to utilize the proceeds from this offering to fund our PRC subsidiaries by making loans or providing additional capital contributions to our PRC subsidiaries, subject to applicable government registration, statutory limitations on amounts, and approval requirements.

 

Any loans made to GoodFaith WFOE, which is treated as a foreign-invested enterprise under PRC law, are subject to PRC regulations and foreign exchange loan registrations. For example, loans made by us to GoodFaith WFOE to finance its activities cannot exceed statutory limits and must be registered with the local counterpart of the SAFE, or filed with the SAFE in its information system. Pursuant to relevant PRC regulations, we may provide loans to GoodFaith WFOE up to the larger amount of (i) the balance between the registered total investment amount and the registered capital of GoodFaith WFOE, respectively, or (ii) twice the amount of the net assets of GoodFaith WFOE, calculated in accordance with the Circular on Full-Coverage Macro-Prudent Management of Cross-Border Financing, or the “PBOC Circular 9.” Moreover, any medium or long-term loan to be provided by us to GoodFaith WFOE or other PRC operating entities must also be filed and registered with the NDRC. We may also decide to finance GoodFaith WFOE by means of capital contributions. These capital contributions must be recorded with the MOFCOM or its local counterpart.

 

On March 30, 2015, the SAFE issued the Circular of the State Administration of Foreign Exchange on Reforming the Administrative Approach Regarding the Settlement of the Foreign Exchange Capital of Foreign-invested Enterprises, or “SAFE Circular 19,” which took effect and replaced previous regulations effective on June 1, 2015. Pursuant to SAFE Circular 19, up to 100% of foreign currency capital of a foreign-invested enterprise may be converted into RMB capital according to the actual operation, and within the business scope, of the enterprise at its will. Although SAFE Circular 19 allows for the use of RMB converted from the foreign currency-denominated capital for equity investments in the PRC, the restrictions continue to apply as to foreign-invested enterprises’ use of the converted RMB for purposes beyond their business scope, for entrusted loans or for inter-company RMB loans. On June 9, 2016, the SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or “SAFE Circular 16,” effective on June 9, 2016, which reiterates some rules set forth in 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-affiliated enterprises. On October 23, 2019, the SAFE issued the Notice of the State Administration of Foreign Exchange on Further Facilitating Cross-border Trade and Investment, which, among other things, expanded the use of foreign exchange capital to the domestic equity investment area. Non-investment foreign-funded enterprises are allowed to lawfully make domestic equity investments by using their capital on the premise without violation of prevailing special administrative measures for access of foreign investments (negative list) and the authenticity and compliance with the regulations of domestic investment projects. If our PRC operating entities require financial support from us or our wholly owned subsidiary in the future and we find it necessary to use foreign currency-denominated capital to provide such financial support, our ability to fund our PRC operating entities’ operations will be subject to statutory limits and restrictions, including those described above.

 

 
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In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, including SAFE Circular 19, SAFE Circular 16, and other relevant rules and regulations, we cannot assure you that we will be able to complete the necessary registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we received or expect to receive from our offshore offerings and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our business, including our liquidity and our ability to fund and expand our business.

 

Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions in China and by China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. Since we sell a majority of the products of our brand partners in the U.S., the fluctuations in exchange rates would have a negative effect on our business and results of operations and financial condition. 

 

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

 

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into more hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

 

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

 

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

 

 
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If the PRC tax authorities determine that the actual management organ of GoodFaith Cayman is within the territory of China, GoodFaith Cayman may be deemed to be a PRC resident enterprise for PRC enterprise income tax purposes and a number of unfavorable PRC tax consequences could follow. First, we will be subject to the uniform 25% enterprise income tax on our worldwide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Finally, dividends payable by us to our investors and gains on the sale of our Ordinary Shares may become subject to PRC withholding tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of our Company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in our Ordinary Shares. As of the date of this prospectus, GoodFaith Cayman has not been notified or informed by the PRC tax authorities that it has been deemed to be a resident enterprise for the purpose of the EIT Law, however we cannot assure you that it will not be deemed to be a resident enterprise in the future. 

 

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

 

In February 2015, SAT issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or “SAT Circular 7.” SAT Circular 7 provides comprehensive guidelines relating to indirect transfers of PRC taxable assets (including equity interests and real properties of a PRC resident enterprise) by a non-resident enterprise. In addition, in October 2017, SAT issued an Announcement on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or “SAT Circular 37,” effective in December 2017 and amended in June 2018, which, among other things, amended certain provisions in SAT Circular 7 and further clarified the tax payable declaration obligation by non-resident enterprise. Indirect transfer of an equity interest and/or real properties in a PRC resident enterprise by their non-PRC holding companies are subject to SAT Circular 7 and SAT Circular 37.

 

SAT Circular 7 provides clear criteria for an assessment of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. As stipulated in SAT Circular 7, indirect transfers of PRC taxable assets are considered as reasonable commercial purposes if the shareholding structure of both transaction parties falls within the following situations: i) the transferor directly or indirectly owns 80% or above equity interest of the transferee, or vice versa; ii) the transferor and the transferee are both 80% or above directly or indirectly owned by the same party; iii) the percentage in bullet point i) and ii) shall be 100% if over 50% the share value of a foreign enterprise is directly or indirectly derived from PRC real properties. Furthermore, SAT Circular 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. Where a non-resident enterprise transfers PRC taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an indirect transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such indirect transfer to the relevant tax authority and the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding, or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.

 

According to SAT Circular 37, where the non-resident enterprise fails to declare the tax payable pursuant to Article 39 of the EIT Law, the tax authority may order it to pay the tax due within required time limits, and the non-resident enterprise shall declare and pay the tax payable within such time limits specified by the tax authority. If the non-resident enterprise, however, voluntarily declares and pays the tax payable before the tax authority orders it to do so within required time limits, it shall be deemed that such enterprise has paid the tax in time.

 

 
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We face uncertainties as to the reporting and assessment of reasonable commercial purposes and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries, and investments. In the event we are assessed as having no reasonable commercial purposes in an indirect transfer transaction, we may be subject to filing obligations or taxed if we are a transferor in such transactions, and may be subject to withholding obligations (to be specific, a 10% withholding tax for the transfer of equity interests) if we are a transferee in such transactions, under SAT Circular 7 and SAT Circular 37. For transfer of shares by investors who are non-PRC resident enterprises, our PRC subsidiary, GoodFaith WFOE, may be requested to assist in the filing under the SAT circulars. As a result, we may be required to expend valuable resources to comply with the SAT circulars or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that we should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations. 

 

Our PRC subsidiaries are subject to restrictions on paying dividends or making other payments to us, and there is no assurance that the PRC government will not intervene or impose restrictions on our ability to transfer cash out of or to mainland China and Hong Kong, which may have a material adverse effect on our ability to conduct our business.

  

We are a holding company incorporated in the Cayman Islands. We may need dividends and other distributions on equity from our PRC subsidiaries to satisfy our liquidity requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.

 

Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective registered capital. There can be no assurance that the PRC government will not intervene or impose restrictions on our ability to transfer or distribute cash within our organization or to foreign investors, which could result in an inability or prohibition on making transfers or distributions outside of mainland China or Hong Kong and adversely affect our business. In addition, our PRC subsidiaries may also allocate a portion of their respective after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends. Such existing or potential limitations on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments, or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. 

 

Governmental control of currency conversion may affect the value of your investment and our payment of dividends.

 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenue in the RMB. Under our current corporate structure, GoodFaith Cayman may rely on dividend payments from our PRC subsidiary, GoodFaith WFOE, to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore, GoodFaith WFOE is able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by our shareholders or the ultimate shareholders of our corporate shareholders who are PRC residents. Approval from or registration with appropriate government authorities is, however, required where the RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demand, we may not be able to pay dividends in foreign currencies to our shareholders.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

A recent joint statement by the SEC and the PCAOB, rule changes by Nasdaq, and the HFCA Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.

  

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

 

On May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply a minimum offering size requirement for companies primarily operating in a “Restrictive Market,” (ii) adopt a new requirement relating to the qualification of management or the board of directors 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 auditor. On October 4, 2021, the SEC approved Nasdaq’s revised proposal for the rule changes.

 

On May 20, 2020, the U.S. Senate passed the HFCA Act requiring a foreign company to certify it is not owned or manipulated by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditor for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange or in the over-the-counter trading market in the United States. On December 2, 2020, the U.S. House of Representatives approved the HFCA Act. On December 18, 2020, the HFCA Act was signed into law.

 

On June 4, 2020, the U.S. President issued a memorandum ordering the President’s working group on financial markets, or the “PWG,” to submit a report to the President within 60 days of the date of the memorandum that should include recommendations for actions that can be taken by the executive branch and by the SEC or PCAOB to enforce U.S. regulatory requirements on Chinese companies listed on U.S. stock exchanges and their audit firms. 

 

On August 6, 2020, the PWG released a report recommending that the SEC take steps to implement the five recommendations outlined in the report. In particular, to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate, or “NCJs”, the PWG recommends enhanced listing standards on U.S. stock exchanges. This would require, as a condition to initial and continued exchange listing, PCAOB access to work papers of the principal audit firm for the audit of the listed company. Companies unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in NCJs may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm. The report permits the new listing standards to provide for a transition period until January 1, 2022 for listed companies, but would apply immediately to new listings once the necessary rulemakings and/or standard-setting are effective.

 

 
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On August 10, 2020, the SEC announced that SEC Chairman had directed the SEC staff to prepare proposals in response to the PWG Report, and that the SEC was soliciting public comments and information with respect to these proposals. If we are listed on the Nasdaq Capital Market and fail to meet the new listing standards before the deadline specified thereunder due to factors beyond our control, we could face possible de-listing from the Nasdaq Capital Market, deregistration from the SEC, and/or other risks, which may materially and adversely affect, or effectively terminate, the trading of our Ordinary Shares in the United States. 

 

On December 18, 2020, the HFCA Act, was signed by President Donald Trump and became law. This legislation requires certain issuers of securities to establish that they are not owned or controlled by a foreign government. Specifically, an issuer must make this certification if the PCAOB is unable to audit specified reports because the issuer has retained a foreign public accounting firm not subject to inspection by the PCAOB. Furthermore, if the PCAOB is unable to inspect the issuer’s public accounting firm for three consecutive years, the issuer’s securities are banned from trade on a national exchange or in the over-the-counter trading market in the United States or through other methods.

 

On March 24, 2021, the SEC announced that it had adopted interim final amendments to implement congressionally mandated submission and disclosure requirements of the HFCA 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, and on December 29, 2022, the Consolidated Appropriations Act was signed into law by President Biden, which contained, among other things, an identical provision to the Accelerating Holding Foreign Companies Accountable Act and amended the HFCA Act by requiring 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, thus reducing the time period for triggering the delisting of our Company and the prohibition of trading in our securities if the PCAOB is unable to inspect our accounting firm at such future time.

 

On September 22, 2021, the PCAOB adopted a final rule implementing the HFCA Act, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act, whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction.

 

On November 5, 2021, the SEC approved the PCAOB’s Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act. Rule 6100 provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act, whether it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction.

 

On December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act, which became effective on January 10, 2022. 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, the PCAOB issued a report on its determinations that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in China and in Hong Kong because of positions taken by PRC and Hong Kong authorities in those jurisdictions. The PCAOB has made such designations as mandated under the HFCA Act. Pursuant to each annual determination by the PCAOB, the SEC will, on an annual basis, identify issuers that have used non-inspected audit firms and thus are at risk of such suspensions in the future.

   

The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection.

  

 
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The lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, 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 firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our Ordinary Shares to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

 

On August 26, 2022, the PCAOB signed the SOP Agreements with the CSRC and China’s Ministry of Finance. The SOP Agreements established a specific, accountable framework to make possible complete inspections and investigations by the PCAOB of audit firms based in mainland China and Hong Kong, as required under U.S. law. On December 15, 2022, the PCAOB Board determined that the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB Board will consider the need to issue a new determination within three years’ time. The PCAOB continues to demand complete access in mainland China and Hong Kong moving forward and is making plans to resume regular inspections in early 2023 and beyond, as well as to continue pursuing ongoing investigations and initiate new investigations as needed. The PCAOB has also indicated that it will act immediately to consider the need to issue new determinations with the HFCA Act, if needed.

 

Our auditor, UHY 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 its compliance with the applicable professional standards. Our auditor is headquartered in New York, and has been inspected by the PCAOB on a regular basis, with the last inspection in 2019. Therefore, as of the date of this prospectus, our auditor is not subject to the PCAOB determinations announced by the PCAOB on December 16, 2021 relating to the PCAOB’s inability to inspect or investigate completely registered public accounting firms headquartered in mainland China or Hong Kong because of a position taken by one or more authorities in the PRC or Hong Kong. However, there is no assurance that our auditor, following our initial public offering, would be subject to PCAOB inspection. Additionally, the recent developments have added uncertainties to our offering and we cannot assure you whether the national securities exchange we apply to for listing or regulatory authorities would apply additional or more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit. Furthermore, the HFCA Act, which requires that the PCAOB be permitted to inspect the issuer’s public accounting firm within two years, as amended, may result in the delisting of our Company in the future if the PCAOB is unable to inspect our accounting firm at such future time. Our securities may be prohibited from trading if our auditor cannot be fully inspected as more stringent criteria have been imposed by the SEC and the PCAOB recently. While the Company’s auditor is based in the U.S. and is registered with PCAOB and subject to PCAOB inspection, in the event it is later determined that the PCAOB is unable to inspect or investigate completely the Company’s auditor because of a position taken by an authority in a foreign jurisdiction, then such lack of inspection could cause trading in the Company’s securities to be prohibited under the HFCA Act, and ultimately result in a determination by a securities exchange to delist the Company’s securities. The PCAOB continues to demand complete access in mainland China and Hong Kong moving forward and is making plans to resume regular inspections in early 2023 and beyond, as well as to continue pursuing ongoing investigations and initiate new investigations as needed. The PCAOB has also indicated that it will act immediately to consider the need to issue new determinations with the HFCA Act, if needed. If trading in our Ordinary Shares is prohibited under the HFCA Act in the future because the PCAOB determines that it cannot inspect or fully investigate our auditor at such future time, Nasdaq may determine to delist our Ordinary Shares. A termination in the trading our of securities or any restriction on the trading in our securities would be expected to have a negative impact on the Company as well as on the value of our securities.

  

It remains unclear what the SEC’s implementation process related to the above rules will entail or what further actions the SEC, the PCAOB or Nasdaq will take to address these issues and what impact those actions will have on the companies that have significant operations in the PRC and have securities listed on a U.S. stock exchange (including a national securities exchange or over-the-counter stock market). In addition, the above amendments and 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.

 

Furthermore, new laws and regulations or changes in laws and regulations in both the United States and China could affect our ability to list our securities on the Nasdaq Capital Market, which could materially impair the market for and the market price of our securities.

 

The approval of the CSRC may be required in connection with this offering under a regulation adopted in August 2006, and, if required, we cannot assure you that we will be able to obtain such approval, in which case we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek CSRC approval for this offering.

 

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 SPV 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 SPV’s securities on an overseas stock exchange. In September 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by an SPV seeking CSRC approval of its overseas listings. The application of the M&A Rules remains unclear.

 

Our PRC legal counsel has advised us, based on their understanding of the current PRC law, rules, and regulations, that CSRC approval is not required for the listing and trading of our shares on the Nasdaq Capital Market in the context of this offering, given that (i) the CSRC currently has not issued any definitive rules or interpretations concerning whether offerings under this prospectus are subject to the M&A Rule; and (ii) we established GoodFaith WFOE by means of direct investment rather than by merger with or acquisition of PRC domestic companies as defined in the M&A Rules.

 

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

 

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

 

The M&A Rules discussed in the preceding risk factor and recently adopted regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex. For example, the M&A Rules require that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that have or may have impact on the national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. Mergers or acquisitions that allow one market player to take control of or to exert decisive impact on another market player must also be notified in advance to the Ministry of Commerce when the threshold under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, or the “Prior Notification Rules,” issued by the State Council in August 2008 is triggered. In addition, the security review rules issued by the Ministry of Commerce that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the Ministry of Commerce, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce or its local counterparts may delay or inhibit our ability to complete such transactions. It is clear that our business would not deemed to be in an industry that raises “national defense and security” or “national security” concerns. The Ministry of Commerce or other government agencies, however, may publish explanations in the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in the PRC, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited. Our ability to expand our business or maintain or expand our market share through future acquisitions would as such be materially and adversely affected.

  

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

 

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

 

 
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Risks Related to Our Businesses and Industries

 

The financial sector in China is subject to changes in regulations. Non-compliance with new financial regulations or new licensing requirements may materially affect our business operations and financial results.

 

The Company’s operations are subject to evolving regulatory oversight by the Chinese governmental and local regulatory authorities. As the Chinese financial sector grows, applicable laws, rules, and regulations are evolving. Any changes in laws and regulations applicable to our operations may increase our cost of compliance or may force us to revise our business plan or cease some aspects of our operations. If we fail to continuously comply with applicable rules and regulations, we may face fines or restrictions on our business activities, or even a suspension of all or part of our business operations. Furthermore, the Chinese governmental and local authorities may institute new licensing requirements applicable to our current or future operations. If such licensing requirements were introduced, we cannot assure you that we would be able to obtain any newly required license promptly, or at all, which could materially and adversely affect our business. 

 

The industries we are in are still evolving, which makes it difficult to effectively assess our future prospects.

 

The industries in which we operate, including the intelligent risk management and debt collection business, in the PRC are still in evolving stages. The regulatory framework for these industries remains uncertain for the foreseeable future. Many market players in these industries, including us, are inexperienced in responding effectively to market changes and steadily sustaining the growth of business when the industries enter a different stage. We may not be able to sustain our historical growth rate in the future.

 

You should consider our business and prospects in light of the risks and challenges we encounter or may encounter, given the rapidly evolving markets in which we operate and our limited operating history. These risks and challenges include our ability to, among other things:

 

 

offer competitive product and services;

 

 

 

 

broaden our prospective customer bases across all business lines;

 

 

 

 

increase the utilization of our products and services by existing customers as well as new customers; 

 

 

 

 

maintain and enhance our relationship and business collaboration with our partners, including, but not limited to, developing cooperative relationships with new commercial banks;

 

 

 

 

navigate a complex and evolving regulatory environment in China; 

 

 

improve our operational efficiency; 

 

 

 

 

attract, retain and motivate talented employees to support our business growth; 

 

 

 

 

enhance our technology infrastructure to support the growth of our business, maintain the security of our systems, and safeguard the confidentiality of the information provided and utilized across our systems; 

 

 

 

 

navigate economic conditions and fluctuation; and 

 

 

 

 

defend ourselves against legal and regulatory actions, such as actions involving intellectual property or privacy claims.

 

 
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We operate a socially sensitive business. Public complaints against the debt collection industry in general, or against us in particular, may materially and adversely affect our business, financial condition and results of operations.

 

The general public may have certain misconceptions about the debt collection industry, such as the perceived use of unlawful means to collect debts. Given the growth of collection service providers in China, the contentious nature associated with debt collection, the unpredictability of borrower behavior, and the inflow of small-scale market participants with weak compliance protocols, the post-loan debt collection industry is subject to potentially higher and unpredictable government scrutiny. Such development could subject our operations to regulatory restrictions, government investigations, administrative fines, and increased compliance requirements. As a result, our business and our ability to generate revenue could be materially and adversely affected.

 

Furthermore, negative publicity about our industry and business creates the possibility of heightened attention from the public, the media and government regulators. From time to time, complaints or allegations against us, regardless of their veracity, may result in negative publicity, which in turn could result in government inquiry or reputational harm. There is no assurance that we would not become a target for public scrutiny in the future or such scrutiny and public exposure would not severely damage our reputation, business, and prospects. Furthermore, we rely heavily on our reputation to develop and maintain client relationships. Our prospective clients, including commercial banks, may refuse to work with us if we suffer from a tarnished reputation, since any perceived or actual violation of laws and regulations by service providers could increase our clients’ regulatory risks. As such, our business is particularly vulnerable to negative media coverage and negative publicity.

 

In addition, our directors and management may become subject to scrutiny by the media and the public regarding our business, which may result in unverified, inaccurate or misleading information about our directors and management being reported by the press. Negative publicity about our directors or management, even if untrue or inaccurate, may harm our reputation.

 

Our revenue would be adversely affected if our clients develop or adopt an alternative to our services.

 

If our prospective clients, including commercial banks and other financial institutions, decide to develop their own risk evaluation and loan collection solution or platform internally or rely on their in-house collection team and other service providers, our debt collection business could be adversely affected. Since our success partially depends on our ability to use our advanced technology system, clients resorting to such alternate systems may deprive us of our competitive advantage. In addition, our clients may decide against the use of third-party service providers altogether by relying on internal and proprietary resources, which could result in reduced revenue.

 

Our operating history, and our experience in risk evaluation and the debt collection business, may not provide an adequate basis to judge our future prospects and results of operations.

 

As we launched our credit loan risk management business in 2015 and debt collection services in 2014, we only have a limited operating history. Members of our management team have been working together only for a short period of time and are still in the running-in period. They may still be in the process of exploring approaches to running our Company and reaching consensus among themselves, which may affect the efficiency and results of our operation.

 

We have limited experience in most aspects of our business operations, such as service and product offerings, credit assessment, risk management, and the development of long-term relationships with commercial banks, non-bank financial institutions and other business partners. As our businesses develop or in response to competition, we may continue to introduce new products and services, adjust our existing products and service profile, or make changes to our business operation in general. Any significant change to our business model may have a material and adverse impact on our financial condition and results of operations. It is therefore difficult to effectively assess our future prospects.

 

Furthermore, in addition to our existing product and services offerings, we may also from time to time explore other growth opportunities, such as broadening our customer base and seeking strategic partnerships to enter new markets that are complementary to our existing business lines. These initiatives may have different impacts on our operation, including the potential cannibalization of existing services. Failure to manage our expansion may have unexpected materially adverse effect on our financial condition and results of operation.

 

 
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Our employees, including collection specialists, may violate our compliance policies and government rules and regulations during the repayment and collection management process.

 

We have compliance policies to instruct and guide our employees during the repayment and collection management process to comply with government rules and regulations. However, our employees, such as our collection specialists, may not comply with our compliance policies and may violate laws and regulations in the repayment and collection management process. They may make verbal or written threats of physical harm, use vulgar or inappropriate language, or agree to unauthorized repayment arrangements with borrowers, among other actions, to increase the likelihood of collection. They may use illegal tactics, such as impersonation of government officials or fabrication of documents to exert influence over borrowers. They may solicit loan applicants’ personal information illegally and sell such information to third parties for their personal financial gains.

 

Although these are individual acts, such acts may still adversely affect our business, cause reputational damage, or result in monetary penalties or loss of business. If the violations are severe, our clients may terminate our services and cease cooperation with us in the future. In addition, the government may investigate our operations for potential violations of government rules and regulations, which may interrupt our normal operations, and we may be subject to administrative penalties such as monetary penalties or, in the most severe circumstances, suspension of our loan repayment and collection management business.

 

Fraudulent activity could negatively impact our operating results, brand, and reputation, and cause the use of our risk evaluation services to decrease.

 

We are subject to the risk of fraudulent activity associated with loan applicants and parties handling loan application and processing information. Our resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. Even if we identify a fraudulent borrower and reject her loan application, such borrower may re-apply by using fraudulent information. We may fail to identify such behavior, despite our measures to verify personal identification information provided by borrowers. A significant increase in fraudulent activities could negatively impact our brand and reputation, discourage commercial banks from collaborating with us, reduce the total amount of loans originated by commercial banks that have partnered with us, and lead us to take additional steps to reduce fraud risk, which could increase our costs. High profile fraudulent activity could lead to regulatory intervention and may divert our management’s attention and cause us to incur additional expenses and costs. Although we have not experienced any material business or reputational harm as a result of fraudulent activities in the past, we cannot rule out the possibility that fraudulent activities may materially and adversely affect our business, reputation, financial condition, and results of operations in the future.

 

Market, economic and other conditions in China may adversely affect the demand for our products and services.

 

Loan services depend upon the overall level of economic conditions and consumer spending in China. A sustained deterioration in the general economic conditions in China, including any turmoil in the economy, reductions in household disposable income, distresses in financial markets, or reduced market liquidity, as well as increased government intervention, may reduce the number of our customers. Small-to-medium size business owners, in particular, are more susceptible to adverse changes in market, economic and regulatory conditions and the level of consumption in China. As a result, the demand for our existing and new repayment services could decrease, and our financial performance could be adversely affected.

 

Adverse market trends may affect our financial performance. Such trends may include, but are not limited to, the following:

 

 

fluctuations in consumer demand, which reflect the prevailing economic and demographic conditions;

 

 

low levels of consumer and business confidence associated with recessionary environments, which may in turn reduce consumer spending;

 

 

financial institutions restricting credit lines to existing cardholders or limiting the issuance of new cards to mitigate cardholder defaults; and\or

 

 

government intervention and regulation, and/or reduction in government investments in our customers, such as governmental funding for social welfare programs and infrastructure or reductions in consumer taxes, that may reduce consumer desire to use our products and services.

 

 
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We rely on our advanced technology, including artificial intelligence, our proprietary technology system, and digital technology, to offer risk evaluation and solvency assessment products and services. If our assessment model or the underlying algorithm lacks accuracy or fails to achieve clients’ goals, our reputation and market share would be materially and adversely affected, which would severely impact our business and results of operations.

 

Our ability to attract new clients to, and build trust in, our pre-approval risk evaluation business is significantly dependent on our ability to effectively evaluate loan applicants’ credit profiles and the likelihood of default. We have devised and implemented a systematic credit assessment model and an asset-driven, disciplined risk management approach to minimize a loan applicant’s default risk and mitigate the impact of default. Specifically, our assessment model and risk management capabilities not only enable our commercial bank clients to select high-quality borrowers whose financial conditions and personal backgrounds satisfy them, but also protect them from against lending more than they may be able to recover in the event of default. For details on our credit assessment and risk management approach, see “Business-Our Products and Services-Risk Evaluation and Solvency Assessment Products and Services-Credit Loan Pre-approval Stage.” While we are constantly training, updating and optimizing our products using new data, there can be no assurance that our risk management measures will allow us to identify or appropriately assess whether the interest and principal payments due on a loan will be repaid when due, or at all.

 

We also rely on analytical models (both models developed by us and those supplied by third parties) and information and data (both generated by us and supplied by third parties). Models and data will be used to make projections on loan applicants’ ability to repay loans. When models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon might not be reliable. Some of the analytical models we use are predictive in nature. For example, through our pre-approval risk warning scoring model, or the “Pre-approval Risk Warning Scoring,” we process anonymous application information, collected and provided by our clients such as banks and financial institutions through a secure and encrypted transmission to our Contractual Capacity Scoring system (as defined below), to calculate each applicant’s probability of being delinquent for more than thirty (30) days. Applicants with high probability of being delinquent for more than thirty (30) days will be identified as an applicant with risks. The use of predictive models has inherent risks. For example, such models may incorrectly forecast future behavior, leading to volatility in results. In addition, the predictive models used by us may differ substantially from those models used by our competitors. Our business, financial condition, and results of operations could be materially impaired, in the event the analytical models or information data we rely on are found to be incorrect, misleading or incomplete.

 

We rely on third parties to provide basic verification services to our clients. If such third parties, or critical staff of such third parties, are unable or unwilling to continue in their present positions, our business may be severely disrupted.

 

We rely on certain third-party service providers for our basic verification products and services. See “Business-Products and Services-Risk Evaluation and Solvency Assessment Products and Services-Credit Loan Pre-approval Stage-Our Products and Services for Risk Evaluation and Solvency Assessment-Basic Verification.” For example, we purchased brief verification, portrait comparison, and watchlist scoring services from such third-party service providers. In particular, brief verification services are used to verify loan applicants’ names, ID numbers, start and end dates of their ID cards, their driving license information, and the validity of driving licenses. The portrait comparison service is an on-site verification used to confirm whether the documents presented by a loan applicant are attributable to that particular loan applicant, and the watchlist scoring service is used to determine a loan applicant’s default risk. If such third-party service providers fail to function properly, we cannot assure you that we would be able to find an alternative resource in a timely and cost-efficient manner or at all. Even though the services we rely upon are usually subject to pay-per-use schedules, we do maintain a few fixed-term contracts, and we cannot assure you that we can renew any such contracts once they expire, or we can renew them with the term we desire. Such service providers may also be demanded by their customers not to work with us, or may form alliances to seek better terms dealing with us. Even though our business does not substantially depend on any particular third-party service providers, the above-mentioned occurrences may result in our diminished ability to operate our business, potential liability to borrowers, inability to attract borrowers, reputational damage, regulatory intervention, and financial harm. Such occurrences could negatively impact our business, financial condition, and results of operations.

  

Credit and other information we receive from third parties about borrowers may be inaccurate or may not accurately reflect a prospective borrower’s creditworthiness, which may compromise the accuracy of our credit assessment.

 

For credit assessment purposes, we obtain certain information of the prospective borrowers from our clients directly, including commercial banks or other financial institutions. Such information may not be complete, accurate, or reliable, especially in instances in which some of the data needs to be anonymized for safety concerns. Our credit assessment may not reflect that particular loan applicant’s actual creditworthiness because the assessment may be based on outdated, incomplete, or inaccurate borrower information. Such occurrences could negatively impact our business, financial condition, and results of operations.

 

If our pre-approval risk evaluation and solvency assessments business do not achieve sufficient market acceptance, our financial results and competitive position will be harmed.

 

Our pre-approval risk evaluation and solvency assessment business could fail to attain sufficient market acceptance for many reasons, including, but not limited to, any of the following:

 

 

there may be defects, errors, or failures in our credit assessment and risk management process;

 

 

there may be negative publicity about our risk evaluation and solvency assessment services;

 

 

 

 

regulatory authorities may take the view that our existing and new recommendation services do not comply with PRC laws, regulations, or rules applicable to us; and\or 

 

 

 

 

there may be competing products or services introduced or anticipated to be introduced by our competitors.

 

 
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If our pre-approval risk evaluation and solvency assessment services do not maintain or achieve adequate acceptance in the market, our competitive position, results of operations and financial condition could be materially and adversely affected.

 

We face increasing competition, and if we do not compete effectively, our operating results could be harmed.

 

The industries in which we are operating are competitive and evolving. With respect to pre-approval risk evaluation and solvency assessment business, we compete with market players, such as Tongdun Technology Co., Ltd., Bairong Yunchuang Technology Co., Ltd., and Shanghai Bingjian Information Technology Co., Ltd. For post-loan delinquent debit collection services, our major competitors include Hunan Yongxiong Asset Management Group Co., Ltd., Shenzhen Shenjuyuan Credit Consulting Co., Ltd., Guangdong Delv Credit Management Co., Ltd., and Huadao Data Co., Ltd.

 

Our competitors may operate with different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove to be more successful or more adaptable to new regulatory, technological and other developments. Some of our current and potential competitors have significantly more financial, technical, marketing and other resources than we do, and may be able to devote greater resources to the development, promotion, sale and support of their platforms. Our competitors may also have longer operating histories, more extensive pool of borrowers, larger amounts of data, greater brand recognition and loyalty, and broader partner relationships than we do. For example, traditional financial institutions may offer risk assessment services of their own. Such institutions are likely more experienced in financial product development and risk management and able to devote greater resource to the development, promotion, sale and technical support, and, thus, may gain a competitive edge against us. Additionally, a current or potential competitor may acquire one or more of our existing competitors or form a strategic alliance with one or more of our competitors. Any of the foregoing could adversely affect our business, results of operations, financial condition and future growth.

 

Our competitors may be better at developing new services and products, responding to new technologies, charging lower fees on products and services and undertaking more extensive marketing campaigns. When new competitors seek to enter our targeted markets, or when existing market participants seek to increase their market share, they sometimes undercut product and service pricing and/or terms prevalent in the markets, which could adversely affect our market share or ability to capture new market opportunities. Our pricing and terms could deteriorate if we fail to act to meet these competitive challenges.

 

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

 

Enhancing the recognition and reputation of our brand is critical to our business and competitiveness. Factors that are vital to this objective include, but are not limited to, our ability to:

 

 

maintain the quality and reliability of our products and services; 

 

 

 

 

provide our customers with a satisfactory and distinguished customer experience; 

 

 

 

 

enhance and improve our credit assessment model, risk management system, and IT infrastructure;

 

 

 

 

effectively manage and resolve customer complaints; and 

 

 

 

 

effectively protect personal information and privacy of customers and business partners.

 

Any malicious or innocent negative allegation made by the media or other parties about our Company, including, but not limited to, aspects of our Company with respect to our management, business, compliance with law, financial condition or prospects, whether with merit or not, could severely hurt our reputation and harm our business and operating results. As the industries in which we operate are still evolving, negative publicity may arise from time to time. Negative publicity about China’s financial industry in general may also have a negative impact on our reputation, regardless of whether we have engaged in any inappropriate activities.

 

 
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In addition, certain factors that may adversely affect our reputation are beyond our control. Negative publicity about our partners, outsourced service providers or other counterparties, such as negative publicity about their business practices and any failure by them to adequately protect confidential information, to comply with applicable laws and regulations or to otherwise meet required quality and service standards, could harm our reputation. Furthermore, any negative development in the financial industry in China, such as bankruptcies or failures of finance platforms, or negative perception of the industry as a whole, even if factually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established and negatively impact our ability to acquire new customers and establish new strategic partnerships. 

 

Misconduct, errors and failure to function by our employees and third-party service providers could harm our business and reputation.

 

We are exposed to many types of operational risks, including the risk of misconduct and errors by our employees and third-party service providers. Our business depends on our employees and third-party service providers to a variety of business activities, including, but not limited to, interacting with potential and existing customers, processing large numbers of transactions, and supporting the loan repayment and collection management process, all of which involve the use and disclosure of personal information. We could be materially adversely affected if transactions were redirected, misappropriated or otherwise improperly executed, if personal information was disclosed to unintended recipients or if an operational breakdown or failure in the processing of transactions occurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of our operations or systems. In addition, the manner in which we store and use certain personal information and interact with customers is governed by various PRC laws. It is not always possible to identify and deter misconduct or errors by employees or third-party service providers, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses. If any of our employees or third-party service providers take, convert or misuse funds, documents or data or fail to follow protocol when interacting with our customers, we could be liable for damages and subject to regulatory actions and penalties. We could also be perceived to have originated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or criminal liability.

 

Our operations depend on the performance of the internet infrastructure and fixed telecommunications networks in China, which we do not control.

 

Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the MIIT. We primarily rely on a limited number of telecommunications service providers to provide us with data communications capacity through local telecommunications lines and internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s internet infrastructure or the fixed telecommunications networks provided by telecommunications service providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure by relevant regulatory authorities. We cannot assure you that the internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage. 

 

In addition, we have no control over the costs of the services provided by telecommunications service providers. If the prices we pay for telecommunications and internet services rise significantly, our financial performance may be adversely affected. Furthermore, if internet access fees or other charges to internet users increase, our business may be harmed.

 

We are highly dependent on IT systems, and an interruption or error in those systems could have an adverse effect on our business and results of operations.

 

Our business is materially dependent on our proprietary IT systems. For example, during the credit loan pre-approval stage, we utilize our self-developed artificial intelligent system developed based on machine learning models and digital technology to offer risk evaluation and solvency assessment products and services to our clients. During the post-loan stage, other than the portals offered by banks or financial institutions, we rely on two collection operating portals we acquired to navigate through the collection process. Development and maintenance of our technology infrastructure are complex, expensive, and time-consuming, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our operating portal and IT systems from functioning properly and consequently adversely affect our information infrastructure and our business. If our IT systems cease to work, become unavailable, or experience significant interruption, we may be prevented from operating business normally.

 

 
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Our business also depends on the efficient and uninterrupted operation of our computer systems. All our computer hardware and our computing services are currently located in China. Although we have prepared for contingencies through redundancy measures and disaster recovery plans, such preparation may not be sufficient, and we currently do not carry business interruption insurance. Despite any precautions we may take, the occurrence of a natural disaster, such as an earthquake, flood or fire, or other unanticipated problems at our offices in China, including power outages, telecommunications delays or failures, break-ins to our systems or computer viruses, could result in delays or interruptions to our business and loss of data for us. Any of these events could damage our reputation, significantly disrupt our operations, and subject us to liability, which could materially and adversely affect our business, financial condition, and results of operations.

 

Our internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.

 

Our internal systems-including the pre-approval artificial intelligent system, two post-loan collection operating portals, and other systems utilized in our operations-rely on software that is highly technical and complex. In addition, our internal systems depend on the ability of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for financial institutions and commercial banks that we partner with, delay introductions of new features or enhancements, result in errors or compromise our ability to protect borrower data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of customers or business partners, loss of revenue, or liability for damages, any of which could adversely affect our business and financial results.

 

If we are not able to respond to technological advances in a timely manner, we may not remain competitive.

 

Our success depends in a large part on our technology and IT infrastructure, such as the pre-approval artificial intelligent system and its machine learning technologies. If we are not able to respond to advances in telecommunications and computer technologies in a timely manner, we may not be able to remain competitive. We have made significant investments in technology to remain competitive and we anticipate that it will be necessary to continue to do so in the future. Although we will continue to devote significant resources to enhance and develop our technologies, we cannot assure you that we will have the capital resources available to invest in new technologies, and we may not be able to implement technology updates on a timely basis, or at all. In addition, new technologies may not succeed or integrate well with our existing systems and infrastructure, and even if integrated, may not function as expected. As telecommunications and computer technologies are changing rapidly and are characterized by short product life cycles, we may not be successful in anticipating new technology trends or adopt technological changes on a timely basis. If any of the foregoing were to occur in the future, our business and results of operation could be materially adversely affected. 

 

We may not be able to manage the repayment and collection of consumer receivables efficiently and a decline in our ability to manage the repayment and collection of consumer receivables could adversely affect our ability to generate revenue and reputation.

 

The success of our post-loan delinquent debt collection business depends on our ability to manage the repayment and collection of such loans efficiently. We do not purchase any of delinquent loans for which we assist with delinquent debt collection. Instead, we collect commissions from our clients based on the amount of delinquent loans we successfully collect. Furthermore, we have been able to establish our industry reputation largely because we have been able to manage the repayment and collection of these loans efficiently. Our ability to manage the repayment and collection of consumer loans may be adversely affected by, among other factors, the borrowers’ inability to repay during economic downturns, the age of the loans, or any issue with our operating portal. If we are unable to manage the repayment and collection of consumer loans efficiently in the future, our business, financial condition and results of operations could be significantly and adversely impacted.

 

Our ability to protect the confidential information of various parties, including loan applicants and delinquent debtors, may be adversely affected by cyberattacks, computer viruses, physical or electronic break-ins or similar disruptions.

 

We collect, store, and process certain personal and other sensitive data from various parties, including but not limited to loan applicants, delinquent debtors, commercial banks, and non-bank financial institutions, which makes it an attractive target and potentially vulnerable to cyberattacks, computer viruses, physical or electronic break-ins or similar disruptions. While we have taken steps to protect the confidential information that we have access to, our security measures could be breached. Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access to our systems could cause confidential information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships with our customers, including borrowers, investors, and merchants, could be severely damaged, we could incur significant liability, and our business and operations could be adversely affected.

 

 
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Meanwhile, if there is any failure by us to protect confidential information, we may be involved in various claims and litigations raised for privacy or other damages. Such claims and litigations will take a lot of time and resources to defend and we cannot assure you any result for us litigations.

 

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

 

We regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights. See “Business-Intellectual Property.” However, we cannot assure you that any of our intellectual property rights would not be challenged, invalidated or circumvented, or such intellectual property will be sufficient for providing us with competitive advantages. In addition, other parties may misappropriate our intellectual property rights, which would cause us to suffer economic or reputational damages. Because of the rapid pace of technological change, we cannot assure you that all of our proprietary technologies and similar intellectual property will be patented in a timely or cost-effective manner, or at all. Furthermore, parts of our business rely on technologies developed or licensed by other parties, or co-developed with other parties, and we may not be able to obtain or continue to obtain licenses and technologies from these other parties on reasonable terms, or at all.

 

It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment, and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly, and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or authorized third-party service providers use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition, and results of operations.

 

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

 

We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, copyrights, know-how, proprietary technologies or other intellectual property rights held by other parties. We may be, from time to time in the future, subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be other parties’ trademarks, copyrights, know-how, proprietary technologies or other intellectual property rights that are infringed by our products and services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions. If any infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.

 

Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, copyrights, know-how, proprietary technologies or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected. 

 

 
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Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.

 

Pursuant to PRC laws and regulations, our PRC operating entities are required to participate in various employee social insurance plans, including pension insurance, unemployment insurance, medical insurance, work-related injury insurance, maternity insurance, and the housing provident fund, and contribute to these plans and fund at the levels specified by the relevant local government authorities from time to time at locations where we operate our business. For the six months ended June 30, 2022 and the fiscal years ended December 31, 2021 and 2020, our PRC operating entities did not make full contributions to the social insurance plans as required under the relevant laws and regulations. As of June 30, 2022 and December 31, 2021 and 2020, they had outstanding social insurance payments payable in the aggregate amount of approximately $1,960,235, $1,525,543, and $443,175, respectively. Although they have not received any notice from the relevant local government authorities regarding the outstanding contributions, we cannot assure you that the relevant local government authorities will not require our PRC operating entities to pay the outstanding amount within a prescribed time or impose late fees or fines on us. A late fee of 0.05% per day and a fine of one to three times the outstanding amount may be imposed by the authority, which may materially and adversely affect our business, financial condition and results of operations. We have not made any accruals for late fees and fines that may be imposed by the relevant local government authorities in the financial statements. We have not received any inquiry, notice, warning, or sanctions regarding such late fees or fines, and the interpretation and implementation of labor-related laws and regulations are still constantly evolving which may be further amended from time to time. There are a number of policies providing that local governmental authorities shall act carefully to avoid burdensome measures over the small- and medium-size entities. For example, pursuant to the Emergency Notice on Practicing Principles of the State Council Executive Meeting and Stabilizing Work on Collecting Social Insurance Premiums, promulgated by the Ministry of Human Resources and Social Security on September 21, 2018, local authorities are prohibited from recovering the unpaid social insurance premiums from enterprises without permission in a centralized manner. In addition, our current shareholders had agreed to compensate us for the relevant fines, any outstanding sum, and any related costs and expenses arising from such noncompliance if imposed by the competent PRC authorities. We have taken measures to implement our policy on the payment of social insurance and housing fund contributions for employees for the purpose of compliance with relevant PRC laws and regulations starting from June 2022.

  

One of our PRC operating entities failed to make adequate income tax as required by PRC regulations previously, which may subject us to penalties.

 

Shenzhen Xindesheng, one of our PRC operating entities, did not properly file the tax return with the State Administration of Taxation (the “SAT”) and pay related enterprise income taxes in a timely manner for the fiscal years from 2017 to 2021. As of June 30, 2022 and December 31, 2021 and 2020, Shenzhen Xindesheng had under-declared tax payable in the aggregate amount of approximately $2,330,793, $1,333,138, and $1,008,399, respectively. According to the Tax Collection and Administration Law of the PRC, promulgated by the SCNPC on September 4, 1992 and most recently amended on April 24, 2015, if a taxpayer fails to pay taxes due or fails to remit tax payments within required time limits, the PRC taxation authorities shall order the taxpayer or the withholding agent thereof to pay or remit the tax within a specified time limit and impose a penalty for late payment at the rate of 0.05% per day of the outstanding amount from the due date. Notably, a taxpayer commits tax evasion if he (i) forges, alters, conceals, or destroys without authorization accounting books or vouchers for the accounts, (ii) overstates expenses or omits or understates incomes in the accounting books, or (iii) refuses to make tax declaration after being notified by the PRC tax authority to do so, makes false tax declaration, or fails to pay or underpays the amount of tax payable. In addition, where taxpayers commit such tax evasion, they (i) are required to make up the tax payment due and pay late fees, and (ii) shall be fined not less than 50% but not more than five times the amount of tax such taxpayers fail to pay or underpay; where a crime is constituted, such taxpayers shall be investigated for criminal liability in accordance with the applicable PRC laws. According to the Criminal Law of the PRC, promulgated by the NPC on July 1, 1979 and most recently amended by SCNPC in 2020, if taxpayers resort to deception or concealment to make false tax declarations or fail to declare, evading the payment of a relatively large amount of tax that accounts for more than 10% of the tax payable, such taxpayers shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention, and shall also be fined; those who account for more than 30% of the taxable amount shall be sentenced to fixed-term imprisonment of not less than three years but not more than seven years and shall also be fined. If taxpayers who commit the aforementioned tax evasion, upon receiving a notice of recovery from the PRC tax authority, make up the tax payable including the late fees and have received an administrative penalty, they shall not be investigated for criminal liabilities, except in cases where such taxpayers have been received criminal punishment for evading tax payment or have been subject to two or more administrative penalties imposed by the PRC tax authority within five years.

  

As of the date of this prospectus, Shenzhen Xindesheng has not received any notice from the PRC tax authorities regarding the outstanding tax payment. It is, however, possible that the Company may be subject to fines, late fees, and other penalties even if the Company makes such tax payments. As a result, our business, financial condition, and results of operations may be adversely affected. In this regard, for the six months ended June 30, 2022, our Company has recognized an accrued interest of $520,935, which are mainly related to estimated tax payable for under-declared income to the tax authority for fiscal years from 2017 to 2021. For the fiscal years ended December 31, 2021 and 2020, our Company has recognized an accrued tax penalties and interest of $774,584, and $370,462, respectively, which are mainly related to estimated tax payable for under-declared income to the tax authority for fiscal years from 2017 to 2020. The tax penalty is calculated at 50% of estimated under-declared corporate income tax payable and interest is based on 0.05% per day for the estimated under-declared corporate income tax payable since the income tax settlement date on the following May 31 for each fiscal year. As of the date of this prospectus, Shenzhen Xindesheng may become subject to a tax penalty and interest in respect of its estimated under-declared corporate income tax payable for fiscal year 2021 due to its previous failure to make adequate income tax payments. To address issues that may arise from Shenzhen Xindesheng’s previous failure to make adequate income tax payments, the Company issued a letter of commitment stating that Suzhou GoodFaith and its subsidiaries (including Shenzhen Xindesheng) would pay any unpaid taxes before September 30, 2022. On September 21, 2022, the under-declared income taxes and associated interest for fiscal years from 2017 to 2021 as of June 30, 2022 were fully paid, and we have confirmed that any associated tax penalty has been exempted by the local tax authority as of the date of this prospectus. Our Company expects to be exempted from any criminal liability, given that our Company and our PRC subsidiaries have not been subject to any other criminal or administrative penalties for evading taxes within the last five years. See “Note 9 - Accrued Expenses And Other Current Liabilities” in the notes to our consolidated financial statements.

  

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

 

Our business operations depend on the continued services of our management, particularly the executive officers named in this prospectus, and teams in charge of our risk management, research and development, customer relationship management, and collaboration with academic institutions. While we have provided different incentives to our management, we cannot assure you that we can continue to retain their services. If one or more of our management were unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted, our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain qualified personnel. In addition, although we have entered into confidentiality and non-competition agreements with our management, there is no assurance that any member of our management team will not join our competitors, form a competing business, or disclose confidential information to the public. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.

 

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

 

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

 

Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including:

 

 

difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, rights, platforms, products and services of the acquired business;

 

 

the inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;

 

 

difficulties in retaining, training, motivating and integrating key personnel;

 

 

the diversion of managements time and resources from our daily operations;

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

the failure to successfully further develop the acquired technology; 

 

 

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

 

 

 

 

potential disruptions to our ongoing businesses; and

 

 

 

 

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

 

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

 

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

 

We believe our success depends on the efforts and talent of our employees, including risk management, technology infrastructure and IT system maintenance and upgrade, financial and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled technical, risk management and financial personnel is extremely intense. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.

 

In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and our operational efficiency could diminish, resulting in a material adverse effect to our business.

 

If our business does not grow as we expect, or if we fail to manage our growth effectively, our operating results and business would suffer.

 

Our business has grown substantially since our inception, and we anticipate that growth to continue. Toward this end, we strive to expand our client base and improve our brand recognition as a national service provider for pre-approval risk management and post-loan debt collection. In addition, we intend to continue investing in data analytics and information technology. Starting from 2023, we also plan to establish five new operation centers for our post-loan debt collection business in the following two years through investments or mergers and acquisitions. Such expansions may cause strain on our managerial, operational, and financial resources. We must continue to hire, train, and effectively manage new employees. If our new hires perform poorly or if we are unsuccessful in hiring, training, managing, and integrating new employees, our business, financial condition, and results of operations may be materially harmed.

 

Our future results of operations also depend largely on our ability to execute our future plans successfully. Our continued growth may subject us to additional challenges and constraints. Specifically, we may have difficulty developing clients due to: (i) fluctuations in market demand, especially in the post-loan debt collection market; (ii) uncertainties about the adverse effects of potential financial regulatory policies on pre-approval risk management and post-loan debt collection; and (iii) uncertainties as to the customer satisfaction with existing services. Regarding technology development, we may encounter difficulties and uncertainties mainly as a result of (a) the effectiveness of the products we develop; (b) whether our technology updates can keep up with the rapid changes in market demand; and (c) the acceptance of our innovative products by customers. The potential investment or mergers and acquisitions may present us with challenges and difficulties, primarily because of (1) uncertainties regarding the willingness of a target company to cooperate; (2) whether we have sufficient capital reserves; and (3) the legal risks associated with mergers and acquisitions.

 

All of the aforementioned endeavors involve risks and will require significant management, financial, and human resources. We cannot assure you that we will be able to effectively manage our growth or to implement our strategies successfully. Besides, there is no assurance that the investment to be made by our Company as contemplated under our future plans will be successful and generate the expected return. If we are not able to manage our growth or execute our strategies effectively, or at all, our business, results of operations, and prospects may be materially and adversely affected.

 

We rely on third-party agencies to provide outsourced collection specialists in connection with our post-loan debt collection business, and any disruption to the provision of such outsourced collection specialists could materially and adversely affect our business, financial condition, and results of operations.

 

Our post-loan debt collection business will depend, in large part, on our ability to retain a team of experienced collection specialists who are qualified to conduct direct negotiations with debtors. As of December 31, 2022, we had approximately 130 full-time employed collection specialists and 600 outsourced collection specialists. See “Business-Employee.” Shenzhen Xindesheng, one of our PRC subsidiaries, entered into outsourcing agreements with a third-party agency who would provide such outsourced collection specialists for Shenzhen Xindesheng’s post-loan debt collection services. However, as we expect to renew our outsourcing agreements with such third-party agencies for the provision of such outsourced collection specialists, we cannot assure you that we will be able to maintain such a partnership at the same level, or at all. Such third-party agencies are subject to their own unique operational and financial risks, which are beyond our control. If the third-party agencies breach, terminate, or decide to not renew the outsourcing agreements with us or experience significant disruption to their operations, we will be required to find a substitute for the provision of a sufficient number of outsourced collection specialists in order to continually maintain our daily debt collection services. If we are unable to do so in a timely or cost-effective manner, we could suffer severe interruptions to our post-loan debt collection services, which could result in a decrease in the total annual amount of delinquent credit loan debt we successfully collected. As a result, our business, financial condition, and results of operations may be adversely affected.

 

Our Post-loan debt collection business primarily relies on outsourced collection specialists and such employment practices may be deemed as noncompliant with labor-related laws and regulations in China, which may adversely affect our financial performance and business prospects.

 

As of December 31, 2022, we had approximately 130 full-time employed collection specialists and 600 outsourced collection specialists. See “Business-Employee.” Specifically, Shenzhen Xindesheng, one of our PRC subsidiaries, entered into outsourcing agreements with a third-party agency who would provide such outsourced collection specialists for Shenzhen Xindesheng’s post-loan debt collection services. As we have been subject to stricter labor-related regulatory requirements in terms of entering into labor contracts with our employees and paying various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance, and maternity insurance to designated government agencies for the benefit of our employees, we cannot assure you that our employment practices will be deemed to be in compliance with labor-related laws and regulations in China due to the interpretation and implementation uncertainties related to the evolving labor laws and regulations, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees or subject to administrative penalties. As a result, our business, financial condition, and results of operations may be adversely affected.

 

Failure to maintain the quality of customer services could harm our reputation and our ability to retain existing customers and attract new customers, which may materially and adversely affect our business, financial condition, and results of operations.

 

We depend on our customer service representatives to provide assistance to clients using our services. As such, the quality of customer services is critical to retaining our existing customers and attracting new customers. If our customer service representatives fail to satisfy our customers’ individual needs, we may incur reputational harms and lose potential or existing business opportunities with our existing clients, which could have a material adverse effect on our business, financial condition, and results of operations.

 

        

 
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Our largest clients generate a significant portion of our revenue and our business may rely on a few suppliers that account for more than 10% of our total purchase. Any interruption in operations in such major clients or suppliers may have an adverse effect on our business, financial condition, and results of operations.

 

During the six months ended June 30, 2022 and the fiscal years ended December 31, 2021 and 2020, we derived most of our revenue from a few clients. Specifically, for the six months ended June 30, 2022, three clients accounted for 79%, 7%, and 3% of our total revenue, respectively. As of June 30, 2022, two clients accounted for 70% and 9% of our total accounts receivable, respectively. For the fiscal year ended December 31, 2021, three clients accounted for 49%, 15%, and 13% of our total revenue, respectively. As of December 31, 2021, two clients accounted for 37% and 26% of our total accounts receivable, respectively. For the fiscal year ended December 31, 2020, one client accounted for 60% of our total revenue. As of December 31, 2020, four clients accounted for 18%, 16%, 13%, and 20% of our total accounts receivable, respectively. These clients are generally able to reduce or cancel spending on our services on short notice for any reason. A number of factors, including our performance, that could result in the loss of, or decrease in the volume of business from, a client. Even though we have a strong record of performance, we cannot assure you that we will continue to maintain the business cooperation with these clients at the same level, or at all. The loss of business from one or more of these significant clients could materially and adversely affect our revenue and profitability. Furthermore, if any significant client terminates its relationship with us, we cannot assure you that we will be able to secure an alternative arrangement with a comparable customer in a timely manner, or at all.

  

In addition, we depend upon a limited number of major suppliers. Specifically, for the six months ended June 30, 2022, our top four suppliers-Supplier H, Shenzhen Ourui Consulting Co., Ltd. (“Shenzhen Ourui”), and Suppliers C, I, and J (as represented in Note 12 to the Unaudited Condensed Consolidated Financial Statements)-accounted for 27%, 14%, 12%, and 11% of our total purchase, respectively. During the fiscal year ended December 31, 2021, the top three suppliers-Supplier A, Shanghai Beiming Data Technology Co., Ltd. (“Beiming Data”), and Suppliers B and C (as represented in Note 12 to the Consolidated Financial Statements)-accounted for 28%, 11%, and 10% of our total purchase, respectively. For the fiscal year ended December 31, 2020, the top two suppliers (Beiming Data and Supplier D) accounted for 21% and 17% of our total purchase, respectively. See “NOTE 12. CONCENTRATION OF CREDIT RISK.” Specifically, we purchased data verification services from Beiming Data and outsourcing management services from Suppliers B, C, and D. We cannot ensure that we will have no concentration of suppliers in the future. Such third-party suppliers are run by independent entities that are subject to their own unique operational and financial risks, which are beyond our control. If any of these suppliers breach or terminate their contracts with us, or experience significant disruptions to their operations, we will be required to find and enter into arrangements with one or more replacement suppliers. Finding alternative suppliers could involve significant delays and other costs and these suppliers may not be available to us on reasonable terms or at all. As a result, any such event could harm our business and financial results and result in lost or deferred revenue.

  

One of our shareholders will own approximately []% of our Ordinary Shares after the completion of the proposed offering.

 

If we sell 3,000,000 Ordinary Shares in this offering (excluding any shares that may be sold as a result of the underwriters’ over-allotment option), one of our shareholders will beneficially own, in the aggregate, approximately 2.61% of our Ordinary Shares, and two members of our management will beneficially own approximately 30.61% of our Ordinary Shares. As a result, these shareholders will be able to exercise a significant level of control over all matters requiring shareholder approval, including the election of directors, amendments to our Articles of Incorporation, and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our Company or changes in management and will make the approval of certain transactions difficult or impossible without the support of this shareholder.

 

In addition, Nasdaq provides a “controlled company,” a company of which more than 50% of the voting power for the election of its directors is held by a single person, entity, or group, with exemptions from certain corporate governance requirements, including the requirement that a majority of its board of directors consist of independent directors. While we will not be a “controlled company” after the offering pursuant to Nasdaq rules, if a shareholder beneficially own approximately [●]% of our Ordinary Shares, we could become a “controlled company.” If we become a “controlled company,” we may elect to rely on certain exemptions from Nasdaq’s corporate governance rules. In such a case, you may not have the same protection afforded to shareholders of companies that are subject to those corporate governance requirements.

 

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

 

Our business may be adversely affected by instability, disruption or destruction in a geographic region of China in which it operates, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest, and natural or manmade disasters, including famine, flood, fire, earthquake, storm or pandemic events and spread of disease, including the COVID-19 pandemic. The COVID-19 pandemic has already significantly affected our overall business, results of operation, and financial conditions for the fiscal year 2020. Specifically, the COVID-19 pandemic gave rise to economic downturns and other significant changes in regional and global economic conditions. As a result, loan applicants’ default and delinquency risks increased, as they experienced unemployment or generated less income. Subsequently, higher default and delinquency risks required us to dedicate more resources to maintain our current collection rate for the loan repayment and collection management business and posed risk-management challenges for our risk evaluation and solvency assessment business, increasing our operating costs. As the majority of our merchant customers are retailers whose businesses were adversely affected by the COVID-19 pandemic, the COVID-19 pandemic caused our merchant customers to stop or delay using our services, adversely impacting our revenue from these businesses.

 

Any significant disruption to communications and travel, including travel restrictions and other potential protective quarantine measures by governmental agencies, also increase difficulty in our operations and could make it impossible for us to conduct on-site inspection of collateralized properties, which is a necessary step of our credit assessment and risk management process. Accordingly, travel restrictions and protective measures caused the Company to incur additional unexpected labor costs and expenses and restrained our ability to retain the highly skilled personnel we needed for our operations, adversely affecting our business and results of operation.

 

 
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In the beginning of February 2020, we had to temporarily suspend our services due to government restrictions. Throughout the COVID-19 pandemic, we managed to promptly implement a series of response measures, including having our full work force resuming work remotely by the end of February. We fully resumed our operation on March 10, 2020 and the COVID-19 impact on our operating results and financial performance for fiscal year 2020 seems to be temporary. During the fiscal year ended December 31, 2021, the COVID-19 pandemic did not have a material impact on the PRC operating entities’ respective financial positions and operating results. Although, during the six months ended June 30, 2022, the COVID-19 pandemic adversely affected our pre-approval risk assessment business, our post-loan debt collection business benefited from the pandemic, and overall, the COVID-19 pandemic did not have a material impact on our operating entities’ financial positions and operating results. Specifically, the COVID-19 subvariant (Omicron) outbreak hit China in March 2022, spreading more quickly and easily than previous strains. As a result, a new round of lockdowns, quarantines, or travel restrictions has been imposed upon different provinces or cities in China by the relevant local government authorities. As a result, during the six months ended June 30, 2022, our revenue from the pre-approval risk management products and services decreased by 25% compared with the same period in 2021. Meanwhile, the COVID-19 pandemic has led to a rise in overdue loans, and, consequently, our post-loan debt collection business has grown significantly. Our revenue derived from the post-loan debt collection services increased by 226% for the six months ended June 30, 2022, compared to the same period in 2021. Overall, our revenue in the first half of 2022 increased by 182.6% over the same period in 2021. However, the measures taken by government authorities to contain the virus, including travel bans and restrictions, quarantines, stay-at-home or shelter-in-place orders and business shutdowns, may remain in place for a significant period of time and may adversely affect our business and results of operations. The emergence of regional recurrences of the pandemic and the corresponding restrictive measures are beyond our control. If additional waves of COVID-19 occur in the regions in which we operate or globally and cannot be contained, the risks set forth in this prospectus may be exacerbated or accelerated at a heightened level. Should a COVID-19 resurgence in China negatively affect our execution of customer contracts and collection of customer payments, it may cause the Company’s revenue and cash flows to underperform in the next 12 months. The extent of any future impact of COVID-19 on our business is still highly uncertain and cannot be predicted as of the date of this prospectus.

 

Changes in international trade policies, trade dispute or the emergence of a trade war, may have a material adverse effect on our business.

 

Political events, international trade disputes, and other business interruptions could harm or disrupt international commerce and the global economy, and could have a material adverse effect on us and our customers, service providers, network carriers and other partners.

 

International trade disputes could result in tariffs and other protectionist measures that could adversely affect our business. Tariffs could increase the cost of the goods and products which could affect consumers’ discretionary spending levels and therefore adversely impact our business. In addition, political uncertainty surrounding international trade disputes and the potential of the escalation to trade war and global recession could have a negative effect on consumer confidence, which could adversely affect our business.

 

We may from time to time be subject to claims, controversies, lawsuits and legal proceedings, which could have a material adverse effect on our financial condition, results of operations, cash flows and reputation.

 

We may from time to time become subject to or involved in various claims, controversies, lawsuits, and legal proceedings. However, claims and threats of lawsuits are subject to inherent uncertainties, and we are uncertain whether any of these claims would develop into a lawsuit. Lawsuits, or any type of legal proceeding, may cause us to incur defense costs, utilize a significant portion of our resources and divert management’s attention from our day-to-day operations, any of which could harm our business. Any settlements or judgments against us could have a material adverse impact on our financial condition, results of operations and cash flows. In addition, negative publicity regarding claims or judgments made against us may damage our reputation and may result in a material adverse impact on us.

 

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

 

This prospectus contains certain data and information that we obtained from various government and private entity publications and reports, including the Frost & Sullivan Report which we commissioned. Statistical data in these publications also include projections based on a number of assumptions. While we have not independently verified the data and information contained therein and such data and information may have been collected using third-party methodologies, we believe that the data and information, including projections based on a number of assumptions, from these third-party publications and reports used in this prospectus is reliable. However, the industries in which we operate may not grow at the rate projected by market data, or at all. Failure of these industries to grow at the projected rate may have a material adverse effect on our business and the market price of our Ordinary Shares. In addition, the rapidly evolving nature of these industries results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of the industries in which we operate. Furthermore, if any one or more of the assumptions underlying the market data is later found to be incorrect, actual results may differ from the projections based on these assumptions.

 

We rely on assumptions and estimates to calculate certain key operating metrics and inaccuracies in such metrics may harm our reputation and adversely affect our business.

 

Certain key operating metrics in this prospectus are calculated using our internal data that have not been independently verified by third parties. While these numbers are based on what we believe to be reasonable calculations for the applicable periods of measurement, there are some challenges in measuring those metrics. In addition, our key operating metrics are derived and calculated based on different assumptions and estimates, and you should be cautious of such assumptions and estimates when assessing our operating performance.

 

Our operating metrics may differ from estimates published by third parties or from similarly titled metrics used by our competitors due to differences in data availability, sources and methodology. If we discover material inaccuracies in our operating metrics, our reputation may be harmed and third parties may be less willing to allocate their resources or spending to us, which could adversely affect our business and operating results.

  

Our current insurance policies may not provide adequate levels of coverage against all claims and we may incur losses that are not covered by our insurance.

 

We believe we maintain insurance coverage that is customary for businesses of our size and type. However, our insurance policies currently do not cover certain types of losses or claims, including (i) losses caused by natural disasters or accidents in the areas where our properties are located; (ii) the death, injuries, or occupational diseases incurred by our employees resulting from accidents related to or as a consequence of engaging in work within the scope of their employment; and (iii) damages and losses caused by accidents in public places where our PRC operating entities assume the compensation responsibility pursuant to applicable laws. The occurrence of uninsured losses, damages, or incidents could have a material adverse effect on our reputation, business, results of operations, financial condition, or prospects.

 

 
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Risks Relating to this Offering and the Trading Market

 

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

 

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

 

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

 

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

 

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

 

The initial public offering price of our Ordinary Shares is substantially higher than the (pro forma) net tangible book value per share of our Ordinary Shares. Consequently, when you purchase our Ordinary Shares in the offering, upon completion of the offering you will incur immediate dilution of $4.40 per share, assuming a midpoint initial public offering price of $5. See “Dilution.” In addition, you may experience further dilution to the extent that additional Ordinary Shares are issued upon exercise of outstanding options we may grant from time to time.

 

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

 

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. 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 fiscal years ended December 31, 2021 and 2020, we and our independent registered public accounting firm have identified material weaknesses in our internal control over financial reporting, as defined in the standards established by the PCAOB, and other control deficiencies. The material weaknesses identified included (i) a lack of accounting staff and resources with appropriate knowledge of U.S. GAAP and SEC reporting and compliance requirements; (ii) a lack of proper systems, procedures, and segregation of duties in place to ensure effective supervision and monitoring of the financial reporting process; and (iii) a lack of a formal policy to monitor and approve related party transactions, to identify all related parties and ensure that all significant related party transactions have been properly accounted for and disclosed.

    

Following the identification of the material weaknesses and control deficiencies, the board of directors of our Company has adopted resolutions to appoint independent directors with extensive experience in U.S. public offerings and has established an audit committee to strengthen our corporate governance.

 

We plan to take additional remedial measures, including (i) hiring more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework; and (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel.

 

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. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our Ordinary Shares, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud. 

 

 
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Upon completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2022. In addition, once we cease to be an “emerging growth company,” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified, if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated, or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational, and financial resources and systems for the foreseeable future. We may be unable to complete our evaluation testing and any required remediation in a timely manner.

 

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

 

Upon consummation of this offering, we will incur significant legal, accounting, and other expenses as a public company that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and Nasdaq, impose various requirements on the corporate governance practices of public companies.

 

Compliance with these rules and regulations increases our legal and financial compliance costs and makes some corporate activities more time-consuming and costlier. We have incurred additional costs in obtaining director and officer liability insurance. In addition, we incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers.

 

We are an “emerging growth company,” as defined in the JOBS Act and will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.235 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior December 31, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies.

  

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

 

We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

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

 

Sales of substantial amounts of our Ordinary Shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our Ordinary Shares to decline. An aggregate of 20,000,000 Ordinary Shares is outstanding before the consummation of this offering. An aggregate of 23,000,000 Ordinary Shares will be outstanding immediately after the consummation of this offering, assuming no exercise of the over-allotment option, and 23,450,000 Ordinary Shares will be outstanding immediately after the consummation of this offering, assuming the full exercise of the over-allotment option. Sales of these shares into the market could cause the market price of our Ordinary Shares to decline.

 

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.

 

 
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If securities or industry analysts do not publish research or reports about our business, or if they publish a negative report regarding our Ordinary Shares, the price of our Ordinary Shares and trading volume could decline.

 

Any trading market for our Ordinary Shares may depend in part on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade us, the price of our Ordinary Shares would likely decline. If one or more of these analysts cease coverage of our Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of our Ordinary Shares and the trading volume to decline.

 

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.

 

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 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.

  

The price of our Ordinary Shares could be subject to rapid and substantial volatility.

 

There have been instances of extreme stock price run-ups followed by rapid price declines and strong stock price volatility with recent initial public offerings, especially among those with relatively smaller public floats. As a relatively small-capitalization company with a relatively small public float, we may experience greater stock price volatility, extreme price run-ups, lower trading volume, and less liquidity than large-capitalization companies. In particular, our Ordinary Shares may be subject to rapid and substantial price volatility, low volumes of trades, and large spreads in bid and ask prices. Such volatility, including any stock run-ups, may be unrelated to our actual or expected operating performance and financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our Ordinary Shares.

 

In addition, if the trading volumes of our Ordinary Shares are low, persons buying or selling in relatively small quantities may easily influence the price of our Ordinary Shares. This low volume of trades could also cause the price of our Ordinary Shares to fluctuate greatly, with large percentage changes in price occurring in any trading day session. Holders of our Ordinary Shares may also not be able to readily liquidate their investment or may be forced to sell at depressed prices due to low volume trading. Broad market fluctuations and general economic and political conditions may also adversely affect the market price of our Ordinary Shares. As a result of this volatility, investors may experience losses on their investment in our Ordinary Shares. A decline in the market price of our Ordinary Shares also could adversely affect our ability to issue additional Ordinary Shares or other of our securities and our ability to obtain additional financing in the future. No assurance can be given that an active market in our Ordinary Shares will develop or be sustained. If an active market does not develop, holders of our Ordinary Shares may be unable to readily sell the shares they hold or may not be able to sell their shares at all.

 

Our management has broad discretion to determine how to use the funds raised in the offering and may use them in ways that may not enhance our results of operations or the price of our Ordinary Shares.

 

We anticipate that we will use the net proceeds from this offering for working capital and other corporate purposes. Our management will have significant discretion as to the use of the net proceeds to us from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the market price of our Ordinary Shares.

 

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

 

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

 

 
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As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to a domestic U.S. issuer, and are exempt from certain Nasdaq corporate governance standards applicable to U.S. issuers, which may limit the information publicly available to our investors and afford them less protection than if we were a U.S. issuer.

 

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

 

As a foreign private issuer, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act and therefore there may be less publicly available information about us than if we were a U.S. domestic issuer. We are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

 

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

 

 

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

 

 

the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and the selective disclosure rules by issuers of material non-public information under Regulation FD.

 

We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

 

If we cannot continue to satisfy the listing requirements and other rules of the Nasdaq Capital Market, our securities may be delisted, which could negatively impact the price of our securities and your ability to sell them.

 

We have applied to have our Ordinary Shares listed on the Nasdaq Capital Market upon consummation of this offering. It is a condition to the closing of this offering that our Ordinary Shares qualify for listing on a national securities exchange. Following this offering, in order to maintain our listing on the Nasdaq Capital Market, we will be required to comply with certain rules of the Nasdaq Capital Market, including those regarding minimum shareholders’ equity, minimum share price, minimum market value of publicly held shares, and various additional requirements. Even if we initially meet the listing requirements and other applicable rules of the Nasdaq Capital Market, we may not be able to continue to satisfy these requirements and applicable rules. If we are unable to satisfy the Nasdaq Capital Market criteria for maintaining our listing, our securities could be subject to delisting.

 

 
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If the Nasdaq Capital Market subsequently delists our securities from trading, we could face significant consequences, including:

 

 

a limited availability for market quotations for our securities;

 

 

 

 

reduced liquidity with respect to our securities;

 

 

 

 

a determination that our Ordinary Shares are a “penny stock,” which will require brokers trading in our Ordinary Shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our Ordinary Shares;

 

 

 

 

limited amount of news and analyst coverage; and

 

 

 

 

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

 

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

 

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

 

 

provisions that authorize our board of directors to issue shares with preferred, deferred or other special rights or restrictions without any further vote or action by our shareholders; and

 

 

 

 

provisions that restrict the ability of our shareholders to call meetings and to propose special matters for consideration at shareholder meetings.

 

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

 

For as long as we remain an “emerging growth company,” as defined in the JOBS Act, we will elect to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of shareholder approval of any golden parachute payments not previously approved. Because of these lessened regulatory requirements, our shareholders would be left without information or rights available to shareholders of more mature companies. Further, we elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary Shares and our share price may be more volatile. See “Implications of Our Being an Emerging Growth Company.

 

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

 

We are an exempted company with limited liability incorporated under the laws of the Cayman Islands with limited liability. Our corporate affairs are governed by our memorandum and articles of association, the Companies Act (as Revised) of the Cayman Islands and by the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws relative to the United States. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. Therefore, our public shareholders may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

 

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

 

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

 

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

 

Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. These rights, however, may be provided in a company’s articles of association. Our amended and restated memorandum and articles of association provide that upon the requisition of shareholders holding shares which carry in aggregate not less than one-third of all votes attaching to all issued and outstanding shares of our Company entitled to vote at general meetings, our board will convene an extraordinary general meeting and put the resolutions so requisitioned to a vote at such meeting. However, our post-offering amended and restated memorandum and 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 .

 

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

 

A non-U.S. corporation such as ourselves will be classified as a passive foreign investment company (“PFIC”) for any taxable year if, for such year, either

 

 

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

 

 

 

 

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

 

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

   

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

 

Depending on the amount of cash we raise in this offering, together with any other assets held for the production of passive income, it is possible that, for our 2021 taxable year or for any subsequent year, more than 50% of our assets may be assets which produce passive income, in which case we would be deemed a PFIC, which could have adverse US federal income tax consequences for US taxpayers who are shareholders. We will make this determination following the end of any particular tax year.

 

For purposes of the PFIC analysis, in general, a non-U.S. corporation is deemed to own its pro rata share of the gross income and assets of any entity in which it is considered to own at least 25% of the equity by value.

 

For a more detailed discussion of the application of the PFIC rules to us and the consequences to U.S. taxpayers if we were or are determined to be a PFIC, see “Material Income Tax Considerations—United States Federal Income Taxation-PFIC.

 

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

 

Our pre-IPO shareholders may be able to sell their Ordinary Shares under Rule 144 after the completion of this offering. See “Shares Eligible for Future Sale” below. Because these shareholders have paid a lower price per Ordinary Share than participants in this offering, when they are able to sell their pre-IPO shares under Rule 144, they may be more willing to accept a lower sales price than the IPO price. This fact could impact the trading price of the Ordinary Shares following the completion of the offering, to the detriment of participants in this offering. Under Rule 144, before our pre-IPO shareholders can sell their shares, in addition to meeting other requirements, they must meet the required holding period. We do not expect any of the Ordinary Shares to be sold pursuant to Rule 144 during the pendency of this offering.

 

 
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

 

assumptions about our future financial and operating results, including revenue, income, expenditures, cash balances, and other financial items;

 

 

 

 

our ability to execute our growth, and expansion, including our ability to meet our goals;

 

 

 

 

current and future economic and political conditions;

 

 

 

 

our capital requirements and our ability to raise any additional financing which we may require;

 

 

 

 

our ability to attract clients and further enhance our brand recognition;

 

 

 

 

our ability to hire and retain qualified management personnel and key employees in order to enable us to develop our business;

 

 

 

 

uncertainty about the further spread of the COVID-19 virus and the impact it may still have on the Company’s operations, the demand for the Company’s products, and economic activity in general;

 

 

 

 

trends and competition in the pre-approval risk evaluation and delinquent debt collection services industry; and

 

 

 

 

other assumptions described in this prospectus underlying or relating to any forward-looking statements.

 

We describe certain material risks, uncertainties and assumptions that could affect our business, including our financial condition and results of operations, under “Risk Factors.” In addition, there is uncertainty about the spread of the COVID-19 virus and the impact it may continue to have on the Company’s operations, the demand for the Company’s services and economic activities in general. We base our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may, and are likely to, differ materially from what is expressed, implied or forecast by our forward-looking statements. Except as required under the federal securities laws, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this prospectus, whether as a result of new information, future events, changes in assumptions, or otherwise.

 

Industry Data and Forecasts

 

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

 

 
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ENFORCEABILITY OF CIVIL LIABILITIES

 

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

 

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

 

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

 

Maples and Calder (Hong Kong) LLP, our counsel with respect to the laws of the Cayman Islands, and AllBright, our counsel with respect to PRC law, and Ince & Co, our counsel with respect to the laws of Hong Kong, have advised us that there is uncertainty as to whether the courts of the Cayman Islands or the PRC or Hong Kong would (i) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States or (ii) entertain original actions brought in the Cayman Islands or the PRC or Hong Kong against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

 

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

 

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

 

Ince & Co has further advised us that there are currently no treaties or other arrangements between Hong Kong and the United States that provide reciprocal enforcement of foreign judgments. However, Hong Kong’s common law permits an action to be brought upon a foreign judgment. A foreign judgment itself may form the basis for a cause of action as judgment may be regarded as creating a debt between the parties. In a common law action for the enforcement of a foreign judgment in Hong Kong, enforcement is subject to various conditions, including, but not limited to: (i) the foreign judgment is final, (ii) the foreign judgment is for a liquidated amount in a civil matter and not in respect of taxes, fines, penalties, or similar charges, (iii) the proceedings in which the judgment was obtained were not contrary to natural justice, and (iv) the enforcement of the judgment is not contrary to the public policy of Hong Kong. Such a judgment must be for a fixed sum and come from a competent court as determined by the private international law applied by the Hong Kong courts. The defenses available to a defendant in a common law action brought on the basis of a foreign judgment include lack of jurisdiction, breach of natural justice, fraud, and contrary to public policy. However, a separate legal action for debt must be commenced in Hong Kong in order to recover such debt from the judgment debtor.

 

 
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USE OF PROCEEDS

 

We estimate that the net proceeds from the sale of 3,000,000 Ordinary Shares in this offering will be approximately $13,800,000, after deducting the underwriting discounts, non-accountable expense allowance and estimated offering expenses payable by us, based on the assumed midpoint initial public offering price of $5.00 per Ordinary Share, the midpoint of the estimated price range set forth on the cover page of this prospectus. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds to us from this offering will be approximately $15,870,000, after deducting the underwriting discounts and estimated offering expenses payable by us.

  

The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders and obtain additional capital. We plan to use the net proceeds of this offering as follows:

 

 

approximately 10% for establishing more subsidiaries wholly owned by us and operating centers to expand our customer bases;

 

 

 

 

approximately 20% for investments in technology development including updating the IT and service systems and expanding product and service offerings;

 

 

 

 

approximately 30% for business expansion and growth although we have not yet identified or entered into preliminary negotiations with any specific acquisition target as of the date of this prospectus;

 

 

 

 

approximately 10% for recruitment of new talent; and

 

 

 

 

The balance to fund working capital and for other general corporate purposes.

   

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. To the extent that the net proceeds we receive from this offering are not immediately used for the above purposes, we intend to invest our net proceeds in short-term, interest-bearing bank deposits or debt instruments. In the event that the net proceeds we receive from this offering, together with cash flow available from our current operations, are insufficient to fund all of the intended purposes of this offering, we intend to raise additional funds as needed through bank borrowing, shareholder contributions, and capital marketing financing. The amount of the financing cannot be determined as of the date of this prospectus, which will be dependent on factors such as the proceeds we receive from this offering and our growth strategies that will be adjusted accordingly.

 

In using the proceeds of this offering, we are permitted under PRC laws and regulations to utilize the proceeds from this offering to fund our PRC subsidiaries by making loans or additional capital contributions, subject to applicable government registration and approval requirements. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Relating to Doing Business in the PRC—PRC regulation of parent/subsidiary loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

    

 
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DIVIDEND POLICY

 

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

 

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

 

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

 

Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our PRC subsidiaries 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 directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.

 

The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. For instance, the Circular on Promoting the Reform of Foreign Exchange Management and Improving Authenticity and Compliance Review, or “SAFE Circular 3,” issued on January 26, 2017, provides that banks shall, when dealing with dividend remittance transactions from a domestic enterprise to its offshore shareholders of more than $50,000, review the relevant board resolutions, original tax filing form, and audited financial statements of such domestic enterprise based on the principal of genuine transaction. Furthermore, if our PRC subsidiaries incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our PRC subsidiaries are unable to receive all of the revenue from our operations, we may be unable to pay dividends on our Ordinary Shares, should we desire to do so in the future.

 

Cash dividends, if any, on our Ordinary Shares will be paid in U.S. dollars. GoodFaith HK may be considered a non-resident enterprise for tax purposes, so that any dividends GoodFaith WFOE pays to GoodFaith HK may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10%. See “Material Income Tax Consideration—Enterprise Taxation in Mainland China.”

 

In order for us to pay dividends to our shareholders, we will rely on payments made from Suzhou GoodFaith to GoodFaith WFOE and the distribution of such payments to GoodFaith HK as dividends from GoodFaith WFOE. Certain payments from Suzhou GoodFaith to GoodFaith WFOE are subject to PRC taxes, including business taxes and value-added taxes. In addition, if any of our PRC operating entities incurs debt on their own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

 

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

 

 
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CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2022:

  

 

on an actual basis; and

 

 

 

 

on an as adjusted basis to reflect the issuance and sale of the Ordinary Shares by us in this offering at the assumed midpoint 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, after deducting the estimated discounts to the Underwriter, non-accountable expense allowance, and the estimated offering expenses payable by us.

 

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

 

 

 

June 30, 2022

 

 

 

Actual

 

 

As adjusted

(Over-allotment

option not

exercised)

 

 

As adjusted

(Over-allotment option

exercised in full)

 

 

 

$

 

 

$

 

 

$

 

Cash and cash equivalents

 

$

8,645,021

 

 

 

22,445,021

 

 

 

24,515,021

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary shares, $0.0001 par value, 500,000,000 Ordinary Shares authorized, 10,000,000 Ordinary Shares issued and outstanding; 23,000,000 Ordinary Shares issued and outstanding, as adjusted assuming the over-allotment option is not exercised, and 23,450,000 Ordinary Shares issued and outstanding, as adjusted assuming the over-allotment option is exercised in full

 

$

1,000

 

 

 

2,300

 

 

 

2,345

 

Subscription receivable

 

 

(1,000

)

 

 

-

 

 

 

-

 

Additional paid-in capital(1)

 

$

-

 

 

 

12,050,332

 

 

 

14,120,332

 

Statutory surplus reserve

 

 

208,364

 

 

 

208,364

 

 

 

208,364

 

Retained earnings

 

$

2,663,319

 

 

 

2,663,319

 

 

 

2,663,319

 

Accumulated other comprehensive income

 

$

(35,335

)

 

 

(35,335

)

 

 

(35,335

)

Total Stockholders’ Equity

 

$

2,836,348

 

 

 

14,888,980

 

 

 

16,959,025

 

Total Capitalization

 

$

2,836,348

 

 

 

14,888,980

 

 

 

16,959,025

 

 

(1)

Reflects the sale of Ordinary Shares in this offering at an assumed midpoint initial public offering price of $5.00 per share, and after deducting the estimated underwriting discounts, non-accountable expense allowance, and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing. Additional paid-in capital reflects the net proceeds we expect to receive, after deducting the underwriting discounts, non-accountable expense allowance, and estimated offering expenses payable by us. We estimate that such net proceeds will be approximately $12,050,332.

 

A $1.00 increase (decrease) in the assumed midpoint initial public offering price of $5.00 per Ordinary Share would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by $2.76 million, assuming the number of Ordinary Shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

   

 
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DILUTION

 

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

 

Our net tangible book value as of June 30, 2022, was $1,811,157, or $0.08 per Ordinary Share. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting the net tangible book value per Ordinary Share (as adjusted for the offering) from the initial public offering price per Ordinary Share and after deducting the estimated commissions to the underwriters and the estimated offering expenses payable by us.

 

After giving effect to our sale of 3,000,000 Ordinary Shares offered in this offering based on the assumed midpoint initial public offering price of $5 per Ordinary Share after deduction of the estimated commissions to the underwriters and the estimated offering expenses payable by us, our as adjusted net tangible book value as of June 30, 2022, would have been $13,861,489, or $0.60 per outstanding Ordinary Share. This represents an immediate increase in net tangible book value of $0.52 per Ordinary Share to the existing shareholders, and an immediate dilution in net tangible book value of $4.40 per Ordinary Share to investors purchasing Ordinary Shares in this offering. The as adjusted information discussed above is illustrative only.

  

The following table illustrates such dilution:

 

 

 

Post-

Offering (1)

 

 

Full Exercise of Over-Allotment Option

 

Assumed Initial public offering price per Ordinary Share

 

$

5.00

 

 

$

5.00

 

Net tangible book value per Ordinary Share as of June 30, 2022

 

$

0.08

 

 

$

08

 

As adjusted net tangible book value per Ordinary Share attributable to payments by new investors

 

$

0.52

 

 

$

0.60

 

Pro forma net tangible book value per Ordinary Share immediately after this offering

 

$

0.60

 

 

$

0.68

 

 

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

 

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value per Ordinary Share after the offering would be $0.68, the increase in net tangible book value per Ordinary Share to existing shareholders would be $0.60, and the immediate dilution in net tangible book value per Ordinary Share to new investors in this offering would be $4.32.

 

The following tables summarize, on a pro forma as adjusted basis as of June 30, 2022, the differences between existing shareholders and the new investors with respect to the number of Ordinary Shares purchased from us, the total consideration paid and the average price per Ordinary Share before deducting the estimated commissions to the underwriters and the estimated offering expenses payable by us.   

 

 

 

Ordinary Shares

purchased

 

 

Total consideration

 

 

Average

price per

Ordinary

 

Over-allotment option not exercised

 

Number

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Share

 

 

 

($ in thousands)

 

Existing shareholders

 

 

20,000,000 

 

 

 

86.96 

%

 

$

 

 

 

0.01 

%

 

$

 

New investors

 

 

3,000,000 

 

 

 

13.04 

%

 

$

15,000 

 

 

 

99.99 

%

 

$

5.00 

 

Total

 

 

23,000,000 

 

 

 

100.00 

%

 

$

15,002 

 

 

 

100 

%

 

$

0.65 

 

 

 

 

Ordinary Shares

purchased

 

 

Total consideration

 

 

Average

price per

Ordinary

 

Over-allotment option exercised in full

 

Number

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Share

 

 

 

($ in thousands)

 

Existing shareholders

 

 

20,000,000 

 

 

 

85.29 

%

 

$

2

 

 

 

0.01 

%

 

$

 

New investors

 

 

3,450,000 

 

 

 

14.71 

%

 

$

17,250 

 

 

 

99.99 

%

 

$

5.00 

 

Total

 

 

23,450,000 

 

 

 

100 

%

 

$

17,252 

 

 

 

100 

%

 

$

0.74 

 

 

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

 

 
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CORPORATE HISTORY AND STRUCTURE

 

Our Corporate History

 

We began our operations in 2015 through Shenzhen Xindesheng, Beiming Technology, and Shanghai Yuyi, each of which is a limited liability company established pursuant to PRC laws and wholly owned by Suzhou GoodFaith, a limited company incorporated in Suzhou City, Jiangsu Province, China on April 28, 2021. In particular:

 

 

Shenzhen Xindesheng was formed in Shenzhen, Guangdong Province on September 14, 2015 and is primarily engaged in providing post-loan delinquent debt collections services. Shenzhen Xindesheng has formed or acquired the following owned subsidiaries pursuant to PRC laws: (i) Yiguoxuan (Shenzhen) Investment Holding Co., Ltd., a wholly owned subsidiary of Shenzhen Xindesheng, which was established on July 3, 2017 and dissolved on April 6, 2021; (ii) Jiujiang Xindesheng Information Consulting Service Co., Ltd. (“Jiujiang Xindesheng), a wholly owned subsidiary of Shenzhen Xindesheng, which was established on October 13, 2017; (iii) Guiyang Xindesheng Information Technology Co., Ltd. (“Guiyang Xindesheng”), a wholly owned subsidiary of Shenzhen Xindesheng, which was established on April 1, 2020; (iv) Chengdu Xindesheng Information Technology Co., Ltd. (“Chengdu Xindesheng”), a wholly owned subsidiary of Shenzhen Xindesheng, which was established on October 23, 2020; (v) Huizhou Xindesheng Information Technology Co., Ltd. (“Huizhou Xindesheng”), a wholly owned subsidiary of Shenzhen Xindesheng, which was established on March 16, 2020; (vi) Beihai Xindesheng Information Technology Co., Ltd. (“Beihai Xindesheng”), a wholly owned subsidiary of Shenzhen Xindesheng, which was established on June 10, 2021. On December 31, 2021, Suzhou GoodFaith acquired 100% of the equity interests in Shenzhen Xindesheng from its original shareholders. As a result, Suzhou GoodFaith became the 100% owner of Shenzhen Xindesheng and all of its wholly owned subsidiaries listed above.

 

 

 

 

Beiming Technology was formed in Shanghai, China on July 21, 2015, while Shanghai Yuyi was formed in Shanghai, China on July 25, 2014. Both Beiming Technology and Shanghai Yuyi are primarily engaged in providing pre-approval risk evaluation and solvency assessments business, and are 100% owned by Beihai Beiming Investment Co., Ltd. (“Beihai Beiming”), a limited liability company incorporated in Beihai City, Guangxi Province, China on April 29, 2020. Beihai Beiming was once 100% owned by Beiming Data, a limited liability company formed in Shanghai, China on November 5, 2013. On August 30, 2021, Beiming Data transferred all its shares in Beihai Beiming to Suzhou GoodFaith. As a result, Suzhou GoodFaith became the 100% owner of Beihai Beiming, and, therefore, the 100% owner of Beiming Technology and Shanghai Yuyi.

 

In connection with this offering, we have undertaken a reorganization of our corporate structure (the “Reorganization”) in the following steps:

 

 

on May 13, 2021, we incorporated GoodFaith Technology Inc. (“GoodFaith Cayman”) under the laws of the Cayman Islands;

 

 

 

 

on May 26, 2021, we incorporated GoodFaith Technology Holdings Limited (“GoodFaith BVI”) pursuant to the laws of the British Virgin Islands as a wholly owned subsidiary of GoodFaith Cayman;

 

 

 

 

on June 10, 2021, we incorporated GoodFaith Technology Limited (“GoodFaith HK”) in Hong Kong as a wholly owned subsidiary of GoodFaith BVI;

 

 

 

 

on October 25, 2021, Suzhou Chuangzhixin Information Technology Co., Ltd. (“GoodFaith WFOE”) was incorporated pursuant to PRC laws as a WFOE and as a wholly owned subsidiary of GoodFaith HK;

 

 

 

 

on December 31, 2021, Chung Sun Finance Limited acquired 5% of the equity interests in Suzhou GoodFaith from Xiaowei Wang, and Suzhou GoodFaith became a joint venture; and

 

 

 

 

on December 31, 2021, GoodFaith WFOE acquired 100% of the equity interests in Suzhou GoodFaith. Consequently, GoodFaith Cayman, through a restructuring, which is accounted for as a reorganization of entities under common control, became the ultimate holding company of all other entities mentioned above.

 

 
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Table of Contents

  

Our Corporate Structure

 

The following diagram illustrates our corporate structure as of the date of this prospectus and upon completion of our IPO based on a proposed number of 3,000,000 Ordinary Shares being offered, assuming no exercise of underwriters’ over-allotment option.

 

 

Notes:

 

 

(1)

Represents 9,460,000 Ordinary Shares held by Xiaofeng Fei and the Trust, together holding 100% of the equity interests in Qearl’s Holdings Limited, an investment holding company incorporated in the British Virgin Islands, as of the date of this prospectus. Specifically, Qearl’s Holdings Limited is held by (i) Wonder Phoenix Holdings Limited as to 10%, which is in turn wholly owned by Xiaofeng Fei; and (ii) Wonder Phoenix Family Limited as to 90%, which is in turn wholly owned by the Trust. As the First Protectors and the First Members of the Investment Committee of the Trust, Xiaofeng Fei and Kai Zhou are invested with the authority to make investment decisions for the Trust. On November 2, 2021, Xiaofeng Fei and Kai Zhou executed an acting-in-concert agreement, which provides that (a) they shall inform and discuss with each other and reach a consensus before exercising voting rights in making investment decisions for the Trust, and (b) if no consensus can be reached by them, the decision made by Kai Zhou prevails. Through the acting-in-concert agreement, Kai Zhou has the ultimate control of the Trust, and, therefore, of Qearl’s Holdings Limited.

 

 

 

 

(2)

Represents 5,840,000 Ordinary Shares held by Xiaowei Wang, the 100% owner of Gread Cause Holdings Limited, an investment holding company incorporated in the British Virgin Islands, as of the date of this prospectus.

 

 

 

 

(3)

Represents 1,200,000 Ordinary Shares held by Xu Dai, the 100% owner of Cloud Light Holdings Limited, an investment holding company incorporated in the British Virgin Islands, as of the date of this prospectus.

 

 

 

 

(4)

Represents an agreement of 3,500,000 Ordinary Shares held by four shareholders, each one of which holds less than 5% of our Ordinary Shares, as of the date of this prospectus.

  

Investors are purchasing securities of our holding company, GoodFaith Cayman, instead of securities of our PRC subsidiaries. We do not use a VIE structure.  

 

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

 

 
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Table of Contents

  

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

 

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

 

BUSINESS OVERVIEW

 

We offer customized pre-approval risk management and post-loan delinquent debt collection products and services to commercial banks and non-bank financial institutions in China in connection with credit loans. We endeavor to efficiently and effectively assist our clients with their pre-approval risk management and post-loan delinquent debt collection in connection with credit loans. We have established a national network of 16 operating centers and 3 administrative offices in over 11 cities across China. We have also built a broad client base across commercial banks and non-bank financial institutions throughout China.

 

Our business is comprised of two segments: (i) the credit loan pre-approval stage: risk evaluation and solvency assessment products and services; and (ii) the credit loan post-loan stage: delinquent debt collection services. Our clients typically service the loans they originate. Currently, we are focused on providing our products and services to commercial banks, e-commerce platform affiliated finance companies, licensed consumer finance companies, and other financial institutions in China who engage in the consumer credit loan business.

 

We are committed to providing products and services that address risk evaluation and solvency assessment during the pre-approval stage and credit loan debt collection during the delinquency stage.

 

We have recently achieved strong growth for post-loan delinquent debt collection businesses.

  

Our total revenue amounted to $20,653,211 for the fiscal year ended December 31, 2021, representing growth of approximately 29% compared to the fiscal year ended December 31, 2020. The total revenue derived from the pre-approval risk management products and services amounted to $3,557,857 for the fiscal year ended December 31, 2021, an approximate 41% increase compared to the fiscal year ended December 31, 2020. The total revenue derived from the post-loan debt collection services amounted to $17,095,354 for the fiscal year ended December 31, 2021, an approximate 27% increase compared to the fiscal year ended December 31, 2020.

 

For the six months ended June 30, 2022, our total revenue amounted to $24,560,502, representing growth of approximately 183% compared to $8,691,983 for the six months ended June 30, 2021. The total revenue derived from the pre-approval risk management products and services amounted to $1,115,568, an approximate 25% decrease compared to the six months ended June 30, 2021, which was due to the continuous impact of the COVID-19 resurgences in mainland China for the first half of 2022 that led to large-scale lockdowns. However, total revenue derived from the post-loan debt collection services surged to $23,444,934 for the six months ended June 30, 2022, an approximate 226% increase compared to the six months ended June 30, 2021, primarily due to the dramatic growth in delinquent credit loan debt under collection allocated by our existing clients, driven by the deteriorating economic conditions during the COVID-19 pandemic.

  

Key Factors that Affect Our Results of Operations

 

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

 

Our ability to effectively and efficiently conduct risk assessments

 

Our ability to attract and maintain new clients for our pre-approval risk evaluation business significantly depends on our ability to effectively evaluate loan applicants’ credit profiles, the likelihood of default, and return accurate verification results to our clients. Our team have devised and implemented a systematic credit assessment model and a disciplined risk management approach to facilitate our clients’ decision-making in connection with approving and granting credit loans to their applicants, which further enhances the effectiveness and efficiency of their risk management systems. Specifically, through evaluating the applicants’ information, we are able to identify applicants with high risks of delinquency and alert our clients accordingly, which usually leads to the rejection of loan applications directly. Further, we conduct evaluation on the solvency of the loan applicants. The results may be used to assist our clients with their determinations on loan amounts to be granted to the applicants, in order to reduce the scale and the risk of loan delinquency. While we are constantly training, updating, and optimizing our models using new data, if our own risk evaluation and solvency assessment model cannot remain effective, or if we otherwise fail or are perceived to fail to cater to the specific needs of different clients, our reputation and market share could be materially and adversely affected, which would severely impact our business and results of operations.

 

 
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Table of Contents

  

Our ability to provide delinquent debt collection services efficiently

 

The success of our post-loan segment business depends on our ability to collect delinquent consumer receivables efficiently. A certain percentage of the total amount of delinquent consumer receivables collected as commission is paid to us by our clients, and the commission rate is based upon a predetermined collection rate schedule with each client. Our post-loan delinquent debt collection service has demonstrated good performance and has maintained a good reputation in the industry. We actively assist our clients with credit loan collection to lower their bad debt rates and we have achieved targets set by them. We are shortlisted by three PRC commercial banks and financial institutions as their preferred service provider and are their trusted business partner. If we are unable to maintain, develop, and expand our business or adapt to changing market needs as well as our current or future competitors are able to, or if we are unable to acquire a sufficient number of customers who need our services, we may not be able to generate the same amount of revenue and/or profits to sustain the operation of our consumer loan debt collection business. As a result, our business and results of operations may be adversely affected.

  

Our ability to obtain prospective financial institution clients effectively and expand our customer base

  

We started our pre-approval risk management services in July 2015. Our revenue growth in this business largely depends on our ability to obtain prospective financial institutions effectively and increase overall risk evaluation and solvency assessment products and services to them. We intend to continue to dedicate significant resources to our client acquisition efforts. We believe that our customer base is the core building block of our pre-approval risk management services business, and our ability to facilitate our clients’ decision-making in their risk management systems is critical to our success and the continuous growth in our customer base. Our ability to provide customers with accurate and satisfactory results is subject to a number of factors, including our ability to provide effective services, our ability to continuously innovate and improve our services to meet customer needs, and our access to and cooperation with our business partners. If we experience service disruptions, failures, or other issues, or, if we fail to deliver satisfactory and distinct customer experiences, we may lose our customers and business partners, which could further lead to a decrease in the volume of transactions processed via our pre-approval risk management services. As a result, our business, results of operations, and financial condition may be adversely affected. If we are unable to attract potential financial institutions or if financial institutions do not continue to use our pre-approval risk evaluation and solvency assessment products and services at the current rates and/or we are unable to increase the overall business scale as we expect, our business and results of operations may be adversely affected.

  

Our ability to expand our delinquent debt collection services

 

We started to generate revenue from our delinquent debt collection services in September 2015. We derive our revenue primarily from providing collection services to commercial banks and online consumer finance companies. Our main source of revenue are the commissions that we receive from such services. See “Note 2-Summary of Significant Accounting Policies-Revenue recognition.” To maintain profitability, we must continuously receive more debt collection tasks from our clients. Therefore, our ability to maintain, develop, and expand our business for debt collection services is essential to our operation. Any material change in consumer receivables for collection could have a significant impact on our results of operations. We currently maintain strong business relationships with top national commercial banks and reputable online consumer finance companies in China and have a consistent stream of receivables for collection. To this end, we need to continue to maintain our relationships with existing clients and develop business relationships with new clients to ensure that we have sufficient consumer receivables for collection. If we are unable to retain our existing clients or explore potential clients, our business and results of operations may be adversely affected.

  

COVID-19 Affecting Our Results of Operations

 

On January 30, 2020, the World Health Organization (the “WHO”) declared the outbreak of COVID-19 a “Public Health Emergency of International Concern,” and on March 11, 2020, the WHO characterized the outbreak as a pandemic. Governments in affected countries have imposed travel bans, quarantines, and other emergency public health measures, which have caused material disruption to businesses globally and resulted in an economic slowdown. These measures, though temporary in nature, may continue and increase depending on developments in the COVID-19 pandemic.

 

In the beginning of February 2020, we had to temporarily suspend our services due to government restrictions. Throughout the COVID-19 pandemic, we managed to promptly implement a series of response measures, including having our full work force resuming work remotely by the end of February. We fully resumed our operation on March 10, 2020 and the COVID-19 impact on our operating results and financial performance for fiscal year 2020 seems to be temporary. The COVID-19 pandemic did not have a material impact on our results of operations for the fiscal year 2021. During the fiscal years ended December 31, 2021, the COVID-19 pandemic did not have a material impact on the operating entities’ respective financial positions and operating results. Although, during the six months ended June 30, 2022, the COVID-19 pandemic adversely affected our pre-approval risk assessment business, our post-loan debt collection business benefited from the pandemic, and overall, the COVID-19 pandemic did not have a material impact on our operating entities’ financial positions and operating results. Specifically, the COVID-19 subvariant (Omicron) outbreak hit China in March 2022, spreading more quickly and easily than previous strains. As a result, a new round of lockdowns, quarantines, or travel restrictions has been imposed upon different provinces or cities in China by the relevant local government authorities. As a result, during the six months ended June 30, 2022, our revenue from the pre-approval risk management products and services decreased by approximately 25% compared with the same period in 2021. Meanwhile, the COVID-19 pandemic has led to a rise in overdue loans, and, consequently, our post-loan debt collection business has grown significantly. Our revenue derived from the post-loan debt collection services increased by approximately 226% for the six months ended June 30, 2022, compared to the same period in 2021. Overall, our revenue in the first half of 2022 increased by approximately 182.6% over the same period in 2021.

 

In early December 2022, the PRC government announced a nationwide relaxation of its zero-COVID policy, resulting in a surge in COVID-19 infections across the PRC after related restrictions were lifted. As of the date of this prospectus, although the spread of COVID-19 appears to be under control, the extent to which the COVID-19 pandemic may impact our future financial results will depend on future developments which are uncertain and unpredictable, including the duration, spread, severity, and recurrence of COVID-19 and any COVID-19 variants, the effectiveness of efforts to contain or treat cases, and future actions that may be taken in response to these developments. In addition, the COVID-19 pandemic has also caused heightened uncertainty in the global economy. The global spread of COVID-19 pandemic in major countries of the world, including China, may also result in global economic distress, and the extent to which it may affect our results of operations will depend on future developments of the COVID-19 pandemic, which are highly uncertain and difficult to predict. There may be potential impacts on our results of operations if the pandemic and the resulting disruption were to extend over a prolonged period. Consequently, the COVID-19 pandemic may continue to adversely affect our business, financial condition, and results of operations in the current and future years.   

   

 
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Table of Contents

 

In preparing these consolidated financial statements, we have evaluated events and transactions for potential recognition or disclosure. No events require additional adjustment to or disclosure in the consolidated financial statements.

 

RESULTS OF OPERATIONS

 

Comparison of Results of Operations for the Six Months Ended June 30, 2022 and 2021

 

The following tables set forth a summary of our consolidated results of operations for the fiscal years indicated therein. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of operations in any period are not necessarily indicative of our future trends.

 

(Amounts, other than percentages, expressed in U.S. dollars)

 

 

 

For the Six Months ended June 30,

 

 

 

2022

 

 

2021

 

 

Variance

 

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-approval risk management revenue

 

$ 1,115,568

 

 

 

4.5 %

 

$ 1,490,060

 

 

 

17.1 %

 

$ (374,492 )

 

 

(25.1 )%

Post-loan delinquent debt collection revenue

 

 

23,444,934

 

 

 

95.5 %

 

 

7,201,923

 

 

 

82.9 %

 

 

16,243,011

 

 

 

225.5 %

Total operating revenue

 

 

24,560,502

 

 

 

100.0 %

 

 

8,691,983

 

 

 

100.0 %

 

 

15,868,519

 

 

 

182.6 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

19,221,281

 

 

 

78.3 %

 

 

7,331,940

 

 

 

84.4 %

 

 

11,889,341

 

 

 

162.2 %

Gross Profit

 

 

5,339,221

 

 

 

21.7 %

 

 

1,360,043

 

 

 

15.6 %

 

 

3,979,178

 

 

 

292.6 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

 

234,761

 

 

 

1.0 %

 

 

238,866

 

 

 

2.7 %

 

 

(4,105 )

 

 

(1.7 )%

General and administrative expenses

 

 

1,126,246

 

 

 

4.6 %

 

 

985,558

 

 

 

11.3 %

 

 

140,688

 

 

 

14.3 %

Total operating expenses

 

 

1,361,007

 

 

 

5.5 %

 

 

1,224,424

 

 

 

14.1 %

 

 

136,583

 

 

 

11.2 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

3,978,214

 

 

 

16.2 %

 

 

135,619

 

 

 

1.6 %

 

 

3,842,595

 

 

 

2,833.4 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

238,248

 

 

 

1.0 %

 

 

(59,320 )

 

 

(0.7 )%

 

 

297,568

 

 

 

(501.6 )%

Governmental subsidies

 

 

40,844

 

 

 

0.2 %

 

 

17,422

 

 

 

0.2 %

 

 

23,422

 

 

 

134.4 %

Interest income, net

 

 

9,413

 

 

 

0.0 %

 

 

323

 

 

 

0.0 %

 

 

9,090

 

 

 

2,811.9 %

Total other income (expense)

 

 

288,505

 

 

 

1.2 %

 

 

(41,575 )

 

 

(0.5 )%

 

 

330,080

 

 

 

(793.9 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

4,266,719

 

 

 

17.4 %

 

 

94,044

 

 

 

1.1 %

 

 

4,172,675

 

 

 

4,436.9 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

1,100,887

 

 

 

4.5 %

 

 

76,086

 

 

 

0.9 %

 

 

1,024,801

 

 

 

1,346.9 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$ 3,165,832

 

 

 

12.9 %

 

$ 17,958

 

 

 

0.2 %

 

$ 3,147,874

 

 

 

17,529.2 %

 

 
56

Table of Contents

 

Revenue

 

Our total revenue for the six months ended June 30, 2022 was $24,560,502, a significant increase by $15,868,519, or approximately 182.6%, from $8,691,983 for the six months ended June 30, 2021. The revenue from pre-approval risk management services decreased by $374,492, or approximately 25.1%, which was mainly attributable to (i) the continuous impact of the COVID-19 resurgences in mainland China for the first half of 2022, and (ii) the termination of a one-off project, so that the demand for risk evaluation and solvency assessment from our clients, especially from non-banking financial institution clients, decreased significantly. The revenue from the post-loan delinquent debt collection services increased significantly by $16,243,011, or approximately 225.5%, which was mainly due to the dramatic growth in delinquent credit loan debt under collection allocated by our existing clients.

 

Our operating revenue by service type is as follows:

 

 

 

For the Six Months ended June 30,

 

 

 

2022

 

 

2021

 

 

Variance

 

 

 

Amount

 

 

% of

revenue

 

 

Amount

 

 

% of

revenue

 

 

Amount

 

 

% of

revenue

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-approval risk management revenue

 

$

1,115,568

 

 

 

4.5

%

 

$

1,490,060

 

 

 

17.1

%

 

$

(374,492

)

 

 

(25.1

)%

Post-loan delinquent debt collection revenue

 

 

23,444,934

 

 

 

95.5

%

 

 

7,201,923

 

 

 

82.9

%

 

 

16,243,011

 

 

 

225.5

%

Total operating revenue

 

$

24,560,502

 

 

 

100.0

%

 

$

8,691,983

 

 

 

100.0

%

 

$

15,868,519

 

 

 

182.6

%

 

We have the following two revenue streams: (i) pre-approval risk management services, and (ii) post-loan delinquent debt collection services. For the six months ended June 30, 2022 and 2021, post-loan delinquent debt collection revenue accounted for approximately 95.5% and 82.9% of our total revenue, respectively. Pre-approval risk management revenue accounted for approximately 4.5% and 17.1% of our total revenue for six months ended June 30, 2022 and 2021, respectively.

 

Pre-approval risk management revenue

 

We charge our clients fees monthly based on the preset unit price and the number of verification records processed by our risk evaluation and solvency assessment products and services, and we receive regular payments on a monthly or quarterly basis, in accordance with our service agreements with specific clients.

 

Our pre-approval segment revenue derived from our commercial bank clients and non-bank financial institution clients accounted for approximately 83.0% and 17.0%, respectively, in the six months ended June 30, 2022, compared to approximately 46.2% and 53.8%, respectively in the six months ended June 30, 2021. The revenue portion from non-bank financial institution clients decreased primarily because of the termination in 2022 of the cooperation with a new non-bank financial institution with large verification demands, a one-off project that started in 2021.

 

Revenue derived from pre-approval risk management services decreased by $374,492, or approximately 25.1%, from $1,490,060 in the six months ended June 30, 2021 to $1,115,568 in the six months ended June 30, 2022.  The decrease in revenue was attributable to a decrease in the average fee rate by approixmately 27.8% from RMB0.35 to RMB0.25 per verification record, and an increase in the number of verification records by approxiamtely 3.8%. 

 

The average fee rate of pre-approval risk management revenue decreased from RMB0.35 per verification record in the six months ended June 30, 2021 to RMB0.25 per verification record in the six months ended June 30, 2022. The decrease in the fee rate was mainly due to the decreasing percentage of revenue from non-bank financial institution clients in the six months ended June 30, 2022 of approximately 17.0% compared to 53.8% in the six months ended June 30, 2021, which charged a higher rate of RMB0.31 per verification record compared to RMB0.24 per verification record charged to commercial bank clients in the six months ended June 30, 2022.

  

The total number of service agreements with our clients decreased by 12%, from 60 in the six months ended June 30, 2021 to 53 in the six months ended June 30, 2022. For the six months ended June 30, 2022, we processed approximately 28,700,000 verification records, representing a 4% increase from approximately 27,600,000 verification records for the six months ended June 30, 2021.

     

Post-loan delinquent debt collection revenue

 

We collect commissions from our clients based on the debt collection services we rendered, either measured by the number of specialists we dedicated to our clients or the performance results of debt collection.  Accordingly, there are two ways we calculate our fees: amount-based and percentage-based. Amount-based fees are equivalent to the fee rate for each collection specialist multiplied by the number of collection specialists for such projects.  Percentage-based fees are equivalent to the recovery amount after our debt collection service, multiplied by the commission percentage. The amount-based calculation is mostly used on credit loans that are past due for less than sixty (60) days, namely, M1-M2 receivables, while the percentage-based calculation is mainly used on credit loans that are past due for more than sixty (60) days, namely, M3 and M3+ receivables. For some specific clients, the percentage-based calculation is also used for M1-M2 receivables. Delinquent credit loan receivables are generally categorized based on the length of their delinquency. M1-M2 receivables are ones that are one to two months past due, and M3 and M3+ receivables are ones that are over two months past due. See “Industry-Market Overview of Credit Loan Collection Management Industry in China-Introduction of Credit Loan Collection Management Market in China.”

  

 
57

 

 

Other than basic commissions, we may receive incentive bonuses based on our performance from time to time. Bonus amounts are determined by our clients at their discretion in a few selected months, and are calculated according to their own formula based on factors such as the performance ranking of all their suppliers in those months. The incentive bonuses are recognized when we receive notification emails from clients. The aforementioned two ways of calculation of our fees are exclusive from each other. For example, once a project is determined to use an amount-based method, no percentage-based revenue method will be used to calculate the revenue for this project. Any incentive bonus will be added to the basic commissions as total revenue. We charge our clients monthly and we receive regular payments on a monthly or quarterly basis, in accordance with our service agreements with specific clients.

  

Revenue generated from post-loan delinquent debt collection services increased significantly by $16,243,011, or approximately 225.5%, from $7,201,923 in the six months ended June 30, 2021 to $23,444,934 in the six months ended June 30, 2022, which was mainly due to a significant increase in percentage-based revenue by $15,475,706, or approximately 333%, from $4,651,676 in the six months ended June 30, 2021 to $20,127,382 in the six months ended June 30, 2022. Due to the dramatic growth of our major clients’ delinquent credit loan debts, we have been allocated a greater volume of delinquent cases and offered a higher fee rate for successful collection of percentage-based cases from one major client. For the six months ended June 30, 2022 and 2021, percentage-based revenue accounted for approximately 85.9% and 64.6% of our total post-loan segment revenue, respectively, while amount-based revenue accounted for approximately 13.9% and 35.4% of our total post-loan segment revenue, respectively. Incentive bonuses were $49,521 and nil, respectively, for those periods, which accounted for approximately 0.2% and nil of our total post-loan segment revenue, respectively.

 

The following tables present the average fee rate of different categories of receivables in our post-loan delinquent collection service.

 

Average fee rate for amount-based revenue

 

For the Six Months Ended

 

 

 

June 30,

 

 

 

2022

 

 

2021

 

Receivables category

 

Per specialist

per month

 

 

Per specialist

per month

 

Collection of M1 receivables

 

 

RMB3,000-14,000

 

 

 

RMB10,000

 

Collection of M2 receivables

 

 

RMB12,000

 

 

 

RMB12,000

 

 

We were engaged to provide amount-based collection services for M1 receivables to some new financial clients in the six months ended June 30, 2022, and as a result, the average fee rate for collecting M1 receivables varies from RMB3,000 to RMB14,000 per collection specialist per month in the current period. During the six months ended June 30, 2021, collection of M1 receivables was charged by RMB10,000 per collection specialist per month. The average fee rate for collection of M2 receivables remained the same during the six months ended June 30, 2022 and 2021. which was charged by RMB12,000 per collection specialist per month.

 

Commission percentage for percentage-based revenue:

 

For the Six Months Ended

 

 

 

June 30,

 

 

 

2022

 

 

2021

 

Receivables category

 

% of Recovery amount

 

 

% of Recovery amount

 

Collection of M1 receivables

 

 

0.4 %

 

 

0.2 %

Collection of M2 receivables

 

 

4.0 %

 

 

1.9 %

Collection of M3 receivables

 

 

11.1 %

 

 

14.1 %

Collection of M3+ receivables*

 

 

24.5 %

 

 

24.8 %

Collection of other receivables**

 

 

3.7 %

 

 

33.0 %

Collection of total percentage-based revenue

 

 

3.9 %

 

 

2.0 %

 

* M3+ receivables refer to credit loans which are past due for more than ninety (90) days

**other receivables refer to a package of collection receivables mixed with M1、M2、M3and M3+ receivables charged with a flat rate.

 

 
58

 

 

The average fee rate varied in terms of the aging of delinquent debt receivables. A higher rate indicates a more sophisticated collection process and older receivables. Average fee rates for M1 and M2 receivables increased significantly in the six months ended June 30, 2022, compared with the same period in 2021, as our clients offered us a higher fee rate to motivate us to deliver a higher recovery result for delinquent debts. Average fee rates for M3 receivables decreased in the six months ended June 30, 2022, compared with the same period in 2021, because a major client allocated an increased volume of M3 receivables to us while setting a lower collection target, thereby resulting in a decrease in the fee rates for M3 receivables. Average fee rates for M3+ receivables remained stable during the six months ended June 30, 2022 and 2021. The average fee rate for other receivables can vary to a large degree, which is subject to different packages. However, the proportion of collection of other receivables was approximately 3.0% and 7.5% of our total post-loan segment revenue for the six months ended June 30, 2022 and 2021, respectively, and thus the fluctuation of fee rates for collection of other receivables had a limited impact on our overall average fee rate. As a result, the overall average fee rate for percentage-based revenue increase from approximately 2.0% for the six months ended June 30, 2021 to 3.9% for the six months ended June 30, 2022.

 

The following table indicates our key operating data for the periods indicated:

 

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

 

 

 

 

 

Increase /

 

 

Percentage

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

Change

 

Monthly average delinquent receivables under collection

 

$ 634,979,409

 

 

$ 350,540,326

 

 

$ 284,439,083

 

 

 

81 %

Total annual amount collected

 

 

1,141,430,094

 

 

 

616,517,129

 

 

 

524,912,965

 

 

 

85 %

Monthly average amount collected per collection specialist

 

 

197,138

 

 

 

149,567

 

 

 

47,571

 

 

 

32 %

Monthly average commission earned per collection specialist

 

 

2,025

 

 

 

1,747

 

 

 

277

 

 

 

16 %

 

For the six months ended June 30, 2022, monthly average delinquent receivables under collection increased significantly by approximately 81%; total annual amount collected increased by 85%; and monthly average amount collected per collection specialist increased by approximately 32%, compared with the same period in 2021. These increases were mainly due to the increasing number of delinquent receivables allocated to us by our existing clients, as a result of the COVID-19 resurgence, especially percentage-based M2 and M3 receivables. Monthly average commission earned per collection specialist increased by approximately 16%, which was mainly attributable to the increase of average fee rate and increased volume of percentage-based delinquent receivables. The total commissions we collected for the six months ended June 30, 2022 and 2021 were $23,444,934 and $7,201,923, respectively, representing a significant increase of approximately 225.5% from the previous periods.

  

Cost of Revenue

 

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

 

 

 

 

 

Increase /

 

 

Percentage

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

Change

 

Total revenue

 

$ 24,560,502

 

 

$ 8,691,983

 

 

$ 15,868,519

 

 

 

182.6 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

19,221,281

 

 

 

7,331,940

 

 

 

11,889,341

 

 

 

162.2 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

5,339,221

 

 

 

1,360,043

 

 

 

3,979,178

 

 

 

292.6 %

Margin %

 

 

21.7 %

 

 

15.6 %

 

 

6.1 %

 

 

 

 

 

 
59

 

 

Cost of revenue increased to $19,221,281 for the six months ended June 30, 2022 from $7,331,940 for the same period in 2021, representing an increase by $11,889,341, or approximately 162.2%. The increase was mainly attributable to the combined effects of the following: (i) an increase in management service costs for operating centers in the post-loan segment; (ii) an increase in salaries and benefits in the post-loan segment; (iii) an increase in outsourcing labor costs in the post-loan segment; (v) a decrease in data service costs in the pre-approval segment; and (v) a decrease in IT service costs in the pre-approval segment. The cost of revenue by segment is further discussed in detail below.

 

The following table indicates the cost and margin of the pre-approval risk management segment for the periods indicated:

 

Pre-approval risk management segment

 

For the Six Months Ended

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

Increase /

 

 

Percentage

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

Change

 

Total revenue

 

$ 1,115,568

 

 

$ 1,490,060

 

 

$ (374,492 )

 

 

(25.1 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

770,913

 

 

 

880,817

 

 

 

(109,904 )

 

 

(12.5 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

344,655

 

 

 

609,243

 

 

 

(264,588 )

 

 

(43.4 )%

Margin %

 

 

30.9 %

 

 

40.9 %

 

 

(10.0 )%

 

 

 

 

 

Cost of revenue in the pre-approval segment is mainly comprised of (i) data service costs and (ii) IT service costs. Cost of revenue decreased to $1,115,568 for the six months ended June 30, 2022 from $1,490,060 for the same period in 2021, representing a decrease by $374,492, or approximately 25.1%. The decrease was mainly attributable to the combined effects of the following:

 

(i) Data service costs. Data service costs in the pre-approval segment decreased by $65,652, or approximately 8.3%, from $793,933 in the six months ended June 30, 2021 to $728,282 in the six months ended June 30, 2022. Due to the impact of the COVID-19 resurgence and decreased demand from our non-banking financial institution clients, the data service costs decreased accordingly.

 

(ii) IT service costs. IT service costs in the pre-approval segment decreased significantly by $43,922, or approximately 51.8%, from $84,781 in the six months ended June 30, 2021 to $40,859 in the six months ended June 30, 2022, primarily because during the six months ended June 30, 2022, we used our own employees for daily operations and maintenance, and the demand for purchasing IT service decreased significantly.

  

The following table indicates the cost and margin of the post-loan segment for the periods indicated:

 

Post-loan delinquent debt collection segment

 

For the Six Months Ended

 

 

 

June 30,

 

 

 

 

 

 

 

Increase /

 

 

Percentage

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

Change

 

Total revenue

 

$ 23,444,934

 

 

$ 7,201,923

 

 

$ 16,243,011

 

 

 

225.5 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

18,450,368

 

 

 

6,451,123

 

 

 

11,999,245

 

 

 

186.0 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

4,994,566

 

 

 

750,800

 

 

 

4,243,766

 

 

 

565.2 %

Margin %

 

 

21.3 %

 

 

10.4 %

 

 

10.9 %

 

 

 

 

 

 
60

 

  

Cost of revenue for the post-loan segment is mainly comprised of (i) management service costs for operating centers; (ii) costs in salaries and benefits for our collection specialists; (iii) outsourcing labor costs; (iv) communication fees for operating centers; and (v) rent and utility expenses.

 

Cost of revenue for the post-loan segment increased to $18,450,368 for the six months ended June 30, 2022 from $6,451,123 for the same period in 2021, representing an increase by $11,999,245, or approximately 186.0%. The increase was mainly attributable to the combined effects of the following:

 

(i) Outsourcing management service costs for operating centers. Our outsourcing management service costs for operating centers in the post-loan segment increased by $8,151,237, or approximately 803.1%, from $1,014,993 in the six months ended June 30, 2021 to $9,166,230 in the six months ended June 30, 2022. As the revenue from the post-loan segment increased significantly, outsourcing management service costs increased accordingly.

 

(ii) Salaries and benefits. Our salary and benefit costs in the post-loan segment increased by $2,371,683, or approximately 48.8%, from $4,863,199 in the six months ended June 30, 2021 to $7,234,882 in the six months ended June 30, 2022. The increase of salaries and benefits was mainly due to the growth of revenue and collection specialists in the six months ended June 30, 2022.

 

(iii) Outsourcing labor costs. In order to improve our operational efficiency of collection specialists, we cooperated with a domestic third-party human resources agency to optimize our labor structure in May 2022. As of December 31, 2022, we had approximately 130 full-time employed collection specialists and 600 outsourced collection specialists, while all of our 570 collection specialists were full-time employees as of June 30, 2021, resulting in an increase in outsourcing labor costs of $1,414,845 during the six months ended June 30, 2022.

 

Gross Profit

 

As a result of the factors described above, our gross profit increased from $1,360,043 for the six months ended June 30, 2021 to $5,339,221 for the same period in 2022. Our gross profit as a percentage of revenue increased from approximately 15.6% for the six months ended June 30, 2021 to approximately 21.7% for the same period in 2022. The increase in overall gross profit was mainly attributable to the significant increase in gross profit and gross profit margin in the post-loan segment.

 

Operating Expenses

 

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

Increase /

 

 

Percentage

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

Change

 

Selling expenses

 

$ 234,761

 

 

$ 238,866

 

 

$ (4,105 )

 

 

(1.7 )%

% of revenue

 

 

1.0 %

 

 

2.7 %

 

 

(1.7 )%

 

 

(65.2 )%

General and administrative expenses

 

 

1,126,246

 

 

 

985,558

 

 

 

140,688

 

 

 

14.3 %

% of revenue

 

 

4.6 %

 

 

11.3 %

 

 

(6.7 )%

 

 

(59.6 )%

Operating expenses

 

$ 1,361,007

 

 

$ 1,224,424

 

 

$ 136,583

 

 

 

11.2 %

 

Selling Expenses

 

Selling expenses consist primarily of salaries and benefits for the sales team, entertainment expenses, marketing expenses, commission expenses, and travel expenses. Selling expenses slightly decreased by approximately 1.7%, or $4,105, from $238,866 for the six months ended June 30, 2021 to $234,761 in the same period of 2022. The increase was mainly attributable to the combined effects of the following:

 

(i) Our salaries and benefits for the sales team decreased by $23,175, or approximately 16.3%, to $118,945 for the six months ended June 30, 2022 from $142,120 for the six months ended June 30, 2021. The decrease was mainly attributable to the decrease in the revenue derived from our pre-approval risk management services.

  

 
61

 

 

(ii) Our marketing expenses decreased significantly by $45,016, or approximately 97.6%, to $1,127 for the six months ended June 30, 2022, from $46,143 for the six months ended June 30, 2021. The decrease was mainly attributable to fewer marketing activities from our pre-approval risk management services due to the impact of COVID-19.

 

(ii) Our entertainment expenses increased by $65,781, or approximately 164.1%, to $105,856 for the six months ended June 30, 2022, from $40,075 for the six months ended June 30, 2021. The increase was mainly attributable to the increased networking expenses with the expansion of our post-loan segment business.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries and benefits expenses for our general administrative and management staff, rent and utility expenses, office expenses, professional fees, IT service expenses, depreciation and amortization expenses, and other miscellaneous expenses incurred in connection with general operations. General and administrative expenses increased by approximately 14.3%, or $140,688, from $985,558 for the six months ended June 30, 2021 to $1,126,246 in the same period of 2022. The increase was mainly attributable to the combined effects of the following:

  

(i) Our salaries and benefits for management increased by $125,615, or approximately 17.6%, to $837,899 for the six months ended June 30, 2022 from $712,285 for the six months ended June 30, 2021. The increase was mainly attributable to the increased number of in-house employees for operation and maintenance in our pre-approval risk management service.

 

(ii) Our office expenses increased by $21,950, or approximately 73.8%, to $51,690 for the six months ended June 30, 2021 from $29,740 for the six months ended June 30, 2021. The increase was mainly attributable to the expansion of our post-loan segment business.

 

Net Income

 

 

 

For the six months Ended

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

Increase /

 

 

Percentage

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

Change

 

Income from operations

 

$ 3,978,214

 

 

$ 135,619

 

 

$ 3,842,595

 

 

 

2,833.4 %

Total other income (expense)

 

 

288,505

 

 

 

(41,575 )

 

 

330,080

 

 

 

793.9 %

Income before income taxes

 

 

4,266,719

 

 

 

94,044

 

 

 

4,172,675

 

 

 

4,436.9 %

Income tax expense

 

 

(1,100,887 )

 

 

(76,086 )

 

 

1,024,801

 

 

 

1,346.9 %

Net income

 

$ 3,165,832

 

 

$ 17,958

 

 

$ 3,147,874

 

 

 

17,528.9 %

Effective tax rate

 

 

25.8 %

 

 

80.9 %

 

 

(55.1 )%

 

 

 

 

 

Operating income

 

As a result of the factors described above, operating income increased by $3,842,595, or approximately 2,833.4%, to $3,978,214 for the six months ended June 30, 2022, compared to $135,619 for the same period of 2021.

 

Total other income (expense)

 

Total other income was $288,505 for the six months ended June 30, 2022, while total other expense was $41,575 for the same period in 2021. On September 21, 2022, we fully paid the under-declared income taxes and associated interest for fiscal years from 2017 to 2021 as of June 30, 2022. As a result, we adjusted the accrued tax penalties and interest for fiscal years from 2017 to 2021 as of June 30, 2022 according to the subsequent actual payment amount due to the exemption of tax penalties from the local tax authority and recognized non-operating income of $225,649 in the consolidated statements of income for the six months ended June 30, 2022. Total other income increased significantly by $330,080, or approximately 793.9%, accordingly.

     

Income tax expense

 

Income tax expense was $1,100,887 for the six months ended June 30, 2022, compared to $76,086 for the same period of 2021. An increase of approximately 1,346.9% in income tax expense was mainly attributable to the increase of income before income taxes for the six months ended June 30, 2022, compared to the same period of 2021.

 

 
62

 

 

Effective tax rate

 

Effective tax rate was 25.8% for the six months ended June 30, 2022, compared to 80.9% for the same period of 2021. A decrease of approximately 55.1% in effective tax rate was mainly attributable to the decrease of tax effect of un-deductible items for the six months ended June 30, 2022, compared to the same period of 2021.

 

Net income

 

As a result of the factors described above, net income was $3,165,832 for the six months ended June 30, 2022, representing an increase of $3,147,874 from $17,958 for the same period of 2021.

 

Comparison of Results of Operations for the Fiscal Years Ended December 31, 2021 and 2020

 

The following tables set forth a summary of our consolidated results of operations for the fiscal years indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of operations in any period are not necessarily indicative of our future trends.

 

(Amounts, other than percentages, expressed in U.S. dollars)

 

 

 

For the Fiscal Years ended December 31,

 

 

 

2021

 

 

2020

 

 

Variance

 

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-approval risk management revenue

 

$ 3,557,857

 

 

 

17.2 %

 

$ 2,516,756

 

 

 

15.7 %

 

$ 1,041,101

 

 

 

41.4 %

Post-loan delinquent debt collection revenue

 

 

17,095,354

 

 

 

82.8 %

 

 

13,481,095

 

 

 

84.3 %

 

 

3,614,259

 

 

 

26.8 %

Total operating revenue

 

 

20,653,211

 

 

 

100.0 %

 

 

15,997,851

 

 

 

100.0 %

 

 

4,655,360

 

 

 

29.1 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

17,041,672

 

 

 

82.5 %

 

 

10,784,060

 

 

 

67.4 %

 

 

6,257,612

 

 

 

58.0 %

Gross Profit

 

 

3,611,539

 

 

 

17.5 %

 

 

5,213,791

 

 

 

32.6 %

 

 

(1,602,252 )

 

 

(30.7 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

 

567,601

 

 

 

2.7 %

 

 

1,110,228

 

 

 

6.9 %

 

 

(542,627 )

 

 

(48.9 )%

General and administrative expenses

 

 

1,991,880

 

 

 

9.6 %

 

 

2,205,743

 

 

 

13.8 %

 

 

(213,863 )

 

 

(9.7 )%

Total operating expenses

 

 

2,559,481

 

 

 

12.4 %

 

 

3,315,971

 

 

 

20.7 %

 

 

(756,490 )

 

 

(22.8 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

1,052,058

 

 

 

5.1 %